It was a
beautiful winter morning in December 1989 and Robert and
David Kennedy were having a meeting to discuss future plans for the
egg production operation of their company, Staken Farms Limited
(Staken), which they operated on the west coast of Newfoundland.
David began, "Robert, I think it's time we did something about that
grading equipment. Either we use it or get rid of it and use the
space for something else."
"I agree, David,"
said Robert. "We've had a couple of producers interested in buying
it, but because we felt we might grade our own eggs some day we
turned the offers down. I suppose it's time we made a decision one
way or the other."
became involved in farming quite by accident. By having a few
chickens and cows at his summer cottage lie got to know the farmers
in the area and after a short while realized an opportunity existed
to operate a financially viable farming operation. He formed the
company Staken Farms Limited (STAnley KENnedy), with himself as the
majority shareholder, and began growing broiler chicken. Since the
mid 1970's, the broiler chicken operation expanded and other types
of farming were added. In 1989, Staken was very profitable and had
grown to the point where it was involved in the production of eggs,
pullets, broiler chicken, milk and forage.
This case was
prepared by Bonnie L. Simmons for the Atlantic Entrepreneurial
Institute as a basis for classroom discussion, and is not meant to
illustrate either effective or ineffective management. The material
in this case has been disguised.
Copyright © 1993, the Atlantic Entrepreneurial Institute.
Reproduction of this teaching note is allowed without permission for
educational purposes, but all such reproduction must acknowledge the
copyright. This permission does not include publication.
The production of
eggs required layer hens which were approximately 20 weeks old;
prior to this age, their egg production was nonexistent. Every
six months, one half the flock was replaced by new layers and
they would lay for one year before being replaced. The process of
egg collection was almost completely automated requiring one
individual to oversee collections twice a day.
operation involved the raising of hens for future egg production.
One-day old chicks were brought to the farm every six months and
raised for twenty weeks until they were ready to be transported to
the layer barn to begin egg production.
chicken operation was different again. One-day old chicks were
brought to the farm and raised for four to six weeks after which
time they were sent to the local abattoir to be processed for human
involved several operations including a complicated breeding
process to ensure a top quality herd and a sophisticated and
automated milk collection facility.
operation included the growth and harvesting of hay and silage. The
hay was the grass which was dried and stored in the barn. The silage
was the grass which wasn't completely dried and was stored in an
air-tight vacuum. Because of the moisture in the silage, it was a
higher protein-content feed for the cattle than was the
In June of 1989
Stanley decided to retire and sold his shares to his two oldest
sons, Robert and David. Shortly thereafter, each of the dairy and
broiler chicken operations were sold to outside third parties and
Robert and David decided to concentrate on the production of eggs,
pullets and forage. Both sons had worked in the business since it
began and had gained considerable practical knowledge of the
operation, from a farming and a business perspective. In addition,
both received post-secondary education from a well-known
Prior to the
change of shareholders, the company purchased grading equipment for
eggs, but it had been allowed to sit idle for a few years. At the
time the brothers took over the company's operations, all of
Staken's eggs were graded by Northern Dairies Limited (Northern).
David and Robert felt they should simply keep the equipment in the
event the situation with Northern someday changed to Staken's
disadvantage. However, they realized the longer the grading
equipment sat idle, the less valuable it was.
grading equipment seemed to be an opportunity waiting to be
utilized, there were other factors to consider. The main problem was
the size of Northern, their potential competitor. If Staken began
grading and marketing eggs, Northern had the resources to lower
prices to the point where Staken could no longer compete and would
be forced out of business. It was this risk of jeopardizing the
other, successful, operations of Staken that caused Robert and David
to avoid making a decision. However, they both felt this had gone on
long enough and decision time had come. They decided they had two
- Sell the grading equipment
at the best offered price; or
- Take the necessary steps to
begin grading and marketing their own eggs.
They knew that
before they made any decision they would have to look at the cost
and benefits of both options. The option to begin grading would
require the most work since they knew they would need to gather
information and formulate some kind of "business plan" for the
operation. At first they were skeptical about spending time and
money on a business plan if they would only decide later not to
pursue the grading operation. However, they were soon convinced of
the benefits of such a plan when they realized how much money could
be lost if they started operations right away and it turned out to
"Well, Robert, we
definitely need to follow through on this business plan idea, but
it's difficult to know where to begin. There's an awful lot of
different information we need to collect." "Exactly," Robert
responded, "we'll need to talk to people from the local wholesale
and retail operations and consumers, as well as to Northern. Then we
will need to make some calculations based on these conversations and
any other information we have."
