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Fundamentals of BO Unit III PDF 4

Business combinations refer to the association of two or more business units to eliminate unhealthy competition and encourage cooperation for maximum profit. Factors leading to their growth include the elimination of competition, economies of scale, and the rise of joint stock companies. While they offer advantages like improved efficiency and reduced competition, they also pose risks such as monopolization and exploitation of labor.

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10 views

Fundamentals of BO Unit III PDF 4

Business combinations refer to the association of two or more business units to eliminate unhealthy competition and encourage cooperation for maximum profit. Factors leading to their growth include the elimination of competition, economies of scale, and the rise of joint stock companies. While they offer advantages like improved efficiency and reduced competition, they also pose risks such as monopolization and exploitation of labor.

Uploaded by

newstimes650
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© © All Rights Reserved
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BU SI N E S S COMBI N ATIO N S

Me a n i n g of Bu s i n e s s Com b i n a t i o n –

Busine s s Combin a tio n is an econo mic associa tio n or asse m b ly of two or


more busin e s s units enga g e d in sam e or in differe n t lines of busine s s for
the elimina tio n of mut u al unhe al t hy comp e ti tio n or to elimin a t e wast eful
expe n di t u r e or for encou r a g i n g mut u al co- oper a tio n unde r a definite
agre e m e n t . E.g., ACC cem e n t .

Defi n i t i o n of Bu s i n e s s Com b i n a t i o n -

“Combi n a tio n refer s to any form al or inform al combini n g of two or more


indus t ri al units, propri e t a r y or corpo r a t e entity, prod u ci n g similar or
differe n t articles or enga g e d in the succe s sive proce s s e s of man ufa c t u r e
of an article with a view to ear ni n g maxim u m profit on capital employe d”.
---- Dr. M L Kotha ri

Cau s e s OR Fact o r s OR Circ u m s t a n c e s givi n g ris e to th e grow t h of


Bu s i n e s s Com b i n a t i o n s -

1. Elim i n a t i o n of Com p e t i t i o n and Pric e war – Due to inten s e


comp e ti tio n in the mark e t , small units tend to stru g gl e for their survival.
As a cons e q u e n c e , price s decr e a s e and profits dwindle.

2. Eco n o m i e s of larg e sc al e op er a t i o n – In the are a s of purc h a s e of


raw mate ri al in bulk, overh e a d s , man a g e m e n t , raisin g financ e and
mark e ti n g (adve r ti sin g and sales prom otio n).

3. Tec h n i c a l Pro g r e s s – Mode r n and scientific tech niq u e s requi r e large r


reso u r c e s which may be out of the reac h of individu al units, which may
ultim a t ely induc e combin a tio n.

4. Ris e of Joint sto c k Com p a n i e s – Comp a ni e s facilita t e the grow t h of


combin a tio n s due to its speci al cha r a c t e r i s tic s of limited liability,
sepa r a t e legal entity and corpo r a t e financ e.

5. Effe c t s of Trad e Cycl e s – Trad e Cycles are the periods of ups and
downs in the econo my. Ups are booms i.e., periods of high econo mi c
activities mark e d by incre a s e in prod u c tio n, profits, employ m e n t .
Encou r a g e d by the rosy scen a rio new firms will ent e r the mark e t from all
possible direc tio n s giving rise to unhe a lt h y comp e tition res ultin g into
combin a tio n s .
Downs are depr e s si o n i.e., periods of red uc e d econo mic activities mark e d
by decr e a s e in prod u c tio n, profits and employm e n t . In such
circu m s t a n c e s only efficient firms man a g e to survive and inefficient firms
combin e with stron g e r firms.
6. Lack of ma n a g e r i a l and en tr e p r e n e u r i a l tal e n t – Lack of
man a g e r i al ability and scarcity of entr e p r e n e u r i a l talen t in the
developi n g count ri e s induc e s combin a ti o n.

7. Ne e d for Rati o n a l i z a t i o n – To make the exercis e of ration aliza tion a


succe s s, joint action on the part of firms is nece s s a r y. Technic al,
man a g e r i al and administ r a t iv e aspe c t s of indus t ri al ent e r p r i s e s need to
be re- orga nize d , which would be easily possible thro u g h combin a tio n.

8. Des ir e for mo n o p o l y pow e r – Monopoly leads to cont rol of mark e t


and henc e larg e r profits. It succe e d s well in the case of prod u c t s having
inelas tic dem a n d i.e. whe r e the price can be raise d withou t fearin g
red uc tio n in dem a n d .

