Mattingly "AI & Prompt Design: The Basics of Prompt Design"
Read the attached case and answer the following questions in
1. Read the attached case and answer the following questions in
sentence/paragraph form, unless noted
otherwise:
1) Conduct an analysis of the general business / macro-
economic environment facing Mihi. For
each component of your analysis, identify the relevant trends
and the implications (positive or
negative) for the company. The time horizon for your analysis is
3-years.
2) Conduct a Porter’s 5-Forces Analysis of Canadian Retail
Cannabis industry?
a. Describe the characteristics associated with each of the five -
forces
b. For each of the five forces and based on the characteristics
you identified in 2a above,
identify the level of the force (low, medium, high) along with a
rationale as to your
assessment.
2. 3) Describe how attractive/unattractive you believe the industry
is for Mihi using your answers
from #1 and #2 above as evidence to back-up your position.
4) Describe what you believe is the recommended launch
strategy for Mihi using the strategy
triangle. For each component of the triangle include your
rationale for your decision.
1
MĪHĪ CANNABIS: PLANTING THE SEEDS FOR A NEW
RETAIL
CANNABIS BUSINESS IN CANADA
This case was written solely to provide material for class
discussion. The author does not intend to illustrate either
effective or ineffective handling of a managerial situation. The
author may have disguised names and or information
to protect confidentiality.
3. In June 2018, the Government of Canada passed the Cannabis
Act, paving the way for the
legalization of recreational cannabis cultivation, acquisition,
possession and consumption on
October 17 of that same year1. This move set off a flurry of
activity, as existing companies, private
equity firms and entrepreneurs sought to establish an initial
position within the burgeoning
industry.
One critical aspect in the formation of the industry would
undoubtedly be how cannabis products
would ultimately get to the end consumer. mīhī Cannabis, a
new-startup, was planning on
establishing itself as a key player within this part of the
industry’s value chain. Thomas Dyck, the
recently appointed CEO of mīhī (Latin meaning “for me”), was
busy developing a retail concept
and strategic plan he could take to his investors. He knew that
the challenge for the company and
its competitors would be to establish a strategy that adequately
addressed the plethora of external
factors influencing the industry and its growth potential.
4. THE CANADIAN CANNABIS MARKET
Cannabis (also known as marijuana, pot and over 1,200 other
slang terms2) is cultivated from the
flowers of cannabis plants. Two of the 113 cannabinoids
produced from the flowers of the cannabis
plant generate two psychoactive effects when heated or smoked,
tetrahydrocannabinol (THC),
which is responsible for getting people “high”, and cannabidiol
(CBD) which relaxes people3. The
cannabinoids present within cannabis are also responsible for
the observed medical benefits of the
drug, including reduced inflammation, lower blood pressure,
improved sleep and the calming of
PTSD symptoms3.
Cannabis has been used throughout history for both social -
recreational and medical purposes. The
earliest physical evidence of cannabis use by humans was
discovered in 2008 by researchers in
China who uncovered a 2,700-year-old Caucasian shaman grave
containing 700 grams of
cannabis. Notwithstanding this historical popularity, as of 2018,
the drug was prohibited in most
countries.
5. In Canada, cannabis was made illegal under the Narcotics Drug
Act Amendment Bill in 1923.
Since then, over two million people have been arrested for
cultivating and selling pot. Views as to
the rationale behind this prohibition are mixed, with some
historians attributing it to a book written
by Emily Murphy, published during the same period, that
claimed “marijuana turned its users into
2
homicidal maniacs.”4 Regardless, the popularity of cannabis
continued to grow in the 1960-70s,
resulting in increased arrests for simple possession.
