What is Business Combination and its Types

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What is Business Combination and its Types

What is Business Combination?

In a capitalistic economy, the trend in the industrial system is towards the development of mass production, a growth of specialization use of automatic machinery and an electronic computer.

There is also stiff competition among the producers for the marketing of products resulting in lowering of the prices. The competition among producers has given place to a business combination.

Business combination is a voluntary association of firms for the achievement of a common objective. The combination among the firms may be temporary or permanent. The combination may be formed by a written agreement among the firms, or there may be an oral understanding among them to unite for enjoying the advantages of a monopoly.

The firms may have a loose type of combination merge themselves into one unit. In such a case, the uniting firms lose their separate entities.

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Types of business combination

When the nature of work is the basis of combination, it is named as a type of business of combination. On this basis, there is four main division of business combination.

  1. Horizontal combination
  2. Vertical combination
  3. Circular combination
  4. Diagonal combination
  1. Horizontal Combination:

It is a voluntary association of two or more than two business units activity at the same distribution level and serving the same geographical market.

For example:
                if three sugar industries which are at the same stage of production integrate, and are brought under one management it will be named horizontal combination. Here all the three business units sell sugar. They are engaged in a same activity. They all sell wholesale. They sell the product inside the country and thus cover the same geographical market.

The growth of horizontal combination cannot be traced to any one purpose or factor. The business units engaged in the small type of trade or at the same stage of production may combine for survival in the face of still competition. They may combine for seeking avenues of growth and expansion. They may be motivated to merge for prestige that goes with large scale production.

Horizontal Integration

1AutomobileAutomobileAutomobileà Market
2Sugar MillSugar MillSugar Millà Market
3Spinning MillSpinning MillSpinning Millà Market
4Local Coal DealersLocal Coal DealersLocal Coal Dealersà Market

The main motives or objective of a horizontal combination are summarized as under.

  1. Elimination of competition
  2. Availing of benefits of large scale production
  3. Using improved methods of production
  4. Better use of skilled persons
  5. Better services to customers at reduced rates
  6. Availability of luring market for the product
  7. Organized common advertising campaign
  8. Improvement in the quality and quantity of product
  9. Greater profit potential.

The horizontal combination is associated with evils of monopoly. It is, therefore, anti-social in operation.

  1. Vertical combination:

The vertical combination is another type of business combination. the combination of a firm engaged in successive phases of the process of manufacture or sale under an effective control of top management.
In the words of prof Robinson’s, “vertical integration is the combination of firms in successive stages of the same industry”, 

For example: If the business units engaged in cotton wearing, cotton  calendaring , cotton bleaching and cotton marketing combine together , it will be a case of a vertical combination.

In this combination, all the successive processes from the raw material stage to marketing of the product are brought under the control of one organization.  

The motives of forming vertical line of combination is;

  1. Elimination of wasteful competition
  2. Elimination of middlemen
  3. Gaining control over the quantity and quality of goods
  4. Availability of raw material at cheaper rates
  5. Reducing advertising and transport charges
  6. Gaining control over marketing of products
  7. Reducing cost per unit.

The main difficulties of a vertical combination are that it leads to an unwieldy organization, huge investment, and greater risk.

Cotton

Gaining

———–

Cotton

Spinning

———–

Cotton

Wearing

———–

Cotton

Processing

————-

The main difficulties of vertical combination are that it leads to unwieldy organization, huge investment, and greater risk

  1. Diagonal Combination:

Another type is Diagonal combination is also named as service combination. it is brought about by combining two or more than two business units providing auxiliary (helping) services in the main line of production .

For Example, cigarette makers may combine with firms making cartons, packets , nd a transport unit. The main advantage of service combination is that it makes bigger business unit self-sufficient. It has not to depend on outside sources for services like provision of cartons, transport etc

 

  1. Circular combination:

Circular combination is also called mixed combination , it is a merger of firms producing altogether different commodities under the banner of central agency.

For Example: a cotton mill combining with plastic factory and a sugar industry is an example of circular or mixed combination.

The main object of circular combination to secure the benefits of administrative integration through common management.