Fungimental Pty Ltd: Business Opportunity Assessment and Strategy Design - Case Study Example

Fungimental Pty Ltd: Business Opportunity Assessment and Strategy Design Student’s Name Institutional Affiliation Course Name Date of Submission Table of Contents Table of Contents 2 Market Analysis 4 Market Opportunity 5 PESTEL Analysis 5 Political Environment 5 Economic Environment 6 Social Environment 6 Environmental Factors 7 Competitive Environment 8 Competitive Rivalry 8 Threat of Substitution 8 Threat of New Entry 9 Buyer Power 9 Supplier Power 10 Consumer Markets and Consumers (TAM, SAM & SOM) 10 Total Available Market 10 Value Proposition 14 Monetized Value Proposition 15 Strategy & Recommendation 15 References 19 Market Analysis Mushroom business is booming in most parts of the world, including Asia, Africa, America and Australia. However, in most of these countries, mushroom is still grown in the traditional way in which mushrooms are grown in large farmlands (Australian Bureau of Statistics 2008). However, we intend to introduce a new concept of mushroom farming business in Sydney, Australia, in which oyster mushrooms will be grown on waste coffee grounds on the UTS rooftops. This is a completely new mushroom farming business that will not only generate huge profits for the venture, but also promote social, economic and environmental sustainability. According to AMGA (2011), only 1% of coffee beans end up in the cup while the remaining ground is discarded in the form of waste. This implies that hundreds of thousands of coffee waste is ends up in the landfills in the form of waste. However, the large amounts of coffee wastes on then landfills create environmental problems as decomposed coffee waste usually generates methane gas that pollutes the environment. The Market and Markets (2015) report indicates that the larger Sydney area has about 1000 coffee houses, which produces a weekly average of 2,500 kilograms of grounds that end up as waste. This means that large amount of methane gases are leased to the environment if these ground coffee are taken to the landfills. Therefore, growing oyster mushroom on the waste coffee ground will provide a huge benefit to the environment (Gomba Forum 2010). This is because it will help cut carbon emissions by a huge margin. Currently, Australia ranks among the countries with the highest greenhouse gas emission in the world. Therefore, using waste coffee grounds to grow oyster mushrooms will not only ensure that the physical environment is clean, but also that the amounts of carbon emission to the environment is minimized, thereby promoting environmental sustainability (Gartry 2015). As such, the fact that this form of mushroom farming promotes environmental sustainability will make it well received by the environmentalists and the local population. The business concept will also be of economic value considering that the business will create employment to the local population. Like most countries, Australia still struggles with the problem of youth unemployment. Currently, the rate of unemployment in Australia stands at 6% with the rate increasing almost every year (Heritage 2016). Therefore, this business concept will add value to the economy by absorbing some of the unemployed people as the business expects to create jobs to more than 500 people in Sidney. Moreover, this being an entrepreneurial business, it will also help boost the economy of the country in the form of taxes to the government. Market Opportunity PESTEL Analysis Political Environment The Australian political environment creates an opportunity for the mushroom business venture that is intended for creation. The Australian government offers tax incentives to innovative businesses that aim to address the challenges facing the society (Horticultural Research & Development Corporation 1996, p. 16). Similarly, the government provides grants and other forms of financial assistance to innovative SMEs whose ideas aim to transform the society (Government House South Australia 2012). As such, this offers a huge business opportunity for the Fungimental Pty as it would find it easy operating in the country without experiencing political risks. However, the business venture will have to comply with the policies and regulations established by the Australian Mushroom Growers Association, that includes paying levies for the mushrooms production (Alston et al. 2003, p. 277). Economic Environment The success of Fungimental in Sidney will be greatly impacted by the state of the economy. Fortunately, analysis of the Australian economy indicates an opportunity for the mushroom business. Australia being a developed country has a high population of high and middle income earners that will favor the growth of the business. Currently, Australia’s gross national income stands at US$981.8 billion per PPP while its GDP stands at 1.56 trillion (Heritage 2016). The economy of Australia also grew by about 3% in the beginning of 2016 (Heritage 2016). All these coupled with low inflation rate of 2.5% and low unemployment rate of 6% means that the Australian population has a high purchasing power and would be able to buy the mushrooms easily without much problem. Alston and Parks (2011) indicate that the population of middle income earners is growing very fast, which translates to more business opportunity. Social Environment The socio-cultural environment has a huge impact on the success of a business. Firstly, Australia is one of the countries that have experienced a huge change in lifestyle with many consumers demanding healthier foods (Centre for International Economics (CIE) 2008, p. 4). This change towards healthy eating lifestyle being witnessed in Australia today offers a great business opportunity for Fungimental Pty (Gartry 2015). The mushrooms to be sold to the Aussies will be fresh from the farms and will be subjected to high degree of health standards. As such, there is a prospect for a huge demand for the healthy mushrooms in Sydney. The other social factor that will impact the business is the increasing urbanization of Aussie population. Currently, Australian population stands at 23. 