Chemunity.Com Case Study Analysis

Take Home Exam Questions Question 1 When ChemUnity. com began, Herman Rijks was a 37 year old, Masters of Science graduate from the Technological University of Delft, Netherlands. He was born in South Yemen and grew up in Africa. Rijks had experience in green-field chemical distribution start-ups, and general management experience in various chemical companies. He worked for HCI, a chemical company for three years, and prior to ChemUnity. com, he was part of the HCI corporate e-commerce task force. Mark-Jan Terwindt was a 34 year old graduate from Nijenrode Business School in Netherlands.

He worked for eight years in the chemical distributions in countries such as: Ecuador, El Salvador, and Venezuela. Later, he went to the Czech Republic to manage HCI Operations, and before ChemUnity, he was in South Africa managing the integration of an acquired company. Both the founders spoke Dutch, English, Spanish, and a working knowledge of German, and additionally, Herman spoke French. Also, the founders shared similar interests, like sports and traveling (flying), and both have wives and children. The founders have a good amount of experience in business, e-commerce and the general industry to succeed.

They both have several years tenure in companies related to the industry. Also, they are highly educated in areas that are important to the company (for example, Business and Science). The linguistic abilities of the founders allow them to understand and communicate with partners and customers in Western Europe, improving communication channels and service quality. The shared interests they have could mean that they understand each other more, have a good friendship, and allow them to work together on the company more frequently than just regular founders.

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Alternatively, this could mean that they will reinforce each other’s ideas without truly considering all the factors involved. Question 2 The product that ChemUnity provides fits extremely well with an online exchange because it’s a commodity. Meaning that all variables (grade, concentration & packaging) can be standardized and price is the determinate factor. The system used protects the buyers and sellers, and creates a serious and profitable environment for all, and makes buying and selling easy.

A buyer’s order has a preferred and highest acceptable price, and only the preferred price is transferred to the suppliers. Potential suppliers within the right geographical region are forwarded the message via email and SMS. The supplier has 25 hours to respond with a bid, and this only happens once to avoid price erosion of auction-like bids. ChemUnity compares the bid, informs the buyer and supplier who got the deal, and they take care of the transaction. Additionally, no parties can withdraw from the deal, and inquiries are very serious.

The simplicity in the variables makes commodities easy to trade in an online exchange and the business model developed by ChemUnity creates a profitable, safe, and easy buying & selling environment. The characteristics of the products fit, and can be successfully sold online in an online exchange. Question 3 Steps (1) through (5) explain the trading process at ChemUnity and are listed below. (1) An inquiry is posted from a buyer on the ChemUnity website that includes the name, grade, concentration, and packing of the commodity based on a predetermined list, delivery date, geographical region of the buyer, and a price indication. price indication includes preferred and highest acceptable price, and the preferred is given transferred to suppliers) (2) Potential suppliers, determined by information given by companies, are forwarded the inquiry. (Both supplier and buyer can exclude parties or regions outside of their scope to trade. ) (3) Once an email or SMS message is received by the supplier they have 25 hours to respond with its bid. (Which only can be made once to prevent price erosion) (4) ChemUnity compares the bids, informs the supplier who got the deal, and connects the buyer and seller where the transaction is managed between the two parties. transaction is binding and because of credit insurance, supplier payment is certain) (5) The supplier ships the product and the buyer receives it. The trading process is streamlined and simplified in a concise number of steps. This seems like a very efficient process that does not even revision and it serves its purpose. Question 4 Value Proposition for Both Buyers and Sellers * Time efficiency in buying & selling products. * Access to good buyer & seller track records. * Emotion free deals with no room for confusion. * Multiple ways to access: internet or WAP phone capability. Clear legal framework adds simplicity. * No time zones. * Future linkage to your order entry. * Credit insurance. * More efficient supply chain. * Optional usage and ability to react whenever needed. * Higher margins as non-value added middlemen are eliminated. Value Proposition for Buyers * No need to contact multiple sellers with each purchase of products. * Quick responses to requests. * Proactive & filtered information with no overload or irrelevant postings. * Post your preferred price. * Able to source from new companies more efficiently and at lower prices. Value Proposition for Sellers Receive only interesting requests from buyers that are profitable through filtering of information based on seller’s profile. * Possibility of serving smaller customers and reaching customers in new geographical markets. * Freedom in making bids. * Set your own prices. * Payment coverage and easy credit checks. * Ability to exclude regions or parties in a buyers list. * Ability to do normal business and travel as bids only needed to be checked once a day. * Eliminate regional boundaries and ability to reach the whole market. * Other sellers in market will not dump products. No Price erosion from auction like bids. There are several advantages for both parties at what would seem like little to no cost to either party. ChemUnity assists these companies in making transactions while they focus on their respective specializations. This allows for much more buying and selling efficiency. The value proposition is extremely strong. The value proposition seems great on paper, but in fact could be improved greatly. As the alternative ChemUnity. com Case (2002) suggests the chemicals market is large one and has a long inefficient supply chain.

