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Table of Contents

Executive Summary................................................................................................................................. 2 1.0. 2.0. 3.0. 4.0. 5.0. 6.0. 7.0. 8.0. 8.1. 9.0. 10.0. 11.0. 12.0. 13.0. 14.0. 15.0. 16.0. 17.0. Introduction - Sri Lankan Economy ............................................................................................. 3 The Floriculture Industry of Sri Lanka ......................................................................................... 7 The World Floriculture Industry ................................................................................................ 11 Challenges, Risks, Barriers in the Domestic Industry ................................................................ 12 Special Characteristics in the Floriculture Industry .................................................................. 15 Trade Terms of the Floriculture Industry .................................................................................. 16 Import and Export Policies Implemented by the Sri Lankan Government ............................... 17 Country Analysis- Netherlands.................................................................................................. 19 Growth Prospects for the Industry in the Foreign Market ....................................................... 34 SWOT Analysis of the Floriculture Industry .............................................................................. 37 Floriculture Industry- Porters 5 Forces ................................................................................ 39 Floriculture Industry -Diamond Theory ................................................................................ 40 Possible Modes of Entry........................................................................................................ 42 International Business Strategy ............................................................................................ 44 Challenges, Risks and Barriers in the International Arena .................................................... 45 Recommendations ................................................................................................................ 48 Conclusion ............................................................................................................................. 51 References ............................................................................................................................ 53

Executive Summary
This report is a critical analysis on identifying the most suitable industry to enter the International market. The primary contents of this report discusses about the Sri Lankan economy, relating to areas such as total exports, imports and trade balance. In addition to this, this report also emphasises on the international trade the country is engaging in. The selected industry chosen for this assignment was the Floricultural industry which includes products such as Bulbs Tubers Corms Live Plants Cut flowers Foliage Flowers seeds and many others

A comprehensive report is provided on this selected industry, mentioning about the negative aspects in the local market and challenges faced in the international market. This report also identifies the growth prospects available for the industry by catering to both domestic and international markets. In addition to this, we have also suggested and clearly explored the selected modes of entry towards the international market through floriculture. Furthermore, in order to provide more information, we had selected and explained SWOT analysis, Porters 5 forces and Diamond theory based on floricultural industry. On the other hand, we were also able to provide a country analysis on our desired country of export which is the Netherlands. Finally, the report consists of the action plan and implementations by the government of Sri Lanka; and how they would support this industry to improve its quality standards, productivity growth and market expansion.

1.0. Introduction - Sri Lankan Economy


Despite the years of civil war, the growth rate in Sri Lanka achieved strong growth rates in the past few years. Taking a look back from year 2007 to 2012, Sri Lankas gross domestic product (GDP) growth rate attained 8.2 percent as the highest GDP at the end of 2011, alongside with a ground breaking lowest GDP growth rate of 3.5 percent in 2009.The Sri Lankan economy is based mainly on tourism, tea export, apparel, tourism, textile and rice production sectors (www.cbsl.gov.lk) Sri Lanka has many resources to be offered to the world market; out of which some of the highly reputed exports according to the Central bank of Sri Lanka 2013 are as follows.

Tea Rubber Coconut Vegetables Coffee Cinnamon Pepper

Beatle leaves and Arecanuts Sesame seeds and other oil seeds Unmanufactured tobacco Mineral exports Precious stones Textiles and garments

On the other hand, apart from these bulky exports, Sri Lanka also participates in various minor exports. These are some of the minor exports being carried out, according to the export development board of Sri Lanka.

Ayurvedic and herbal products Boat building Electrical and electronics Coconut and coconut based products Fruits and vegetables Giftware and lifestyle products Handloom Floriculture

Organic products Ornamental fish Wooden products Plastic Products Printing and stationary Spices and allied products Toys games and sports Footwear and leather

The above minor categorized exports would generate a very small portion of the total income to the country. But when looking up on the larger scale of exports from Sri Lanka, each product being exported plays a vital role in the overall total income of Sri Lanka. This can be further explained in the graph below.

Exports
Exports Linear (Exports) 974.3 1,167.5 1,245.5

Millions of Rupees

583.9

638.2

716.5

845.6

878.4

813.9

2004

2005

2006

2007

2008

2009

2010

2011

2012

Year

(Values are given in millions of Sri Lankan rupees) (Source: Central bank of Sri Lanka 2013) As seen in the above graph, given are the total exports of Sri Lanka from year 2004 to 2012. Exporting products includes- Agricultural exports, tea, rubber, coconut products, industrial exports, textiles and garments, petroleum products, mineral and others. If we look at each years total exports; it has increased gradually but in the year of 2009, total exports had

declined due to the financial crisis affecting all market activities globally. After the financial crisis in 2009 Sri Lankan exports started to increase its exports back again in 2010 and continuing to grow increasingly, year after year in 2011 and 2012. Furthermore, when concentrating on the imports sector to Sri Lanka, since the year of 2004 till 2012 and at present, the need for the following products have been consistent. In other words, Sri Lanka is highly dependent on the following products, as they do not have sufficient resources, land and the necessary capabilities of growing them. Such products imported are,

Rice Flour Sugar Milk and milk products Fish dried and fish Fuel Motor cars and cycles Fertilizer

Tyres and tubes Medical and Pharmaceutical products Building materials Machinery and equipment Chemical elements and compounds Dyeing, tanning and colouring materials and many other products are also being imported.

This can be illustrated further in the following graph

Exports, Imports and Trade balance


Exports Imports Trade balance

2004 -227,171 2005 -253,082 2006 -350,110 2007 -404,703 2008 -647,207 2009 -358,707 2010 -545,350 -1,073,900 -1,195,368 -1,500,000 -1,000,000 -500,000 2011 2012 0

583,967 811,138 638,276 891,359 716,579 1,066,689.00 845,683 1,250,389.00 878,499 1,525,705.00

819,911 1,172,618.00 974,387 1,519,737.00 2,241,488.00 2,440,899.00

1,167,588.00 1,245,531.00

500,000

1,000,000 1,500,000 2,000,000 2,500,000 3,000,000

(Values are given in millions of Sri Lankan rupees) Given above are the total values of Sri Lankas exports, imports and trade balance according to the Central bank of Sri Lanka. As shown above, more than the exports sector, more products have been imported to the country. Although the exports sector has been increasing steadily, the imports have also been increasing at the same time. The need and the demand for the product is immense, that Sri Lanka starts to import such products and services. Moreover, spending on imports has increased more than the profits being gained through exports. This causes the trade balance to increase in negative values. A situation where the differentiation between imports values are higher than the exports values. From then on trade balance would start to increase in a negative perspective. In addition to this, in the year of 2009 during the financial crisis; both imports and exports had declined in Sri Lanka, as world markets were severely affected. From year 2010 and beyond, exports started to regenerate and increase its profits meanwhile imports started to increase alongside elevating again to a higher negative trade balance.

2.0. The Floriculture Industry of Sri Lanka


Plants are primarily needed for our ecology, living environment and surroundings. The root cause for purchasing floricultural products are due to various different cultures, traditions and beliefs; to express ones feelings to one another or as to a group. Having the best suitable temperature, climate and land, Sri Lanka has the potential in developing the floricultural sector to great extent. Initially, floriculture industry started in the 1970s and ever since then, Sri Lanka has been gradually moving up the ladder to become an exporting industry. Sri Lankas top rated exporting country for floriculture, as at current is Netherlands. At present Sri Lanka is highly reputed as one of the best quality floricultural producing industries in the world. On the other hand, although the reputation seems to be highlighting, it is disappointing that Sri Lankan floricultural production receives much less than 1% of its share in the world market. During the year of 2011, Sri Lanka was able to achieve 14.8 million US $ worth of foreign exchange earnings through floricultural exports. When compared to the year of 2010, Sri Lankan floriculture exports had grown by 9%. (www.srilankabusiness.com) The flower industry covers up to 500 hectares as at present; where most of the lands reside in the Western Province. Out of which; 472 hectares are allocated for foliage plants, 10 hectares for carnations, 3 hectares for roses, 2 hectares for gerberas, 10 hectares for anthuriums and 3 hectares for orchids. The floriculture industry currently employs to more than 5000

employees in total. (www.slcarp.lk) The Sri Lankan floriculture comprises of three sectors for producers or growers, Large commercial ventures for export Middle level growers targeting the local market Village level producers who will produce to the above parties

Large scale commercialised floricultural businesses produce plants together with foreign partners. All the required technologies and methods for production are shared with its partners. These ventures pay less attention in producing cut flowers but focuses on ornamental foliage plants and cut foliage plants. On the other hand, middle and village level producers focus on producing flowers within the local market for a lower price when compared to exports; due to minimal advancement in technologies and following traditional

approaches. Majority of the middle and village level producers are the ones who get involved in producing cut flowers to satisfy the local market. Any excessive production of cut flowers occasionally, will be later exported. However, exportation of cut flowers are continuing to increase. The floriculture industry in Sri Lanka has segmented its exports in the following. Such categories are (Based on Harmonised System HS code),

HS Code 0601

Description Bulbs, tubers, corms and other propagated materials

0602

Live plants Cut flowers and flower buds of a kind

0603

suitable for ornamental purposes, fresh, dried, bleached, impregnated or otherwise prepared

Foliage, branches and other parts of plants, 0604 without flowers or flower buds and grasses, mosses and lichens, being goods of a kind suitable for bouquets or ornamental purposes, fresh, dried, bleaches, impregnated or

otherwise prepared Flowers seeds

1209-3

(Samarasekara, 2007) These acquire high management skills, maintenance, suitable facilities and resources. In order to be competitive, either locally or internationally the participation and involvement of the Sri Lankan government is highly essential, as the government can help the floricultural industry to improve its production.

