Different Types of Combination / advantages and disadvantages
Business combinations are the result of the integration of productive activities. They are following types: (1) Horizontal (2) Vertical (3) Lateral (4) Diagonal.
1. Horizontal combinations
These combinations in trade and industry are the result of horizontal integration. Horizontal integration means the combination of plants or units at the same stage of production or at the same level of activities join hands to achieve some common objectives. A combination of soap manufacturers doing similar business can be called horizontal combinations.
Advantages of Horizontal Combination-Following are the advantages of Horizontal Combination:
1. Elimination of Unnecessary Competition: When the units belonging to similar business combine themselves, unnecessary competition is eliminated
2. Advantage of the Services of Specialists: In such combinations, benefit of the services of specialists can be taken which is difficult to get separately.
3. Benefit of Large scale Production: In similar type of combined units, production is done at large scale which facilitates in enjoying the economies of large scale production.
4. Helpful in Research : Due to Horizontal Combination, research work can be formed easily whereas it becomes difficult for separate small units to do the research work easily.
5. Balance between demand and supply: In the combination balance is made between demand and supply. This provides safety against the problems of less or more production.
6. Improvement in Quality of Production: This type of combination not only improves the quality of production but also brings uniformity in production
Disadvantages of Horizontal Combination- Following are the disadvantages of Horizontal Combination:
1. Misuse of Power: This type of combination develops the monopolistic tendency. Consequently, industrialists start to exploit consumers, labour and sellers.
2. Birth to Capitalism: Combination is an another form of Capitalism.
It contains all the defects of Capitalist Economy.
3. Hurdle to Industrial Progress: Due to the elimination of competition among various industrial units, the speed of economic progress falls down
4. Exploitation of Consumers: In such combination producers exploit consumers by giving them low quality of commodities on higher price.
2. Vertical Combinations
Prof. Robinson describes vertical combination as “the combination of firms in successive stages of the same industry.” The firms combining are not competing but are inter-dependent on each other for the supply of raw materials for processing. This type of integration, also called industry integration or combination takes place in an industry where a product passes through a number of processes. It is of two kinds: (i) forward integration which takes place when an entrepreneur tries to control the succeeding activities: and (ii) backward integration which takes place when an entrepreneur tries to control the preceding activities in an industry. A manufacturer of shoes may take over a tannery and also opens his own retail stores to market shoes. This is the case of vertical integration. Following diagram depicts this combination.
Such combinations are suited to industries which possess the following characteristics : (i) where the finished product of one becomes the raw material of another firm, (ii) where processes are complementary, (iii) where balanced production is necessary as in the case of woollen textiles, and (iv) where some control over the supply of raw materials is required to maintain certain standard of quality for the finished product.
Advantages of Vertical Combination- Following are the advantages of Vertical Combination:
1. Certainty of Raw materials: Such type of combination solves the problem of availability of raw materials and because the goods manufactured
by first process is raw materials for another process. 2. Certainty of Sale of Finished Goods: In such combination only last unit has to make efforts to sale-finished goods. This provides a saving in expenses.
3. Standardisation: The quality of production improves with such combination and standardized production becomes possible.
4. Safety from Trade Cycles: The units including in trade cycles arenot affected by trade depression or inflation because these units are morepowerful and steady.
5. Elimination of Middlemen: In vertical combination, per unit production cost reduces with the elimination of middlemen due to combination of various units.
Disadvantages of Vertical Combination Following are the disadvantages of Vertical Combination :
1. Lack of Advantages of Large-scale Production : In vertical combination, there is lack of advantages of large-scale production.
2. Cut throat Competition: In this type of combination, only complementary units are combined. Therefore, competition prevails with similar business doing units.
3. Mutual Dependence : In vertical combination, every next unit is depend on the production of first unit. If the production of any process stops, the production work of next process will also be affected.
4. Bad Effect of Change in Modes or Tastes of Consumers: It affects adversely on vertical combination if modes or tastes of consumers get changed.
5. Limited Scope: The scope of vertical combination is very limited. 3. Lateral or Allied Combinations
Such a combination takes place when firms manufacturing different types of products but allied in some ways come together. It may be either: (1) divergent lateral integration or (ii) convergent lateral integration.
(1) Divergent lateral combination : It is brought about where a particular raw material is used in the manufacture of a variety of products by a number of firms; and all the firms join hands with the large firm to supply the raw materials. For example, Tata Steel supplies different types of raw materials to TELCO for the manufacture of trucks and to Indian Tube Company for the manufacture of steel tubes.
(ii) Convergent lateral combination : It takes place where different products combine to make one product. Take the case of steel manufacture, coal, iron ore, lime stone and manganese are needed to produce steel ingots. Unite producing these raw materials may combine to produce finished steel. Following diagrams illustrate these two forms of lateral integration :
(iii) Diagonal or Services Combinations: Diagonal or services or combination takes place when a unit providing certain essential ancillary or ancillary services or goods joins a unit operating in the main line of a particular industry. For example, a textile factory may have its own repair shop. Another example may be where certain activities which help in marketing may be combined. For example, a wine manufacturing unit acquire a bottling plant to make glass bottles.
