BUSINESS GROWTH AND COMBINATIONS Forms of combinations Combinations may take several forms which may be classified as follows

1. Simple Combinations: They arise out of association of natural persons such as partnership firms and companies. 2. Compound Combinations: Compound combinations may take the following forms (i) Association : Trade Associations, Chambers of Commerce and Industry and informal agreements. (ii) Federation : Pools and cartels. (iii) Consolidation : Consolidation may take two forms: (a) Partial consolidation : trust, holding company and community of interest. (b) Complete Consolidation: Merger and amalgamation.

FORMS OF COMBINATIONS

Association --Trade association --Chambers of Commerce & Industry I--nformal agreement --

Federation --Pools --Cartels Partial Consolidation --Trust --Holding company --Community of Trust

Consolidation Complete Consolidation Merger Amalgamation

Circular or mixed integration When there is integration of business units which are remotely connected with one another in their production and sales circular integration is achieved. The remote connection may be found between products requiring similar manufacturing processes or using the same marketing or trade channels. Circular combinations are created to build up big industrial empires. Business houses of Tata's Birlas and D.C.M. are the illustrations in this regard. For instance, the D.C.M. group controls the units engaged in textiles, chemicals, fertilizers, sugar, electronic goods, business machines, etc. Diagonal or services combination It means integration of a main activity or process with ancillary activities and services. For instance, a newspaper company may integrate with transport company to ensure timely delivery of the newspaper to different parts of the country or an automobile plant may combine with a power generating unit. Thus, diversification of activities is diagonal. The purpose of diagonal integration is to ensure smooth and timely availability of ancillary services which are essential for the continuous working of the main unit. Lateral or allied combination It refers to the integration of business units producing an selling different but allied products. The lateral combination may be either convergent or divergent. Convergent lateral combination arises when firms producing different products but supplying to a common user join with him. For example, brick manufacturer, stone supplier, cement supplier and timber supplier may integrate with a construction company. Divergent lateral combination represents combination of one supplier of a common raw material with different users. The example of divergent lateral integration is provided buy a flour mill supplying flour to a number of units like bakery, confectionery and hotel. The main benefit of lateral integration is that both the supply of raw materials and availability and existence of demand are ensured to the new combination. Benefits of centralized control of various units is achieved. Under divergent integration, markets are diversified and risks are scattered. Difference between horizontal integration and vertical integration Horizontal integration differs from vertical integration in regard to the following

1. Nature: Under horizontal combination, units carrying on the same trade or activity join together. They operate at the same stage in the industry but in case of vertical combination, units operate at different stages of manufacture of a product. 2. Elimination of Competition: The horizontal combination eliminates competition among the units so combined. But it is not so in vertical integration as the combined units were not competing with each other. 3. Control over Market: Horizontal combination may lead to full control of a monopoly. But it is not so in case of vertical combination. 4. Sell-sufficiency: Horizontal combination does not lead to self-sufficiency of materials. But in vertical integration, the manufacturer of a product may integrate with the supplier of raw material. This will lead to self-sufficiency. 5. Inter-dependency: The combined units under horizontal combination are not interdependent as far as raw materials are concerned. All units operate as semiautonomous units. The stoppage of work in one unit doesn't affect the working of others. But in case of vertical integration, there is a combination of successive stages of production. Stoppage of work at one stage will affect the functioning at all subsequent stages. For instance, bread can't be prepared if flour is not available. Flour can't be made available if wheat grains are not available. Vertical combination It is also known as sequence or industry or process integration. It arises as a result of integration of those business enterprises which are engaged in different stages of production of a product.

In other words, it implies combination under single control of enterprises in different stages of manufacturing the product. The aim of vertical integration is to gain self-sufficiency as regards rawmaterials and distribution of finished products. Two or more business units engaged in successive stages of production, or producing articles leading to the same final products, may combine together and mange all stages of production and the distribution of the final product. For example, in cotton textile industry, there may be a combination of units engaged in successive stages of cloth manufacturing such as spinning, weaving, bleaching and finishing of cloth. Vertical integration is a means to achieve internal and external economies of production and distribution. These economies arise because of control over the sources of raw

