A Business Plan By

Manoj Karia

, 519-434-3742

Smita Yadav

, 519-474-7648

Saurav Singhal

, 519-857-3532

Ashwat Yennagudde

, 519-433-7463

of theRichardIveySchool of Business

Index

Topic Pages

  • Executive Summary 2-7
  • Comprehensive Business Plan 7-26
  • Canada – Investment Climate 7
  • Canada as a TCM Market – Macroeconomic Analysis 7
  • The Canadian NHP Industry 8
  • Canada as a TCM Market For a New Entrant 8
  • Chinese Herbal Products – Competitive Environment 9
  • Entry Strategy 9
  • Value Proposition & Positioning 10
  • Marketing Strategy 10
  • Market Segmentation & Target Segment Identification 11
  • Marketing Plan 13
  • Organizational Plan & Management Structure 17
  • Operational Strategy 20
  • Financial Analysis 24
  • Business Risks 26

EXECUTIVE SUMMARY

RECOMMENDATION

We recommend that DragonCare Ltd expand its footprint to Canada through a fully owned subsidiary by the name of “DragonCare Canada Ltd”.

Awareness of alternative health medicine is increasing rapidly in Canada. The Canadian Natural Health Products (NHP) industry (Market Size: $2620million)[1], of which the herbalmedicineshave a 40% share (Market Size: $1048 million), is growing at 20% annually[2].

The Traditional Chinese Medicine (TCM) segment in particular is highly fragmented with no major brand in the marketplace. Market share of none of the current players exceeds 5%. In this respect, the market condition inCanada is similar to what exists in DragonCare’s current markets and provides DragonCare a good opportunity to create a niche for itself by building a brand on the strength of its scientific research capabilities and experience of operating in such markets.

ROLL OUT STRATEGY

DragonCare Canadashould employ a phased approach in introducing its products, its geographic expansion in Canadaand introduction of its full value proposition to the Canadian customers.

DragonCare should enter Canada with two patentedwomen’s healthcare productspreferably for nutritional benefits & immunity development which have the highest demand in Canada[3]. The strategy is to develop these products as DragonCare’s “Flagship” products in Canada. Introduction of other products will be after the “DragonCare Brand” is established. Further, DragonCare should initially limit itself toBritish Columbia and Alberta since these are the biggest marketsfor TCM products (51% of people in BC & Albertause NHPs & TCM)[4]. BC also has a high Chinese immigrant population (380,000 Chinese immigrants i.e. 31% of Chinese immigrants in Canada are in Vancouver,BC)[5], thereby providing an attractive easy-to-tap market for DragonCare. After 3 years of operations in Canada,DragonCare should introduce services in the form of TCM clinics, thereby completing its value proposition.

Dragoncare, with its limited resources should focus on growing primarily in the Canadian market. However, if a few years down the road, DragonCare decides to enter the US market, it should consider setting up a manufacturing unit in Canada to take advantage of the North American Free Trade Agreement and use Canada as a manufacturing base for North America. However, we do not recommend setting up a manufacturing unit in Canadato target the Canadian market because of higher risk associated with high initial investment and also because the production costs are lower in Malaysia and Singapore.

OPERATING MODEL

DragonCare Canadashould source products from its manufacturing facilities in Singapore and Malaysia, and useCanadian pharma-products distributors to reach the pharma-retailers and ultimately the end users.

MARKET SIZE ANALYSIS & MARKETING PLAN

Product

DragonCare should enter the Canadian market with only the TCM product line since DragonCare can differentiate itself best on the basis of its research and scientific capabilities (which are more applicable to this line of patentable products) and because there are more opportunities for market penetration in this segment due to less competition.DragonCare should introduce two patented women’s healthcare products for nutritional benefits & immunity development (55% of consumers use NHPs for this reason)[6]. The primary reason for this recommendation is that women form the biggest TCM market segment[7] (Women’s Herbal Medicine Market Size: $ 535 million. Growth Rate: 20%).This limited introduction approach will allow DragonCare to strategically allocate itslimited resources in building the brand effectively.Exhibit 13 & 14 show market size calculations and projected growths.

Price

We suggest that DragonCare adopt a premium pricing strategy (inline with its brand image) and priceitsproducts at $32-$35/bottle (Retail price in Canadian$).Competitor’s products are in the price range of$21-$35/bottle[8].

