Types and Objectives of Business Combination


Meaning of Business Combination

Business communication refers to the combination of two or more independent businesses for attaining same objective. This association of business with one another is either temporary or permanent and is meant for pooling production, finance, marketing and profit. Such association of firms is carried out both at local and international level.

For combining together these firms enter into an agreement that is done either in oral form or a written form. Business combination helps firms in eliminating the competition and maximizing their profit. Firms by merging together as one unit are able to enjoy a monopoly position in market.

It enables them in sharing knowledge and ideas with one other which help in achieving better efficiency. This imparts greater health and stability to firms for surviving during tough business cycles. Combination result in joint investment by firms in research and development activities that leads to better innovative products.

Types of Business Combination
Types of Business Combination

Types of Business Combination

Circular combination

Circular combination is a combination of those businesses which belong to different industry and produce differentiated products. It is also known as mixed combination as two different firms comes together through it. This combination helps firms in taking benefits of administrative integration.

Diagonal combination

It is the one in which two or more firms providing auxiliary services combines with the main firm involved in main line of production. Diagonal combination is also termed as service combination. Its main aim is to increase the business size and to make it self-sufficient so that it may not be dependent on any outside firms. Example under this category is combination of firms manufacturing automobiles with those providing spare parts and repairs services.  

Vertical combination

It means combining various department of same business unit to bring under same management. Vertical combination refers to the integration of different stages of firm involved in production of product. Here all steps from conversion of raw material to finished product are linked together. 

Horizontal combination

Horizontal combination is an integration of business units of similar nature producing identical product. They are under one management and serve same geographical market. Integration of two shoe industry or two textile industry is an example of this combination.

Objectives of Business Combination
Objectives of Business Combination

Objectives of Business Combination

Eliminates competition

Business combination helps in eliminating the tough competition among firms in market. In presence of a competition, many businesses are not able to earn suitable profits. They come together and set up their combination to work together for achieving common goals.

Proper management

It leads to proper management of all business units that merged together into one unit. Small business cannot afford the services of quality managers which affects their performance. Combination of these units together enables them in hiring management experts.

Attains monopoly

Acquiring market dominance is another major objective of business combination. Several businesses by forming a combination attain a monopoly position and enjoy a larger share in market.

Economy Scale

Business combination assist in availing the benefits of economies of scale. Small business units by merging together purchases large amount of raw materials at cheap rate and carrying out their production activities at a large scale. This brings down their cost of operations and increases their profit level.

Solves capital problem

It helps in overcoming the capital problems. Small business units lack funds for growing their activities. By associating with other units they easily gets funds for large scale production, buying advanced machinery and carrying out research activities.

Economic stability

Combination of business impart them greater health to face crisis. By joining as one unit they can easily overcome times of political and economic instability. 

Improve product quality

It leads to enhance the quality of products and level of production by firms. Combination enables them in sharing ideas, knowledge and technology with each other which results in better production. By combining the efforts they come up with new and advanced products in market.