EORUPA ACADEMY

Q. No. 20: What is business combination? For What purposes, business combinations are formed? Discuss briefly the various types of business combinations? ANSWER:

BUSINESS COMBINATION
INTRODUCTION: In a capitalistic economy the trends in the industrial system are toward development of mass production, growth of specialization, use of automatic machinery and electronic computers. There is also stiff competition among the products for the marketing of products resulting in lowering of prices. The completion among the producers has given place to business combinations. DEFINITION: The definitions are as follows: Ralph Estes: Business combination is the joining of two or more companies to form a single organization for the conduct of business activities. J. L. Hanson: It is an association, temporary or permanent, of two or more firms. EXPLANATION: 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 oral understanding among them to unite for enjoying the advantages of monopoly. The firms may have loose type of combination having control in the internal administration or they may decide to completely merge themselves into one unit, in such a case the uniting firms lose their separate entities.

PURPOSES OF COMBINATIONS
The following are the purposes of combinations. 1) Use of working capital: The working capital of a separate business unit is normally more than their requirements. It remains idle. When, these units combine such idle working capital can be used properly. 2) Saving in capital expenditure: The growth of business combination reduces wasteful competition, replaces outdated and obsolete machinery, and reduces capital expenditure. 3) Economies in Production: The economies in productions can be achieved through combinations of many business units. Example: Economies of bulk purchasing of material and fuels. Division of labour specialization etc. the operating costs can be reduced due to installation of costly automatic machinery and its fuller utilization. 4) Economies in Management: Secretarial and administrative work may be centralized and few efficient persons may be able to do the work performed by several. As a result of better management, the economy can be made by reducing the pre unit costs.

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5) Economies in Marketing: Economies in marketing can also be achieved through saving in selling expenses due to larger sales and extensive advertising. Combining units can avoid middlemen and sell directly to the consumers. As there is no competition so they can concentrate on production instead of spending much on marketing. 6) Stability in Prices: As a result of combination, there will be no unnecessary price-cutting competition among the combing units. Thus, the businessmen may be in a position to charge reasonable prices of the products form customers. 7) Availability of Funds: The big units can easily arrange for funds. A large combine has greater credit worthiness. Additional funds can easily be raised for expansion and re-equipment. This will ultimately help to bring down costs and prices. 8) Investment Opportunities: The combination provides investment opportunities to public. People do not like to invest in small business units. The big company provides a market to public for investing in shares and debentures. 9) Greater Stability as a result in geographical decentralization: Local strikes or breakdowns do not injure a large and wide spread combine to the same extent as they do to a solitary business unit. 10) Polling of resources and brain power, and improved facilities for research: The combination will be able to utilized more efficient buyers, salesman and administrators and avail itself o the services of inventors, chemists, etc. it can continually experimenting for the purpose of discovering means to cheaper production, improve the quality and extend the products, by providing improved service to the public.

TYPES OF COMBINATIONS
The following are the Types of Business combinations 1) HORIZONTAL COMBINATION: Horizontal combination is a voluntary association of two or more than two business units which resource the same line of products or engages in a sales activity at the same distribution level and such type of combination is also known as parallel combination or trade combination. Example: If four cement industrial units are at the same stage of production they may engaged in same activity. They also sale the product in the same market. Following diagram shows horizontal combination. HORIZONTAL COMBINATION Management Cement Cement Factory Factory

Cement Factory

Cement Factory

Advantages/ Objectives of Horizontal Combination: These are as follows: 1: To avoid competition. 2: To minimize the cost per unit. 3: To hire the services of experts. 4: To supply the goods at possible lowest prices. 5: To avoid over production. 6: To introduce improved methods of production. 7: To regulate the price of product. 8: To achieve the benefits of large scale production. 9: To find out the proper market for production. 10: To earn the maximum profit.

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11: To supervise the management. 12: To reduce the middlemans commission. 13: To organize common advertising campaign. 2) VERTICAL COMBINATION: Vertical combination is the combination of forms engaged in successive phases of the process of manufacture or sales under an effective control of top management. In the words of Professor Robinson: Vertical integration is the combination of firms in successive stages of the same industry. If the business units engaged in cotton wearing, cotton, calendaring, and cotton marketing combine together; it will be case of vertical combination. The combination of various units mentioned above may be forward or backward. Forward combination; if big manufacturing business until integrate and retain wholesale selling in its organization, it is a forward combination. Following diagram shows vertical combination. Cotton Ginning Cotton Spinning Cotton Wearing Cotton Processing Advantages/ Objectives of Vertical Combination: These are as follows: 1: To minimize the cost per unit. 2: To eliminate competition. 3: To hire the services or experts. 4: To supply the gods at lowest price. 5: To avoid over production. 6: To reduce the middleman commission. 7: To earn maximum profit 8: To supervise the management. 9: To locate proper market for the product 10: To achieve economy in purchasing. 11: To use improved methods of production. 12: To supply the raw material. 13: 3) CIRCULAR COMBINATION: Circular combination is also called mixed combination or complementary combination. OR It is a merger of forms producing altogether different commodities under the banner of a central agency. Example: If a cement, cloth, chemical, and shoes industry combines together under one controlling authority, circular combination takes place.

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Following diagram showing circular/ mixed or complementary combination. Chemical Industry Cement Industry

Cloth Industry

Shoes Industry

Advantages/ Objectives of Circular/ Mixed/Complementary Combination: These are as follows: 1: To increase the efficiency of business and industries. 2: To secure the benefits of administrative ability through common management. 3: To establish coordinal relation among different types of business units. 4) DIAGONAL COMBINATION: Diagonal combination is brought about by combining two or more than two business units providing auxiliary services in the main line of production. Example: If designing and tailoring business units are combined with garments industry, then it is called diagonal combination. Tailoring Units Garments Industry Designing Units Advantages/ Objectives of Diagonal Combination: These are as follows: 1: It makes the business unit very large and self sufficient. 2: To maintain the quality of product. 3: To reduce the cost per unit. 4: To promote the efficiency of business. 5) LATERAL COMBINATION: A combination formed by the different units engaged in the production of allied products, it is called lateral combination. Sometimes it is also named as allied combination. It is the combination of different industries units, which supply goods and services to help in the functioning of one major common undertaking. The finished products of many units constitute the raw material of one.

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Example: The best example of lateral combination is found in a printing press, which may be associated with the other units engaged in the supply of paper, ink, types and cardboard. Ink Paper

Printing Press

Typist s

Card Board

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