Business combinations are of two kinds horizontal combinations and vertical combinations.
Type # 1. Horizontal Combinations:
When competing firms combine with a view to common policies in their operations it is case of horizontal combinations. The primary motive is to remove the rigors of competition and enlarge the scale of their business operations.
“Consolidation consists of combining under some single form of management several industrial enterprises of similar character producing similar products.”
Horizontal combinations are thus formed by consolidation process, i.e., bringing together firms doing the same business under some form of common management.
Features of Horizontal Combinations:
Important features of horizontal combination may be summarised as under:
(1) Association of firms engaged in the same business.
(2) Firms agree to follow common policies regarding output, selling, prices etc. or they may agree to be brought under single ownership or control.
(3) Agreement not to compete with one another in specified fields or aspects of their common business.
For example, Associated Cement Company (A.C.C.) in India is a horizontal combination of firms engaged in cement production agreeing for common marketing of their produce and avoiding competition between the different cement units bound by the agreement.
Advantages of Horizontal Combinations:
Following are the advantages of horizontal combinations:
1. Elimination of wasteful inter-firm competition in the same line of business.
2. Realisation of economies of scale by collective operations of some or all aspects of their business under some degree of common and coordinated management. Cost per unit of output will be less when all firms pool their resources and enlarge the scale of their business.
3. Larger control over the market by combinations will mean stronger prices and profits for the firms committed to the agreement.
4. Possibility of securing external economies in respects of research, transport, banking services, marketing services, advertisement campaigns etc.
5. Adjustment of production (supplies) according to demand is possible when firms agree to abide by common output policies decided upon by their combination. Over-production can be avoided by closing down the non-paying units.
Limitations of Horizontal Combinations:
1. Horizontal combinations under the pretext of realising economies of scale may grow monopolistic postures and rig up the price in the market.
2. They indulge in restrictive practices as output is deliberately curtailed in order to arbitrarily raise the prices.
3. These combinations by dint of their oligarchic or near monopolistic hold in the market may exploit the consumers by excessive price hikes, hoarding the stock, degrading the quality, etc.
4. Management of big combinations will prove to be unwieldy and hence so- called economies of large-scale production and sales may not be realised owing to diseconomies of management.
5. Combinations may be over capitalized and their overall efficiency stoops down with its deterrent effects on market.
6. Combination earning abnormal profits tempt the Government to levy more taxes, interfere in their administration to protect the labours, consumers, etc. and finally they may be taken over by the Government.
Type # 2. Vertical Combinations (Integration):
Vertical combinations are the result of integration of process implied in the manufacture of a product. “Integration,” according to Kimball and Kimball, “means an effort to acquire as far as desired, control of all stages of process in manufacturing and distributing a line of commodities form the raw material to the customer”.
Vertical integration implies combination under single control of firm engaged in different process for manufacturing a given product. Hence a steel firm may absorb a coal firm or a weaving firm may absorb or may be absorbed by the spinning firm. Vertical combination may result from backward integration or forward integration.
The basic objectives of vertical integration are either to secure an assured supply of raw materials and other requirements or to create ready outlet for the goods produced. The first objective is fulfilled by backward integration of processes so that the firm will be able to obtain a continuous supply of raw materials and other semi-finished or partly processed materials.
The second objective is realised by forward integration of further stages in production and marketing of the goods so that materials processed, the product turned out finally will find a ready market.
Advantages of Vertical Combinations:
1. The processes of production can be kept up in continuous sequence when all the processes are under single control through integration.
2. The waste of time, motive power and other overhead costs arising from separate smaller units working in different stages of production can be eliminated through coming together of such firms under common operational agreement of administrative arrangement.
3. Economies in handling, storing, transporting, packing etc. are realised through integration of firms.
4. Management costs would also be saved when general firms engaged in related processes are brought under common administrative control.
5. It will be possible to gain substantial control or bargaining strength with regard to the purchase of raw materials etc. required for the main line of production.
6. Integration enables the firms to control the quality of the finished product by proper control over the previous stages of production because, “the needed supplies may be made to conform more closely to the requirements.”
7. Standardised production of bulk lines would be possible and prove economical by utilising the materials within the integrated unit to the full capacity and in continuous sequence.
Difficulties of Vertical Combinations:
1. Large integrated units tend to become inelastic and they may find it almost impossible to adapt to the changes in trends of production and marketing.
It is said that once an organisation through integration is turned up to produce a given article, it is hard and burdensome to switch over to new lines and models of production.
2. It is not easy to bring about co-ordination between the activities of the integrated enterprises consisting of “dissimilar units.” The cost of achieving co-ordination may outflank the gains expected of integration.
3. Strain on management would be so severe that the combination may eventually crack down.
4. A slight dislocation in any stage of production within the integrated unit will throw the entire organisation out of gear. Overhead costs in such a case would be a drag on the proprietors or managements concerned.