Sri Lanka apart from its bulky floricultural exports to Netherlands, Sri Lanka also exports to Japan, United Kingdom, Germany, Saudi Arabia etc.

Sri Lanka Export statistics - Floriculture


600000000

500000000

400000000

300000000

200000000

100000000

0 Netherlands Japan 2008 United Kingdom 2009 2010 Germany 2011 2012 Saudi Arabia Others

(Source: Customs) (Values given in Millions of Sri Lankan Rupees) As shown above in the diagram are from year 2008 to 2012. There are no continuous increments in exports from Sri Lanka to the above stated countries. Each countrys floricultural export either has increased or decreased end of each year; it has not been consistent. This could have occurred due the following reasons. Level of floriculture exports from Sri Lanka may have diminished for that particular period The importing country may have shifted its tastes, demand, products towards another and various other reasons Climate, weather conditions may have affected both the importer and the exporting parties Financial crisis etc.

On the other hand, Sri Lanka also imports floriculture from Netherlands, India, Thailand, Japan, Egypt etc.

Sri Lanka Floriculture Imports - Cut Flowers and Foliage


2008 60000000 2009 2010 2011 2012

50000000

40000000

30000000

20000000

10000000

0 Netherlands India Thailand Japan Egypt Others

(Source: Customs) (Values given in Millions of Sri Lankan Rupees) Shown above are the floricultural imports of Sri Lanka from year 2008 to 2012. Sri Lanka widely imports cut flowers and foliage. In the year of 2008, The Netherlands had exported closer to Rupees 50 million worth of goods to Sri Lanka. Compared to Netherlands and other countries imports to Sri Lanka; Thailand, Japan and Egypt have been increasing its imports to Sri Lanka. Whereas, Netherlands, India and rest of the other countries imports have been fluctuating annually. A reason for this could be, Sri Lanka being able to grow and cultivate and export such products or there may have been less demand for such products.

3.0. The World Floriculture Industry


As at present floricultural products are exported mainly to the European countries. The global exports has been growing with an annual average of 10.3% which is expected to reach US$ 25 billion by the end of 2012. Developed nations such as America, Europe and Asia accounts for more than 90% of the total floricultural world trade.

Ornamental young plants and cut flowers are highly vitalized exporting products for several developing countries, such as East Africa, South and Central American, and the Middle East. The consumption for floriculture is on the rise, therefore many countries get involved in the world floriculture market. (www.floriculturetoday.in)

The major exporters of floricultural industry based on cut flowers are Netherlands, India, Ethiopia, Kenya etc, and based on decorative foliage are Israel, India, Malaysia, Egypt, Sri Lanka, Ecuador and Philippines. (www.allafrica.com)

The biggest importers for (Product HS code 06) live trees, plants, bulbs, roots cut flowers etc, are Germany, Netherlands, United States of America, United Kingdom, France, Russia, Japan and Italy. In addition to this, the largest countries that import cut flowers are, The United States of America, Germany, United Kingdom, Netherlands, Russia, Japan etc. (www.srilankabusiness.com)

4.0. Challenges, Risks, Barriers in the Domestic Industry

Sri Lanka is gifted with a favorable and different climate conditions which would help in supplementing the floriculture products ranging from tropical to temperate flora. Hence, Sri Lanka is renowned as one of the best quality production centers in the world. The industry has created employment opportunities in rural and sub-urban areas. In addition, it generates high net foreign exchange earnings. Sri Lanka has dropped their share of export market towards the leading importing countries due to many shortfalls in the domestic economy. It is at up most priority to take these factors into account in order to compete in the global market. Challengers, Barriers and Risks were understood through data collections and organizations which are involved in floriculture industry.

Lack of market information

Understanding of growers to change in their cultivation practices is been questioned, since growers are not been aided with right information on the market of floriculture. Lack of information has been one of the main limitations towards up-to-date technology and production methods. Especially small scale growers are not been informed of the market requirements of products. Therefore, growers are unaware of the quality and standards of products. In addition, the number of small scale growers have increased and they are scattered over a wide area. Where their production is in small quantity which has resulted in setbacks in access for large buyers. As a result, there is a barricade in passing on the communicated information of larger buyers to small scale buyers which affects the productivity and quality of products. In the long run, small scale grower's production will be static since there is a difficulty in achieving necessary bulk and quality standards for exporting reasons. Apart from quality and standards of the products, some of the other market information that should be communicated are, availability of input supplies, new varieties of plants, organic fertilizers, new products in relation to disease control, nets and construction materials for poly and shade houses.

Cost of production

Traditionally cultivation has happened in the backyard with minimum equipments. Therefore, it could be said that the costs in relation to domestic market production is considerably low. However, financially it has proved to be a barrier for growers to up-scale their nurseries in order to increase the productivity and the quality of products. Initial investment in order to enhance the quality of the product with standards of exporting products is relatively high because of essential net house constructions and planting materials. There is very little support given towards the growers by the government or other financial institutes in order to invest in more sophisticated equipments and inputs. The assistance towards the floriculture sector by financial institutes is not favorable since financial assistance is provided at usual lending rates which are considerably high. The high financial cost involved would add up to the production cost which would lead to an increase in production cost.

Availability of skilled labor

Employment opportunities increase as the scale of production increase. Since the requirement of workforce for small scale growers is low, there is no problem in finding labors. However, availability of skilled labor is a problem for medium scale growers who are to expand their nurseries who has no own training capacity.

According to the director of Omega green (Pvt) Ltd, being one of the leading exporting companies, the organization has the fear of not being able to recruit employees in the future. According to him, the demand for employment in the field of floriculture is diminishing.

Lack of coordination between relevant stakeholders

According to research conducted by Export Development Board, it has found out that there is hardly any coordination between relevant stakeholders which has lead to wastage of resources. One reason that the floriculture in not competitive in the global market is that the roles and responsibilities have not clearly defined or communicated between government and

private organizations. Disorganized supporting service adds up to the lack of coordination which has lead to conflicting interventions.

Lack of Varieties

Although Sri Lanka is capable of growing or develop floriculture products ranging from tropical to temperate flora, due to government interventions, growers are being restricted in increasing the range of products. For example, according to the quarantine regulations in Sri Lanka farmers or growers cannot import plants which belongs to the palm family in order to facilitate the local coconut industry. This is been found out as one of the main obstacles to introduce new varieties to the market.

Transportation of sand

The regulations which applies to the construction sector are also related to the floriculture sector, since restrictions imposed on transportation of sand are suppose to prevent soil erosion through unconsidered sand mining's. Therefore, it is necessary to acquire a flexible permit procedure at a divisional level.

5.0. Special Characteristics in the Floriculture Industry


Growing of floriculture products undergo a normal procedures, either be for the purpose of exports or domestic retailing. As for the words of Director of Omega Green (Pvt) Ltd, agricultural activities in regards to the growing of plants are at usual mannerisms, where it could differ from plant requirements. For example, certain plants are to be planted right on the soil, some are to plant on pots and several are to plant beyond the soil. However, there are some mannerisms they follow in order to enrich the final product,

According to the director of Omega Green (Pvt) Ltd, certain plants should be covered with a cloth in order for it to grow at the right humidity level. Growing under the right level of humidity would help in supplementing the quality of the final product, or it would reach to the standards of customer requirements.

With increase in demand for organic products, a formation of a positive trend has been observed in the local production of organic manure, which is used as fertilizer when growing. As an additional benefit, organic manure is less expensive than readymade fertilizer which gives a competitive advantage.

