Industrial combination (or integration) is the coming together of two or more firms in order to form one large economically stable firm.
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REASONS FOR INDUSTRIAL COMBINATION
- Firms may integrate in order to fight economic recession
- The desire to reap the advantage of monopoly
- To obtain stable prices.
- To obtain raw materials from direct sources.
- To reduce cost of production and increase profits
- To meet statutory capital requirements necessary for operations e.g. banks
- In order to achieve large scale of production.
COMBINATION OF FIRMS
- Vertical Combination: This refers to the joining together of firms which are engaged in different stages of production/distribution.
Where the manufacturer secures control of the firm supplying him with raw materials the integration is said to be backward integration on the other hand, where the manufacture takes control of the demand for his product by taking over a firm that sells his products, the integration is a forward integration.
- Horizontal Combination: This refers to the combination of firms at the same stage of the production process.
- Lateral Combination: This is the fusion of firms in different lines of business.
FORMS OF INDUSTRIAL COMBINATIONS
- Cartel (Kartel):- This is a voluntary association of firms engaged in the production and sale of the same product. The firms coming together retains their individual identity and independence e.g OPEC (Organisation of Petroleum Exporting Countries).
REASONS FOR FORMING CARTELS/AIM OF CARTEL
- To control prices i.e. to keep up the prices of their products
- Control output through the use of production quotas
- To eliminate competition thereby reducing wastes
- To maximize profit for members
- To serve as a Political/Economic bloc capable of influencing world/economic affairs
- To assist member countries and non-member countries and to improve trade relationship among members.
- To maximize productive efficiency of members
- To stabilize the market and the industry.
- Trust:- This is a large amalgamation of different competing firms in different lines of business under a single control. In Trust, the merging firms will retain their identities but the trustee will take over the management and control i.e. the amalgamated firms are brought under a central control. Certificate will be issued to all members by the trustee.
DIFFERENCES BETWEEN CARTEL AND TRUST
|Members will lose their independence
|Members will still maintain their independence.
|Trust is a complete merger
|It is voluntary and members can withdraw
|It has a vertical or lateral structure
|It is horizontal in structure
|Certificates are issued
|No certificate is issued
|There is no quota system
|There is production quotas
AIMS/OBJECTIVES OF TRUSTS
- To bring the merging firms under central control.
- To eliminate unhealthy competition.
- To bring about increased and efficient production.
- To reduce cost and eliminate waste.
- To maximize profit.
- What is a cartel?
- State three reasons for the existence of a cartel.
- Consortiums:- These are teams of independent firms who combine resources together to execute a project which is either too large or too complex for an individual firm to handle. When the project is fully executed. The profit/loss is shared and the consortium is dissolved.
- Price Rings:- These are formed when completing firms producing similar products come together and agree to fix uniform prices for their products. They usually set minimum prices below which no member may sell.
- Holding Company:- These are firms that have brought controlling interest (equity shares) of 51% or more in other firms known as their subsidiaries. They are purely investment organizations.
- Amalgamation/Merger:- This refers to the fusion (joining together) of two or more previously independent firms to form one new firm with the old firms completely losing their former individual identities. The new firm usually takes a new name.
REASONS WHY FIRMS MERGE/ADVANTAGES OF MERGERS
- To raise large capital.
- To control a larger share of the total market for a product.
- To encourage research and development.
- To enjoy the advantages of large scale production e.g. lower cost of production/managerial economies of scale.
- It lowers the cost of production.
- It discourages unhealthy competition and eliminates wastes.
- To diversify the activities of the firm into other areas.
- To mobilize a pool of specialized managerial skill drawn from the previously independent firms.
- It prevents over production.
- It saves the cost of advertisement.
- It leads to control of outputs and stabilize prices.
- To increase the efficiency of management where the acquired company is poorly managed.
- Centralized management.
DISADVANTAGES OF MERGERS/INDUSTRIAL COMBINATIONS
- It leads to monopoly.
- It does not encourage specialization.
- It denies consumers their right to make choice.
- Absence of competition may reduce the quality of products.
- It can lead to unemployment as some employees can be laid off.
- It may force some other firms out of business.
- Greater difficulty in managing a large firm will lead to a decline in efficiency.
- Exploitation of consumers by monopolies.
- Danger of over –capitalization.
- State five differences between cartel and trust.
- Explain three reasons why some businesses merge.
GENERAL EVALUATION QUESTIONS
- Explain five factors affecting the choice of transportation of frozen products
- State five disadvantages of air transport
- State seven features of a public corporation
- List and explain six new trends in retailing
- State five features of a mail order business
- A group of firms working together on a project too large or too complex for a single firm to undertake is referred to as (a) Consortium (b) Conglomerate (c) Co-operative (d) Partnership.
- The coming together of two or more companies to form one big viable company is known as (a) Association (b) Cartel (c) Merging (d) Trust.
- What is NOT an advantage of combinations (Monopolies) (a) Better opportunity to expand operations (b) Fall in the cost of selling (c) Pool of specialized managerial skills (d) danger of over-capitalization.
- Which of the following takes place when firms producing at different stages in the same industry combine (a) Conglomerate (b) Vertical integration (c) Horizontal Integration (d) Cartel.
- The merger of two companies producing the same type of product is an example of (a) Vertical integration (b) Horizontal integration (c) Lateral merger (d) An acquisition
- What is a business merger?
- Give three disadvantages of business merger.