The lateral integration is a term that describes the action of merging two companies that deal in the sale of similar goods within one market branch. This combination is often caused by the company's willingness to develop and expand its operations. Unlike the vertical one, the lateral integration is carried out by two companies at the same stage of the production of the object or any kind of service. Although lateral integration is often associated with horizontal integration, it somewhat differs from it. This is because companies before the merger do not compete with each other. The areas in which they operate are interrelated (for example, they belong to one industry) but the products or services they provide are not the same and are not mutually exclusive. The customer can use the services of both companies at one time without having to choose between them.
Advantages of lateral integration
The company's decision to perform lateral integration brings several benefits. The most important of them are for example:
- increasing revenue - thanks to the merger, the company increases its area of operation, and thus the number of customers. Higher turnover when providing services or selling goods means generating more income.
- reducing production costs - when two companies merge, there may be a situation in which they can save money from restraining purchase of expensive equipment.
- gaining knowledge and experience - each organization has its own unique experience in the areas in which it operates. After the lateral integration, companies can exchange knowledge that they accumulated over the years.
- increasing foothold among customers - the more products or services provided by one company, the more recognizable its name becomes. Many customers nowadays are more likely to trust recognized brands than new businesses. Therefore, the goods produced by a given organization can reach a much larger number of recipients.
Disadvantages of lateral integration
Unfortunately, lateral integration also has several disadvantages. Among others:
- reduced flexibility - when a company becomes a large enterprise, its ability to adapt to a dynamically changing market may prove difficult. A larger field of activity means that any change in the company's approach to many aspects must be implemented in advance.
- possible lack of needed knowledge - when entering a new economic territory, a company can easily face previously unknown adversities. Experience and knowledge of how to remedy them can be very important. Therefore, lateral integration should be preceded by thorough preparation and risk analysis.
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Author: Kinga Więcek