Mark Larson, president of Digi-Key, talks to New Electronics about meeting the needs of designers around the world and how the performance based marketing approach is paying dividends.
NE: What are your thoughts about the electronics market in 2009? ML: Continuing volatility in the financial markets over the past few months and its potential impact on the electronics industry is certainly cause for concern as we contemplate 2009. For this reason, it is probable that the overall market for electronic components will face some headwinds for a number of months. Nevertheless, several areas of Digi-Key’s business are demonstrating significant strength and are indicators for future growth. Digi-Key’s design in activity continues to enjoy excellent growth in spite of a generally weak global economy. The company is seeing substantial progress in terms of increasing sales revenues and expanding its customer base within the design community. While additional revenues are immediately gratifying, strength in this area holds greater significance as a predictor of future growth. NE: What are the best indicators for growth? ML: Design activity is an excellent leading indicator for industry growth, because designs lead production. On this basis – at least in theory – it would seem reasonable to expect that the more design activity that occurs today, the greater the potential for production business tomorrow. The fact that Digi-Key has, arguably, the largest customer base of design engineers in the industry and the fact that this base of design engineers represents all industry segments lends additional credence to the assumption that this design activity is diverse and broad based. Digi-Key’s growth rate in terms of sales and customers in Europe and Asia is a second area of continuing strength. While Digi-Key is growing at a rate in the mid single digits in North America, its growth rate in Europe and Asia is in the mid double digits. The true significance of this revenue growth goes far beyond the additional sales dollars. Success in Europe and Asia is a validation of the decision to serve the world from a single location and to offer customers worldwide the advantages of this business model. This decision sets Digi-Key apart from the rest of distribution. Serving the worldwide market from one product distribution centre might appear to be a radical choice, but its success is based on the fact that the company is extremely customer centric. Logistics specialists, such as United Parcel Service, Federal Express and Airborne, have made the world a much smaller place over the past few years and time in transit has plummeted. Nevertheless, in spite of the fact that shipments can reach almost any destination in the world within days, other distributors have failed to leverage this advantage. Instead of viewing the electronic components market as a single worldwide market, they continue to view it as a market that consists of at least three distinct regions – Europe, Asia and North America. This means they must have at least three product distribution centres. While there is no question that each region must have distributors that are regional – and regional distributors are often times the logical choice for sourcing product – Digi-Key believes there are times when sourcing components regionally works to the customer’s disadvantage. Additionally, the historic customer advantages of sourcing regionally are diminishing and will continue to diminish because of inherent weaknesses in serving the customer. NE: What are the implications of a geographically segmented approach common to other distributors and how is the customer negatively impacted when purchasing from a distributor that approaches the worldwide market as three or more regions as opposed to a single worldwide market? ML: Digi-Key believes customers are offered a reduced choice of product for off the shelf delivery, confronted with a higher percentage of out of stock product, have access to smaller available quantities of in stock product and may become a victim of the pricing pressures faced by the distributor. The impact on a customer of any or all of these weaknesses may vary, depending on the following circumstances. Will reduced range of product result in a design engineer compromising his design? Will an out of stock product delay a design project? Will access to smaller available quantities result in a line down situation? Will distributors’ upward pricing pressures increase the customers cost? There is often a penalty for failing to view the world as a single market and the customer pays that penalty. Digi-Key’s believes its decision not to fragment the world market often works to the customer’s advantage. Meanwhile, the company’s success in web based marketing also outpaces the industry and its website is now the source of more than 50% of orders taken. If this total is combined with orders received by e-mail, the figure exceeds 65%. While we value the strong and continuing growth of our web based sales and the new customers generated each year, there is a more significant aspect to this success. NE: How important is the internet to Digi-Key? ML: The growth of web sales in terms of number, size and customer base lends credence to the fact that ‘relationship based marketing’ is continuing to give way to ‘performance based marketing’. While relationships are important in some transactions, many other transactions require the ability to get the right product at the right time and at the right price and for customers to know that if there is a problem, it will be resolved fairly and expeditiously. Growing acceptance of ‘performance based marketing’ worldwide plays to Digi-Key’s greatest strength: ‘performance’ is, and will continue to be, the single biggest driver of its growth – for 2009 and the years that follow. Predicting the future is a dangerous game. However, it is clear that in the sea of uncertainty, as in the economy at large, these key leading indicators point to continued strong growth. Success in growing design in business is laying the groundwork for strong future production sales. Success in Europe and Asia is clear validation of Digi-Key’s ‘one world, one market’ business model. Web success points to the growing importance of ‘performance based marketing’.