Cases in Competitive Strategy 

Chapter 1 Note on the Electronic Component Distribution Industry

The electronic component distribution industry was engaged in distribution of semiconductors, capacitors, resistors, connectors, and other electronic parts purchased from component manufacturers to a wide range of commercial and industrial customers in the United States and overseas. The industry had developed in parallel with the development of the electronics industry itself. Beginning with the vacuum tube, successive waves of product innovations in electronic components had been added to the distributors' product lines. Vacuum tubes were followed over time by the transistor, the integrated circuit, the large-scale integrated circuit, and, recently, the latest technological innovation, the microprocessor. In 1975, approximately 23 percent of the electronic components sold passed through distributors, while the balance were sold directly by manufacturers (Exhibit 1-1).

The distribution industry had grown dramatically with the growth of electronics, with distributors' sales rising from $937 million in 1971 to $1.4 billion in 1974, an annual compound growth rate of 15 percent per year. However, 1975 proved to be a very bad year for the industry. Sales declined 21.4 percent to $1.1 billion from 1974's peak of $1.4 billion, and profits declined even more sharply. Despite the poor results in 1975, observers unanimously predicted a turnaround in 1976 as the recession ended, and forecast substantial long-term growth for the industry. The percentage of electronic component sales passing through distributors was expected by some observers to increase to 32 percent by 1985. Projections put the dollar value of distributors' sales at $5.6 billion in 1985 versus $1.1 billion in 1975, or an increase of about 18 percent per year.

These prospects were not without uncertainties, however. The projected sales increase hinged in part on expectations for the growth of the microprocessor and its accompanying equipment (Exhibit 1-2). How the microprocessor would affect distributors' operations was a major question facing the industry. In addition, the recent moves by certain electronic component manufacturers toward expanding their captive distribution operations and the potential effect of the expected entry of major Japanese electronic component manufacturers into the U.S. market increased the uncertainty faced by distributors.

Functions Performed by Distributors

Distributors served as the link between electronic components producers and the wide variety of components users. Distributors performed the following essential functions:

* Hold and manage inventories. Distributors carried from 25,000 to upwards of 300,000 different electronic components in inventory at any one time. Most items had a value of less than 50 cents, with individual items ranging from fractions of a cent to $20.00 for microprocessors. Generally the higher-priced items were the more complex recent devices, and the average unit cost of distributor inventories was increasing. The specific number of components maintained in inventory varied as a function of the distributor's business strategy and the tradeoff between maintaining high inventory turnover and minimizing the risk of stock outs. The distributor assumed the capital costs of holding component inventories. A typical broad-line distributor stocked components that it reordered from manufacturers every month, others that it reordered three or four times a year, and others where six months to a year would elapse before reordering. Inventory typically represented approximately 50 percent of a distributor's total assets, with supplier credit providing a major mechanism for financing it.

* Hold and manage accounts receivable. Almost 100 percent of distributors' business was transacted over the telephone, therefore involving the extension of trade credit to customers. Credit terms were normally 2/10 net 30; however, the normal terms were often overlooked for the smaller customers in an effort by the distributor to gain sales volume. Servicing accounts receivable involved the maintenance of between 10,000 and 40,000 individual customer accounts, with at least one order generally posted to one-third of the active accounts each month.

* Provide fast service in meeting orders. Providing requested items within twenty-four hours was the most critical function performed by the distributor. According to industry executives, the first question asked by customers was, "Do you have the part in stock right now?" The range of customer types was exceptionally broad, from one-person "basement operators" to multibillion-dollar firms, such as Raytheon and General Electric. However, when using a distributor the diverse customers shared a desire for instantaneous delivery. This was due, in part, to the cost of components versus their importance to the success of customers' projects. An item might cost only a few dollars, but without it expensive equipment and engineers remained idle.

* Servicing of small orders. The distributor filled orders that were too small for component manufacturers to be willing to fill directly. Typical distributors had average order sizes of $150 to $250, compared to minimum order sizes for manufacturers in the range of $2,500.