13 million, according to 2013 report and is expected to reach 25 million by the year 2020 (Australian Government 2015). The majority of these people live in urban centers. Studies indicate that there has been a huge increase in urbanization of the Aussie population. Sidney, where Fungimental Pty intends to establish the mushroom farming business, for example, has a population of about 4.2 million people. This population provides a market opportunity as it translates to a huge market for the mushroom that the business will be selling. Additionally, the growing aging Aussie population also provides a huge market opportunity for the business since there is a high demand for mushrooms among this age group. Technology is another external environmental factor that will impact the business. Australia being an industrialized country has high technological advancements and adoptions. The faster technological adoption in Australia is seen first with the high internet usage. The latest estimates indicate that about 85% of Australians have access to the internet (Surridge2009). The vast majority of Australian population also has computers, television and other digital communication tools. The high technological advancements in Australia offer business opportunity for Fungimental Pty since it provides an easy way for marketing the mushrooms to the local population. Environmental Factors The environmental factors also have a huge influence on a company. For instance, the Australian government in response to the Kyoto Protocol and Copenhagen agreements on climate change plans to cut its carbon emissions by 26% by 2030 with the main target being businesses and industries (Singh et al. 2011). Therefore, the fact that Fungimental Pty is an environmental sustainable business initiative is a good opportunity as it would receive strong governmental support considering that the business will be eliminating waste coffee grounds from the landfills that pollutes the environment. Competitive Environment The business opportunity available for Fungimental Pty can be analyzed with respect to the competitive environment. The competitive landscape of the Australian mushroom industry can be assessed using Porter’s five forces model to establish the competitive position of Fungimental Pty in the industry. Competitive Rivalry The competitive rivalry in the Australian mushroom industry is high. According to the AMGA (2010), Australia has 73 commercial growers of mushroom, with Costa Pty Ltd dominating the industry. Other than the domestic growers, Australia also imports large quantity of processed mushroom from foreign countries, particularly China. The high competitive rivalry in the Australian mushroom industry signifies a threat to Fungimental Pty (Chakravarty 2011, p. 103). However, the fact that Fungimental will deal with oyster mushroom that most of the mushroom products firms does not grow gives Fungimental a competitive edge over rivals. Threat of Substitution The threat of substitution is high. Although mushroom business is huge in Australia, venturing in the business faces the threat of substitution. In particular, meat provides a close substitute for mushrooms. Chang and Buswell (1996, p. 473) shows that consumers can easily switch to meat anytime, which posses a potential risk to the Fungimental Pty mushroom business. Threat of New Entry The threat of new entry is low. According to a report by AMGA (2011), although starting a mushroom farming business requires minimal capital, entering the Australian mushroom industry has been made difficult by the existing firms through consolidation. For instance, in 2009, Australian mushroom industry had 77 firms (AMGA 2010). More than 50% of mushroom growing enterprises have since been taken-over, closed or merged. Currently, over 50% of the total production comes from just 3 growing firms while 15 represent more than 75% of mushroom production (Market and Markets 2016). The consolidation of the industry creates huge entry barrier. This offers a business opportunity for Fungimental because it will minimize the threats of new entrants that might force the firm out of business. The increased consolidation of the industry is also an opportunity for Fungimental Pty because it reduces the number of competitors in the industry. Buyer Power The buyer power is high. The Australian mushroom industry has many mushroom growing firms (Chang and Miles 2004, p. 45). This offers the buyer a higher bargaining power because of wide choice. At the same time, the fact that mushrooms have close substitutes that buyers can easily switch to, such as meat gives the buyers a greater bargaining power. The high bargaining power of buyers is a risk to Fungimental Pty as it would result in a situation, where the company will not have full control over its prices. Supplier Power The supplier power is high. The supplier power is high because there are few suppliers of aspects, such as land for farming and rooftops