AQA A-Level Business (7138)

## Learning Outcomes

- Understand what selecting a strategy means and why it is a major long-term business decision
- Identify how businesses compare strategic options using objectives, risk, resources and market conditions
- Explain how Ansoff’s Matrix helps businesses assess growth strategies
- Calculate expected value and net gain from decision tree data
- Distinguish between strategic choice, strategic positioning and strategic methods
- Evaluate why the numerically best option may not be the best strategic choice overall

## AQA A-Level Business (7138) Syllabus

For the AQA A-Level Business (7138), you are expected to understand how businesses select a strategy, with a focus on the following syllabus points:

![Ansoff’s Matrix classifying growth strategies by existing or new products and markets: penetration, market development, product development and diversification.](https://static.pastpaperhero.com/images/aqa-a-level-business-7138-strategy-selecting-a-strategy_00.png)

_Ansoff’s Matrix presents four strategic growth options according to whether products and markets are existing or new._

- Know that selecting a strategy means choosing the most suitable long-term course of action to achieve business objectives
- Identify the four growth options in **Ansoff’s Matrix**: market penetration, market development, product development and diversification
- Explain the difference between strategic positioning, strategic choice and strategic methods
- Understand how businesses compare strategic options using risk, likely return, finance, objectives and implementation capability
- Be able to use decision trees, expected value and net gain to support strategic choice
- Understand that payback and ARR may support strategy selection but should not be used in isolation
- Evaluate the limits of decision trees and Ansoff’s Matrix when real business conditions are uncertain

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What is the difference between market development and product development?
2. Why is diversification usually seen as riskier than market penetration?
3. How do you calculate expected value from a decision tree?
4. Why might a business reject the strategy with the highest expected value?
5. How do business objectives affect which strategy is selected?

## Introduction

Selecting a strategy is one of the most important decisions senior managers make. A strategy commits finance, people and time over the medium to long term. If the choice is poor, the business may waste resources, lose market share or struggle to reverse the decision quickly.

In AQA A-Level Business, strong answers do not just name a strategy. They explain why a particular option fits the business's objectives, resources and external environment better than the alternatives. That means combining models, calculations and judgement.

> **Key Term: selecting a strategy**
> Choosing the most suitable long-term course of action to achieve business objectives, using both quantitative and qualitative information.

### What businesses consider when selecting a strategy

A strategy should never be chosen just because it sounds ambitious. Managers need to ask whether it is achievable, suitable and worth the risk. The best strategic choice is the one that fits the business, not the one with the biggest headline growth.

The first issue is the business's **objectives**. A firm aiming for rapid growth may accept high risk and lower short-term profit. A business focused on survival or stable returns may prefer a safer option. A public limited company may face shareholder pressure for faster growth, while a family business may be more cautious.

The second issue is the firm's **resources**. A strategy may look attractive but still be unrealistic if the business lacks finance, skilled staff, production capacity or management time. For example, international expansion may offer growth, but it can fail if the business has weak cash flow or little knowledge of foreign distribution channels.

The third issue is the **external environment**. Competition, economic conditions, social trends, technology and legal change all affect strategic choice. In a saturated market, market penetration may produce only limited gains. In a fast-changing market, product development may be necessary simply to stay competitive.

The fourth issue is **implementation**. Even a sensible strategy can fail if it is carried out badly. If employees do not understand the plan, or managers lack control over deadlines and budgets, the strategy may underperform. This is why exam answers should link strategic choice to whether the business can actually deliver it.

> **Key Term: strategic positioning**
> The place a business chooses in the market and how it seeks competitive advantage relative to rivals.
>
> **Key Term: strategic methods**
> The broad routes used to carry out strategy, such as organic growth, innovation, internationalisation or external growth.

A useful distinction is this:

- **Strategic choice** = which long-term option to select
- **Strategic positioning** = how the business will compete
- **Strategic methods** = how the chosen strategy will be pursued

Students often mix these up. For example, "entering India" is a strategic choice about direction, while "competing on low prices" is strategic positioning.

> **Test Tip:** In evaluation questions, always judge a strategy against the business's objectives. A strategy cannot be called "successful" unless you show what it is trying to achieve: growth, profit, survival, market share or risk reduction.

