It refers to the integration of business units producing and selling different but allied products. The lateral combination may be either convergent or divergent.
Convergent lateral combination arises when firms producing different products but supplying to a common user join with him. For example, brick manufacturer, stone supplier, cement supplier, and wood supplier may integrate with a construction company;
Divergent lateral combination represents combination of one supplier of a common raw material with different users. The example of divergent lateral integration is provided by a flourmill supplying flour to a number of units like bakery, confectionary, and hotel.
The main benefit of lateral integration is that both the supply of raw materials and availability and existence of demand are ensured to the new combination. Benefits of centralized control of various units are achieved. Under divergent integration, markets are diversified and risks are scattered.