Assignment 1: The Glucometer Case

Case/Situation:

A new medical device has been developed to measure the blood sugar level. This is expected to be used widely by diabetics for self-monitoring. The product is non-invasive yet is accurate and is expected to substitute existing products in the market, particularly the diabetic strips that cost $1 per use, and involve a prick using a lancet. The current popular technology used by most consumers is the diabetic strip meter, where the strips cost just a dollar each, and the reusable meter has a low cost of $20 only; further the user needs to prick himself not very pleasant!

The new firm ABC has a patent for a new technological medical device referred to as a Glucometer, that expires after 4 years.

The New Device:The new Glucometer is iris response based (actually uses the iris in the eye); its manufactured cost is $3000 (for the machine), and annual maintenance costs for the machine average $500 per year. The machine does not require an attendant or any material inputs. All the patient has to do is look into a viewer and the device measures blood sugar levels using iris examination- the machines instrumentation, gives the results on a digital display panel. The simple looking machine looks like a small computer with a two-eye viewer into which the user looks.

Questions to be answered (Please answer all questions and number the Answers):

1. Suppose the Glucometer company is to sell the machine only to hospitals, and the company will maintain the Glucometer machine for the hospital for the first four years. A hospital, on an average, will use the machine 80 times a day, 300 days in a year. If this is the case, then suggest a price that the company should charge hospitals and justify your answer. What is the basis of your recommendation? (20 points)
2. Suppose the company realizes that it is more appropriate to sell the service of the machine rather than the machine itself. So, it decides to install the machine like a health or blood pressure monitor in Walmart, Walgreens etc. and operate it like a vending machine, charging $ 1.00 per use. Assume that there is an average of 30 users per day, for 360 days in a year.

Now calculate (making any appropriate assumptions):

1. The break-even level of demand for the machine. That is, calculate the minimum number of customers you require per day to break even i.e. at least not make a loss.
2. If Walmart were to retain 70% of the revenues and the Glucometer firm receives 30% of the revenues then calculate the Net Return on Investment to the company for a typical installation charging $ 1.00 per use and an average of 30 users per day, for 360 days in a year.
3. Calculate the pay-back period for an installation for the Glucometer company on the assumption that it receives 30% of the revenues. The pay-back period for the company is the period (number of days) in which the company should recover its initial investment (which is $3000 manufacturing cost).

(Question 2 carries 60 points)

3. Suggest a business strategy for the firm after four years when the patent expires. In your answer discuss at least three alternative strategies and explain your choice of your ideal strategy. (Question 3 carries 20 points)