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Odi Inc

In: Business and Management

Submitted By olexmat
Words 1541
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ODI (A).
Problem and recommendations:
ODI has developed a completely new product – contact lenses for chickens, which has the potential to revolutionize the poultry industry by modifying animals’ behavior, thus, replacing traditional debeaking practices and saving the farmers annually 25 cents per bird. In pricing the product the Company faces the objective of balancing the need to have a high contribution margin (to cover high fixed costs, including
R&D and marketing expenses) with a necessity to achieve a 50% (from zero) target market penetration in
5 years, which is an aggressive goal. We believe the price of 16 cents per pair would allow the company to balance the two aforementioned goals. The break-even quantity at that level is 8.4mn of pairs, which is reasonable given 30mn chicken population in California – one of the target market.
Company, Competitors, Customers:
Company: SWOT analysis
Strenghts:
Tangible, tested product; ready to market
Attractive product

Comments:
The Company has already designed the contact lenses and tested them successfully on a number of US farms
Ability to reduce cannibalization, feed costs, and trauma among chickens; cost-effective for farmers
3-year patent protection may prevent competitors to entry. However, the technology is relatively simple, so entry barriers are not
Formal patent protection particularly high
Licensing arrangement
Exclusive licensing arrangement with the reliable supplier, New World - would ensure quality supply and complicate competitors' entry
Weaknesses:
Comments:
Limited resources
Limited financial and human resources
Small size
Lack of scale will make it harder for the Company to compete with larger players
Lack of management attention
Top-management has not put full time into the company
No experience with the product
The Company has only tested the product selectively; no full-scale sales rollout
Opportunities:
Comments:
466 mn of chickens (in 1977) with stable historical (6% CAGR in 1960-x) and projected (1% CAGR in 1970-x) growth rates;
Large adressable market approximately 400 k of chicken farms in the US
No competition
The company has a first-mover advantage, can create distribution/marketing/brand entry barrier
Farms are becoming larger, more sophisticated, more commercial - therefore, willingness to adopt new, more effective technologies
Poultry industry consolidation
(such as ODI lenses), and, moreover, pay for such technologies increases as well
Threats:
Comments:
No product adoption
The Company fails to persuade farmers in merits of the lenses
Sales/technical support functions' poor execution Company's sales and technical people are not able to offer a required service level, thus, killing product potential
Technology is easy to copy
Low entry barriers from a technological side; intensified competition may erode margins
Will be hard to compete once large companies enter, particularly with competitors experienced in optics (human lenses manufacturers
Big players' entry willing to expand into animal lenses market to enjoy economies of scale)

Competitors: the major competitors are the farms’ internal employees or debeaking services firms. The debeaking operations/service was essentially a commodity, as it consisted of a non-sophisticated labor operation and paid hourly, with the pricing floor influenced by the US government’s minimum wage
Competitor type
Startup trying to emulate ODI's technology Large agri services companies eager to diversify business
Human lenses companies

Significance for ODI

Comments

Small: limited size and lack of first-mover advantage

Could be new startups or previous debeaking companies

Established agri services players willing to capitalize on new
Large: scale (including established distribution and existing clients' lists) and financial resources. attractive lense industry and extract economies of scale from
However, no experience in optical technology existing agri clients and distribution networks
Human lenses companies may have huge technological
The most significant: learning curve scale, financial resources, strong brand. However, no agri advantaege and learning curve effects to be able to offer lower experience, no clients, no distribution price/higher quality combination