Some distributors also performed certain very simple assembly operations with electronic components called connectors, which were devices that joined two cables. The distributor modified a standard connector body by attaching the desired number of male and female leads to serve a specific application. This function was an accepted practice because large inventory savings could be achieved by holding unassembled connector parts instead of finished connector assemblies.

Product Lines

The electronic components handled by distributors fell in two broad general categories, active and passive. The two classifications will be discussed separately.

Active Components

In simple terms, active components have a specific effect on the electrical current passing through them. Certain components convert the electrical current from wave form to a digital (either 0 to 1) series, while other components serve to amplify the signal or modify its wave shape. Active components had progressed through several technological phases since the 1930s, reflected in five general product types.

Each new technological phase had reduced the physical size of the components and increased the number of functions that could be performed per dollar. The first four product types had all followed a distinct product life cycle. This cycle was characterized by rapid standardization and rationalization of the component type over time as users became more experienced with the technology and with hardware and software configurations, and as component manufacturers strongly influenced by the learning curve philosophy sought to increase the size of market by forcing down unit production costs over time through standardization and lowering prices. Figure 1-1 shows the approximate position in the product life cycle of each of the five product types in 1976.


The development of the microprocessor had resulted from the proliferation of LSIs, each of which was designed and produced for a specific application. The design content of LSIs meant that their uses were limited to applications where the volume was large enough to justify the design costs involved. Rather than continue to design a specialized computer (LSI) for each new application, a general-purpose programmable microprocessor, a "computer on a chip," could be produced in a standard form and customized by the user. Operating instructions for any particular application could be stored in a memory circuit where changes could be made in seconds rather than having to wait for the design and production of a new LSI circuit. Industry observers (distributors, manufacturers, and user engineers) unanimously believed that the number of applications for microprocessors was limited only by the imagination. Intel Corporation was the first company to develop a working microprocessor in 1974 and until late 1975 had a virtual monopoly. All the major active component manufacturers had entered the microprocessor market by 1976.

Although the microprocessor had been in existence only since 1974, its growth was expected to be even more explosive than its predecessor components. From a market approximating $100 million in 1975-1976, sales of microprocessors were expected to reach $500-$1,000 million by 1980 (see Exhibit 1-2). The microprocessor differed substantially from earlier generations, because it did far more than simply affect an electrical current. It was a computer, and like all computers it required input / output linkages, memories, and programming languages to complete the system. Thus, three steps had to be taken before a microprocessor could be used in a particular application. First, it had to be linked to the input/output and memory units in what was called the "hardware configuration." Step two was designing, writing, and testing the "software" or computer language programs that caused the hardware configuration to perform the specific tasks desired by the user. In step three, the tested programs were written onto devices known as Programmable Read Only Memories (PROMs), which controlled the microprocessor's operation. These instructions could not be altered without using a special device to erase the PROM completely.

Some industry sources believed that the second step in preparing the microprocessor for use (programming it), represented an opportunity for distributors to increase their role in the electronics industry by providing services in educating and helping customers to perform this step more effectively. As a result, by 1975 about half of the top twenty-five distributors had set up microprocessor centers where a customer's engineers could come to set up a hardware configuration for microprocessor application studies and then to write and test the software. These centers each required an investment of approximately $30,000 each to establish and were expected to speed the introduction and development of the microprocessor. Some industry executives expected an additional benefit to the distributor to come when the customer bought from the distributor the microprocessors themselves, input/output devices, etc., for the application developed in the distributor's centers.

However, there were critics in the industry who argued that it was not the business of the distributors to educate the customers and that distributors had "fallen in love" with the microprocessor rather than view it objectively.

Passive Components

Passive components did not emit electrons themselves but influenced the behavior of electrons that had been emitted by active components. The four principal types of passive components were.

All four types of passive components were simple to produce (relative to the manufacture of active components), had been on a technical plateau for many years, and were considered standard "off-the-shelf" items.

Product Standardization

A high degree of product standardization existed among the product lines of competing suppliers of both passive and active components. This standardization was especially pronounced in the passive component lines, where specifications had been fixed for many years. In the active component lines some technological differences existed near the upper performance limits of a specific electronic device. However, such differences among different suppliers' products were important only in a very small number of applications.

