Vertical Business Combination Explained
“This type of business combination takes place in the industry where a product passes through a number of processes. It is the result of integration of processes. ”
Vertical business combination is the combination of such firms, which are interdependent for the supply of raw materials for processing. The firms operate at successive stages in the same industry. This type of combination is also called as sequence or process combination.This type of business combination takes place in the industry where a product passes through a number of processes. It is the result of integration of processes. Such business combinations are suited to industries where finished products of one unit become the raw material for another unit or where processes are complementary or where balanced production is necessary
These combinations are also required in cases where some control over the supply of raw materials is required to maintain certain standard of quality for finished products. For example, in textile industry, management may integrate units engaged in the successive stages of cloth manufacture, such as cotton ginning, spinning, weaving, painting, dying and marketing. Vertical business combination may result from backward or forward integration.
Since all firms operating at different stages come under common control, the supply of raw materials at successive levels becomes continuous and uninterrupted. The quality of the product can be improved because the needed supplies may be made to conform more closely to the requirements.
Middlemen’s margin can also be saved by integration. Mostly, the middlemen are an extra burden both on the companies as well as the consumers. There may be economy in tax payment also. Economy can also be achieved in selling expenses, since bulk goods can be marketed more cheaply and effectively through a single agency.
Through integration, firms can realize the economies in handling, storing, transporting, packing etc. that results in the increase in efficiency of the industry. The integrated units are relived from marketing activities of their product and they can better concentrate on research and quality improvements of the products. It can be said that like-minded people come for each other’s help.
During the period of depression, firms can easily meet the situation by reducing cost of production which otherwise may not be possible. The end result is that the combined units develop more strength and resistance.
Author - DeeKay
This article was created by DailyOjo staff. Report Spam/Abuse