Optical Fiber Corp Case Analysis

Case Analysis visual graphic symbol Corporation Introduction Optical Fiber Corporation (OFC) is a financially in(predicate), albeit relatively small manufacturer of multi temper ocular types. The troupe was founded in 1990. The fo lows were equal to(p) to immortalise the commercialize largely on the basis of acquiring spargon clears from bigger ocular reference rigids. These licenses restricted arguing between the entities and provided OFC with instant access to ocular part technology. In return, OFCs customer substructure is limited by the license agreements and royalties of 7% on sales of licence products ( recently renegotiated to 9%) argon paid to the licensors. scorn these handicaps the quick has grown in sizing and profit dexterity. OFC makes several(prenominal) types of multi musical agency optical fiber including specialty turning point products they run through real outside of any license agreements. All customers atomic number 18 line manufactur ers that transform the fibers to optical fiber cable. Three such secures account for over 70% of OFCs revenues. Focusing on customer service, quality and product figure of speech and process improvements has proved a winning line of merchandise model to date. OFC straightaway faces a variety of challenges including the expiration of many of the patents that afford most of its profits.This raises the real possibility of tonic competitors in the food grocery. Further, while in the past multimode and wizness mode optical fibers rich person generally been used for data communication theory and tele communication theory respectively and as such were non in direct competition with each other(a), the advent of cheaper manufacturing processes for case-by-case mode fibers coupled with their inherent ability to transmit data more than efficiently over pertinaciouser distances may make them a more appealing choice for some of the uses that historically have favored multimod e fibers.OFC is at now at a hamlet where they must(prenominal) decide if they are to stay in the multimode fiber business only, begin producing single mode fibers as well, or even enter the cabling business with a in the lead desegregation strategy. Competition in the Optical Fiber Industry The optical fiber patience is perhaps trump out considered as two industries that are closely related, the multimode fiber and the single mode fiber industries. The multimode industry in which OFC specializes is precise combative. The join States 2001 total optical fiber grocery store was approximately 3. 5 cardinal kilometers only 330 thou of which was multimode.The value of the multimode mart was $65 million that year, only a ordinal that of the single mode market. Within the multimode market and a number of fiber manufacturers. The main rivals for OFC are the two licensors to whom they pay royalties. These firms are considerably larger and have greater resources with which to com pete. Further, they have a competitive advantage in that they are the recipients of royalty payments rather than the firm making those payments. Also they are in a position to control the extent of OFCs market penetration at least with respect to their licensed products.OFC has responded by creating gamy quality products and providing exceptional customer service. In addition, OFC has made improvements to the basic purport of some of the licensed fibers making them, in a real brain sassy products. The R and D department at OFC has also been made at take oning new and slight big-ticket(prenominal) manufacturing processes, which has helped to offset the added command processing overhead time of the royalty payments. Finally, OFC has veritable specialty fibers with health check, aircraft, aerospace and extreme environment applications.These new fibers impart not be subject to royalty payments, competition from new entrants until patents choke years in the prox, and genera lly afford spirited uper profit margins than other optical fiber products. New entrants to the market are a holy terror to OFC and all other fiber take a shitrs. New firms must contend with the high capitalization costs of this technologically commanding and exacting industry. One of the costs of optical fiber toil is the R and D commandd to bring successful products to market. Between 1999 and 2007 the patents for many of the basic fibers produced by OFC and its licensors exit expire.New firms entering the market volition be bountiful to produce the products once protected nether those patents without having incurred any R and D costs. These firms go outing also be free from royalty payments to licensors or any restrictive covenants such as those under which OFC operates. The industry in general, and OFC in particular, must contend with the purchasing force out of its buyers. Optical fiber is converted into optical fiber cable. In the United States in that location ar e twenty companies that perform this function. OFC sells over 70% of their fiber to honourable three.The loss of any of these accounts could be devastating for OFC and places them in a weak position when negotiating prices, at least when the products are those which are quick available from other multimode fiber manufacturing businesss. It is doubtful that switching costs would be high for buyers. Favoring OFC and the optical fiber market are the projections for increase need for multimode optical fibers at least through the middle 2000s. Sources of increase demand for multimode fiber are anticipated to entangle cable TV, undersea cables, topical anaesthetic area networks (LAN) as well as general data communications growth such as computer uses.As noted the single mode optical fiber market is ofttimes larger than the multimode market. It too, is expected to chatter signifi faecal mattert growth over the next several years. Single mode fibers have the advantage of efficiently transmitting data over long distances, faster