A LEVEL BUSINESS

Business Strategy: Meaning, Purpose and Influences

1. What is Business Strategy?

Simple Definition

Business strategy is a long-term plan that explains how a business will move
from where it is now to where it wants to be in the future.

Easy Example

⬇
Current position: Small local shop

⬇
Objective: Increase sales and grow

⬇
Strategy: Open an online store and sell in new markets

Future position: Larger national business

Remember:

Objectives = What the business wants to achieve

Strategy = How the business will achieve it

2. Why is Business Strategy Important?

A strategy helps a business to:

 Provide direction – shows where the business is going.

 Provide focus – helps managers concentrate on important activities.
 Achieve objectives – provides a plan to reach business targets.
 Make major decisions – such as which products and markets to choose.
  Integrate activities – helps different departments work towards common
goals.

Example

Objective: Increase sales by 20% in two years.

Possible strategies:

 Launch new products

 Enter new markets
 Improve online sales
 Increase promotion

3. What Influences Business Strategy?

Business strategy is influenced by four main factors:

R–S–C–O
BUSINESS STRATEGY
│
┌───────────────┼───────────────┐
│ │ │
RESOURCES STRENGTHS COMPETITION
│ │ │
What can What are we What are rivals
we afford? good at? doing?
│
▼
OBJECTIVES
What do we want to achieve?
│
▼
STRATEGIC DECISIONS

4. Resources Available

Meaning
Resources are limited. These include:

 Finance
 Employees
 Machinery
 Technology
 Time

How do they influence strategy?

A business may have a good idea but not enough resources to implement it.

Example

A business wants to launch a product nationwide but does not have enough
finance.

It may have to:

 Launch in one region first

 Reduce the size of the launch
 Delay the launch

Chain of Analysis
Limited resources
↓
Fewer strategic choices
↓
Strategy may be reduced or changed

5. Strengths of the Business

A business should consider what it is already good at.

Strengths may include:

 Strong brand
 Skilled employees
 Good technology
 Strong finance
  Efficient production

Example

A successful soft-drink business may choose to develop more soft drinks because it
already has experience and skills in this area.

Key Point

Businesses often increase their chances of success by building on their existing

strengths.

A business may also sell weak or unsuccessful parts of the business and focus on
its core strengths.

6. Competitive Environment

Businesses must consider what their competitors are doing.

Competitors may:

 Reduce prices
 Launch new products
 Use new technology
 Improve customer service

Example

If a competitor reduces its prices, a business may need to reduce its own prices to
avoid losing customers.

Possible Result
Competitor reduces price
↓
Business faces pressure
↓
Business may reduce its price
↓
Customers may be retained
 ↓
Profit margin may fall

Key Point

Competitor actions can force a business to change its strategy.

7. Business Objectives

Strategy must help a business achieve its objectives.

Different objectives require different strategies.

Objective Possible Strategy

Increase short-term profit Reduce costs

Achieve long-term growth Invest in new products

Increase market share Reduce prices or increase promotion

Improve social responsibility Use environmentally friendly materials

Important Point

A strategy that helps one objective may not help another.

For example:

Research and development may reduce short-term profit but help achieve long-
term growth.

8. Complete Strategy Model

RESOURCES
What can we afford?
+
STRENGTHS
What are we good at?
+
COMPETITION
What are rivals doing?
+
OBJECTIVES
What do we want to achieve?
↓
BUSINESS STRATEGY
↓
LONG-TERM BUSINESS DECISIONS
↓
ACHIEVEMENT OF OBJECTIVES

9. Key Terms

Business Strategy

A long-term plan to achieve business objectives.

Strategic Decision

A major decision that affects the future direction of a business.

Resources

Inputs available to a business, such as finance, employees and machinery.

Business Strength

An area where a business has skills, experience or an advantage.

Competitive Environment

The actions of competitors that affect a business.

Objectives

Targets that a business wants to achieve.

10. Assessment Objectives: How to Answer

AO1 – Knowledge
Know and define the concept.

Example:

Define business strategy.

Business strategy is a long-term plan designed to achieve the objectives of a

business.

AO2 – Application
Use information from the case study.

Example:

The business has limited finance, so it may not be able to launch its product
nationally.

Case fact + Business concept

AO3 – Analysis
Explain the chain of consequences.

Formula:
Point
↓
Because...
↓
Therefore...
↓
Business impact
Example:

Limited finance may prevent a national product launch. Therefore, the business
may launch in a smaller market, which could reduce potential sales and slow
growth.

AO4 – Evaluation
Make a justified judgement.

Consider:

 Size of the business

 Resources available
 Strength of competitors
 Business objectives
 Short-term and long-term effects

Evaluation Sentence

Overall, the most suitable strategy depends on the objectives and resources of
the business.

QUICK REVISION

Strategy = HOW
Objectives = WHAT
Four Influences:

R – Resources → What can we afford?

S – Strengths → What are we good at?

C – Competition → What are rivals doing?

O – Objectives → What do we want to achieve?

Memory Trick:

Real Strength Creates Objectives

R – Resources
S – Strengths
C – Competition
O – Objectives

Absolutely. Here is a short, simple and conceptually clear version for learners, with a clear
graphic organiser and AO1–AO4 exam focus.

8.2 STRATEGIC MANAGEMENT

Meaning, Purpose and Strategy vs Tactics

1. What is Strategic Management?

Strategic management is the process of deciding the long-term direction of a business and
putting those decisions into action.

After setting SMART objectives, strategic management follows three stages:

ANALYSE → CHOOSE → IMPLEMENT

1. STRATEGIC ANALYSIS
Where are we now?
↓
2. STRATEGIC CHOICE
Where do we want to go?
Which option should we choose?
↓
3. STRATEGIC IMPLEMENTATION
How will we make it happen?
↓
ACHIEVE BUSINESS OBJECTIVES
2. The Three Stages of Strategic Management

Stage 1: Strategic Analysis

Meaning

Strategic analysis examines the current position of the business and its business
environment.

Managers study:

 The business itself

 The market
 Competitors
 External factors
 Possible future changes

Three Key Questions

1. Where are we now?
↓
2. What changes may affect us?
↓
3. How should we respond?

Why is it important?

A business needs to understand its current situation before making major decisions.

Poor analysis → Poor strategic decisions

Stage 2: Strategic Choice

Meaning

Strategic choice involves selecting the best long-term option from different possible
strategies.

Managers consider:

 Benefits of each option

 Limitations and risks
 Available resources
  Cost
 Possible competitive advantage

A good strategy should be:

CHALLENGING + ACHIEVABLE + AFFORDABLE

Possible Strategies
↓
Compare options
↓
Consider benefits, risks and resources
↓
Choose the best strategy

Important Point

Strategic choice requires:

 Analysis
 Experience
 Judgement
 Management skills

Stage 3: Strategic Implementation

Meaning

Strategic implementation means putting the chosen strategy into action.

A strategy is only useful if the business can successfully implement it.

Successful implementation requires:

1. Suitable Organisation Structure

The business must be organised to support the change.

2. Adequate Resources

The business must provide sufficient:

 Finance
 Employees
  Equipment
 Technology

3. Motivated Employees

Employees should understand and support the change.

4. Suitable Leadership and Culture

Managers should lead and support the implementation.

5. Control and Review

The business must check whether the strategy is achieving its objectives.

3. Strategic Management: Complete Graphic Organiser

SMART OBJECTIVES
↓
┌──────────────────────┐
│ 1. STRATEGIC ANALYSIS│
│ Where are we now? │
└──────────────────────┘
↓
┌──────────────────────┐
│ 2. STRATEGIC CHOICE │
│ Which option is best?│
└──────────────────────┘
↓
┌──────────────────────┐
│3. IMPLEMENTATION │
│ How will we do it? │
└──────────────────────┘
↓
MONITOR & REVIEW
↓
ACHIEVE OBJECTIVES

Memory Trick:

A–C–I

Analyse
Choose
Implement
4. Strategy and Tactics

Strategic Decisions
Strategic decisions are major, long-term decisions that affect the whole business.

