Odi Case Study
Optical Distortion, Inc.HBS Case Study 9-575-072 Marketing Management MKT 6301.002 – Fall 2012 Team Members Young soo Han Kevin Yang Jay Chi Lenny Liao Brad Standridge As of 1974 the chicken population in the US is already in excess of 400 million birds, with slow but steady growth expected through 1980.
Given that fact that a great many of these birds live in tight quarters on very large chicken farms, a means of combating the chicken’s natural instinct to peck other chickens is needed. Pecking can actually lead to high mortality rates in flocks (cannibalization), which in turn raises the costs of farming.
Debeaking has been used for some time with good results, but it has its own set of drawbacks. The lens developed by Optical Distortions, Inc. (ODI) holds the promise of reducing the threat caused by pecking, without some of the issues associated with debeaking. The specific advantages of these lenses will be discussed in the following report, as will a plan for marketing this new product. By permanently inserting a pair of sight distorting lenses into the eyes of an egg-laying hen, studies have shown that cannibalization can be reduced from 9% to 4. %. Moreover, feed loss due to “billing” is substantially reduced relative to debeaked birds, allowing for much greater efficiency in feed consumption (less waste). Finally, given that lens insertion does not inflict the same trauma that debeaking does, egg production is not adversely affected. Given the above advantages, it is expected that farmers could increase their profit from egg sales by more than one-third (37%) simply by employing the use of the ODI lenses (Exhibit 1).
Although the potential impact of the ODI lenses is substantial, there are some important assumptions underlying the anticipated value to farmers. For example, one of the biggest financial gains could be in the reduction in feed waste, so the assumption that hens with lenses will “bill” much less is critical. Test results have shown that flock mortality can be cut in half relative to debeaking, so another important assumption is that these positive results can be duplicated consistently in the field.
Despite its disadvantages, debeaking is a practice which is familiar to chicken farmers, and the labor and cost associated with debeaking a flock is reasonably well known. It is assumed that a team of individuals trained to perform the lens insertion could process approximately as many chickens in an hour as they would if debeaking were done instead. This would keep the cost of insertion on par with debeaking and would thus lessen the concerns of the farmer. Tied to this is the assumption that a farmer’s own personnel could be readily trained in the art of lens insertion.
Should this turn out not to be the case, it could prove nearly impossible for a large number of lenses to be deployed – a small team simply could not address the millions of chickens which would need to be targeted. If millions of lenses cannot be sold in the first year of business, ODI would find it difficult to survive against bigger competitors who are waiting to enter the market. This is thus an area of potentially high risk which needs to be addressed as early in the product introduction phase as possible.
Bound up in the assumptions listed above is the underlying assumption that all chickens will respond in more or less the same way to the lenses. There are a number of factors which could allow ODI’s lens technology to quickly penetrate the market. One of the most important is the potential for farmers to experience a large profit increase (> 30% increase) through lower operating costs. Chicken farming is very price sensitive due to its low profit margin (roughly 6% profit on a dozen eggs from a debeaked bird).
Use of lenses could allow this margin to increase to 8% or more (Exhibit 1); promoting this possibility should entice many farmers to give the lenses a try. Another key to quick market penetration is the achievement of one or two clear success stories. Given its very small size, ODI needs to focus its limited resources on product introduction at one or two large farms, continuing the focus there until the farmer/owner is pleased with the results. The farmer’s future endorsement of the lens approach would then be invaluable in generating interest from potential customers.
As a means of attracting the participation of the first one or two trial farms, ODI could offer free lenses for up to 1000 birds, including insertion labor. It should be noted that penetration of the market can only occur if ODI can supply product in sufficient quantities. Given that there are millions of chickens to be serviced, it is imperative that ODI’s supplier be prepared to likewise supply millions of lenses on a consistent basis. The fact that ODI is bound by contract to a single lens supplier is itself a risk which must be analyzed.
