mktg3000-m2-optical-distortion-1

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Monetizing Value M INI -C ASE S TUDY Optical Distortion, Inc. (ODI) Abridged (Adapted from Optical Distortion, Inc. (A), Harvard Business School Publishing, 1999) California farms are responsible for over 12% of the egg production in the United States and some are expanding their egg-laying chicken flocks to 100,000 to gain economies of scale. However, this expansion has adverse effects: (1) more conflict in the pecking order among chickens, leading to high mortality and (2) the need to use a traumatic “debeaking” process on each chicken to reduce pecking mortality, causing more feed waste since de-beaked chickens eat in a clumsier manner. For this environment, a start-up called Optical Distortion, Inc. (ODI), offers a new technology product, “contact lenses for chickens,” to eliminate these adverse effects. The contact lenses for chickens distort their eyesight so that the chickens can no longer identify other chickens in the pecking order, reducing conflict. This reduced conflict lowered the mortality rate from 10% to 5%, resulting in an estimated savings of $.50 per chicken for replacement chickens. In addition, debeaking is no longer necessary. The typical cost of feed is $1.10 per year for a de-beaked chicken. Since debeaking is no longer needed, the amount of feed for a beaked chicken is reduced by 50%. As a bonus, no debeaking means less trauma for the chicken, which increases egg output by 1 egg per chicken over the year. (Currently eggs are selling for $3.00 per dozen.) Optical Distortion has estimated manufacturing costs of the lenses to be $.15 per lens pair and expects General, Selling, and Administrative fixed costs to be $3,000,000. ODI is thinking of charging $.35 per lens pair. (Note: the target market is the California region which has 23,000,000 chickens.) Your job is to calculate the Value Created and Value Captured by ODI and therefore the Net benefit to the farmer. Use the following template to complete this task. (HINT: carry out your calculations on a “per chicken” basis.) Savings per Chicken: $.50 Cost of feed for debeaked chicken: $.55 Output increases 1 egg per chicken…$3.00/12=$.25/egg revenue increase: .25 per chicken Cost of lens $.35 to the farmer Cost of lens to manufactures: .15 Fixed cost: $3,000,000 Sale price: $.35 per lense 23,000,000 chickens in California © Dr. Juan P. Montermoso, December 2023

Assignment Based on the ODI scenario, complete Table A by answering items “a” through “e” below: Table A Optical Distortion Type of Benefit (a) Quantified Operational impact (b)Quantified Financial Benefit (and is it additional revenue or cost savings) Lower mortality (per chicken) 10% to 5% Saving $.50 More eggs (per chicken) 1/per chicken $3.00/12=$.25/egg=$.25 per chicken Less feed (per chicken) 50% $1.10 x 50% = $.55 Net Benefit to farmer (per chicken) Hint: Net Benefit = Value Created-Value captured (Value captured is price) $1.30-$.35=$.95 (net benefit) $.95 Net Benefit to farmer (per flock) Flock is 100,000 chickens $.95x100,000=$95,000 net benefit to farmer a) Quantify the impact of each annual benefit on a per chicken basis. • $1.30/chicken b) Calculate the financial impact of that benefit (+revenue increase or -cost decrease). • $.35/cost per lens c) Sum up the financial benefits (per chicken) to the farmer. • $.95 benefit per chicken d) What is the net financial value (or net benefit) of the lenses for a chicken farmer with a flock size of 100,000 chickens? • $95x100,000= $95,000 e) Given the proposed price, what is the break-even point and implied market share at breakeven? 23,000,000 chickens, lens price is $.35, manufacturing cost: $.15 Unit contribution: $.20 Fixed cost: $3,000,000 Breakeven: ($3,000,000)/($.20)=15,000,000 units Market share=breakeven point/total number of chickens

15,000,000/23,000,000= Implied market share is 65% Optional Extra Question: Can ODI raise the price? To what level? If ODI is selling directly to the farmer, and all other factors remain constant they can technically raise the price to $1.29 and the farmer will still be benefitting. However, it’s doubtful that a $.01/per chicken benefit would incentivize them to invest. We would need to know what % benefit the farmer would need in order to buy the product to determine which price point to raise the price to. Additionally, if ODI sells to a wholesaler who then sells to the farmer, we would also need to know what margin each level is hoping to make

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