6.0. Trade Terms of the Floriculture Industry


Trade terms of an industry explains the relationship between the buyer and the seller in regards to discounts, payment periods, delivery, return terms and trade documents. Payment Period Payments for orders are commonly completed through the means of telegraphic transfers. Telegraphic transfers are Regarded as the hub of floriculture, Netherlands is one of the foremost countries with which stealthy relationships are sustained. Owing to continuous orders, buyers from Netherlands are granted a credit period of 4 weeks in order to fulfil their transactions. Seasonal orders, arriving mainly from countries such as Korea and countries in the Middle East, are required to pay either of two ways. They could either pay upfront, or and 50% of the advance could be made with the rest having to be settled at the end of the transaction. Trade Documents In order to legally officiate transactions, exporters use a form of consignment note, known as a "Quarantine Regulation", when conducting transactions with trading parties (buyers). A formal Quarantine Regulation consists details of the supplier/exporter, the particulars of the consignee, specifics of the goods ordered and the quantity of goods declared, the place of origin and the destination, etc. (refer annexure 01 for a detailed Quarantine Regulation format). Delivery Delivery is completed by means of sea or air. Goods are either shipped or sent through air freight depending on the type of plant. Shipping acquires a long period of time and plants require to be kept at a certain level of humidity to keep them fresh and healthy. For this reason, plants which can be kept under robust conditions are recommended to go through shipments, while the rest should be transported through air.

7.0. Import and Export Policies Implemented by the Sri Lankan Government
As per the regulations set by the Sri Lankan government any floriculture product to be export should be sourced from nurseries. This regulation set by the government helps in encouraging growers to increase their range of floriculture products when exporting and to prove that the forests are not disrupted. In order to justify that the exporting products should not have gathered from the wild or from the open nature, exporting organizations should require a clearance certificate from forestry department and therefore it is mandatory. If in any case endangered floriculture species are grown for exporting purposes, the CITES certificate which is to be acquired by the department of Wild Life Conservation should be required. When exporting aquatic plants, a certificate from the National Aquatic Research and Development Agency and the Forest Department are required. When shipping, all floriculture products should come with a phytosanitory certificate issued by the department of agriculture. To go with the certificate issue by the department of agriculture, a clearance certificate is compulsory to state the clearance from the Airport Authorities. In addition, country of origin or GSP certificate should be in hand of the exporting organization. Apart from all the certificates and regulations, it is mandatory to all the exporting organizations to register with the Export development board. In addition in regards to exports, The Sri Lankan exporters were forced to pay an import tax of 11 to 12 percent (%) when exporting to European countries. However, with sheer pressure on the government from growers and exporting organizations, they have been able to bring it down to zero percent (0%). The main reason for this pressure on the government was because of the advantage that the Central American countries had over us since they were able export at zero percent (0%) to European countries. The argument that the Central American countries have brought up in order to get this advantage was, ' to encourage floriculture products and discourage OPM or drugs products which are been cultivated in the same geographical area. Sri Lankan exporters have been able to export at zero percent (0%) to European countries till 2004. However, after the GSP+ team was withdrawn at present, the

importing countries in Europe has to pay an import tax of 3 percent (%) which a disadvantage for Sri Lankan exporters since even at present Central American countries does not charge any taxes. As per words of director of Omega Green (Pvt) Ltd, one of the many reasons for us to go down on the market share of the global floriculture industry is because of the government implication of the policy on forcing the importing country to pay a 3 percent (%) tax on our exports. In regards to policies on Imports, Sri Lankan government has implemented certain general policies in regards to many industries which is in line with floriculture industry as well. According to 'Imports Standardization and Quality control regulations 2006' import policies are as follows, Category 1: the shipment should go along with a quality standard certificate from an accredited overseas laboratory where the Sri Lanka Standard Institution (SLSI) has signed a memorandum of understanding. Category 2: quality certificate from the national standards body of the exporting country should be accompanied in the shipment. Category 3: consignment accompanied by a quality certificate from the manufacturer which is registered with the Sri Lanka Standards Institution (SLSI). Category 4 : national standards of the exporting country should be compatible with the corresponding Sri Lankan standards where the shipment of products carrying the 'Certification Mark' (www.thaiembassy.org)

If the shipment does not fall under any of the above categories,

''Samples will be drawn from consignments falling under Categories 1 to 4 and subject them for testing either for a random check or if there is a reasonable doubt regarding the quality of the consignment. Any consignment of a designated item, which falls under Category 5 will be sampled at the port. The consignment will not be released from the port until test report is available. If the two standards are fully compatible, a quality certificate need not be submitted. In instances where a particular requirement of the National Standard deviates

from the Sri Lanka Standard, a test certificate is required to certify that the particular requirement complies with the Sri Lanka Standard'' (www.thaiembassy.org).

8.0. Country Analysis- Netherlands


History of Dutch economic competitiveness Netherlands has become a central trading post for Western Europe as it is well placed with its 451 km coastline and waterways of rivers and canals that are networked. Amsterdam which is the capital of Netherlands was known to be one of the wealthiest capitals in Western Europe during its Golden Era in the 17th century. Many colonies and trading posts were established by the Netherlands all over the world in Asia for the spice trade and in America for sugar and slaves. The economic power of Netherlands is said to have grown steadily through innovation and expansion, despite the competition from other European powers such as Spain and Portugal. Insurance schemes, pension and other financial services were introduced by Dutch companies in order to support businesses and merchants. Expansions in the shipping and banking sectors were facilitated by advancements in technology and finance. The worlds first stock exchange was developed by Dutch East India Company which is a multinational, to finance various ventures. Economic innovation and history of trade laid the foundation for a powerful economic performance. (Philippot et al, 2011) Recent economic performance The Dutch economy being the sixth largest economy in the euro-zone is considered to have an important role as a European transportation hub and is noted for its moderate levels of unemployment and inflation, stable industrial relations and a sizable trade surplus. On 1st January 2002 Netherlands, along with its 11 other European Union partners began circulating the euro currency. However in 2009 as a result of the global financial crisis the Dutch economy contracted by 3.5% as it was highly dependent on an international financial sector

and international trade. After 26 years of uninterrupted economic growth, the financial sector of Netherlands suffered as some Dutch banks were highly exposed to American mortgagebacked securities. In order to prevent further deterioration of vital sectors, the government nationalized two banks and injected capital worth billions of dollars to other financial institutions in 2008. With the intention of enhancing the domestic economy the government accelerated infrastructure programs, offered corporate tax breaks to employers and expanded export credit facilities. However, in 2010 bank bailouts and stimulus programs caused the government budget to have a deficit of 5.3% of GDP (Gross domestic product). This highly contrasted with the surplus of 0.7% that was achieved in 2008. In early 2011, the government of Netherlands implemented several fiscal consolidation measures that facilitated an improvement in the budget deficit during the same year. (www.cia.gov) In 2012 a contraction of the economy took place by 1% in comparison to 2011. This was the first time in the history of the Dutch economy to contract year on year since 2009. During the same year tax revenues dropped nearly 9% and GDP fell down to US$ 695.8 billion showing a negative GDP real growth rate of 1.5%. And also consumption and investments were down by 1.4% and 4.6% respectively. However, in 2012 the budget deficit further deteriorated and the rate of unemployment remained relatively low at 5.3%. And substantial growth was realised in exports which increased by about 3% (Statistical Yearbook, 2013). Economic composition The Dutch economic composition shows that it is a highly service oriented economy with 72.6% in the service sector, 24.9% in the industry sector and 2.5% in agriculture (www.cia.gov). Even though there has been a slow down in the growth of financial services and logistics, such sectors remain foundational to the services sector. Processing of imported raw materials such as petroleum and chemicals has become a major activity in the industrial sector. The Netherlands oil and gas products cluster contributes

greatly to its GDP and is the second biggest export cluster within the country. Petroleum processing is the biggest sub-cluster within the country and is also the fourth largest from the entire world. Production technology that builds on processing and production competencies has taken the spot of the top growth cluster. The fact that Netherlands has become one of the top five exporters of specialized process machinery clearly indicates that they are advancing into other sub-clusters as well. An important contributor to the Dutch economy is their historically important agricultural sector which is the largest export cluster in the country. The key products in this sector are floriculture, livestock and meat and dairy products. This sector is considered as one of the most productive as it has a long history of technological innovation (Philippot et al, 2011). Key economic drivers Exports

Based on a research conducted by the Netherlands Bureau for economic policy, 30% of Netherlands income is derived from the export of goods and services. The value of its exports was 86.7% of GDP in year 2012 (www.cpb.nl). After the US the second largest exports of agricultural products goes from Netherlands, where horticulture segment is the most important in that sector. Other significant export products of Netherlands include chemical products, machinery, vehicles, high quality aerospace components and systems, ships, yachts, busses and car parts. Almost 79% of Dutch exports remain within Europe itself, especially Western Europe. The most significant trading partner of Netherlands is Germany, followed by Belgium, UK and France (Philippot et al, 2011).

