It’s nearly impossible to sum up an executive’s legacy in a single article. There are, of course, executives that will be associated with a single event – such as Dennis Kozlowski – both good and bad. Mark Larson’s career can best be described as steady and consistent. The company he managed for nearly 40 years, Digi-Key Electronics, is well off the beaten path in Thief River Falls, MN. No one would call the company or its management “flashy.” Yet Digi-Key grew from $800,000 to almost $2 billion during Larson’s tenure.
Rather than try to boil the ocean, EPS focused on two areas during an interview with Larson: what events, either internal or external, helped shape the company; and what were some of the toughest decisions its longtime president had to make.
In retrospect, said Larson, many of the events and decisions during his tenure seem prescient. “It is very interesting that as I get down to the last several weeks of my tenure as president I have become more reflective,” Larson said. “As you look back, it’s not always clear at the time you are doing something of significance.”
Thief River Falls, Where?
The first such decision was to establish and expand Digi-Key in Thief River Falls, MN. The early years of the electronics distribution industry were centered on urban centers such as New York City, where excess military components were available for sale.
“Ultimately the remoteness of [Digi-Key] played very positively in our favor,” said Larson. For one thing, it helped Digi-Key fly under the radar of many of its competitors. “There was not a lot of conflict [between suppliers or distributors] because the industry was still very regional at that time,” he explained. “We were able to capture some nice lines. Back then, it was one [line] at a time. When I look back I see that as important: customers want quality manufacturers, and having quality manufacturers is probably as or more important than the distributors themselves.”
Larson points to Digi-Key receiving the Panasonic product line as the beginning of its momentum. “I think that a remote location played in our ability to get Panasonic, which was in 1975.”
Concurrently with the addition of franchises was Digi-Key’s intense focus on customer service. Larson himself was a buyer of electronics components prior to Digi-Key’s founding. “It became clear to me there was lots of room for somebody to raise the bar,” he said. “The fact that I had no other experiences working at a distributor or manufacturer– if I had I would have seen how they solved problems—turned out to be an advantage. The distribution of electronics started in the late 1940s and by the 1950s and 1960s it had already developed a structure that by today’s standards would be considered very vulnerable."
"I saw there was room to do things better and improve the service levels for the customer," he continued. "As a real-time example, I ordered components from one of the catalog guys. A part was in the catalog but on back order for 26 weeks. There were no communications [such as we have online] and no alternative and we accepted that at that time.”
A lot of people buying components in those days were hobbyists, Larson said. “Over the years we could see them buying products that were shipped to their place of business. These individuals were also engineers doing design work—but with surplus components quality was questionable, so one of the early decisions that seemed totally logical was that we should become franchised.”
Timing Is Everything
Another proven strategy, Larson said, was a focus on operations. “My personal focus has always been heavy on operations and then sales,” he said. “I think strong operations made a huge difference—we focused on small quantities serving the hobbyist, and right around 1980 we expanded our marketing to start targeting design engineers. That proved to be a pivotal move because although the hobbyist might do a project a year, the designer has multiple projects. If you could win the project you had an opportunity for the long-term.”
“We also thought that by guaranteeing same day shipment it would be viewed very positively by our customer base,” he said. “Today, that would be nothing remarkable. But at that time engineers who were doing design work ordered components and had to wait for them, which interrupted [their progress]. So we began to guarantee any order that we got by 3 p.m. they got it the next day.”
To guarantee these shipments, Digi-Key had to work closely with logistics providers. Once again, Digi-Key’s timing was optimal. As the distributor was focusing on getting components shipped quickly to engineers, logistics companies such as UPS and FedEx were competing for the overnight delivery business. “I think it is interesting that there was a convergence of logistics support and at that time there was the rapid development of competition between UPS and FedEx. We were able to parley that in a sense — we played one against the other to get a higher level of service,” Larson said.
Digi-Key now has planes regularly departing Thief River Falls for FedEx and UPS hubs.
