AP Business with Personal Finance · Lesson 2

Strategy and decision making

Know Know it

A strategy is a long-term plan for how a business will compete and reach its goals. Two broad routes: compete on low cost, so the business can charge less than rivals, or differentiate, by offering something customers value and will pay more for, such as quality, design or service. A business can also aim either route at a narrow niche.

Decisions happen at three levels. Strategic decisions are long-term and made by top managers, such as entering a new market. Tactical decisions are medium-term plans by middle managers to carry out the strategy, such as a regional marketing plan. Operational decisions are day-to-day, such as tomorrow's staff schedule.

A careful decision-making process: define the problem; gather information; list the options; set the criteria and weigh each option against them; choose and act; then review the result with a KPI. Every choice has an opportunity cost, the value of the best option given up.

A weighted decision matrix turns criteria into a choice. Give each criterion a weight that shows how much it matters, with the weights adding up to 1 (or 100 percent). Score each option on each criterion, multiply each score by its weight, and add. The option with the highest weighted total best fits the criteria as weighted.

Trap Add the weighted scores, not the raw ones

Adding raw scores treats every criterion as equally important. If cost carries half the weight, a low cost score should hurt an option far more than a low score on a minor criterion. Multiply by the weights first, then add.

Worked example Easy

Which of these is a strategic decision for a fictional regional grocery chain?

  1. Choosing which part-time workers cover Saturday's evening shift at the busiest store
  2. Deciding whether to expand into a neighboring state over five yearsAnswer
  3. Ordering more bananas for the coming week
  4. Setting the price of a weekend special on bread

How to solve it

  1. Strategic decisions are long-term, big and made at the top.
  2. Only the five-year expansion into a new state fits all three.

Why each choice is right or wrong

  • A. Incorrect. Scheduling part-time workers for one Saturday shift is a day-to-day operational decision, not a long-term plan.
  • B. Correct. Entering a new state over several years is long-term, affects the whole chain and is made by top managers.
  • C. Incorrect. Ordering bananas for a week is routine and short-term, so it is an operational decision.
  • D. Incorrect. Pricing one weekend special is a short-term choice inside the existing plan, not a strategic one.

Explain Explain it

Task verbs: calculate, justify

To justify a choice, name the criterion that matters most for this business and show how the option you chose does better on it, using a number from the case. Then name the trade-off: what the option gives up, and why that cost is worth it.

Worked example Medium

Weighted decision matrix for a new location, Harbor Bean Coffee (fictional); scores from 1 (poor) to 10 (excellent)

CriterionWeightSite XSite YSite Z
Foot traffic0.5956
Rent (higher score = lower rent)0.3597
Parking0.2688

Which site has the highest weighted total?

  1. Site X, with 7.2Answer
  2. Site Y, with 7.3
  3. Site Z, with 6.7
  4. Site Z, with 7.0

How to solve it

  1. Site X: 9(0.5) + 5(0.3) + 6(0.2) = 4.5 + 1.5 + 1.2 = 7.2.
  2. Site Y: 5(0.5) + 9(0.3) + 8(0.2) = 2.5 + 2.7 + 1.6 = 6.8.
  3. Site Z: 6(0.5) + 7(0.3) + 8(0.2) = 3.0 + 2.1 + 1.6 = 6.7.
  4. Site X wins even though Site Y has the highest raw sum (22), because foot traffic carries half the weight.

Why each choice is right or wrong

  • A. Correct. Site X: 9(0.5) + 5(0.3) + 6(0.2) = 4.5 + 1.5 + 1.2 = 7.2, the highest total.
  • B. Incorrect. Site Y's weighted total is 2.5 + 2.7 + 1.6 = 6.8, not 7.3, and 6.8 is below Site X's 7.2.
  • C. Incorrect. Site Z does total 3.0 + 2.1 + 1.6 = 6.7, but that is below Site X's 7.2, so it is not the highest.
  • D. Incorrect. 7.0 is Site Z's unweighted average (21 / 3); its weighted total is 6.7, below Site X's 7.2.

Justify Your turn

A fictional furniture maker known for hand-finished oak tables is choosing between two strategies: cutting its prices by 30 percent by switching to cheaper particleboard, or keeping its oak and raising its prices to stress quality. Its customers say craftsmanship is the main reason they buy. Recommend one strategy and justify it using the customers' view, then name one risk of the strategy you chose.

Write it, then compare. Nothing you type here is saved or graded.

Compare with a model answer

A full answer does this

  • Recommends one of the two strategies
  • Justifies the choice with the fact that customers buy for craftsmanship
  • Names a real risk of the chosen strategy

Model answer

The company should keep its oak and raise prices to stress quality. Its customers say craftsmanship is the main reason they buy, so a differentiation strategy keeps exactly what they value, and they are more likely to pay a higher price for it; switching to particleboard would throw that away. One risk is that higher prices could lose buyers who care more about price, so total sales might fall.

Apply Apply it

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