FDI

Based on the statistics provided by the Netherlands Foreign investment Agency, around 6300 foreign companies have been given the opportunity to establish nearly 10,000 operations within the country. Such foreign companies include Cisco systems, Nike, Microsoft, Sabic and so on. In 2012 the direct investments made by foreign companies amounted to $589 billion and has provided 15% of total Dutch employment. This positions Netherlands as the worlds tenth largest recipient of foreign direct investments (www.hollandtrade.com).

Labour productivity

With regard to labour productivity Netherlands is one of the most productive countries in comparison to OECD countries. The rate of its labour productivity is US$35 of GDP per hour worked. Whereas the average OECD rate of labour productivity is of US$25 (Philippot et al, 2011).

Innovation

The major sectors in the Dutch economy that holds a strong global position are Agri-Food, Horticulture, High-Tech, Energy, Logistics, Creative industries, Life Sciences & Health and Chemicals. 1.5 billion Euros were allocated by the Dutch government for further development of these sectors. As a part of the Netherlands knowledge institutes research programmes, innovation contracts were drawn up in 2012. A number of globally relevant and competitive technological top institutes and programs in innovation and R&D were created by the Dutch economy during the same year. In addition, Holland's R&D infrastructure comprises several independent research giants. Among these are the Energy Research Centre of the Netherlands, Philips Research (one of the worlds major private research organizations) and TNO (the country's largest independent applied research institute) (www.hollandtrade.com). Macroeconomic Policy Monetary policy

Monetary policy of Netherlands came under the control of the central bank of Europe since its adoption of the euro in 1999. This monetary policy sternly focuses on inflation-targeting. Since the commencement of the circulation of the euro the rate of inflation has generally remained below 3% (www.inflation.eu). Fiscal Policy

Dutch fiscal policy is in line with the EU framework of a balanced budget, which seeks to reduce public spending and lower tax and social security contributions. The low borrowing costs of Netherlands in international markets and its role as a safe haven is said to be as a result of its long standing track record of sound fiscal policies and its robust institutional framework. This strength derives from strong credibility with regard to the fiscal policy and

also due to the focus on medium-term objectives that are in line with sustainable public debt dynamics.

Dutch floriculture cluster analysis Cluster context The floriculture industry of Netherlands involves in the production of bedding plants, bulbs, shrubbery, flower seeds and sod. It also includes the cultivation of flowering plants and ornamental plants both outdoors and in greenhouses. The Dutch flora growers dominate the global cut flower business and hold a strong position in the world flower trade despite the absence of favourable climatic conditions and soil certainty to grow flowers and plants. The Dutch floriculture cluster has become so powerful mainly due to the countrys important logistical hubs, development of high quality and high tech production methods, proximity to Europes 500 million beyond consumers, creation of efficient supply chains and so on. The Netherlands floriculture industry is concentrated in six clusters, known as the Greenports. In each of these clusters, research institutes and businesses work in concert on production, logistics, research and development, infrastructure and exports. A significant contribution is made by this sector to the prosperity of the country, through high quality production, considerable volumes/quantity and technological innovations. Netherlands have undertaken a unique approach to innovation and R&D. In simpler terms it means that its government, research institutes and businesses work together closely on innovation projects and programmes (www.hollandtrade.com). Brief history The floriculture industry of Netherlands is said to have originated from the cultivation of imported tulips. This industry has a long history that dates back to the 16 th century. Despite the unfavourable weather conditions and limitations in land area, the industry has developed as a result of nearby demanding markets. The establishment of the Dutch flora industry was facilitated by three regions in the country namely, Rotterdam area, northern and southern parts of Amsterdam and Hague. These regions were mainly specialised in the production of trees, flower bulbs and vegetable seeds.

With the intention of protecting vegetable growers against wholesalers the very first auction of plants, flowers and vegetables was conducted in Netherlands in 1887 at Broek op Langedijk. Emergence of other auctions took place soon after the first one in Westlands and around Aalsmeer. Since then the industry has experienced continuous expansions. An exceptional growth was demonstrated in this sector specifically after the World War II as it was supported by public investments in physical infrastructure such as roads, waterways and rails (www.euc2c.com).

Cluster structure and value chain

TECHINICAL SUPPLIERS

LOGISTICS

GROWER AUCTION

WHOLESALE TRADE

EXPORTER

RETAILER

CONSUMER

IMPORTER

UNIVERSITIES

GOVERNMENT INSTITUIONS

BUSINESS SERVICES

(Anandatissa, 2014) The elements of the value chain of the Dutch floriculture industry are performed by certain groups who are specialised in carrying them out. The Dutch flower industry has become so powerful due to the fact that the above mentioned groups working closely together. Such form of strategic coupling has generated networks that possess immense capabilities to compete in the international arena.

Starting point of the value chain involves growers who are highly specialized in what they do. As an example Boskoop which is one of the clusters of the Netherlands Greenports have 400500 growers concentrated, who are highly specialized in producing ornamental plants and flowers. Mostly every grower specialises for several decades in producing a single or several cultures that have made their production values and volumes more efficient. Long term learning and powerful knowledge infrastructure that is embedded in various research and market institutions have facilitated such specialization. All these factors have supported the growers to develop and produce a wide assortment as a whole which helps them to be competitive domestically as well as internationally. After the production of the floriculture products, the growers have the option of delivering them to an auction. If they do so the following procedure will take place. At the auction trade takes place early in the morning where fresh products located in cool storages are brought out, tightly packed on trolleys or on a running belt. Then the pictures and information of such plants such as the origin, quality, start price stated by the auctioneer etc are displayed on the auction screens. Once the auction starts the price will drop until the buyer stops it and decides on the actual price. But every product has a minimum price under which they cannot be sold. Products that are bought at the auction will be directed to specialized storages on the belt where they will be packed and prepared for delivery. At the auction the wholesalers and exporters buy floriculture products in order to cater to their retailers and thereby fulfil the needs of the end consumers.

Products that are not traded through auctions will be directly sold by the grower to another wholesale market or an exporting company. In the past direct trade of products between growers and retailers was a rare case. This is mainly due to the fact that the growers catered to large scale buyers with a single or handful of product assortments but retailers usually required small quantities of wide assortments. But considering todays context this direct trade between the above mentioned parties are taking place and is expected to develop further as the power of retailers (supermarkets) in the chain is scaling up. However, still majority of the plants passes through the particular structure of mediation.

Exporting companies are a major part of the value chain as it performs the function of connecting domestic and international retailers and end consumers to the value chain. The main functions carried out by them are assortment, packaging, paperwork, quality control and

many more. Most of the exporters in Netherlands locate themselves in close proximity to auctions or growers so that they could engage in providing sophisticated assortment and have them packed and delivered in no time. Other important groups in this value chain are private and public institutions that promote the industry and carries out R&D activities and quality standard regulations. Sale of Dutch floriculture production is promoted domestically and internationally by Flower council of Holland where as ornamental products commodity board in Netherlands conduct R&D activities. Another institution that supports the promotion and joint marketing of Dutch plants is Plant Publicity Holland. Knowledge infrastructure is provided by universities such as Wageningen that researches on plant breeding, post harvesting and greenhouse techniques, economics, marketing and so on. (Martsynovska, 2014) Performance of the Dutch floriculture cluster

Trends in the Dutch floriculture cluster A new trend that can be seen is the share of supermarkets scaling up and creating a dominating position in the trade. European mass market retailers such as Sainsbury, Tesco and Marks&Spencer have obtained the control in especially the cut flower value chain. The purchasing power of wholesalers and the Dutch auction systems are gradually taken away by these dominating retailers. In todays context retailers (supermarkets) are moving on to long term contracts to buy large quantities of cut flowers directly from producers. This goes on to say that the typical floriculture value chain will be shortened and thereby eliminating the role of certain intermediaries. The main objectives of those retailers are to reduce cost, reduce delays and gain more control over their suppliers

At the expense of existing producers and exporters of floriculture products new exporters in developing countries are said to be gaining more market share in Netherlands. As stated by experts this is due to the traditional growers moving their production focus to countries with favourable climatic conditions, lower production and labour cost and also where abundant labour and land could be found. The Dutch flora industry has already moved their attention to flower trading from flower production. Netherlands have already selected countries such as Ecuador, Ethiopia, Kenya, Colombia and India as their new production centres.