From a business continuity perspective, it would be preferable if ODI could obtain its lenses from two different New World Plastics plants. This would then mitigate the risk somewhat should there be, for instance, a serious product quality issue at one of the facilities. As regards target segment, it would seem that the focus should be initially on farms with a flock size of 50,000 and over, since this would limit the overhead (fixed costs) needed to service these accounts (fewer sales and technical experts required).
Also, by focusing on large farms, the sales team could interface with the farms directly, and there would be no need for a “middle man” to be involved in product distribution. Avoiding this intermediary would help keep costs down. Given the density of large farms in California (flock size of 50,000 or greater), it seems prudent not only to perform the initial product introduction there but to focus the entire first year of business in this single West Coast state. The first year’s planned production volume is approximately 20 million, essentially the same as California’s chicken population.
Success in this region could later force farms in other states to implement the lens simply as a means of staying competitive. Rather than relying on word of mouth alone, ODI could promote its lens technology by participating in both industry trade shows and advertising in the leading poultry industry publications. Moreover, it is also possible that California’s Department of Agriculture could become an ally in promotion of lenses as a viable alternative to debeaking. It is proposed that lenses be sold at a price of $0. 09 per pair, which would in turn provide a profit per pair of $0. 026 (see Exhibit 2).
Though the lenses appear to have a value to the farmer much greater than 9 cents, keeping the price in the “single digits” has a beneficial psychological effect and could help foster the perception that they are a good value. Moreover, if the price grows much beyond this, the product will obviously be less attractive to farmers who might already be uneasy about adopting a new technology. Given a volume of 20 million units, a price of $0. 09/pair would produce an annual profit of $520,000. This sum would easily allow $250,000 to be directed toward future R&D (so the company can become more than a one-product company).
Moreover, there would be more than a quarter of a million dollars remaining to fund rapid expansion the following year (to build a new regional office, for example). Exhibit 1 – Monetary Value of ODI Lenses to Farmers As regards putting a monetary value on the lenses, this can be estimated as follows: a. ($2. 50/hr*3 workers)/225 birds = $0. 033 (cost of inserting a pair of lenses in one chicken) This is essentially the same cost involved in debeaking a bird; for this reason it need not be taken into account when considering the benefits of lenses relative to debeaking. . Proposed cost of lenses to farmer: $0. 09 per pair c. ($2. 40*0. 045) = $0. 108 per chicken (savings in allocation for replacing dead chicken, relative to debeaked flock reduction in flock mortality from 9% to 4. 5%) d. ($158 / ton)(ton / 2000 lb)(156 lb per day / 20,000 chickens) (365 days) = $0. 225 per chicken (annual savings in feed assumes elimination of feed loss due to billing) e. Let’s see how b. and c. above translate into cost of production for a dozen eggs (assuming a chicken produces 22 dozen eggs per year): ($0. 108 + $0. 225 – $0. 09)/22 = $0. 11 per dozen eggs Thus, the cost to produce a dozen eggs would drop from $0. 50 (for a debeaked bird) to $0. 489, and a farmer’s profit per dozen eggs increases from $0. 03 for a debeaked flock to an estimated $0. 041 (assuming a selling price of $0. 53). This means a farmer’s profit could increase by approximately 37% if the lenses were used throughout the flock. Exhibit 2 – Pricing Considerations for a Pair of Lenses Fixed Costs 1) Headquarters: $184,000 annually (for volume of 20 million pair) 2) Regional Office and Warehouse: $196,000 annually 3) Advertising in Trade Publications: $100,000 annually ) Participation in Industry Trade Shows: $100,000 annually 5) Costs of Molds: $12,000 x 3 = $36,000 (3 molds are needed to produce 21,600,000 pair annually) 6) Licensing Agreement with New World Plastics: $25,000 (per year, must be paid for 1st and 2nd year of production) Variable Costs $0. 032 per pair of lenses (cost to purchase from manufacturer, New World Plastics) So, in the first year of production, if 20,000,000 pairs of lenses are sold, the TOTAL COST would be: [($184,000 + $196,000 + $100,000 + $100,000 + $36,000 + $25,000)/20,000,000] + $0. 032 = $0. 064 per pair