Boise State University
College of Business & Economics
_____________________________________________________________________________________
DigiMaxCon (A): The Case of the Shrinking Margins1
It is late spring and time for the DMC management team to begin the planning cycle for the next fiscal
year. While CEO Tom Grant has always preferred the tried and true business strategies from Michael
Porter (cost leadership, differentiation and market focus), he knows the executive team needs to be
creative to set the path for the future of the company during the new planning cycle. In this highly
competitive global market, DMC will face many challenges in choosing a strategic plan for the next five
years. The current strategic plan includes a goal of increasing electronic component sales while
establishing a more stable sales pattern and margins, but this goal is not going well. Grant passed the
challenge on to his functional VPs, but he knows he has to keep a hand in to guide the overall direction
and be able to sell the chosen direction to the board of directors. All functional areas in the company
will have a part to play in a change in strategy, so he needs to ensure all areas are involved in the
decision process. Grant is not sure what that direction should be, or even how to define the overriding
problem the company now faces. In spite of the many challenges of competing in a global industry, they
have to determine how to successfully compete and grow business margins.
Company & Industry Background
DigiMaxCon (DMC) is one of the survivors of the computer component evolutionary competitive wars of
the late twentieth century. In the late ‘70’s and early ‘80’s countless companies evolved to design and
manufacture the essential components of the rapidly emerging computer market. Computers went from
monstrous and expensive corporate computer centers run by obscure specialists in large corporations
and institutions to becoming essential for nearly every organization and, not much later, to the desktops
of most workers and educators.
Many design engineers moved from company to company or formed their own entrepreneurial start-up
companies, many of which failed or were absorbed into others. DMC originated when several engineers
joined forces and moved to a western mid-sized city. They focused on designing components that could
meet the competitive market conditions outside of the chaos of the contemporary computer
manufacturing centers. At first, they designed components similar to the rest of the market, but they
soon discovered that huge foreign electronics companies could dominate their market by sheer
economic size and economies of scale. DMC engineers committed themselves to excelling in creating
smaller, more powerful, and cheaper components through superior technology. They wanted to
compete in tomorrow’s market rather than today’s.
DMC’s founders also discovered that both location and lack of company history made it difficult to raise
capital, especially with the presumed technological advantages of the Japanese and large U.S. Silicon
Valley companies. Ultimately, they were able to capitalize on their technological uniqueness in their
community to attract a diverse set of local investors who had built their own companies from the
1
This case is an assessment tool developed for the College of Business & Economics at Boise State University, by
Dr. Sharon Tabor & Dr. Gary McCain. While based upon an actual company and events, all names are changed and
the business scenario enhanced to assess student performance. Copyright, 2013.
“ground up.” These investors owned successful regional manufacturing and agribusiness companies.
Early in their growth days, a major agribusiness investor who was on the Fortune list of wealthiest
people in the country, was fascinated by the technology and joined in. What these investors had in
common was their “cowboy” independence and an attitude of not willing to fail. As other competitors
and similar component manufactures closed or sold out to huge Asian companies, these investors
supported and reinvested in DMC.
The company started out in a single room rented in excess space of a local small business. As physical
space needs grew, the founders rented more in scattered empty buildings and unused areas of other
businesses. They kept their engineering design function in the city and recruited engineers who wanted
to “get away from the rat race.” Production workers came from the local area, which had a strong work
ethic. An influx of refugees from other parts of the world also provided intelligent workers who were
unable to pursue their original careers and trades due to language limitations. Work rules were strict
and demanding. All management recruits started in production, and anyone who could not perform well
in the labor jobs quickly left company ranks. The only outside recruiting tended to be for engineers. By
the nineties, when the company had over 12,000 employees, most of the top management had risen
from the ranks and achieved college education on their own. Eventually, these experienced managers
took the top positions, replacing the founders. By 2005, top executives also came from a national pool
when the need arose for new talent.
It was obvious from the first that growth was not only important, but also essential for survival in this
industry. Design and production vision followed a modified version of Moore’s law -- every two years
the product had to be twice as fast, half the size, at half the cost. Pricing was determined by the open
competitive market. As the market consolidated, price wars erupted, resulting in federal involvement to
combat parts dumping by foreign giants. Tens of millions of dollars went into product design, especially
process design, as DMC strove to meet a goal of being the lowest cost producer. Although
technologically they were doing well, even with their lower wage, location and labor pool, they
eventually moved some production offshore through acquisitions of Asian competitors.