Promotion

DragonCare will use a multi-pronged approach for establishing its brand. It will have a budget of $2.5 million for promotions in 2006.Advertising in health books and buzz marketing techniques will be the main promotion vehicles. (Market research indicates health books (18%) and family/friend referrals (36%) as being top influencers in buying decision for NHPs)[9].

Advertising: Using health magazines for women, cable TV, radio, newspaper, bill boards, and internet. The focus of the advertisements will beproduct benefits, DragonCare’s research labsand Singapore - a clean & progressive city. This approach will help build consumer confidence on the quality of health products imported to Canada.

Sales Promotions: Includes free samples, discount coupons, bundling products into value packs, and bundling DragonCare goods (key chains, coffee mugs etc).

In-Store Promotions: Includes Trade Discounts and special In-Store campaigns.

Public Relationships: Includes participation in Trade Shows, sponsorship of social causes targeted at women.

Direct Mail Campaigns: These campaigns will be used for selectively reaching potential long term customers.

Blogs: DragonCare will also initiate/participate in discussions on herbal products inblog sites like its customers can share their experiences on the efficacy of DragonCare’s products. This channel, we believe, will prove to be effective for buzz marketing.

Distribution

There are threemain distribution channels for Dragon care in Canada: health food stores, pharmacies and TCM practitioners. DragonCare will reach the health food stores and pharmacies through strategic alliances with two pharma-product distributors (one each in BC and Alberta). Online sales are not recommended based on ROI calculations.

FINANCIAL ANALYSIS

(Note: All figures are in ‘000s SGD)

5- Year Return on Initial Investment: 14.43% (Refer Exhibit 33 for details)

Net Present Value of Project: 5.2 Million SGD(Refer Exhibits 32 & 33)

Initial Investment Required: $2.1 million in 2005-06.

Profitable in 2007. 7% of DragonCare Ltd’s net profits in 2010 will be from Canadian operations. 14% of DragonCare Ltd’s sales in 2010 will be from Canadian operations.

Positive cash flows from operations in 2007.

Breakeven Sales Volume: $ 5.3 million/year in 2006 (Refer Exhibit 44 for details)

Breakeven Market Share: 4.2% (Refer Exhibit 44 for details)

Interest Coverage Ratio: Healthy (> 4 ) Refer Exhibit 40 for other ratios.

Refer Exhibits 28 to 44 for projected financial statements (Canadian operations and Consolidated), ratios, cash flows,sensitivities and assumptions.

Source of Funds:DragonCare Ltdshould secure long term loans from its current bank in Singapore to fund capacity expansion in its Singapore/Malaysian facilities and its own excess cash for funding initial working capital requirements. In later years the Canadian division can source working capital requirements from Canadian banks.

Risks:a) High working capital requirements in future years to meet growth.

Mitigation steps – Supply chain efficiency improvement.

b) Foreign exchange risks. Risk level –Medium. Mitigation Steps – Hedging.

Organization Plan & Management Structure

DragonCare Canada’s Mission Statement:

“Caring for Humanity by providing the traditional route to a healthy life.”

Organization Structure:

Inline with the structure of DragonCare’s other subsidiaries, GM Canada will report to VP-Sales & Retail. Since Marketing will be DragonCare Canada’s focus, the Marketing Manager will report directly to GM Canada.A R&D Coordinator will act as a link between Canadian Government and Dragoncare Ltd’s R&D headquarters for matters regarding certification, product safety etc.

COMPREHENSIVE BUSINESS PLAN

CANADA – Investment Climate

Canada is a dynamic and competitive economy that has liberal and favorable policies for establishing new businesses. Canada’s strong economic fundamentals and relative cost advantages over other developed nations provide a first rate business environment. Canada led the G-7 countries in terms of GDP growth (3.1%) in 2000-2003[10] and is expected to remain a top performer in 2004-2006 (2.8%). Canadian locations compare well internationally in terms of statutory corporate income tax rates. Firms in Canada have growing income tax rate advantages over US firms. Elimination of capital tax is expected to increase the tax advantage over US from the current 2.3% to 3.4% by 2008[11].

