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

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

Workbook answers
Answers to questions that ask for ‘one or two’ points, reasons or impacts may contain more than the
required number of points, indicating that alternative responses exist that could be equally valid. The
suggested answers to questions that are testing the skills of analysis and evaluation, apart from the worked
examples and the ‘improve this answer’ examples, are in a ‘building block’ form. This means they provide
an outline of the key knowledge, application, analysis and evaluation skills required to help learners
construct a complete answer. For further details of the annotation used in some of the completed answers,
refer to the ‘How to use this book’ section.

Chapter 8
Key skills exercises
1 Analysing the current business situation, setting long-term objectives, deciding on business strategies to
achieve them and then implementing these strategies.
2 Before an important decision can be made, the internal strengths and weaknesses, and the external
business environment need to be analysed to help increase the chances of an appropriate strategy being
devised and decided on.
3 Entering/selling to an uncontested market.
4 The existing strengths and weaknesses of the business.
5 Strength – the number of followers/subscribers; weakness – the business may lack sufficient numbers
of creative and innovative employees; opportunity – to increase revenue from the sale of advertising;
threat – bigger social networking firms exist.
6 A model used to show the degree of risk associated with the four growth strategies of market
penetration, market development, product development and diversification.
7 Buyer power; supplier power; ease of substitution; ease of entry.
8 An important business capability that gives a firm competitive advantage.
9 Learners’ answers will vary (e.g. the restraining force of employee resistance could be reduced by
consultation, involvement, financial or non-financial incentives).
10 It forces managers to consider the main risks and uncertainties that affect their business.
11 Market penetration is aiming to sell more/increase market share in an existing market; market
development is selling existing products in new markets.
12 Diversification.
13 Learners’ answers will vary (e.g. Tesla Model X EV).
14 Resistance could be reduced (and possibly overcome) by the employer offering increased training
opportunities to, for example, improve the ability of employees to operate new technology.
15 Giving numerical values to the forces can be subjective.
16 The chances of events occurring after a decision has been made will impact on the expected value.
17 The forecasted pay-off of a decision once the economic returns have been multiplied by the
expected probabilities.
18 Estimation of probabilities is open to judgement/inaccuracy.

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

19 A 5 market penetration; B 5 market development.

20 Making aircraft escape slides, which are different products sold in a different market.
21 Diversification.
22 Forecast probabilities of an outcome could be assessed by analysing the results of previous similar
strategic decisions.
23 WE. Node 1 5 ($20m 3 0.8) 1 ($4m 3 0.2) 5 $16.8m
Node 2 5 ($12m 3 0.6) 1 ($2m 3 0.4) 5 $8m
Node 3 5 ($40m 3 0.7) 1 ($2m 3 0.3) 5 $28.6m
24 A – Cut advertising costs even further.
B – Ensure that income elastic products are made available in Country Y as soon as possible.
C – Take over a competing business with similar fabric to reduce competition.
25 A – Sales representatives offered other jobs.
B – Improve language training for employees.
C – Try to reduce the cost of buying the patent.
26 It classifies products according to market share and market growth; OC can take decisions about the
product portfolio based on this analysis (e.g. should any action be taken with ski jackets?).
27 Estimates of probabilities may be subjective and likely to be inaccurate; estimated payoffs or financial
outcomes are not based on previous similar decisions so could also be inaccurate.
28 It identifies the constraining forces that could be reduced most easily; it identifies the driving forces
that could be increased most easily.
29 WE. One limitation is that the allocation of values to each constraining or driving force can be subjective.
Why did ‘language barriers’ obtain the value it was given? If these values prove to be inaccurate,
the benefits of using force field analysis are much reduced and other techniques become more important.
If ‘language barriers’ is given a value that turns out to be too low then, if Strategy B is chosen,
language barriers might become a real problem and the business might have to spend more on language
training courses.
Second limitation: It may be that not all of the constraining and driving forces have been correctly
identified (e.g. transport issues with Strategy B).
30 OC has cut production costs and this has led to increased profit.
31 OC uses low-cost countries for production, which might lead to quality/delivery problems.
32 A new government might plan to nationalise some businesses in the private sector.
33 If all new clothes must be made with flameproof fabric, that might not be as light as Litetec.
34 WE. One economic factor could be exchange rates. As Strategy B involves selling OC products to
Country Y for the first time, an appreciation of Country Y’s exchange rate would allow OC to sell its
products to this country at lower prices than originally planned, leading to higher than forecast sales
and profits from exporting.
Second factor: An increase in profit tax would reduce retained profit, which could have been used to
buy the manufacturing rights to Weartex.
35 The innovative fabric could be used for a range of clothing products and perhaps even for products
other than clothing (e.g. car covers, umbrellas). This will help to distinguish OC in the marketplace.
36 It identifies major external factors likely to affect OC; OC directors could consider how they might
respond to changes in external factors.
37 It would need to be frequently updated to be realistic (e.g. the competitor coming to market with
the new synthetic fabric will change the threats to OC); subjective judgement is involved and other
directors might focus on other issues.
38 Increased immigration might increase labour supply so making it cheaper to produce clothes in
Country X; the increased trend towards healthy leisure activities might increase the demand for
OC clothing.