New product development was always important to DMC. The founders believed that the experience of
an entrepreneurial driver or team had to start from scratch and create success. They did not believe the
future evolved from forecasting or planning in the technology world. The company identified
outstanding managers coming up through the ranks, selected a few each year, and gave each $5 million
to “make something happen.” With three or four new product efforts each year, they recognized most
might fail, but hoped the winners would make up for the losers. They created their own brand of
personal computer, touch screen monitors, midmarket assembly operations, and other technology
products. As expected, most of these products did not make an impression in their respective markets.
Failed product executives left ( “left” seems too weak since they were forced out, this is an added
element of pressure on VP’s) the company. Successful startup projects became separate businesses until
acquired or merged into other entities.
By the twenty-first century, DMC had grown to become a multi-billion dollar company, consistently
ranked in the top five in their industry. Between 2008 and 2012 combined sales from internally
developed product lines, acquired companies, and joint ventures increased from a little over $5 billion
to over $8 billion, but returns showed great profit and loss swings (see Table 1). These ranged from a net
loss of $1.9 billion in 2009, to a net income of $1.9 billion the next year, to a net loss of $1 billion in
2012, the most recent reporting year. Despite over $3 billion in long-term debt, DMC was able to make
financial arrangements for a line of credit of from $500 million to nearly $2 billion to finance potential
acquisitions of major competitors whose financial situations made them available.
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Table 1: Simplified Income Statement Summary
2012
Net sales
Gross margin
Operating income (loss)
Net income (loss)
Net income (loss) attributable to DMC
Diluted earnings (loss) per share
Cash and short-term investments
Other current assets
Property, plant and equipment, net
Total assets
Total current liabilities
Long-term debt
Other noncurrent liabilities
Total DMC shareholders’ equity
Noncontrolling interests in subsidiaries
Total equity
$
8,050 $
940
(590)
(1,000)
(1,003)
(1.00)
2,100
5,600
7,000
14,700
2,200
3,000
1,100
7,700
700
8,400
2011
2010
8,500
1,700
700
1700
150
0.15
(in millions)
$
8,200 $
2,600
1,500
1,900
1,850
1.75
2,000
5,800
7,450
15,250
2,300
1,800
1,450
8,400
1,300
9,700
2,800
6,000
6,000
14,800
2,700
1,740
760
7,900
1,700
9,600
2009
2008
4,500 $
(400)
(1,500)
(1,900)
(1,800)
(2.30)
5,200
(50)
(1,450)
(1,500)
(1,500)
(2.00)
1,300
3,300
6,900
11,500
1,800
2,350
550
4,900
1,900
6,800
1,200
3,400
8,200
12,800
1,500
2,100
400
6,300
2,500
8,800
Functional Area Management Team
DMC has a relatively flat management structure, with functional areas managed through a group VP,
directors, and a small quantity of middle managers (see Figure 1). Both management and employees are
loyal to the company, most following the pattern of starting on the manufacturing line and working their
way up to other positions within the company.
CEO Grant’s top management team is well aware that a major change in strategy causes other change;
each manager is concerned how his/her own area will change, even while they all know they have to
help determine a direction that is the best overall choice for the company. They are well aware that the
current growth strategy is insufficient. They also know that of necessity, any proposed solution will
depend on a thorough evaluation of market segments to determine where unmet demand might reside,
whether or not a chosen target segment is profitable enough to pursue, and how these changes might
influence manufacturing, supply chain, and personnel.
Depending upon future direction, there will likely be an impact on information systems as well. While IT
has a progressive management team who is always willing to implement technical solutions to expedite
product development and sales, their budget has been constrained along with all departments over the
course of the recent recession and the variability of returns to the company.
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Figure 1. High Level Company Organization Chart
Finance and accounting remain concerned about cash flow demands and financial activity for major
company undertakings. HR knows from experience that major change can have a significant impact on
staffing and morale. Engineering, always well financed, fulfills the continual commitment to R&D to stay
abreast of technological development and acceleration of industry consolidation. They are already
working on a new product concept that would reduce the company’s sensitivity to foreign competition,
at least for a mid-term window of 3 to 5 years.
Electronics Industry Channel Structure
In the highly volatile electronics industry, international competition put pressure on the way DMC
traditionally did business, including with whom, where, and at what price levels. Their ability to respond
rapidly to market change is always difficult, based upon the nature of the product and the heavy
investment required for future technologies; as a result, development costs continue to rise while sales
margins have dropped steadily. In their industry, innovation is not an option, but an absolute necessity,
and maintaining a competitive advantage and building market share comes slowly and only to the best
and smartest companies.
