Business combination and disadvantages
Business Combination
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.
Advantages Of Business Combination
Major benefits or advantages of business combination can be expressed as follows:
1. Eliminate The Competition-Business combination helps to eliminate the possibility of cut-throat competition between or among two or more than two business companies of same nature.
2. Raise Capital-Business combination helps to raise large amount of capital which helps to expand business activities by acquiring new technology and adopting improved methods of production.
3. Cost Reduction- Large volume of production is possible because of business combination. So, production cost per unit can be reduced. Similarly, administrative, distribution and management costs can be minimized.
4. Low Purchasing Cost-Large scale purchase is possible because of business combination. It helps to reduce materials costs and transportation costs per unit due to bulk purchase of goods.
5. Fair Selling Price- Company can fix fair and reasonable amount of selling price for its products and services. Because of large scale production. low purchasing costs of raw materials, and low administrative and distribution expenses selling price can be fixed at minimum level..
6. Monopoly-Business combination helps to achieve monopoly in the market by eliminating competitors.
7. Market Control-Business combination helps to control total market by using the power of monopoly. Company can control the market price and supply of its product.
8. Control Over And Under Production- Business combination helps to control over and under production of goods and services by adjusting demand and supply.
9. Increase Reputation- Business combination helps to increase goodwill, reputation and positive image of the company.
10. Stability- Business combination ensures the stability of the business because of large capital, large scale production, monopoly, regular production and proper supply of goods and services.
Disadvantages Of Business Combination
Main drawbacks or disadvantages of business combination can be expressed as follows:
1. Bad Effects Of Monopoly-Business combination creates monopoly in the market. So, consumers may suffer from the evils of monopoly such as high price, low quality products, scarcities and black marketing.
2. Risk Of Over Capitalization-Combined business may suffer from over capitalization because of huge and unused capital. It may result in wastage of resources, fall in profit and lower rate of return.
3. Threat To Small Firms- Business combination is a big threat to other small business firms of similar nature. It is very difficult for small firms to survive and compete with combined firms.
4. Complexities In Management- Business combination creates complexity to perform management function like coordination, controlling, supervision, directing ete.
5. No identity And Goodwill-Identity and goodwill of old companies finish or decrease after combination.
