Business

Business Combination

Business combination is formed when two or more business undertaking units combine to carry on business together for achieving the economic benefits.

It is also originated when a number of different business concerns of same line combine together under one management with a view to achieve some definite objects of mutual benefits.

At present we find a general tendency to form cartel, trust, holding company, pool and amalgamation etc at home or abroad for the object of increasing capital volume, specialization and standardization. Rival firms combine together in order to avoid heavy cost of competition.

Forms of Business Combinations

forms of business combination

At present we find a general tendency to form cartel, trust, holding company, pool and amalgamation etc at home or abroad for the object of increasing capital volume, specialization and standardization. Rival firms combine together in order to avoid heavy cost of competition.

These business combination forms have different types; entirely depends upon missions, agreements, benefits of both parties.

Trade Association

It is a voluntary association of traders, merchants and industrialists who belong to particular place and who engage in similar nature of business. It is formed for the achievement of common purposes.

For example, Cloth Merchants Association, Leader Traders Association, Iron Merchants Association. Common fund is established in  which each member contributes for the protection of their interest.

Objective of Trade Associations

  • To Encourage the friendly relation among the members.
  • To avoid the competition among the members.
  • To promote the interest and welfare of its members.
  • To arrange the supply of raw material and labours.

Chamber of Commerce

It is an association of various merchants, industrialists and business men who belong to particular city or district. It is formed to promote trade, commerce and industrial activities in the country. Its management is conducted by elected executive committee.

Government has also right to appoint some members. Its recommendations are considered very useful in formulating budget and other trade and commercial policy. These chambers remain in close touch with the Ministry of Commerce.

Objectives of Chamber of Commerce

  • To protect the interest of its members.
  • To promote the business activities in the country.
  • To remove or minimize the effect of trade restrictions.
  • To collect the information relating to trade, commerce, industry and shipping.
  • To settle the disputes arising among the members inside or outside the business.

Pool

Pool is a device to regulate the production, to divide the territory of market and to distribute the profit of its members. Under this system members do not loose their entity so it is deemed stable form of combination.

Objectives of Pool

  • To avoid competition among its members.
  • To regulate the supply of production.
  • To control the prices of product.
  • To avoid over production.
  • To minimize the expenditure on distribution.
  • To earn handsome profit of their goods.

Cartel

It is an association .of independent producers and businessmen to design certain arrangements for jointly conducting their marketing functions. Joint selling agency is to be organized for performing marketing functions.

All the participating members agree with the cartel to dispose of their entire product to it. Then the cartel arranges to supply the goods to the market. It is a loose type of combination where the member units enjoy full independence. So they can easily come out of cartel at any time.

The form of combination was first introduced in Germany.

Objectives of Cartel

  • To achieve economy of large scale distribution.
  • To eliminate unnecessary competition.
  • To limit the supplies of their product.
  • To improve the quality of the product and condition of sale.
  • To control the price of their products.

Rings

This is an organization of producers who combine to restrict output they produces for the purpose of securing some monetary gain. All the members agree with the ring that they would not produce the goods in excess of the quote fixed for them. Defaulters are to be fined by the rings. It is usually organized to exploit the consumers.

Objectives of Rings

  • To avoid over production.
  • To control the supply of the product.
  • To secure monetary gain by controlling price.

Trust

Trust is another kind in which the stockholders transfer a majority of their stock or shares to a Board of Trustees in exchange for trust. certificates This is the combination of several joint stock companies which is managed by the Board of Trustees who control the shares or stock of its members.

Trust is formed to control the production and distribution. As it enjoys sound financial position it can achieve the benefits of large scale production. This is a strong vertical type of combination. Its members cannot easily come out of the trust.

Trust originated in U.S.A in 1879 but due to its harmful activities for the public it was declared illegal by the court in 1890.

Objectives of Trust

  • To increase capital volume for large scale production.
  • To enjoy the benefits of large scale organization.
  • To achieve the economies in production and distribution.
  • To control the market.
  • To regulate the prices and output.

Corner

This is the combination of speculators which is generally organized in the share market. Under this system entire goods or shares available on the particular market are purchased by the corner with the object of reducing the supply to the minimum.

Thus its members are in a position to achieve monetary gain by affecting prices. But in the modem age this device cannot be successful due to fast means of transport and communications.

Objectives of Corner

  • To establish a temporary monopoly of the market.
  • To charge high prices of their goods.
  • To control the supply of the particular commodity.

Informal Agreement

This is the form of mutual understanding or agreements among the competing business with the object of controlling the prices of the product and regulating the market. This is a simplest and loose form of combination which is generally based on oral agreement among the rival units.

