There is a trend afoot for firms to become more vertically integrated – controlling their supply sources, manufacturing, and distribution channels.  A few recent examples include Oracle acquiring Sun Microsystems to integrate hardware and software and H-P acquiring EDS to capture more consulting and professional services revenue, along with buying 3Com to capture more customers.  In the past, companies divested non-core assets and outsourced much of their work to create a more variable cost model. I think this current wave of vertical integration will be short-lived. It is primarily to capture revenue which companies desperately need.

What’s next, then? There is now an opportunity for companies to be creative with deal structuring and consider minority investments and strategic alliances.  Firms then have the advantage of having identified resources as partners, and can invest in and be privy to the expertise of a company, but are not saddled with having to run the businesses which are out of their expertise.

For example, I don’t see GM returning to being a fully integrated manufacturer like it was 50 years ago.  Rather than being a solid vertical line, you will see companies have dotted lines where they own key pieces and outsource others and have minority investments in some, majority investments in others and even strategic alliances.  The key will be for companies to decipher what pieces will be critical for them in 2020 and then figure out what the best deal structures are to maintain those key components.

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