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Dr. Charlie HallDr. Charlie HallEllison Chair in International FloricultureEllison Chair in International FloricultureTexas A&M UniversityTexas A&M Universitycharliehall@tamu.educharliehall@tamu.edu

Green Industry 2010: The Green Industry 2010: The Dynamics of HypercompetitionDynamics of Hypercompetition

Hypercompetition

“an environment characterized by intense and rapid competitive moves in which competitors must move quickly to build new advantages and [simultaneously] erode the advantages of their rivals.”

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Hypercompetition

Hypercompetition

In response, companies must constantly:

‐‐ innovate within their supply chain, innovate within their supply chain, 

‐‐ tweak their value propositions, tweak their value propositions, 

‐‐ or have enough financial capital to or have enough financial capital to outlast other competitors .outlast other competitors .

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DISTRIBUTION &LANDSCAPE FIRMS

MINING

OIL WELLS

FORESTRYFISHERIES

Extractive & Manufacturing

PAPER MILLS

PRINTED MATERIALS:(Catalogs; signs; packaging)

Wrappings,Containers

Packaging materialsLabels

Irrigation materials

PLASTICSMANUFACTURING

PETROLEUMPRODUCTS

FERTILIZER;PESTICIDES

CHEMICAL PLANTS

FERTILIZERPLANTS

METAL WORKING

TOOLS &MACHINERY

Production

AG COLLEGES;RESEARCH FARMS

Nursery& Greenhouse

Firms

Marketing

ConsumptionRETAILING• Garden centers• Retail nurseries• Retail greenhouses• Florists• Supermarket floral depts.• Discount mass merchants• Home improvement centers• Farm markets• Mail order & internet sales

INDIRECTMARKETING

FIRMS

• Installation• Maintenance• Storage• Transportation• Financing• Information

FUNCTIONS• Brokers• Landscape contractors• Lawn maintenance firms• Re-Wholesalers• Terminal market firms• Cooperatives• Auctions

DIRECTMARKETING

INSTITUTIONAL• Schools; Churches• Hotels; Resorts• Hospitals• Restaurants• Interior landscapes• Malls• Corporate landscapes• Public buildings• Community parks

IMPORTS:• Columbia, The Netherlands,• Ecuador, Mexico, Canada, • Guatemala, Australia, Israel,• England, Costa Rica, Hawaii,• Philippines, Japan, China,

Africa

EXPORTS:• Market Area to

Market Area• Other states• Canada• Europe

TRADE PRESS & PUBLICATIONS

Trade AgreementsTrade Barriers & Import RestrictionsAPHIS/PPQPatents, Royalties & CopyrightsEnvironmental ProtectionPesticide and other chemical regulations

TRADE

ASSOCIATIONS

Regulatory

End Consumer

FragmentedFragmentedBipolarBipolarComplexComplexMatureMature

Nursery and greenhouse crop Nursery and greenhouse crop consumption by householdconsumption by household

$112$117

$122$131$132$135$139$143

$149$152$152

$146$147

$90

$100

$110

$120

$130

$140

$150

$160

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

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Source: National Gardening Surveys, NGA. 

$33,

519

$33,

404

$37,

734

$39,

635

$38,

371

$36,

778

$35,

208

$34,

077

$35,

102

30,00031,00032,00033,00034,00035,00036,00037,00038,00039,00040,000

Mill

ions

($)

1999 2000 2001 2002 2003 2004 2005 2006 2007

Total U.S. household Total U.S. household lawn and garden retail saleslawn and garden retail sales

Source: National Gardening Surveys, NGA. 

05,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

2001 2002 2003 2004 2005 2006

Mill

ions

($)

Total U.S. HH lawn & garden retail Total U.S. HH lawn & garden retail sales vs. lawn/landscape servicessales vs. lawn/landscape services

DIY L&G activities = $34.1Bn in 2006 

L&L services = $44.7Bn in 2006 

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U.S. nursery and greenhouse U.S. nursery and greenhouse grower cash receipts($1,000).grower cash receipts($1,000).

