Chapter 5

Business Combinations
 Need Of Business Combinations
 Competitive Era
 Inclination towards large scale of operation
 Gradual Expansion
 Expansion is External & Internal
 Expansion through extensions of scale of operations of
an individual unit- Internal
 Expansion is result of drawing together several units
under single control- External or Combination

Business Combinations 2
 Business Combinations

 Business combinations: events and

transactions in which two or more
business enterprises, or their net
assets, are combined to be under
the control of a single business
entity.

Business Combinations 3
 Business Combinations
• 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 purposes”

• A combination may be formed to control prices, raw

materials, markets, profits or any other factor affecting
profit in order to stabilize or increase net profits of the
members.

Business Combinations 4
 Objects Of Business Combinations
1. Economy in the use of floating capitals.
2. Economy in capital expenditure
3. Economy in administrative expenses and greater
stability in administration.
4. Economy in selling and distributive expenses
5. Maintenance of selling prices
6. Commanding greater financial strength
7. Pooling of resources and brain power and improved
facilities for research

Business Combinations 5
 Causes Of Business Combinations
1. Wasteful Competition
2. Growth of joint stock business & competition
3. Advantages of Large scale organization
4. Potentialities of monopoly in production & trade
5. Self Defense
6. Pressure from government
7. Lust of power
8. Profiteering motive
9. Growth of transport & communication
10. Respect for size Business Combinations 6
 Causes Of Business Combinations
11. Technological advancements
12. Regulated, controlled & planned economy.

Business Combinations 7
 Advantages Of Business Combinations
1. Secures economies of scale
2. Over production risk is reduced
3. Shutting down insufficient funds
4. Availability of cheap goods
5. Pooling of knowledge and experience
6. Tackling of common problems
7. Great financial strength and stability

Business Combinations 8
 Disadvantages Of Business Combinations
1. High Prices
2. Unfair practices
3. Political Corruption
4. Managerial difficulties
5. Economic & Legal disabilities

Business Combinations 9
 Types Of Business Combinations
1. Horizontal Combination
2. Vertical Combination
3. Lateral Combination

Business Combinations 10
 Horizontal Combination
 Combination of business units engaged in same line of
business or in same stage or line in production or
process.
 Also called as Trade or Parallel Combination.
 Eg: If we combine 2 or more sugar units or 2 or more
paper mills.
 Eg: The sugar syndicate and associated cement
companies

SUGAR SUGAR SUGAR SUGAR SUGAR

MARKET
MILL 1 MILL 2 MILL 3 MILL 4 MILL 5

Business Combinations 11
 Horizontal Combination
 Eliminates competition
 Achieves economies of large scale production
 Reduction in COP
 Fixing common prices
 Purchase of bulk raw material helps in standardization of
materials, cheaper credit, process standardization.
 May lead to monopoly
 Concentration of industrial power in few hands

Business Combinations 12
 Vertical Combination
 Combination of different units working on different
planes or stages of production.
 Also known as Industry or Sequence combination
 It represents the various successive stages of productive
activity either in same industry or various industries
connected in a sequence.
 Eg: In a cotton textile industry cotton ginning factory
combines with the spinning factory and it with weaving
and further with factory producing garments.
 In Sugar industry sugarcane cultivation may combine with
crushing plant, then with manufacturing plant and with
factory manufacturingBusiness
confectionery
Combinations
and jams. 13
 Vertical Combination
 In paper industry also pulp producing units , the paper
mill and printing press and book co. combine toegther.

SUGAR CANE
CULTIVATION FARM

SUGARCANE CRUSHING
FARM

SUGAR MILL

CONFECTIONERY OR
CANNERY MARKET
Business Combinations 14
 Vertical Combination
 Eliminates intermediate profits
 Reduction of COP
 Steady production
 Gaining self sufficiency
 Does not results in monopoly
 Does not eliminates competition
 Interdependent processes may lead to problems

Business Combinations 15
 Lateral Combination
 Combination of different units working on different
planes or stages of production.
 Also known as Industry or Sequence combination
 It represents the various successive stages of productive
activity either in same industry or various industries
connected in a sequence.
 Eg: In a cotton textile industry cotton ginning factory
combines with the spinning factory and it with weaving
and further with factory producing garments.
 In Sugar industry sugarcane cultivation may combine with
crushing plant, then with manufacturing plant and with
factory manufacturingBusiness
confectionery
Combinations
and jams. 16