We live in an age of disruption. As of 2011, only 67 of the original Fortune 500 companies were still in business. Meanwhile, Gartner estimates that by 2017, 50% of the applications for the Internet of Things (IOT) will come from startups less than three years old.
The truth is that success often breeds failure. Firms develop core competencies, begin to prosper and build out a distinct model. Then the market environment shifts, new companies take the lead and the old dogs find it hard to learn the new tricks. Eventually, every business model fails.
Yet Arrow Electronics is living proof that it doesn’t have to be this way. Starting out as a small electronics shop in 1935, the company has seen every stage in the evolution in the technology industry. Yet each time its business was threatened, Arrow saw opportunity and found a way to thrive. The story is an important lesson: Disruption can be beat.
In the pre-war years, the family radio was the highlight of every American living room. If you wanted to laugh along with Jack Benny or Groucho Marx, the radio was your front row seat. Orson Welles thrilled (and terrified) audiences with The War of the Worlds and when the Bambino hit his called shot in Chicago, the fans back in New York heard it on the radio.
At the center of this quaint history was New York’s Radio Row. Sure, there were lots of places where you could buy a radio, but none like Radio Row. It was the type of place that makes cities innovation platforms, with shops not only selling electronics, but also spare parts to hobbyists, repairmen and even fledgling electronics businesses.
In 1935, Murray Goldberg opened up his shop on Radio Row and called it Arrow Radio. At first, he mostly sold used sets and spare parts, but by 1940 he was prospering enough to start stocking shiny new models from RCA, GE and Philco. He still kept a parts department in back and by the 1950’s expanded to include a salesforce that called on industrial customers.
The timing was fortunate because just across the river, in Murray Hill, NJ, a team of scientists at Bell Labs were working on something that would transform the electronics business and lead to the destruction of Radio Row.
A Miracle At Bell Labs
When John Bardeen, Walter Brattain and William Shockley invented the transistor, it sent shockwaves throughout the industry. Bell Labs, fearful that they would be seen as profiting off of research that was largely government funded, decided to license the technology to anyone for a mere $25,000, kicking of a wave of innovation.
That meant trouble for Radio Row. The vacuum tubes that amplified signals in the radios and other electronics that Goldberg and his friends sold were expensive and unreliable. The transistor meant that cheap and durable products would flood the market. Radio Row was eventually demolished in 1961 to make way for the World Trade Center.
Yet it also led to a wave of new electronics businesses and that meant opportunity as well. Shockley himself left Bell Labs to start a semiconductor company. However, he proved a poor manager and two of his key executives, Bob Noyce and Gordon Moore led a mutiny that became Fairchild Semiconductor. Other firms, such as Texas Instruments also entered the fray.
While these companies were heavy on engineering talent, they lacked marketing heft and Arrow helped fill the void, transforming itself from a value-added retailer to a value-added distributor. With manufacturers looking to replace mechanical components with electrical ones, business boomed.
The Age Of The Microprocessor
1968 was a pivotal year for Arrow and the industry. Three Harvard Business School friends, Duke Glenn Jr., Roger Green, John Waddell acquired a controlling interest in the company. At around the same time, Noyce and Moore left Fairchild to form Intel and brought with them a hard charging Hungarian engineer named Andy Grove as their third employee.
A decade earlier, Noyce (and at the same time Jack Kilby at Texas Instruments) came up with the idea of an integrated circuit, which allowed an array of electronic components to be arranged onto a wafer of silicon in order to produce special purpose chips. This made possible an entirely new generation of devices that were smaller, cheaper and more complex.
The only problem with these chips was that they were fairly limited. Each one could only do the job it was designed for. But in 1971, Intel developed the microprocessor, a general purpose chip that could be programmed to do just about anything. Walter Isaacson describes the impact of Intel’s invention in his new book, The Innovators:
In 1971 microprocessors began making complex circuit boards obsolete, and Japanese electronics companies began mass producing products that were cheaper than homemade ones. Sales of do-it-yourself kits withered away.
Once again, the onward march of technology posed serious challenges and enormous opportunities. Manufacturers needed less help finding a supplier to build custom chips for a specific purpose, but a serious need for a value-added technology partner that was sophisticated enough to understand the complexity of the new products and large enough to handle the exploding business.
Arrow rapidly expanded its operations and opened sales offices in over 20 cities. By 1980, its turnover had reached almost $200 million. As its financial capacity grew, it acquired a wide array of electronics businesses, including enterprise level solutions, becoming a veritable one-stop shop for anybody who needed to design, build and market technology.
Today, Arrow’s sales are more than $20 billion, which makes it the second largest electronic distributor in the world (after Avnet, another former Radio Row firm), with global scale. However, now the company is facing a new challenge as technology reinvents itself yet again.
A New Internet Of Things
The next phase of technology will not be centered around products, but ecosystems in the Internet of Things. That changes the game entirely, because now firms need to deal with multiple levels of complexity. To understand how profound the change is, consider the humble parking meter which, until now, was just a “dumb” device for taking payments.
The next generation of smart parking meters will help transform cities by monitoring spaces through sensors. The data is then sent to the cloud, analyzed and sent to mobile applications displaying vacancies. Considering that up to 30% of traffic is made up of people looking for spaces, the potential to reduce congestion, fuel use and frustration is enormous.
As Aiden Mitchell, a VP at Arrow says, “It’s not just your company’s product anymore, but how it fits into an entire tapestry of components, systems and end user experiences. That’s the challenge. It has to be seamless.” It’s also a big opportunity for firms like Arrow, who have the expertise and scale to pull together all of the elements that the Internet of things requires.
And that’s the funny thing about disruption. Yes, it wreaks havoc, leaving an untold number of corporate carcases in its path. But for those that are nimble and responsive to market challenges, each new evolution can also create limitless opportunity.