$0$2,000,000

$4,000,000$6,000,000

$8,000,000$10,000,000

$12,000,000$14,000,000

$16,000,000

$18,000,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

p

Industry has shown some recession resistance and a strong correlation to housing starts.

Trend in Total U.S. Housing StartsTrend in Total U.S. Housing Starts

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Average annual growth Average annual growth rate,1967rate,1967--2007.2007.

• In the 1970’s: 13.64%13.64%

• In the 1980’s: 9.91%9.91%

• In the 1990’s: 4.64%4.64%

• In the 2000’s: 2.87%2.87%

2.2%2.4%

5.4%4.6%4.8%

4.4%2.0%

9.3%4.6%4.9%

4.6%1.9%

5.6%4.3%

11.9%7.2%

8.4%12.6%

9.5%5.6%

14.3%12.8%

9.8%7.0%

14.6%13.1%

17.1%10.4%

20.7%15.2%

10.9%18.0%

10.5%5.8%

3.2%3.7%3.9%4.1%

20042003200220012000199919981997199619951994199319921991199019891988198719861985198419831982198119801979197819771976197519741973197219711970196919681967

Year

Source: USDA Situation & Outlook, 1967‐2007. 

1.0%20051.0%2006

1.5%2007

The Rising Cost of The Rising Cost of GettinGettin’’ ByBy

• Chemicals ↑7%

• Fuel ↑49%

• Fertilizer ↑69%

• Containers ↑11%

• Machinery ↑7%

• CPI ↑4%

*** price increases since May 2007*** price increases since May 2007

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The CostThe Cost--Price Price SqueezeSqueeze

Retail consolidationFewer buyersOversupply

• Product tags/labels• JIT delivery, setup & care• Barcode/pre-pricing• Returnable shipping

equipment• Pay-by-scan• Take back unsold product• Consistent pricing• Continuous volume

replenishment• Rising input costs (e.g.

fuel)• Labor availability

•• ““These staggering costs have us scared to deathThese staggering costs have us scared to death””

•• ““We are surviving, but profitWe are surviving, but profit‐‐wise, itwise, it’’s a squeeze.s a squeeze.””

•• ““Costs of energy, labor, fumigants, pots, Costs of energy, labor, fumigants, pots, polyethylene, delivery polyethylene, delivery –– everything is going up. Iteverything is going up. It’’s s really beginning to hurt.really beginning to hurt.””

Emotional reactions to rising costs?Emotional reactions to rising costs?

Quotes from article in Florists Review.

MAY 10, 1979!MAY 10, 1979!

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Signs of a maturing Signs of a maturing industryindustry

Slowing demand breeds stiffer competition.

More sophisticated buyers demand price alignment.

Greater emphasis on cost reduction and service.

“Topping out” problem in adding production capacity.

Product innovation and new end uses harder to come by.

International competition increases.

Industry profitability falls due to decreasing margins.

Mergers and acquisitions reduce number of industry rivals.

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So the $64 question is So the $64 question is thisthis……

What do firms need to do to compete successfully in a maturing market?

“I skate to where the puck is going to be . . .

not to where it has been.”- Wayne Gretsky

© RoyaltyFree/PhotoLink/ Getty Images 

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External strategic External strategic responsesresponses……

1. Become a low‐cost operator and play the volume (commodity) game.

2. Differentiate in some way ‐ specialize by product, service, customer type, or geographic area.

3. Increase customer value via horizontal and/or vertical coordination.

As firm size increases, economies of scale and scope lead to decreasing per unit costs.

sizesize

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Many firms are becoming increasingly automated leading to improved cost performance.

automationautomation

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climate control climate control systemssystems

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tissue culture tissue culture and plug and plug productionproduction

biotechnologybiotechnology

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container technologycontainer technology

slowslow--release and release and soluble fertilizationsoluble fertilization

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irrigation technologyirrigation technology

My thoughtsMy thoughts……

• All of these technologies have been used to decrease costs of production, successfully.

• While some firms have a ways to go, many have stretched their production systems as thin as they can be stretched. Lean (flow) manufacturing is important, but will only take us so far.

