Vertical Combination

Vertical Combination

When two or more units, performing different sequential activities in the same industry are combined, the combination is called Vertical Combination. In this kind of combination, the work of combined units is not competitive but complementary to each other, that is, the finished product of one unit is the raw material for the other unit. For example, a combination of a unit engaged in producing cotton thread, with a unit producing cloth, is a form of Vertical Combination.

Objectives

1. To eliminate intermediaries.
2. To bring co-ordination in the activities of the same industry.
3. To end the uncertainty of the usage of the finished product.
4. To bring economy in the expenses of advertisement, transportation, etc.

Merits of Vertical Combination

1. Availability of Raw Material

   In this kind of combination, the units have no worries about purchasing raw materials, because the finished product of one unit is the raw material for the other unit.

2. Economy in Expenses

   Such a combination brings economy in the expenses incurred on raw material, transport, etc. of the finished product.

3. No Need of Storing Goods

   In this kind of combination, storing raw materials or semi-finished goods, etc. is not required. Therefore, there is a saving in the cost of storing.

4. No Problem of Selling

   There arises no difficulty in the sale of the finished product because it is purchased by the next unit.

5. Elimination of Middlemen

   Such a combination eliminates middlemen which helps in decreasing the prices of products.

Demerits of Vertical Combination

1. Mutual Dependence

   Under such kind of combination, if any problem arises in one unit, of the combined units, it poses a danger of upsetting the organization of other units.

2. Lack of Monopoly

   There can be several kinds of combinations in the same industry. Therefore in Vertical Combination, the profits earned through monopoly cannot be achieved.

3. Limited Utility

   Such a combination is possible only in those units, one of whose finished products can be used as a raw material for the other.

4. Competition Prevails

   Since there can be many units combined in a single industry, therefore, competition between units carrying on the same business prevails.