Customer Profile

The customer base served by distributors was exceptionally diverse. An individual distributor dealt with as many as 40,000 customers each year, with many purchasing only a few times per year. Customers tended to be small electronic firms that could not buy directly from component suppliers as a result of their small order sizes. However, even multibillion-dollar firms such as Raytheon, General Electric, and Westinghouse used distributors for rush orders and the purchase of certain low-volume items that suppliers preferred not to service themselves. Customers were located nationwide but tended to concentrate in a number of important centers for electronics industry activity (Exhibit 1-3). Most customers of distributors were original equipment manufacturers (OEMs) using electronic components in the manufacture of everything from burglar alarms to sophisticated missile guidance systems. A very large customer might account for 1 to 2 percent of the typical distributor's total sales, while the smallest customer might have placed only a single $25 order. There were a growing number of small customers in the industry as electronics technology spread to more and more applications.

Customers tended to be very knowledgeable about the product, and components were usually standardized items bought to specifications. The buyer was primarily interested in price and delivery, and maximum retail prices were known to buyers, thanks to price books published by manufacturers. Buyer loyalty to a distributor was transient (one distributor described it as a "what have you done for me today?" attitude).

The particular buying procedure followed by customers varied according to the nature of the buyer firm. Buyers could be approximately grouped into three categories:

* Large professionally managed companies with a separate purchasing department. These companies used a professional buyer, who was usually required to solicit bids from distributors. This buyer was often solely responsible for component purchases and tended to be well informed about them. The number of bids solicited varied as a function of the dollar value of the order. For example, a $500 order might require two documented bids, a $1,000 order three documented bids, and so on up to the spending authority of the buyer. As a result of this process, large buyers tended to be very price-sensitive. Recently some large customers had moved toward annual buying contracts with a group of the larger distributors. Annual buying contracts did not guarantee a minimum level of purchases from any one distributor but guaranteed that all orders would be placed with one of the distributors on the approved buying list. The contracts also generally stipulated a rising rebate level as purchases increased. Large firms selected distributors based on the presence of local stocking locations, local sales offices, important supplier franchises (such as Texas Instruments, Fairchild or Motorola), product expertise, financial strength, and a "reasonably" thought-out plan for servicing the buying firm's needs.

* Medium-size firms without an independent purchasing department. In this type of company, orders were usually placed by a clerical or administrative employee who was not a specialist in component purchasing. The employee followed selection criteria specified by the chief engineer, production manager, or administrative manager. In these circumstances the process was very mechanical since the buyer could not deviate from the instructions given. Quotes were then reviewed by the individual who initiated the request for bid before an order was placed.

* Small companies. In these instances the president and chief engineer themselves would request the bids and place the order. These firms often did the most shopping around for the best price.

Selling and Marketing

Distributors used a combination of field salespeople, product specialists, limited cooperative advertising, and product catalogs to promote their services.

The function of the field sales force was to call on current and potential accounts to push the services and product lines offered by their firm. The salespeople were not technically trained and had no formal technical background. They usually had previous sales experience that involved extensive client contact.

The product specialists were responsible for the marketing functions, such as pricing and promotion planning. Product specialists were typically former purchasing agents. They also received little or no formal training and had nontechnical backgrounds.

Cooperative advertising and product catalogs were the primary media used by the electronic component distributors. Advertising had just recently become an important promotion tool for the larger distributors.

No distributor employed an engineering staff to answer the technical questions raised by its customers. The distributors did disperse technical material supplied to them by the component manufacturers and referred customers to manufacturer technical personnel.

Distributor Operations

The day-to-day operations of a distributor consisted largely of order processing and shipping of components. Industry executives used terms such as "order/paper processing factory" to describe a distributor's home office operations. The order process flow could be generalized as follows:

* The request for a bid was received by an "inside salesperson" over the telephone for a certain type, quantity, and mix of components. The salesperson looked up the current price for the components on the spot and gave a bid to the customers.