Example:

A business decides to enter international markets.

This may involve:

 Marketing
 Finance
 Production
 Human resources

Tactical Decisions
Tactical decisions are smaller, short- or medium-term decisions that help achieve strategic
objectives.

Example:

A business decides to sell the product in different-sized packages.

This may help support the larger strategy.

5. Strategy vs Tactics
Strategic Decisions Tactical Decisions

Long-term Short- to medium-term

Major decisions Smaller decisions

Difficult and costly to reverse Easier to change

Taken by directors and senior managers Taken by lower-level managers

Affect the whole business Often affect one department

 Strategic Decisions Tactical Decisions

Cross-functional More limited in impact

6. Simple Example

Business Objective

Become a leading international clothing brand.

Strategic Decision

Enter the Indian and European markets.

This is a major long-term decision affecting:

 Finance
 Marketing
 Production
 Human resources

Tactical Decisions

To support this strategy:

 Use local advertising

 Sell different clothing sizes
 Offer local payment methods
 Change packaging

Remember:

Strategy = Big direction

Tactics = Smaller actions that support the direction
7. Why is Strategic Management Important?

Without strategic management, a business may fail to:

Plan for the Future

The business may make decisions only for the present.

Respond to Change

The business may fail to react to competitors or changes in the external environment.

Make Effective Long-Term Decisions

Decisions may be made without clear objectives or proper analysis.

8. Assessment Objectives

AO1 – Knowledge
Know the meaning of:

 Strategic management
 Strategic analysis
 Strategic choice
 Strategic implementation
 Strategy
 Tactics

Example

Define strategic implementation.

Strategic implementation is the process of putting a chosen business strategy into action.

AO2 – Application
Apply the concept to the case study.
Example

If the case study states that the business has limited finance:

The business may not have sufficient resources to implement its chosen expansion strategy.

AO3 – Analysis
Explain the chain of consequences.

Example

If employees are not motivated, they may not support the new strategy. This could slow down
implementation and reduce the likelihood of achieving the business objectives.

Analysis Chain
Problem
↓
Effect on implementation
↓
Impact on business
↓
Impact on objectives

AO4 – Evaluation
Make a justified judgement.

Example

Although a strategy may provide significant growth opportunities, its success will depend on
whether the business has sufficient finance and motivated employees to implement it effectively.

Evaluation Depends On:

 Resources available
 Size of the business
 Employee support
 Leadership
 Competitive environment
 Business objectives
 Time period
QUICK REVISION SUMMARY

Strategic Management
Deciding the long-term direction of a business and putting the decision into action.

Three Stages:

A – Analyse → Where are we now?

C – Choose → Which strategy is best?

I – Implement → How will we make it happen?

Strategy vs Tactics
Strategy

Big, long-term direction

Tactics

Smaller, short-term actions that help achieve the strategy

Memory Sentence:

Strategy chooses the destination; tactics are the steps taken along the way.

This version keeps the essential syllabus content while making the process easy for learners to
remember: Analyse → Choose → Implement.

Here is a short, simple and clear learner-friendly version of Blue Ocean Strategy, with a
graphic organiser and AO1–AO4 exam focus.

APPROACHES TO DEVELOPING BUSINESS STRATEGY

BLUE OCEAN STRATEGY

1. What is Blue Ocean Strategy?

Simple Meaning

Blue Ocean Strategy means creating a new market where there is little or no competition,
instead of competing in an existing crowded market.

Developed by:

W. Chan Kim and Renée Mauborgne

2. Red Ocean vs Blue Ocean

🔴 Red Ocean

A market with many competitors.

Businesses try to:

 Compete with existing businesses

 Attract existing customers
 Beat competitors
 Fight for existing demand

🔵 Blue Ocean

A new or uncontested market with few or no close competitors.

Businesses try to:

 Create a new market

 Attract new customers
 Create new demand
 Make competition less important
3. Main Idea
RED OCEAN
Compete with rivals
↓
Fight for existing customers
↓
High competition
↓
Price pressure
↓
Lower profits

⬇️Instead of competing...

BLUE OCEAN
Create something new
↓
Attract new customers
↓
Little or no direct competition
↓
Create new demand
↓
Potential for higher profits

Key Idea:

Do not fight for existing customers. Create new customers and new demand.

4. The Aim of Blue Ocean Strategy

The aim is to achieve:

HIGH CUSTOMER VALUE + LOW BUSINESS COST

This is called value innovation.

BLUE OCEAN
│
┌────────┴────────┐
│ │
HIGH VALUE LOW COST
for customers for business
│ │
└────────┬────────┘
▼
VALUE INNOVATION
Important Point

Normally, a business may choose between:

 Differentiation – offer something different but possibly at higher cost

 Low cost – offer cheaper products but with less differentiation

Blue Ocean Strategy aims for:

Differentiation AND low cost

5. Four Actions Framework

To find a Blue Ocean, businesses ask four questions:

R – Raise
What should be increased above the industry standard?

Examples:

 Quality
 Customer service
 Convenience

R – Reduce
What can be reduced?

Examples:

 Unnecessary advertising costs

 Complicated features
 Extra costs

E – Eliminate
What can be completely removed?

Ask:

What do customers not really need?

C – Create
What new factors can be introduced?

Ask:

What has the industry never offered before?

6. Four Actions Framework Graphic Organiser

FOUR ACTIONS
│
┌──────────────┼──────────────┐
│ │ │
RAISE REDUCE ELIMINATE
What should What can be What can be
be improved? reduced? removed?
│
▼
CREATE
What new value can
be offered?
│
▼
BLUE OCEAN MARKET

Memory Trick:

R–R–E–C

Raise – Reduce – Eliminate – Create

7. Red Ocean vs Blue Ocean
Red Ocean Strategy Blue Ocean Strategy

Compete in existing markets Create new markets

Focus on existing customers Focus on potential customers

Try to beat competitors Make competition less relevant

Exploit existing demand Create new demand

Usually high competition Little or no direct competition

Differentiation or low cost Differentiation and low cost

8. Simple Example

Existing Market

Many cafés compete by selling:

 Coffee
 Cakes
 Snacks

This is a Red Ocean.

Blue Ocean Idea

A business creates a new type of café experience that combines:

 A unique service
 A new customer experience
 Lower operating costs
 A completely different target market

The business is no longer competing in exactly the same way as existing cafés.

Result:

The business creates new demand instead of only fighting for existing customers.
9. Advantages of Blue Ocean Strategy

1. Less Competition

The business may have few direct competitors.

2. New Customers

The business may attract people who were not previously customers.

3. New Demand

The business creates a new market or market segment.

4. Potential for Higher Profits

Less competition may reduce price pressure.

5. Differentiation

The business may stand out from existing competitors.

10. Possible Limitations

Blue Ocean Strategy may be risky because:

 It may be difficult to create a completely new market.

 Customers may not accept the new product or service.
 The business may need significant innovation.
 Competitors may copy the successful idea.
 Creating a new market may require substantial investment.

11. Assessment Objectives

AO1 – Knowledge
Define Blue Ocean Strategy.
Blue Ocean Strategy is an approach that involves creating a new, uncontested market rather than
competing directly in an existing market.

AO2 – Application
Use the case study to show how the business may create a new market.

Example:

A business could create a new customer experience that is not currently offered by its
competitors.

AO3 – Analysis
Explain the chain of consequences.

New market created

↓
Less direct competition
↓
Less price pressure
↓
Potentially higher profit margins

AO4 – Evaluation
Make a judgement about whether the strategy is suitable.

