CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Address a threat by developing mobile phone technology. LVM would need to consider:
• That this would be a risky option, especially after rejecting it two years ago. Competitors have a
significant early lead in developing the product. It would be difficult for LVM to catch up.
• Cost of R&D is significant. Although profits are steady, would LVM have the funds available
for research?
Take advantage of an opportunity to relocate to an area of high unemployment. LVM would need
to consider:
• The impact on the existing workforce and ethical considerations.
• The size of the government grant available balanced against other location factors, such as the
availability of labour.
• Low cost of labour could give competitive advantage.
• The need for finance and concern over rising interest rates.
Evaluation: cost and risk are likely to be important issues. The Ansoff matrix could be used to help
evaluate risk.

Activity 8.5
1 Product differentiation
• Demand will be less sensitive to price. Product differentiation will enable a firm to charge higher
prices for its product.
• Differentiation may be expensive to develop if the aim is for genuine differences.
• The strategy may be more successful when a firm is able to patent innovations that give rise to
product differentiation.
Buying out competitors
• Competition policy. In some countries, there is strict control of takeover activity to prevent one
firm gaining too much influence within an industry. The regulatory authorities have the power to
investigate proposed mergers and block them if it is felt that they are not in the public interest.
• Availability of finance. Can the business raise the capital to launch a takeover bid?
• Ownership of competitors. Private limited companies may be more difficult to take over because
shares are concentrated in a few hands.
Focus on less competitive market segments
• Size of the market segments. If demand is very low, the segment will be of less interest to other
firms. However, the returns will also be low.
• How easy it is for other firms to enter the market segment.
• Different needs of the market segment. The degree of difference will have an impact on the cost of
developing products for the segment.

Activity 8.6
1 Fashion industry
• The threat of new entrants is low due to the strength of the existing brands in the market. It would
be expensive for new entrants to build brand awareness. It is difficult for new entrants to establish
appropriate distribution chains as exclusive shops often have agreements with fashion companies
to be their exclusive outlets. E-commerce may make a route to the market possible for new
fashion houses.
• Power of buyers. There is a limited number of large buyers, which increases their power over
the fashion companies and increases competitive rivalry. However, there is a large number of
independent buyers, which would reduce competitive rivalry.
• Power of suppliers. Suppliers are relatively weak as there are many suppliers of the materials used
in the industry.

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World car industry

• The threat of new entrants is relatively low due to worldwide overcapacity and the substantial
costs of capital equipment. Economies of scale are also significant in the car industry and this led
to mergers in the 1980s and 1990s so that firms could share components between models.
• Brand awareness is high and it would be expensive to build a new brand from scratch.
• Threat of substitute products. Alternatives to the car are limited. Other forms of transport, such
as trains and buses, lack the flexibility offered by the car.
• Power of buyers. Manufacturers control many of the car showrooms directly or indirectly. Large
multinationals dominate the car industry.
• Power of suppliers. Car manufacturers such as Toyota and Nissan have tried hard to build supply
chains rather than use multiple suppliers. This enhances the power of the remaining suppliers.
• To gain sales, manufacturers have to take market share from each other as industry growth is low.
This increases competitive rivalry between firms.

Activity 8.7
1 Learners’ answers might include:
• Just setting objectives is not sufficient to ensure that they are achieved. Logically, having
determined its objectives, a business needs to develop strategies that will facilitate achievement of
the objectives. Therefore, it needs a long-term plan.
• Long-term plans provide a sense of direction for a business and its employees. A plan helps ensure
that all parts of the organisation are working towards fulfilling the objectives.
• A plan can also motivate employees.
2 Learners’ answers might include:
• GDP per head. This will affect consumer demand for coffee shops. Rising incomes provide an
opportunity for increasing sales at the type of coffee bars operated by Caffè Nero.
• Inflation. If inflation is volatile in Turkey, it will be more difficult to plan. Predicting future costs
and revenues becomes increasingly difficult the more volatile the inflation rate.
• The number of established coffee chains in the market and their market share. If another chain has
already built a substantial market share, it may be more difficult for Caffè Nero to establish itself.
• Recent growth in the market. A rapidly growing market will be easier to enter, as competition may
be less intense as there are sufficient consumers to share.
• Changing patterns of consumption, e.g. relative spending on different types of coffee. This may
indicate whether there is potential for the type of products that Caffè Nero sells.
• Exchange rate. This will affect the cost to Caffè Nero of entering the market.
3 Caffè Nero is adopting market development as it is aiming to sell its existing products in new markets
by entering the Turkish market, among others. Caffè Nero is therefore focusing on the product that
it already understands, which reduces risk. However, by entering new markets, the business is taking
a risk as the consumers in new markets may be very different to consumers in existing markets. Caffè
Nero may need to adapt its product offer. The appointment of a manager with experience of the
Turkish market and understanding of changing consumer tastes in the country will give Caffè Nero a
better chance of success.
Caffè Nero may have decided on this strategy because:
• existing markets are saturated
• the Turkish market has growth potential.
Siemens Gasema is using product development and market penetration. It is developing more efficient
wind turbines to gain a competitive edge and therefore penetrate its existing markets. It is using this
approach because of its expertise in developing products and because it has significant cost advantages
due to its scale of production.

