Business environment and strategy
The business environment and strategy domain asks you to read the world outside the firm, then explain how the firm positions itself inside it. PAU questions usually combine a short case with three tasks: classify environmental factors, choose and justify a strategy, and evaluate a decision with a tool such as SWOT or Porter's five forces. Precision of vocabulary is what separates a 7 from a 9.
Analysing the environment
- PESTEL orders macro factors: Political, Economic, Socio-cultural, Technological, Ecological, Legal. These are outside the firm's control.
- Porter's five forces measures industry attractiveness: rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers. A strong combined force means low profitability.
- SWOT is a synthesis, not an analysis: strengths and weaknesses are internal; opportunities and threats are external. A SWOT that does not end in actions earns few marks.
Competitive and corporate strategy
- Corporate strategy decides which businesses to be in: diversification (related or unrelated), vertical integration (backward towards suppliers, forward towards customers), horizontal integration (competitors), internationalisation.
- Competitive strategy (Porter): cost leadership, differentiation, focus on a niche (by cost or by differentiation).
- Growth (Ansoff): four options from crossing product (existing/new) with market (existing/new) - market penetration, product development, market development, diversification.
Worked example
A regional dairy sells yoghurt locally. It considers (a) selling the same yoghurt in France, (b) launching a lactose-free line, and (c) buying a milk farm. (a) is market development: same product, new market. (b) is product development: new product, existing market, and also a differentiation move. (c) is backward vertical integration - it secures supply and captures the supplier's margin, but raises fixed costs and reduces flexibility. Answering "diversification" for (b) is wrong because the market has not changed.
Traps that cost marks
- Placing competitors or customers inside PESTEL instead of Porter.
- Listing strengths and weaknesses in the opportunities/threats quadrant.
- Calling any new product "diversification".
- Confusing focus with differentiation: a focused firm serves a narrow segment; a differentiated firm sells a distinct product to a broad market.
- Describing a strategy without saying what external pressure it answers (cost, risk, market power).