Example:

Blue Ocean Strategy may be highly effective if the business has the finance and innovation
needed to create a new market. However, if customers do not accept the new product, the
strategy may result in significant losses. Therefore, its success depends on the business's
resources and the level of customer demand.
QUICK REVISION

BLUE OCEAN STRATEGY

Stop competing. Start creating.

Red Ocean:

Existing market + many competitors

Blue Ocean:

New market + little or no direct competition

Four Actions:

RAISE → REDUCE → ELIMINATE → CREATE

Main Goal:

High customer value + low business cost

Exam Memory:

Create a new market → Create new demand → Reduce competition → Potentially increase
profit

Here is a short, simple and clear set of notes for learners covering Scenario Planning and
SWOT Analysis, with graphic organisers and AO1–AO4 exam focus.

APPROACHES TO DEVELOPING BUSINESS STRATEGY

1. SCENARIO PLANNING

What is Scenario Planning?

Scenario planning is a technique where managers consider different possible future
situations and prepare strategies for each one.

Simple Idea

“If this happens, what will we do?”

How Does It Work?
Identify possible future events
↓
Create different scenarios
↓
Ask: What if this happens?
↓
Develop a strategy for each scenario
↓
Business is better prepared

Possible Factors Creating Scenarios

 Social changes
 Economic changes
 Technological changes
 Competitor actions
 Government policies

Example
Scenario 1: Demand increases

Possible strategy: Increase production.

Scenario 2: A new competitor enters

Possible strategy: Improve the product or reduce prices.

Scenario 3: Costs increase

Possible strategy: Find cheaper suppliers or improve efficiency.

Benefits of Scenario Planning

1. Identifies Risks

Managers think about important uncertainties.

2. Provides Different Strategies

The business is prepared for different possible futures.

3. Increases Flexibility

Managers can change strategy depending on what happens.

Limitations of Scenario Planning

1. Too Many Scenarios

Managers may become confused by too many possibilities.

2. Incorrect Predictions

The actual future may be completely different from the scenarios considered.

3. Short-Term Focus

Managers may consider only immediate risks and miss long-term opportunities.

Scenario Planning: Quick Summary

UNCERTAIN FUTURE
↓
POSSIBLE SCENARIOS
↓
STRATEGY FOR EACH SCENARIO
↓
FLEXIBLE BUSINESS

Exam Evaluation

Scenario planning is useful because it prepares a business for uncertainty. However, it cannot
guarantee that the actual future will match any of the scenarios created.
2. SWOT ANALYSIS

What is SWOT Analysis?

SWOT analysis is a strategic analysis technique used to examine the internal strengths and
weaknesses of a business and the external opportunities and threats facing it.

SWOT GRAPHIC ORGANISER

SWOT ANALYSIS
│
┌────────────┴────────────┐
│ │
INTERNAL EXTERNAL
│ │
┌─────┴─────┐ ┌─────┴─────┐
│ │ │ │
STRENGTHS WEAKNESSES OPPORTUNITIES THREATS
│ │ │ │
What are What are What chances What could
we good at? our problems? can we use? harm us?

Memory Trick:

SW = Inside the business

OT = Outside the business

S – STRENGTHS

Meaning

Internal factors that give the business an advantage.

Examples:

 Skilled employees
 Strong brand
 Good product quality
 Innovative products
 Strong marketing skills
 Loyal customers
 Good location
Key Question:

What does the business do well?

W – WEAKNESSES

Meaning

Internal factors that put the business at a disadvantage.

Examples:

 Poorly trained employees

 Old equipment
 Weak brand image
 Poor marketing
 Limited production capacity
 Poor-quality products

Key Question:

What problems does the business have?

O – OPPORTUNITIES

Meaning

External factors that could create opportunities for growth or higher profits.

Examples:

 Growing markets
 New technology
 New international markets
 New market segments
 A competitor leaving the market
 Lower interest rates

Key Question:
What opportunities can the business take advantage of?

T – THREATS

Meaning

External factors that could damage the business.

Examples:

 New competitors
 Price wars
 New laws
 Higher taxes
 Competitors launching better products
 Competitors with better distribution

Key Question:

What external factors could harm the business?

3. SWOT AND STRATEGIC OBJECTIVES

SWOT helps managers answer:

What are we good at?

↓
What problems do we have?
↓
What opportunities exist?
↓
What threats do we face?
↓
What strategy should we choose?

Matching Strengths with Opportunities

The best strategy may be found by matching:
BUSINESS STRENGTH

Strong online sales system

MARKET OPPORTUNITY

Growing international online market

POSSIBLE STRATEGY

Expand online sales into international markets

Overcoming Weaknesses
Sometimes a business must solve a weakness before taking advantage of an opportunity.

Example

Opportunity: Growing demand for online sales

Weakness: Poor online marketing skills

Possible Strategy:

Train employees or employ digital marketing specialists.

4. Limitations of SWOT Analysis

1. Subjective
Different managers may have different opinions about the same strength or weakness.

2. Not Quantitative
SWOT does not show:

 The cost of solving a weakness

 The exact profit from an opportunity
 Which factor is financially most important

3. Does Not Give the Final Answer

SWOT identifies important factors, but further analysis is needed before choosing a strategy.

Important Exam Point:

SWOT is a starting point for strategic decision-making, not a complete decision-making

tool.

5. SWOT Example

Business: A Small Clothing Business

Strengths Weaknesses

Strong local reputation Limited finance

Good-quality products Small production capacity

Skilled designers Weak online presence

Opportunities Threats

Growing online market Large online competitors

International demand Price competition

New social media platforms Rising material costs

6. SWOT Analysis: AO Skills

AO1 – Knowledge
Define SWOT analysis.

SWOT analysis is a strategic tool used to identify the internal strengths and weaknesses of a
business and the external opportunities and threats facing it.

AO2 – Application
Use case-study information.

Example:

The business has limited finance, which is an internal weakness.

AO3 – Analysis
Explain how a factor affects the business.

Example:

Limited finance may prevent the business from investing in online marketing. This could reduce
its ability to take advantage of the growing online market.

AO4 – Evaluation
Evaluate the importance of a SWOT factor.

Example:

Although the growing online market provides a significant opportunity, the business may be
unable to benefit fully because of its limited finance. Therefore, overcoming this weakness may
be more important than immediately pursuing the opportunity.
QUICK COMPARISON
Scenario Planning SWOT Analysis

Focuses on possible futures Examines current position

Considers different future scenarios Identifies S, W, O and T

Helps prepare different strategies Helps identify strategic options

Useful in uncertain environments Useful as a starting point for strategy

FINAL REVISION MAP

STRATEGIC ANALYSIS
│
┌────────┴────────┐
│ │
SCENARIO PLANNING SWOT
│ │
Possible futures Current position
│ │
What if...? S – W – O – T
│ │
└────────┬────────┘
▼
STRATEGIC CHOICE
▼
STRATEGY

Remember:
Scenario Planning

Prepare for different possible futures.

SWOT Analysis

Understand the business and its environment before choosing a strategy.

Here is a short, simple and learner-friendly version of PEST Analysis and Porter’s Five
Forces, with clear graphic organisers and AO1–AO4 exam focus.
STRATEGIC ANALYSIS TOOLS

1. PEST ANALYSIS

What is PEST Analysis?

PEST analysis examines major external factors that may affect a business and its future
strategy.

These factors are part of the macro environment.

Macro environment = The wider external environment surrounding a business.

A business cannot directly control these factors.

PEST GRAPHIC ORGANISER

PEST ANALYSIS
│
┌───────────────┼───────────────┐
│ │ │
POLITICAL ECONOMIC SOCIAL
& LEGAL
│
▼
TECHNOLOGICAL

Memory Trick:

PEST = Politics, Economy, Society, Technology

P – POLITICAL AND LEGAL FACTORS

These are government decisions and laws that affect businesses.