In 2001 the Canadian government began a medical marijuana
program allowing those with a
medical prescription to grow their own cannabis or receive the
drug directly from Health Canada
until a regulated industry could be developed. At the time,
medical cannabis was being used to
treat a number of ailments including the pain, spasms and
spasticity associated with multiple
sclerosis, behavioral improvement in Parkinson’s disease
patients, memory preservation in
6. Alzheimer’s patients and tumor suppression and nausea relief
for cancer patients. The use of
cannabis was also linked to other benefits. In one study, 82% of
respondents indicated they had
reduced alcohol consumption, while 73% had reduced tobacco
usage, 86% had reduced their use
of anxiety related medication and 95% had reduced their use of
opiates5. These benefits were in
stark contrast to warnings coming from the Centre for Addiction
and Mental Health about the
negative effects of cannabis6 and a report from the Canadian
Automobile Association (CAA)
indicating that "two-thirds of Canadians are concerned that
roads will become more dangerous
with the legalization of marijuana."7
Overall, public opinion and the negative criminal stigma
surrounding cannabis was changing for
the positive. According to a 2016 Nanos Research study, 7 in 10
Canadians were now in favour of
legalization8. By 2016 cannabis usage in Canada was strong
with 3.8 to 5.2 million regular users
expected by 20219,10, approximately 10-14% of the Canadian
population. This expanding base of
7. users increasingly did not fit the traditional, “stoner” stereotype
profile often associated with
cannabis usage. New users were older, more likely to be married
with children and have higher
levels of income11. Recreational cannabis was being used for a
variety of stated reasons, including:
to help relax or sleep (66%), to reduce stress or anxiety (62%)
and to have fun with friends (58%)12.
Despite changing attitudes, most users continued to hide their
consumption from others. This was
particularly true for new consumers.
One challenge the industry faced was getting existing cannabis
users to switch to legalized
channels of distribution. Among other factors, existing users
indicated they would switch if
product quality was better (55%), there was a range of price
points for every budget (54%), and
products could offer a range of potency (47%)12. Those looking
to use legalized cannabis indicated
a strong interested in buying from a retail store (48-51%) as
opposed to growing their own (27%)
or purchasing through a website (28-33%)12. One likely reason
for this was the importance
consumers placed on knowledgeable in-store staff above other
8. factors, to educate and help them
with their purchases. Even long-time, regular cannabis users
indicated that their product
knowledge was quite limited and would like to learn more.
With the establishment of a legal and regulatory framework for
the production, distribution and
possession of recreational cannabis on October 17, 2018,
Canada became only the second nation
to legalize cannabis for recreational use. Overall, the market
was forecasted to grow to $23 billion,
plus an additional $2.7 billion for cannabis edibles, topicals and
drinks, which were legalized one-
year later13. Given the size of the opportunity, a number of
competitors were expected to enter the
industry. Competition was predicted to come primarily from 5
different groups.
3
Licensed Producers. These organizations were originally formed
to provide medical grade
cannabis, as prescribed and overseen by Health Canada. They
built facilities to turn cannabis into
9. oil, gel caps and other product types as both a producer and
manufacturer of cannabis products.
They had access to significant pools of capital, a wealth of
product experience, and could take
advantage of the economics of full vertical integration.
However, given their potential power over
the industry’s value chain, it was expected that significant
regulatory restrictions would be placed
on their ability to establish private retail outlets.
Enthusiasts. As there already was an established grey/black
market for cannabis across the country,
many retail stores existed that actively ignored current
regulations and sought to meet the needs of
their existing customer base as efficiently as possible. These
businesses had access to black market
supply, often at significantly lower prices than available
through government supply chains. While
regulation and compliance adverse, it was expected that these
businesses would ultimately
transition to legal retail outlets. While being extremely
knowledgeable about the products they
sold, these competitors had little access to capital or the
business acumen to expand significantly.
Landlords. Superior retail locations very quickly became the
10. critical scarce commodity within the
industry. Because of this, commercial landlords realized that
they had an opportunity to stake a
claim in the industry. While they controlled key locations, they
had no day-to-day experience
managing a retail business, particularly one within a highly
regulated industry.
Private Liquor. In British Columbia and Alberta, private liquor
distributors were expected to
leverage their existing retail distribution networks and supply
chain expertise to get into the
cannabis industry in a big way. While they had experience
managing a regulated retail business,
they had little knowledge and experience with cannabis and the
unique needs of the cannabis
consumer.
