Business

Combinations
What is business combinations?
• According to Dr. Kothari , “ combination by
whatever name called, refers to any informal
or formal combining of two or more industrial
units, producing similar or different articles or
engaged in the successive processes of
manufacturing of an article with a view to
earn maximum profit on the capital
employed.”
Causes of combinations:
• Elimination of competition and price war.
• Economies of large scale business.
• Effects of trade cycles.
• Improved means of transport and communication.
• Technological progress.
• Desire to enjoy monopoly power.
• Desire to self sufficiency.
• Requirement of huge capital in modern business.
• Personal ambition.
 Types of
combination
• Business combination may take a
wide variety of forms. It is the result
of integration of productive
activities. The integration may be
horizontal, vertical, lateral and
circular or diagonal.
 Horizontal combination
• It is also called as Parallel or Unit or Trade
Combination. It takes place when the units
carrying on identical business activities join
hands to achieve some common objectives.
• In other words it means that firms or units at
the same stage of production or at the same
level of activity in trade with a view to
eliminate the intensity of competition and to
derive the economies of large scale business.
Horizontal Combination.
Steel Mill Steel Mill Steel Mill Steel Mill

The Sugar Syndicate, Associated Cement

Companies (A.C.C) are horizontal
combinations in India.
 Features of Horizontal Combination
• Integrating or combining firms operate in the
same type of business.
• The firms make the agreement to follow some
common policies or to come under common
management.
• The main object of firms for forming such
combinations is to reduce competition in the
market or to solve common problems jointly or to
achieve the economies of large scale production.
 Advantages of Horizontal
Combinations
• Wasteful inter-firm competition is eliminated.
• Large control over the market by combinations
will mean better price and more profits.
• The economies of large scale business are
realized since the constituent firms after
combining operates certain business activities
under common and coordinated management,
such as purchase, marketing, research, transport,
etc.
• The firms can obtain the equilibrium or
balance in demand and supply in the market
by estimating demand and controlling
production.
• Standardization of product is possible.
 Disadvantages of Horizontal
Combinations
• Horizontal combinations lead towards
monopolistic control in the market and may
exploit consumers.
• They indulge in deliberate curtailment of
output in order to raise the prices in the
market.
• There may be diseconomies of management
as the management of big combinations may
become unsuccessful.
 Vertical Combination
• It is also known as Sequence or Process
combination.
• It is the combination of such firms which are
inter-dependent for the supply of raw materials
for processing. Infact, it is the combination of
firms in successive stages of the same industry.
This type of combination is almost peculiar to an
industry where a material passes through a series
of distinct processes.
• Such combinations are suited to industries
possessing the following characteristics:
• Where finished product of one unit becomes the
raw materials of another unit.
• Where processes are complementary.
• Where balanced production is necessary and
some control over the supply of raw materials is
required to maintain certain standard of quality
for finished product. For example, in textile
industry, management may integrate units
engaged in the successive stages of cloth
manufacture, such as, cotton ginning, spinning,
weaving, painting and dyeing, marketing.
 Advantages of Vertical
Combination
• Assurance of raw materials:
Since all the firms operating at different stages
come under common control, the supply of
raw materials at successive levels becomes
continuous and uninterrupted.
• Improvement in the quality of products:
It helps in improving the quality of product
due to of continuous process.
• Protection against trade cycles:
During the periods of depression , firms can easily
meet the situation by reducing cost of production
which otherwise may not be possible.
• Increase in efficiency:
Through integration, firms can realize the
economies in handling, storing, transporting,
packing, etc. which result in the increase in
efficiency of the industry.
• Assurance of sale of manufactured goods:
The integrated units are relieved from
marketing activity of their product and they
can better concentrate on the research and
quality improvement of the products.
 Disadvantages of vertical
combinations

• Limited utility.

• Mutual dependence.
 Lateral combination
• It is also known as Allied Combination.
• It refers to the combinations of those firms
which manufacture different kinds of the
products though they are allied in some way. It
may take either of the two forms:
(a) Convergent lateral integration.
(b)Divergent lateral integration.
Convergent Lateral Integration
• In CLC (Convergent Lateral
Combination) various firms join together
with a major firm to supply its
requirements of raw materials or basic
materials. Thus the different type of
products manufactured by the combining
units become raw materials of a single
firm which can be regarded as the centre
of nucleus of a combination of this kind.
Divergent Lateral Integration

Steel

Machinery Engineering
Tubing
goods
• In DLC (Divergent Lateral Combination) a
major firm supplies its product to various
other combining firms which use it as their
raw materials. Thus, the product of one firm
becomes the raw material of many other
firms. This will happen where a number of
products can be manufactured from a
material produced by the firm.
 Advantages of Lateral
Combination
• Economies in management take place
since the units can employ common
managerial experts.
• Marketing costs are considerably
reduced.
• Un-interrupted and regular supply of raw
material is ensured.
 Disadvantages of Lateral
Combination
• Such combinations become monopolies and
therefore are anti- social.

• The output of constituent units is purposely

restricted and they do not use full capacity
because they produce only that quantity
which gets consumed with the combinations.
 Circular Combinations
• It is also known as Mixed or
Complementary Combinations.
• It is referred as the integration of those units
which are producing and marketing different
types of goods and services and they want to
have common administration.
• If a sugar mill combines with a steel works
and a cement factory , it will be an example
of mixed combination.
 Advantages of Circular
Combination

• It results in reduction of administrative cost

because common management controls a
number of units.

• Problem of monopoly.
 Disadvantages of Circular
Combination

• Administrative integration may reduce cost

upto a certain point beyond which
diseconomies may set in.
• It results in the concentration of economic
power in a few hands in the country. Unequal
distribution of wealth and income may appear
with all their social economic evils.
 Diagonal combination
• It is also known as Service Combination.
• It is the combination of main unit producing
particular type of goods with the units which
provide ancillary services, or supply services
required to keep up the production.
• The main purpose of such integration is to
eliminate the wastages of time due to
breakdowns and to improve the marketability
of the goods produced.
 Forms Of Combination
• Haney has group all the forms of
combinations into two main
categories:
1) Simple combination.
2) Compound combination.