A member can be expelled from the combination if he fails to abide by any rules and regulations but it may also come to an end if the members are violating rules. This is also known as Gentlemen’s, Agreement.

Objectives of Informal Agreement

  • To avoid unnecessary competition among the constituent units.
  • To control the prices of the product.
  • To improve the condition of the scale.
  • To restrict output of the competing members.
  • To reduce the cost of marketing the product.

Syndicate

This is the organization of producers and manufacturers who combine to regulate the product and price. This is loose type of combination in which member units have complete independence in the matter of internal administration of their own units.

It can be formed of local, national and international level. The following procedure is to be adopted by syndicate.

  • Its members cannot dispose of their product directly in the market, but entire output of its members are purchased by syndicate at agreed prices.
  • Syndicate arranges to sell the product of its members in the market at reasonable prices.
  • The profit earned by the syndicate is distributed among the members in agreed producers.

Objectives of Syndicate

  • To avoid competition among the producers.
  • To regulate the output and prices of the product.
  • To locate reasonable market for the products of its constituent units.
  • To dispose of the output at handsome prices.

Holding Company

A holding company is a device to control the majority of other company’s shares. Under this system, any company may become holding if the sufficient number of shares are purchased by it.

The company whose shares are owned by the holding company is named as subsidiary company. A company may itself be a holding company and at the same time be a subsidiary to another company.

Objectives of Holding Company

  • To eliminate competition.
  • To obtain the benefit of large scale production.
  • To achieve economy in the field of management and production.
  • To increase the efficiency of business by modern technique.
  • To control market and to avoid over production.
  • To enjoy the research results and patent rights of each other.
  • To increase the financial stability of the subsidiary company before the general public.

Amalgamation

When two or more joint stock companies which are already established combine into large one amalgamation comes into existence. New combination company generally take over all the assets and obligations of the old companies.

Each company of the amalgamation lost its separate entity. For example if X company and Y company combined together under the new name of X and Y company it is called amalgamation.

Objectives of Amalgamation

  • To achieve the economies of large scale production.
  • To increase the financial resources.
  • To attain the benefit of technical and scientific development.

Merger

When a joint stock company takes over the entire ownership of one or more than one business units. It is known as a merger. So two or more firms absorb into one in exchange for stock and shares. In case of a merger, each firm loses ~ its separate entity. For instance, if y company merge with the A company, y company will lose its identity.

Objectives of Merger

  • To eliminate competition.
  • To secure benefit of large scale production.
  • To control market.
  • To achieve the economies in management, production and distribution.
  • To hire the services of expert and efficient persons.
  • To enjoy taxes and other exemption facilities.
  • To increase the efficiency of business by adopting new technique, improved formula and scientific invention.

Types of Business Combination

Vertical Business Combination

Vertical combination takes place when various department of large industrial units combine together under single management. Under this arrangement constituent units link up all the stages of production i.e. from purchasing of raw material to its finishing.

Objectives of Vertical Business Combination

  • To regular the supply of raw material
  • To achieve economy in the purchasing and other sectors.
  • To locate the assured market for their products
  • To minimize the cost per unit.
  • To eliminate competition.
  • To avoid over production.
  • To reduce the middle man’s commission.
  • To supervise the management and production of effectively.
Vertical Business Combination

Horizontal Business Combination

When two or more similar nature of business units combine under one management Horizontal combination comes into form. For instances two or more textile industrial undertakings unite under single management it is called horizontal combination. It is also known as a parallel combination

Horizontal Business Combination

Objectives of Horizontal Business Combination

  • To achieve benefits of large scale production.
  • To avoid competition.
  • To obtain economy in management and production.
  • To regulate the prices of product.
  • To hire the service of outstanding talented persons.
  • To increase the efficiency of constituent units.
  • To produce the goods at minimum cost.
  • To supply the goods at possible lowest prices.
  • To secure the market of the product.
  • To introduce the improved method of production.
  • To avoid over production.

Circular Business Combination

When different natures of industrial business units combine into single large company under one managing authority it is called circular combination. It is also named as lateral combination.

For example if sugar; chemical and glass industries are combined together under one controlling authority, circular combination takes place.

Circular Business Combination

Objectives of Circular Business Combination

  • To establish the cordial relation among the constituent units.
  • To supervise the production and management most effectively.
  • To promote the cooperation in financing advertising, research and other overheads.

Diagonal Business Combination

Diagonal combination takes place when two or more business units rendering subsidiary services unite under main industry. Suppose if repairing and distributing units are combined with textile industrial unit, it is called diagonal combination.

Objectives of Diagonal Business Combination

  • To maintain the quality of the product.
  • To reduce the cost per unit.
  • To achieve the economy in various overheads.
  • To promote the efficiency of business
Diagonal Business Combination

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