William Clark

January 8, 2013

Unit 4 Assignment

GB519 Measurement and Decision Making

Prof. Stanley Self

Special Order Earth Baby Inc. (EBI) has recently celebrated its tenth anniversary. Earth Baby

produces organic baby products for health-conscious parents. The products include food, toys and

clothing. The company just recently introduced a new line of premium organic baby foods. Extensive

research and scientific testing indicate that babies raised on the new line of foods will have

substantial health benefits and EBI is able to sell its products at prices higher than competitors’

because of its excellent reputation for superior products. EBI sells and markets its products through

high-end grocery stores, pharmacies, and specialty retail baby stores.

The founder and CEO of EBI, Joan Alvarez, recently received a proposal from, Robert Bradley, a

classmate who she attended business school with, who is the vice president of Great Deal Inc (GDI),

a large discount retailer. Mr. Bradley proposes a joint venture between his company and EBI,

referring to the growing demand for organic products and the larger distribution channels of his

organization. Under this endeavor EBI would make minor modifications to the manufacturing

process of its best-selling baby foods and the foods would then be packaged and sold by GDI.

Under this agreement, EBI would receive $3.10 per jar of baby food and would provide GDI a limited

right to advertise the product as manufactured for Great Deal by EBI. Joan Alvarez set up a meeting

with Fred Stanley, Earth Baby’s CFO, to discuss the profitability of the venture. Mr. Stanley made

some initial calculations and determined that the direct materials, direct labor, and other variable

costs needed for the GDI order would be about $2 per unit as compared to the full cost of $3

(materials, labor, and overhead) for equivalent EBI product.

Required

Should Earth Baby Inc. accept the proposed venture from GDI? Why or why not?

Based on the readings both companies could be very beneficial and profitable by combining

efforts to form a joint venture together. EBI has done a good job of developing a product that has

gained the consumer demand. GDI which also proves to be a leader in its industry will give a

mutually beneficial existence to EBI. One of the primary benefits of this venture would be the

added distribution that will be available to EBI. This would mean that supply and demand will

serve as being a prime factor.

This proposal could also serve as being very beneficial and not necessarily a liability or high

risk. It would allow EBI to reach consumers outside of their normal targeted demographics and

the company will now be able to reach customers on a broader scale which in turn, will give the

brand more visibility and allow areas of profitability to excel. In most cases one would think,

more distribution would provide bigger profits and more Return on Investment (ROI). However,

that is not always the case. By giving limited rights to GDI they will be agreeing to have GDI

market the EBI brands effectively among their own distribution channels and consumers. The

products would become a part of GDI and based on the already established reputation and

branding which would result in the same brand recognition, however with new consumer

markets.

With any brand there should always remain consistency in the full product. This should remain

the same with product development, the quality of the product, and packaging for the product.

With a request to make changes to the existing EBI line there is a big risk that could be involved

with this. First, changing the brand could deter regular loyal customers away from it. As the

marketing rule has always stated: “80% of a company income will come from 20% of its loyal

customers.” The main concerns with this should be addressed as: “How will this make the

product better”? “Is it a test market involved”? “Is any risk associated that could damage the

reputation of the brand”? In addition, any bad publicity that could result from this would have to

be carefully executed and could often become costly at times.

The opportunity to have both companies merge together does sound like it would be a very

beneficial for the companies to establish a partnership with each other. However, if there are too

many modifications and changes needed to be made then the deal should not occur. EBI has

invested many years to establish its brand as a unique and highly reputable brand in its industry.

REFERENCES

Agans, R., & Shaffer, L. (1994). The hindsight bias: The role of the availability heuristic and

perceived risk. Basic And Applied Social Psychology, 15 (4), 439-449.

Blocher, E., Stout, D., & Cokins, G. (2010). Cost Management: A strategic emphasis. (5 ed.).

New York, NY: McGraw-Hill.