Another trend that we identified was with regard to the progress that has taken place in vertical integration and consolidation. This can be proved by the merger of FloraHolland and Bloemenveiling Aalsmeer (the two largest cooperative flower auctions in Netherlands) which has paved the way for the creation of the worlds largest flower market place known as Flora Holland. And also as a result of retailers going in to long term contracts with growers to facilitate direct sales, producers also have integrated.

A strong trend has been identified towards products that are organic and also products that are provided by suppliers who guarantee the compliance of ethical standards and fair treatment of workers. Now a days consumers are conscious about the social and

environmental impacts and are better informed. As a result of this they demand/expect high levels corporate social responsibility, service guarantees and codes of conduct to be followed by suppliers. All these factors are now becoming a prominent part of the Dutch floriculture sector as they already have implemented the Dutch milieu programma sierteelt (MPS), Flower Labelling Programme (FLP), Fair Flower and Fair Plants label (FFP), etc In order to reduce the environmental issues, consumers expect suppliers to use more biological pesticides and adopt environmentally sound production practices. (www.floriculturetoday.in)

Floriculture Industry Netherlands - Porters 5 Forces

Bargaining power of customers- High

When considering the floriculture industry of Netherlands we could state that there is an increase in the bargaining power of buyers. This is mainly with regard to the changing nature of the main distributional channels in the industry value chain. Mass market retailers such as supermarkets have gained a dominating position and have preferred set of suppliers from whom they purchase large volumes of products. This has made them gain more control over the whole supply chain management. When considering the foreign buyers of Netherlands still we could state that the bargaining power is high as countries such as Germany, UK and France account for a very high proportion of the Netherlands total exports. If they are not in line with the expected quality with regard to the products, the buyers have the power to always reject them. This fact is greatly proven in the case of auctions. The buyer gets to bargain and determine any price between the price stated by the auctioneer and the minimum price under which they cannot be sold. Threat of new entrants- High

The Netherlands floriculture industry is said to be highly competitive and posses a nature with low barriers to entry. This is because the industry has given various opportunities to obtain production skills, have access to organized logistics and marketing systems and also access to efficient distribution systems that provide an ease to reach the final consumer. Another important fact is that there are many active institutions in this industry that provide

training, financial services, R&D facilities and technological knowhow that supports potential entrants. There is also a threat from new entrants residing in other countries. The Dutch flora companies should find more innovative ways to be competitive as there is a high potential threat coming from Dubai. This is because the government of Dubai financed and opened the Dubai Flower Centre recently that has the capacity to handle 180,000 tons of perishable goods annually and has a high potential to attract international wholesalers and shippers. This centre also focuses on reducing shipping charges to and from Dubai and to expand trading activities in many countries (www.euc2c.com). And also the fact that any domestic/foreign buyer could take part in their auctions has given more opportunities for new competitors to enter their market.

Rivalry-High

The number of firms that grow flowers and pot plants amounted to 4125 and the number of wholesalers and exporters amounted to 1082 firms (Martsynovska, 2014) this goes on to say that the rivalry between existing competitors in the market is very fierce. But the fact that these growers specialize in one or few product assortments reduces the fierce competition towards a particular variety. These actors in the industry compete for quality, freshness and variety. The most efficient and competitive are considered to be those who provide supply chain management starting from the seed to the end consumer. In comparison to international competitors, in todays context Netherlands is facing competition from export clusters such as China, Kenya, Ecuador and Colombia and also from upcoming export clusters such as Ethiopia and Zimbabwe. The Netherlands being one of the leading clusters still faces competition from the above mentioned countries mainly because of its unfavorable climatic conditions, extremely high labor cost, increased regulation and environmental concerns. Threat of substitutes- Low

Importance of artificial flowers and plants are on the rise. This is a threat to the floriculture industry as it could be substituted easily. Now a days the quality of the artificial flowers and plants have improved so much that they are becoming more and more realistic. And also

unlike fresh flowers and plants they are not perishable. Nevertheless, customers are still attracted to and prefer fresh flowers and plants which show that this threat is minimal in nature.

Bargaining power of suppliers- Low

Most of the countries that supply floriculture products to Netherlands are developing countries. Such developing countries have a low bargaining power as majority of their business depends on the imports of a country like Netherlands. The Dutch industry determines the exact quantity, type and the quality they need. Floriculture Industry Netherlands Diamond theory Demand conditions

The Dutch domestic consumer market is considered as historically the most important market for cut flower and plant sales. The Dutch consumers account for three quarters of expenditure in this sector. The most important purchasing criteria for these consumers are the quality and perishability. The demanding nature of the domestic market has been responsible for sustaining the quality of the products that they produce. The Netherlands domestic market for floriculture products is relatively big. Approximately 700 million euros are being spent by Dutch consumers each year on cut flowers itself. Once in every four months 61% of families in Netherlands buy flowers and pot plants. There is also a high local demand for new products/varieties in this sector (Splinter et al, 2011). Factor conditions

Geography Geographic placement of Netherlands has become an advantage as it is in close proximity to important markets. Netherlands have a major trading partnership with Germany and UK as they are two of its neighbouring countries. Due to its close proximity to important European markets the transportation costs are relatively low. Climate Climate in Netherlands is not favourable for cultivation of flowers and plants. This is because the winters are often too cold and the summers are usually too hot. This is why they use a lot

of greenhouses which are heated by burning fossil fuels to produce flowers and plants under protected conditions. Infrastructure Good connections with important markets are facilitated by the Netherlands effective logistic networks. Proper infrastructure is set to transport products either by road, sea or air. Netherlands prominent position as a transit hub is supported by the presence of the Schiphol airport as transportation of floriculture products of Kenya, Ethiopia and Ecuador passes through this.

Human resources In 2008 32,000 people were employed in the ornamental horticulture sector. The number of people working in this sector was reduced by 25% from year 1998-2008 as a result of increasing mechanization. In todays context more temporary and seasonal labour is in demand in this sector (Splinter et al, 2011).

Related and supporting industries

Since most plants and flowers are grown in greenhouses, greenhouse suppliers are a major supporting industry. High competition between such suppliers has motivated them to come up with innovative developments and that in turn has helped them to be major players in proving horticulture solutions. On the other hand there are also suppliers of plant material such as fertilizer, seeds, pesticides and also the plastic and clay industry that provides pots and material for packaging. Firm strategy, structure and rivalry

The Dutch local floriculture market has fierce competition that has made them highly competitive. But there is a greater degree of rivalry as there are large numbers of growers, wholesalers, exporters and so on. They use a differentiation strategy and their technological knowhow to compete domestically and internationally. Differentiation strategy is in terms of always coming up with new varieties or new ways of production which helps them to be unique. Their technological knowhow is used to produce high quality products.

Role of the government

Knowledge development, research and education, new innovative projects and subsidy schemes are funded by the government to develop this sector and make it competitive. Funds such as the Economic Structure Enhancing Fund were introduced to facilitate the development of Greenports. Apart from that a Sustainable Greenhouse Horticulture Areas Stimulus Plan was established for the development of new horticultural areas. Government has also set out energy and environmental performance based targets for this sector.

PESTEL Social factors There is a very high demand for responsibly produced floriculture products. As a result of this several CSR programmes have been implemented. The first is MPS, which is the floriculture quality and environmental sustainability certification programme that attempts to encourage CSR and sustainable production. Other programmes include GlobalGAP, Fair trade and other certification programme, EPHEA code of practice, Florverde and so on. During special occasions such as mothers day and Valentines Day there is very high demand for certain range of flowers and prices usually escalate during these peaks. Technological factors Marketing process of the Dutch auction is being replaced by ICT systems. Purchases made by buyers are based on a digital product image. This has replaced the traditional form of how things are done at the auction. This has also caused a disconnection of physical supply logistics from the actual place of trading. In todays context various types of traceability solutions and tools such as barcodes are used to integrate information from the producer and buyer. Indicators such as time of delivery, temperature and place could be tracked using these tools. The product could also be monitored throughout the supply chain. Economic factors

Since the time of the recession the Dutch economy has been contracting. But in the upcoming years it is expected to move on to a slow economic growth. But this ongoing condition in the market will not support them to acquire new or additional market share. Retailer concentration is taking place as supermarkets are acquiring a high proportion of market share in this sector. As a result of this they have gained more buying power and more control over the supply chain. Apart from the increasing scale of retailing a growing demand was identified towards niche products in this sector. This will help growers to distinguish themselves and also provide unique products to their customers. Environmental factors All actors in the floriculture value chain are taking necessary precautions to protect the environment from negative impacts resulting from business practices. Many discussions are ongoing regarding the minimization of using chemicals and pesticides that are bad for the environment. They are also focusing on minimizing the emission of greenhouse gasses during production and transport. Through the use of labels many growers, exporters and retailers demonstrate that they comply with standards relating to environmentally friendly business practices. Various private certification schemes and industry codes with regard to this issue has been developed. Political and legal factors Strict phytosanitary controls are being implemented in order to check if any hazardous organisms are present in imports that are brought into the country. Advanced techniques are also being used to identify the pesticide and chemical application at the border of the country. Standards have been set with regard to enforcement of breeders rights. This gives exclusive control to inventors of new plant variety over its propagation and commercial use. Economic partnership agreements were made with several countries which gave them preferential access to their markets. Such countries were given duty free or quota free access.

