AIOU SOLVED ASSIGNMENT 2 CODE 463 FUNDAMENTAL OF BUSINESS
The solved assignment # 2 for Fundamental of Business code 463 for
Open University students of B.com and B A level. We are going to share the
solution of fifth question of this assignment 2 code 463 while the solution of
other questions can be found by clicking the following link: PRESS HERE
Q NO 5: WHAT ARE THE DIFFERENT FORMS OF BUSINESS COMBINATIONS IN
PAKISTAN? ALSO DISCUSS THE REASONS OF BUSINESS COMBINATION.
ANSWER
BUSINESS COMBINATION
When a number of business or industrial undertakings combine
together for enjoying some benefits a business combination forms that is called
business combination. The constituent units’ conic into an agreement for fixing
up the terms and conditions of combination. A combination can enjoy some economies
& benefits partly by eliminating wasteful competition and partly by
reducing cost of production and distribution. The business undertakings which
unite together may not loss their separate entity complete merger of the
constituent units is also possible when they will lose their separate entity.
TYPES OF COMBINATIONS
Ø Monopoly:-
Where there is only one seller of a particular commodity this condition is
called a "Monopoly. These monopolies pursue policies which are against the
common interest of society. On government side, Railways, PIA. Electric supply.
Telephone and Telegraphs, are examples of monopolies as there is no competition
against prices charged by the federal Government agencies.
Ø Pools:- A POOL is a business federation is
which a number of business units join to control price by controlling their
total output, market or even income. Bench pools may be "output
pool•". The loose combination of suits is thus based on a
"Gentlemen's agreement?
Ø Cartel:-
A cartel is an association of independent units in the same industry in matters
of production and sale. It is a louse combination without affecting
independence ol associating units: They may come to agreement governing selling
prices. Cartels may end due to failure of the member, to keep their agreements
or some outside units having started the same industry.
Ø Gentlemen's
Agreements:- These agreements have been referred to in above paragraphs. If
several competing units agree to raise prices and such rise takes place, this
agreement is termed as "Gentlemen's Agreement". This is however
illegal as it involves restraint of competition.
Ø Trust:-
A trust signifies a consolidation of capital and the combining units fuse
together their internal management. tinder this method enough share capital to
control the voting power in several companies is transferred to a board of
trustees. The Trustees elect Board of Directors and appoint officers to carry
out the purposes for which trust has been formed. Because of their monopolistic
features trusts have been declared illegal in several countries.
MOTIVES OF FORMATION OF THE BUSINESS COMBINATION
Following are
the factors those contribute to the formation of the business combination:
1. Destructive
Competition:
Destructive
competition may result into the stoppage of many firms. In order to remove the
fear created by strong competition, the competing firms arrive at some sort of
understanding to regulate prices and eliminate overproduction. In other words,
combination may be created as a means of furthering self-interest by common
action.
2. Economies
of large Scale:
A large number
of economies are achieved if a business is carried on a large scale. These
economies relate to production, management, financing and marketing. Small
business units may combine together to reap the benefits of large scale
operations and organization. This will reduce the cost of production and
increase the profits of the business.
3. Joint
Stock Enterprise:
The evolution
of company form of organization has also facilitated the combination of various
units by acquiring shares of various companies to control their affairs. The
companies under the common control through the system of inter-locking
directorship can be easily combined to get many benefits of combination.
4. Control of Market:
Combinations
are created to secure steady market. Sometimes, combinations are created to
control the entire market and create a monopoly which is detrimental to the
interest of the consumers. By controlling the market, they can sell their
products at higher prices and earn huge profits.
5. Individual Ability:
According to
Shield. ‘Great organizing ability, strategic genius, or personal ambition on
the part of one or a number of men may account in part for the rise of certain
business combinations. The scarcity of business talent became one of the causes
of centralization of power in a few hands, endowed with business insight,
business talent and business courage." Many a time, business combination a
are created due to the initiative and organizing ability of an individual or a
number of individuals.
6. Lust for power:
Some
businessmen have a lust for economic power which can be satisfied by creating
industrial empires. Desires to bring up industrial regime lies at the back of
many combinations. Individual ambition of becoming the pioneer member or
coordinator of a huge combine is also one of the factors favoring combination.
7. Business Cycles:
In uncontrolled
economies, there are trade cycles. During books, firms expand to take advantage
of rising demand, and during depressions, inefficient and weak firms find it
difficult to survive because of lower demand. Business ups and downs generally
lead to business combinations. Particularly in industries, where huge capital
is employed and where demand is subject to cyclical changes, combinations occur
as a revulsion against risk of burdensome overhead cost, glut, low turnover and
lower process during depression.
8. Protective
tariffs:
Protective
tariffs are used to encourage home industries. When the Government imposes
import duty on certain items, the home manufacturers of such items are
encouraged to form combination to develop their business and exploit the
domestic market fully. Sometimes, national level combinations are formed to
provide a united front to perpetuate protection.
9. Government Pressure:
The Government
policy may compel the weaker units to amalgamate with the stronger units so as
to improve the overall efficiency of the industry. Even the Government may take
over the sick units and combine them to form a viable unit and introduce
rationalization in it.
10. Miscellaneous Factors:
a) Dearth of
managerial talents may lead to managerial integration of business units. Many
companies have common directors which in fact mean their common control.
b) If an
enterprise wants to be self-sufficient, it may combine with other units.
Vertical integration is the result of desire for self-sufficiency. Under this,
various units producing the related raw materials and semi-finished products
are combined together so that they produce the finished products at economical
prices.
c) Growth of
transport and communication has increased the intensity of completion not only
in the national market but also in the international market. This has resulted
in the formation of multinational enterprises having subsidiaries in different
countries.
d) Sometimes,
firms in an industry join to avail of the benefits of patent rights of one
firm. Haney has divided the above factors or forces into three categories which
are as follows:
i.
Driving or impelling forces consisting of cut-throat competition and decrease
in the opportunity Inc speculative gains
ii.
Beckoning forces which include opportunity for profits, protective traffic and
gains of over capitalization
iii.
Facilitating forces comprising of joint stock enterprises and other forces.
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