requirements. Therefore, we do not view existing competition as a significant threat. However, a potential competition in the animal lenses market could pose significant threats to the Company. There are three groups of potential competitors (described above).
Customers: chicken farms are the major customers of the product. The product is compelling (see 4P
Product section). However, farmers initially will be less willing to adopt the product because of its novelty and, potentially, price, being “breed of men who might react very unfavorably if they get the idea that they have been taken”. Farmers differ in size (number of chickens), which, in turn, influences their willingness to pay and desire to adopt advanced technologies. There was a recent trend of declining number of smaller farms, and industry consolidation, which is positive for the Company as it increases the number of sophisticated farms, willing to pay for and adopt new technologies such as ODI lenses.
Segmentation, Targeting, Positioning
Segmentation: we believe the most effective way to segment farms is by size because it dictates farms’ willingness to adopt and pay for new technologies, as well as determines ODI’s distribution mode
(direct sales for large accounts vs through agri retailers/distributors for small farms). Geographical segmentation is also useful as it would allow to dedicate scarce resources to the most promising (sizeable, the highest number of chickens per fram), thus, potentially profitable US regions.
Targeting: ODI should target the farms with size of 50,000 birds and more because a) farms with at least
10,000 birds could afford to buy ODI lenses; b) they collectively represent sizeable 32% of the market in terms of the number of chickens; c) those customers have the highest amount of sophistication, thus, are more susceptible to new technologies and willing to pay for them; d) they represent only 0.3% of total number of farms, thus, would allow to maximize the effectiveness of a given regional sales/technical manager by allowing him/her to focus limited efforts on the largest farms (minimizing sales cost per farm).
Pacific (CA specifically as the largest market) and West South Central have the highest number of chickens per farm, thus, should be targeted as the regions for expansion (maximizing revenue per farm).
Positioning: “Among chicken cannibalization prevention professional tools market ODI is an optical device that reduces cannibalization occurrences by 2x because of a proven chicken vision distortion technology”.

Product, Place, Promotion, Price
Product: chicken optical lenses that reduce chicken mortality by reducing cannibalization by 2x, decrease feeding costs and trauma among chickens, as well as decrease space requirements for cages. Moreover, ancillary services such as lenses delivery, installation, replacement, recycling should also be bundled into a product offering. Warranty should also be offered, as well as extensive post-sale services.
Place: since the target segment is a small number of large sophisticated farms in Pacific and West South
Central regions direct sales method is preferred because it would allow to allocate the fixed sales and tech officers’ expenses on a larger chicken base, minimizing sales costs per chicken, as well to build the customer loyalty and switching costs offering focused salesperson’s attention and customer service.
Promotion: put increased attention to educate consumers about the merits of the product by offering free samples, discounts, publications in agri press, product demonstration on agri expos and trade fairs.
Price: Economic value of ODI lenses to the farmer = incremental benefit of lenses – switching costs from debeaking. Incremental benefits of lenses equal to 25 cents per 1 bird, which is a price ceiling per lenses pair. Price floor is variable costs + fixed costs/output (assuming 20mn pairs)=0.034+0.038=7 cents.
Incremental benefit of lenses calculation:
1. Reduced mortality:
$ per bird
Dead birds costs@9% mortality
0.21
Dead birds costs@4.5% mortality
=0.21/2=0.11
2. Reduced feed stock: pounds per 100 birds
0.78
pounds per 1 bird per year
=0.78/100*365=2.85
cost per pound per bird, $
=2.85*158/2000=0.23
3/8 adjustment, $per bird
=3/8*0.23=0.08
3. Reduced trauma revenue per 1 egg, $
=0.53/12=0.04
Subtotal, $ per bird
0.23
4. Interest expense savings
@8% per laying stock
=0.08*0.23=0.02
TOTAL savings per bird, $
0.25
Same as per 1 pair of ODI lenses

ODI lenses's costs calculations
ODI lenses's varibale costs:
New World man-ing costs
Injection mold
Plastic box
Box filling
Order pr-ng and shipping
TOTAL VC

$ per pair
0.032
=12,000/15mn=0.0008
=0.1/250=0.0004
=0.14/250=0.00056
=0.18/250=0.00072
0.03448

ODI's fixed costs @20mn annual production, $ k
CA Regional office and w-house
196
HQ costs
184
Marketing, publications+trade shows*
100
R&D**
100
New World license
25
Sales and tech reps***
=3*40+35=155
TOTAL FC
760
FC per par @20 mn production
0.038
*It is not necessary to undertake ALL possible marketing activities
**My adjustment. 250 k is too much for a start-up
***assuming expansion in CA: 201 large farms=3 sales persons

The Company’s objective is to balance profitability and market share. Therefore, we would suggest to price the product in the mid-range, leaving consumer and producer surpluses approximately equal. The final price is 16 cents per pair of lenses, (7+25)/2. The break-even level is 760,000/(16-7)=8.4mn pairs.…...

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