Examples:

 Government stability
 Employment laws
 Tax changes
  Environmental regulations
 Competition laws
 Consumer protection laws

Business Impact

A new law may increase costs or require a business to change its operations.

E – ECONOMIC FACTORS

These affect the level of business activity and customer spending.

Examples:

 Economic growth
 Interest rates
 Inflation
 Exchange rates
 Tax rates
 Stage of the business cycle

Business Impact

Higher interest rates may increase borrowing costs and reduce investment.

S – SOCIAL FACTORS

These relate to changes in society and people's lifestyles.

Examples:

 Population age
 Education levels
 Migration
 Lifestyle changes
 Social attitudes
 Environmental concerns
 Language and culture
Business Impact

An ageing population may increase demand for products designed for older customers.

T – TECHNOLOGICAL FACTORS

These relate to changes in technology and innovation.

Examples:

 Internet access
 Automation
 New production technology
 Product innovation
 Process innovation
 Renewable energy technology

Business Impact

New technology may reduce production costs but may also make existing products obsolete.

PEST: OPPORTUNITY OR THREAT?

EXTERNAL PEST FACTOR
↓
┌──────┴──────┐
│ │
OPPORTUNITY THREAT
│ │
Helps business Creates risk

Example:

New technology

Opportunity: Lower production costs

or
 Threat: Existing technology becomes outdated

PEST AND SWOT

PEST and SWOT are complementary.

SWOT PEST

Examines internal and external factors Examines only external factors

Strengths and weaknesses Political, economic, social, technological

Opportunities and threats Helps identify opportunities and threats

Simple Link
PEST ANALYSIS
↓
Identifies external changes
↓
Creates opportunities or threats
↓
Used in SWOT analysis
↓
Helps develop strategy

Evaluation of PEST Analysis

Advantages

 Helps businesses understand the wider environment.

 Identifies opportunities and threats.
 Supports strategic decision-making.
 Encourages managers to prepare for change.

Limitations

 The environment can change quickly.

 Predictions may be inaccurate.
 It does not directly tell managers which strategy to choose.
 It must be regularly updated.
Important Point

PEST analysis is not a one-time exercise. It should be regularly reviewed.

For international businesses, PEST analysis may be needed for each country in which the
business operates.

2. PORTER'S FIVE FORCES

What is Porter's Five Forces Analysis?

Porter's Five Forces is a framework used to analyse the level of competition and potential
profitability in an industry.

It was developed by Michael Porter.

PORTER'S FIVE FORCES

THREAT OF
NEW ENTRY
▲
│
SUPPLIER POWER ← COMPETITIVE → BUYER POWER
RIVALRY
│
▼
THREAT OF SUBSTITUTES

Main Question:

How competitive and profitable is this industry?

FORCE 1: THREAT OF NEW ENTRANTS

Meaning

How easy is it for new businesses to enter the industry?

Threat is HIGH when:

 Start-up costs are low

 Technology is cheap
 Distribution is easy
 There are few legal restrictions
 Strong brands are not important

High Threat:

More competitors may enter → competition increases → prices and profits may fall.

FORCE 2: POWER OF BUYERS

Meaning

How much power do customers have over businesses?

Buyer power is HIGH when:

 There are many suppliers

 Products are similar
 Customers can easily change suppliers
 Switching costs are low

High Buyer Power:

Customers can demand lower prices or better quality.

FORCE 3: POWER OF SUPPLIERS

Meaning

How much power do suppliers have over businesses?

Supplier power is HIGH when:

 There are few suppliers

 Switching suppliers is expensive
  The supplier has a strong brand
 The business depends heavily on the supplier

High Supplier Power:

Suppliers may increase prices → business costs increase → profits may fall.

FORCE 4: THREAT OF SUBSTITUTES

Meaning

A substitute is a product from another industry that satisfies a similar customer need.

Examples:

 Rail transport ↔ Bus transport

 Plastic containers ↔ Glass containers
 Traditional television ↔ Streaming services

High Threat:

Customers can easily switch to another product.

FORCE 5: COMPETITIVE RIVALRY

Meaning

The level of competition between existing businesses in the industry.

Rivalry is HIGH when:

 There are many competitors

 Competitors are similar in size
 Market growth is slow
 Fixed costs are high
 New businesses can enter easily
 Substitutes are available

High Rivalry:
Businesses may reduce prices or increase advertising.

This can reduce profit margins.

PORTER'S FIVE FORCES: ANALYSIS CHAIN

STRONG COMPETITIVE FORCE
↓
MORE PRESSURE ON BUSINESS
↓
Higher costs or lower prices
↓
Lower profit margins
↓
Lower industry profitability

How Does Porter's Five Forces Help Strategy?

It helps a business decide:

1. Should We Enter the Industry?

If competition is very strong, entry may be risky.

2. Should We Stay in the Industry?

If competition is increasing, the business may consider leaving.

3. How Can We Improve Our Position?

The business may try to:

 Differentiate its products

 Reduce costs
 Build customer loyalty
 Develop strong supplier relationships
 Create barriers to entry
PEST vs PORTER'S FIVE FORCES
PEST Analysis Porter's Five Forces

Examines the macro environment Examines industry competition

Political, economic, social and technological factors Five competitive forces

Wider external environment Specific industry environment

Helps identify opportunities and threats Helps assess competition and profitability

ASSESSMENT OBJECTIVES

AO1 – Knowledge
Define PEST Analysis.

PEST analysis is a strategic tool used to examine external political, economic, social and
technological factors affecting a business.

Define Porter's Five Forces.

Porter's Five Forces is a framework used to analyse the competitive forces affecting an industry.

AO2 – Application
Use case-study information.

Example:

The business operates in a market with many competitors and low switching costs.

This suggests that competitive rivalry and buyer power may be high.

AO3 – Analysis
Explain the business impact.
Example:

If buyer power is high, customers may demand lower prices because they can easily switch to
another supplier. This may reduce the business's profit margin.

Analysis Chain:
High buyer power
↓
Customers demand lower prices
↓
Business reduces prices
↓
Profit margin falls

AO4 – Evaluation
Make a judgement.

Example:

Although high competitive rivalry may reduce profitability, the business may still enter the
industry if it has a strong brand or unique product that allows it to differentiate itself.

Evaluation Depends On:

 Strength of the business

 Availability of resources
 Level of competition
 Market growth
 Long-term objectives

FINAL REVISION MAP

STRATEGIC ANALYSIS
│
┌────────┴────────┐
│ │
PEST PORTER
│ │
Wider environment Industry competition
│ │
Political New entrants
Economic Buyer power
Social Supplier power
 Technological Substitutes
Rivalry
│ │
└────────┬────────┘
▼
STRATEGIC CHOICE
▼
STRATEGY

Remember:
PEST asks:

What is happening in the wider environment?

Porter asks:

How competitive and profitable is this industry?

SWOT asks:

What are our strengths, weaknesses, opportunities and threats?

Here is a short, simple and clear learner-friendly version covering Evaluation of Porter’s
Five Forces, Core Competencies and the introduction to the Ansoff Matrix.

STRATEGIC ANALYSIS AND STRATEGY DEVELOPMENT

1. Evaluation of Porter's Five Forces

Main Benefit
Porter's Five Forces helps managers:

 Analyse competition logically.

 Understand the competitive structure of an industry.
 Assess potential profitability.
 Identify strategic opportunities and threats.

Key Point

It is a useful starting point for developing business strategy.

Limitations
1. It Can Be Too Static

The model analyses an industry at a particular point in time.

However, industries can change rapidly because of:

 Globalisation
 New technology
 Changing customer preferences

Therefore, the analysis may quickly become outdated.

2. It Can Be Complex

Modern industries may include:

 Joint ventures
 Several product groups
 Different market segments

Each product or market may face different competitive forces.

Therefore, it may be difficult to apply one simple model to the whole industry.

