Strategic Analysis

Hilary Dorr

Michelle Mullins

Overview

Summary of Key Industry and Firm Characteristics

Summary of SWOT AnalysisStrategic Alternatives ConsideredFinal Recommendation

Background on eMERGE

1994—eMERGE Interactive incorporated as eMERGE Vision Developed image and infrared thermography systems for maritime

use1999—IPO, high stock price, initial offering 8 M shares Fall 2001— Sold many non-profitable company operations August 2001—New mngmt. team, significant exp. in cattle

industry. 2002 – New product launch 2004 – Sold PCC 2005—Two business units 2005— Company has been operating in the red since IPO

Huge stock price fluctuations.

Case Study Objectives

How does eMERGE stay afloat until the market is ready?

What can eMERGE do to increase the adoption rate of their new technologies?

Industry Overview

eMERGE Interactive operates in two distinct industries:

Animal Information Management IndustryCattleLog: Animal Information Management System

• Provides a management system for the livestock as well as traceability if there were a food safety issue.

Visual Diagnostic Technology IndustryVerifEYE: Detects organic contamination on several surfaces

• VerifEYE has many other applications, not just in the realm of food safety.

Firm Financial Analysis

COGS = Approx 32% of Net Sales

Combined SGA and R&D = Approx 760% of Net Sales

Implies eMERGE Cost Structure =

High Fixed Costs, Low Variable Costs

INCOME STATEMENT2003 2004

Net Sales 926,838 1,156,019COGS 321,664 367,229Gross Profit 605,174 788,790Selling, General and Admin Expenses 5,873,471 6,605,865Technology and Development (R&D) 1,747,015 2,204,051Impairment, Restructuring and Related Charges 0 0Deprec. (and Amort.) 2,433,048 1,806,076Amoritization 0 0Total Operating Expenses 10,053,534 10,615,992Operating Income/Loss -9,448,360 -9,827,202

SWOT Analysis:CattleLog Pro

StrengthsGood reputation among customer baseUSDA PVP CertificationLeast expensive data service in AIM IndustryProducts give information, not just dataCattleLog Pro is easy to useAlready meets the NAIS program specificationsAlready have strategic alliance with ADM Alliance NutritionLarge number of producer organizations already utilizing the system

WeaknessesFuture operational capacity (database and financial)Potential to lose PVP Certification (must be renewed yearly)Poor financial health100% Equity Financing

OpportunitiesPossible NAIS mandate (Traceability)Traceability is already mandated in CanadaApplication of system to other animals (zoos/pets)Growing health and quality trend among consumersIncreased food safety movement (Bioterrorism)COOLGlobal market expansionFragmented Organizational Environment of Primary Customer Base

ThreatsStricter regulatory requirements and practicesRemoval of International Trade Barriers (CAFTA Beef Imports)Emergence of Substitute Products (Microsoft)Fragmented Organizational Environment of Primary Customer BaseCustomer base hesitant to adopt innovative

technology

SWOT Analysis:VerifEYE

StrengthsPatented TechnologyProducts give information, not just data

Many potential applicationsAlready have established relationship with ExcelAlliances with Major Global Distributors

WeaknessesLack of Brand RecognitionFuture R&D is necessary and cost intensive

High cost of product to potential buyers

OpportunitiesUnfulfilled customer need

Wide variety of buyersNew modifications of current technologyChanging Education Curriculum (Health Classes)Social Changes: Shift toward healthier societyGlobal Market Expansion

ThreatsNew Entrants/New Patented TechnologyIncreased Regulatory Procedures (Testing/R&D)

Cost of R & D

General Strategies to Increase Net Income

Objective: Positive Net

Profit

Increase Volume of

Product Sold

Increase Product Price

Reduce Operational

Business Costs

Selling, General and

Administrative

Research and Development

Animal Info System

Food Safety Technology

CattleLog

Target CattleLog Pro to the Top Four Feedlots

Market to Global Producers

Niche Markets

Purebred Assoc. Relying on Quality

COOL Markets

1. Cactus Feeders Inc2. ContiBeef LLC3. ConAgra4. Caprock

1. Canadian Prod.

2. Producers Exporting Replacement Heifers

Increase Volume of CattleLog Sold

Increase Volume of VerifEYE Sold

VerifEYE

Carcass Inspection

System

Handheld Solo

Hand Hygiene System

Licensing Agreement with Hand Sanitation

Distributor

Market to other top five meat packers andPossible modifications

to ID other contaminants

Continue to market Solo to packing

facilities

Market to other industries

Final Recommendations

QUESTION: How does eMERGE stay afloat until the market is ready?

ANSWER: Limit operational expenditures to net sales Best achieved by increasing net sales

QUESTION: What can eMERGE do to increase the adoption rate of their new technologies?

ANSWER: Reposition investment among products Increase volume of VerifyEYE Solo and Hand Hygiene

System Licensing Agreement with Unilever

At high prices, volume is lowLower the price and increase volume sold Move along AFC curve providing lower company fixed

costs

Economics Behind the Unilever Strategy

Final Strategy Recommendation

Increase volume of VerifEYE products sold through a licensing agreement with Unilever

SWOT: eMERGE

Strengths UtilizedGood reputation among consumer basePatented Technology – possible marketing

monopolyMany Potential ApplicationsAlliances with major global distributors

SWOT: eMERGE

Weaknesses AddressedPoor financial healthConsumer’s purchase price can be large – high

cost of product (CIS, possible hand wash system)

Lack of Brand Recognition

SWOT: eMERGE

Capitalized OpportunitiesIncreased food safety movement

(Bioterrorism)Unfulfilled customer needWide variety of buyersGlobal market expansion

SWOT: eMERGE

Threats AddressedGap in the Technology Adoption CurveCost of R&D

Plan of Action

Short term: 1 year Form licensing agreement with Unilever

Market Hand Hygiene System and Solo to food service industry

Medium term: 2-5 years Branch into other industries such as medical,

education and child care

Conclusions

The products that will see eMERGE to a future of net profit are predominantly the VerifEYE products.

eMERGE should maintain the current quality of the CattleLog Pro and work closely with the industry and government on the NAIS mandate

Sources

Copeland, Tom et al. Valuation: Measuring and Managing the Value of Companies, 3rd ed. Wiley Publishing, 2000.

eMerge Interactive, http://www.emergeinteractive.com/. Accessed July 20, 2005.

Golan, Elise, et al. Food Safety Innovation in the United States: Evidence from the Meat Industry. Agricultural Economic Report Number 831. April 2004.

Gremaud, Michael. Personal Interview. July 18 2005. Mays, Don. Personal Interview. July 14, 2005. Oster, Sharon. Modern Competitive Analysis, 3rd ed. Oxford

University Press, 1999.

Thank you from Mizzou!