### Using Ansoff’s Matrix to compare growth strategies

**Ansoff’s Matrix** is one of the main tools for selecting a growth strategy. It compares options based on whether products and markets are existing or new. This helps managers think about the level of risk involved.

> **Key Term: Ansoff’s Matrix**
> A model that classifies growth strategies according to whether products and markets are existing or new.

The four options are:

- **Market penetration**: existing products in existing markets
- **Market development**: existing products in new markets
- **Product development**: new products in existing markets
- **Diversification**: new products in new markets
  > **Key Term: market penetration**
  > A growth strategy that increases sales of existing products in existing markets.
  >
  > **Key Term: market development**
  > A growth strategy that sells existing products in new markets.
  >
  > **Key Term: product development**
  > A growth strategy that offers new products to existing markets.
  >
  > **Key Term: diversification**
  > A growth strategy that involves new products in new markets.

#### Market penetration

This is usually the lowest-risk option because the business already knows the product and the market. It may increase sales through more promotion, lower prices, stronger branding, loyalty schemes or wider distribution.

This strategy works well when the market still has room for growth or when the business believes it can win customers from rivals. Tesco introducing stronger Clubcard offers to increase spending by existing UK customers would fit market penetration.

The problem is that low risk often means lower growth potential. If the market is mature or saturated, extra promotion may only raise sales a little. Price cuts can also reduce profit margins.

#### Market development

Here the business keeps its existing product but targets a new market. This might mean a new region, a new country, a new age group or a new sales channel.

This can be attractive when the home market is crowded. A UK food brand entering another country with the same products is using market development. The business knows the product, but not necessarily the buying habits, laws or competitors in the new market.

Risk is higher than market penetration because the market is unfamiliar. The business may need to adapt branding, pricing or distribution. Existing local competitors may defend their market share strongly.

#### Product development

This means creating new products for existing customers. A business may do this to respond to changing tastes, stop customers switching to rivals or build a wider product portfolio.

This is common in technology, fashion and food markets, where customers expect regular innovation. The advantage is that the business already understands the customer base. The weakness is that new products are expensive to research, test and launch, and many fail.

#### Diversification

This is usually treated as the highest-risk Ansoff option because both the product and the market are new. Managers have less knowledge, so uncertainty is greater.

However, diversification is not always a poor choice. It may reduce over-dependence on one market. If a firm's current market is declining, diversification may improve long-term security. Related diversification, where the new activity is close to the firm's existing capabilities, is often less risky than moving into a completely unrelated area.

A strong evaluative point is that Ansoff shows **relative** risk, not guaranteed outcomes. A well-researched diversification strategy by a cash-rich business may be safer than market penetration in a collapsing market.

> **Test Tip:** Do not write that diversification is "always" the worst strategy. Better wording is "usually the highest-risk option because both the product and market are unfamiliar, although the real risk depends on research, resources and the nature of the market."

### Using decision trees, expected value and net gain

Businesses often face strategic choices under uncertainty. A decision tree helps compare options when outcomes are uncertain and probabilities can be estimated.

> **Key Term: decision tree**
> A diagram showing strategic options, chance outcomes, probabilities and financial returns.

The key calculation is **expected value**.

> **Key Term: expected value (EV)**
> The weighted average predicted return from a decision, found by multiplying each outcome by its probability and adding the results.

Formula:

EV = sum of (outcome × probability)

If there is an initial cost, managers may also calculate **net gain**.

> **Key Term: net gain**
> The expected value minus the initial cost of the investment.

Formula:

net gain = expected value − initial cost

#### Worked example

A business is choosing between two strategies.

- **Option A: launch a new snack range**
  - 60% chance of return of £800,000
  - 40% chance of return of £200,000
  - initial cost = £300,000

- **Option B: enter a new overseas market**
  - 50% chance of return of £1,200,000
  - 50% chance of return of £100,000
  - initial cost = £500,000

Step 1: calculate EV for Option A

EV = (£800,000 × 0.6) + (£200,000 × 0.4)  
EV = £480,000 + £80,000  
EV = **£560,000**

Step 2: calculate net gain for Option A

Net gain = £560,000 − £300,000  
Net gain = **£260,000**

Step 3: calculate EV for Option B

EV = (£1,200,000 × 0.5) + (£100,000 × 0.5)  
EV = £600,000 + £50,000  
EV = **£650,000**

Step 4: calculate net gain for Option B

Net gain = £650,000 − £500,000  
Net gain = **£150,000**

Judgement:

- Option B has the higher EV: **£650,000**
- Option A has the higher net gain: **£260,000**

This means the final choice depends on what matters more. If the business wants the highest average return, it may prefer Option B. If it wants the stronger reward after cost, it may prefer Option A.

