Optical Distortion Inc.

Analysis
Value of ODI Lens
In order to determine the perceived value of the ODI lenses to the farmers it is useful to list out the factors that they are likely to consider while comparing the ODI lenses with the current technology, i.e., debeaking. Table 1 shown below lists these factors and gives the incentives associated with each factor while Appendix I shows details for these calculations and lists the assumptions in place for calculating the lower and Table 1 : Factors affecting ODI lens value estimation
# 1 2 3 4 5 6 7 8 Factor Reduction in chicken mortality due to cannibalism Savings in the cost of chicken feed (feed trough height assumed to be 3/8 for lower estimate and 1 for higher estimate) Savings due to reduction in egg laying traumas Interest Expense on laying stock Labor Savings* Total Incentive Less changes in pecking order, lower trauma, and hence less disruptions** Incentive in cents/pair of lens Lower Higher Average Estimate estimate 10.80 10.80 10.80 8.44 22.49 16.87

4.42 4.42 4.42 0.86 0.86 0.86 0.08 0.08 0.08 24.60 38.65 33.03 The value associated with these factors can not be determined with given data. Field tests at the early Increased egg production by hens of lower pecking order** adopters can give this incentive Since this is a cost it has a negative Cost of Switching i.e. retraining employees effect on perceived value * It should be noted that for most farmers this may not be a perceptible factor

As shown in the table the net value of a pair of ODI lens to farmers in the absence of field tests on the farms of early adopters is ~24.6 cents at the very least and in some cases could be as high as ~38.7 cents.

Geographic Areas and Market Segmentation

There are several factors to think about while choosing geographic areas to launch the product (a) Effective use of sales force (b) Size of the market in terms to total chicken and hence total lens that may be sold (c) Relative distribution of small, medium and large farms in different areas (d) ODIs perceptions about the willingness of farmers willingness to accept new technologies.

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California in general and Southern California in particular has the highest density of chicken farms. In fact close to 5% of all the egg-laying hens were housed on 20 farms located within 2 counties in Southern California. Furthermore, California, Georgia and North Carolina together account for 25% of market. Similarly, Exhibits 1 and 3 also show that other south eastern (South Atlantic) states such as Florida, Alabama, Missouri, South Carolina and Arkansas also have a number of chicken and chicken farms. Therefore ODI should launch in 2 markets: California and South Atlantic with focus on Southern California, North Carolina and Georgia. Apart from Geographical Segmentation, ODI can also employ market segmentation is based on the size of the chicken farms. The large farms with more than 50000 birds are managed like small manufacturing firms and so may be more likely to accept the bizarre sounding yet more effective new technology. ODI could use some of the early adopters from this segment as reference accounts and also conduct field tests to get a better idea of the true incentive of their lens to the farmers (see comments in Table 1). Given the fact that the cash assets of ODI are limited to ~200,000 it needs to select the introductory market segments very carefully. Since the cost savings for farms scale with size of the farms, and since larger farms allow ODI to better use their sales force, ODI should first target the largest farms with more than 100000 birds, then the ones with 50000 birds, and finally the smaller sized farms with 10000-50000 birds in any given region. Dan could you do the relevant calcs and complete the following paragraph ? I have attached a spreadsheet that would allow you to do the same. Please give me a call at 510-499-8545 sometime tomorrow if the spreadsheet does not make sense. As ODI decides to launch into a market it needs to get an assessment of the possible market penetration in the key geographical zones to make sure that they stay profitable. As seen in Exhibit 2, the variable costs associated with producing a pair of lens is 3.45 cents. Thus is ODI sells the lens for 8 cents, the margin per pair of lenses is 4.55 cents. For ODI to breakeven this margin should pay for the fixed costs. For different cases shown in Appendix 2 we calculate the market penetration required for ODI to break even

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Appendix I: Details of calculations for the perceived value of ODI lens

In this section we will explain the calculations that were performed to determine the incentives shown in Table 1 and state assumptions made if any. Since the lenses are not reusable, incentive per chicken is equivalent to the value of a pair of lenses. Factor 1: Reduction in chicken mortality due to cannibalism From Exhibit 1 we know that the cost of each egg laying bird is $2.40. Cannibalism in debeaked birds is 9% whereas ODI technology reduces this down to 4.5%. This suggests that the net savings due to ODI lenses is:
2.40 * (0.09 - 0.045) = $0.108 = 10.8 cents/chic ken

Factor 2: Savings in the cost of chicken feed Here we generate two estimates to bound the incentive between high and low limits. The high savings estimate assumes that the farmers would be able to reduce the feed height in troughs by 1 while the low savings estimate assumes this reduction to be only 3/8. For every inch reduction in feed in the trough the farmers save 156 lb of feed per day for a flock of 20000 birds. Since the feed costs $158/ton or 7.9 c/lb we can now calculate the upper and lower bounds on the incentive as follows

U p p e r L o w e r

B o u n d b o u n d

1 5 6 = 1 " * 2 0 0 0 0 3 1 5 6 = " * 8 2 0 0 0 0

* 3 6 5 * 3 6 5

* 7

* 7 . 9

Factor 3: Savings due to reduction in egg laying trauma The case suggests that for 5 month old chicks, debeaking leads to trauma which results in reduction in egg production by 1 egg/bird. The price of 1 dozen eggs is 53 cents which makes the price of each egg 4.42 cents. Since any extra egg laid by a bird does not have any marginal cost associated with it, the price of the extra egg produced represents the incentive of employing ODI lenses over traditional debeaking procedure. Factor 4: Interest Expense Savings

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Exhibit 5 in the case suggests that for most farmers, there is an interest expense of 8% for the capital borrowed to buy the livestock. Lower mortality in chicken having ODI lens leads to lower interest expense of 0.08 * 10.8 = 0.8 cents/chicken. Factor 5: Labor Cost savings The case suggests that the a crew of three people paid $2.50/hr each can debeak 220 chicken or put ODI lenses in the eyes of 225 chicken in 1 hour. This allows us to calculate the cost savings as:
1 1 Labor Cost Savings = 3 * 250 * = 0.08 cents/chic ken 220 225

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