Optical Fiber Corporation
Optical Fiber Corporation (OFC) is a financially successful, albeit relatively small manufacturer of multimode optical fibers. The company was founded in 1990. The founders were able to enter the market largely on the basis of acquiring patent licenses from larger optical fiber firms. These licenses restricted competition between the entities and provided OFC with instant access to optical fiber technology. In return, OFC’s customer base is limited by the license agreements and royalties of 7% on sales of licensed products (recently renegotiated to 9%) are paid to the licensors. Despite these handicaps the firm has grown in size and profitability. OFC makes several types of multimode optical fiber including specialty niche products they have developed outside of any license agreements. All customers are cable manufacturers that convert the fibers to optical fiber cable. Three such firms account for over 70% of OFC’s revenues. Focusing on customer service, quality and product design and process improvements has proved a winning business model to date. OFC now faces a variety of challenges including the expiration of many of the patents that afford most of its profits. This raises the real possibility of new competitors in the market. Further, while in the past multimode and single mode optical fibers have generally been used for data communications and telecommunications respectively and as such were not in direct competition with each other, the advent of cheaper manufacturing processes for single mode fibers coupled with their inherent ability to transmit data more efficiently over longer distances may make them a more appealing choice for some of the uses that historically have favored multimode fibers. OFC is at now at a crossroads where they must decide if they are to stay in the multimode fiber business only, begin producing single mode fibers as well, or even enter the cabling business with a forward integration strategy. Competition in the Optical Fiber Industry
The optical fiber industry is perhaps best considered as two industries that are closely related, the multimode fiber and the single mode fiber industries. The multimode industry in which OFC specializes is very competitive. The United States’ 2001 total optical fiber market was approximately 3.5 million kilometers only 330 thousand of which was multimode. The value of the multimode market was $65 million that year, only a fifth that of the single mode market. Within the multimode market and a number of fiber manufacturers. The main rivals for OFC are the two licensors to whom they pay royalties. These firms are considerably larger and have greater resources with which to compete. Further, they have a competitive advantage in that they are the recipients of royalty payments rather than the firm making those payments. Also they are in a position to control the extent of OFC’s market penetration at least with respect to their licensed products. OFC has responded by creating high quality products and providing exceptional customer service. In addition, OFC has made improvements to the basic design of some of the licensed fibers making them, in a real sense new products. The R and D department at OFC has also been successful at developing new and less expensive manufacturing processes, which has helped to offset the added overhead of the royalty payments. Finally, OFC has developed specialty fibers with medical, aircraft, aerospace and extreme environment applications. These new fibers will not be subject to royalty payments, competition from new entrants until patents expire years in the future, and generally afford higher profit margins than other optical fiber products. New entrants to the market are a threat to OFC and all other fiber producers. New firms must contend with the high capitalization costs of this technologically demanding and exacting industry. One of...