Optical Distorition Case

Recommendation: As Optical Distortion, Inc (the “Company” or “ODI”) prepares to introduce its new polymer contact lens for chickens (the “product” or “ODI Lens”) to the egg production market it should attempt to compete against the debeaking practice for the “large farms” commercial egg producer market segment. The Company should sell directly to the egg producers and price its product at $0.27 a pair (skimming pricing to maximize cash flow). A monthly advertising campaign, combined with direct sales efforts and trade show promotions will enable the Company to sufficiently penetrate the market in advance of new competition. With the above and other assumptions found in the case, and after forecasting Bass Diffusion model sale volumes using inputs for a close agricultural comp (hybrid corn adoption), the Company can be expected to generate $26 million of excess cash by 1980 (See Exhibit A and B). The Company should NOT reinvest this money into research and development but should instead use it to fund legal enforcement / extension of its patent and licensing rights thereby motivating its large agricultural competitors to purchase the Company should they wish to enter the market.

Company: The Company has two major assets: its product patent and its exclusivity license with New World Plastics for the use of its polymer in non-human contact lenses. In 1969, ODI’s founder Robert Garrison secured a patent for its product that gives it the exclusive opportunity to monetize the ODI lens. The Company’s chief weakness is its lack of capital needed to defend its patent –ODI’s management expects that by 1980 large agricultural supply firms will have noticed ODI’s success and managed to circumvent its patent to enter the market. The Company’s other significant strength is the long term licensing agreement that Daniel Garrison negotiated with New World Plastics for its supply of the non-human contact lenses. ODI is the only company allowed to use New World Plastics unique lens material in non-humans for a $50,000 payment over two years (Clarke, 2009). The first $25,000 payment is assumed to have occurred in 1974 in model found in Exhibit A.

Competition: The Company’s product can be deployed by egg producers to (1) reduce the natural chicken behaviors that lead the chicken cannibalization and (2) reduce the feed waste that is associated with billing and / or raising debeaked birds.

The most significant competitive threat to the ODI lens is the current incumbent market practice (50 year track record) of debeaking the birds that are kept in henhouses. Debeaking is utilized by farmers / egg producers to limit the damage that leads to chicken mortality as a result of cannibalistic behavior. Debeaking has been found to reduce annual deaths from cannibalization from 25% to 9% (Clarke, 2009). ODI enjoys two advantages: (1) debeaking is seen as an unethical practice wherein serious chicken trauma results from debeaking (though not a significant impact to egg production – only one egg in five months); (2) debeaking is a source of cost inefficiency and does not offer the feed cost savings advantages that the ODI lens offers.

The Company faces several competitive challenges: (1) the eventual patent incursion of large agricultural businesses mentioned above, (2) the strength of the incumbent debeaking practice and the challenge of farmers and egg producers to immediately observe the value proposition posed by this new technology.

Customer: ODI’s customers broadly characterized are egg producing chicken farms. In the United States this is a significantly sized market – 400 million chickens (Clarke, 2009). Within this customer group large commercial farms are the fastest growing market segment. Commercial egg manufacturers that raise chickens in densely packed henhouses are most concerned with cannibalization and the mortality of their laying stock

Segmentation: ODI’s customers are further segmented into small, medium and large farms based on the numbers of chickens under management. Small farms are defined as those farms managing 10,000 chickens or less and are typically family operated and don’t experience the same cannibalization issues as the other segments. Large farms are defined as 50,000 chickens or more and are more likely to use tightly packed large hen-houses and would therefore be more susceptible to the cannibalization problem. Medium farms fall in between the two. While medium farms also experience the need for the ODI lens they offer a reduced yield on sales efforts as they are able to purchase less product due to the size of their laying stock. For purposes of modeling, this analysis considers “large farms” as sub-segmented into 50,000 – 99,000 bird farms and +100,000 bird farms per the data presented in the case (Clarke, 2009).

Targeting: Farmers are going to be hesitant to switch from debeaking which has been proven to work at a low cost for fifty years. Family owned egg farms (small farms) will be more hesitant to adopt as they are less sophisticated in tracking operating margins for their businesses. It will be harder to sell them on the costs savings / low switching costs of the ODI lens as these benefits are not immediately observable. The Company should instead target the large farms commercial egg producer segment. Large farms are the fastest growing of the market segments and are also the most sophisticated customers for the sales force to engage. Given that ODI is working with limited sales force