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39 a Buyer power increases and this increases the degree of competitive rivalry for OC.
b WE. This increases the threat of substitute products being developed and it might also reduce
barriers to entry. If buyers of outdoor clothing now prefer the clothing ranges produced using this
cheaper fabric, competitive rivalry increases for OC. If new businesses are encouraged to come
into this market because it is now cheaper to produce and use synthetic fabrics in outdoor clothes,
again competitive rivalry increases for OC. As this market becomes more competitive, OC might
consider other strategies to improve its competitive position.
40 Outline: Select data carefully; do not try to comment on all the data available. Analyse the significance
of some data for all three strategies. Compare the results (expected monetary value of A 5 $6.8m;
B 5 $2m and C 5 $13.6m). Evaluate the data and the techniques used. Make an overall decision,
explaining why this decision is best and why the other strategies were rejected.
41 Outline: Explain the purpose of SWOT and PEST analysis and how they could be useful to OC in this
case. Evaluate the effectiveness of these techniques (e.g. by considering how subjective they might be).
Evaluate whether the data they contain could become out of date quickly. Evaluate whether Rajev
would really benefit from these forms of strategic analysis in this case. Analyse the potential benefits
to Rajev when developing future strategies. Final evaluation could include the extent to which other
approaches to developing new strategies might be even more useful.

Exam-style questions
Decision-making questions
1 Outline: Define strategic analysis and its most common forms (e.g. SWOT and PEST). Make references
to SWOT in this case; analyse the benefits of SWOT when developing new strategies in this case.
Consider the content and uses of PEST; analyse the benefits of PEST in this case (the economic and
market situation are important factors).
2 Outline: The choice of strategy is important as decisions are costly, often affecting all functional
departments, and are difficult to reverse.
Option 1 is market development, using the existing strengths of QTC. It has a lower expected
monetary value EMV but may be less risky too. It is income elastic but less price elastic so it could be
the right time to enter this market niche, especially as the package holiday market is so competitive.
The new brand is important as the target customers might be deterred from buying a QTC holiday.
Option 2 is riskier product development as QTC has no experience in airline organisation/
management, although other holiday companies have made this move. It has a higher EMV but
possibly higher investment too and selling second-hand aircraft if unsuccessful might be a problem.
Other data would be useful (e.g. investment appraisal, performance of other travel companies’
airline divisions, market growth of cruise market segment). An overall conclusion and a judgement
are needed.

Business strategy questions

1 See ‘Annotate this answer’.
2 Outline: Identify two other approaches to developing business strategy (e.g. blue ocean strategy and
Porter’s five forces − other approaches are equally valid). Analyse how these approaches can be used to
develop and evaluate future potential strategies for HPS. Consider the strategies that might be adopted
by HPS and how the two approaches you have analysed could help with making decisions between the
strategic choices. Evaluate whether the approaches you have selected are really useful in this case or
whether other approaches should be used instead or as well.

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

Annotate this answer

The sample answer for business strategy Q1 has been annotated.
Looking back on HPS’s decision to develop hybrid power systems, it seems to have been an excellent
strategic choice [E]. HPS seems to have taken this decision at just the right time [E]. Environmental pressure
groups are forcing governments to take measures to reduce pollution from vehicles [K]. One way to do this
is to ban non-hybrid vehicles or subsidise hybrid vehicles [Ap]. HPS will have benefited from these political
decisions and this will have helped the business double sales in just four years [Ap/An]. Business customers
might be willing to pay high prices for hybrid vehicles if they use less fuel and if they can be driven into city
centres. This helps to explain HPS’s higher profit margins on each power system sold [Ap/An]. The market
for traditional engines for buses and trucks is probably very competitive. To sell these engines HPS might
have had to offer lower prices. However, hybrid engine systems using patented designs offer something
different to customers. This product differentiation is an important way to gain competitive advantage.
This form of competitive advantage often allows relatively higher prices to be charged and helps to explain
the higher profit margins HPS is achieving from these engines [An+]. Its newly developed core competence
is allowing HPS to develop other products with its hybrid engines. It may develop an excellent reputation
for this type of engine and have a very strong brand image [An].
However, the decision to develop hybrid power systems was obviously costly [K]. HPS has high debt
levels. It needed finance to cover the cost of developing the new engines [Ap]. This high level of debt will
become a serious problem if interest rates do increase as suggested in the PEST analysis [Ap]. High interest
payments will reduce profit levels and HPS might not be able to pay back loans [An].
By focusing so much on hybrid engines, HPS might not have the resources to develop pure electric
engines. This is an opportunity cost of spending finance on developing hybrid engines [K/Ap/An]. If the
environmental pressure for cleaner air becomes stronger then governments may make all engines illegal in
city centres other than pure electric ones [An]. This would then mean that HPS would have a much smaller
market for its hybrid engines [Ap/An]. There is also the great risk of hydrogen-powered vehicles [Ap]. HPS
does not seem to have developed this type of engine so if these become popular its sales will fall [An].
More information would have been useful to evaluate whether this strategic decision was a good one [E].
The number of potential competitors and the technology they are developing would allow an assessment of
how strong HPS’s competitive advantage is [An/E]. Details of actual sales and profit levels could allow an
evaluation of whether the hybrid engines have increased returns to shareholders. The level of debts would
also allow an evaluation of how important an increase in interest rates might be to HPS finance costs.
However, on balance, this strategic choice of developing hybrid engines seems to have been an excellent one
given the information provided [E+].

4 Cambridge International AS & A Level Business – Stimpson © Cambridge University Press 2021