Evaluation Chain
Porter's Five Forces
↓
Helps analyse competition
↓
Supports strategic decisions
↓
BUT
↓
Industry changes quickly
↓
Analysis may become outdated
Exam Judgement

Porter's Five Forces is a useful starting point, but it should be regularly updated and used
with other strategic analysis tools.

2. CORE COMPETENCIES

What is a Core Competency?

A core competency is a special skill, resource or capability that gives a business a
competitive advantage.

The concept was developed by:

Gary Hamel and C. K. Prahalad

Three Requirements of a Core Competency

A core competency should:

1. Provide Customer Benefits

It should give customers something valuable.

2. Be Difficult to Copy
Competitors should find it difficult to imitate.

Example:

 Patented technology
 Unique production process
 Special expertise
3. Be Useful in Many Markets
It should help the business develop different products or enter different markets.

CORE COMPETENCY GRAPHIC ORGANISER

CORE COMPETENCY
│
┌─────────────┼─────────────┐
│ │ │
CUSTOMER DIFFICULT USEFUL IN
BENEFIT TO COPY MANY MARKETS
│ │ │
└─────────────┼─────────────┘
▼
COMPETITIVE ADVANTAGE
▼
NEW PRODUCTS + NEW MARKETS

Core Competence vs Ordinary Competence

A business may be good at something, but this does not automatically make it a core
competency.

Example

A computer assembly business may produce computers efficiently and cheaply.

However, if competitors can easily buy the same components and copy the process, this is not a
core competency.

Key Point:

A core competency must be special, valuable and difficult to copy.

3. How Are Core Competencies Developed?

Core competencies may develop when a business combines:

 Technology
  Product knowledge
 Employee skills
 Design expertise
 Production expertise
 IT skills

Important Point

A business does not always need to spend huge amounts on research and development.

It may create a core competency by combining existing skills in a new and effective way.

4. Core Competencies and Strategy

Several Competencies
↓
Core Product
↓
┌──────┼──────┬──────┐
Business 1 Business 2 Business 3 Business 4
↓ ↓ ↓ ↓
Products Products Products Products

Therefore, one core competency can eventually lead to many different end products.

Figure 8.6: Core competencies can lead to a large number of end products

A core competency can lead to:

CORE COMPETENCY
↓
CORE PRODUCT
↓
MANY END PRODUCTS
↓
NEW MARKETS
↓
COMPETITIVE ADVANTAGE

Example

A business with expertise in small electric motors may use this core competency to produce:

 Power tools
 Lawnmowers
 Food processors
Strategic Benefit

The business can use the same core competency in different products and markets.

This may create economies of scale.

5. ANSOFF MATRIX

What is the Ansoff Matrix?

The Ansoff Matrix is a strategic planning tool used to identify different strategies for
increasing sales and business growth.

It was developed by Igor Ansoff.

The matrix considers two questions:

1. What product will we sell?

 Existing product
 New product

2. Which market will we sell in?

 Existing market
 New market

ANSOFF MATRIX
PRODUCTS
EXISTING NEW
┌────────────┬────────────┐
│ │ │
EXISTING │ MARKET │ PRODUCT │
MARKETS │ PENETRATION│ DEVELOPMENT│
│ │ │
├────────────┼────────────┤
│ │ │
NEW │ MARKET │ DIVERSI- │
MARKETS │ DEVELOPMENT│ FICATION │
│ │ │
└────────────┴────────────┘
Four Ansoff Strategies

1. Market Penetration
Existing Product + Existing Market

The business sells more of its existing products to its existing market.

Examples:

 Increase advertising
 Reduce prices
 Encourage existing customers to buy more

Risk:

Lowest risk

The business already knows the product and market.

2. Product Development
New Product + Existing Market

The business develops new products for its existing customers.

Example:

A sportswear business launches a new range of sports shoes for its existing customers.

Risk:

Moderate risk

The business knows the market but the product is new.

3. Market Development
Existing Product + New Market

The business sells its existing products to a new market.

Examples:

 Enter a new country

 Target a new age group
 Sell to a new customer segment

Risk:

Moderate to high risk

The product is known but the new market is unfamiliar.

4. Diversification
New Product + New Market

The business enters a new market with a new product.

Example:

A clothing business starts producing and selling electronic products in a new country.

Risk:

Highest risk

The business has little experience with both the product and the market.

ANSOFF RISK MODEL

LOW RISK
▲
│
MARKET PENETRATION
│
 PRODUCT DEVELOPMENT
│
MARKET DEVELOPMENT
│
DIVERSIFICATION
│
HIGH RISK

Memory Rule:

The more new things a business does, the greater the risk.

6. AO1–AO4 EXAM SKILLS

AO1 – Knowledge
Define a core competency.

A core competency is a special capability that provides customer benefits, is difficult to copy and
can be used in different products or markets.

Define diversification.

Diversification is a growth strategy involving a new product being sold in a new market.

AO2 – Application
Use the case study.

Example:

A business with a patented production process has a core competency that competitors may find
difficult to copy.

AO3 – Analysis
Explain the consequences.
Example:

A patented production process may reduce production costs. This could allow the business to
offer lower prices and gain a competitive advantage over rivals.

AO4 – Evaluation
Make a justified judgement.

Example:

Diversification could provide significant growth opportunities, but it is the riskiest Ansoff
strategy because the business has no experience with either the new product or the new market.
Therefore, it may be more suitable for a financially strong business with transferable core
competencies.

FINAL REVISION MAP

STRATEGIC ANALYSIS
│
├── PORTER'S FIVE FORCES
│ ↓
│ Analyse competition
│
├── CORE COMPETENCIES
│ ↓
│ Build competitive advantage
│
└── ANSOFF MATRIX
↓
Choose growth strategy

Remember:
Porter

How competitive is the industry?

Core Competency

What are we exceptionally good at that competitors find difficult to copy?

Ansoff
Should we sell existing or new products in existing or new markets?

Here is a short, simple and clear learner-friendly version of the four Ansoff strategies,
evaluation of the Ansoff Matrix and Force-Field Analysis.

ANSOFF MATRIX: GROWTH STRATEGIES

The Ansoff Matrix helps a business decide how to increase sales and grow.

It considers:

 Products: Existing or New

 Markets: Existing or New

1. MARKET PENETRATION

Existing Product + Existing Market

The business tries to sell more of its existing products to its existing customers/market.

Methods:

 Reduce prices
 Increase advertising
 Improve promotion
 Encourage customers to buy more
 Gain market share from competitors

Example

Samsung reduced the prices of its 4K televisions to increase its market share.

Risk: LOWEST

The business already knows:

 The product
 The market
 The customers

Limitation
Price reductions may lead to a price war.

Lower prices
↓
More customers
↓
Higher market share
↓
BUT
↓
Lower profit margins

2. PRODUCT DEVELOPMENT

New Product + Existing Market

The business develops a new or improved product for its existing customers.

Example

Diet Pepsi was developed as a new version of Pepsi for the existing soft drinks market.

Methods:

 New product features

 Product innovation
 New versions
 Improved technology

Risk: MEDIUM

The business knows the customers and market, but the new product may not be successful.

3. MARKET DEVELOPMENT

Existing Product + New Market

The business sells an existing product to a new market.

New Markets May Include:

 A new country
  A new age group
 A new customer segment

Example

Lucozade was repositioned from a health drink to a sports drink, attracting younger customers.

Risk: MEDIUM TO HIGH

The product is known, but the new market may be unfamiliar.

4. DIVERSIFICATION

New Product + New Market

The business enters a new market with a new product.

Example

The Virgin Group expanded from media into airlines, railways and financial services.

Risk: HIGHEST

The business has limited experience with:

 The new product

 The new market

Potential Benefit

High risk may bring:

 High profits
 Entry into a fast-growing industry
 New sources of revenue

Related vs Unrelated Diversification

Related diversification: New activity is connected to the existing business.

Unrelated diversification: Business enters a completely different industry.