Another external factor where the timing couldn’t have been better is the Internet, Larson said. He attended a conference in 1995 where users demonstrated how the Internet was used for marketing. “The early adopters they said had sold some product, but the Internet was originally intended for disseminating information. If you had interest in a product you could make a decision based on the information provided. But the ability to conduct commerce was up in the air.”
But by the mid-1990s, Digi-Key had already put its catalog in a digital format on CD-ROMs. “At that time you didn’t have to have the perfect Internet site -- you could go to a site under construction,” Larson said.
“We got guidance developing our site from customer input. We developed what was a pretty good website in 1996 and that was kind of the beginning. We were one of the first [distributors] that introduced a website and that probably better positioned us to take advantage of [e-commerce],” he added.
While Digi-Key was able to touch a worldwide customer base, serving global customers often meant building or acquiring facilities overseas. “We had a single distribution center [in Thief River Falls] and we elected to service the world from that center,” Larson said. “That had some real implications beyond what we understood at the time. We thought that if we got sales of $50 million in Europe that would justify putting a warehouse there. But our sales kept climbing and we broke $100 million per year by buying and shipping from a single site.”
Digi-Key’s ability to ship small orders anywhere in the world diminished the need for local offices and inventory.
Ask Permission; Beg for Forgiveness
Digi-Key wasn’t duplicating its competitors’ model overseas. During the late 1980s through the late 1990s, U.S.-based distributors were rapidly acquiring their European brethren. By doing so distributors secured both product franchises and local customers. “I think one of the most difficult decisions I had to make was, I knew it was important to expand internationally,” Larson said. “We were working with our largest suppliers in the 1990s and they were pushing for international coverage. They were ultimately going to rationalize their distribution network and if you weren’t international you were at a disadvantage.”
“The problem was that even in the States, we had a virtual presence,” Larson explained. “It doesn’t seem so earthshaking now but when we put up our website in the UK 12 or 13 years ago we offered our full linecard for sale. We weren’t franchised in the EU for all of our lines and the question was how suppliers would react. We knew we’d have Farnell and Electrocomponents upset. But I felt we had to move quickly enough to prove the concept. We hoped the supplier would say ‘we realize Digi-Key is not buying product in this region and doesn’t have the franchise but…’ and 98 percent of them ultimately extended their franchise [to Digi-Key].”
There was an element of risk, Larson acknowledged. “We had invested a fair amount in our web presence and were afraid of the reaction. The other alternative was to ask for permission rather than beg for forgiveness, but [asking permission] would mean sending things through legal and that would take months. So somehow we had to become strong enough [in those markets] to prove the concept. The various suppliers we dealt with saw that this made sense and said ‘Let’s get behind the movement.’ Now most major suppliers are working diligently to establish a worldwide market – they all have an international presence but things are still handled very regionally. We see more and more of the global aspect and I’m not suggesting it won’t happen over time. Some of the complexities of price discrepancies will have to be dealt with, but we will go to a worldwide market as opposed to regional.”
Silver Linings Playbook
One of the few major changes Digi-Key made to its strategy came about during a market crisis. In 2009 the U.S. economy was falling apart and distributors were pulling back on their inventory levels. The electronics market dropped by as much as 30 percent. “Digi-Key has always had an emphasis on being inventory-centric,” said Larson. “We always maintained a strong inventory position.”
When the market turned around in 2010, companies that never used Digi-Key before were able to turn to the company for small production orders. “We interfaced with tens of thousands of customers and our sales went up by 63 percent,” said Larson. “We figured once we got to 2011 it would slide back. But we held on to a high percentage of those customers.”
Digi-Key found it was able to provide low-quantity production orders without changing its high-service business model. “In a sense we had the opportunity to prove to ourselves [that we could manage this],” Larson said.
“If you have a broad customer base and you monitor the vendor situation among those customers they form patterns. We found the ability to hit the needs of a high percentage of these customers,” he added.
The Digi-Key story is far from over. One of the executives involved in building Digi-Key’s production business is David Doherty, recently named Digi-Key president and COO. EPS will feature an interview with Doherty later this week and will run the full Q&A with Larson in the near future.