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4 Businesses typically aim to make profit, increase market share and increase sales. Factors
influencing strategy include the following:
• Ownership. This will affect the availability of finance and skills within the business and therefore
the strategies which can successfully be adopted.
• Owner attitude to risk. If owners are risk averse, they will avoid taking on too much debt and
will use more cautious strategies, e.g. expansion may be far less aggressive and organic growth
more likely.
• Economic factors.
• Interest rates affect the desirability of debt finance.
• Economic growth will be critical.
• The exchange rate may influence location decisions.
• Market factors such as the long-term prospects within a market, e.g. oil companies will have
to look for alternative energies if they are to continue to grow. Competition will also have a
significant impact on strategic decisions, e.g. if one supermarket is to compete with another,
it may have to expand rapidly into non-food retailing.
• Social factors. For example, tobacco companies have had to develop strategies to respond to
declining sales in western economies. This has typically involved diversification and targeting
developing economies.
• Political factors. Tobacco company strategies have been influenced by legal restrictions in
many countries.
• The evolution of trading blocs (e.g. the EU) influences location decisions.
• Evaluation could include an assessment, using examples, of how different factors will vary in
importance depending on the business context.

Activity 8.8
1 Market development: Buildit Construction is aiming to enter a new segment of the property market.
Previously, the firm built houses for sale, but now it is considering entering the rental market.
2 Force-field analysis diagram:

Forces for change Forces against change

(driving forces) (constraining forces)

Cutting costs due to

Manager opposition (7)
economic downturn (8)
Change proposal:
Staff worried about new
Increasing responsibilities delayering of
responsibilities (3)
of staff (3) management and
multi-skilling
administration Avoiding redundancy (2)
Giving staff greater staff to increase
skills (3) flexibility Inadequate skills of
existing staff (3)

Disruption (4)

Total 14 Total 19

3 Improving the chances of this strategic choice being successful requires the directors to increase the
forces pushing the plan and/or reduce the strength of the forces opposing it. Possible approaches
may include the following:
• Raising the wages of remaining staff to reflect their additional responsibilities. This would add a
new force in favour of the change.

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• Staff training would reduce inadequate skills but add a new constraining force in terms of the cost
of transition.
• Offer attractive redundancy packages. This would reduce the manager opposition but add to the
cost of transition.
• Evaluation could include an assessment of which way is likely to be more effective; also a
suggestion that a new force-field analysis is undertaken once these measures are taken to analyse
the impact on the chances of the strategy succeeding.

Activity 8.9
1 Node 1: EV = 60 000 × 0.3 + 120 000 × 0.7 = $102 000
Node 2: EV = 80 000 × 0.3 + 200 000 × 0.7 = $164 000
2 Net return of Town A = 102 000 – 50 000 = $52 000
Net return of Town B = 164 000 – 75 000 = $89 000
3 Factors include:
• Expected change in GDP and its impact on demand. If GDP is growing, there will be an increase
in demand. Income elasticity of demand will be important.
• Level of unemployment. Unemployment affects household income and therefore spending.
• Impact of competition in each town. If a competitor is offering similar products in a town, this
will affect estimated revenues.