Related diversification is usually less risky than unrelated diversification.

ANSOFF RISK DIAGRAM

EXISTING MARKET NEW MARKET

EXISTING MARKET MARKET

PRODUCT PENETRATION DEVELOPMENT
LOWEST RISK HIGHER RISK

NEW PRODUCT DIVERSIFICATION

PRODUCT DEVELOPMENT HIGHEST RISK
MEDIUM RISK

Memory Rule:

The more new elements, the greater the risk.

EVALUATION OF THE ANSOFF MATRIX

Advantages
1. Shows Different Growth Options

It helps managers identify four possible strategies.

2. Shows Relative Risk

Managers can compare the risk of each option.

3. Supports Decision-Making

Managers can compare:

 Costs
 Potential benefits
 Risks
Limitations
1. Considers Only Two Main Factors

It focuses only on:

 Products
 Markets

It does not fully analyse the wider environment.

Therefore, managers should also use:

 SWOT analysis
 PEST analysis
 Other strategic tools

2. Does Not Give Detailed Answers

For example, it may suggest market development, but it does not show:

 Which country to enter

 Which customer segment to target
 Which product to sell

Further research is required.

3. Management Judgement Is Still Needed

The matrix does not automatically select the best strategy.

Managers must consider:

 Experience
 Resources
 Risk
 Expected returns
 Business objectives

Exam Judgement
The Ansoff Matrix is useful for identifying growth options and comparing risk, but it
should not be used alone.

5. FORCE-FIELD ANALYSIS

What is Force-Field Analysis?

Force-field analysis is a decision-making technique that compares the forces supporting a
decision with the forces opposing it.

It was developed by Kurt Lewin.

Simple Question:

Are the forces for change stronger than the forces against change?

FORCE-FIELD GRAPHIC ORGANISER

DRIVING FORCES RESTRAINING FORCES
FOR CHANGE AGAINST CHANGE

+ Employee benefits - High cost

+ Increased efficiency - Employee resistance
+ Business survival - Lack of skills
+ Higher productivity - Fear of technology

────────────────►
PROPOSED CHANGE

6. How to Conduct Force-Field Analysis

Step 1

Identify the current situation and the desired situation.

Step 2

List the forces supporting the change.

Step 3

List the forces opposing the change.

Step 4

Give each force a score from 1 to 10.

 1 = Very weak
 10 = Very strong

Step 5

Add the scores.

Step 6

Decide whether the change is viable.

Step 7

Try to:

 Increase driving forces

 Reduce restraining forces

7. Simple Example

Decision:

Introduce a new IT system.

Driving Forces Score Restraining Forces Score

Increased efficiency +4 Cost of system -5

Better productivity +3 Employee resistance -4

Improved business survival +2 Training costs -2

Total +9 Total -11

Result:

The restraining forces are stronger.

Therefore, management should try to:

 Train employees
 Explain the need for change
 Choose cheaper technology
 Reward employees
 Improve energy efficiency

8. Improving the Decision

REDUCE RESTRAINING FORCES
+
INCREASE DRIVING FORCES
↓
CHANGE BECOMES MORE VIABLE

Example:

Employee fear of technology

Provide training

Fear is reduced

Employees are more likely to support the change

9. Evaluation of Force-Field Analysis

Advantages
 Provides a logical way to examine change.
  Identifies benefits and disadvantages.
 Helps managers understand resistance.
 Suggests ways to improve the chances of success.

Limitations
1. Important Forces May Be Missed

Inexperienced managers may fail to identify all relevant factors.

2. Scores Are Subjective

Different managers may give different scores to the same force.

For example:

One manager may score employee resistance as 8.

Another may score it as 4.

Therefore, the final decision may differ.

10. AO1–AO4 EXAM SKILLS

AO1 – Knowledge
Define market penetration.

Market penetration is a growth strategy involving existing products being sold in existing
markets.

Define force-field analysis.

Force-field analysis is a decision-making technique that compares forces supporting a decision

with forces opposing it.
AO2 – Application
Use the case study.

The business is facing employee resistance to the new IT system.

AO3 – Analysis
Explain the consequences.

Employee resistance may reduce the speed of implementation, which could delay the benefits of
the new IT system.

AO4 – Evaluation
Make a judgement.

Although the force-field analysis suggests that the change may initially face strong resistance,
training employees could reduce this problem. Therefore, the change may still be worthwhile if
the long-term efficiency gains are greater than the implementation costs.

FINAL REVISION MAP

ANSOFF MATRIX
↓
Choose a growth strategy
↓
Market Penetration
Product Development
Market Development
Diversification
↓
Assess risk and returns

FORCE-FIELD ANALYSIS
↓
Forces supporting change
VS
Forces opposing change
↓
Compare strengths
 ↓
Increase positive forces
Reduce negative forces
↓
Make better strategic decisions

Remember:
Ansoff Matrix

How can we grow?

Force-Field Analysis

Should we go ahead with this decision?

Here is a short, simple and clear learner-friendly version of Decision Trees, including the
calculation method and AO1–AO4 exam focus.

DECISION TREES

1. What is a Decision Tree?

A decision tree is a diagram that helps managers compare different decisions by showing
possible outcomes, probabilities and financial returns.

Simple Question:

Which decision is most likely to give the highest expected financial return?

2. What Does a Decision Tree Show?

A decision tree shows:

1. Different options
2. Possible outcomes
3. Probability of each outcome
4. Financial return or loss
3. Decision Tree Symbols
□ DECISION NODE
A choice must be made

○ CHANCE NODE
Different outcomes may occur

──► BRANCH
An option or possible outcome

Important Rule:

Decision trees are drawn from left to right but calculated from right to left.

Explanation of the Decision Tree

This decision tree helps the manager decide whether to hold the fundraising auction indoors or
outdoors.

Step 1: Decision Node □

The square on the left represents the decision the manager must make:

Option 1: Hold the auction indoors

Cost = $2,000

Option 2: Hold the auction outdoors

Cost = $3,000

Step 2: Chance Nodes ○

The circles show that the result depends on the weather.

For both options:

 60% probability of fine weather

 40% probability of poor weather
OPTION 1: INDOORS
INDOORS
Cost = $2,000
│
○
/ \
60% 40%
Fine Poor
$5,000 $7,000

Expected Value

[
(0.6 \times $5,000) + (0.4 \times $7,000)
]

[
= $3,000 + $2,800
]

[
= $5,800
]

Now subtract the cost:

[
$5,800 - $2,000 = $3,800
]

Net Expected Value of Indoors = $3,800

OPTION 2: OUTDOORS
OUTDOORS
Cost = $3,000
│
○
/ \
60% 40%
Fine Poor
$10,000 $4,000
Expected Value

[
(0.6 \times $10,000) + (0.4 \times $4,000)
]

[
= $6,000 + $1,600
]

[
= $7,600
]

Now subtract the cost:

[
$7,600 - $3,000 = $4,600
]

Net Expected Value of Outdoors = $4,600

FINAL COMPARISON
Option Expected Value Cost Net Expected Value

Indoors $5,800 $2,000 $3,800

Outdoors $7,600 $3,000 $4,600

Decision
The manager should choose the outdoor auction because it has the higher net expected value:

$4,600 > $3,800

Simple Exam Explanation

Although the outdoor auction costs $1,000 more to organise, its expected financial return is
significantly higher. Therefore, based on quantitative information, the outdoor option is
preferred.
Remember the Process:

Decision → Possible outcomes → Probabilities → Expected value → Subtract costs →

Compare

4. Expected Value

Formula
Expected Value (EV)

EV = (Probability × Financial Outcome) + (Probability × Financial Outcome)

If there are more outcomes, continue adding them.

