Business Model Canvas .Site Market Selection

Universidad EAFIT

School of Management

International Business Department

International Entrepreneurship and Innovation

Business Model Canvas

Presented to

Camilo Franco Ruiz

Written by

Martin Cárdenas

Simón Pastrana

Miguel Pineda

Tomás Pineda

David Ríos

November 3, 2020

Site Market Selection

While Analyzing which market site to export the Hydrangeas White Select, we established that North America could be a very attractive market for our product. The demand of flowers in the northern continent is increasing rapidly. We performed site selection analysis that involved 3 countries, The United States, Mexico and Canada. Also, we selected the variables that fit into our business market and expected site such as GDP, Inflation, Exchange rates, Ad valorem tariffs, specific duty tariffs, rules of origin, Phytosanitary barriers, market size and transportation system. The United States showed the highest score on the Matrix analysis (1,08) followed by Mexico (0,58) and last Canada (0,14).

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The United States getting the highest score is not coincidence. The economic variables showed us that The United States, for our business, is the most attractive out of the three, for us to reach a bigger net margin. Also, our research showed us that 74% of flowers that are exported to The United States during holiday seasons come from Colombia, around 35.000 tons (Dominguez, 2018). This data represents the high demand in that country, but also the numerous competition entering the American Market.

(Data collected for the analysis criteria is annexed on the document “Site selection matrix Hortensias”)

Secondary Information

How long does the flowers you buy normally last?         Do you buy common flowers or rare flowers?

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How much money do you spend on flowers?       why do you buy flowers?

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Do you buy flowers because of the price or the looks?      What is your favorite flower?

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Have you ever bought a Hydrangea?                     Would you buy a hydrangea again?

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Did you know that Hydrangea comes in different colors?   What is your favorite hydrangea color?

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After conducting the survey, we could get some conclusions out of this. First, people don’t normally look at the price of flowers, they just care that the flower looks pretty.  Although this Is true, normally they buy in small quantities because they like to spend less than 10USD in flowers. Another conclusion is that people who buy hydrangea will always buy it again. Selling white hydrangea can be key due to making it a little more exclusive (it is not the most common hydrangea color) and it is the second favorite out of all the colors.

Business Environment Analysis

Market Forces

• Market Issues: In the United States, flower demand has steadily increased over the last few years and with that, production and exports of this product has too increased. (Loyola, 2019) However, some of the key issues affecting the offer perspective was insect management, we touched on this issue during on Lean Canvas presentation, but controlling and eradicating pests is an expensive a time-consuming issue that cuts into the profits of all flower exporters. Another common problem is crop management, this brings issues such as determining the correct harvest stage, harvest windows that are too short, flowering all at once, or lack of control when the crop is ready to harvest. On the customer side, the most common problems are high prices for quality products and the lack of offer during important holidays such as Valentine’s Day and Christmas. Another issue for customers is when deciding which flower to purchase, as there are over 98 flower options, which creates a deciding challenge when buying. (Loyola, 2019)
• Market Segments: The consumer discretionary industry grew 2.86% this part quarter in the United States, meaning that no matter the segmentation, the overall flower market grew, and it is expected to continue growing on an upside trend in 2021. (Fidelity, 2020) The flower market is divided into three segments, mostly defined by income. The first segment are low-income customers with an average yearly income of $35,000 or less, these customers are very sensitive to price changes and are the least likely to purchase imported goods. Next are middle-income customers with an average yearly income between $35,000 and $70,000, these customers are less sensitive to price changes but are still cautionary of how prices and affect their bottom line. Finally, high-income customers with an average yearly salary of $70,000 or more, these customers are the least sensitive for price changes and are the most likely to purchase imported goods as they are the segment which more growth upside.
• Needs and Demands: Customers within the flower industry are very demanding and expect their needs to be fulfil quickly, as any other consuming goods industry. Customers demand the upmost quality no matter the price range, their needs revolve around finding the exact type or color of flower they are looking for. What they want to get done is almost always obtain the approval of somebody else though the purchase of flowers, so in many cases, the purchasing party is not the end user, which creates added pressure for the product to not only meet expectations but to surpass them. Demand is increasing around exported products since it brings an added value of satisfaction to know the precedence of the product.
• Switching Costs: As previously mentioned, customers within this industry are very price sensitive to price changes, unless a previous relationship has been cultivated and stablished with a customer for many years or the brand has been built to the point where the name is a synonym of how good the quality, packaging, customer relations and other variables, the decision between switching flower suppliers might come down to a difference of a few cents in the closing price of the product. It is very easy for customers to find similar products and purchase at similar prices, that’s why customer retention and feedback is so important to build a successful flower business.
• Revenue Attractiveness: We believe the real revenue attractiveness within the flower industry comes through volume; it is very hard to consistently deliver profits if the volume of exported goods does not reach the minimum volume for profits. However, volume is also the biggest potential for large margins to be achieved, the greater number of flowers a supplier exports, the larger his margins would be, this also depends on variable costs and how they fluctuate with every delivery.