* If the bid was not accepted because of price, the salesperson could refer the customer to a manager for rebidding.

* If the bid was accepted, then an order to remove the components from inventory was prepared and forwarded to inventory control.

* Warehouse personnel selected the specified items from the thousands of cardboard boxes lining the shelves in the warehouse, placed the components in a plastic bag, and forwarded the order to packing and shipping. If an item was not in stock (because physical inventory frequently differed from stated inventory), then the sales representative was notified so that the customer could be informed and asked if another product was satisfactory.

* The packaging and shipping department shipped the orders.

The actual process varied a great deal depending upon the size of the distributor; in extremely small firms the president sometimes did all of the order-processing functions personally.

Order processing was made complex by the large number of small orders received by a distributor. Orders averaged approximately $150-$250 in size, with the average shipment approximately one-half the average order. Thus a $50 million distributor would process approximately 200,000 orders and 400,000 shipments per year. Order processing was further complicated by frequently changing prices on items held in inventory. This was more common for active components because of the pricing policies of firms following the learning curve in the hope of gaining additional market share, but it affected the entire product line.

Most distributors operated from a central ware-house facility plus a series of remote "stocking locations," as they were referred to in the parlance of the industry. A stocking location was a remote warehouse containing high-turnover components dedicated to a particular marketing area. Nonstocking locations were field sales offices without a dedicated warehouse. The number of stocking locations had declined in the several years prior to 1976, as the 1975 sales decline prompted distributors to close marginal stocking locations and the growth in computer-based order entry and inventory management systems permitted better coordination between a central warehouse and regional markets. Some distributors believed that a fully computerized system would theoretically permit a single warehouse facility to be used in conjunction with air freight shipping, though other distributors felt that the presence of a stocking location was an important marketing tool.

The bulk of the distributor's order-processing functions were handled by clerical-level personnel with minimal direct supervision. Most distributors had very lean management teams, often consisting of only the owners of the firm.

Industry observers believed that few economies of scale existed in the order-processing operation. Some economies of scale were thought to exist for the largest distributor within a specific product line. The economies resulted from higher inventory turns, improved expertise in the product line, and increased consumer awareness of the distributor as the leading source of information about the line and holder of the largest inventory of it.

Active Component Manufacturers

The active component (semiconductor) manufacturing industry was highly concentrated, as shown in Exhibit 1-4. Approximately 60 percent of the market was accounted for by Texas Instruments, Motorola, Fairchild Camera, and National Semiconductor. Texas Instruments and Motorola had total sales in excess of one billion dollars, while Fairchild Camera and National Semiconductor were somewhat smaller. All the major firms were growing rapidly.

Industry surveys indicated that distributors handled 15-30 percent of a semiconductor manufacturer's sales. Distributors were given "franchises" to sell a supplier's products either regionally or nationally. However, franchises did not give distributors exclusive rights to an area, nor did they provide any real protection for the distributor against competition. It was not uncommon for a supplier to set up competing franchises if individual distributors began to account for more than 10-15 percent of its sales through distributors in a given area. Recently, leading distributors, such as Cramer Electronics and Hamilton/Avnet, had begun to aggressively use cooperative advertising with major suppliers. This was a relatively new development in distributor-supplier relations in active components, and its long-term effects was still uncertain.

The semiconductor industry was strongly influenced by the presence of (and belief in) a strong learning curve effect, which meant that costs tended to decline as volume increased. It was estimated that costs fell 27 percent every time cumulative volume doubled. Semiconductor manufacturing was a process in which labor could be and was readily replaced by capital. Capacity additions in the industry tended to occur in large discrete chunks rather than spread evenly over time. Texas Instruments, the industry leader, was well known for its aggressive business strategy of bringing new capacity on-stream in anticipation of future market demand to ensure that its total cumulative production volume was' the highest. As long as the learning curve operated, this made its unit cost the lowest of all manufacturers. It was not uncommon for market shares in the industry to change rather often as manufacturers opened new and larger production facilities. Vigorous price competition was the rule in the industry.

