Lateral integration (2024)

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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^[1]. 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^[2].

Advantages of lateral integration

The company's decision to perform lateral integration brings several benefits. The most important of them are for example^[3]:

• 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.

Examples of Lateral integration

• The merger of two apparel brands, such as Nike and Adidas, is a classic example of lateral integration. By combining their resources, they can create a larger and more efficient marketing and sales structure. This would allow them to reach more customers and produce higher quality products at a lower cost.
• Another example of lateral integration is the acquisition of two food companies. A fast-food chain, such as McDonalds, may acquire a bakery chain, such as Panera Bread, in order to expand the variety of food products it offers. This would allow the fast-food chain to capitalize on the bakery chain’s existing customer base and product range.
• Technology companies also often engage in lateral integration. For example, Apple may acquire a streaming music service, such as Spotify, in order to expand its offerings and increase its presence in the music streaming industry.

Other approaches related to Lateral integration

Lateral integration is not the only approach to company mergers and acquisitions. Other methods of integrating two companies may include vertical integration, horizontal integration, and conglomerate integration.

• Vertical integration is the process of combining two companies that are at different points in the production process. For example, a company may acquire a supplier of raw materials to gain more control over the production process.
• Horizontal integration is the process of merging two companies that are at the same level of the production process. This type of integration is often used to increase market share or to gain efficiency by eliminating competition.
• Conglomerate integration is the process of merging two companies that have no direct relationship to one another. This type of integration is often used to diversify a company's portfolio or to acquire new technology.

In summary, lateral integration is one of several approaches to company mergers and acquisitions. Other methods of integration may include vertical integration, horizontal integration, and conglomerate integration. Each approach has its own advantages and disadvantages and should be carefully evaluated before making a decision.

Footnotes

References

• Florence P. (2013), The Logic of British and American Industry, Routledge, London
• Griffiths A., Wall S. (2008), Economics for Business and Management, Pearson Education, Harlow
• Komine A. (2014), Keynes and his Contemporaries: Tradition and Enterprise in the Cambridge School of Economics, Routledge, New York
• Sabri E., Shaikh S. (2010), Lean and Agile Value Chain Management: A Guide to the Next Level of Improvement, J. Ross Publishing, Fort Lauderdale

Author: Kinga Więcek