Arrow Electronics Inc.

Group - II

Introduction
Arrow/Schweber Electronics (A/S) Subsidiary of Arrow Electronics Arrows North American operations headquartered at Melville, NY Founded in 1935 to sell radio equipment's and gradually positioned itself as a broad-line distributor of electronic parts, including semiconductors and passive components by successive acquisitions. In 1992, it reached #1 position Arrows largest working group with sales of around $2.07 billion in 1996

Arrow Electronics is a global provider of products, services and solutions to industrial and commercial users of electronic components and enterprise computing solutions

Company History
1935 Founded & positioned itself into a broad-line distributor of electronic parts Acquired #2 position

1968-1980

1980

economic recession & death of companys top 6 officials and 8 executives

1992

reached #1 position among electronics competitors

Operations Structure
Five Operating Groups distinguished by product & strategy Zeus Electronics semiconductors to military and aerospace customers Anthem Electronics and Arrow/Schweber semiconductors to industrial customers Product Driven Groups Gates/Arrow Distribution computer systems, peripherals & software Capstone Electronics passive components These operating groups being individually responsible for asset & materials management and P&L

Arrow/Schweber
Technical certification of its field sales representatives Dedicated investments in product management

Organization Structure
Field Sales Representatives Inside Sales Representatives Product Managers Field Application Engineers Administrative Personnel Additional Managers

Six Regional VP

39 Branch/General Managers

Express Parts

Independent Distributor
Internet-based trading system around multi-distributor bulletin board 50000 OEMs to use its service

Takes care of shipping to customers

Fee worth 6%

Product and Suppliers

75% Standardized Multiple suppliers

A/S

25% Propriety Singular suppliers

 Only franchised distributors 56 suppliers in 1997 and growing big four Altera Intel Texas Instruments Motorola

Two chip categories Standardized chips interchangeable and produced by multiple suppliers Proprietary chips - manufactured by a single supplier comprehensive services

Suppliers

Products & Services

OEM Contract Manufacturers Customers buying customized, computer product sub-assemblies

Customers

Distributor/Customer Relationship
Transactional customers
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
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

Discount
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

Analyzing the Market: Porters 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

Competitors New Entrants Moderate barriers to entry New entrants need to build relations with suppliers
Avnet Inc Foreign competitors

Substitutes

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

4 P - Analysis

Arrows Selling effort

No. 1 among electronics Distributors 60% sales from Value Added Content Credit facility Value added services Cross selling Reduction in Operating Income in 1996 Expenses at 11% with Gross margins of 15% No online presence Low switching cost for customers
Strengths Weaknesses

Opportunities

Threats

Strong online presence Collaboration with Express Learn to how to sell against Going out of business

Express as a competitor Cannibalization of BAS business if Express proposal accepted Competitors making online business model

Arrows Selling effort

Book and Ship (BAS) Real time, On-line computer system tracking costs, prices & inventory movement 300 Branch based sales & marketing representatives (SMRs) responsible for securing business from customers requesting quote, obtaining discounts from suppliers and shipping product Gross margins on BAS products-20% to 25%

Value Added (VA)

Design win Situation- Order originated by field engineering, facilitated by field sales representative (FSR) 400 FSRs visiting customers design engineers (10-12 per FSR) and promote new products Gross margins on VA products-10% to 15%

Express Parts
Non franchised distributor Internet based trading Multi-Distributor bulletin board Quick cross reference equivalent parts Cost competitiveness Popular with price sensitive customers Margins narrowing EXPRESS PARTS PROPOSAL A/Ss full list of inventory and price listing Express would receive order, do credit check Route to respective distributor electronically Express shipping facility Express fees 6% of price Paid 30 days after orders shipped

Examining Express

How many of customers will Express be able to take away? 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.

Express would expose our business to more customers.

Existing customers may bypass Arrow and go directly to Arrows competitors All transactional and about 40% relational customers may switch to Express or could easily switch to another distributor and potentially destroy A/S low price model.

Pros and Cons of association with Express

Express business model cut cost on building new customer relationship and could potentially reach customers outside A/S present target market Risk losing franchise distribution or distribution due to removal of their channel member status by the suppliers, with suppliers using Express. Express cannot create new business as it only respond to demand, where A/S creates new business through its value added products

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
Difficulty in deciding on association between commodity products and transactional behaviour on one hand and value added products and relational behaviour on the other.

Options available
Option 1: Not to associate with Express Inc. Business as Usual Option 2: Get Associated with Express Inc.

Go with Express
Gain access to Express potential customers Expand customer base Potentially secure competitors transactional customers Give promotional responsibility to Express Express Incs 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. Sign up would expose A/S to estimated 50,000+ OEMs throughout the US and increasing sales Cost and time effort savings in serving and converting low price shoppers into potential customers.

Fundamental Value Creation of Arrows

How does Arrow create value for its customers for the price it charges How this value is different from what suppliers can provide to customers directly Whether firms like express can offer the same value for firms at lower prices

Recommendation B2B Buying process

Service component is important B2B emphasizes personal selling rather than advertising. Complex buying process; takes longer duration Buyer Seller Relationship (v. close relationship) Designing Customer Solutions B2B must understand the technical aspects of the organizations requirements; as well as knowing who influences the buying decision and why

Not to Go with Express

Choose not to associate with Express Avoid 6% service fee Avoid possibility of losing customers if we are not always lowest price

Continue serving customers as we always have

Focus on relationship customers who are either customers going in for modified rebuy or straight rebuy.

Products need delivery that would be compromised if we partner with Express Build relationship with customers by creating supply chain system that will provide value-added services. Evaluate, adapt and adjust the existing business model to the changes Express may create

Recommendation
Do not partner with Express AND develop websites purchasing capabilities Give 5% discount to online buyers Gain access to customers previously unavailable Give relational customers opportunity to use online purchasing as well

Create Our Own Internet Presence:

Introduce purchasing capabilities on website already in operation Serve price-sensitive customers through website Direct re purchase, online support, payment gateway, Knowledge Centre

Discussion