Private Retail. The final group of competitors included a mix of
firms singularly focused on the
retail cannabis market. Some were entrepreneur’s, intent on
becoming 1 to 3 store operators, who
lacked retail or cannabis specific experience. Others, like mīhī,
had access to significant sources
of early-stage funding from private equity firms, interested in
investing in the sector. The value
11. of these early entrants’ sky rocketed, creating large capital
pools which ultimately trickled down
to smaller firms. Several were able to leverage their early
entrance to amass a significant capital
position and build management teams with extensive retail
expertise.
While opportunities within the cannabis industry looked
promising, the overall economic outlook
for Canada was less positive in 2018. Strong economic growth
over the past decade was expected
to subside due to slower employment growth and high consumer
debt levels.14 The Bank of Canada
was also expected to gradually raise interest rates to offset
inflationary pressures, reducing
investment stimulus. In addition, there was potential pressure
on retail salaries given declining
unemployment rates and more generous provincial minimum
wage policies. Other economic
indicators captured by the company for planning purposes are
included in exhibit 8.
4
REGULATORY FRAMEWORK
12. Legalization meant that Canadians could now possess up to 30g
of dried cannabis and grow four
cannabis plants with licensed seeds or seedlings. However, it
was expected that the majority of
users would want to purchase rather than grow their own
cannabis. In this regard, the Canadian
Government, through Health Canada, would control both the
quality of supply, through strict
licensing of producers, as well as individual consumption risk
through regulatory control of the
product marketing mix (i.e., significant product, packaging,
advertising restrictions). In contrast,
each province would be responsible for decisions surrounding
the supply chain and retail
distribution of cannabis to Canadians. In some markets,
municipalities would also be granted
authority over whether to participate or decide on the number of
retail locations they would allow
within their community. This resulted in a complex patchwork
of regulations for companies to
navigate as they developed launch strategies. In addition,
cannabis ecommerce was limited to
online purchases made through provincial government websites.
While private retailers were
13. technically free to set their own prices, in reality there were
numerous pricing constraints at play.
First, retailers had to purchase supply at regulated, wholesale
price points which effectively set a
price floor for all legal competitors. Second, provincial
government website prices for online
purchases established a price point for legalized cannabis in the
minds of consumers. Lastly, black
market sellers consistently undercut the legal wholesale rate,
establishing a price range for
consumers willing to purchase illegal product.
The market potential for private retailers was very regionalized.
Quebec and the Atlantic provinces
chose to utilize their own public, retail liquor networks to sell
cannabis, eliminating any private
retail opportunity. Alberta, using its experience in privatizing
retail liquor decades earlier, chose
to permit private retail distribution. However, the province
delegated site selection and building
permit decisions to municipal governments with mixed results.
Some municipalities were quick to
establish guidelines, creating an investment frenzy, others chose
to opt-out completely, while the
14. remainder established excessive restrictions, making it virtually
impossible for private firms to
operate successfully.
British Columbia was slower to establish regulations, already
having a stable grey market (not
legal, but not enforced) which they were concerned about
disrupting. The guidelines they
ultimately established delegated location decisions to
municipalities and allowed for only 5 stores
per firm. In addition, they also chose to sell cannabis through
their own retail liquor network,
which would compete directly with the private retail firm’s they
were offering licenses to.
While most provinces established clear guidelines with minor
changes during implementation,
Ontario was the most problematic. In early 2018, prior to
legalization, the provincial government
indicated that it would be using the province’s retail liquor
network (the LCBO) for cannabis
distribution. However, one day after legalization, the
Progressive Conservative Party of Ontario
won a provincial majority and quickly abandoned these plans in
favour of private retail.
For those provinces which allowed private retail distribution,
15. store licensing procedures were
somewhat similar. Each firm had to submit an application to the
province, which included a non-
refundable fee of thousands of dollars per location, and
evidence that an executed, unconditional
5
retail lease had been signed for each location. The application
also authorized the provincial
government to conduct a full criminal and financial check of
company officers, directors and large
investors.
MĪHĪ CANNABIS INC.
mīhī Cannabis Inc was founded in Toronto, Ontario Canada, in
August, 2018 through a joint
ownership agreement between Blackshire Capital Corporation
and mīhī’s management group.
Thomas (Tom) Dyck, the company’s new CEO, was given the
mission of developing a world-
class cannabis retail chain within the Canadian marketplace.
