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EORUPA ACADEMY

Q. No. 20: What is business combination? What disadvantages of business combination? ANSWER: are the advantages and

BUSINESS COMBINATION
INTRODUCTION: In a capitalistic economy the trends in the industrial system are toward development of mass production, growth of specialization, use of automatic machinery and electronic computers. There is also stiff competition among the products for the marketing of products resulting in lowering of prices. The completion among the producers has given place to business combinations. DEFINITION: The definitions are as follows: Ralph Estes: Business combination is the joining of two or more companies to form a single organization for the conduct of business activities. J. L. Hanson: It is an association, temporary or permanent, of two or more firms. EXPLANATION: The combination among the firms may be temporary or permanent. The combination may be formed by a written agreement among the firms or there may be oral understanding among them to unite for enjoying the advantages of monopoly. The firms may have loose type of combination having control in the internal administration or they may decide to completely merge themselves into one unit, in such a case the uniting firms lose their separate entities.

ADVANTAGES OF BUSINESS COMBINATION


The advantages claimed of combinations arise due to: 1: Size of business 2: Creation of Monopoly Following are the merits of business combinations. 1) Capital Rising: A combination can easily raise large capital both short and long tem for the expansion of business, replacement of machinery, introduction of improved methods of production etc. 2) Elimination of Competition: Due to growth of combination there is no price cutting by the competing firms. There is also reduction of cost freight. 3) Saving in Expenses: Administration, production, and distribution expenses reduce due to business combination.

Prepared By: H.ABDUL REHMAN

0321-6485593

EORUPA ACADEMY
4) Large Scale Marketing: The combination is in a better positioning the marketing of production at the national and international accosts per unit of purchase. 5) Large Scale Purchasing: The combination purchases goods in bulk. There are economies in buying and transportation costs per unit of purchasing. 6) Service of Specialists: A combination is able to acquire the services of talented technicians and of those who are specialists in the management of company. 7) Division of Labour: The division of work among directors, managers, offers and labour increases the productive efficiency of combination. 8) Labour Saving devices: As the combination is capital incentive. It can therefore save expenses of labour and thus can reduce the cost per unit of the commodity. 9) Production research: A combination can incur expenditures on production research. It cash thus produce a variety of goods of standard quality with minimum of cost. 10) Use of By-products: The growth of combination has made it possible to profitably utilized by the product which in small concerns usually go waste. 11) Reduction in selling expenses: Due to business combination selling expenses are reduced as per unit cost of advertisement is less. 12) Use of modern technology: A combination can raise large capital for invention and new methods of production which increase the rate of profit. 13) Stability: It is more stable form of business as compared to other individual units. Dissolution of combination is less than other organization. 14) Uniform Policy: Uniform policy may be adopted in all the sectors by the combination for its constituent units. It therefore helps to regulate the business activities for the industrial combination as a whole. 15) Saving from dissolution: There are some companies in the market which are on the verge of dissolution. The combination absorbs those companies and saves them form collapse.

DISADVANTAGES OF BUSINESS COMBINATION


The following are the disadvantages of business combinations. 1) Monopoly: A combination develops monopoly charging of higher prices, paying low wages, selling substandard good etc, which is harmful for the public. 2) Over capitalization: In business combination from there is always a danger of over capitalization which is harmful for business combination. 3) The closing of small firms: Due to the growth of combination the small firms arent able to compete with the large-scale combines. They, therefore, are compelled to close down the business, which creates unemployment in the country. 4) National Interest:

Prepared By: H.ABDUL REHMAN

0321-6485593

EORUPA ACADEMY
The combination s due to their own selfish interests overlooks the national interests. They bribe and pollute the political atmosphere or satisfy their own selfish ends. 5) Unequal Distribution of wealth: The combines lead to unequal distribution of wealth in society. The class rift among the rich and poor widens. 6) Exploitation of Investors: The combination has a bad name in frauds and manipulation of the minority shareholders. 7) Public Opinion: The public opinion is always against the growth of combination. The monopolists always exploit the consumers and inflate their profit at the cost of helpless buyers. 8) Increased risk: Due to bad management if combination collapses, the person who have invested money suffer badly. 9) Legislative Acts: For combating the antisocial influences of combination, legislative acts are passed. Government has to fix the prices of commodities, provides subsidies etc, etc. 10) Chance of Friction: The change of friction among directors and officers are bright. They quarrel with each other for their own interests. 11) Risk of Failure: A combination of large number of units increases the risk if failures. If the managers are not loyal they may bring down the business. A public hated of monopoly can adversely affect the business. 12) Bar to Economic Progress: The combines due to monopoly power are least worried about developing new method of producing goods. The cost reducing processes are also not undertaken. The combines thus also operate as a bar to economics progress. CONCLUSION: The business combination is very important for increasing the capital and expansion of business and to get maximum benefits out of production. However the demerits definitely discourage such practices due to exploitation of labour and public.

Prepared By: H.ABDUL REHMAN

0321-6485593