Kinds of Business Combinations | Advantages and Disadvantages

Types of Combinations in Business

Ownership and the nature of the business are the two basic factors that determine the type of the combination. Strictly speaking the term combination refers to the combining or coming together of two or more persons. But in this context, it refers only to a compound combination i.e. Combination of associations.

On the basis of the type of the units that may combine together, business combinations can be broadly classified into five kinds. They are:

  1. Horizontal Combinations,
  2. Vertical Combinations,
  3. Circular Combinations,
  4. Lateral Combinations, and
  5. Diagonal Combinations.

1. Horizontal Combination

Horizontal combination refers to the combination of the firms producing the same or similar type of products, engaged in the same or similar process of production. Combination of two or more jute mills, textile mills, and factories is examples for this type of combination. It is also known as parallel combination. Associated Cement Company in India constitutes a beautiful example of this type of combination. The following chart illustrates this type of combination.

Horizontal Combination
Horizontal Combination

Merits of the Horizontal Combination

1. Eradication of wasteful competition among the various units of the same industry.

2. Larger and effective control over the market.

3. Avoidance of the risks of undue price fluctuations in the market.

4. Reduction in the cost of production by securing external economies.

5. Control and adjustment of output to maintain strong and favorable prices for the products.

6. Realization of all the economies of collective operation.

Demerits of the Horizontal Combination

1. Such combination may give rise to monopolistic tendencies, which always work against the welfare of the community.

2. By deliberately curtailing the output, such units in the combination may indulge in restrictive practices and create an unhealthy atmosphere.

3. Management of too big combinations is really a difficult task. Hence, economies of large-scale production shall be offset by the dis-economies of it.

4. It may sometimes result in over capitalization.

2. Vertical Combination

Vertical Combination
Vertical Combination

Vertical combination or integration implies the combination of different firms engaged in different processes for manufacturing a given product. Prof. Robinson defines it as

the combination of firms in successive stages of the same industry

A more comprehensive definition was formulated by Haney. In his words,

Vertical or sequence combination unites organizations which are in different places and which represent the successive stages or trade within an industry. The organizations combines are not competing side by side, but stand end to end, the one receiving the products of the other as its own material.

In short, vertical combination is the linking up of all the stages of production right from the raw material to the finished product.

Features of Vertical Combination

The principal features of the vertical combination are:

1. The units forming the combination are not producing the same product.

2. The final product of one unit is the raw material of another unit.

3 All units are brought under one management.

Merits of Vertical Combination

1. Vertical combination ensures full control over the raw materials. Hence, production can be carried on without any interruption.

2. It ensures economies in handling, storing, transporting, packing etc.

3. It eliminates middleman’s profits. Consequently the cost of production decreases.

4. It also facilitates continuous utilization of plant.

5. Opportunities for developing by-products are more.

6 It also assures full control over the market because such combination adds further strength to compete with other units.

Demerits of Vertical Combination

1. Co-ordination and control of large combinations is really a difficult task. The gains arising out of such combinations may even offset the cost of co-ordination of dissimilar units.

2. A slight dislocation or breakdown of one unit shall lead to a complete dislocation of all other units of the combine.

3. Large integrated units tend to become inelastic. It is very difficult to adjust to the changes in the trends of production and marketing.

4. This type of combination shall not yield good results if the sizes of different units vary.

5. The risk involved in marketing the final product is not eliminated altogether.

6. The economies of large-scale production cannot be achieved under this type of combination unless all the units forming the combination are fairly large in their size.

Differences between Horizontal Combination vs Vertical Combinations

The nature and characteristics of both vertical and horizontal combinations can be well understood by discussing the points of distinction between the two. The following are the main differences between them:

Horizontal Combination Vertical Combination
1. Member units are producing similar products. 1. Member units are not producing similar products.
2. The object of this combination is to avoid competition. 2. The object is to secure regular supply of raw materials.
3. Break down in one unit shall not result in the stoppage of work in all other units. 3. The break down in one unit shall result in the stoppage of work in all other units.
4. Member units do not lose their independence. 4. Member units lose their identity and independence.
5. It may lead to monopoly over the market. 5. No such situation shall result.
6. There is no specialization and division of labour. 6. Every member unit specializes in a particular stage of production.
7. Economies of large-scale operations are available. 7. They may or may not be available.

3. Circular Combination

When the industrial units producing different varieties of articles combine together to make use of the same distribution outlets, that combination is known as circular combination. This type of combination is also known as mixed combination.

The firms entering into mixed combination are quite dissimilar and non-competitors. None of the features of other types of combination are found in this type. The important object of this combination is to secure the benefits of administrative integration.

4. Lateral Combination

Lateral combination refers to the combination of different units producing different products but allied in someway. Examples of allied goods are radio, fans, heaters and other electrical goods. Hence, this type of combination is also known as allied combination. This type of combination may take either of the following two forms:

1. Convergent lateral integration.

2. Divergent lateral integration.

1. Convergent Lateral Integration

It refers to a combination of business units whose products form the allied components of a main line of a product. Thus, under this combination the products of different combining units become the raw materials of a single combine.

For example, a building construction company may integrate with the stone suppliers, brick manufacturers, steel concerns, cement suppliers, wood suppliers etc. It is a form of materials integration. The following chart illustrates this type of integration.

Convergent Lateral Integration
Convergent Lateral Integration

2. Divergent Lateral Integration

It refers to the combination of different firms producing different products but using the same raw materials. For example, various units producing engineering goods, machinery, locomotives etc. require steel combine together. It is a kind of product integration. The organizational chart of this combination is given below:

Divergent Lateral Integration
Divergent Lateral Integration

5. Diagonal Combination

This combination refers to the integration of the main firm with ancillary services or ancillary products required for keeping up the production or services process. For example, an industrial enterprise combines a repair workshop for maintaining the tools and machines in good order and a power generation unit; such a combination can be termed as diagonal combination or service combination.