Case: FreeMarkets Online, Inc.

Supply Chain Management

December 13, 2012

Submitted to: Prof. Ismael C. Pangilinan

Submitted by: Jeniefer C. Espino Maria Munna Gravador Ronald Nebres Geinah R. Quiones

I.

Statement of the Problem/Key Strategic Issue

FreeMarkets OnLine, Inc. is an electronic market company which provides interactive bidding among competing suppliers generated price savings. It created fair and open exchange software which is necessary for Competitive Bidding Event (CBE). The company was successful at developing reasonable expertise and market knowledge, to lead the art and science of making markets for custom products, where each buyer in the market has his own set of objectives and issues. FreeMarkets assists industrial buyers in posting requests for proposal (RFPs) and holding Internet based reverse auctions for their products. By automating the flow of information, a large number of suppliers can be effectively included in the RFP process, resulting in more competition and lower costs for the buyer. Freemarkets Online lead in creating B2B online markets and providing E-commerce technology and services for the procurement of industrial parts, raw materials, commodities and services. Freemarkets combines its proprietary technology platform with information on the procurement, or sourcing of direct materials, commodity-specific domain knowledge and services to deliver measurable savings to customers. FreeMarkets Online is faced with developing a strategy that will increase revenues from $1.8 in 1997 to $6 million in 1998. To accomplish this tripling of their revenue streams, FreeMarkets Online must decide which strategic opportunities they wish to pursue in order to achieve these revenue goals. These opportunities include both vertical and horizontal market expansion, technology licensing, and networked purchasing information systems. FreeMarkets Online management must ascertain how to best leverage such factors as their current competitive advantages, value proposition, and pricing and technological strategies in order to determine the most profitable and successful strategic direction for the company in the coming year. II. Statement of the Objectives To determine the most profitable and successful strategic direction for FreeMarkets Online, Inc. To analyze how FreeMarkets Online, Inc. can manage their growth carefully To determine how Freemarkets Online, Inc. can maintain its leadership position Relevant Case Facts/Findings

III.

Freemarkets Online, Inc.: Company Background Founded in Pittsburgh in 1995 Has almost 1,000 employees worldwide and maintains offices in Asia, Europe and Latin America Core Service: To provide on-line industrial market-making services that culminated in real-time Competitive Bidding Events (CBEs) Market: Concentrated in the middle- components that were not commodities, but for which competitive supply markets exists Sales Model: Consisted of high bandwidth client developers networking into and establishing relationships with senior level purchasing, operations, and finance executives at large targeted corporations Market-Making Process: o Phase 1: Identify savings opportunities - Analysis expenditure and savings for buyers o Phase 2: Prepare total-cost RFQ(Request for Quoting) - Defining all elements of Request for Quotations,requirements of drawings, volume forecast, cost. o Phase 3: Identify, screen, and support suppliers - Screening the potential suppliers with buyers and supporting RFQ to suppliers o Phase 4: Conduct on-line competitive bidding events - Training sessions to suppliers, submitting real-time bids o Phase 5: Provide post-bid analysis and award support - Collecting cost breakdown, final supplier analysis FreeMarkets Online, Inc. strengths: First-mover advantage. They are the leading B2B market maker while industry consortiums continue to develop.

They serve their clients very well, offering full-service or do-it-yourself options. This good service earns the trust of clients. Their service is complex and difficult to deliver, so their organizational skills are an advantage.

FreeMarkets Online, Inc. weaknesses: Loss of key customers. 35% of FreeMarkets revenues come from United Technologies and Visteon. Dependence on a single outside vendor for the computer network over which online auctions are conducted. Breakdowns have occurred. Initial setup of new clients requires a significant commitment of time and resources. There is no guarantee of a long-term commitment that is needed to make the relationship profitable. The strength of pre-existing supplier relationships, plus switching costs associated with changing suppliers. FreeMarkets Online, Inc. opportunities: Extend its customer base in its target market of Global 2000 corporations and other large enterprises including government agencies. Add domain knowledge of industrial product categories, called supply verticals. This is one factor that differentiates FreeMarkets from other participants in B2B e-commerce. Add new proprietary technology in order to maintain leadership position in B2B e-commerce. FreeMarkets Online, Inc. threats: Status quo (imbedded EDI systems) Rapid technology changes could make its products obsolete. Poor financial health of major customers will adversely affect earnings and profitability Possible government regulations on B2B e-commerce. International instability and foreign exchange rate fluctuation may hinder growth and revenues. IV. Alternatives

1. Strategy: Increase revenues. Core competencies needed: Customer service, organizational skills. Recommended Actions: Expand consulting and service fees Subscription fees for user support License technology Sell its information to information management companies 2. Strategy: Decrease cost of revenues Core competencies needed: Visionary management, R&D. Recommended Actions: Partnerships & alliances to share cost of growth into new markets. Decrease cost of new customers by promoting more self-service auctions using FreeMarkets QuickSource software. 3. Strategy: Increase trading volume Core competencies needed: Customer service, Visionary management Recommended Actions: Add domain knowledge in additional product categories where online markets can generate savings for buyers. Grow through strategic relationships and acquisitions. Focus on becoming the online purchasing department for customers (through the use of networked systems). Promote the use of self-service auctions.

V. Conclusion a. Recommendation/s FreeMarkets Online should leverage their current competencies and competitive advantages to first increase their vertical market dominance. This will reduce their risk of market base loss due to competitive encroachment and will provide a springboard for future horizontal expansion. FreeMarkets Online should not license their technology for use by buyers and 3rd parties. The potential for misuse of the technology, coupled with the loss of the value of FreeMarkets Onlines market making activities, increases the risk of limited returns for both buyers and suppliers. FreeMarkets Online should continue focusing on their large target market base and attempt to vertically strengthen their market position. This will lead to a sustainable competitive advantage that may be leveraged to take advantage of future opportunities.

OTHER STRATEGIES AND RECOMMENDEDATIONS 1. How to deal with their target market FreeMarkets Online can pursue vertical market dominance in their current target market, or they can expand the borders of their target market through horizontal market expansion. The company initially chose its target market based on the fact that out of the $600 billion market for industrial intermediate purchasing a full $300 billion consists of components that fall short of commodity status, but make up large orders and have significant demand and competition. Ways to release their technology to open up new sources of revenue to license the bidding technology for use by individual buyers to change the way the current service was sold, such as eliminating commissions. This would push FreeMarkets Online to a fee-only pricing strategy. Sell other industrial purchasing related services One such service suggested was a web-based purchasing information service based off of FreeMarkets Onlines data from its past client engagements. However, this is not a corecompetency for FreeMarkets Online and could prove severely detrimental to their core service.

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