An option has a 0.5 chance of a 200,000 gain and a 0.5 chance of a 40,000 gain. Calculate its expected value. [2 marks]

WJEC Eduqas Eduqas 2020-style practice: A firm faces a decision with two options. Launching a new product has a 0.6 chance of a 400,000 gain and a 0.4 chance of a 100,000 loss; the launch costs 50,000. Calculate the expected value of the launch net of its cost. (6)

A Component 2 decision-tree calculation rewarding the expected value, the deduction of the cost, and units. Expected value (before cost) = (0.6 × 400,000) + (0.4 × -100,000) = 240,000 - 40,000 = 200,000. Net of the 50,000 launch cost = 200,000 - 50,000 = 150,000. Markers reward the correct expected value, the subtraction of the cost and the units. The common errors are forgetting the loss is negative, not weighting by the probabilities, or failing to deduct the cost of the option.

EnglandBusinessSyllabus dot point

How and why do businesses grow, and how do they choose a strategy?

Business objectives and growth; organic versus external growth (mergers, takeovers, franchising); Ansoff's matrix; strategic analysis using SWOT; decision-making techniques including decision trees; and the link between strategy and corporate objectives.

A focused answer to the Eduqas A-Level Business statement on business growth and strategy. Covers business objectives and growth, organic versus external growth, Ansoff's matrix, SWOT analysis, decision-making techniques including decision trees, and the link between strategy and corporate objectives, with a worked decision-tree calculation.

Generated by Claude Opus 4.814 min answerUpdated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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Quick answer

Business objectives range from survival and profit to growth, market share and social aims, and they guide strategy (the long-term plan to achieve them). Organic (internal) growth expands the firm's own operations (slow, cheaper, lower-risk); external (inorganic) growth combines with other firms through mergers, takeovers or franchising (fast, but riskier and costlier). Ansoff's matrix sets out four growth options by product and market: market penetration, market development, product development and diversification, rising in risk. SWOT analyses Strengths, Weaknesses, Opportunities and Threats. Decision trees calculate the expected value of options ( $\sum (\text{probability} \times \text{outcome})$ ) to compare risky choices. Strategy and these tools must serve the corporate objectives.

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What this theme is asking
Business objectives and growth
Organic versus external growth
Ansoff's matrix
SWOT analysis
Decision-making techniques: decision trees
Strategy and corporate objectives
Examples in context
Try this

What this theme is asking

Eduqas wants you to know business objectives and the methods and reasons for growth, the difference between organic and external growth, Ansoff's matrix of growth options, strategic analysis using SWOT, and decision-making techniques including decision trees, all linked to corporate objectives. This is the strategic heart of Component 2, where analysis and judgement carry the most marks.

Business objectives and growth

Organic versus external growth

Ansoff's matrix

SWOT analysis

SWOT analysis is a strategic tool that summarises a firm's internal Strengths and Weaknesses and its external Opportunities and Threats. It helps a firm build strategy on its strengths, address its weaknesses, exploit opportunities and defend against threats. Its value is that it organises analysis and informs strategic choice; its limitation is that it is only a snapshot of judgements and does not by itself decide what to do.

Decision-making techniques: decision trees

Worked example: choosing between two options with a decision tree

A firm chooses between launching a new product (cost $\pounds 50{,}000$ ) and improving an existing one (cost $\pounds 20{,}000$ ). The launch has a $0.6$ chance of a $\pounds 400{,}000$ gain and a $0.4$ chance of a $\pounds 100{,}000$ loss. The improvement has a $0.7$ chance of a $\pounds 150{,}000$ gain and a $0.3$ chance of a $\pounds 20{,}000$ gain.

step 1: expected value of the launch

(0.6 \times 400{,}000) + (0.4 \times -100{,}000) = 240{,}000 - 40{,}000 = \pounds 200{,}000

Net of cost:

200{,}000 - 50{,}000 = \pounds 150{,}000

step 2: expected value of the improvement

(0.7 \times 150{,}000) + (0.3 \times 20{,}000) = 105{,}000 + 6{,}000 = \pounds 111{,}000

Net of cost:

111{,}000 - 20{,}000 = \pounds 91{,}000

step 3: compare

The launch has the higher net expected value ( $\pounds 150{,}000$ versus $\pounds 91{,}000$ ), so on the numbers the firm should launch.

step 4: qualify the decision

The figures rest on estimated probabilities and values, and the launch carries a real chance of a $\pounds 100{,}000$ loss, which a cautious firm may avoid despite the higher expected value. Decision trees inform the choice but should be combined with judgement about risk, the reliability of the estimates and the firm's objectives.

Strategy and corporate objectives

Strategy is the long-term plan a firm uses to achieve its corporate objectives, and the growth method, Ansoff route and decisions it takes must all serve those objectives. A firm pursuing rapid growth may accept the risk of a takeover or diversification; one pursuing stability prefers low-risk market penetration and organic growth. SWOT and decision trees support the choice, but the test is always whether the strategy fits the objectives, the firm's strengths and its appetite for risk.

Examples in context

A coffee chain grows organically by opening new stores, while a rival grows by takeover to gain scale fast. A clothing brand uses market development to export to new countries (Ansoff). A firm uses SWOT to build strategy on a strong brand while addressing weak online sales. A manufacturer uses a decision tree to weigh a risky new product against a safer improvement.

Try this

Q1. State the four growth strategies in Ansoff's matrix. [4 marks]

Cue. Market penetration, market development, product development, diversification.

Q2. An option has a $0.5$ chance of a $\pounds 200{,}000$ gain and a $0.5$ chance of a $\pounds 40{,}000$ gain. Calculate its expected value. [2 marks]

Cue. $(0.5 \times 200{,}000) + (0.5 \times 40{,}000) = 100{,}000 + 20{,}000 = \pounds 120{,}000$ .

Exam-style practice questions

Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Eduqas 20206 marksA firm faces a decision with two options. Launching a new product has a

0.6

chance of a

\pounds 400{,}000

gain and a

0.4

chance of a

\pounds 100{,}000

loss; the launch costs

\pounds 50{,}000

. Calculate the expected value of the launch net of its cost. (6)

Show worked answer →

A Component 2 decision-tree calculation rewarding the expected value, the deduction of the cost, and units.

Expected value (before cost) $= (0.6 \times 400{,}000) + (0.4 \times -100{,}000) = 240{,}000 - 40{,}000 = \pounds 200{,}000$ .

Net of the $\pounds 50{,}000$ launch cost $= 200{,}000 - 50{,}000 = \pounds 150{,}000$ .

Markers reward the correct expected value, the subtraction of the cost and the units. The common errors are forgetting the loss is negative, not weighting by the probabilities, or failing to deduct the cost of the option.

Eduqas 202210 marksEvaluate the view that external growth through a takeover is the best way for a business to grow. (10)

Show worked answer →

A levels-of-response evaluation. For takeover: external growth is fast, gains market share, assets, brands and skills at once, removes a competitor, and can bring economies of scale and access to new markets, which organic growth cannot match for speed. Against: takeovers are risky and expensive, can overpay, often fail to deliver expected synergies, face culture clashes and integration problems, and can stretch management and finances; organic growth is slower but cheaper, lower-risk and easier to control. Evaluation: a takeover can be the best route where speed, scale or a specific asset matters and the firm can fund and integrate it well, but it is not always best: the right method depends on the objective, the finance available, the risk appetite and integration ability; many firms blend organic and external growth. The top band judges and applies.

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Sources & how we know this

Eduqas A Level Business Specification (A510) — Eduqas (2015)