material and/or control over the market. Internal economies arise from cheaper procurement of raw materials, large scale production and efficient use of funds. External economies arise because of savings in storage and transport and large scale marketing of products. Raising of funds from the capital market is also cheaper for a big firm. The basic objective of vertical combination is either to secure an assured supply of raw materials and other requirements, or to create market for the products manufactured. The former objective is fulfilled by backward integration and the latter is realised by forward integration. Backward Integration: Manufacturers at successive stages of production may integrate backward upto the sources of raw materials. For instance, a textile unit may take over cotton ginning yarn spinning units to get smooth supply of raw materials. Backward integration is followed to have a control over the sources of raw materials. Forward Integration: A manufacturing unit may integrate with the business units which distribute its products. For instance, a Textile Company manufacturing various kinds of cloth may take over the wholesalers and retailers which are engaged in marketing its products. Forward integration is a means to attain control over the channels of distribution. Benefits: the advantages of vertical integration are as follows: (i) it reduces the dependence on other enterprises in the industry and helps in achieving self-sufficiency. (ii) It eliminates the intermediate profits and thus reduces the cost of production. (iii) There is steady production as a result of regular supply of raw materials and regular sales. (iv) Products of higher quality can be obtained because of the control over the supply of raw materials. Evils: Vertical Integration may lead to the following evils. (i) It does not eliminate competition as in case of horizontal integration. (ii) The size of the business may grow and it may bring inflexibiity of operations. (iii) Since its processes are interdependent, a slight interruption in one process may dislocate the entire production system. (iv) It gives rise to concentration of economic power.

Horizontal combination It is also known as parallel or trade unit integration. It is effected by units engaged in manufacturing similar products or rendering similar services. It involves bringing together of competing firms under single ownership and management . For instance, if two or more sugar mills are combined under the same management, it will be a case of horizontal combination. Tata Iron and Steel Ltd. and Associated Cement Company are the illustrations of horizontal combination. Benefits: The benefits of horizontal combinations are as follows: (i) It eliminates wasteful inter-firm competition in the same line of industry. (ii) It helps in achieving economies of large scale production and distribution. (iii) It can control supply of the products and market prices. Evils : Horizontal combination may lead to the following evils: (i) It create monopoly which is harmful from the point of view of the customers. (ii) there may be restriction of output and exploitation of customers. (iii) It gives rise to concentration of economic power in a few hands. Broadly speaking, combinations may be of the following types: Horizontal, Vertical, Lateral, Circular, and Diagonal.

A brief description of these has been given below: 1. Horizontal combination 2. Vertical combination 3. Lateral or allied combination 4. Diagonal or services combination 5. Circular or mixed integration Evaluation of benefits and evils of combinations There are many benefits of combinations to the business community and the society. Because of their large scale operations, they reap the economies in production, marketing, financing and management. Thus, the cost of production per unit of a combination is reduced considerably. The consumers will be benefited if the benefits of large scale are passed on them.

But it is rare that consumers have to pay less for the same products after combinations are formed. As a matter of fat, combinations lead to monopoly of sellers. Monopoly in any area of business in harmful for the consumers in particular and the society in general. Whenever there is lack of competition,k the consumers are exploited. They have to pay higher prices. Monopoly also leads to inefficiency in operations because there is no fear of losing market. The monopoly business house may to care for the requirements of the consumers and may not offer quality products. It may indulge into profiteering and blackmarketing. Therefore, it may be concluded that business combinations are likely to prove harmful to the interests of the consumers unless their operations are strictly controlled by the Government through anti-monopoly legislation and other regulatory measures. Evils of combinations Combinations are stated to be harmful form the point of view of consumers and society as discussed below 1. Rise of Monopoly Power: It has been seen that combinations generally culminate in monopoly. In spite of the numerous economies of large scale operations, the products may be sold dearer than under a state of free competition. Thus, the consumers may be exploited by charging higher prices and offering inferior goods. 2. Concentration of Wealth: Combination result in concentration of wealth in the hands of a few persons also. They are responsible for the concentration of economic power in a few hands. 3. Inefficient Use of Capital: In a combination, weaker and stronger units combine together. Because of weaker units, it may not be possible to make the efficient use of capital resources. 4. Speculation: Since there is concentration of economic power in a few hands, the people really controlling the big enterprises may manipulate the prices of shares in the stock exchange. They may also indulge in speculative activities which is not in the interest of the general public. 5. Stagnation: Absence of potential competition and control of market in a giant combination makes the enterprise inefficient and stagnant in character. 6. Political Corruption: Having vast resources at their command, big enterprises may bribe the legislators for passing laws in their favour. Government officials are often bribed the legislators for passing laws in their favour. Government officials are often bribed for ignoring the violation of labour laws and other regulatory measures of the Government.