Activity 8.10
1 Decision tree showing strategic options:
0.8 High
$500 000
Petrol forecourt
($100 000) 0.2 Low
$380 000 $400 000

$530 000 0.8 High

$800 000
Car showroom

($150 000)
0.2 Low
$200 000

2 Node 2: EV = 500 000 × 0.8 + 400 000 × 0.2 = $480 000

Node 3: EV = 800 000 × 0.8 + 200 000 × 0.2 = $680 000
Net return for petrol forecourt = 480 000 – 100 000 = $380 000
Net return for car showroom = 680 000 – 150 000 = $530 000
Based on the decision-tree analysis, the car showroom is the better option.
3 Learners’ answers might include:
• Attitude towards risk. If demand is low, the car showroom only provides a return of $50 000
whereas the petrol forecourt provides more consistent returns of $400 000 and $300 000
respectively for high and low demand.
• Availability of finance. The car showroom has a cost of $150 000 compared to $100 000 for the
petrol forecourt. The owner may struggle to finance the car showroom.
• Cash flow. The petrol forecourt is likely to provide a quick turnover of stock and require less
working capital to run. The car showroom may require significant inventory and working capital
to run.

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Exam-style questions
Decision-making questions
1 Which country?
1 Decision tree showing options:
0.4
$5m

Country A

0.6
$8m

0.3
$3m

Country B 0.5
$4m

$6.9m 0.2
$8m

0.4
$3m

Country C
0.5
$6m

0.1
$10m

0.3
$5m

Country D 0.3
$6m

0.4
$9m

2 Country A: EV = 5m × 0.4 + 8m × 0.6 = $6.8m

Country B: EV = 3m × 0.3 + 4m × 0.5 + 8m × 0.2 = $4.5m
Country C: EV = 3m × 0.4 + 6m × 0.5 + 10m × 0.1 = $5.2m
Country D: EV = 5m × 0.3 + 6m × 0.3 + 9m × 0.4 = $6.9m
Based on quantitative data, Keenan should expand into Country D.
3 Benefits of the decision tree technique
• It gives a quantitative measure for making the decision between the four markets.
• By estimating probability, it helps minimise risk and the decision can be based on potential
profitability.
• It encourages managers to consider and discuss all options.
Limitations of the decision tree technique
• These are new markets abroad and Keenan’s estimate of returns and risk depend on the
quality of the data. Keenan has no experience of the markets, so the estimated probabilities
may be inaccurate.
• Expected values are average returns. However, there will only be one outcome and this is still
unknown, so the decision tree does not eliminate risk.
• Decision-tree analysis does not take account of qualitative factors’ impact on a decision.

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Evaluation: the managers’ attitude to risk is very important. They may prefer a country that offers
greater certainty rather than the highest returns.
4 SWOT analysis: this provides a useful starting point for strategic analysis. It can identify strengths
that the business can build on and weaknesses that should be addressed. Opportunities will help
identify areas for expansion. However, SWOT analysis is highly subjective and one manager’s
assessment might be very different to another’s.
Force-field analysis: this considers all the forces for and against a decision. These forces are given a
numerical score to establish whether the driving forces outweigh the constraining forces. Managers
can then consider how to increase the strength of the driving forces and reduce the constraining
forces. The technique encourages managers to consider a range of qualitative factors, including the
reaction of workers to a proposed strategy. However, assigning a numerical value to the forces is
subjective and different managers will identify different factors as being important.
2 Restaurant owner considers her options
1 Big extension:
Expected value = 60 000 × 0.5 + 600 000 × 0.5 = 30 000 + 300 000 = $330 000
Subtract cost = 330 000 – 200 000 = $130 000
Small extension:
Expected value = 40 000 × 0.2 + 200 000 × 0.8 = 8 000 + 160 000 = $168 000
Subtract cost = 168 000 – 75 000 = $93 000
Do nothing: expected value = $0
2 A number of factors should be considered:
• The decision-tree analysis demonstrates that the big extension has a higher expected value, so
is preferable. It offers an average expected value of $130 000, which is $37 000 (approximately
40%) more than the small extension.
• If June proceeds with the big extension and it is a success, it will produce a profit of $400 000
compared with only $125 000 for the small extension. That represents a 200% return on
the investment.
• However, with the big extension, the chance of success is only 50% or 1 in 2. The investment is,
in other words, just as likely to be a failure. If it fails, June will lose $140 000. Such a loss could
destroy June’s business.
• In contrast, the small extension has a strong chance of being successful and generating a
return of $125 000. If it fails, the loss would be a more modest $35 000.
• Doing nothing generates no extra profit. There is the possibility that customers will tire of
having to wait for tables and, therefore, start using other restaurants.
• June normally avoids risks. The lowest-risk option is to do nothing. The highest-risk option is
to build the big extension.
• Given her attitude towards risk, the most stressful option is to build the big extension. June
will be worried about the 1 in 2 chance of failure and will also have to cope with the greater
disruption to the business as it is built.
• If June has to borrow most of the $200 000 for the extension, the gearing of the business will
increase significantly. There is a greater risk of being unable to repay the principal loan and
service the debt.
• The decision-tree analysis is based on estimates of revenue and costs, and the probability
of success and failure. Although it is a quantitative technique, the estimates may be highly
inaccurate.
Evaluation: the decision tree favours the big extension. However, June is risk averse and this
suggests she would favour the smaller extension because the big extension has a relatively high risk
of failure and potentially catastrophic consequences for June’s business. The big extension is more
than twice the cost, will cause more disruption, necessitates targeting a higher-income market
segment and is as likely to fail as to succeed. Therefore, of the two options, June should choose the
smaller extension.

