‘Optical Distortion, Inc. ‘ Case Study December 02, 2013 Situation Executive Summary: Optical Distortion Inc. is a single product company that produces contact lenses for chickens. ODI believes that the use of contact lenses for chickens is a superior solution for poultry farms relative to the current alternative manners that farmers use to prevent cannibalism among their chickens – something that is the cause of mortality rates of up to 25% on some farms.
Given the fact that these lenses can cut mortality rates down to as low as 4. 5% (compared to the current common alternative f debeaking chickens, which brings mortality rates down to 9%), there is the belief that these contact lenses can have a drastic impact on the market and prove to be very successful for ODI. Also, with over $363 million chickens in the US, the market size to promote this product to is rather substantial.Order now
Considering the limited resources available to ODI and the desire to make an impact in the market prior to other firms Joining them in 2-3 years’ time when they would be in a position to market a comparable product, aiming for the right market segments and entering with the ight price are paramount to success. By focusing the marketing attempts on large farms (of 100,000 chickens or more) in California, and selling a box of lenses for $37. 50 each, then the company would be in a prime position for success.
Situational Analysis: Issues that farmers are currently facing include life expectancy of chickens, their average egg yield, and their food consumption. All these factors are marred by a chicken’s naturally aggressive nature in their familial hierarchies. Of greatest concern however, is that fact that chickens have cannibalistic tendencies, resulting in up to 5% mortality rates. In order to avoid literal ‘henpecking, farmers are having the chickens’ beaks cut off.
For many weeks, these chickens deliver a sparse yield of eggs, beaks though not only traumatizes the chickens, but also alters the way chickens naturally consume food, making it more difficult to eat their grain. Thus, farmers are required to overstock the chicken feed, ultimately leading to food being wasted (as a cost to the farmer). Taking all of this into consideration, it is clear that the desire for farms to have a means of reducing these problems is very high. Product Characteristics With chickens being social birds, they follow a social structure; a literal pecking order.
The dominant birds peck the submissive ones and the pecking goes on increasing to the point of cannibalism. While the method of debeaking has proven effective, as mentioned, there are side effects. The ODI lens on the other hand does not have these side effects. The lens reduces the vision of the chicken to roughly 12 inches, forcing the chickens to constantly have their beaks down to search for food or their pathway to wander, in turn making it very difficult to differentiate between the ubmissive chickens from the dominant ones.
This is essentially the reason for mortality rates being reduced to as little as 4. 5%. Of key concern to farms would be value proposition of this new product and process. Of great importance is the fact that the rate at which chickens have lenses inserted is roughly the same as the rate at which chicken can be debeaked (225 per hour vs. 220), in turn ensuring that the cost of this process is equal to that of the debeaking process. Additionally, these lenses would not cause any trauma and they would cater to the problem at hand without any significant side-effects.
Beyond this, analysis showed that nearly 1 56 pounds of feed could be saved per day. This would lead to considerable annual saving since the feed itself is valued at $158 per ton. Financial Analysis: By looking at the average cost of $0. 50 to produce a dozen eggs (based on 22 dozen eggs per hen per year), we can see that on an annual basis, $252. 5mil is spent per year on producing eggs in California. Profits in turn are $0. 03 per dozen, meaning profits of $15. 15 million per year. Other things being equal, by reducing mortality rates from 9% to 4. 5%.
Other things being equal, this, as a result of the extra eggs hat could be laid and sold, would raise profits by approximately $750,000 per annum. Add to this the food savings of roughly $4. 25mil per year (adjusted for the extra birds that would not be killed through cannibalization), means a savings per year of $5mil. Looking at this on a per chicken basis, this means increase profits $0. 22 per chicken. As such, ODI should look to selling the lenses at $37. 50 per box ($0. 15 per pair of lenses), allowing them to take much of the savings of the product from the farmer whilst still allowing an overall profit increase of $0. 7 cents per chicken for he farmer. Looking at how this would be taken to market, ODI ought to consider how to attract farmers, this should be done in a way that farmers perceive this as a “safe” investment. Marketing should be around the following factors: 1) Improvements over debeaking in lowered mortality rates, 2) Improvements over debeaking in lowered billing, 3) For the first month of introduction, free trial (labor and lenses) for first 1,000 chickens to demonstrate the effects (if the farm has a flock of more than 100,000). The quick, the farmers would be interested.
The only condition would be that the 1,000 hickens should be separate from other chickens to demonstrate lowered mortality. The initial costs would be $196,000. Since ODI is confident of the product, they should expect every time they give a free trial of 1,000 pairs, they would convert them to a customer. If we assume only 1% trials during the first month, the initial free applications would only cost ODI roughly $400 for all of the lenses and roughly $10 per 1000 chickens inserted with lenses. If we consider then what this means in terms of company profits, at a selling price of $37. 0 per box, this means a mark-up of $37. 08 per box. Selling 480,000 boxes per year would bring in $18mil per year in revenues. With headquarter costs of $1. 2mil and $1. 2mil in annual marketing costs, making potential profits as high as $16. 6mil per year. Recommendation: The key to the recommended marketing Strategy is to choose one particular state and one market segment (segmenting the market by farm size). With this in mind, ODI would be best suited to targeting, in the short run, only farms with a flock size of 100,000 chickens or more, in California.
Since the company has limited resources to invest in their marketing campaign to begin with, it important to market the product o the segment that is likely to yield the largest and most instant results and do so with a minimum level of cost. By targeting the larger farms, every farm penetration has the potential for sales of 100,000 or more, depending on the size of the farm. Not only are there larger potential returns for any given farm, this allows for less total marketing needed, with time and effort saved by having fewer farms to approach (relative to targeting smaller firms whereby the number of farms to target is greater).
This would allow the company to have only 1 sales representative and one technical xpert, given the fact that there are only 87 such farms in our target state of California (looking to loosely bend Olsen’s initial desire to have any sales person have a maximum of 80 farms). This would also allow the use of only 1 office rather than being spread across the country that would require multiple offices (and in turn, more Regional Managers, Admin Staff, Shipping Clerks and rent).
In addition to this, the share of chickens from farms that have 100,000 or more chickens farms has been increasing at an average rate of 38% per annum and is thus the segment that long erm the firm would wish to ensure they are part of. As for why California, the farms there (with a flock size of 100,000 or more) have more number of chickens compared to any other region (22,952,283 in total – an average of 264,000 chickens for each farm) and thus is the state with the biggest market.
Whilst this is a very high margin return investment, the downside is that is requires a high level of start-up capital and a bi marketing push. Given the current size of the firm, there would need to be quick expansion, which sometimes is not only difficult but can mean bringing in the rong people, who may not share the same vision as the likes of Garrison and Olson but may simply not be good enough to market such a product.
Indeed, with competitors able to Join within the next 2-3 years, time truly is of the essence as failure to launch and be successful within the first year may mean never creating a change their ways, or may need a long time to, there the main dangers of not hitting the required targets quick enough that would be needed to recover the initial investment. Should they be successful however, the potential for profits are enormous.