9. Infl u e n c e of Tariffs and Prot e c t i o n Poli c y – Tariffs or duties


incre a s e the cost of impor t s and make s the m expe n sive for consu m e r s .
To take advan t a g e of prot e c tio n, prod u c e r s reso r t to combi n a tio n in
orde r to exploit dom e s tic mark e t fully.

10. Infra s t r u c t u r a l Facili t i e s – A small firm may wish to combin e with


a bigge r firm to take ben efit of its imme n s e infras t r u c t u r a l facilities.

11. Expa n s i o n and Diver s i f i c a t i o n – Prod u c t or service s enlar g e m e n t ,


diversifica tion and seg m e n t a t i o n may not be within the reac h of small
und e r t a ki n g, but after combini n g with a bigge r unde r t a ki n g it beco m e s
gra d u a lly feasible.

Advan t a g e s of Bu s i n e s s Com b i n a t i o n s –

1. Eli mi n a t e s un h e a l t h y co m p e t i t i o n .

2. Eco n o m i e s of larg e sc al e bu si n e s s .

3. Inc u l c a t e s th e spirit of Co- op er a t i o n am o n g bus i n e s s


en t e r p r i s e s .

4. Equili b ri u m in de m a n d and sup p l y – The nee d s of mark e t after


combin a tio n will be easily unde r s t a n d a b l e . Henc e the r e shall be no over
prod u c tio n or unde r produ c tio n and fluctu a tio n in the prices. As a result,
stock turnov e r incre a s e s ther e by decr e a s i n g holding period and holding
costs.

5. Full utili z a t i o n of res o u r c e s like time, labou r and plant capa ci ty.
6. Impr ov e s th e effi ci e n c y of ma n a g e m e n t – due to pooling of
combin e d divers e man a g e m e n t talen t s and expe r t s or speci alist s.

7. Eco n o m i e s in Dis tri b u t i o n – due to combin e d tra n s p o r t a t i o n,


mark e ti n g of goods, collective adver tisin g and publicity.

8. Capa c i ty to fac e Bu s i n e s s / T r a d e /Cycli c a l cha n g e s – Combin a tio n


is beneficial in both boom as well as depr e s si o n.

9. Be n e f i t s to Con s u m e r s – Decre a s e in prices, Incre a s e in quality,


Regula r and prom p t supply of goods and service s, incre a s e in the
stan d a r d of living.

Dis a d v a n t a g e s or Evils of Bu s i n e s s Com b i n a t i o n s –

1. Lead s to mo n o p o l y – Combin a tio n leads to incre a s e in the prices,


dete rio r a t io n in the quality of goods, black mark e ti n g and cre a t e s
artificial short a g e of goods.

2. Con c e n t r a t i o n of ec o n o m i c pow e r - Busine s s and wealth beco m e s


conc e n t r a t e d in the han d s of few indus t ri al unde r t a ki n g s . As a
cons e q u e n c e they tend to cont rol the mea n s of produ c tio n.

3. Risk of over c a p i t a l i z a t i o n – Reduc e d ear ni n g s per sha r e and


divide n d, manip ul a tio n in accou n t s to show high e r profits, setb a c k to
ass et s maint e n a n c e , setb a c k to comp a n y goodwill,
and redu c e d mark e t value of comp a ny sha r e s .

4. Ineffi c i e n c y – Enlar g e d , unm a n a g e a b l e size of busin e s s , man a g e m e n t


beco m e s irres p o n si bl e, lack of initiative and henc e decr e a s e in the level
of efficiency.

5. Incr e a s e d risk – Conce n t r a t io n of reso u r c e s , incre a s e in oper a tio n a l


risk. Ther e may be disho n e s t y of officials and inade q u a c y of resou r c e s .
Combinin g unit may indulg e in secr e t violation of orga niz a tio n rules
ther e b y shakin g the whole unit.

6. Corru p t i o n infl u e n c e s – Powe r may be conce n t r a t e d in the hand s of


few man a g e r i al perso n n e l who are likely to misus e it in their favour
unduly. It may also lead to political interfe r e n c e s and corr u p t io n.

7. Expl oi t a t i o n of Labo u r – Unde r the gar b of Ration aliza tio n,


Mode r niz a tio n, Autom a tio n and scientific man a g e m e n t labou r will get
exploite d which will be a gre a t setb a c k for the labou r welfar e.
8. Thre a t for sm a l l scal e en t e r p r i s e s - Busine s s combin a tio n s may ruin
free mark e t econo my whe r e everyo n e has a right to carry on his
busin e s s . In partic ul a r, the small scale ent e r p ri s e s will be una bl e to cope
up with the exorbit a n t comp e ti tion given by the stron g combin e d unit.

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