This is exactly why calculation alone is not enough.

Students also need to know the difference between EV and net gain. EV is the weighted average outcome before adjusting for cost. Net gain includes the cost of the decision.

Common errors:

- forgetting to multiply outcomes by probabilities
- using probabilities that do not total 1 at a chance node
- forgetting to subtract the initial cost for net gain

Decision trees are useful because they force managers to think clearly about risk. They also make comparisons easier in exam questions. But they have limits. The probabilities may be guesses. The financial outcomes may be based on weak forecasts. Non-financial issues such as brand fit, ethics, employee resistance or likely competitive response are not shown clearly.

### Supporting strategy choice with financial and evaluative reasoning

A business may also use **payback** and **ARR** when comparing strategies.

> **Key Term: payback**
> The time taken to recover the initial investment from cash inflows.
>
> **Key Term: average rate of return (ARR)**
> Average annual profit as a percentage of the initial investment.

Payback is useful when cash flow is tight or the environment is uncertain. A short payback reduces risk because the investment is recovered faster. ARR is useful for comparing percentage profitability.

However, neither measure should decide the strategy on its own. Payback ignores returns after the payback point and can encourage short-term thinking. ARR is based on profit, not cash flow, and ignores the timing of returns.

Good exam answers compare the numbers, then go beyond them. For example:

- A highly geared business may prefer a low-risk strategy with short payback
- A business in a declining market may need a riskier strategy despite a weaker short-term return
- A company with strong brand loyalty may be in a good position to use product development
- A business with weak management capability may struggle to implement diversification

This is where AO3 and AO4 marks are won. Analysis means explaining the likely effect of a strategy on performance. Evaluation means weighing arguments and reaching a justified judgement.

A strong judgement often follows this structure:

- **On the one hand**: identify the strongest reason for choosing the strategy
- **On the other hand**: explain the main risk or drawback
- **It depends on**: show what contextual factor changes the answer
- **Final judgement**: choose the best option for this business, at this time

#### How to structure an evaluative answer

When evaluating which strategy a business should select, use three layers of evidence.

First, use **financial evidence**. Refer to EV, net gain, payback, ARR, profit forecasts, cash flow or available finance if the case gives them.

Second, use **non-financial factors**. Discuss objectives, brand strength, management expertise, employee support, competition, market saturation, economic conditions and stakeholder attitudes.

Third, discuss **limitations**. Forecasts may be uncertain, markets can change, and implementation may fail. A good answer avoids generic comments by linking these limits to the case. For example, a rapid international strategy may be less suitable for a small UK retailer with limited overseas experience.

The final judgement should be specific. Do not say "the strategy could work if managed well." Instead say which strategy is most suitable and why, given the business's size, resources, market conditions and objectives.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Selecting a strategy means choosing the most suitable long-term course of action to achieve business objectives
- Strategy choice should be judged against objectives, resources, risk, market conditions and implementation capability
- Strategic choice, strategic positioning and strategic methods are different ideas and should not be confused
- Ansoff’s Matrix compares growth strategies using existing and new products and markets
- Market penetration is usually the lowest-risk Ansoff option because the business knows both the product and the market
- Market development means existing products in new markets
- Product development means new products in existing markets
- Diversification means new products in new markets and is usually the highest-risk option
- Expected value is calculated by multiplying each outcome by its probability and adding the results
- Net gain equals expected value minus the initial cost
- The option with the highest EV may still be rejected if risk, finance or strategic fit is poor
- Strong evaluation uses both numerical evidence and business context before making a judgement

## Key Terms and Concepts

- selecting a strategy
- strategic positioning
- strategic methods
- Ansoff’s Matrix
- market penetration
- market development
- product development
- diversification
- decision tree
- expected value (EV)
- net gain
- payback
- average rate of return (ARR)


Strategy - Selecting a strategy