Strategy

In October 2006, the Group completed a strategic review of its activities and announced the results of that review. The strategy set out at that time was one of profitable growth through focus on our EDE customer base, the ongoing utilisation and development of our web proposition and the internationalisation of our business model as we expand into new higher growth international territories. In addition, in the strategy announcement we identified that we intended to sell our BuckHickman business and this was completed successfully in April 2007. Detailed below is a summary of the strategy and a review of the progress that we have made in the last financial year.

Focus on EDE

The global EDE market consists of customers involved in the design of electronic products and components and is part of the catalogue addressable market estimated at £15 billion worldwide. EDE customers have similar service requirements wherever they are located – these include: a broad product offering, technical support, and reliable and prompt delivery. Our data indicates that over the period of the strategy we expect that demand for our products purchased by design engineers will grow in the range of 6-8%. This is approximately twice the growth we anticipate in the MRO part of our business. During the current financial year, and as we have implemented the key proposition elements of our EDE strategy, we have seen an increase in revenue growth. This is particularly true of the increase in growth rates for our North American and Asian markets where our levels of EDE business are lower than the European business. In particular, sales into our small customer segment in North America (which are predominantly EDEs) were up 28% in the year. In APAC, we saw sales growth accelerate over the year as our Chinese business completed the migration away from its former MRO base and engaged with the growing EDE customer base in that market.

A key part of the proposition is the product range that we offer to EDEs. We announced last year that we intended to add approximately 70,000 products to our current stocked range (of approximately 300,000 products) with a further 500,000 lines to be available on demand. We have made good progress this year and have added 88,000 new products (before deletions) into stock and have made a further 50,000 available on an as needed basis. Concurrently, with this activity, we have continued our work managing out the RoHS non-compliant inventory in Europe and improving our product life cycle management to better align inventory availability with the demand for product.

We have set as a goal for this part of our strategy that 50% of MDD revenue will come from EDE customers by the end of financial year 2010.

Enhance our successful operational web and eCommerce platform

This part of our strategy is intended to provide design engineers and purchasing professionals with a fast and efficient channel to access our growing range of products and associated technical information. The web is a preferred channel for many EDE customers and offers a lower cost to serve channel as opposed to more traditional sales channels. This part of our strategy is a key element of our multi-channel end to end customer experience plan, which includes both our EDE and our MRO customer base.

We have set a goal for this part of the strategy that we will achieve at least 50% of our MDD revenue via eCommerce by the end of financial year 2010.

Internationalising our model with immediate focus on China and Eastern Europe

The Chinese market for small volume electronics is estimated at over £1 billion annually and growing at a rate faster than Chinese GDP. This market is highly fragmented, offering a significant growth opportunity and potential for us to achieve market leadership with the growing number of design engineers graduating from Chinese universities every year and engaging in design activities in their local industries.

We have made good progress this year with the launch of Premier Electronics in China. This business is focused on the local design community and is supported by the investments that we have made this year in inventory systems (with circa 28,000 stocked SKUs in our warehouse in Shanghai),marketing support and next day delivery available in over 95 Chinese cities. Fourth quarter revenue growth was over 20% reflecting the benefit of these investments and we are planning on achieving at least these levels of revenue growth in 2009.

The expansion of the European Union and the highly fragmented nature of these new markets also offer growth opportunities. During the current year we have launched websites in several new languages as well as hiring dedicated technical and marketing support for these parts of Europe.

In January 2008, we successfully completed the acquisition of the high service distribution business of Hynetic Electronics in India. This business, which had sold the Farnell product range for over six years as a distributor, has offices in eight locations and employs just over 30 staff. This business will be a platform for further investment in 2009 and 2010, into a market which also has a rapidly growing customer base of university graduates working in local design activities both for the Indian and the global market.

We have set as a goal for this part of the strategy that 20% of the Group’s revenue would be from international or emerging markets by 2010.

Initiatives to drive operational and cash efficiencies

As part of the strategic business review, we completed a thorough analysis of our business processes. Whilst this confirmed the robustness of our existing processes, we identified areas where improvements could be made and which would lead to a reduction in our net operating expenses to sales ratio over the three year period of our strategy. We had anticipated that in 2008 we would see an increase in this ratio due to the investments to support the business strategy initiatives outlined above.

During 2008 we started work on these initiatives and have made slightly better progress than planned, such that our operating expense ratio to sales decreased from 28.0% to 27.9% in the year, after making the necessary investments in support of our key strategy enablers. We anticipate further progress in 2009 and 2010.

We also identified actions to manage the working capital of the business more effectively as part of the business strategy review. We said that we would improve our inventory turns whilst maintaining current service levels and would achieve a reduction in our working capital to sales ratio over the period of approximately 2%. We planned to achieve this through working with our customers and suppliers to enhance our processes and to reduce waste and errors. These improvements in working capital would be used to fund the investment in the other strategic business review initiatives.

During 2008 we saw a number of these actions deliver improvements across our businesses. Our working capital to sales ratio ended the year at 25.7%, down from 27.1% in 2007. We have a number of ongoing initiatives in 2009 and into 2010 and we remain confident of achieving the 2% overall reduction.

Key performance indicators

The business strategy is intended to deliver increased shareholder value over the period through the successful execution of the strategic building blocks outlined above. The key performance indicators for the Group are discussed in more detail in this report. They fall into two groups – strategic and financial. The strategic metrics are those that are used to track our success in executing the building blocks of our strategy and the financial metrics measure the outcomes of those strategies in conjunction with the successful performance management of our core business prior to the execution of the strategy. As the strategy becomes more embedded within the business, the two sets of measures really become one.

Strategic measures:

Sales per day growth – focus on the faster growing EDE segment and the impact of internationalisation (ie operating in faster growing markets) should deliver revenue growth in the 6-8% range.
eCommerce revenue as a % of total revenue – this is used to track the effectiveness of our eCommerce investments.
International and emerging market revenue as a % of total revenue – this is a measure of our success in our internationalisation strategy and the exposure to higher growth markets.
Gross margin % – gross margin stability is a key platform to deliver operational gearing. EDE margins are higher as are web margins and these mitigate the impact of lower margins in the emerging markets.
Return on sales % – is a function of both the gross margin stability and the success of efficiency programmes as well as reflecting the multi-channel cost to serve impact of our strategy.
People engagement – as a service business, our results are achieved through our people. Part of our investments in the strategy have been in ensuring that we have the right people in our business and that our employees are actively engaged.
Working capital as a % of sales – this is a measure of the success of our cash efficiency programmes.

Financial measures:

Return on net operating assets % – this is an overall measure of the effectiveness of management’s investment in operational assets. We have set a target of 30% for the Group.
Free cash flow to sales % – this is a combined measure of both the improved profitability and cash flow targets of the strategy. We have set as a goal that we will achieve a free cash flow to sales ratio of 6%.

Carbon footprint

We are aware that all businesses have an impact on the environment in which they operate. As part of our strategy, we are seeking to both limit the impact of the strategy on the environment as well actively working to reduce the impact of the Group’s existing business. The actions being taken to address our carbon footprint are outlined in our Corporate Social Responsibility report.