For its main electronic component product lines, DMC has a small number of very large, high volume
manufacturing customers who buy components on a continuous basis for their supply chain. They value
the quality and reliability of DMC components and are partners in a long-term relationship, but often
have changes in their own finished product demand which, in turn, affects the volume of component
purchases. DMC also sells to the wholesale distributor, OEMs (Original Equipment Manufacturer), and
VAR (Value Added Reseller) market segments. OEMS use the components in their manufacturing
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process, while VARs typically resell their components to smaller manufacturers, computer shops or large
end users. The VAR group always has irregular demand, as they react to the supply chain cycles of their
small manufacturing customers and budget cycles for equipment upgrade customers. This segment is
highly price sensitive, demanding attractive discounts and low delivery costs. OEMs and VARs will switch
manufacturer sources for a few cents per product, and they, in turn, blame their inability to place
regular orders on the irregular demand cycles of their customers. The traditional supply chain for
electronic components appears in Figure 2.
OEM
Sourcing
Manufacturer
Wholesale
Distributor
Value Added
Reseller (VAR) /
Retailer
Business
Customer
Consumer
Figure 2. Traditional Supply Chain for Electronic Components
According to industry analysts, the world electronic component and semiconductor market reached
$430 billion in 2010. The electronics industry suffered considerably during the recession, dragging
component sales down along with them. Worldwide demand declined through the fourth quarter, 2009,
and then experienced only minimal growth on an international basis.
Recent activity in the North American semiconductor market has been more promising, with expected
growth of 8% annually until 2015, reaching a potential of $628 billion. While still at the mercy of their
manufacturing customers, this estimate well exceeds the 1% annual growth from 2006 to 2010.
Integrated semiconductors represent the leading market segment in the industry, reaching almost $230
billion in 2010, or close to 54% of the overall market. See actual sales trends and North American sales
growth in Figure 3.
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Figure 3: Component Order Growth (Marketline, 2013)
CEO Grant has worried for a long time about the variability of the supply chain, and particularly whether
direct sales to the end user customer could be a viable option. While the web is an important purchasing
component for most businesses, DMC primarily used it for some business-to-business (B2B) eCommerce
transactions, industry marketplace participation, and recruiting functions for HR. Other web
technologies used inside the organization help them provide company process and procedure manuals,
HR training and employee manuals, and secure employee access to personnel information, and general
internal use. Business-to-consumer (B2C) eCommerce, however, is not common in the electronic
components industry.
Grant started thinking more about the potential for B2C after an informal meeting with VP of IT, Sarah
Miles and a couple of her top web developers. They seemed to think there was a possibility of moving
into B2C without a large capital outlay if they could allocate some dedicated programming time to the
project. He was pleased to see some business-oriented thinking coming out of the IT group, but knew
that the sales team would have to be heavily involved in any project like this. Others had looked at
catalog sales to the consumer in the past, and come up with the conclusion that smaller orders would
not be cost effective and would require too much support for product selection. The IT team’s view of
sales on the web was that it could be a relatively automated process, with a built-in digital configurator
tool to help customers choose the right parts with minimal human intervention overall.
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Current Environment
While CEO Grant stresses about global competition in his corner office, his functional area VPs are in
planning mode, scheduling meetings to review group performance and develop recommendations for
their individual areas.
Down the hall, Roberta James, VP of Sales, has called a meeting of her management team to discuss the
current market conditions and company performance to date. Roberta realizes the importance of
increased sales growth, both to the long-term health of the company, and for the commission structure
review that she also has to finish by next week. From her recent executive MBA studies, however,
Roberta also understands the need to increase profit margins over time. Her main concern now was a
rumor that CEO Tom Grant wanted to consider direct sales over the web via eCommerce. Although this
option might have some upside for higher margin sales growth, it also brings the potential issue of
channel conflict. She thought carefully about how to open her planning meeting to get people to
understand the seriousness of the company’s position and contribute to the current discussion without
starting a panic and losing some good people. There had to be a reasonable strategy that would reduce
the margin problem and move the company forward until the “next big thing” was ready from
engineering.
Across the corporate campus, VP of Manufacturing, Bret Hendricks knows everyone always expects his
group to achieve more efficiencies, but he feels they already do a great job of controlling costs and
improving processes. He is somewhat perplexed with all the issues of market share and margins, and is
at a loss on where the problem lies. He strongly feels his group cannot achieve any more efficiencies
from the manufacturing lines unless they do a major overhaul and replace some of the manufacturing
systems. He is well aware of the challenge of competing with foreign suppliers who typically receive
development funding from their governments. He also knows their engineering capabilities and constant
innovation at DMC is far above that of most competitors.