Industry Forces

• Competitors: There are a lot of competitors in the Colombian flower business as it is a booming market, it is estimated that around 95% of all flowers produced in Colombia leave as exports to be sold elsewhere. ) More specifically, the hydrangea is almost entirely grown and sold out of Antioquia, with 99% of production coming from this region. (Asocolflores, 2019) One of the biggest players in the flower industry is Innovaflora, they export a wide variety of flowers, including hydrangeas to over 60 countries and employ 600 people directly. Flores Prisma, Flores Siberianas and Carmary Farms are also big competitors within the industry with years of experience, knowledge, connections and access to capital. They all share the same market segments we shared before and their main client is American flower distributors. It is estimated that almost 80% of hydrangeas planted in Colombia are exported and sold in the United States.

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• New Entrance: As the industry has grown overtime, so have the amount of players that compete for the same customers, however, new players are faced with a wide range of challenges that they must overcome to not only export flowers but to do it profitably while also gaining market share. Some of the main obstacles to overcome are obtaining a piece of land to plant crops, whether it is outright bought or rented, although is easy to find land, it’s tough to find land which gives the exact temperature and altitude specifications for hydrangeas to grow perfectly. Next, getting the ICA certificate and finally starting to export, this last part is the most challenging one, since there area already big players in the market, most of the time, new players end up giving their product very cheaply or even for free in order to start accumulating clients.
• Substitute products/services: The biggest substitute products to hydrangeas are simply, other flowers. Roses, carnations, alstroemerias, chrysanthemums, callas, gerberas, gypsophila, lilies, heliconia, pompoms and anthuriums are among the most exported types of flowers. (Procolombia)
• Supplies and other value chain actors: The flower industry is heavily dependent on over actors to be successful, for example, the supply chain covers everything from the moment the flowers leave the planting site to when they reach the end customer, everything in between, such as transport to airport, export due diligence and paperwork, airplane packaging, airport pickup and delivery, these are all external factors that are handled by actors outside the purview of the original handling company.
• Stakeholders: some stakeholders that might influence our business model are the Colombian government, should they impose new regulatory measures to export flowers, this could impact the business. The United States government, should they impose quotas or similar trade related measures that could generate a negative impact on profits. The end customer if the customer changes their demand outlook and stops buying hydrangeas.

Key Trends

• Technology Trends: As previously mentioned, pest control is one of the key factors that decide how profitable a flower business can be, and businesses rely heavily on the quick eradication of pests to be able to fulfil the required quota in order to be generate income. The creation of a new technology that eradicates pests quicker and helps keep the flowers safe would be completely disruptive for the flower business. In addition, technology to maintain the flowers from damage during transport could be of great help. Overall, the flower industry has remained the same for decades, it’s a proven process through trial and error and it’s been working for a while so it probably won’t change much unless some of the mentioned new technologies can help.
• Regulatory Trends: All flower growers and exporters in Colombia require a regulatory certificated called ICA, it is a mandatory phytosanitary certificate that is enforced when exporting plants. Although the certificate is easy to get, the flower business is very weary of new regulatory mandates that could provide challenges when exporting plant products. Also, if the United States were to apply quotas for flowers to be imported into their country, it would hurt immensely the flower business as margins would go down or would even mean that a price increase to avoid margin losses could affect demand.
• Social and Cultural Trends: These trends heavily rely on what flowers are in style during a specific time window, for example, hydrangeas might become very popular during a few months of the year due to different demand implications such as social media trends, home styling, among others, but could then see a decrease in demand during a few months because another type of flower became popular. Since these trends are unpredictable, it is impossible to predict and the outgoing flower offer is not affected by them.
• Socioeconomic Trends: As previously mentioned, the flower industry is divided into three main socioeconomic segments, each highlight their own risks and benefits to give a clearer outlook into the market. The first segment are low-income customers with an average yearly income of $35,000 or less, these customers are very sensitive to price changes and are the least likely to purchase imported goods. Next are middle-income customers with an average yearly income between $35,000 and $70,000, these customers are less sensitive to price changes but are still cautionary of how prices and affect their bottom line. Finally, high-income customers with an average yearly salary of $70,000 or more, these customers are the least sensitive for price changes and are the most likely to purchase imported goods as they are the segment which more growth upside.