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3 PEST analysis. This is a form of strategic analysis that analyses the external environment within
which the business operates or where it is thinking of operating. It encourages managers to
consider the political, economic, social and technological influences on business. The analysis
will guide managers towards possible strategies that can be developed or determine whether a
new market is suitable. For example, understanding the economic environment could highlight
the possibility of June taking the restaurant upmarket due to rising incomes. PEST complements
SWOT analysis and considering the external environment is essential in assessing the chances of
a strategy being successful. As the business environment is dynamic, a PEST analysis can quickly
become outdated.
Porter’s five forces. This technique analyses competitive forces within a market based on
considering the barriers to entry, power of suppliers and buyers, and threat of substitutes. This
enables competitive rivalry to be determined. It helps make decisions about whether to enter a new
industry and can provide insight into the profitability of markets. It can analyse existing markets
to decide whether to stay in the market and help formulate strategies to reduce competitive rivalry.
The Ansoff matrix. This focuses on the different options for increasing sales growth based on
the two variables of market and product. The four options are market penetration, product
development, market development and diversification. The matrix allows managers to analyse the
degree of risk associated with each option. However, it is limited by its focus on just two variables.
It is therefore essential that other factors are also considered.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded may
be different.

Coursebook answers
Most of the answers are in ‘outline’ form indicating the appropriate points and skills that learners need
to include in their answers. They provide the necessary guidance to allow learners to develop and extend
the points for a fuller answer that contains the relevant skills. In many instances, there may be other valid
approaches to answering the question.

Chapter 9
Business in context
Learners’ discussion might include:
Why is constant business change occurring?
• Changes to the external environment including economic, social, technological and environmental.
Good leadership and corporate culture during a period of significant change
• Corporate culture determines how things are done in the business.
• Culture is a powerful influence on flexibility to meet change.
• Leadership provides vision for the business.
• Inspirational leaders can lead change and persuade employees of the need for change.

Activities
Activity 9.1
1 A corporate plan provides managers with a clear focus for several years ahead, e.g. to continue with
earnings per share growth. Its sense of purpose can be communicated to all managers and employees.
It helps ensure that all employees are moving the business in a uniform direction. It enables control
and review; actual outcomes can be compared with the objectives and the performance of PepsiCo can
be assessed. It helps ensure that resources are used effectively and that all departments are working
together. The planning process itself is useful as it encourages directors and managers to consider the
current situation of the firm and to set objectives accordingly.
2 A key part of corporate planning is control and review, which is likely to be more successful with
quantifiable targets. Targets are used not just by managers but also by external stakeholders (e.g.
investors looking for financial targets). Targets allow for planning financial resources (e.g. a budget for
increased marketing support or cost of retrenchment). However, qualitative factors such as culture or
environmental impact also need to be considered. The main limitation of corporate planning is that the
business environment can change so rapidly, particularly for a multinational corporation operating in
a large number of markets. Change to the business environment will make parts of the plan outdated.
The planning process should try to identify how the firm should react to a variety of changes in
the environment.

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Activity 9.2
1 Learners’ answers might include two from the following:
• Power culture: in response to a crisis as it is important to make decisions quickly.
• Role culture: where stability is needed, e.g. in a large bank.
• Task culture: where product life cycles are short and therefore there is a need to be adaptable,
e.g. in technology industries.
• Person culture: where an organisation has employees working abroad on their own, so those
individuals do not have to refer all decisions back to head office.
• Entrepreneurial culture: in a highly competitive industry, encouraging risk-taking in order to gain
a competitive edge.