Example
There is a:

 60% chance of fine weather

 40% chance of poor weather

Indoor Event

Weather Probability Return

Fine 0.6 $5,000

Poor 0.4 $7,000

Calculation

EV = (0.6 × $5,000) + (0.4 × $7,000)

EV = $3,000 + $2,800

EV = $5,800

If the cost is $2,000:

Net Expected Value

$5,800 – $2,000 = $3,800

5. Comparing Two Options

Outdoor Event

EV = (0.6 × $10,000) + (0.4 × $4,000)

EV = $6,000 + $1,600

EV = $7,600

Cost = $3,000

Net Expected Value

$7,600 – $3,000 = $4,600

Decision
Option Net Expected Value

Indoor $3,800

Outdoor $4,600

Best Decision:

Hold the event outdoors because it has the higher expected value.

6. Decision Tree Calculation Process

1. Identify the decision options
↓
2. Identify possible outcomes
↓
3. Add probabilities
↓
4. Add financial returns
↓
5. Calculate EV
↓
6. Subtract costs
↓
7. Choose the highest net EV

Memory Trick:

P × R → Add → Subtract Costs → Compare

Probability × Return → Add outcomes → Subtract costs → Compare options

7. More Complex Decision Trees

Some decisions involve several decisions one after another.

Example:

A company owns an old building.

It can:

1. Sell it immediately
2. Renovate it and sell as one house
3. Renovate it and convert it into apartments

Each decision may involve:

 Additional costs
 Different possible outcomes
 Different probabilities

Important Rule
Always work backwards from right to left.

Example:
FINAL OUTCOMES
↓
Calculate EV
↓
Subtract additional costs
↓
Compare options
↓
Take the best option backwards
↓
Calculate final net EV

8. Advantages of Decision Trees

1. Considers All Options

Managers are encouraged to identify different choices.

2. Includes Risk
Probabilities show the likelihood of different outcomes.

3. Includes Financial Returns

Managers can compare the expected financial results.

4. Encourages Logical Thinking

The diagram makes complex decisions easier to understand.

9. Limitations of Decision Trees

1. Probabilities May Be Inaccurate

Past data may not accurately predict the future.

2. Financial Values May Be Uncertain

Expected returns may not actually occur.

3. Non-Financial Factors May Be Ignored

Decision trees may not consider:

 Employee reaction
 Business reputation
 Environmental effects
 Social responsibility

4. Expected Value Is Only an Average

The highest expected value does not guarantee the highest actual return.

10. AO1–AO4 EXAM SKILLS

AO1 – Knowledge
Define expected value.

Expected value is the weighted average financial return calculated by multiplying each possible
outcome by its probability and adding the results.

AO2 – Application
Use the figures from the case study.

There is a 60% probability of fine weather and a 40% probability of poor weather.

AO3 – Analysis
Show the calculation and explain the result.
The outdoor event has a net expected value of $4,600 compared with $3,800 for the indoor
event. Therefore, the outdoor event is expected to provide a higher financial return.

AO4 – Evaluation
Consider factors beyond the calculation.

Although the outdoor event has the higher expected value, this decision depends on the
reliability of the weather probabilities. If poor weather creates serious reputational damage or
cancellation costs, the indoor option may be safer despite its lower expected financial return.

QUICK REVISION

Decision Tree
A diagram used to compare business decisions using options, probabilities, outcomes and
financial returns.

Symbols:

□ = Decision

○ = Chance

Formula:

EV = Probability × Financial Outcome

Rule:

Draw left to right. Calculate right to left.

Final Decision:

Choose the option with the highest net expected value, but also consider qualitative factors.

Here is a short and simple learner-friendly note on the Evaluation of Decision Trees, with
clear AO4 exam focus.
EVALUATION OF DECISION TREES

Decision trees are useful for comparing business options, but they have important limitations.

1. Data May Be Inaccurate

Decision trees depend on:

 Estimated financial returns

 Predicted sales
 Forecast market demand

If the data is inaccurate, the final decision may also be inaccurate.

Analysis Chain
Inaccurate forecasts
↓
Incorrect expected values
↓
Possibly poor business decision

Key Point:

Decision-tree results should be treated as a guide, not a guarantee.

2. Probabilities May Change

Probabilities are often based on past experience.

However, the future may be different.

Example:

A new shop may have been successful last year.

However, a competitor may open a shop nearby this year.

Therefore, the probability of success may be lower.

Key Point:
Past results do not always predict future results.

3. Qualitative Factors Are Not Fully Included

Decision trees mainly focus on numerical information.

They may not fully consider:

 Employee attitudes
 Environmental effects
 Business reputation
 Social responsibility
 Management attitude towards risk

Example:

A decision may have a high expected financial return but damage the environment.

Managers may still reject it.

4. Managers Have Different Attitudes to Risk

Two businesses may make different decisions even when the expected values are the same.

Risk-Averse Manager

May prefer:

A lower but more certain return.

Risk-Taking Manager

May prefer:

A higher but less certain return.

5. Expected Value Is an Average

Expected value represents an average expected return.

It assumes that the decision or outcome occurs many times.

However, a business may make the decision only once.

Example:

A decision tree may show an expected return of $100,000.

The actual result may be:

 $200,000 profit
 $50,000 profit
 A loss

The business will not actually receive the average value of $100,000.

IMPORTANT CONCLUSION
DECISION TREE
↓
Uses probabilities + financial returns
↓
Provides a quantitative guide
↓
BUT
↓
Data may be inaccurate
Probabilities may change
Qualitative factors may be ignored
Risk is not eliminated
↓
MANAGERIAL JUDGEMENT IS STILL NEEDED

AO4 EVALUATION SENTENCE

Although decision trees provide a logical way of comparing the expected financial returns
of different options, the accuracy of the decision depends on the reliability of the data and
probabilities used. They also do not fully consider qualitative factors or eliminate risk.
Therefore, decision trees should be used as a guide alongside managerial judgement and
other forms of analysis.
EXAM MEMORY POINT

Decision Trees Answer:

“What is the expected financial outcome?”

But Managers Must Also Ask:

“How reliable are the figures?”

“What are the non-financial consequences?”

“How much risk is the business willing to accept?”

Yes. For teaching, you need a little more explanation than just definitions. You can explain each
concept to students in this simple “What is it? → How does it work? → Example” format.

Chapter 8: Developing Business Strategy

8.1 Business Strategy

Simple explanation

A strategy is a long-term plan showing how a business will move from its current position to
its desired future position.

How to explain to students

Imagine you want to travel from Chennai to Delhi.

 Where are you now? Chennai

 Where do you want to go? Delhi
 How will you get there? By flight, train or car

This plan is your strategy.

Similarly, a business asks:

 Where are we now?

 Where do we want to be in the future?
 How will we reach there?
Business example

A small clothing business wants to become a national brand.

Its strategy may be:

“Open more branches, sell online and introduce new products.”

Teaching line:
👉 Strategy is the long-term plan for achieving business objectives.

8.2 Strategic Management

Strategic management is the complete process of developing and putting a strategy into
action.

Explain using 3 simple questions:

1. Strategic Analysis – Where are we now?

The business studies:

 its strengths and weaknesses;

 competitors;
 customers;
 market conditions;
 external factors.

2. Strategic Choice – Where do we want to go?

The business compares different options and chooses the best strategy.

3. Strategic Implementation – How will we make it happen?

The business:

 provides finance;
 allocates resources;
 involves employees;
 puts the strategy into action;
 checks whether it is successful.
Easy example

A school wants to introduce online classes:

Analysis: Are students interested? Are competitors offering online classes?

Choice: Should we offer online classes?
Implementation: Buy technology, train teachers and start the classes.

Memory:

A→C→I

Analyse → Choose → Implement

8.3 Approaches to Developing Business Strategy

1. Blue Ocean Strategy 🌊

Simple meaning

Instead of fighting competitors in an existing market, the business creates a new market where
there is little or no competition.

How to explain

Imagine a crowded ocean where many businesses are competing. This is a red ocean.

