Applichem Case Analysis Pt. 1

Executive Summary

Applichem is a global operation of specialty chemical productions that had its beginnings in Chicago before World War II.  Today there are 6 manufacturing plants located around the world including the original plant in Gary, IN.  Each manufacturing plant has its own organizational structure, technological know-how, and process formulations to help meet its respective market niche that surrounds the aging product, Release-ease.  This decentralized approach, however, only serves to exacerbate Applichem’s excess capacity issues and use of aging processes and machinery across plants that contribute to its high overhead costs. In order to sustain long-term profitability, Applichem’s efforts should be focused toward redefining their organizational architecture, underlying operational strategy, and use of processes and services that more accurately reflect the lifecycle of the Release-ease market.

Market Analysis

Applichem faces a number of threats that must be addressed in order to sustain long-term market share.  These include:

Potential Entrants- while there are a number of investment barriers for potential entrants into this market, there may be some who are willing to bear these high fixed costs to enter a market of this magnitude.  If the Release-ease type products were approved in Japan, as the case suggests is a possibility, then it would represent a significant threat to Applichem’s future growth opportunities.

Rivals- both in the U.S., and especially Europe, there are rivals who pose a threat to Applichem’s market share.  Because Applichem’s manufacturing organization is spread out (compared to more focused and more concentrated players) competitors could realize cost and economies of scale advantages.  Moreover, high overhead costs contribute to the fierce competition in Europe and make it easier for competitors to undercut on price.

Substitutes- although John Benfield (N.A. Operations Manager) may not be too concerned about a smaller player in the U.S. market who is producing a substitute product using excess capacity, it may prove to eventually erode Release-ease’s market share.  One can assume that a newly-introduced substitute may have characteristics (such as lower costs that are derived from latest technological advancements) that would provide the substitute producer with a competitive cost advantage.

Government- in addition to taxes, Applichem also has to consider the costs of tariffs imposed on their imports and exports through various countries, as well as the costs of the monitoring and control systems to oversee these processes.

Buyers- assuming expected demand remains stagnant for the next five years, as Applichem’s market research group predicts, then buyers may well have greater ability to extract more favorable service and price changes.

Suppliers- although not a likely long-term threat, the variability in the cost of raw materials across plants could potentially pose a threat if operational strategies are not changed.

Import and Export Costs:The highest import costs are in Mexico and Venezuela at 60% and 50% respectively. Germany, Japan and the U.S. have low import tax comparatively.

Hazardous issues:Some of the raw materials that are required to make up the product are extremely hazardous and cannot easily be transported. This would make it expensive to transport large quantities of hazardous materials long distances. Plants need to be specifically located to minimize transport costs.