Benefits of combinations Combinations are beneficial not only for the manufacturers, but also for the consumers. Combination by reducing costs offers goods and services at lower price to the consumers. The advantages of the combination are discussed below: 1. End of Cut-throat Competition: Combination helps in eliminating competition in the market. This will also save the expenditure of business units on wasteful competition. 2. Economics of Large Scale: Economies of large scale operations (economic in production, management, marketing, and finance) can be achieved because combinations are big enterprise and they facilitate large scale operations. The benefits of lower cost can be transferred to the consumers. 3. Proper Utilization of Capital: Combination helps, in the optimum Utilization of capital. There is least wastage of capital. The owners of business are benefited because of this. 4. Benefits of Research: Small enterprises cannot spend sufficient amount of money on research and development activities. Combinations can undertake research on a large scale and can get patents from the Government. 5. Growth and stability: Combinations have higher capacity to withstand the cyclical changes in the demand of their products. Because of large scale operations, they have a greater chance of survival in the market. They can also make use of best managerial talents. This will help in the growth of the enterprise. 6. Encouragement of Foreign trade: Business combinations can carry on foreign trade smoothly as they can bear the risks involved in the foreign trade. 7. Government Control: It is easier for the Government to control the small number of combinations as compared to the large number of small units. Causes of combinations The causes of combinations are as follows 1. Destructive Competition: destructive competition may result into the stoppage of many firms. In order to remove the fear created by strong competition, the competing firms arrive at some sort of understanding to regulate prices and eliminate overproduction. In other words, combination may be created as a means of furthering self interest by common action.

2. Economies of Large Scale: A large number of economies are achieved if a business is carried on a large scale. These economies relate to production, management, financing and marketing. Small business units may combine together to reap the benefits of large scale operations and organisation. This will reduce the cost of production and increase the profits of the business. 3. Joint Stock Enterprise: The evolution of company form of organisation has also facilitated the combination of various units by acquiring shares of various companies to control their affairs. The companies under the common control through the system of inter-locking directorship can be easily combined to get many benefits of combination. 4. Control of Market: Combinations are created to secure steady market. Sometimes, combinations are created to control the entire market and create a monopoly which is detrimental to the interest of the consumers. By controlling the market, they can sell their products at higher prices and earn huge profits. 5. Individual Ability: According to Shield, ' ' Great organising ability, strategic genius, or personal ambition on the part of one or a number of men may account in part for the rise of certain business combinations. The scarcity of business talent became one of the causes of centralisation of power in a few hands, endowed with business insight, business talent and business courage.' ' Many a time, business combination a are created due to the initiative and organising ability of an individual or a number of individuals. 6. Lust for power: Some businessmen have a lust for economic power which can be satisfied by creating industrial empires. Desires to bring up industrial regime lies at the back of many combinations. Individual ambition of becoming the pioneer member or coordinator of a huge combine is also on of the factors favoring combination. 7. Business Cycles: In uncontrolled economies, there are trade cycles. During books, firms expand to take advantage of rising demand, and during depressions, inefficient and weak firms find it difficult to survive because of lower demand. Business ups and downs generally lead to business combinations. Particularly in industries, where huge capital is employed and where demand is subject to cyclical changes, combinations occur as a revulsion against risk of burdensome overhead cost, glut, low turnover and lower process during depression. 8. Protective tariffs: Protective tariffs are used to encourage home industries. When the Government imposes import duty on certain items, the home manufacturers of such items are encouraged to form combination to develop their business and exploit the domestic market fully. Sometimes, national level combinations are formed to provide a united front to perpetuate protection. 9. Government Pressure: The Government policy may compel the weaker units

