Case: Arrow Electronics, Inc.

Q: How is the market power balances between Arrow and its suppliers? How should
Arrow respond to the proposal from Express? Justify your recommendation in view of
the implications of this decision for Arrow.
A: Arrow electronics maintains good relationship with suppliers. It understands the needs of
suppliers from distributers very well. Suppliers have two needs and these are (Page 4,
paragraph 6):

1. To win business in their standardized products(i.e. helping gaining market share and
profits)
2. To represent new technologies and proprietary products to our customers.

Also the components of relationship with the suppliers are (page 4, paragraph 7):

1. Providing financial incentives such as price protection and limited return privileges:
Suppliers refuse to honour warranties of products purchased through channels other
than the designated ones.
2. Many Suppliers ship their proprietary and standardized products at list price or
marginally below that price. So to control the price following designs were used:
 Design win
 Jump ball

 In case of jump balls, information is given to customers by suppliers about the various
distributers they can buy from.

Supplier’s relationship with Arrow

 Suppliers manage the time they take in responding to a distributor’s request for prices.

 Suppliers can manage the flow of orders by managing the time they take in
responding to a distributer’s request for prices.

 In order to balance the market power Arrow comes with the following strategies:
1. Design wins and competitive standardized products
2. Knowledge about customers to create demand for suppliers
3. Knowledge about growth opportunity, including watching small companies
Arrow should consider following points to respond to proposal of express:

 Considering pessimistic scenario in which all transactional and 40% of relationship

customers would switch their purchases from Arrow to Express.(page 11 paragraph 2
,4th line)
 (Exhibit 7)
 As mentioned in the case(page 11,paragraph 7 last line) that the business model that
express would utilize would cut cost on building new customers relationship rather
than existing one.
 Express would be best option for transactional or price sensitive customers (i.e. those
want to shop at lowest price).
 So it’s a trade-off between maintaining good relationship with existing customers or
acquiring new transactional customers or price sensitive customers.

So the options that Arrow has:

 Arrow should go with the express model with an optimism considering it would lead
to additional business for hose customers who are difficult to reach.
 By going with express model would expose Arrow to estimated more than 50,000
OEMs throughout United States.(Page 10,paragraph 3)
 It would lead to increase in sales at half the cost via its branch network. .(Page
10,paragraph 3)

Arrow has two options to respond to proposal of Express:

One to sign up with Express business model:

 Using internet as a direct channel: Arrow should use internet as a direct channel
bypassing the suppliers and direct to customer. It will help in reducing cost, more
profit etc.
 Serving Price-sensitive customers: Arrow should serve price sensitive customers
using express business model so as to attract more new customers.
 It should maintain relationships already established by being a direct line of
communication along with attracting new customers that are price sensitive or
transactional customers.
Second is to maintain same business model and not opting for Express model:

 Focussing on maintaining relationship customers: Arrow should focus on relationship

customers by continuing servicing customers they have.
 It should not choose with express: It should avoid 6% Express fee that can generate
profit in future.(Page 10, Last line)
 Arrow should avoid opportunity of losing customers if they are not lowest in price

Recommendations:

Arrow can do both opt for express model for gaining new customer (price sensitive)
and original model only for existing or value customers. As we have seen in Exhibit
4,with value addition profit of Arrow is increasing i.e. it has increased by 9% from
from 1995 to 1996.They can use Express as an advertising medium digitally and also
to provide information to customers. They should give relational customers a chance
to shop online as well as generally transactional customers would come to express to
compare prices ,considering other overhead costs and then visit arrow’s page to make
actual purchase.