transmission rates and other desirable optical properties save until recently have been more expensive to produce. The advent of cheaper production methods go out allow single mode fibers to enter markets that were once dominated by multimode fibers.Production of these fibers requires expensive specialized manufacturing equipment and a signifi discountt commitment to R and D. The industry includes single of the OFC licensors. Substitute products for single mode fibers include microwaves, and satellites for telecommunications. Impact seems limited. slob wire can be used as a stand-in for the fiber-to-home and fiber-to-curb applications of either multimode or single mode fibers but by the mid 2000s the lowered cost of production of single mode fibers will apparent make this the preferred choice for these functions.Finally, it should be noted that suppliers are unlikely to exert competitive forces on the fiber optics markets. The mat erials used in the production of fibers are commodities of low value such as glass, certain(p) gases and oxide particles. OFC Strengths OFC has many strengths. The firm is financially strong with record sales and hire for the exist year as well as increased manufacturing aptitude. Furthermore, there was a $20 million backlog for optical fibers in the last year and orders are increasing. There was net income of $6. 1million on revenue of $48. million in 2002. The Quick Ratio, a measure of a firms ability to meet short-term debt obligations (Current Assets Inventories)/Current Liabilities = ($31. 0m $6. 6m)/$12. 5 = 2. 0 is very solid. Return on equity (Net Income/Equity) = $6. 1m/$44. 0m = 13. 9% is also very impressive. OFC has developed new specialty products for medical, military, commercial aircraft, aerospace and severe environment uses. These are likely to receive patents and will not require royalty payments and will be protected from competitors for years to come.The fir m has a variety of pickings to confront the challenges of the changing market place. OFC has patent licenses to produce optical cables that would allow for forward integration if they chose to move in that direction. Engineers at OFC have been able to find new ways to produce old products more efficiently reducing production costs. They have also developed adaptations of existing products to create new and rummy demands for those products. OFC is in an industry that is expected to enjoy strong growth for at least the next several years.That demand will come from a variety of industries adding stability to the market. The equipment needful to produce optical fiber is expensive and the expertise demanding creating, a relative barrier to entry. Copper wire as a substitute is relatively expensive and as technological advances diminish the cost of optical fibers copper will belong a non-entity. perchance most importantly, OFC has a strong constitution for quality, service and com petitive pricing. OFC Weaknesses OFC is a small company. They were only able to enter the market by integrity of other firms products and license agreements.Those licenses have protected OFC from competition but have also limited the scope of its customer base and added significant rooted(p) costs in royalty payments. Royalties will now increase to 9% (after paying a one time $3 million fee) on 85% of sales. Furthermore, while OFC is paying royalties to use these patents new entrants may briefly be competing as patents expire. These firms will have essentially no R and D cost and of course no royalty payments potentially allowing them to produce at costs below those of OFC.OFC must also contend with a limited number of buyers. Over 70% of sales are to just three cable producers. The ability of OFC to increase prices to these large purchasers is doubtful. If even one of these customers were lost to an alternative fiber optic producer the effect on OFC could be dramatic. OFC opera tes in a competitive industry that will become more so with time. Copper wire manufacturers will turn to optical cable production to stay relevant. Overseas producers, already sources of competition to OFC, are likely to play a larger role in the future.Finally, OFCs success has been built on quality, service and innovation. One or more competitor can potentially offer all of these. OFCs onus Competencies OFC manufactures multimode, high quality optical fiber for cabling companies that convert that fiber into cable for a variety of data communications uses. The firm has a reputation for low prices and excellent customer service. Much of their success can be attributed to their R and D program, which has developed cost saving production technologies as well as product innovations.More recently, OFC has shown itself to be an innovator, developing entirely new multimode optical fiber products that fill a variety of unique respite functions. To continue producing and selling multimode optical fiber successfully, OFC needs to prepare for increased competition as patent protections expire. As new entrants begin producing many of the higher volume OFC products, likely at lower cost devoted their lack of R and D and royalty expenses, OFC will need to lead additional resources on developing decreased costs of production if they are to continue selling those products profitably.They will need to maintain their focus on quality and customer service. In part that will require proceed product testing. They may wish to explore, however, if testing 100% of products as is veritable policy is necessary or if testing samples from each batch would fare as well and save money. OFC will need to continue to give R and D to develop new products and patentable improvements on existing ones. Options operable for Growth Pursuit of Niche Markets OFC has already demonstrated an ability to develop marketable niche multimode fibers. Previously created are fibers able to withstand high radiation nvironments for nuclear reactor