Activity 9.3
1 Problems: no sense of common purpose; employees motivated by self-interest rather than corporate
goals; no code of ethics to inform appropriate behaviour.
2 Change the way pay and bonuses are determined, e.g. not just based on volume of business but on
whether the actions of the employees follow the values. Internally appoint change champions to share
new values and encourage commitment to these values. Ensure that values are communicated to and
understood by all employees.

Activity 9.4
1 If organisational cultures are different, expansion is less likely to be successful because:
• The two cultures will conflict and lead to disputes at all levels of the new organisation.
• The firms have different ways of operating. For example, if a business with a power culture merges
with a business that has a person culture, the role of the individual is very different. Autocratic
leaders in the first business would fight to maintain their power, whilst employees in the second
business would resist any loss of freedom to express themselves fully.
• Conflict will cause inefficiency in decision-making.
• The merged business will not share the same values.
• If cultures are different, there will be no synergy between the merged businesses.
As Porsche adopts more of a stakeholder view of its role, if it merges with a firm that puts the
shareholder first, there will be conflict between the management of the two businesses.
After a merger, the business may have to adopt a single culture. Changing the value system of a
business and attitudes of staff is never an easy task.
The success of an expansion depends, in part, on the businesses sharing common values and goals.

Activity 9.5
1 Learners’ answers might include:
• Sally should have tried to obtain the support and commitment of existing directors to drive
through the changes she believed were required. Replacing 50% of directors and key managers
within five weeks is likely to cause conflict and demotivate employees used to the old culture, which
rewarded service.
• Sally should have explained to workers that the culture needed to change as it is a very
competitive market.
• It would be useful to allow discussion and for employees to be able to propose alternatives rather
than imposing change on them.
• The business could have adopted a new mission statement that reflects its values without
completely removing the positive aspects of the old culture. The statement should have been
communicated to employees. Sally could have focused more on some of the good aspects of the
business that promoted staff loyalty and contributed to high levels of customer service.

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2 Answers need to identify the benefits of the change in culture and the weaknesses of the existing
culture. These might include:
• The old culture promoted a complacent attitude towards business growth.
• Low profitability threatens the future competitiveness of the business due to a lack of funds
for investment.
• Promoting staff for long service does not guarantee that they will be competent to do the job.
It also reduces the exposure of the business to new ideas.
• The change in culture has enabled the business to make cost savings through driving supplier
prices down and changing pension arrangements for new staff.
Problems:
• The change in culture will have significant short-term costs due to employee resistance and the
disruption caused by the loss of 50% of key managers and directors.
• The power culture adopted by Sally extends to treatment of suppliers. An adversarial relationship
with suppliers will impact long-term prices and quality.
Evaluation: the culture is being changed to meet the expectations of shareholders. These expectations
may focus on short-term profit at the expense of the long-term viability of the business. The old culture
at President Supermarkets was beneficial in promoting a stakeholder view of the role of the business
and it may be argued that such a view provides a firm foundation for long-term success.
Businesses that involve employees may be more profitable in the long term because the employees will
be more dedicated to achieving the goals of the business. Sally appears to be alienating her staff.

Activity 9.6
Learners’ own answers.

Activity 9.7
1 Communicating the need for change: this reduces resistance to change as employees will understand
why the organisation has to adapt.
Training: as Britax has introduced a complex computer system, it is critical to provide employees with
suitable training. Training reduces the fear of modern technology felt by some employees.
2 Answers might follow Kotter’s eight-stage change model:
• Create a sense of urgency. Identify why change is necessary. Change is easier to implement if
everyone in the organisation wants it.
• Create an effective project team to lead the change. Strong leadership, supported by key
individuals from different departments, is needed to lead change. When Britax introduced its
complex computer system, the change would have required different departments to work together
and therefore an effective project team was essential.
• Develop a vision and a strategy for change. A clear vision, based on values that are central to the
change and easy to remember, helps people understand why change is necessary.
• Communicate this change of vision. The new computer system at Britax required a change in
working practices and skills, so it was important to communicate the need for change to employees.
• Empower people. Get rid of obstacles to change. At Britax, employees were empowered through
training. This would reduce opposition to change.
• Build short-term gains from change that benefit as many people as possible. Success will motivate
people. Short-term targets that are achievable help maintain the momentum of change.
• Consolidate the gains. Real change runs deep in an organisation. Kotter argues that many projects
fail because they do not build on their successes.
• Build change into the culture of the organisation. The link between change and improved
performance needs to be communicated effectively.
• Evaluation might include a discussion of why each stage is important and could suggest that
involvement of employees (for example) is often the most important factor.

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