What is Vertical Combination ? Example of vertical combination.
Vertical combination implies combination under single control of firm engaged in different process of manufacturing a given product. Vertical combinations are the result of integration of process applied in the manufacture of a product. In the words of Kimball and Kimball Integration means an effort to acquire as far as desired, control of all process in manufacturing and distributing a line of commodities from the raw material to the customers. In case of vertical combination the relationship amongst the combining units is that the output of one unit is used as inputs by another combing unit. According to prof. Robinson, vertical combination as the combination of firms in successive stages of the same industry. Vertical combination is also known as Industry Integration and combination, which takes place in an industry where a product passed through a number of processes. The combining units are not competing but are inter dependent on each other for supplying raw material for processing. Each unit of enterprise contributes a finished product, which becomes the raw material for the next process until the finished product is completed. When the finished product is ready for the market he would entrust the work of selling it to a distributing house. After integration, all the successive processes, from the raw material stage to marketing are in the hands of one organizations. Integration may start for the manufacturer who desires control of supplies and markets, it may start with the merchandiser who wishes better control of the products that he is selling, it may emenate from the producer of raw materials who desires an out let for them, or it may appear as a recognition of the mutuality of the interest on the part of all concerned. Because of this fact the vertical combination is also known as sequence or process combination. This type of combination is suitable for those industries where the product process involves a number of processes or stages.
Kinds of vertical combination : There are mainly two kinds of vertical combination. Such as -
(i) Forward vertical combination, where an entrepreneur or business unit tries to control the succeeding activities of combining units. Example : Combination between cloth making and ready made garment.
(ii) Backward vertical combination where an entrepreneur tries to control the producing activities in an industry. Example: cloth making unit combines with the unit of producing cotton and spinning cotton.
Example of vertical combination: Textile is an example of vertical combination, where performance of consecutive process such as carding spining and weaving are carried out by one organization. In this form, all stages from the basic or extractive industry to the finished article or even to marketing are united. These stages are sometimes described as extractive(raw-materials), analytical (fabrication of parts) assembling (putting the part together to make the finished article) and marketing. This example is shown by the following diagram.