Types of Business Combination (3 Major Types: Horizontal, Vertical, and Lateral Combination)

When two or more business organizations combine together with some common purpose then it is termed the business combination. The business combination can be divided into four types. These types of business combination are discussed below:

Types of a business combination

1. Horizontal Combination

Combinations are said to be horizontal when a company producing or distributing goods of the same type or in the same stages of production, combines and comes together under one management and control.

For example-Bangladesh Drug Association, and Bangladesh Sugar Industries. It is also apprehended as a parallel or trade unit combination.

It is Modified by units engaged in manufacturing similar stocks or rendering the same co-operation. It involves returning together to competing firms under a single purchase and management.

For instance, if two or more sugar mills are connected under the same management, it will be a crisis of horizontal combination. Tata Iron and Steel Ltd plus the associated cement business the illustrations of the horizontal combination.

Characteristics of horizontal combination:

  • Engaged in the same type/line of business: Same line or types of business are the prerequisites for horizontal combination and this is the main characteristic of the horizontal combination.
  • Single ownership and control: Two organizations get together for the same purpose but their owners should be the same.
  • Same types of goods produced: Mostly horizontal combinations happen between two or more business organizations when their goods or product are the same.
  • The existence of perfect competition: Both or all business organizations should require perfect competition for the horizontal combination.
Types of Business Combination
Types of Business Combination

2. Vertical Combination

Under vertical combination, the combining units represent various successive stages of productive activities either of the same industry or of various industries connected in a sequence.

It is also known as string or industry or process integration. It arises as a result of the combination of those companies which are interested in the different stages of production of a product.

In other words, it implies sequence under the single control of enterprises in varying stages of manufacturing the product. The aim of vertical integration is to attain self-sufficiency as regards raw elements and distribution of finished commodities.

Two or more business units occupied in successive stages of the product, or creating articles leading to the same final product, may combine and manage all degrees of crop and the distribution of the last stock.

For example, in cotton textile manufacturing, there may be a combination of units engaged in progressive stages of cloth production.

Characteristics of vertical combination:

  • Different ownership and control
  • Different stages of production

Objectives of vertical combination

  • Elimination of wasteful expenses
  • Elimination of unnecessary expenses
  • Securing economic advantages
  • Quality control

3. Lateral Combination

It refers to the alliance of business units producing and Selling different but allied products. The parallel combination may be either convergent or diverging.

A concurrent parallel combination arises when firms produce several products but supply to a regular user join with him.

For example, a brick manufacturer, stone supplier, concrete supplier, and wood supplier may integrate with a construction organization; Divergent parallel combination represents the combination of one supplier of standard raw material with different users.

The example of different lateral integration is presented by a flour mill supplying flour to some units like the bakery, confectionery, and hotel.

Other Content of Business Combination:

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