Tom had just recently retired from a
16. successful 32-year career in banking at Toronto Dominion
Bank, where he held senior
management positions in a variety of financial business lines in
both Canada and the United States.
In Tom’s last role as Executive Vice President, Community
Banking, he was responsible for the
bank’s commitment to deliver a “legendary bank experience to
Canadians”, leading 25,000
employees in 1,150 branches. At mīhī Tom would have to create
a new organization from the
ground up, while navigating significant external hurdles, a
nearly 180-degree shift from his
experience at the bank.
Tom had already recruited some impressive talent for key
management positions. His senior vice-
president of guest experience was a seasoned, consumer
packaged goods and mass market retail
executive, and a recognized thought leader in retail innovation
while his chief administrative
officer, had over 30-years of business and technology
experience in highly regulated industries.
Other key management positions included a policy guru with
previous experience within
17. government regulatory teams in both Canada and the U.S., a
product manager with 15-years
consumer packaged goods product and sourcing experience and
a brand leader with over 20-years’
experience developing some of Canada’s most recognized
brands.
Initial revenue and cost planning had also begun. In terms of a
build-out, Tom estimated that each
store would cost between $1 million to $1.3 million to setup,
including the initial working capital
needed to operate the store. On average, he wanted to achieve a
minimum 30% return on store
capital annually. Tom felt that his competitors’ product mix
would likely be 80% cannabis and
20% cannabis related accessories. Based on the regulated costs
of acquiring product from
suppliers, his competitors would likely generate cannabis gross
margins of 28 - 32%. Conversely,
gross margins on cannabis-related accessories were forecast at
50-60% and would form the balance
of store revenue. Tom firmly believed that a top-tier retailer
could achieve a higher gross margin
than the industry average through smarter product mix and price
management decisions (exhibit
18. 11). Total operating expenses, including lease, staffing and
store-related expenses were expected
to run between $650 - $800 per square foot.
EARLY CHALLENGES
The regulatory frameworks established at the federal, provincial
and municipal level created
significant challenges for early industry development and the
conversion of existing cannabis users
to legal channels. At the federal level, initial regulations only
permitted the sale of plant and oil-
6
based products which represented about 40% of traditional
cannabis usage, leaving much of the
market out of reach for industry players. In addition, delays in
the licensing of cannabis production,
and the regulatory complexity established, created a significant
production learning curve,
resulting in supply shortages in the first year of legalization.
Conversely, the black market offered
a full line of products and no supply shortages.
19. The product packaging and dosage regulations imposed by the
federal government did not match
what consumers were used to prior to legalization. For example,
edible products could only contain
10mg of cannabis per package. If the container included five
gummy bears (the most popular
form), each gummy could only contain 2mg of cannabis
compared to the black market which used
an average dosage of 15-25mg per candy.
At the provincial level, retail licensing guidelines caused a
massive “land grab” as competitors
realized they needed to secure locations to meet licensing
application requirements. Commercial
landlords were receiving multiple bids for the same retail
locations, and quickly increased their
lease rates by 3x – 5x the normal price per square foot,
significantly impacting industry business
models. In addition, most landlords would not permit firms to
break their lease despite the
uncertain regulatory environment. This meant that each
cannabis retailer had to decide how much
risk they were willing to accept, based on the number of leases
they were prepared to sign before
knowing whether their store license would ultimately be
20. approved.
Retailers wanting to operate in multiple provinces faced even
greater challenges. For example,
each firm had to manage and negotiate with separate supply
chains in each province. In addition,
store location planning had to consider the fact that overall
customer demand, store potential and
even the prices consumers were willing to pay appeared to have
regional variations.
MOVING FORWARD
Unlike Tom’s previous roles, here, he was responsible for
launching a company in an industry that
did not exist as yet. There were few opportunities to learn from
others, even in other countries.
Both the industry players and the various levels of government
were learning in real-time. He knew
that he needed to flush out a strategy for moving forward. In
particular, he needed to make
decisions regarding, which markets to enter and how big a retail
footprint to initially establish.
While many of the traditional elements of the product marketi ng
mix would be common across all
competitors due to industry regulation, Tom knew he still
21. needed to develop a strong value-
proposition that would both differentiate the company and
support the normalization of the
industry in the eyes of the communities in which it operated.