Exhibit 1 summarizes few of the advantages of Canadaas an investment destination.Canada leads the G7 Countries in terms of quality of life (highest index value = 9.2), business environment, labor costs (lowest index value = 80) and cost of living (lowest index value = 60).

CANADA AS A TCM MARKET – Macro Economic Analysis

The Political climate in Canadais well suited for investment. The bilateral discussions on the Canadian Singapore Free Trade Agreement are ongoing since 2001. The approval of CSFTA will lead to the elimination of all tariff and non-tariff measures between Canada and Singapore and more efficient trade and customs procedures. The Canadian economy is on an upswing with low unemployment rates, low interest rates, strong dollar value, low inflation and high disposable incomes resulting in positive consumer behavior. Increasing health consciousness and growing awareness of alternate healthcare products especially TCMpresents tremendous growth opportunities for Chinese herbal product companies. Further, the presence of a large Chinese immigrant populationalso addsto the attractiveness of Canada as a TCM market.High computer literacy has led to wide spread usage of internet making this an attractive advertising channel. Hence, from a macro economic perspective, Canada is a very attractive market for TCM products.

Refer Exhibit 2 for the Political, Economic, Social and Technological (PEST)Analysis.

THE NATURAL HEALTH PRODUCTS (NHP) INDUSTRY IN CANADA

Canadians are becoming increasingly willing to shoulder responsibility for their own health. With this trend has come a new awareness of health products,therapies and remedies derived from ancient sources of knowledge such as the Traditional Chinese Medicines (TCM) have found increasing appeal in the contemporary Canadian Society[12].

The Canadian NHP industry is a SG$ 2620 million industry growing at 20% annually. The biggest markets for NHPs within Canada are the Western Canadian provinces of British Columbia and Alberta.Women are the largest users of Natural Health Products (49% of Canadian Women use NHPs) and a significant percentage of Canadians spend over SG$ 39 monthly on these products. 55% of NHP consumers use these products to develop immunity and for nutritional benefits.

Refer Exhibits 3 to8 on the Canadian Natural Health Products Market.

CANADA AS A TCM MARKET FOR A NEW ENTRANT

The TCM industry (Herbal Medicine Market Size: $ 1048 million) in Canada is highly fragmented with several small players vying for customer attention. The absence of dominant players and major brands (no player has more than 5% market share) in such a rapidly growing market and low barriers to entry, make Canada an attractive market for DragonCare Ltd. Despite the threat of increased competition from new entrants, the Canadian TCM market provides DragonCare an attractive growth avenue which it can tap effectively by acting promptly and establishing a strong brand early on the basis of its quality, scientifically developed products and aggressive marketing.

Exhibit 9 summarizes the attractiveness of the Canadian TCM market from the perspective of a new entrant.

CHINESE HERBAL PRODUCTS MARKET - COMPETITIVE ENVIRONMENT

While the absence of a major brand in the market is to DragonCare’s advantage, it is worth taking note that there are a large number of small players currently in the market. Most of these are small companies/distributors (Sales < $1 million)that sell relatively unprocessed products like ginseng roots, Chineseherbs (Example: Sumbu City Chinese Herbs) etc.The bigger players are into selling more value added products similar to DragonCare’s TCM product line. While a significant percentage of the Canadian players are targeting their products at the Chinese/Asian immigrant population (their no frills packaging with traditional names and low pricing indicate this), very few players are targeting their products specifically at the Canadians. DragonCare can position itself to bridge this gap and can develop its products and promotions to specifically target westerners. The competitor to take note of for DragonCare is Kaiser Pharmaceutical Ltd, a Taiwanese company, which co-ordinates its business through a sales office in North America. This company too has a research oriented focus and markets its products on the same basis[13]. It operates in Canada through two distributors (one in Vancouver, BC and one in Winnipeg, Ontario) and has made a good name for its products in a short time.However, this company sells its products only to TCM Practitioners (since it currently focuses on the US market, it does not have the resources in Canadato take the retail route) and DragonCare can avoid direct conflict with this company by opting for the retail route. A few other players such as Herbal Comfort Products andA World of Good Health sell products using the online channel[14].

ENTRY STRATEGY

We recommend that DragonCare Ltdenter the Canadian market through a wholly owned subsidiary which sources its products from its manufacturing units inSingapore/Malaysia.

