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Optical Distortion Inc

In: Business and Management

Submitted By RichardCory
Words 1592
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Optical Distortion, Inc. (ODI) is the world’s first company to introduce contact lenses for chickens. These lenses offer farmers a unique cost saving opportunity and are more humane and efficient than the current de-beaking method. ODI, with help from New World Plastics has developed this commercially viable technology to reduce cannibalism by inducing astigmatism. With a patent holding off competition for at least three years, ODI needs to decide how to price contact lenses to ensure high adoption and profitability which will fuel ODI’s ability to circumvent competition through further investment in R&D – a key requirement to be able to establish themselves as a multiproduct, multimarket company which can provide effective service anywhere in the country. ODI should initially target Large Farms with 100,000+ birds with this product at a price of $0.16/pair because this contact lens technology yields the following superior results versus current debeaking method: greater reduction in cannibalism by 4.5%, zero chicken traumas, no risk versus medium risk with de-beaking, and a reduction in feed costs.
There are several segments within the poultry industry – Small, Medium, and Large farms characterized by 10,000 or less birds, 10,000-50,000 birds, and 50,000+ birds, respectively. Based on the case data, the US Poultry industry is consolidating at a rapid rate. For instance, in 1964, 1.2M farms represented 38.3% of the entire chicken industry and managed 343M birds. Five years later, the number of farms managing roughly the same number of chickens shrunk to 0.47M farms, or 17% of the total number of farms in the US. The consolidation trend is further exemplified through the 25% rate of decline amongst small farms, which ODI will not target because of the difficulty in justifying the costs associated with targeting this segment. Consolidation has resulted in larger, more sophisticated farms requiring 100+ employees to carry on the daily tasks that a farmer used to manage on his own. Large farms are also more focused on maximizing cost efficiency versus Small and Medium farms as they compete amongst each other for contracts with National Grocery chains whereas Small farms sell their products in local groceries and Medium farms sell their eggs to larger corporations. Exhibit 1 provides more detail for each segment that supports our choice for targeting Large farms. For instance, Small farms have 10,000 or less birds, meaning that we would need to spend more time building relationships with these farmers to sell 1/5th as much product than we could sell with Large Farms.
Given that ODI has a patent in place covering their contact lens technology in addition to an exclusivity agreement to limit New World Plastic’s development of hydrophilic polymers for non-human application, they can protect themselves from direct competition for roughly three years. In the meantime, they need to effectively communicate the benefits of the product versus the de-beaking method to their targeted segment. We believe that the more sophisticated Large farms are easier to penetrate with ODI’s product as they are more sensitive to their operating costs; and, thus, are more likely to understand the superior value provided by the lenses compared to the de-beaking method. Once we have a foot in the door we will target the medium farms that are owned and operated by farmers who are sensitive to costs.
ODI should base its lens pricing on what benefits the lenses provide to the farmers above the next best alternative (de-beaking). The difference in value, or the Economic Value to Customer (EVC), is much higher than the minimum price of 8 cents per pair that ODI has identified as the minimum price (EVC ~ $0.37/pair). Exhibit 2 breaks down the various economic benefits provided by the contact lenses that add up to 37 cents/pair. This includes increased egg production from lower pecking order birds due to better survival rate and reduced trauma for survivors and a reduction in feed costs. Since the labor cost of inserting the lenses roughly equal to de-beaking, there was not significant benefit to include in the calculations. Our pricing strategy is to price-skim to make efficient use of available resources and maximize short term unit contribution. This will also help us signal a high EVC while still inducing customers to switch from de-beaking. Pricing at $0.16/pair, would be ideal to balance these twin needs. Also, this has the added advantages that the chicken farmers will not perceive that they have been taken advantage of and the additional revenue will fund larger penetration which will increase network effect. The main disadvantage of price skimming (competitors entering at a lower price point imminently) is averted in this situation due to patent protection. The actual realized value for the farmer is the increased benefits of utilizing the ODI less the portion of EVC consumed by ODI and the farmer’s switching costs. The main switching cost for the farmer will be educating them on the significantly higher benefits of utilizing ODI lenses and reducing/eliminating loss aversion, the fear of losing chickens by adopting this new technology and changing status quo.
ODI has limited startup funds (total assets as on 30 Sept. 1974 is $275,000) and will have cash flow problems until they can find favorable financing options (like going public). We think that they can approach the equity markets in Yr2 based on their financial performance in Yr1. Considering the tight liquidity situation and the fact that we may have to offer financing options which will further constrain cash flow, the best strategy for Yr1 is to target the 87 Large Farms in California with 100,000+ chickens each versus going National immediately. Exhibit 3 shows the income statements for both options. It also shows that a National Strategy would require $1.7M, money that ODI does not have at this time. In Yr2, ODI can raise additional capital with their Yr1 performance assuming they are able to gain their expected 50% penetration. Favorable valuations will put them in a very comfortable financial position to focus on a National rollout starting with West South Central region, followed by East South Central region, and then South Atlantic region. We expect the ROI for these regions to be the highest given their higher chicken-to-farm ratios when compared to national average.
ODI sees itself as a company that can revolutionize the poultry industry. Not only do they believe in their chicken contact lens product, but also believe that they can offer additional innovative products to the industry if they are profitable and able to dedicate the necessary funds to develop products through their R&D group. In Yr1, ODI should not focus on R&D since the expenses may prove too high for ODI’s Yr1 financial position. However, in Yr2, R&D efforts should be fully started to diversify the product portfolio. Two full years of R&D will help ODI position themselves to take on competition when expected at the end of Yr3.
In Yr1, advertising in national trade journals may not be required since the initial focus is regional. But in Yr2, aggressive advertising should be done. However, advertising alone will not induce farmers to switch to this product. In Yr1, the firm can hire 2 sales agents, each of whom can divide the market, and will be supported by 1 technical representative. The sales force will educate farmers about maximum savings generated by utilizing our product and illustrate the lost opportunity of not adopting the lenses (utilizing test performance data). The technical representative will follow up periodically to check the proper use of the product and obtain feedback from each farm. The regional salesperson will need to maintain strong relationships with Large Farms and work hard to educate potential clients. We also plan to work with the starter pullet distributors and provide incentives to either push our products or bundle with starter pullets. They will also have the ability to offer volume-based rebates on the list price to induce early adopters and generate interest among Large farms with tremendous scale. The salespeople will also offer money back guarantees, technical expertise and provide insurance against any damage caused by ODI. This will alleviate the concerns of chicken farmers and will provide experiences for the farmers that will build trust with ODI lenses—the same trust that ODI has for its own products.
Long term use and offering guarantees will convince our corporate customers that we are valuable partners that seek to engage in win-win relationships. As we diversify our product offering, these strong relationships will provide a solid foundation to support our future success with additional products under our brand name.

Exhibit 1: Market Fragmentation Small Medium Large
Birds 50,000
ODI opportunity NO YES YES
Operations Family operated Owned and managed by the farmer Like a small manufacturing firm
Sales Sell their eggs locally through small grocery or milk and egg stores or at their own farm Regional / Large Grocery chains Egg production may be sold through complex negotiated contracts with regional offices of large grocery chains
Purchase of Starter Pullets Only once or twice a year Once or twice to up to four times a year At least four times a year
Birds Per Penhouse 1,000–2,000 birds 5,000–10,000 birds
Competence novice Requires considerable business skill as well as agricultural skill The farm could employ 100 or more people
Yearly cash flows

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