Disadvantages of business combination

Disadvantages of business combination to Combining Firms

1. Dis economies of large scale operations: Combined firms may become too large which leads to problems in co-ordination and control. Supervision might become difficult resulting in poor quality of products, wastage, corruption etc.

2. Delayed decisions: In large combined firms, decisions are delayed because of various levels of authority. The organization would not able to utilize opportunities in the market place.

3. Conflicts: Combined firms might witness conflicts of power, differences of opinion, politics etc which may destabilize the organization.

4. Unfair practices: Combination of firms might lead to monopoly situations. Monopolies might restrict output, create artificial scarcities, charge high prices, and produce low quality goods. All these affect consumer interests.

5. Lack of consumer choice: Combined firms might try to wipe out competition and prevent the entry of new firms. They would aim to control the market. The consumers would be denied the freedom to choose from products of different manufacturers.

6. Political corruption: Combined firms might bribe politicians to frame policies in their favor. They might also motivate the political class to act against their competitors.

7. Inefficiency: Combined firms aim for monopoly and control over the markets. There would be very less focus on improving efficiency and reducing costs. The consumers would be forced to pay high prices because of the inefficiency of the combined firm.

8. Less innovation: Combined firms would not concentrate on improving quality or on innovation. It is because they have an assured market. Spending on research and development would be considered to be wasteful by them.

9. Lack of personal touch: In a small firm, the owner would personally know his customers. He would know each customer’s tastes and preferences. The personal touch that is possible in small sized firms would not be possible in large combined firms. Tastes and preferences of individual customers might be ignored. It might lead to customer dissatisfaction, decline in sales and profitability.

10. Over capitalization: It is a serious problem faced by combined firms. The firm might be using capital more than what is required. This would result in high costs and poor return to shareholders.

11. Industrial disputes: In small firms the owner would personally know each employee. Since he has direct contact he can solve the problems of employees in the initial stages. In a large firm, the owners and employees do not have personal contact. Employee grievances may not be known and it might lead to strikes, lockouts etc.

12. Legal restrictions: Governments prefer competition in markets and take steps to prevent monopolies. The government might order combined firms to be broken into smaller units.

13. High risk: Combinations are quite huge in size with substantial investment of resources. In case a combination collapses, it results in substantial losses for all those connected with it. Large number of shareholders (loss of investment), employees (loss of jobs and livelihood), suppliers (loss of further business and), creditors (loss of loans advanced) suffer in case of failure of combination.

Disadvantages of business combinations to Consumers

1. Monopoly: In course of time, combinations may develop into a monopoly and exploit consumers by restricting output, irregular supply, poor quality, deficiency in after sales service.

2. Unethical practices: Large combined firms enjoys high sales and profits. Accumulation of profits results in concentration of economic power in the hands of few. Firms because of their huge resources at their disposal, are able to influence government policies to benefit them at the cost of competitors and consumers. They might indulge in unfair trade practices, distort competition, prevent entry of new firms etc.

3. Act against consumer’s interest: Generally combinations act against the interest of the consumers. By restricting the output, combinations create artificial scarcity in the markets. Such artificial scarcities push up the prices which affects the consumers. They are forced to pay more than the actual price.

4. Leads to inefficiency: Competition results in efficiency. When combinations give rise to monopoly, there is lack of competition and it results in inefficiency of firms. There is little or no motivation to improve quality, reduce costs, introduce new or improved products etc. Consumers suffer since they have no alternative but to buy low quality high priced products.

5. Lack of customer choice: Due to combinations there is very little competition among firms. Therefore there is no focus on innovation. Consumers are denied variety, choice and have to be content with outdated products

Disadvantages of business combination to the economy

1. Elimination of small business: Combinations result in monopolies. Such monopolies use their financial strength to wipe out competition and prevent the entry of new firms. They resort to cut-throat competition to eliminate competitors. Small businesses which cannot survive the cut-throat competition are forced to wind up their business.

2. Concentration of economic and political power: Combinations result in concentration of economic power. They bring a number of businesses under their control. Using their financial strength, they try to influence the economic policy by bribing the political class. It results in nepotism and corruption.

3. Economic development affected: Combinations prevent the entry of new firms because they dislike competition. They resort to unfair means such as cut-throat pricing, dumping of goods at retail outlets etc to eliminate rivals. They prevent the establishment of new firms by creating entry barriers. If new business ventures are not established, entrepreneurship will not thrive and ultimately the country’s growth will be affected.

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