DragonCare Ltd has other avenues of entry intoCanada- a joint venture (JV), an acquisition, a greenfield project (with a new manufacturing set up in Canada) are a few such options. While a joint venture and acquisition may help DragonCare leverage the knowledge/resources of partners/existing players, the absence of a large player in the Canadian market with a good fit for DragonCare nullifies the potential benefits that these avenues may have offered.

Further, evaluating theoptions based on the criteria of retaining control, maximizing profits and minimizing the risks of starting a new business in Canada, we find the option of setting up a subsidiary without any manufacturing facilities in Canada as the best alternative.Exhibit 10 shows the Evaluation of the various Entry Avenues available to DragonCare.

DRAGONCARE CANADA’s VaLUE PROPOSITION & BRAND POSITIONING

DragonCare Canada will seek to become an end-to end TCM provider to Canadian customers. In order to achieve this goal it will have a 3-Pronged Value Proposition – Quality, Health and Services. DragonCare Canada’s Value proposition will be represented by the three prongs of the Canadian Maple Leaf. Exhibit 11 shows DragonCare’s Value Proposition Model.

We believe that DragonCare Canadacan differentiate itself from the current players in the Canadian TCM Market on the basis of two main factors – a) High Brand Value andb) Scientifically Researched & Developed Products. This will also allow DragonCare to pursue the premium pricing approach which has been a major reason for its strong past financial performance.Exhibit 12 shows DragonCare Canada’sProduct Positioning Map

MARKETING STRATEGY

In order to strategically use its limited resources and to minimize risk, DragonCare Canada should use a concentrated marketing approach and limitits efforts toWestern Canada and niche segments to build a strong brand image and gain a firm foothold in the Canadian market. DragonCare should enter the Canadian market with only the TCM product line since DragonCare can differentiate itself best on the basis of its research and scientific capabilities (which are more applicable to this line of patentable products) and because the Canadian market offers more opportunities in this segment. Further, DragonCare should initially restrict itself to a very limited number of products within the TCM category. Once theDragonCare brand is established, it can launch new products and increase the range of offerings. After DragonCare establishes itself as a market leader in Western Canada it can leverage on its brand image and target the eastern Canadian markets. DragonCare should then look at setting up TCM clinics under its brand name in order to complete its promise of becoming an end-to-end TCM provider.

To reduce risk and increase the chances of a successful product launch, we recommend that Dragon care does simulated market testing followed by controlled market testing to ensure that its products are well accepted by the target segment during the actual launch. Simulated testing involves observing the purchasing behavior of a focus group in a test environment containing various TCM products including those of competitors followed by a product satisfaction survey a few weeks later. As part of controlled market testing Dragon care will launch the product in a few locations within Vancouverto gauge the consumer reaction to its products and then accordingly modify its strategy during the actual launch of the product.

DragonCarewill have to adapt its marketing strategy to suit the needs of the target Canadian market–“Think Globally Act Locally”. This may result in higher initial costs but will help secure a larger market share and greater return. To differentiate itself from competitors who are primarily targeting the Chinese immigrants,DragonCareshould“Westernize” the names of its products and its packaging, communication, advertising and promotion activities to target the affluent western Canadian women. The detailed marketing plan is explained later in the report.

CANADIAN TCM MARKET SEGMENTATION & IDENTIFYING THE TARGET SEGMENT

We used the following criteria to segment the Canadian TCM Market and identify the Target Segment for DragonCareCanada.

  • Measurability: The size, purchasing power and profile of the segment(s) should be quantifiable objectively.
  • Accessibility: The market segment(s) should have easy accessibility.
  • Substantiality: The market segment(s) should be large and profitable enough to serve.
  • Actionability: Effective programs can be designed to attract and serve the segment(s).
  • Growth: The segment(s) should be undergoing rapid growth.
  • Structural Attractiveness: Avoid segments that have many strong and aggressive competitors.
  • Company Objectives and Resources:DragonCare’s most profitable products are in the patented TCM group for children and women.

Based on these criteria we identified the middle to high income women in western Canadaas our immediate target segment.This segment has a market size of $213 million and is growing at an annual rate of 20%[15]. Refer Exhibit 13 for market size calculations.