In addition, the active component manufacturing industry had a history of rapid technological change. There was active technological competition among firms in the industry, and spinoff firms, founded when scientists and engineers left the larger, more established companies, were not uncommon. The most recent example of this was Intel Corporation. Formed in 1968 by one of the founders of Fairchild Camera, Intel invented the microprocessor and had seen its sales rise from $556,000 in 1968 to $130 million in 1974.

Passive Component Manufacturers

The suppliers of passive components were very different from the suppliers of active components. They were generally smaller, more conservative, and older. A major manufacturer of capacitors was Sprague Electric Company. Founded in 1926, Sprague had sales of $162 million in 1975, of which 90 percent was capacitors. The leading connector manufacturer was Burndy Corporation. Burndy manufactured more than 80,000 different types and sizes of electrical connectors, ranging from cast connectors weighing several hundred pounds to microminiature connectors weighing a few grams. Burndy had sales of $120 million in 1975, of which 90 percent was connectors. The leading resistor manufacturer, Allen-Bradley Corporation, was privately held. Industry sources estimated Allen-Bradley's 1975 sales of resistors at $150-$200 million.

Distributor-Supplier Relations

The operating relationships between distributors and suppliers varied depending on whether the suppliers were active or passive component manufacturers.

Active Component Suppliers

Many distributors believed that the active component suppliers had never really understood or appreciated the role of distributors in their sales effort. Distributors viewed these firms as run by individuals whose primary training and orientation were scientific and not as managers. Distributors complained that they were treated as a necessary evil rather than as an inexpensive and efficient method of servicing a national market without having to build or maintain a captive sales force. Active suppliers believed that their efforts had created the product, according to leading distributors, and that no one but themselves should receive the profits that resulted. This reasoning was used by distributors to explain the aggressive and sometimes hostile competition between the suppliers and the distributors. This conflict took a number of forms:

* As new components gained acceptance and moved into the growth stage of their product life cycles, the dollar value of the orders for them increased. At a certain point, suppliers began to compete directly against their own distributors for the larger orders, with the result that distributors were continuously losing the larger orders to suppliers.

* There was a lack of channel loyalty between suppliers and distributors. Suppliers transferred their franchises to other distributors if the existing ones did not measure up and created competing franchises if a distributor became too large in a given marketing region. Distributors stocked and promoted competing product lines. Supplier reaction to the industry's sales decline in 1975 was to aggressively open new franchises wherever they could find takers. Suppliers justified these actions as keeping production high and reducing unit costs, while the attitude of the distributors was that the suppliers "panicked."

* Suppliers published suggested retail price directories, which were sent to all component end-users. The price list established a firm price ceiling in the market place. However, minimum price levels were not guaranteed by the suppliers except for new products, and on these only for the first six months. In addition, distributors expressed the feeling that the "pricing breakpoints" at which volume discounts were given to customers, mandated by the suppliers, were irrational and were simply holdovers from the first pricing formula used for transistors. Distributors attempted to bargain with suppliers over their purchase price, which was based on the annual volume. The very largest distributors for a supplier might secure an additional discount of 1 percent from the price paid by other distributors.

* Distributors believed that it was the job of the suppliers to educate the market place when a new product was introduced or a new application for an older product was found. In many instances, most notably the microprocessor, distributors complained that the suppliers had not adequately performed this task. The resulting education gap had been left to the distributors to fill.

Passive Component Suppliers

Distributors' relations with the passive component suppliers were quite different from those with active suppliers. Passive suppliers were described by industry sources as more "mature" organization men who had been through several business cycles and were better equipped managerially to cope with bad times. While approximately 15-30 percent of the sales of a typical active supplier passed through distributors, as much as 75 percent of a typical passive supplier's output would be sold by distributors, and some very small passive suppliers sold all of their output through distributors. In general, relations between passive suppliers and distributors were described as cordial and businesslike.


The electronic component distribution industry comprised a few large national firms in addition to hundreds of small companies serving narrow regionalized markets based on personal business contacts. Smaller firms tended to have low fixed overhead and offered a high level of personal service to the customers based on technical support and product knowledge. They relied on a strategy of price-cutting to gain sales volume. However, these small regional distributors had been losing ground to the top twenty-five companies for the last ten years.