to amalgamate with the stronger units so as to improve the overall efficiency of the industry. Even the Government may take over the sick units and combine them to form a viable unit and introduce rationalization in it. 10. Miscellaneous Factors: (a) Dearth of managerial talents may lead to managerial integration of business units. Many companies have common directors which in fact means their common control. (b) If an enterprise wants to be self sufficient, it may combine with other units. Vertical integration is the result of desire for self-sufficiency. Under this, various units producing the related raw materials and semi-finished products are combined together so that they produce the finished products at economical prices. (c) Growth of transport an communication has increased the intensity of completion not only in the national market but also in the international market. This has resulted in the formation of multinational enterprises having subsidiaries in different countries. (d) Sometimes, firms in an industry join to avail of the benefits of patent rights of one firm. Haney has divided the above factors or forces into three categories which are as follows: (i) Driving or impelling forces consisting of cut-throat competition and decrease in the opportunity for speculative gains (ii) Beckoning forces which include opportunity for profits, protective tariffs and gains of over capitalization (iii) Facilitating forces comprising of joint stock enterprises and other forces. Business combination Whenever two or more business units engaged in the same line of business or in different related processes or stages of the same line of business unite or associate together with a view to carry on their activities and shape their policies on common and coordinated basis for mutual benefit, they are said to form a business combination. In the words of Haney, ''To combine is simply to become one of the parts of a whole, and a combination is merely a union of persons to make a whole or group for the prosecution of some common purpose.'' A business combination is ''a method of economic

organisation by which a common control of greater or less completeness is exercised over a number of firms which a common control of greater or less completeness is exercised over a number of firms which either have operated hitherto or could operate independently. This control may be either temporary or permanent for all or only for some purposes. '' Business combination may take numerous forms varying from the unwritten understanding amongst a small group of local dealers to a highly integrated amalgamation or fusion of large business houses. Limitations of Integrative growth strategy (growth by combination) The limitations of integrative growth strategy are as under (i) Integrative growth strategy can be implemented only if huge capital is available with the business firm. (ii) Competent and professional executives are needed to handle the affairs of new units. The existing staff of acquired units may not be able to adjust with the new management. (iii) There is a need of overall revision of the organisation structure to meet new challenges. If it is not done, there will be problems of coordination in the working of acquired units. Limitations of Integrative growth strategy (growth by combination) The limitations of integrative growth strategy are as under (i) Integrative growth strategy can be implemented only if huge capital is available with the business firm. (ii) Competent and professional executives are needed to handle the affairs of new units. The existing staff of acquired units may not be able to adjust with the new management. (iii) There is a need of overall revision of the organisation structure to meet new challenges. If it is not done, there will be problems of coordination in the working of acquired units. Advantages of Integrative growth strategy (growth by combination) The merits of integrative growth strategy are as under (i) It ensures acquisition of running manufacturing units. The problems of promotion are not be faced.

(ii) Business growth is quick because running units are acquired. (iii) The business takes over sources of raw materials. Some sort of self sufficiency is achieved as far as raw materials are concerned. (iv) Acquisition of established market channels facilitate the marketability of the products. Integrative growth strategy (growth by combination) It is strategy of growth by combination. Two or more firms may decide to combine or merge to form a bigger enterprise. When one firm takes over another firm, it is called merger or absorption. But if a new firm is created by combining (or merging) two existing firms, it is called amalgamation. The alternatives of integrative growth strategy are as discussed below: (a) Backward Integration: A company engaged in production of a product may integrate, backward upto the sources of raw materials. This would ensure continuous supply of raw materials for the production processes of the company. The acquisition of a textile mill by a ready-made garments manufacturer is a case of backward integration. (b) Forward Integration: A company may decide to grow through forward integration with the distribution channels of its products. It may acquire certain distribution channels to have a greater control over the distribution of its products. The manufacturer of ready made garments may take over certain retail shops to ensure ready market for his products. (c) Horizontal Integration: It takes place by merging of units engaged in manufacturing similar products or rendering similar services. That means competing firms are brought together under single ownership and management. For instance, if two or more sugar mills are combined under the same ownership, it will be a case of horizontal integration. The benefits of its type of integration are economies of large scale operations and evasion of unnecessary competition. (d) Conglomerative Growth: A company is said to follow the conglomerative growth strategy if is acquires another firm which is engaged in altogether different line business and is using different trade channels. In other words, it seeks its future growth through entering lines of business unrelated to its present market channels or technology. For instance a textile company may take over units engaged in chemicals, fertilizers, sugar, electrical equipments, etc.