When two or more independent
business firms are combined for a common purpose is called business
combination. The combination among firms
may be temporary or permanent. The combination may also be written or oral. The
primary objective of business combination is to maximize profit. In this
article we will learn about the following.
1. Types of Business
Combination
2. Forms of Business
Combination
Types of Business Combination
Following are the four types
of business combination.
Horizontal Combination
When two or more industrial
units which produced similar products join together is called horizontal
combination. They are at the same stage of production, and are dealing in the
same geographical market. For example, association of two sugar mills
under one management. The main objectives of horizontal combination is to:
- Eliminate competition
- Avail of large scale of production
- Improve methods of production
- Better use of skilled persons
- Minimize per unit cost
- Find proper market
- Organize of common advertising campaign
- Maximize profit
Vertical Combination
When various departments of
large industrial units combine together under one management is known as
vertical combination. For instance, combination of publishing departments such
as typing section, printing section and binding section. The main objectives of
vertical combination are same as those of horizontal combination.
Diagonal Combination
When two or more business
entities performing subsidiary services join themselves is called diagonal
combination. For example, joining of automobile manufacturer with a firm
providing repairs and maintenance service.
It is also known as services combination. The main objective of this
type of combination is to make business unit large and self-sufficient.
Circular Combination
When two or more business
units dealing in different products join hands is called circular combination.
For instance, combination of sugar mill with cement factory. This type of
combination is also known as mixed combination. The main advantage of this this
type of combination is to secure the benefits of administrative integration
through common management.
Trust is formed by an
agreement among competing firms in order to eliminate competition. The firms
retain their ownerships and identities. They agree to fix price for their goods
and services to facilitate monopoly and maximize profit. The government interfere in the business for
controlling the trust to protect the interests of consumers. Monopoly
Control in the UK and Anti-Trust Laws
in the USA are the example.
Forms of Business Combination
The forms of business
combination are given below.
Trade Association
A trade association is a
voluntary association of traders and businessmen producing similar goods or
services to protect and promote their common interests through collective
efforts. It does not enter into any business transactions. It is non-profit
organization. The members of a trade association are usually competitors. They
contribute a specified amount to the trade association fund which is utilized
to achieve their common objectives.
Chamber of Commerce
Chamber of commerce is also
formed to protect and promote common interest of the business community. But
Chamber of commerce differ from trade association in that it does not only
confine to the interest of a particular trade or industry, but it stands for
the business community in a particular region or country. It acts as a
spokesman for the business community and makes suggestions to the government
regarding legislations that will promote commerce and trade.
Pool
Pool is a written agreement
made by members dealing in similar products. It is form to avert competition
among firms. Under this system the firm’s entities remain same. Pool has the
following kinds.
- Production pool: Here quota of production for each firm is fixed in order to avoid over production.
- Market pool: Under market pool the market is divided and allocated to different firms to avoid their concentration on a few markets.
- Price pool: Under price pool the price of a commodity is fixed to facilitate monopoly.
The US does not allow pools in
any forms within the country. However, the pool has been allowed outside the US
but under the name of cartel.
Cartel
Cartel is the European name
for the American pools. It is the association of independent firms dealing in
the same type of business to fix the amount of production, divide the market,
determine the price for their products to create monopoly and maximize profit.
Merger
In merger one independent firm
takes over another independent firm. The taken over firm losses its existence. The
buyer firm retains its entity and becomes stronger than previously. This type
of business combination is formed to eliminate growing competition among
merging firms. See the given below example.
a + b = A
The above example shows that ‘a’
firm purchased ‘b’ firm and ‘a’ becomes more stronger.
Amalgamation
This form of business
combination takes place when two or more independent firms combined and loss
their entities and form a new one. Amalgamation
is formed when all combining firms are not quite famous and they are eager to
give up their names and identities and adopt a new one. The example is given
below.
A + B = C
Here ‘A’ and ‘B’ combined and
loss their entities and transformed into ‘C' company.
Holding Companies
The holding company is that
which holds at least 51 percent shares of other companies. Such other companies
are known as subsidiary companies. The
subsidiary companies retain their separate entities. The subsidiary company may
be holding company of another company. The holding company has more control
over the subsidiary companies in management and decision making.
Trust
Causes of Business Combination
There are many reasons of
business combination. Most of them are following.
Elimination of Competition
Due to growth of competition
among firms the rate of margin decreases. Under such circumstances, small enterprises
could not survive. Therefore, the only solution available to the competing
firms to eliminate competition through business combination.
Expansion of Business
Small units of business face
the problem of capital shortage which leads not to expand the business. A
business combination can easily raise capital for the expansion of business to
buy new machinery, produce large scale of production, use new and improve
methods of production and set up research department.
Effective Management
Usually small units of
business cannot afford the services of experience and qualified employees. So,
business combination is formed to hire services of those employees who are
expert in the management of the company.
Market Domination
Business units are also
combine to dominate the entire market and create monopoly. By dominating the
market, the combined firms can sell their products at higher rates and earn
maximum profit.
Economic Instability
Frequent changes in government
policies increase uncertainty among businessmen. They may therefore join
together in a more formalized manner to protect themselves against the effects of
uncertain policies of the government.
Trade Cycle
During the period of
depression, new firms are not willing to enter into industry and even the small existing firms cannot survive. Therefore, the small existing firms are willing to go
for the technique of business combination to ensure their survival.
Influence of Tariffs
The Governments throughout the
world offered protection to home industries by imposing high custom duties on
imported goods. Imposition of tariffs restricts foreign competition which
increases competition among home industries. Consequently, the increase of competition
among home industries leads to business combination.
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