ARROW ELECTRONICS, INC

Arrow Electronics, Inc.

Broad-line distributor of electronic parts Annual sales of $16B Supply channel partner for approximately 700

suppliers and 140,000 OEMs, contract manufacturers and commercial customer

a global network of over 300 locations in 50 countries and territories

Company History

1935Founded & positioned itself into a broad-line distributor of electronic parts

1968-1980 Acquired #2 position

1992reached #1 position among electronics competitors

1980economic recession & death of company’s top 6 officials and 8 executives

1992reached #1 position among electronics competitors

Operations Structure

Zeus Electronics – semiconductors to military and aerospace customers

Capstone Electronics – passive components Anthem Electronics- semiconductors to industrial customers Arrow/Schweber– semiconductors to industrial customers Gates/Arrow Distribution – computer systems, peripherals &

software

Arrow/Schweber

Subsidiary of Arrow Electronics Arrow’s largest working group with sales of around $2b Technical certification of its field sales representatives Dedicated investments in product management

Six Regional VP

39 Branch/General Managers

• Field Sales Representatives• Inside Sales Representatives• Product Managers• Field Application Engineers• Administrative Personnel• Additional Managers

Organization Structure

• Only franchised distributors• 56 suppliers in 1997 and growing• “big four”

• Altera• Intel• Texas Instruments• Motorola

Suppliers

• Two chip categories• Standardized chips - interchangeable

and produced by multiple suppliers• Proprietary chips - manufactured by a

single supplier• comprehensive services

Products & Services

• OEM• Contract Manufacturers• Customers buying customized, computer

product sub-assemblies

Customers

Distributor/Customer Relationship

Transactional customers are those that place requests-for-quotes with distributors simultaneously

Mostly Book & Ship 25% of business Conversion to relationship

customers: 50%

•

Relational customers are those that distributors use value-added products to build relationship with

Mostly Value Added Cross Selling 75% of business Initially mostly transactional

Transactional customers Relational customers

Design Win

• Winning business through• Engineering support and Design Work• Higher Discount

Jump Ball Win

• Winning business based on• Competitive pricing by manufacturer• No extra margin

Discounts

Analyzing the Market: Porter’s Analysis

Bargaining power of suppliers•On design wins: Low•On Jump Ball: High•On standardized products: Low•On Proprietary products: High

Bargaining power of Customers•Transactional customers :Shop around for best prices, May convert to relationships•Relationship customers

New Entrants

•Moderate barriers to entry•New entrants need to build relations with suppliers

Competitors• Avnet Inc• Foreign competitors

Substitutes

•Direct dealing with suppliers•Managing services by themselves•Shopping on the internet (disintermediation)

4 P analysis

• Depending on the customer and deal made

Price

• Distribution of standardized, proprietary electronic chip• Value added services

Product

• RFQs and Orders taken over the telephone• Collaborating with Express can be an option for e-market

Place

• Distributor firm hence not many promotions• Special treatment to relationship customers

Promotion

Express – The new Distribution System Express Parts, inc, a new independent distributor developed an internet-based trading

system around a multi-distributor bulletin board enables distributors to post inventories and prices to bulletin board providing customers large and small an opportunity to shop for prices.

Estimated 50,000 OEMs through out the US having access to the service. Express would allow customers to compare prices and to bargain for the best price among

competitors in the market Registered Express customers could then sign onto the service via internet and could search

by part numbers or description. Its search engine could quickly cross reference equivalent parts from multiple manufacturers based either on part number or technical description

On making a selection, customers could view relevant returned results containing product details, price and available quantities for shipment and click to place the order

Express would review the order, perform credit check and acknowledge accepted orders to customers and simultaneously route them electronically to the appropriate distributor.

Express appointed shippers would pick parts from the distributors and ship orders directly to customers and notifying Express electronically once the shipment has been made.

Express then billed customers, then after deducting a fee of 6%, made payments to the distributors 30 days after orders were shipped.

