Question

Cellar Ltd is in the business of bottling wine, particularly for small wineries that cannot afford sophisticated technical equipment and prefer to concentrate on the growing of the grapes. The white wine and champagne bottles used by Cellar Ltd have a built-in insulation device that keeps the contents of the bottle cold even when held in the hand.

In January 2023, Solar-Blue, a company experimenting with energy sources useful in combating climate change, produced a device which, when attached to the outside of a container, could display the actual temperature of the liquid inside. The temperature was displayed by the highlighting of certain colours on the device. How this device could exactly be used with wine bottles had yet to be specifically determined. However, Cellar Ltd believed that its employees had the skills that would enable the company to determine the feasibility of such a project. They predicted that the additional costs of incorporating the device would be $40,000 with additional revenue of $170,000. They were quite certain about the incorporation outcome.

Cellar Ltd paid $100 000 for the exclusive rights to use the device in conjunction with bottles. Several days after they bought the device, a major competitor who missed the chance of buying the device directly from Solar-Blue, approached Cellar Ltd to discuss the intention of purchase at the price of $110,000.

Cellar Ltd could cease development of the device in relation to its applicability to use with bottles. They could luck up the device reducing the risk that competitors could achieve a significant market edge and so substantial increase market share. By taking this defensive competitive strategy, they predicted a net benefit of $140,000 from future weaken competition. They were quite confidence about their estimates.

In this case, what is the best and highest use of the device?

Cellar Ltd uses the device with their own wine bottles.

Not sure

Sell it to competitor

Cease the development of the device

Answer 1

In the given case the following aspects are very clear that would help decided on the strategy -

• The device is a differentiator
• Cellar has the skillset to implement the project and use it.
• Net gains from the project are positive (estimated additional income less estimated additional cost) i.e. $130000
• Additionaly with an edge over the competitors benefits to the tune of $ 140000 are expected with high degree of confidence.
• The gain by selling the right is only $10000 which is quite low as compared to above benefits.

Given the above state of affairs Cellar should uses the device with their own wine bottles