His choice of value-proposition would
ultimately drive the company’s business model and put greater
pressure on certain organizational
capabilities over others.
Given potential market volatility, Tom knew that conducting a
store-profit sensitivity analysis was
going to be a critical component to his decision making. The
data he had gathered could easily be
used to calculate average industry revenue per store, however,
these calculations would be
misleading, as they did not take into account the vastly different
retail formats that would emerge
in the industry. For example, Tom expected that mīhī would
likely see revenues of 2x the industry
average given their larger retail footprint (2,100 square feet),
the use of higher-cost, prime
7
22. locations and the overall marketing strategy he was planning on
developing. One area of concern
he had was the possibility that market demand would be lower
than forecast, while provincial
governments might still license the maximum number of stores
(exhibit 1). This would result in a
reduction in the average industry revenue per store. Thinking
about this further, he felt that he
could use a 25% reduction in market demand in his sensitivity
analysis to account for this potential
volatility.
8
EXHIBIT 1: ESTIMATED MARKET SIZE AND RETAIL
STORE POTENTIAL BY REGION
9
EXHIBIT 2: DEMOGRAPHIC PROFILE OF CANNABIS
USERS
EXHIBIT 3: REASONS FOR USING CANNABIS
24. Growth in Real GDP 1.5 3.1 2.0 1.7 1.8 1.7 1.8 1.8
Consumer Price Index 1.4 1.7 2.0 2.1 2.1 2.0 2.0 2.0
Bank Rate 0.75 1.00 1.73 2.47 2.99 3.00 3.00 3.00
Exchange Rate (US$ per C$) 0.75 0.78 0.82 0.83 0.84 0.84 0.84
0.84
Unemployment Rate 7.0 6.6 6.5 0.6 6.1 5.9 5.8 5.8
source: Conference Board of Canada, 2018 Economic Outlook
EXHIBIT 9: MINIMUM WAGE BY PROVINCE
2018 2021
British Columbia 14.60 15.20
Alberta 15.00 15.00
Saskatchewan 11.45 11.45*
Manitoba 11.90 11.90*
Ontario 14.00 14.35
source: Retail Council of Canada
*annual increase based on change in CPI
13
25. EXHIBIT 10: PRICE WILLINGNESS (PER GRAM) BY
REGION
EXHIBIT 11: PRODUCT MIX AND MARGIN DATA
Industry
Gross Margin Product Mix
Cannabis 30% 80%
Accessories 55% 20%
mihi Target
Gross Margin Product Mix
Cannabis 35% 75%
Accessories 60% 25%
14
END NOTES
1. Sapra, Bani (20 June 2018). "Canada becomes second nation
26. in the world to legalize marijuana".
CNN.
2. Steinmetz, Katy (April 20, 2017). "Why There Are So Many
Different Names for Weed". Time.
3. Brown, Ian (July 1, 2018). “A biography of cannabis”. Globe
and Mail.
4. Daniel Schwartz (May 3, 2014). “Marijuana was criminalized
in 1923, but why?” CBC News.
5. Merwin, K (January 18, 2018). Eaze Insights: 2017 State of
Cannabis Data Report
6. "About Marijuana". (2012). CAMH.
7. “Canadians Worry Roads Will Be Unsafe When Marijuana
Legalized" (November 14, 2016). CAA.
8. Tahirali, Jesse (30 June 2016). "7 in 10 Canadians support
marijuana legalization: Nanos poll".
CTV News.
9. Skerrit, Jen; Lam, Eric (November 30, 2016). "Marijuana
producer jumps 356% as Canada's
investor pot frenzy intensifies". The Globe and Mail.
Bloomberg News. Retrieved 2 December 2016.
10. Cullen, Catherine (November 1, 2016). "Legal marijuana
could raise federal cash – but not right
away, PBO says". CBC News.
11. mīhī sponsored research (December, 2018), Ipsos Reid
12. Deloitte (2018). A society in transition, an industry ready to
bloom, 2018 Cannabis report.
13. Armstrong, Peter (November 27, 2017). "Merger madness:
Canada's marijuana industry enters
consolidation phase". CBC News.