Todd Nolan, VP of Operations and Supply Chain, is in a similar position. The whole margin (sales less cost
of production) issue includes many different factors in a company the size of DMC, but the company
already benefits from attractive volume pricing contracts from their raw material suppliers. He does not
think there is much room to further negotiate and still maintain their high quality standards. The
company’s just-in-time inventory methods have been working well, reducing the need to build high
inventory levels and insuring that manufacturing schedules are not impacted. He does not see any
problems in the procurement side of the supply chain and feels they have strong vendor relationships.
The rumor about direct sales to consumers over the web was interesting, however. Small quantity
purchases of their major consumer-oriented products would be very small and lightweight, meaning
minimal packaging and shipping costs. With a small shipping charge, they could easily recover their cost.
Furthermore, current warehouse staff could handle a shipping volume increase to a certain level.
Back at the headquarters (HQ) building, James Greene, VP of Finance has been renegotiating the
company’s line of credit and hopes to have some good news for the next executive board meeting.
Beyond that, he hopes some of his team has ideas on other areas to explore to lower general operating
expenses (G&A) that create problems for the bottom line. Functions that do not relate directly to
customers were trimmed last budget cycle, so he knows this is going to be a painful process. He thinks
the direct sales idea floating around is interesting, provided the product pricing is carefully set. From his
perspective, prices would have to cover any increased handling costs and significantly exceed the margin
offered to their larger wholesale customers to make the new venture worthwhile. One difficulty, he
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knows, lies in trying to calculate an ROI on any type of IT project. There were many variables and
intangible benefits to consider.
VP of Human Resources, Jess Harper, dreads this time of year. Changes in strategy often means
workforce reductions and the problem of keeping her team motivated while they share bad news and
help prepare the employees affected. While workforce reductions eventually reduce operating expense,
Harper knows only too well that there are many costs associated with them, including cash payouts,
training expense, and loss of reputation when the company needs to recruit again. Additionally, when
some functions have to be outsourced, there is the added expense of managing the outsourcing
process, overseeing the remote workers’ process and output, and less overall control of the final
product. They’ve also seen that while outsourcing saves money in the short term, over the long run the
company may suffer from not having a large enough employee pool to promote from in certain areas.
Jess has also heard about the possibility of a new venture. It might brighten the hiring outlook and give
her staff an alternative other than layoffs to consider, but she knew they were still far from that point.
Sarah Miles, VP of Information Technology has been working on her budget proposal for a badly needed
infrastructure upgrade across the corporate campus. She knows the decisions made over the next few
weeks will determine whether her group can move the company forward with technology, or have to
spend another budget cycle patching things together. Another year of not being able to offer the
technical solutions that could help the company solve business problems would be a bitter
disappointment to many of her team. They are particularly interested in some new Business Intelligence
(BI) tools they saw at a recent technology conference. She hopes Tom Grant gives some serious thought
to her web team’s ideas about an electronic commerce site. Even without the other needed upgrades,
this would be a fun project to keep her talented staff motivated, as well as help the company grow. She
also knows web site volume is initially hard to predict, and ROI difficult to project. Her team will have to
be flexible with whichever direction the company moves.
Lastly, in the highly secured R&D lab sitting across from HQ, VP of Research and Development Steven
Kidd knows everyone expects his group to come up with the next innovation that will save the company
from this profit decline. If only it were that easy, he thinks. He knows they are quite a way from a
market-breaking product the company needs to have right now, and he cannot see a way to make the
R&D process move along faster to save the day.
Needless to say, all the VPs feel the pressure to perform, and are passing that pressure down to their
directors and teams.
The Next Step
Two weeks later, Tom Grant sits at his usual place at the head of the large conference room table and
waits for his executive team to return after the lunch break. He was pleased to see each VP had brought
one or more of their directors along for their area presentations. It was good exposure for them and
gave him a chance to get to know the next generation of people in the management pipeline. This
morning, each group presented an overview of their area operations, and their performance to the
current strategic plan and budget. The groups all outlined some promising ideas, and the website
project was included among them. Now comes the hard part – with a summary of current performance
across the company, plus a list of issues and options from the functional teams before them, he needs
his team to identify the primary business problem that, when solved, would lead to the best overall
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outcomes. They can then focus on a new or revised strategy, and discuss alternative tactics to address it.
He was hopeful they would have a short list, if not a final direction, by the end of the day.
Readings & Web Resources
Helo, P. (2004). Managing Agility & Productivity in the Electronics Industry. Industrial Management &
Data Systems, 104(7), 567-577.
Porter, M. E. (2008).The Five Competitive Forces that Shape Strategy.” Harvard Business Review,
January, 86(1), 78-93.
Stonehouse, G. and Snowden, B. (2007). Competitive Advantage Revisited: Michael Porter on Strategy
and Competitiveness. Journal of Management Inquiry 16(3), 256-273.
