How do businesses choose how to compete and grow?
Strategies for competing and growing, including Porter's generic strategies of cost leadership, differentiation and focus, the Ansoff matrix of market penetration, market and product development and diversification, organic and inorganic growth, and the reasons firms grow or stay small.
A focused answer to the OCR A-Level Business theme on corporate strategy, covering Porter's generic strategies, the Ansoff matrix, organic versus inorganic growth, mergers and takeovers, economies and diseconomies of scale, and the reasons firms grow or stay small.
Reviewed by: AI editorial process; not yet individually human-reviewed
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What this theme is asking
OCR wants you to explain how a firm chooses to compete (Porter's generic strategies) and to grow (the Ansoff matrix and organic versus inorganic growth), and to judge which route fits a given firm. Growth questions are a staple of Components 2 and 3, often as 16 mark evaluations.
Porter's generic strategies
The strategy must fit the firm. A budget airline pursues cost leadership; a luxury watchmaker pursues differentiation; a specialist running-shoe brand pursues focus. The danger is being half-hearted: a mid-priced, undistinctive retailer is squeezed by cheaper rivals on one side and premium rivals on the other.
The Ansoff matrix
- Market penetration is the lowest-risk route: more promotion, loyalty schemes or competitive pricing to win a bigger share of a known market.
- Market development takes a proven product to new segments or countries, risking unfamiliar customers.
- Product development offers new products to loyal existing customers, risking development cost and failure.
- Diversification spreads risk across unrelated activities but is the hardest to execute because the firm knows neither the product nor the market.
Organic and inorganic growth
Economies and diseconomies of scale
As a firm grows, economies of scale lower its average cost per unit: bulk-buying (purchasing economies), spreading fixed costs over more output (technical economies), cheaper finance and specialist managers. But beyond a point diseconomies of scale raise average cost: communication breaks down, coordination becomes harder, and staff feel remote and less motivated.
Reasons to grow or stay small
Firms grow to win economies of scale, market power, higher profit and the ability to spread risk. But some rationally stay small: to keep close personal service and a strong brand niche, to avoid the diseconomies and loss of control that come with size, or simply because the owner prefers independence over expansion. Small firms can also be more flexible and innovative than large rivals.
Examples in context
Aldi pursues cost leadership, stripping out cost to undercut rivals, while Apple differentiates on design and ecosystem to command a premium. Amazon has diversified far from its bookselling origins into cloud computing and groceries, the high-risk Ansoff corner, funded by deep pockets. Cadbury's takeover by Kraft showed both the speed of inorganic growth and the culture clashes that often follow. A successful independent bookshop may deliberately stay small to keep the personal curation that is its competitive edge.
Try this
Q1. State the Ansoff strategy of selling existing products to new markets. [1 mark]
- Cue. Market development.
Q2. Analyse one benefit and one drawback to a growing firm of inorganic growth. [6 marks]
- Cue. Benefit: fast access to scale, share and capability; drawback: cost, overpayment and integration or culture failure, each developed as a chain in context.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR H431/02 20204 marksExplain what is meant by diversification using the Ansoff matrix. (4)Show worked answer →
A 4-mark "Explain". Define the Ansoff matrix as a tool that assesses growth direction by product (existing or new) and market (existing or new). Diversification is the strategy of launching new products in new markets, the cell furthest from what the firm currently does. Build the chain: because the firm knows neither the product nor the market, diversification carries the highest risk of the four Ansoff strategies, though it can spread risk across unrelated activities. Markers reward the correct definition plus a developed point about its high risk, ideally with a brief example such as a supermarket launching a banking arm.
OCR H431/02 202416 marksEvaluate whether inorganic growth through a takeover is the best way for a UK retailer to grow. (16)Show worked answer →
A 16-mark evaluation on a four-level grid. For inorganic growth: a takeover is fast, instantly buying market share, brands, outlets and capabilities, and can deliver economies of scale and remove a rival. Chain: buying an established chain gives the retailer immediate national coverage that organic store-by-store growth would take years to build. Against: takeovers are expensive, often overpay, and frequently fail to deliver because of culture clashes, integration problems and diseconomies of scale; organic growth is slower but cheaper and lower-risk. Evaluation: the best route depends on the speed required, the finance available and the firm's ability to integrate. A judged conclusion, for example that a takeover suits a firm with the cash and a clear integration plan but organic growth suits a cautious, cash-limited retailer, reaches the top band.
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Sources & how we know this
- OCR A-Level Business (H431) specification — OCR (2015)