Macroeconomic Forces

• Global Market Conditions: Because of the COVID-19 pandemic, the world and especially the United States has entered a huge economic recession. The general market sentiment is that things will get worse before they get better, Europe has begun closing their economy again as the second wave of cases affects the region, the US is expecting over 100,000 new cases every day and there’s also a lot of uncertainty regarding the presidential election. The unemployment rate in the US is as of October 2020 at 7.9%. (Marketplace, 2020) Third quarter GDP growth came in at 7.4% but it is still down year to date and will probably close the year on a negative sentiment in comparison with past years. (The Washington Post, 2020)
• Capital Markets: One positive note about the COVID-19 pandemic is that because of the need to increase spending to boost employment and GDP, the federal reserve of the United States set interest rates at an all-time low of almost 0%, this makes lending money not only very easy but very useful when trying to acquire capital that’s financed with very low interest rates.
• Commodities and other resources: As the flower business grows, we expect prices for resources such as crops, water and electricity to grow as well but they will remain easy to obtain as supply for these products is always available and growing. Labor prices will increase thanks to inflation but given the economic outlook for the upcoming years, it will not be hard to secure quality labor.
• Economic Infrastructure: The flower business has been a core component of the Colombian economy for years; it provides employment for thousands of people as well as contributes to the GDP of the country. Given the stable growth that the industry has shown, it has allowed for the procedures that keep the industry going to be standardized to increase productivity and minimize risks and downtime. Procedures such as: tax payment and transportation between farms, customers, airports, storage facilities.

Blue Ocean Strategy

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• Eliminate: After building the Business Environmental Analysis we figure out that some factors that should be eliminated for internationalize and reduce costs are by taking away the free samples as a way of distribution. This decision is because by giving free samples we are losing a low profit, this low profit in the future can be useful for expand our business, also with this distribution we are proving that Hydrangea are underrated and common flowers so by not doing this client would not think it anymore. Lastly is adapt costs, this should be regulated for hydrangea be more accessible.
• Reduce: Some factors that should be reduce are pest control cost, as we realized in doing the Business Environmental Analysis pest in the crops is something that is inevitable, but this does not mean it should not be done, but cost reduce and not use a big amount of money in pest control. Also, the distribution of personal meetings can be reduced too because the distributions channels of marketing camping and fleet transportation are going to be raise and by having these two channels with more work, personal meetings could be reduced. The last factor that is going to be reduced is switching cost, this type of cost could negotiate and be lower.
• Raise: On this part of the Blue Ocean Strategy the factors that we decided to raise were difficult to choose because are the ones that are going to make our value raised and valued. The first one is delivery time, is one of the most important, time has to be regulated and we need to be strict with it, because if one badge is delivery tardy is a client that we lose. Also, some of our distribution's channels like our own fleet of transportation need to be raise, by having our own fleet we can guarantee that flowers are going to be delivery on time on the airport and to clients. Also marketing campaigns are going to be raised and specially in important seasons and win more clients. Lastly, factors like revenue attractiveness and costumer and client intelligence is a marketing study that could raise and know are clients better, when they need flowers, etc.
• Create: The last part of the Blue Ocean strategy we decided that creating innovations business models would generate more value to our business, having the offer of selling the flowers with decorations or vases included could be a huge plus in our business and would give us more profit. This would also include creating bundled plans for these new services be rentable and clients would realize they are not buying just flowers. On these factors it could also be included strategically boxes for the flowers, our hydrangea is going to be exported, if they get damaged during the transportation, we will lose an entire badge so by creating adequate boxes we will have less probably of damaged flowers. Lastly, is to create a mechanism to control our cost for in a future we could reduce some important cost into a lower amount.

