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.
The advantages of vertical integration are as follows:
(i) It reduces the dependence on other enterprises in the industry and helps in achieving
(ii) It eliminates the intermediate profits and thus reduces the cost of production.
(iii)There is steady production as a result of regular supply of raw materials and regular
(iv) Products of higher quality can be obtained because of the control be achieved.
(v) Economies in storage, transport and handling of materials may be achieved.
Vertical integration may leads to the following evils:
(i) It does not eliminate competition as in case of horizontal integrations.
(ii) The size of the business may grow and it may bring grow and it may bring inflexibility of operations.
(iii) Since its processes are interdependent, a slight interruption in one process may dislocate the entire production system.
(iv) It gives rise to concentration of economic power.
Lateral Combination : It refers to the integration of business units producing and
selling different but allied products. The lateral combination may be either convergent or
divergent. Convergent lateral combination arises when firms producing different products but supplying to a common user join with him. For example, brick manufacturer, stone supplier, cement supplier, and wood supplier may integrate with a construction company; Divergent lateral combination represents combination of one supplier of a common raw material with different users. The example of divergent lateral integration is provided by a flourmill supplying flour to a number of units like bakery, confectionary, and hotel. The main benefit of lateral integration is that both the supply of raw materials and availability and existence of demand are ensured to the new combination. Benefits of centralized control of various units are achieved. Under divergent integration, markets are diversified and risks are scattered.
Diagonal Combination : It means integration of a main activity or process with
ancillary activities and services. For instance, a newspaper company may integrate with
transport company to ensure quick deliver of the newspaper to different parts of the country or an automobile plant may combine with a power generating unit. Thus, diversification of activities is diagonal. The purpose of diagonal integration is to ensure smooth and timely availability of ancillary services which are essential for the continuous working of the main units.
Circular Combination : When there is integration of business units which remotely
connoted with one another in their production and sales, furculum integration is achieved.
The remote connection may be found between products requiring similar manufacturing
processes or using the same marketing or trade channels. Circular combination or created to build up big industrial empires. Business house of Tata’s, Birla’s and D.C.M. are the
illustrations in this regard. For instance, the D.C.M. group controls the units engaged in
textiles, chemicals, fertilizers, sugar, electronic goods, business machines, etc.
Associations: The term association is meant for voluntary union of traders for the
purpose of safeguarding the interest of all the members therein. Broadly speaking, association may be classified into two types namely trade associations and chambers of commerce.
Trade Associations: A trade association may be defined as an association of business
units engaged in a particular trade or industry, or a group of closely related trades. It is a
voluntary and non-profit organization of business units which are competitors. They are
formed for the promotion of the economic interest of their members. In fact, the trade
association is a combination of businessmen, engaged in a particular line of business for the promotion of their common interest, growth of friendly relations and exchange of news and views pertaining to their business activities. The name of the association is usually after natural of the business conducted by the members. The members include businessmen engaged in the same line of business in a particulars region. Some of the associations a t the all India level are: All India Manufacturers Organisation, All India Organisation of Employers, All India Marketing Association, Indian Jute Mills Association, Indian Sugar Mills Association, Indian Paper Mills Association, etc.
Trade associations at the regional level include: Bombay Mill Owners Association, Bombay Printing Press Owners Association, Ahmedabad Cotton Mill Owners Association, etc.
The trade associations perform the following functions:-
Chambers of Commerce : A chamber of commerce may be defined as an association
of businessmen which works for the benefit of its members in a particulars territory it serves. Their aim is to protect the general commercial interest of the members. Chambers of commerce is found all over the differed in their composition and character. For instance in India and England, a chamber of commerce is a voluntary association of businessmen to further their commercial interest. But in France it is a semi-official body comprising of a fixed number of representatives of the Government and the business community. The chambers of commerce perform the following functions:-
(i) They collect and disseminate important on traffic routes, trade conditions, potential
(ii) They maintain statistical bureaus for providing classified information to the members.
(iii)They act as the spokesmen of the business community be commenting on government
polices affecting business or in connecting with an existing piece of legislation that obstructs business.
(iv) They make representations to the government on proposed legislations concerning some spheres of business or in connection with an existing piece of legislation that obstructs business.
(v) They arrange for the settlement of disputes arising out of trade or industry by means of
(vi) They introduce standard trade practices to be followed by their members.
(vii)They organise industrial fairs and exhibitions to further the interest of the business
(viii) They provide & forum of exchanging views to the members by holding conference and seminars.
Distinction Between Trade Association and Chambers Commerce : Trade
Associations and Chambers of Commerce differ in regard to the following points:-
(i) A trade association is formed by those engaged in the same trade or line of
business whereas a Chamber of Commerce is an association of businessmen and /or business units from a particular region belonging to different trades.
(ii) The members of trade association are competitors whereas the members of a
Chamber of Commerce are both competitors and non-competitors.
(iii) A trade association is engaged in protecting the interest of the particular trade but
a Chamber of Commerce is engaged in the general commercial interest of the members
engaged in different trades.