SWOT Analysis• Imminent introduction of Express• Express Inc’s request to join this invite only limited distributors network that could potentially help them to

cater to a larger market and increase sales at less than half the cost of doing so via its branch network.• The reduction in the overall gross margin and slashing of prices due to competitive market place, And since

prices are open to the public, bargain of lower prices by existing customers may occur.• Time constraint at the A/S end in deciding on the pros and cons on signing up for this system• Signing up for Express could create a potential trade-off between gaining new customers and affecting

arrow's relationship with existing customers who may drift away to pick products from different channels.• Risk losing franchise distribution or distribution due to removal of their channel member status by the

suppliers, with suppliers using Express.• Difficulty in deciding on association between commodity products and transactional behaviour on one hand

and value added products and relational behaviour on the other.• Resulting in optimistic cannibalization of $293b and a pessimistic cannibalization of $601b• Express ability to create better value for the customers at a lower price, with a noticeable reduction in cost • Evaluate, adapt and adjust the existing business model to the changes Express may create. • Bright side being reaching out to the additional business and selling to those customers that are out of reach

of the current business model• Reduction in the time and effort of trying to build new customers.• Standardized price offering over internet leads to minimizing time and efforts and significant reduction in

costs to serve customers shopping for low prices. • Express may bring Arrow additional business from potential customers that Arrow has not been able to reach

with its current business model• Express may make reduce the effort in building new relationship with new customers• Express exists only to respond to demands but not to create• Arrow’s profit may be cut down due to an existence of Express as intermediary• Existing customers may bypass Arrow and go directly to Arrow’s competitors• Express may be used as a bargaining tool

Available Options• Sign up for Express system with an optimism that it will gain in terms of getting additional business

and selling to those customers that are out of reach of the current business model. • Sign up would expose A/S to estimated 50,000+ OEMs throughout the US and increasing sales at less

than half the cost of doing so via its branch network.• Cost, time and effort savings in serving and converting low price shoppers into potential customers.• Maintain strong relationships with suppliers by creating demand for their products, could translate

into getting better competitive prices to sell.• Continue with providing value added services to retain relationship customers who are either

customers going in for modified rebuy or straight rebuy.• Still retain those customers who get financed by A/S or those who rely on value added services like

A/S inventory and material management systems.• 70% of the commodity product sales to transactional customers are of products manufactured by

major suppliers who wouldn’t want to see their commodity margins shrink which would keep them away from offering same price to other distributors. This is a blessing in disguise for A/S to continue with being the exclusive franchise of “big four” the suppliers.

• A/S exposure to technology and internet could provide a sort of leverage over Express by incorporating an internet model for commodity projects so that low price shoppers could use the information and perform transactions.

• Scan the environment for other possible Value added & customization services that could be added to existing core business.

• Build relationship with customers by creating supply chain system that will provide value-added services

Recommended Option(s)

Standardized Products/Commodity

Value Added ServiceEngineering supportSupply chain solutionsCredit ManagementInventory/Material Management

Express

Customers

Internet & interactive voice

response

Environmental Scanning for new value added

products/services

Reduction of costs/efforts/time serving

customers who are shopping for low prices

Loss of 6% on sales via Express + Loss in

booking & shipping revenue

Starting a Portal

Have better resources to pull of a portal Can provide better services being leading

distributor Suppliers will not be happy with fall in

prices- lobby with them to avoid selling through online platform till the time you come up with an alternative

Make suppliers lobby to prevent drop in prices & get exclusive dealerships to sell through Express

Starting a Portal

Initial Investment will be less than $1 million Promotion of Portal can be done through existing

distribution channels & by regular promotion activities for which Arrow will have to budget another $5 million

In addition to offering payment services portal should divert customers to existing channels of sale

Being the first mover among insiders Arrow can expect to retain at least 60% (40% may prefer Express) of transactional customers & entire relationship customers.

Starting a Portal

But being a distributor Arrow get exclusive dealership from some manufacturers & also can increase the range of brands they offer over portal thus gaining at least 25% of transactional customers from competitors

This in turn will result in a higher market share for Arrow

This will also help to put a check on lose of market share to Avent

From a long term perspective this makes sense It has to be understood that there will be a delay

between introduction of portal & change in consumer buying behavior (applicable to Exprees also)