8.1. Growth Prospects for the Industry in the Foreign Market

Netherlands hosts the largest auction of flowers and plants in the world

The worlds largest auction of flowers and plants which is located in Netherlands is known as FloraHolland and it consists of six sub structures that cater to both the domestic and international market. The main purposes of the auction are to create a link between producer and buyer, concentrate demand and supply and also provide transparency in prices. Dutch flower and plants auction is considered as an efficient and unique economic mechanism. This was the main market place in the past and even now which brings together growers (producers) and buyers of floriculture products not just in Netherlands but also worldwide. A good price and a constant turnover for the producers who take part in the auction are guaranteed. Buyers from all over the world attend this auction as it is a one stop shop and has a wide and varied assortment of products. At these auctions approximately 100,000 transactions are said to be handled daily, where they sell about 17 million stems per day. Dutch auctions also handle about 65% of the total international cut flower trade, which therefore goes onto say that it plays one of the key roles in the international trade of flowers and plants. All the above factors clearly state the growth prospects available for Sri Lankan floriculture growers and exporters who take part in such auctions. In just one marketplace they able to reach and link with millions of buyers, thus making our products available and known in foreign markets which in turn will be beneficial.

Worlds biggest trade fair for floriculture products

Netherlands hosts an international Horti fair annually in Amsterdam, which is the Worlds biggest trade fair for floriculture products. It has four main segments namely Production, technology, supply and trade. Technology section New techniques and innovations relating to this industry are introduced here. It showcases tools and equipment, automation, lighting, fertilizers, post harvest techniques, packaging machines and materials, environmentally friendly crop protection, water treatment and so on.

Production, supply and trade section It displays new varieties of flowers and plants, floriculture techniques, technologies, supplies and also services related to the industry. By participating in such fairs Sri Lankan growers and exporters of floriculture products will be able to: 1. Obtain orders and build up new trade contacts 2. Strengthen and consolidate present business links 3. Study the latest technologies in production 4. Identify new product assortments for the Sri Lankan market 5. Source mother plant suppliers 6. Obtain first hand information on importers, preferences of consumers and new trends in the market 7. Make adjustments to cope with international changes

Exceptional distribution networks

A central geographical position is held by Netherlands within Europe. It is surrounded by markets such as Germany, France and the UK as it is in the centre of Western Europe. As a result of this they will be able to access regions like London, Brussels, Paris, Frankfurt, Hamburg and Ruhr valley in Germany which are commercial and industrial centres. This goes on to say that there is a high proximity to a large are of consumption, where they could access about 250 million consumers approximately. Netherlands is considered as a gateway to Europe. The excellent distribution networks and the ability of Netherlands to access millions of customers living in commercial and industrial centres will definitely have a positive impact on the Sri Lankan floriculture exports. Netherlands import certain products of ours, make value additions and redistribute it among those nations especially since they do not have a proper climate to produce. In conclusion greater access to more customers will help them to obtain more orders and thereby increasing the demand for certain floriculture products of ours.

Increase in demand for Sri Lankan (i) Fresh foliage, branches and other parts of plants (ii) Un rooted cutting and slip in Netherlands

250000000

200000000

150000000

Unrooted cutting and slip Fresh foliage, branches and other parts of plants

100000000

50000000

0 2008 2009 2010 2011 2012 2013

When looking at the recent years it is identifiable that un rooted cutting and slip and fresh foliage, branches and other parts of plants have significantly surpassed all the other floriculture products that are exported to Netherlands. Netherlands has demanded more of the aforementioned types of floriculture products compared to other types. The increase of fresh foliage has been quite steady without any falls. Un rooted cutting and slip on the other hand has a few drops but the import values are significantly higher than fresh foliage. These two types of imports have future potential for growth. More attention should be given to these products. Additional services provided by importers in Netherlands

As stated by the managing director Omega Greens (Pvt) Ltd most of the importers in Netherlands place continuous orders. As a result of this they have been able to maintain strong trading relationships with them. These importers especially, mass market retailers who directly purchase from our market have been providing additional services. As an example as managing director Omega Greens (Pvt) Ltd stated the clay/plastic pots that are used to place

the potted plants are sent all the way to Sri Lanka free of charge by these mass market retailers.

9.0. SWOT Analysis of the Floriculture Industry


Strengths
Sri Lanka is a country with different climatic conditions which has facilitated to expand floricultural products varying from hot to moderate. Existence of natural substrate (coco-peat) as a growing media, climate appropriate for farming hot & moderate products and availability of skilled & knowledgeable workforce (www.srilankabusiness.com). Sri Lanka is known for the finest quality production and has a reputation as a trustworthy supplier of an ample range of quality floriculture products. Climatic disparities and varied landscape which facilitates to grow a range of products. Physical location of the country makes it easy to deliver products within 24 hrs to whichever country in the world. Having the understanding, skills and technological know-how to finish products based on international standards. Applying good Agricultural Practices to save the environment from harm, look after workers and sustainable use of natural resources.

Weaknesses
Shortage and costly air cargo though the national carrier, Sri Lankan Airlines have given the priority for perishable goods. However the vacant capacity is not adequate. Lack of facilities for research and development The floriculture industry needs trained personnel at each level of production, yet trained personnel are lacking in this industry. Large initial investment on farms in the process of importing essential items which are not produced in Sri Lanka.

Lack of information on pesticides since the existing information and their acceptance in various countries is important. Insufficient product varieties available in the country. Lack of research and development to grow new products. Comparatively small production units in the farms. Rules and regulations by customs and related authorities in exporting various varieties of plants.

Opportunities
Necessity to focus on new products and value addition to current products for better competition. Ability for Sri Lankan Plant Exporters to directly transact with growers without any intermediation of a third party. Long-standing opportunities could be twisted by gaining quality and environmental certifications to the products. Polish market will be a forthcoming market in the Eastern Europe

(www.srilankabusiness.com). Increasing trend in exports point out the growing demand for Sri Lankan products in international markets in the world. International Trade Events such as Trade Fairs held in many countries opens many opportunities for Sri Lanka Floriculture related products exporters to build relationships and gain recognition in the international market and will also help them to market their products to the international market. Export development Board of Sri Lanka do many promotion activities in other countries on behalf of the exporters and develop the industrial relations among other countries so that Sri Lankan exporters can export their products with less taxes and tariffs to other countries.

Threats
Unstable business, political and institutional environment. Demand fluctuations. Legislative and economic uncertainties.

Plants business requires big financial investments and bears big material risks due to the product perish ability and unfavourable conditions for running the business.

10.0. Floriculture Industry- Porters 5 Forces


Bargaining power of customers High In the floriculture industry of Sri Lanka bargaining power of the buyers tend to be high in nature where certain buyers purchases are a high proportion of the suppliers total business. Also buyers tend to keep a relatively high profit margin and sell it back to their customers. The consistency in the quality of the plants and flowers purchase is one of the most important factors under considerations and if that particular quality is not met, buyer has the freedom of rejecting the orders. Bargaining power of suppliers - Low In the floriculture industry of Sri Lanka, the direct exporters have fewer suppliers to their business as they tend to supply all the raw materials by themselves. Thus they do not have any direct suppliers influencing their business activities. They have suppliers to obtain materials such as card board boxes, plastic packaging items, plastic pots and etc. But such suppliers are trying to grab the attention of these exporters since their businesses are completive so therefore they tend to sell goods at a competitive price. Hence the bargaining power of the suppliers in this industry is relatively low. Threat of entry - High According the managing director Omega Greens (Pvt) Ltd, there are lot of threats of entry to the floriculture industry of Sri Lanka. The main constrain is the capital requirement. In order to start the business in small scale a potential businessman needs at least an investment of ten million rupees also the technical knowhow, access to skilled labour and finding a proper location are few other main concerns that creates a threat to the new entrants. Therefore the floriculture industry is known to have many threats of entry. Rivalry - Low There are less than 30 exporters in the floriculture industry of Sri Lanka. Each of these exporters export different varieties of plants and flowers in which they are good at. Hence the

competition towards each variety tends to be low in nature. The rate of growth in the floriculture industry has been decelerated even if there are ample prospects for growth in the industry. According to the managing director Omega Greens (Pvt) Ltd, even if there was at least low competition exists in the market the exporters tend to compete in terms of the quality rather than the price of the product under consideration. Threat of substitutes - Low Floriculture is related to the natural products. They do have a threat from the plastic plants and flowers that are manufactured and sold in the market. However, no matter what, people tend to place natural floriculture related products far beyond the plastics. Therefore the threat from plastics related products to this industry is very minimal in nature.