Exhibit 1-5 gives the total sales of electronic components sold by distributors and the share accounted for by the top twenty-five firms from 1971 to 1975 with estimates for 1976. In 1974 the top twenty-five firms accounted for 71 percent of the industry's sales, up from 35 percent ten years previously. The market share of the top twenty-five companies rose to 86.5 percent in 1975 despite the 21 percent decline in total industry sales, as small "garage" distributors went out of business.

Exhibit 1-6 presents data on the top twenty-five firms as of 1975. The range within the group was most dramatic. The two largest firms accounted for 29.7 percent of the industry's sales while the top five accounted for almost 46 percent. Industry financial characteristics and financial performance are given in Exhibits 1-7 and 1-8.

The industry, despite the increased concentration, did not have a true market leader. Industry executives believed that many of the problems of the industry, especially those involving reduced profitability due to price cutting, were entirely self-inflicted.

Competitive Strategies

Among the top twenty-five distributors a range of competitive strategies had been adopted. Four representative firms are briefly described below, and the financial performance of the three which were publicly held is summarized in Exhibit 1-9.

Jaco Electronics. Jaco carried a limited product line consisting almost entirely of passive components. It distributed from two stocking locations, supported by a sales force of eighty-eight individuals and a computerized order entry and inventory management system. Jaco usually purchased all or nearly all the production output of small suppliers.

Jaco attempted to minimize fixed costs, and its small number of locations reflected its desire to maximize control of inventory levels. Components were shipped by air freight to ensure delivery in twenty-four hours. Jaco's management team consisted of Joel and Allan Girsky, plus two field sales managers. The Girsky brothers maintained a very high profile in the industry and had gained notoriety for the passive component manuals they developed for the military.

Diplomat Electronics. Diplomat's product line consisted of 97 percent semiconductors. It distributed nationally from fourteen stocking locations but concentrated the bulk of its sales efforts in the New York Metropolitan region. Diplomat's sales effort was primarily directed toward other smaller distributors and original equipment manufacturers and was based on extensive knowledge of semiconductor product lines. Diplomat had no computerbased systems.

Cramer Electronics. Cramer Electronics was the second largest component distributor in the United States. Cramer stocked an inventory of approximately 265,000 items covering the entire spectrum of active, passive, and electromechanical components in addition to such items as pliers, soldering guns, and fuse boxes. Cramer maintained twenty-nine stocking locations throughout the United States and had subsidiary operations in the United Kingdom, Italy, Australia, and Canada. It had the largest outside sales force in the industry and had recently introduced computerized order entry and inventory management systems. Cramer also marketed the Cramer Kit (a microcomputer kit ready for assembly by the customer).

Hamilton/Avnet Corporation. Hamilton, the leading distributor in the industry, was a wholly owned subsidiary of Avnet Corporation. Hamilton stocked fewer items in its inventory than Cramer Electronics, but more than either Jaco or Diplomat Electronics. The largest portion of its sales was in active components and connectors, which had both been especially rapid growth lines in the 1970s. Hamilton stocked a variety of passive components and electromechanical devices, however. Hamilton was known for having one of the most aggressive sales programs in the industry with the largest number of stocking locations (thirty-two) and a field sales force of 225. Hamilton was also known in the industry to use price-cutting as a competitive weapon to gain sales. It used manual systems for order processing and inventory control.

Unconsolidated financial data for Hamilton were not available, but Hamilton's $206 million in sales (in 1975) provided 40 percent of Avnet's total sales. Hamilton was acquired by Avnet in 1972 and had gone from a position roughly equal to Cramer Electronics to a leadership position in the industry in terms of sales. Industry observers believed Hamilton was profitable and that the task of raising capital was made easier by its relationship with Avnet.