Business Model Canvas

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1. Customer segment: While developing the business canvas we defined that our customer will be flower distributors from The United States located in Miami Florida. The idea is to engage only one distributor that can afford to purchase our entire production of Hydrangea White Select and supply the demand in different areas of the United States. In that order, after harvesting the flower we put the product in Jose Maria Córdoba Airport located in Rionegro Antioquia, 20 minutes from our location; and then the distributor carry the product to Miami Florida handling all the export costs.
2. Value Propositions: As we mentioned on the Lean Canvas, planting and harvesting the flowers in La Ceja Antioquia can provide an outstanding quality of the product comparing it from other countries such as the Netherlands (Flores Del Este, 2019). But the competition in our location is quite big, the point is that most of the competitors sell their product through brokers affecting the quality of the product and increasing the price of the flower, owning the production and handling the export process we can eliminate those 2 variables from the equation and focus, as Osterwalder & Pigneur explain on the theory, on a price perspective, providing a less expensive product and keeping the quality in Miami the same as in La Ceja.
3. Channels: On the Run to deliver the product to the United States we intend to reach our customer via emails and phone calls in the United States, therefore when presenting our plantation to the distributor, a personal meeting here in Colombia will provide them a very clear perspective of our production process and the outstanding quality that we offer. Owning our own transportation fleet can assure the safeness of the flowers when arriving to Jose Maria Córdoba Airport where the distributor will receive the product.
4. Customer Relationships: In this section we will focus on providing our customer personal assistance. This can be done by only approaching one flower distributor from The United States.
5. Revenue Streams: Our production will be the same as in the Lean Canvas, 225.000 flowers 2 times a year, while developing our market research we identified that the White Select Hydrangea can be sold to the Flower Distributor at a maximum price of 0,50 USD. Owning the plantation and the production process can allow us to sell the flower at 0,45 USD making our product much more attractive to the distributor. In that order, 450.000 flowers per year at 0,45 USD will bring a yearly revenue of $202.500 USD or COP $752 million. After adding up the cost we come up with a net margin of COP $ 518 million each year.
6. Key activities: For us to provide an outstanding flower and supply the demand of the distributor, is very important that in those 3 hectares of land we plant, grow and harvest 225.000 Hydrangea White Select following the requirement of care, such as pest control and soil maintenance.
7. Key Resources: While developing this building block, we identify that Physical resources and human resources are very important for our production process. Owning the land and the transportation fleet will provide us the capacity to plant, grow, harvest and deliver the 450.000 Hydrangea White select per year. On the other hand, well experienced workers are very important to follow the quality requirements of the distributor.
8. Key Partners: We identified that approaching a local company that supply high end solutions for pest control is very important for us to provide a very good keep flower and avoiding high cost in that matter. Also, creating a relationship with only one flower distributor form The United States is ideal for us to make the business clearer and more efficient.
9. Cost structure: As in the Lean Canvas, the cost structure here is very similar. Acquiring the 3 hectares of land in La Ceja Antioquia (COP $3.000 million) will provide us the ability to plant and grow 15.000 crops two times a year. The planting process of the 15.000 crops will cost around COP $30 million every six months and the maintenance of the crops will cost around COP $30 million per year. For us to deliver the product to Jose María Cordoba Airport is very important to acquire a transportation fleet of two refrigerated trucks with a cost of COP $100 million and the yearly the cost of transportation will be COP $ 24 million.

References

Loyola, C. 2019. North American Specialty Cut Flower Production and Postharvest Survey. American Society for Horticultural Science. Retrieved from: https://journals.ashs.org/horttech/view/journals/horttech/29/3/article-p338.xml

Fidelity. 2020. Stock Market & Sector Performance. Fidelity. Retrieved from: https://eresearch.fidelity.com/eresearch/goto/markets_sectors/landing.jhtml 

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