A consortium might not wipe out all the companies, and classifications and regulations in Europe is still far from consistent across all countries. A very large part of customers do not use a Complete Tender Management system, they use catalogues. A large addition to the value added for a supplier and buyer would be to have one of these systems implemented. Sourcing/access to the information will give value added and not just a yellow pages approach to the system. Question 5 There are several major threats to the ChemUnity Business model and four of them are summarized below.

Potential price collusion between suppliers One threat to ChemUnity business model is the collusion of prices between suppliers. If they decided to set all the prices high it could affect the ability for the company to create value for the buyer. Also, even if these prices weren’t high, it would affect the ability for ChemUnity to negotiate prices. This threat is strong because it would eliminate the value added, but is very unlikely to happen as the suppliers want to compete naturally in sales and would require some type of elaborate conspiracy. Supplier and buyer post purchase relationship

Another threat to the ChemUnity business model is if the buyers and sellers decide to keep makings transactions after the first sale without ChemUnity in the picture. This would probably increase seller margins and make products cheaper for the buyers. ChemUnity would not have control over the situation as much, due to the fact they bring the buyer and seller together and let them take care of the transaction. Competing websites (Catalogue, Aggregator and Auction) Catalogue, aggregator, and auction site business models are in direct competition with the ChemUnity business model.

They can take away market share because we all compete for the same customers. If users have no problem searching through the catalogues and finding the deal they want, there is no value added for the searching and time costs that ChemUnity offers. Aggregator business models can add huge amounts of leverage to the buyer as they are all working together to get the best prices. They go to the supplier, speak for the buyers and get the best deal. Auction sites can but a lot of pressure on suppliers and can support dumping practices and price erosion. It is very attractive to a buyer when he can get much lower prices as a result of these effects.

Traditional Distributers These traditional distributers could be considered indirect competitors as they do not compete online, but have a presence in the industry. They could have strong relationships with buyers especially in their local geographical areas. They could compete on convenience and logistics with the buyers, especially if it was a convenient automatic replenishment system, where the traditional distributers handled everything. This is based off of the idea that managing something might have more costs than it’s worth, especially if it’s in small quantities or cost values.

Consortiums According to the alternate ChemUnity. com case study (2002), ChemUnity could encounter problems if a company’s grouped together to start their own market place. This is known as a consortium, and ChemUnity could “find it [hard] to get suppliers and buyers to go on-line, and this is a drawback compared with a consortium. ” It further explains that if key suppliers were to launch a consortium it would crush the market place credibility of ChemUnity. Overall Threat Analysis There are several threats that the ChemUnity business model faces in this environment.

Potential price collusion between suppliers eliminates the value added by the company and supplier & buyer post purchase relationship prevents revenue from repeat purchases. Catalogue, Aggregator, and Auction sites - the direct competition for the company, threaten the business model as they compete for the same customers. Traditional distributers – our indirect competitors, still have a presence in the industry through customer relationships, convenience, and time saved. Consortiums are future competitors; they can crush the credibility of the company if created.

ChemUnity can meet its threats as it a differentiated service than can add a lot of value, but if it cannot meet its threats it will have huge problems with market penetration. Question 6 Below you will find a Porter’s Five Forces analysis used to find the attractiveness of the industry. Bargaining Power of Buyers (-) Bargaining power of buyers is very high, because buyers are not dependant on this way of purchasing a product. They can use multiple other channels to purchase it. There is a high availability of substitute services, so buyers have a lot of power in terms of options.

Buyer switching costs are nothing compared to firm switching costs, buyers can choose to go anywhere and this service has a small amount of buyers (because of the large size of orders). In addition, there is high buyer price sensitivity and buyer information is extremely high. They can search a lot of places to find information on prices. Lastly, the products do not have uniqueness, they are simplistic in the amount of variables and standardized. Overall, bargaining power of buyers is high and I rated this as negative for the attractiveness of the industry.