11.0. Floriculture Industry -Diamond Theory


Factor conditions This means availability of raw materials and suitable infrastructure. Access to required factors of production is relatively high in Sri Lanka as this is tropical country with the availability of perfect weather conditions for the plantation of floriculture related products. The required raw materials also can be easily found in Sri Lanka and such raw materials are considered to be epidemic. Therefore Sri Lanka has the competitive advantage of exporting such plants and flowers compared to other countries. The infrastructure facilities are also in a good condition considerably since the present government has taken many steps in order to develop the infrastructure facilities in the country. Demand conditions The products have to be demanded at home country and this starts international success. In Sri Lanka there is a high demand in the domestic market for the floriculture related products especially cut flowers and pot plants. During the recession period in Europe Sri Lankan floriculture revenue had came down drastically. However since the domestic market was picking up the exporters were able to recover the losses gained due to recession. The domestic demand is substantial it enables the firm to obtain the economies of scale and experience the effects it will need to compete globally.

Related and supporting industries The main related and support industry for the floriculture industry is the plastic industry in Sri Lanka. This includes plastic packaging covers, plastic pots and etc. This is highly integrated with the floriculture industry which facilitates the exporters to do the packaging effectively. Firm strategy, structure and rivalry If the home market is very competitive, companies are more likely to become world class. Many companies in the floriculture industry are private, limited liability companies. The market is relatively competitive in nature. Most exporters in this industry compete in terms of the quality. This has led the country to export quality products which has in turn resulted to improve the national competitiveness. Other events Role of the government Exports Development Board of Sri Lanka provides financial and technical advisory services to the exporters and also the government always motivates the exporters in the floriculture industry as they are trying to improve the agricultural sector in Sri Lanka. The government follows a Zero tax policy with regards to the exports all floriculture related products and also has negotiated with the other countries to reduce the taxes, such as GSP 3%, charged when exporting to their counties (www.srilankabusiness.com). Changing events Recessions and foreign exchange rates fluctuations that take place in other countries have a major impact on this industry. Also there are lot of international fairs which take place in many countries yearly that facilitates lot of suppliers and buyers to meet and make relationships and improve their knowledge and where hundreds of new varieties of flowers and plants are introduced.

12.0. Possible Modes of Entry


A mode of entry into an international market is the channel which companies use to gain entry to international market. There are many modes of entry to the international market such as Internet, Exporting, Licensing, International Agents, International Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture, countertrade, green felid investments, acquisitions, International Sales Subsidiaries and etc (www.marketingteacher.com). Organizations should always make the decision of selecting the best mode of entry to the international market after consider the factors such as; which foreign markets to enter, timing of entry, scale of entry, strategic commitments, risks related to finance and marketing and control. Out of all the modes of entry to the international market, it is recognized that there are two main possible modes particularly identified for the floriculture industry. They are Exporting and Joint Ventures. Exporting Floriculture related products such as Ornamental Foliage Plants, Cut decorative Foliage, Cut Flowers, Aquarium Plants, Landscaping Plants, Tissue cultured Plants and Flower Seeds are the major products that are used for exports. The demand for these products is very high in the international markets due to its exceptional characteristics such as its quality and availability of varieties that cannot be found in any other country. If the products are exported to countries where the demand for the product is high then a better return can also be anticipated. Also if the producers recognize in which international markets the demand is high when the demand in the domestic market is low, they may perhaps raise the exports of the floriculture related products and sell less for the local market. Europe is one of the top floriculture related product consumers in the world and out of which Netherlands is considered as the hub of Floriculture industry in the world where they import products from many different countries and re-export it to other countries. Also in the Germany and Japan there is a high demand for floriculture related products and Germany is considered as the main consumer of floriculture related products in the whole Europe. Thus exporting to these markets would result in an amplified sales and profits.

Selling products to multiple markets allows the producers to expand their business in a large scale and to spread the risks that perhaps brought on them. The producers wont have to be tied to the changes in the demand of the local market or of one specific country. Sometimes the floriculture related products may go through various cycles, such as the introduction, growth, maturity and declining stage which is the end of that product in that market. When the product is more or less reaching its end stage the product can be exported as dry leaves and dry flowers for various purposes. Joint Ventures (JV) Another mode of entry would be to form joint ventures with the floral companies in Netherlands, Demark, India and Japan can be considered. The floral companies would mainly be interested in obtaining the semi finished cut flowers and pot plants to make the finish products such as flower bouquets, flower decorations, flower arrangements in several places and etc (www.srilankabusiness.com). These joint ventures can be formed with Netherlands, Demark, India and Kenyan companies such as: Floral Plant Growers, L L C, Denmark Suera Flowers Ltd, Kenya FloraStand, India Bakker Brothers, Netherlands Ammerlaan flora, Netherlands

Joint ventures entail establishing a firm that is jointly owned by two or more otherwise independent firms and are developed in order to achieve a specific goal. Entering as a joint venture, would help develop a stronger innovative product. The main reasons for choosing Joint Ventures include; ability to gain knowledge in terms of new techniques of planting the crops, packaging systems, business strategies and etc, can enter into agreements to do business for many years, certainty in doing businesses it will enhance the recognition of the company and etc.

13.0. International Business Strategy


International business strategy includes tactics that direct business dealings taking place among organizations in different countries. The majority businesses of any substantial size transact with at least one international partner at several points in their supply chain, and in nearly all deep-rooted fields rivalry is worldwide. For the reason that ways of doing business differ noticeably in different countries, an understanding of cultural, political and legal systems, and the many complications of international trade is vital to business achievements.

As stated in the above section there are many modes of entry to the international market. Out of them the best suitable ones for the floriculture industry are exporting. Here for this purpose the country that we have chosen is Netherlands and the reasons why it was chosen have been mentioned under the previously discussed topics and the target market which has been selected is the super market chains and also have targeted German market through Netherlands since German market is considered to be the largest consumer of floriculture related products in Europe. The advantages of using exports as a mode of entry to the market includes following; ability to generate increased sales and profits, boost domestic competitiveness, expand international Market Shares, lesser Per Unit Costs as the products can be cater to a wider market and enhance new knowledge and experience (www.smallbusinessonlinecommunity.com). As discussed in the country analysis, the risks involved in doing businesses in Netherlands includes the credit periods given by the Sri Lankan exporters to them, the risk of settling the payments on time, delays in shipment that affects the perish ability of the product and occurrence of various economic and environmental uncertainties such as European recession and the weather conditions in especially winter season. The distribution channels will be varied based on the customer requirements. In other words, distribution can be done in both seaways and airways depending on the perish ability of the products. However seaways are more cost beneficial than airways. In terms of the local operations the businesses are backward integrated where the production, packaging, transportation and supplying of raw materials are done by the exporter himself. Organizations use Information systems for the purpose of analyzing the future trend patterns and make the productions accordingly to cater the best demanded products.

Businesses connect with customers and other related parties and make relationships and networks through internet, by visiting the international trade fairs and etc and the main reporting parties to the business includes, government, buyers, forwarder and the other interested parties.

14.0. Challenges, Risks and Barriers in the International Arena

Non availability of new varieties for export

In order to overcome this situation new varieties have to be imported and propagated to meet the demand for exports. The exporters complain that there are obstacles to this process as they do not have laboratory facilities for themselves for research and development. Therefore they have to be dependent on external service providers. The existing government research facilities such as the Botanical garden, the horticulture research and development institute and departments of floriculture of universities have weak linkages to the exporters. These institutes also do not show much enthusiasm to commercialize new varieties of floriculture products. Import restrictions imposed under various government regulations with regard to quarantine etc make the import of new varieties for cultivation nearly impossible. Security checks on roads and at airports

These checks are essential to guarantee safety of ports and aircraft. But these checks are often conducted haphazardly causing damage to the product and packaging. It was identified that the security personnel carrying out such checks are not sufficiently sensitized as to how those delicate floriculture products should be handled. The checking procedure also takes a substantially long time and this cause further damage to the product which is sensitive to delays and temperature changes. This is a big issue especially when dealing with fresh products such as plants and cut flowers as it requires cool storage at all times.

