2-lower risk
4-avoidance of takeovers
1. Business combination brings monopoly in the market, which may be harmful for
the society.
2. The identity of the old company finishes.
3. Goodwill of the old companies decrease.
4. Management of the company becomes difficult.
5. Business combination may result in over-capitalization.
Types of Business Combinations
Types of Combinations:
Horizontal Combination : It is also known as parallel or trade unit integration. It is
affected by units engaged in manufacturing similar products or rendering similar
services .It involves the brining together of competing firms under single ownership
and management. For instance, if two or more sugar mills are combined under the
same management, it will be a case of horizontal combination. Tata Iron and steel
Ltd and associated cement company are the illustrations of horizontal combination.
The benefit of horizontal combination is as follows;
(i) It eliminates wasteful inter-firm completion in the same line of industry.
(ii) It helps in achieving economies of large scale production and distribution.
(iii) It can control supply of the product and market prices.
Horizontal combination may lead to the point of view of following evils:
(i) It creates monopoly which is harmful form the point of view of the customers.
(ii) There may be restriction of output and exploitation of customers.
(iii) It give rise to concentration of economic power
Vertical Combination : It is also known as sequence or industry or process
integration. It arises as a result of integration of those business enterprises which
are engaged in different stage of production of a product. In other words, it implies
combination under single control of enterprises in different stages of manufacturing
the product. The aim of vertical integration is to gain self-sufficiency as regards raw
materials and distribution of finished products. Two or more business units engaged
in successive stages of production, or producing articles leading to the same final
product, may combine together and mange all stages of production and the
distribution of the final product. For example, in cotton textile industry, there may be
a combination of units engaged in successive stages of cloth manufacturing. Such
as spinning, weaving, bleaching and finishing of cloth. Vertical combination may
result from backward or forward integration. Manufacturers at successive stages in
production may integrate backward up to the sources of raw materials or they may
expand through forward integration to retail selling of the finished product. Thus, the
basic objective of vertical combination is either to secure an assured supply of raw
materials and other requirements or to create steady market for the products
manufactured. The former objective is fulfilled by backward integration and the latter
is realized by forward integration.
1. Vertical Combination.
2. Horizontal Combination.
3. Circular Combination.
4. Diagonal Combination.
When different types of business units combine themselves under the one management it is
called circular combination.
Example :- If a cloth industry combining with shoes industry and sugar industry is an example
of mixed combination.
Objects :- The main object of mixed combination is to secure the benefits of administrative
ability through common management.
Example :- If designing and tailoring business units are combined with the garments industry it
is called diagonal combination.
Objects :- The main object and advantage f this combination is that it makes the business unit
very large and self sufficient.
Classify the various Forms of Business Combinations and explain
its objectives or Advantages
1. TRADE ASSOCIATION :-
It is a voluntary association of industrialists traders and merchants who belong to the same
nature of business. The trade association main objective is to protect the economic interests of
the members. It also encourages the friendly relations among the members. Every trade
association elects its office bearers to look after the interest of the members. This association
also provides necessary information's to the rubbers about the business. Wood merchants, iron
merchants and leather trading association are the examples of Trade Association. Trade
associations also establishes its common fund. Each member contributes the fund. This fund is
used to obtain the common objectives.
2. CHAMBER OF COMMERCE :-
It is an association of industrialists traders and businessman who belongs to the particular city
or district. Its management is conducted by the elected office bearers. Govt. has also right to
appoint some members while preparing the commercial and fiscal policy government considers
the recommendations of the chambers of commerce.
3. POOL :-
Pool is an agreement which is made by the members. Members of the pool produce similar
product and they want to regularize the price of the product. The management of the pool
controls the price and product of the pool members. All the member firms transfer their sources
of rights to the pool. The pool eliminates the completion. It divides the market and distributes
profit among the members. Under this system firms do not loose their identity. Pool has three
kinds :
1. Production pool or out put pool :- When quota of production is fixed for each of the
member firm in order to avoid over production it is called production pool.
2. Market pool :- According to this method market is divided among the member firms. Each
firm sells its product only in the allocated area. The pooling of market may be local national or
international.
3. Income or profit pool :- The member of the pool fix the base price which is equal the cost of
production. The members of the pool are allowed to sell the product at higher price fixed by the
central body of the pool. The difference between selling price and cost is transferred to the
account of the Central body of the pool. The pool divides the profit according to their agreed
share.
Advantages of Pool :-
1. It can be easily formed.
2. There is no fear of over production.
3. It reduces competition.
4. It saves the expenditures of the firms.
5. It increases the profit of the firms.
6. It controls the prices of the product.
4. CARTEL or SYNDICATE :-
It is formed by a number of producers engaged in the same industry. They make an agreement
to sell their product jointly through the joint stock company called cartel. The Cartel is
responsible to dispose of the product of the firms in the market. The Cartel secures monopoly
and sells the product at different prices in different countries. The Cartel sells the product on the
behalf of the firms and distributes the profit according to their supply. The Cartel only performs
the duty of distribution of product it does not operate for earning of profit for itself.
Note :- Cartel is an association of independent producers. Cartel can not interfere in the internal
affairs of the firms.
Advantages of Cartel :-
1. The members can earn monopoly profit.
2. The inefficient firm may save itself from competition.
3. The bargaining power of the Cartel is better as compared to others.
4. Selling of the product is economical.
5. The member do not lose their identity.
6. It is more stable than pool.
7. Publicity expenditure of the firms is saved.
Disadvantages of Cartel :-
1. Member of the firms can not maintain uniform standard of the goods.
2. The customers are charged higher prices.
3. Wealth goes in few hands.
4. Non members of the Cartel Compete with the Cartel.
5. New firms also enter into the market due ti high rate of profit.
5. TRUST :-
Trust is a that kind of business organization in which the stock holders transfer their stock or
shares to the Board of Trustees and receive the trust certificates in exchange. The agreement
which takes place is called trust agreement.
Advantages of Trust :-
1. Trust is in a better position to control the out put and market.
2. Trust financial conditions is strong.
3. Trust uses the latest machinery and reduces the cost.
4. Trust has effective control on the member firms.
5. Trust avails the economies of large scale.
6. There is no danger of over production.
7. Trust produces the goods of standard quality.
Disadvantages of Trust :-
1. The process of trust formation is very difficult.
2. The consumer suffers a loss due to Trust monopoly.
3. There is also a danger of over investment in the trust.
4. Wealth goes in few hands.
5. The government of various countries declared it illegal because it is harmful for the public.
Rings :- It is organized to secure the monetary gains. Producers combine themselves to restrict
out put and earn maximum profit. All the members production quota is fixed and no one can
produce more than his quota. It is organized to exploit the consumers. Any member if violates
the agreement he is fined by the ring. Supply of the firm is controlled by the ring.
Posted by fysul mirza at 03:16