A business moves to a new, empty area of the ocean. This is a blue ocean.

Example

Instead of opening another ordinary circus, Cirque du Soleil combined:

 circus;
 theatre;
 music;
 gymnastics.

It created a new type of entertainment.

Teacher explanation

“The aim is not to defeat competitors. The aim is to create something so different that direct
competition becomes less important.”

Four Actions Framework

Ask:

Question Meaning

Raise What should we improve?

Reduce What can we reduce?

Eliminate What can we remove?

Create What new thing can we introduce?

Key phrase:
👉 Create new demand instead of fighting for existing demand.

2. Scenario Planning 🔮

Simple meaning

Scenario planning means preparing different strategies for different possible futures.

How to explain

The future is uncertain. A business cannot know exactly what will happen.

So managers ask:

“What if this happens?”

Example: A college

Scenario 1: More students choose online learning.

Possible strategy: Start online courses.
Scenario 2: A new competitor enters the market.
Possible strategy: Improve quality or reduce prices.

Scenario 3: Government changes education laws.

Possible strategy: Adapt courses to meet new requirements.

Simple teaching line

“Scenario planning is like having a Plan A, Plan B and Plan C for different possible futures.”

Advantage

The business is better prepared.

Limitation

If managers consider too many possible situations, they may become confused.

3. SWOT Analysis

SWOT helps a business understand its current position.

S – Strengths
What does the business do well?

Example:

 strong brand;
 skilled workers;
 loyal customers.

W – Weaknesses
What problems does the business have?

Example:

 lack of finance;
 old machinery;
 poor marketing.
O – Opportunities
What external opportunities can the business use?

Example:

 growing online market;

 new export market;
 new technology.

T – Threats
What external dangers may affect the business?

Example:

 new competitors;
 falling demand;
 new laws.

Very important teaching point

Strengths and Weaknesses = Internal

They come from inside the business.

Opportunities and Threats = External

They come from outside the business.

Classroom example: A small bakery

Strength: Good-quality cakes

Weakness: Small shop
Opportunity: Online food delivery
Threat: A large bakery opens nearby

How SWOT helps

The business can match its strengths with opportunities.

For example:

Good baking skills + growing online demand = Start online cake delivery.

Important: SWOT is a starting point. Managers may need further analysis before making a final
decision.
4. PEST Analysis

Simple meaning

PEST analyses the major external factors that can affect a business.

P – Political/Legal

Government and laws.

Examples:

 taxation;
 employment laws;
 environmental regulations.

E – Economic

The condition of the economy.

Examples:

 inflation;
 interest rates;
 economic growth;
 exchange rates.

S – Social

Changes in society and consumer behaviour.

Examples:

 population changes;
 lifestyles;
 education;
 consumer attitudes.

T – Technological

Changes in technology.
Examples:

 automation;
 artificial intelligence;
 internet;
 new production technology.

Example: A business selling electric vehicles

 Political: Government subsidies

 Economic: Interest rates and consumer income
 Social: Growing environmental awareness
 Technological: Improved battery technology

Teaching point

PEST studies the environment outside the business, which the business cannot directly
control.

PEST and SWOT can be used together. PEST factors may create opportunities or threats in a
SWOT analysis.

5. Porter’s Five Forces

Simple meaning

This model helps a business understand how competitive and profitable an industry is.

Ask students:

“Why is it difficult for some businesses to make profits?”

Because of five competitive forces.

1. Threat of New Entrants

How easy is it for new businesses to enter?

If it is easy → competition increases.

2. Bargaining Power of Buyers

How much power do customers have?

If customers can easily change suppliers → buyers have high power.

3. Bargaining Power of Suppliers

How much power do suppliers have?

If there are very few suppliers → suppliers have more power.

4. Threat of Substitutes

Can customers use another product instead?

Example:

 Train can be a substitute for air travel.

 Plastic can be a substitute for glass.

5. Competitive Rivalry

How strongly do existing businesses compete?

If there are many similar businesses → rivalry is likely to be high.

Simple example: Coffee shops

 Many coffee shops → high rivalry.

 Customers can easily change cafés → high buyer power.
 Many coffee bean suppliers → lower supplier power.
 Tea is a possible substitute.
 New cafés can easily enter → high threat of new entrants.

Teaching line:
👉 The stronger the competitive forces, the more difficult it may be for businesses to earn
high profits.

6. Core Competencies ⭐

Simple meaning
A core competency is something a business does exceptionally well and which competitors find
difficult to copy.

Example

A technology company may be excellent at:

 designing small electronic devices;

 developing software;
 creating innovative products.

This special ability can be used to create many different products.

To be a true core competency, it should:

1. Give customers clear benefits.

2. Be difficult for competitors to copy.
3. Be useful in different products and markets.

Teaching question

Ask students:

“What is one thing that a business can do better than its competitors?”

That could be its core competency.

Example:
A company with excellent technology skills may use them to create phones, tablets and smart
watches.

7. The Ansoff Matrix 📊

Simple explanation

The Ansoff Matrix helps a business decide how to increase sales and grow.

It considers two questions:

1. Is the product existing or new?

2. Is the market existing or new?
1. Market Penetration
Existing product + Existing market

Sell more of the same product to the same market.

Example:

A soft-drink company reduces prices to increase sales.

Risk: Lowest.

2. Product Development
New product + Existing market

Create a new product for existing customers.

Example:

A company that sells ordinary soft drinks introduces a new sugar-free drink.

3. Market Development
Existing product + New market

Sell the existing product to a new market.

Example:

A business begins exporting its product to another country.

4. Diversification
New product + New market

The business enters a completely new market with a new product.

Example:

A clothing company starts a completely new business in food delivery.

Risk: Highest because both the product and market are new.

Easy memory:

Same + Same = Market Penetration

New Product = Product Development
New Market = Market Development
New + New = Diversification

8. Force-Field Analysis ⚖️

Simple meaning

Force-field analysis compares:

Forces supporting a decision

Driving forces

with

Forces opposing a decision

Restraining forces

Example: A business wants to introduce new technology

Forces For Forces Against

Higher productivity High cost

Lower production costs Employee resistance

Better quality Training required

Managers give each force a score, for example from 1 to 10.

Then they compare the totals.

Example:

Forces for = 15
Forces against = 10

The decision may be worth implementing.

Teacher explanation

“The stronger the forces supporting change, the easier it may be to implement the decision.”

But the scoring can be subjective. Different managers may give different scores.

9. Decision Trees 🌳

Simple meaning

A decision tree helps managers choose between different options by considering:

 possible decisions;
 possible outcomes;
 probability;
 financial returns.

Example

A business must choose:

Option A: Open a small shop

Option B: Open a large shop

The result depends on whether demand is high or low.

Managers calculate:

Expected Value = Probability × Financial Return

Then they add the possible expected returns.

The option with the higher expected value may be preferred.

Simple classroom example

There is a 60% chance of high demand.

If high demand gives a return of $100 000:

0.6 × $100 000 = $60 000

This calculation is done for all possible outcomes.

Important teaching point

Decision trees provide a logical and quantitative guide, but they do not remove risk.

The final decision should also consider:

 employee reaction;
 environmental impact;
 business reputation;
 management attitude towards risk.

🧠 Easy Overall Memory Story

When a business wants to develop a strategy:

1. SWOT → Look inside and outside the business.

2. PEST → Study the wider external environment.
3. Porter → Study the level of competition.
4. Core Competencies → Identify what the business does best.
5. Ansoff → Decide how to grow.
6. Blue Ocean → Look for a new market with less competition.
7. Scenario Planning → Prepare for different possible futures.
8. Force-Field Analysis → Compare forces for and against change.
9. Decision Trees → Compare choices using probability and expected returns.

This structure should be much easier to use as a teacher explanation, because you can introduce
each approach with a simple question before teaching the definition.