Bargaining Power of Suppliers (+) In general, there are there are several suppliers who offer similar products so there are a lot of alternatives for the firm to work with other suppliers who want the demand. There is also a high presence of substitute inputs for these chemicals as other manufactures can create identical chemical products. There is also a very weak distribution channel so the suppliers may rely some of the companies’ services. Overall, the bargaining power of suppliers is low and I rated this as positive for the attractiveness of the industry. Threat of New Entrants (-)

A website with a similar business model could easily be implemented at a very low cost. Similar software that the company uses could easily be imitated because of the very simplified variables in commodity products and intuitive idea. Websites can be up in a matter of weeks or days, and overall it is very easy for new entrants to start a company. Alternatively, the exit barriers are very low as well, as a website can be shut down at any moment and the company holds no inventory or major facilities. Overall, the threat of new entrants is high and I rated this as negative for the attractiveness of the industry.

Threat of Substitute Products or Services (-) The threat of substitute services is very high. Any company could come up with a similar idea and there are several substitute business models that threaten the market share. Catalogue, Aggregator, and Auction sites can easily be substitutes for the service. Traditional distributers can also easily service anyone in this market. In addition, key suppliers could create a consortium and take over instantly while killing the market credibility of this service. Overall, the threat of substitute services is high and I rated this as negative for the attractiveness of the industry.

Intensity of Competitive Rivalry (-) Intensity of Competitive Rivalry is high in the industry, as the case noted – there were a lot of players in the market place that established operations and gathered customer base. These companies, along with us compete for the same customers. There are several firms in the industry competing (high firm concentration ratio). Strong competition between online and offline service offerings mixed with difficulty in maintaining a sustainable competitive advantage leads to a high intensity of competitive rivalry.

Overall, the intensity of competitive rivalry is high and I rated this as negative for the attractiveness of the industry. Overall the attractiveness of the industry as seen in the above Porters Five Forces analysis is one out of five which leads me to believe the industry isn’t very attractive. The bargaining power of buyers, threat of new entrants, threat of substitute products or services, and intensity of competitive rivalry were all negative in terms of attractiveness in our analysis. The buyers have power, entrants can easily get in, there are many substitutes, and it is very competitive.

The only attractive part is that supplier power is not that high, even though they are still very important to the firm. Question 7(a) As indicated in the case, the major categories of ChemUnity’s costs were related to marketing, people, and IT. Also, in the beginning marketing was the biggest cost at 60%, leaving 30% to people, and 10% to IT. Later, the people costs were assumed to rise and the marketing costs were assumed to go down. I estimate this would leave us at 50% marketing, 40% people and 10% IT. It was noted in the case that there were two venture capital companies providing early financing in the amount of €1. million (27. 5% of the company). Using this number, marketing would cost €750,000, people would cost €600,000, and IT would cost €150,000. Question 7(b) As noted in the case, the average size of a deal was estimated to be €5,000 to €10,000. Using the 2% transaction fee, and the most conservative deal estimate, you get €100 per transaction (€5000 ? 2%). This would mean that you would require 1,500,000 transactions to break even with the early financing that was made. This could be attainable over time but is not likely to happen quickly, especially with the low amount of buyers the business serves.

Question 7(c) Using the 3000 daily customers to the website from the case, the 1995 click through rate of 2. 1% , and a estimate of €0. 19 per click ( high pay-per click estimate is due to the fact that these customers are very focused), the website could generate €11. 9 daily (3000 ? 2. 1% ? €0. 19), and €359. 10 monthly. This is not a very significant amount of money. The pros of this kind of income is that it is basically free, as long as you have a website and takes not much management of the ads to generate the revenue.

The cons are that there is a very small amount of money per click, and with only 3000 customers daily you are very limited to how much you can make. If you had for example a hundred thousand or so a day, this would be much better. Question 8 Short-Term Challenges The main short-term challenge was to test the concept with a couple of products to see if the company is on the right track. Successful implementation starts from marketing and the company needs to make sure suppliers are aware of the exchange and get product leaders. The belief at the time was that the buyers would come as soon as the sellers were onboard.

Once buyers and sellers are established, the company needs to activate them to get the market liquidity up. Once the company is known for these products, they have succeeded in the first challenge. The second short-term challenge was a human resources issue; they needed people a chemical history background. These people would communicate with suppliers and buyers and should bring enthusiasm and belief in the business idea. The third short-term challenge was an IT issue – the technology needed to work flawlessly in its execution.

The service is not perfect at the moment the company is working towards improving it. Long-Term Challenges The major long-term challenge was expansion of operations. By targeting a couple of strategic suppliers and many fragmented buyers in each product, they believed they could have a total of 200-500 suppliers, and up to 10,000 buyers. They believe they need to proceed with one product at a time, giving them the ability to test the concept and concentrate efforts on a focused segment. The real challenge was to pick the right products.