As stated by Mr.X these reasons have caused rejections from the foreign buyers. It not only causes a loss for the exporter but also has great negative impact on the competitiveness of the whole sector. Duplication of security documents

The documents required for security clearance are really the duplicates of existing documents produced for export procedure. These unnecessary duplication of documentation result in increased administrative cost to the exporter. And also it creates unnecessary complications with regard to export procedure. Insufficient information about export markets, linkages, market requirements and demand conditions Small growers/exporters especially in rural areas receive insufficient information about market requirements and demand conditions. This includes the quality standards set by foreign buyers such as the EurepGap, quantity requirements of importers, consumer trends and market opportunities in the foreign country and also information about new cultivation methods and technologies that will help them to be competitive enough. The exporters also lack information about the pesticides to be used for their products destined to different markets. Pesticides used for one market may not be acceptable to another market. Therefore the exporter should have clear awareness in this regard. Most of the information with regard to the above mentioned factors is available at the export development board and the relevant authorities. However the issue is that there is a great insufficiency in the dissemination of this information. Another problem is the non availability of a regularly updated market research that gives sufficient details of competitors, demand conditions and so on. Financial barriers

One of the entry barriers for an entrepreneur to embark on a floriculture project is its exorbitant financial cost. Use of high quality plants, construction of net houses, purchase of special tools, fertilizers, pesticides, training of workers etc for an export oriented floriculture project cost a large sum of money. The banks provide financial assistance to floriculture sector at usual commercial lending rates which are generally high. The high financial cost

involved makes the cost of production to escalate and thereby the product being not competitive in the international market. The floriculture sector should be categorized as a priority sector for lending and preferential lending rates applied. If this is done the cost of production could be lowered and our products could be made more competitive in the international markets. Access barriers to research facilities

Sri Lanka has a competitive advantage to develop new varieties for export compared to other exporting countries. Although adequate research facilities are available at royal botanical garden, horticulture development institute and at departments of floriculture of universities, these facilities are not accessible to small and medium scale growers. This is mainly due to communication barriers between these institutes and floriculture businesses. It is argued that there is a gap between academic and business world- i.e. research institutes are not being concerned about marketability of newly developed plants. Risk of nonpayment by the foreign buyer

During the interviews we had with the exporters it was revealed that there were instances where the foreign importer defaulted payments to the exporter in Sri Lanka. As stated by Mr X he has lost a great deal of money once as one of the importers in Netherlands went bankrupt and he was never able to recover his money. As we questioned him we found out that the main reason for this was due to the letter of credit system not being used for the export transactions. It was understood that the payment for exports are still done by telegraphic transfers. Issues associated with freight

Although this industry is a foreign exchange earner there are no preferential rates for freight. The air freight cost of this product constitutes 40% of the selling price. This is a huge obstacle for our exporters to be competitive in the international market. Some of the floriculture products are exported by sea freight. Unlike in the case of air freight for sea freight there are no shipping schedules and as a result an exporter would not be able to know the shipment date until it is close at hand. This leaves the exporter with very short period to process his product for export. It also acts as an obstacle for the exporters to plan their tasks effectively.

15.0. Recommendations
Local exhibitions, fairs and markets should be organized more often for growers, suppliers of inputs and buyers in the floriculture sector of Sri Lanka. Growers associations in this sector should be encouraged to organize such exhibitions/fairs quarterly or at least twice a year, may be in cooperation with professional business development service providers. These exhibitions/fairs will give all the players in this sector, the opportunity to exchange information and build up new trade contacts and obtain orders.

Marketing efforts of the above mentioned local and national exhibitions should be improved in order to reach target groups located in rural areas. This is a major concern that should be looked into as most of the growers, input suppliers and buyers who reside outside the major districts are not aware of such opportunities of participation. A central organization such as the national floriculture association could gather information on all such local exhibitions/fairs and publish them annually or twice a year in the media.

The value chain of the Sri Lankan floriculture sector consists of some exporters, domestic buyers and collectors who purchase floriculture items from growers. A major issue faced by such players is the collection of those items, especially from small growers. A good option for this issue would be to establish a regional trade centre. This necessarily does not have to be a real market that requires a large amount of resources, instead could be conducted by a broker where he could gather information about the available products of small growers and disseminate it to potential buyers when required.

The services carried out by the Export development board should be marketed and advertised more widely. Even though EDB provides various services and sources of information such as the exporters directory and many published books relating to this industry, some stakeholders are not aware of them. Hence EDB should develop an effective information distribution strategy.

A better price control has to be facilitated between growers/collectors and exporters. This is because growers complain about the fact that exporters are paying them low prices and on the other hand exporters have strict quality requirements. But what has to be identified is that without real incentives (good price) quality and the quantity will not be improved by growers. Therefore the following could be recommended.

I.

Collective selling of floriculture products should be encouraged through associations, regional trade centres and exhibitions/fairs.

II.

Through forward agreements a pricing system could be established between exporters and growers in relation to different grades of quality.

A separate database of growers and collectors should be developed. This could be similar to the directory of exporters maintained by the EDB. The database could include profiles and contact information of growers and collectors that could be disseminated between relevant stakeholders. It will also link these players into wider markets.

Awareness on market requirements and demand conditions in both the domestic and international market should be increased. Relevant authorities/associations could compile a booklet that gives the required information about market trends and requirements. And also details on market prices should be published regularly. Apart from this they could also:

a. Introduce standards such as EurepGap and other quality certifications to small growers/exporters. An authorized body such as the Sri Lanka Standards Institution (SLSI) could be appointed to carry out training programs.

b. Distribute existing manuals or develop new manuals for growers/exporters which mainly focus on growing different varieties of floriculture products that will help them to be competitive.

A directory of input suppliers should be compiled that will consist of all the information on supplied products and their contact details. Other than that even information on additional services provided by certain input suppliers such as training, provision of free manuals and finance options could be clearly explained.

Business development organizations could develop and conduct training programs that is mainly focused on teaching how a nursery should be managed and conducted as an enterprise.

Encouraging exporting businesses that purchase certain varieties of floriculture products from small growers to adopt Buy-back systems. This system is where the exporting business and the small grower come into an agreement by which the exporting business provides the inputs required by the grower such as cuttings, fertilizer. Afterwards the grower will cultivate the products and sell it back to the exporter.

Capacity of growers associations should be improved and strengthened towards providing a better service to its members. In order to fulfill this purpose, training programs can be carried out for growers associations so they could be educated about the specific roles they need to carry out and also about the benefits of a strong association.

1. Several recommendations could be provided to solve the issues faced in security checks and with regard to the duplication of security documents at airports mentioned in section 1. They are: a. Security personnel should be educated on the proper handling of delicate floriculture products to avoid damages. b. An efficient checking procedure should be implemented to avoid delays and temperature changes in the products c. Security authorities should consider using the existing documents and certifications rather than insisting on new documents if the existing documents already have the details they require.

The communication gap between the institutes that carry out research and development and the floriculture businesses/exporters could be enhanced by

a. Publishing research findings of new varieties of plants b. Undertaking more field visits by the institutes and c. Conducting training camps for growers

The risk of default can be covered by obtaining an insurance policy from Sri Lanka Export Credit Insurance Corporation (SLECIC). More than that the exporters should be encouraged to use the letter of credit system as it ensures the reduction of risk of nonpayment. The risk is reduced as the buyers bank promises the seller a guarantee to pay, in case the buyer defaults.

The exporters association and relevant authorities should take up the issue of high freight charges and negotiate with the relative authorities for subsidized freight rates in view of the employment generation and foreign exchange earning capacities of the industry.

16.0. Conclusion
In conclusion, it could be described as there is an increasing need in both local and international aspects of floriculture. But due to various preferences and demand by the local and foreign parties the production of floriculture is unbalanced. In addition to this, due to various barriers and restrictions implemented by the local government, some of the potential flowers and plants are being restricted as they could have an effect to the environment. For instance when speaking to the chairman of Omega Green, Mr. Ananda stated that, some of the elements that are used on specifically highly potential flowers and plants may have an effect on the environment; more over by using such particles it will be directly affecting the coconut tree atmosphere. So as a result of that, the Sri Lankan government has been severe and also prohibiting any imports of such elements to the country. On the other hand, when stressing on exporting floricultural products there are restrictions

and limitation implemented by the importing country due to various reasons such as spreading of bugs from plans and flowers, lack of demand and preference towards such varieties, country to country lack of understanding etc.

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