and military applications, a fiber that can tolerate deep underwater submersion and a third unspecific of high heat conditions. They have also successfully experimented with a fiber capable of transmitting UV light and another with unique medical and scientific uses. To continue their development program for specialty fibers will require annual R and D spending increases of $400,000 and an additional annual disbursal for three new staff totaling $325,000. Outside firms can be engage to handle sales for 10% commissions.When sales volumes are adequate, salaried OFC employees can be used instead. The calculation as to when this makes financial sense for the firm is simple when 10% of sales exceed the salary and benefit expenses of the needed in-house sales force then sales should become an OFC operation. The advantage of niche products is the lack of competition and relatively higher margins. Develop Single order Fiber Capacity OFC cou ld choose to enter the much larger single mode fiber market. It is estimated that this will require a capital investment of $4 million for new plant and equipment.It will take a year for the new facilities to be operational. There will also be a reported one time R and D expense of $2. 5 million. This is a first year expense so it cannot be capitalized. It can reasonably be assumed that there will be additional R and D expenses going forward although presumably these would be considerably lower than the initial expense. Entering the single mode market places OFC in competition with larger firms than it shortly faces with greater resources to sell products with diluent margins and would divert OFC resources from their bone marrow business functions.Forward Integration A third option for OFC is to produce optical cable. The required patent licenses are available. Two options for this forward integration strategy exist. OFC can commit $5 million in capital investments and plan on spe nding an additional $500,000 annually for R and D or they can simply purchase a cabling company for an estimated $10 15 million in capital expenditure. There is currently an excess supply of cable and cabling firms and several are in danger of bankruptcy and so an acquisition should be feasible. Forward integration raises several concerns.Regardless of the approach taken, entering the fiber optic cable business will be expensive for OFC. This is a market that is already experiencing an excess of capacity so it can be assumed that at least for some time to come profits in the cabling industry will be squeezed. This is not a core business function of OFC but to prosecute cable production will be so expensive as to necessarily draw resources away from some of the firms core activities, activities that are likely to be more profitable and entail less financial risk. Finally, one needs to consider that all of OFCs customers are cable producers.If OFC enters this market they will becom e a competitor of their customers. It seems passing probable that at least some of these optical fiber buyers will respond in a retaliatory manner and switch to switch over suppliers. Most of OFCs products are not unique and can be supplied by their licensors. The three large buyers would seem in a curiously strong position to adversely respond to any entry into the cabling market by OFC. OFC Policy Statement In choosing a direction for the future growth of OFC several considerations should be kept in mind. First, OFC has been successful in large part because of its focus on quality.Any efforts at growth should not come at the expense of producing high quality products. Second, the firm must continue to provide a high level of customer service. This should include responsiveness to customers needs for new products and product features when those offerings are commensurate with the firms vision, available or attainable expertise and when economically viable. Finally, the firm shou ld continue to fund R and D efforts to allow for a consecutive pipeline of new products and improvements to existing ones in an effort to maintain a unique competitive position in the market.OFC has been successful in competing against larger firms by avoiding head to head competition. Initially this was accomplished through license agreements alone. Later, the firm was able to create unique improvements to existing products and processes that gave it an advantage. Most recently OFC has created unique patentable products. These represent three different ways of avoiding direct competition. Despite their growth, OFC remains a relatively small firm in the optical fiber space and should continue to eschew direct competition when possible, realizing that the market is dominated by larger and better-funded firms.Recommendations OFC should stay out of the cable producing business. This market is the least profitable, most expensive to enter and likely to have the concluding return on in vestment. It is also likely to result in vengeance by current customers and reduced sales. The single mode market is much larger than the multimode market but as a consequence will bring OFC in contact with larger firms that already have the equipment and intimacy base to produce these products. A small firm with limited resources should not leave its core competencies behind to take on firms that are already in place.OFC needs to continue to make niche products whether they are improvements on old multimode fibers or new fibers with unique properties and functions. This firm will never be a big player in the highly competitive optical fiber industry, they arrived too late and dont have the capital to displace the dominant firms. Given that projections are for most of the increased demand for optical fibers to occur through the mid to late 2000s OFC may want to watch for an opportune time to sell to one of these larger entities, perhaps a single mode fiber producer to whom the OFC product line would prove complimentary.