2281 · 3.5
Firms flashcards
Revision flashcards for Cambridge 2281 Firms (syllabus 3.5). Flip, recall, then mark a real past-paper question.
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Internal (organic) growth?
Expansion through reinvested profits, new products, or new markets — slower but lower risk than acquisitions.
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External growth?
Growth via merger, takeover, or joint venture — faster market entry but integration risks and regulatory scrutiny.
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Horizontal merger?
Merger between firms at the same stage of production in the same industry — increases market share, may achieve economies of scale.
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Vertical merger?
Merger with a supplier (backward) or distributor (forward) — secures supply chain, reduces transaction costs.
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Conglomerate merger?
Merger between firms in unrelated industries — diversifies risk across markets.
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Why might firms pursue growth?
Economies of scale, increased market power, risk diversification, managerial ambition, and security against takeover.
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What is horizontal integration?
The merger or takeover of a firm at the same stage of production in the same industry. Its main aim is to increase market share, benefit from economies of scale, and reduce competition.
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Define 'organic growth'.
The expansion of a firm's operations from its own resources, without resorting to mergers or takeovers. It is achieved by reinvesting profits, increasing output, or developing new products.
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What is the key difference between a merger and a takeover?
A merger is a voluntary agreement where two firms, often of similar size, join to form a new, single entity. A takeover (or acquisition) is where one firm buys a controlling interest in another, which can be friendly or hostile.
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State two reasons why a firm might pursue conglomerate integration.
1. Risk diversification: Spreading business interests across different, unrelated markets reduces reliance on a single market and cushions the firm from downturns in one industry. 2. To achieve growth where opportunities in the current industry are limited.
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What is meant by 'backward vertical integration'?
When a firm merges with or acquires a business at a previous stage of the supply chain (e.g., a car manufacturer buying a steel producer). This secures the supply of components, protects against price shocks from suppliers, and can reduce costs.
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What are diseconomies of scale?
The disadvantages that arise from a firm growing too large. Average costs start to rise due to problems with communication, coordination, and worker motivation in a large, complex organisation.
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What is a 'niche market'?
A small, specialised segment of a larger market. Small firms often thrive by serving niche markets that are too small or unprofitable for large firms to enter.
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What is profit satisficing?
An objective of a firm where it aims to make just enough profit to keep shareholders happy or to satisfy the owners, rather than striving for the maximum possible profit. This is common in small firms where owners value work-life balance.
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What is meant by 'forward vertical integration'?
When a firm merges with or acquires a business at a later stage of the supply chain (e.g., a coffee bean producer buying a chain of coffee shops). This gives the firm control over the distribution and sale of its products.