for growing mushrooms (Murphy 2003). This is likely to increase the cost of doing business. Australia also has one of the highest costs of labor and this is likely to increase the cost of doing business. Consumer Markets and Consumers (TAM, SAM & SOM) Fungimental Pty has identified a number of key markets that it will target with its oyster mushroom. The key target markets will be wholesalers, restaurants, bars, catering companies, hotels and retailers, such as major supermarkets and groceries in Sidney and its environs. The oyster mushrooms will also be targeted at the health conscious consumers. Source: Allen (2015) Total Available Market The market for mushrooms in Australia is huge and has been growing since the 1970s due to increased demand for this delicacy by the growing population of the health conscious customers (Trim et al. 249). The annual per capita consumption of mushroom currently stands at 3.2 kilograms. According to AMGA (2010) report, in 2008/2009 financial year, domestic production of mushroom stood at 61,000 tones, which fetched over $315 million. The gross production value stood at $390 million while retail value that year was $700 million (AMGA 2014). The market size for mushroom continues to grow as consumer demand for mushroom gets stronger. Industry analysts expect the market size for the Australian mushroom to grow ten-fold by the year 2025 with total demand expected to reach 90,000 tones every year. Production forecast and potential demand shortfall – 2001-02 to 2015-16 Source: AMGA (2010) Serviceable Available Market SAM denotes that portion of TAM that a company targets with its products and/or services (Allen 2015, p. 13). According to the data derived from AMGA (2011), it emerged that the market size for Mushroom is not fully exploited. AMGA indicates that, the industry is dominated by White Agaricus Mushrooms. According to the agency, this type of mushroom has dominated the Australian industry for many years now. The report from AMGA (2010) also indicates that Agaricus mushrooms are the main marketing focus of the industry and are the only type that is levied. The other is exotic fresh mushrooms which though is increasing, is still small in the market and are found only in a selected market segment. The third major type of mushroom in Australia is the processed canned mushrooms. AMGA (2014) indicates that processed canned mushrooms are mainly imported from foreign countries with China being the main sources of this type of mushroom. The table below shows that total market size of the Australian mushroom industry. Total Industry Size (2011) Type Volume (ton) % White Agaricus (Australian fresh & processed) 67,500 92.5 Exotic (fresh) 900 1.2 Imported fresh & processed 4,600 6.3 Total 73,000 100 Australian Mushroom Industry Trends Source: AMGA (2011) AMGA (2011) report indicates that the existing players, such as Noel Arrold and Costa Pty Ltd produce mainly this variety of mushrooms. However, existing production is far less than the demand in the market that currently stands at about 90,000 tones of mushroom every year (Carey 2012). This implies that Fungimental Pty still has a market of about 27 tones to exploit since total production currently stands at only 73,000 tons. Furthermore, Fungimental Pty plans to introduce the oyster mushrooms that are still not produced in Australia. This implies that the company stands a huge chance of capitalizing on this gap. Serviceable Obtainable Market (SOM) SOM is that part of SAM or share of the market that a company serves or intends to capture (Allen 2015, p. 13). The company’s share of the market is estimated at 10% considering that over 75% of the total Australian mushroom market is currently controlled by only 15 production firms. This leaves only 15% to be shared by the about 60 firms. This gives an estimated SOM of $693,000 annually. Value Proposition Although there are many firms that grow mushrooms, there are a number of reasons why customers will find it valuable to buy Fungimental’s oyster mushrooms instead of those of the other companies (Surridge 2009). Firstly, the mushrooms will be healthy as they will be grown purely using waste coffee grounds. Fundamental Pty understands that Aussie consumers are currently more conscious about their health than never before. As such, the firm will provide them with high quality and healthy exotic mushrooms to ensure that Australian population live a healthy life (Chang 1999, p. 5) Therefore, because the company will provide healthy mushrooms, the firm believes that this will make consumers choose Fungimental Pty’s mushrooms instead of those of other competitors. Secondly, the oyster mushrooms that Fungimental intends to grown in the rooftops in Sidney will add value to the customers because its production promotes environmental sustainability. Currently, Australia is grappling with the problem of environmental degradation characterized by global warming effect (Horticultural Research & Development Corporation. 