This case study seeks to answer the question of what the advantages and disadvantages are for Arrow Electronics, Inc. and Schweber (A/S) of moving to express, an Internet-based trading system. It also seeks to find out if Express is a threat to or an opportunity for A/S?
Harvard Business Review (598022-PDF-ENG)
April 20, 1998
Case questions answered:
- What are the advantages and disadvantages of moving to express: Internet-based trading system? Will it destroy Arrow Electronics, Inc. and Schweber (A/S)’s low price business model?
- How many of A/S’s customers are likely to switch some of the purchases to Express and how will this affect A/S’s Sales and profitability?
- How would A/S’s suppliers react to Express and what A/S can do to make unbreakable relationships?
- Is Express a threat to or an opportunity for A/S? What should Kaufman do? How can A/S maintain its Value-Addition content in the supply chain?
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Case answers for Arrow Electronics, Inc.
1. What are the advantages and disadvantages of moving to express: Internet-based trading system? Will it destroy Arrow Electronics, Inc. and Schweber (A/S)’s low price business model?
Arrow Electronics, Inc. and Schweber (A/S) has both advantages and disadvantages in moving to the Express trading system. Let us list both.
1. Access to a huge customer base
The Express platform will provide access to new and diverse groups of customers. The conventional method of SMRs calling on customers to generate demand can now be replaced by customers themselves looking for products and calling on distributors to fulfill those orders.
Since A/S is a franchised distributor from well-established suppliers such as Intel, it can afford to offer low prices compared to the non-franchised distributors in the market.
Also, most of the Express platform customers are looking for low prices, which will make A/S their preferred distributor choice.
2. Costs will be reduced
One of the major challenges for the A/S is its high expense, i.e., 11%. With current margins of 15%, it will have to ensure that the costs are controlled as increasing competition in the market makes it difficult to increase margins.
Thus, with the Express platform’s presence, the costs associated with acquiring new transactional customers as they will approach the A/S themselves. A/S can cut costs associated with acquiring the transactional customers.
Furthermore, with an express platform, A/S can focus on relationships with customers and ensure that higher value is added to their operations and long-term relationships are being established.
3. Focus on Design Wins instead of Jump Ball
One strategic advantage for Distributors in the current market is that suppliers rely on them to generate demand for their products.
These value additions act as counterbalance power to the ones exercised by the suppliers. But currently, A/S is focused on both Transactional and Relational customers, i.e., both design wins and jump ball.
But with a presence on the Express platform, it can shift its focus entirely on Design wins. This way, its importance for the suppliers will increase. It can increase the sales from existing suppliers as A/S will be the preferred distributor for most of the customers in the market.
4. Add new customers and turn them into relational segment
Currently, A/S serves 4 segments of the customers, i.e., OEMs, Contract manufacturers, PC Clones, and Customer computer products. But with the presence of 50,000 OEMs on the Express platform, it will have a large number of customers on its platform.
Thus, A/S can diversify its existing revenue mix, and with changing industry dynamics, it is critical for the long-term sustainability to not rely on few customer segments for revenues.
Furthermore, the initial transactional customers can be developed and nurtured into a relationship base.
1. Lack of control and know-how about the customers
Currently, A/S is in direct contact with the customers and has complete knowledge about them and their long-term needs and requirements. But with presence on Express, its middlemen position will be eliminated, and it will not be able to develop long-term relationships with them.
We know that in B2B sales, we need an element of personalization that can resonate at an emotional level with our customers. Still, without know-how about the customers, A/S will find it difficult to develop long-lasting relationships with customers over the Express platform.
Also, the opportunity to cross-sell other products will be lost by selling through Express.
2. The Platform is only suitable for Standardized products
We know that customers present on the Express platform are looking for lower prices and standardized products without additional value-added services.
Also, our ability to generate demand for suppliers through Design Win contracts is our main source of power with the large-scale suppliers. Thus, if these Relational customers also switch to the express platform, our strategic advantage will be lost.
3. Loss of customer data
Currently, a major portion of Arrow Electronics, Inc. is repeat orders from the existing customers, and distributors will stock large amounts of inventories to fulfill the urgent needs of our customers.
Our major source of advantage in this aspect is the data that we possess across these customers as A/S can forecast their demands to some extent.
But with a presence on the Express platform, A/S will…