They could also expand their service portfolio, by providing more financial services to gain revenue. They could also get involved with transportation, but would be a difficult avenue as they need to choose the right services, good partners and the proper expansion location. Cash flow has been an issue so the company needs to raise more financing. A second round of financing was timed for a couple months after launching the service. The company wants to raise another €5 – 10 million from banks, venture capital, and market players. Meeting Short-Term Challenges

The company needs to begin testing the concept as soon as possible. Successful implementation begins with marketing efforts - the company needs to raise supplier awareness of the exchange and get product leaders onboard. The next issue is raising market liquidity, and it can be done by activating the sellers and buyers by contacting them. Once the company raises awareness about its products, they have succeeded in the first short-term challenge. The second short-term challenge can be solved by using a headhunter to find the best people the company can find.

This would require some funding but will easily be worth the cost. These people would need to be educated on the concepts of the company and know how to communicate well with suppliers and buyers about the service, and have enthusiasm and a strong belief in the business. The final short-term challenge can be solved by rigorously testing and improving the technology to work flawlessly. Meeting Long-Term Challenges The expansion of operations should be done by targeting more suppliers and buyers for more potential revenue.

I believe these need to be higher than the estimates given in the case– 200 suppliers and maybe 5000 buyers is not adequate enough. It is possible they can try targeting an additional geographical location, perhaps in South/Central America or Africa where the founders worked. Either way, with the market they have now, they need to test a concept and concentrate efforts on a focused segment and pick the right products. One option for expansion was to provide financial services, or get involved with the transportation of the product.

Personally, I am not a fan of this idea because they are losing focus on what they specialize in. But if they were to do these options, they would need to hire consultants and rework the business model entirely. Also, with transportation they need to choose the right type of services, good partners, and a good expansion location. Finally for their cash flow problems, they will need to ensure they get that financing by fully disclosing information, addressing the problems they have, and working with venture capitalists to perhaps negotiate the share of the company for a given amount of funding.

Question 9 As the alternate ChemUnity Case Study (2002) suggests, it’s easy to multiply figures and play around revenues and market volume on paper, but it does not address the habits of a given industry. Experience has shown that many internet service providers have failed due to the fact that many of them were not focused enough, spent too much money before making any, and didn’t bring enough value to its users. The main challenge lies in the art of change management.

ChemUnity has this challenge for both buyers and seller, but it remains that these groups would benefit from a multitude of significant strategic advantages (if it had the ability to support change management processes) Also the case suggests that for the company to potentially succeed, the platform they develop must be flexible and characterized by short development cycles that will match the needs of the market and increase the functionality for its end users. They also need the right mix of employees with experience in the field and who are used to driving change along with a highly skilled sales team.

If they had an online complete tender management system, they could save time and money and access more efficient markets. This is a great opportunity for the company to drive change in the company – along with a complete business process reengineering of their buying and selling process. If the company followed these steps, they would have potential success in the market. I personally don’t think they can be successful unless they do these things, and it seems like a big changes are needed. Question 10 (a) The three options for business model changes are below:

Status Quo This option would be to remain the same but focused on its specialization. Transportation Addition to Business Model This option would be to introduce transportation into the model to create more value for customers. Financial Services Addition to Business Model This option would be to introduce financial services into the model to create more value for customers. The criteria we used to assess which business model to use includes the following: Cost, Value Added, Revenue, Expenses, Ease of Change, and Adaptability.

I decided to use a decision matrix and estimate the values from 1-10 using subjective data from the case and intuition. The best alternative according to the criteria is Added Financial Service to the business model. It would not cost a very high amount to implement, would add a decent amount of value and revenue to the business. The expenses are fairly high, seeing as you need more cash on hand and you need to develop this business model, and be able to setup a good financial plan for customers.

The ease of change is pretty fair, is pretty easy to adapt into it, and has a moderate amount of risk involved. Finally, the market share is would increase a lot compared to status quo. The next close business model would have been transportation, it’s just a more risky and more rewarding model because it requires large capital investments, but hard to adapt and change into. References Petri Lehtivaara (2002) ChemUnity. com Case Study. Retrieved From http://www. supplychain-forum. com/documents/articles/ACF41. df Nielsen Norman Group (2000) Methodology Weaknesses in Poynter Eyetrack Study. Retrieved from http://www. nngroup. com/articles/methodology-weaknesses-poynter/ Wikipedia (2012) Pay Per Click. Retrieved from http://en. wikipedia. org/wiki/Pay_per_click -------------------------------------------- [ 2 ]. Nielsen Norman Group reports a 2. 1% click through rate in 1995. [ 3 ]. Wikipedia reports that in 1997 the pay-per-click was from $. 005 to $. 25 (€0. 003 to €0. 19 using March 26,2013 exchange rates)

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