1990, p. 11). As such, consumers currently interested in buying products that are green and environmentally sustainable. As such, the fact that the oyster mushrooms will be planted using waste coffee grounds will provide value to customers as it will help eliminate the landfills created by waste coffee grounds (Horticulture Innovation Australia 2016). In the end, this will help minimize pollution to the environment something that will make customers value Fungimental’s mushrooms. Monetized Value Proposition Analysis of the market size and the projected demand indicates that Fungimental Pty will reap big from the venture. Financial estimates indicate that, in the first year of operation beginning April 1, 2016, the business will incur expenses totaling $433,895. These amounts will be spent on bills, construction, salaries/payroll, plant and equipment, production and sales/marketing. Despite the high cost of staring and running the business, this will be a viable venture since the business is estimated to generate an annual income of $693,000 in the first year of operations. The major incomes sources include grant $80,000, mushroom kits $33,000 and mushroom sales $580,000. This implies that the business would make income before tax of $259,105. After meeting all the expenses, the business will remain with cash in hand of $313,610 after one year of operation. Therefore, the fact that the business will break even just few months after startup and make a huge profit at the end of the first year of operations makes the business viable and worth undertaking. Strategy & Recommendation The analysis of the Australian mushroom industry indicates that there is a huge market that has remained underexploited despite the growing demand for mushrooms. However, Porters five forces analysis above indicates that the Australian mushroom market is highly competitive. This implies that, for Fungimental to succeed and builds a sustainable competitive advantage, the company must ensure that it adopts a winning strategy. Firstly, as described in the market analysis part of the report, Fungimental is going to achieve a sustainable competitive advantage by adopting a differentiation strategy. Although there are many competitors in the market, such as Costa, Fungimental Pty will compete effectively with these companies because it has differentiated itself from rivals by adopting producing healthy mushrooms using ethical model. For instance, Fungimental has adopted the strategy of growing its mushrooms using waste coffee grounds, which is not only unique, but also ensures the production of healthy mushrooms. Currently, most Aussie consumers are very much conscious about their health and demand more of healthy foods (Carey 2012). As such, providing them with healthy mushroom will not just add value to consumers, but also give Fungimental a competitive advantage over rivals since most consumers will want to buy the firm’s mushrooms instead of competitors because their healthiness. Secondly, unlike competitors that do not care about the environment, Fungimental has differentiated itself by promoting environmental sustainability by eliminating tones of coffee that would have otherwise ended up in the landfills and polluted the environment. The use of differentiation strategy is expected to give Fungimental a competitive edge over rivals in the Australian mushroom industry. Secondly, Fungimental Pty intends to use cost leadership strategy to win the market. In this respect, the company intends to become the lowest cost producer in the industry. To achieve this, instead of using fertilizers purchased from shops (Chang 1999), Fungimental is going to rely on waste coffee that will be collected from various sources, including Qantas, Virgin Australia, Westfield, UTS, The Star, Barangaroo and Sydney Airport. Every week, the company projects that it will be able to collect 2.5 tons of waste coffee from these sources. The fact that these wastes will be provided at no cost will enable Fungimental to keep its mushroom production cost low. In turn, the low cost of production will enable the company to sell its mushrooms cheaper to customers but still make a huge profit margin due to high sales turnover. For instance, unlike most competitors that sell a kilogram of mushroom to the public at about $55 and $40 to the restaurants, Fungimental will take advantage of being the low cost producer by selling a kilo of mushroom at $50 to the public and only $35 to restaurants. The low and affordable prices will enable Fungimental attract a large number of customers to the oyster mushrooms that the firm intends to introduce in the market. Thirdly, to establish a position and succeed in the Australian mushroom market, Fungimental will ensure that it engages in aggressive marketing and promotional campaigns. Business gurus have argued that, merely developing products of high quality and selling them at affordable prices is not enough in winning a market. Instead, they advise that a business must ensure that customers are informed of the existence of the product; otherwise they might not even know of its existence (Chang and Miles 2004). Therefore, Fungimental intends to begin by investing adequately in marketing and promotional campaign to create awareness and to persuade Australian mushroom lovers to consider making Fungimental their supplier of choice. As can be seen in the financial estimated, Fungimental has enough finance and has invested $6,000 in sales and marketing. The company will use a variety of communication channels in promoting its mushrooms to reach wide audience. The communication tools lined up for use include TV advert, social media, billboards, road shows, website, sponsorships, as well as sales people on the field. However, the success of the firm in the industry will also depend on how best the firm enters the Australian market. As such, the firm must ensure that it adopts the most appropriate market entry strategy. For Fungimental Pty, it would be most appropriate for the company to enter the market through Greenfield investment. 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