Instructions to Students
After thoroughly reading the case, prepare a strategy brief for DMC using the following criteria and
guidelines:
1. As an outside observer, you will help DMC and CEO Grant focus on their current situation and
identify the primary business problem they need to address. Consider the current issues within
the company and the industry, and as repeated below with an updated understanding of the
factors in the external environment of DMC.
2. Use the COBE Problem Solving Model and concepts learned from your business coursework to
complete your analysis. If you have any questions consult with your instructor.
3. After identifying the primary business problem DMC currently faces, recommend a core strategy
the company should build their plans upon, consider stakeholders and possible tactics and
support your recommendations with both financial data presented in the case, and operational
issues discussed by the management team. Your statement of DMC’s core strategy should
differentiate among its business-level, corporate-level, and global strategy.
Your strategy brief and recommendations should be approximately 1500 words, written double-spaced
in a third person voice, analytic tone, and in proper business format. The brief should open with a
statement of conclusions and recommendation to the management of the company. Conclusions should
include the key indications of your analysis - the main problems, opportunities, and challenges.
Recommendation should include management decisions and/or actions that you think DMC should take
to address the situation, together with any contingencies or other considerations.
After the opening statements of conclusions and recommendations, the brief should indicate the key
considerations of information and analysis that led to the conclusions and recommendation. This will, by
necessity, include your current research of the PESTEL and industry environment which you must clearly
state with appropriate supporting evidence. When your conclusions are qualitative in nature, it is vital
that you make your case with financial and quantitative evidence. If you considered alternative solutions
in your analysis, the report should briefly mention what they are and why you rejected them.
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Your strategy brief will be evaluated using the GB450 Case Grading Rubric. Read through the explanation
of dimensions to see what is expected and valued in the brief.
Note: this assignment is used as part of the annual COBE assessment process. Your strategy brief will be
reviewed by members of the business community, meaning the quality of your work helps build “brand
equity” in your degree from COBE and Boise State University. Do your best to help maintain this
important legacy. This assignment, furthermore, meets a course-specific individual writing requirement.
You will be required to e-mail a copy in response to a designated e-mail with instructions from the
instructor and a hard copy to be submitted in class.
Go to next page for GB 450 Case Grading Rubric:
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GB450 Case Grading Rubric
Unacceptable
SCALE
0
Acceptable
1
2
Excellent
3
4
5
1. Identifies problem(s)/
opportunities
Does not attempt to or fails to
identify and summarize the
problem(s) correctly.
Summarizes the problem(s)
but some aspects are
confused; some details are
missing.
Clearly identifies and
summarizes the main
problem(s). Identifies
secondary or implicit issues.
2. Gathers relevant &
credible information
Shows little evidence of
research; uses few or
inappropriate information
sources.
Shows some evidence of
effective research by using
appropriate information
sources, though sometimes
superficially.
Shows clear evidence of
effective research by using
credible, appropriate
information sources.
Does not identify relevant
facts, opinions, and value
judgments.
Identifies relevant facts,
opinions, and value
judgments.
Examines the evidence and
source of evidence; questions
its accuracy, precision,
relevance, and completeness.
Simply repeats facts from the
case. Does not apply any
recognizable analytical
method.
Uses analytical method to
help clarify the issues and
facilitate decision making.
Provides appropriate,
accurate, and thorough
analysis to facilitate decision
making.
Does not include appropriate
quantitative analysis.
Includes limited quantitative
analysis.
If appropriate, includes
appropriate and effective
quantitative analysis
3.a.
Analysis:
Identifies relevant facts
and assumptions
3.b.
Analysis:
Applies appropriate
analytical methods
competently
3.c.
Analysis:
Applies quantitative
analysis
3.d.
Analysis:
Evaluates alternative
courses of action
Addresses a single perspective
and fails to discuss alternative
resolutions.
4.a.
Proposes a viable plan of
action
Does not propose a plan of
action that resolves the
problem.
4.b.
Communicates a viable
plan of action
The report does not
adequately explain the
recommended plan of action.
The overall problemsolving skills
demonstrated by this
student were:

Unacceptable
Provides basic consideration
of alternatives and some
comparison of alternatives’
strengths and weaknesses.
Proposes a viable plan of
action that addresses the
major aspects of the
problem.
The report provides basic
support for
recommendation; uses some
supported logic and/or
evidence.

Acceptable
Describes, compares, and
critically evaluates alternative
courses of action.
Proposes a viable plan of
action that thoroughly
resolves the problem.
The report makes a
compelling case for the
recommended plan of action;
uses clear logic and/or
evidence.

Excellent
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