Two weeks had
passed and Robert and David were sitting in their offices going over
the following information they had gathered:
- Most wholesalers and
retailers felt that eggs were a necessary evil of the grocery
business. Because of the several sizes, cooling requirements and
ease of breakage, the most important feature for them was not
quality, freshness or even brand name preference, it was price. A
small initial financial incentive would be necessary to deal with
this. Therefore, price would be set at slightly lower than
Northern's, anywhere between $1.09 and $1.67, depending on the
grade (see Exhibit 1). They also thought they could offer to
deliver twice a week rather than once (as Northern did) to lower
the storage requirements for the grocery
- Since the retailers and
wholesalers were not excited about eggs, Robert and David felt
they had to convince the consumers of their product superiority so
they would demand its availability at their local grocery store.
Although Staken could not say their eggs were better, freshness
and quality would be suggested by having the farm name on the
- From an analysis of
Northern's operations, it was decided they were not a very
aggressive marketer. Eggs were not a top priority for Northern and
they had learned the hard way the effects of price wars when they
unsuccessfully tried to penetrate the east coast market the
previous year. It was felt that with a good promotional campaign
Staken could make themselves known fairly quickly. They developed
the catchy phrase, "Have you had your Staken Eggs (Steak-and-Eggs)
today?" as a slogan.
- It was determined that, if
necessary, Staken could handle grading of all the west coast
production. This was a possibility since Staken represented 35% of
Northern's egg grading operation and if they lost Staken as a
customer, it was possible they would close the grading operations
- From conversations with
local wholesalers and retailers, Robert and David felt they could
sell all the eggs they produced which was approximately 554,840
dozen per year (26,000 hens @ 22 dozen per year * 97% saleable
product). Although the demand for eggs fluctuates daily, they felt
an analysis based on average monthly sales would provide a
realistic picture. The proportions of grade type sold are standard
for all stores (see Exhibit 1).
- Initially, eggs would be
graded approximately 13 days a month, for 5 hours a
- The lowest quote received
from several suppliers of cartons and other related supplies was
$0.12 per dozen. This seemed to be a standard price in the
- They had calculated that, on
average, they received $1.24 per dozen from Northern for their
ungraded eggs. Therefore, this is the price the grading operation
would "pay" for the ungraded eggs.
- Other additional expenses
included the following:
- additional labour for
grading (4 people @ $6.50 per hour);
- (no special skills
required; industry-standard wage rate)
- use of the company truck
for deliveries ($182 per month);
- electricity to operate the
equipment ($416 per month);
- repairs and maintenance on
equipment ($417 per month);
- advertising to promote the
product ($417 per month); and
- other miscellaneous
operating expenses ($104 per month).
- No additional investment was
required since the equipment and building were already in place
and fully operational. Only minor repairs would be needed to begin
production. In addition, with egg grading in the back of their
minds, in the previous year the farm purchased a 1-ton truck which
could easily be used for egg deliveries. Since these costs were
already incurred, Robert and Gary knew they did not have to
include them in their analysis.
several hours going over the information they had gathered, the
brothers felt very confident the venture could work. Because of
their business dealings with Northern over the years, Robert and
David were convinced their operation could be more efficient, and
because of this increased efficiency, their eggs would be fresher
and subject to less breakage. They felt if they could convince the
wholesalers and retailers of this, the venture would be
Robert and David
were getting very excited about the idea but at the same time they
were still apprehensive about the risk involved. As Robert said,
"with Northern, we have the security that our 'egg cheque' will come
every month; with this venture, however, our accounts receivable
collections will not be guaranteed or regular." Although they felt
the venture had the potential to earn additional revenue, they
realized they could not make a decision until the business plan for
the operation had been prepared. This plan would indicate to them
what additional costs and revenues would be associated with the
operation and if, in fact, a profit could be expected to be earned.
In addition, since they would no longer be selling their ungraded
eggs to Northern, these "lost sales" must be included in the cost of
grading in order to determine if the operation was a viable one.
Only if a profit resulted would the venture be worthwhile and this
profit figure would be the "net gain" to the business by adding the
- Calculate the total expected
sales per month from the information in Exhibit
Assume Staken grades and markets all the eggs
- Prepare a forecast of
monthly increase in profit with the grading operation using your
calculation in 1. above and cost information provided in the case.
Use the format in Exhibit 2. How is annual profit for the company
affected? Based on these calculations, what would you recommend to
Robert and David?
- Using the business plan
outline in Exhibit 3 and the information provided in the case,
indicate the information you would include under each heading in a
business plan for the egg grading operation.