Recent Recession Experience

In 1975 the electronic components industry experienced its worst general recession. Distributors were caught with inventories far in excess of their immediate sales requirements and were hit by rapidly escalating fixed costs due to inflation. Therefore, the impact on profits and cash flow was even greater than the sales declines for most distributors. The actions of the manufacturers did not help the distributors. When confronted with already oversupplied channels of distribution, firms such as Texas Instruments sought aggressively to open new franchises. Passive suppliers reacted quite differently, working with their distributors to reduce inventories in the channels to a level sufficient to satisfy the reduced demand.

By mid-1976 distributors believed that the recession had run its course. Inventory levels in the industry had been reduced to a minimum, and a sales increase of 15 percent or more in 1976 was likely. Of immediate concern to the existing distributors was the effect of the "recession-born" franchises on the market. Some distributors believed that these new entrants would begin price-cutting to gain volume as the economic recovery got under way, with the possible effect of keeping profits at recession levels for the distribution industry.

Future Outlook

Capital Availability. Unless the industry could generate additional cash flow through improved profitability, the lack of adequate financial support at "livable" interest rates could impact the rapid rate of growth the industry had enjoyed in the past. This pattern could be accelerated by a move to more capital-intensive projects, such as computerized inventory control and order entry systems. Joel Girsky, Vice President of Jaco Electronics, made the following projections in a speech to an industry association:

If we say distribution will gross 30 percent in that year [1980], and we won't, past history proves that; and we turn over inventories three times, and we won't, past history proves that; and we earn 2.5 percent net after (tax), and we won't, past history proves that; look at what we have in absolute numbers: an inventory of $980 million, receivables of $700 million and after-tax profits of $105 million. If we also say that the combined sales for years 1975-1979 equal $12.5 billion and the net after-tax profit reaches an average of 2.5 percent, and remember what I said about past history, the combined profits are $132 million. Add the $105 million for 1980, and we are short 360-some-odd million dollars to fulfill our obligations in inventory and receivables.

That is right, short over 360 million dollars. And that, my fine feathered friends, is being overaggressive in profits and inventory turns. If reality applied, the shortage number would be, in round numbers, 875 million dollars.

Supplier Integration. Texas Instruments began to move toward a system of company-owned and -operated distribution centers. While Texas Instruments had long had a captive distribution company, T. I. Supply, its role was expanding. In addition, Texas Instruments' stated objective was to build a viable consumer franchise for both its electronic components business and such consumer products as the electronic calculators and wristwatches by opening retail stores.

Services. There was a move among the distributors, going beyond supplier pressure, to perform more services. This was especially true with the advent of microprocessors. Customers were still unfamiliar with the technology of microprocessors and required help in configuring, programming, and testing them. Some distributors were packaging kits from components and selling them as an aid for OEMs and other customers to understand the technology of microprocessors. Initial evidence indicated that these kits had not gained the market acceptance first hoped for. Other distributors had gone into packaging digital clock kits, aimed primarily for the hobby market.

Management Infrastructures. The larger distributors were in the process of developing, testing, and installing modern computerized management information systems that they hoped would provide more control over their businesses. The main reason that the industry spoke of "margins" instead of "contribution" was not a lack of management familiarity with the terminology but a lack of useful information. Indeed, even with the computerized systems, determining the variable costs associated with each of the many thousands (up to 250,000 and more) of items sold would be a difficult task. One large distributor had spent approximately $6 million to $8 million and four years developing its computer system. The distributor projected annual operating (fixed) costs for the system at about $2 million.

Microprocessors. This innovation represented a third generation of electronics technology that was still in the early stages of its product life cycle. Distributors had enjoyed better than average margins on the microprocessor units they had sold.

Effects of the Japanese. It was anticipated that the large Japanese manufacturers of active electronic components would enter the United States market in the near future. It was estimated by industry sources that they could take as much as 15 percent of the market from major U.S. firms. The effect of such a broadening of the supplier base was a major question for the distributors.

The Japanese firms that had entered other U.S. industries (such as automobiles, radios, television and stereo components) began with a low-price, high-volume business strategy. Whatever the pattern of market entry to be followed by the Japanese semiconductor manufacturers, the role distributors would play was yet to be determined.