Circular Combination | Advantages | Disadvantages

What is Circular combination in business?

Circular combination refers to combination of firms engaged in different businesses and producing different products. For e.g. a cell phone manufacturer combining with a car manufacturer or a company manufacturing consumer durable combining with a automobile manufacturing company. It is also known as mixed or complementary combination.

Circular business combination - Meaning, Advantages, Disadvantages

Image: Circular business combination – Meaning, Advantages, Disadvantages

An instance of circular combination!n India occurred in 1954. Volkart Brothers of Switzerland and Tata Sons formed Voltas. Voltas was originally trading in machinery and pharmaceutical products. But now it is in a range of businesses (machine tools, mining machinery, electrical equipment. air-conditioners etc).

Advantages of Circular combination to Combining Firms

1. Efficient management: When firms from different industries come together, they can share their knowledge of best practices in different areas. For e.g. if one firm has implemented Total Quality Management successful while another has implemented Total Productive Maintenance, they can share their knowledge. Managerial talent can be better utilized which would lead to efficiency in managing the organization.

2. Economies in operations: The firms can integrate their transportation, administration and marketing costs. This leads to economies and reduction in costs.

Circular Combination Example

Image: Example for circular combination

Advantages of Circular combination to the consumers

1. Evils of monopoly voided: Unlike a horizontal combination, a circular combination does not result in monopolies and consumers are spared from the evils of monopolies.

2. Spread of benefits: If a firm which was successful and efficient in one line of business, engages in other businesses it would run them also in a successful manner. Therefore more customers are benefited.

Disadvantages of Circular Combination

1. Problems in co-ordination: Expansion beyond a particular level would lead to problems in coordination and control. Inefficiencies might creep in resulting in dis-economies and would affect all the businesses.

2. Concentration of economic power: It might result in concentration of economic power in a few hands and inequalities in income distribution in the economy.

3. Loss of employment: Integration of operations might results in downsizing and employees in combining organizations might lose their jobs.