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My thoughtsMy thoughts……

The most meaningful increase in margins in the future (for most firms) will have to come from the demandside of the equation (price).

The key to profitability in this The key to profitability in this industry is industry is notnot selling more selling more flowers/plants, flowers/plants, per seper se..

The key to profitability is The key to profitability is getting more dollars for the getting more dollars for the flowers/plants we do sell.flowers/plants we do sell.

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Value of a 5" Poinsettia Value of a 5" Poinsettia corrected for inflationcorrected for inflation

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

1965 1975 1985 1995 2005 2007

Retail ‐ INF Whole ‐ INF Actual Wholesale

External strategic External strategic responsesresponses……

1. Become a low‐cost operator and play the volume (commodity) game.

2. Differentiate in some way ‐ specialize by product, service, customer type, or geographic area.

3. Increase customer value via vertical coordination mechanisms (alliances and partnerships).

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Differentiation Strategy Differentiation Strategy DefinedDefined

• An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being customers perceive as being differentdifferent in ways that are important to them.

Examples of innovative Examples of innovative differentiation strategies used in differentiation strategies used in

the green industry:the green industry:

New plant introductions.

Innovative packaging & labeling.

Advertising and branding efforts.

Generic promotions.

Value‐adding services.

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new plant introductionsnew plant introductions

2008 Pack Trials, Photos by Chris Beytes

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Ellison’s Greenhouses, Brenham, Texas

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innovative packaginginnovative packaging

brandingbranding

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“…“…innovative new plants designed to innovative new plants designed to solve specific landscape challenges.solve specific landscape challenges.””

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•Good For Your Sole – a national campaign for the Stepables® brand of plants, a line of groundcovers that withstand foot traffic. 

Under the Foot Plant Co.Under the Foot Plant Co.

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Frederique van der Wal

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Paradox of choice?Paradox of choice?

• the paradox that more choices may lead to a poorer decision or a failure to make a decision at all. It is sometimes theorized to be caused by analysis paralysis, real or perceived, or perhaps from rational ignorance (when the cost of educating oneself outweighs any potential benefit). 

generic promotionsgeneric promotions

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• civic pride

• community involvement

• cooperation between  government, business, private citizens & communities

• economic development

• increased property values

• increased tourism

• decreased vandalism

• feedback from judges

cause marketingcause marketingPretty in Pink Garden, Hick’s Nurseries

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External strategic External strategic responsesresponses……

1. Become a low‐cost operator and play the volume (commodity) game.

2. Differentiate in some way ‐ specialize by product, service, customer type, or geographic area.

3. Increase customer value via horizontal and/or vertical coordination.

Examples of Coordinated Examples of Coordinated MarketingMarketing

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Examples of Coordinated MarketingExamples of Coordinated Marketing

Cost of goods sold (COGS)

Product price (P)

Perceived value (PV) = ∑ of perceived benefits

Objective value (OV) = ∑ of all benefits

{Firm’s incentive to sell: (P‐COGS)>0

{Customer’s incentive to purchase: (PV‐P)>0 (economic utility)

$0

Marketing efforts

Prices of substitutes

Source: Note on Behavioral Pricing, Harvard Business School, 9‐599‐114.

?

RECAP: ItRECAP: It’’s all about value!s all about value!……and relevance!and relevance!

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Relationship between Relationship between price elasticity and price elasticity and

total revenuetotal revenue

LongLong--run Industry Pricing Equilibriumrun Industry Pricing Equilibrium

Price SMCS1

S2

D2

D1

LS

MCAC

Output

(a) Typical Firm(a) Typical Firm0

Price

Quantity

(b) Total Market(b) Total MarketQ2

0 q1 q2 Q3Q1

P1

P2

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Ellisonchair.blogspot.comEllisonchair.blogspot.com

Questions?Questions?

Dr. Charlie HallDr. Charlie Hallcharliehall@tamu.educharliehall@tamu.eduEllisonchair.tamu.eduEllisonchair.tamu.edu