Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
CASE 4
Pot of Gold? The US Legal Marijuana Industry
TEACHING NOTE
■ SYNOPSIS ■
At the beginning of 2015, 16 US states and the District of Columbia had legalized the sale of marijuana for
medical use and in four states—Colorado, Washington, Oregon, and Alaska—the sale of marijuana for
recreational use had been legalized. Although the production, possession, and sale of marijuana was still illegal
under federal law, the interest of venture capitalists in the investment opportunities presented by this emerging
■ TEACHING OBJECTIVES ■
The case is intended as an introductory case in the analysis of industry and competition. The learning outcomes
are the development of expertise in:
Using information on demand characteristics, the economics of production, and the regulatory
■ POSITION IN THE COURSE ■
This case is appropriate to that part of the strategy course dealing with the analysis of industry and competition.
■ ASSIGNMENT QUESTIONS ■
1. For venture capital investors with a medium-term time horizon, how attractive is the Colorado marijuana
industry as an investment destination?
2. Which parts of the industry offer the best prospects: growing, distribution, or supplies/ infrastructure?
3. How do you think the US marijuana industry will develop over the next ten years? What will be the
implications of this development for competition and profitability?
■ READING ■
■ CASE DISCUSSION AND ANALYSIS ■
Attractiveness of the Colorado Marijuana Growing Industry
There is very little reliable information relating to the market for marijuana in terms of prices, consumption and
profits. In particular, there is no audited financial data relating to the companies that have entered the industry.
To deploy Porter’s Five Forces framework, we need to observe basic features of the industry’s structure at
present (i.e. mid-2015) and make some predictions about how this structure will change over the next few
years.
1. Entry Barriers. As with any new industry (see Case 1 on obstacle mud runs), ease of entry is probably the
key determinant of entry. Conventional barriers to entry into marijuana growing tend to be low: capital costs
2. Internal Rivalry. With hundreds of licenses issued, this is clearly a fragmented industry producing a
commodity product. Any branding of marijuana products that has taken place so far is by retailers
(“dispensaries”) and the producers’ marijuana-infused products (food and drink products); in principle
3. Substitute Competition. The most important source of substitute competition for both medical and
recreational users is illegal marijuana. Despite all the costs and risks associated with illegal marijuana it has
4. Supplier Power. The critical and powerful supplier to this industry is the state of Colorado which is a
5. Buyer Power. At the growing stage, the buyers are retailers. Although these too are fragmented, they have
low switching costs and are therefore in a position to exert significant bargaining power, especially during
periods of oversupply.
The net impact of these forces is difficult to assess. The most important are likely to be entry barriers, substitute
competition, and internal rivalry among firms. It seems that all three are likely to exert a negative impact on
industry profitability:
The continued issuing of licenses by the state will be a source of continued new entry
Which parts of the industry offer the best profit prospects?
If the production side of the industry appears subject to strong competition and low profitability, what about the
other stages?
Retail distribution. Many of the same factors that affect the growing side of the industry are also
relevant to distribution—e.g. the role of the state in determining entry, the state as a monopoly supplier
Supplies and infrastructure. Students tend to be attracted to the upstream segment of the industry—
citing precedents such as gold rushes of the past where the suppliers of shovels and provisions made
Longer term development of the US marijuana industry
Looking ahead to consider the longer term development of the industry, the crucial issue is to identify the key
factors that will determine how the industry will evolve. Two factors are key:
Legal and regulatory developments. Will the process of liberalization of the law relating to marijuana
production and consumption continue, to include both state and federal governments? If it does we can
Consumption trends. Assuming the path to legality continues, how big will the market for marijuana
be? Will marijuana move towards social acceptance and develop a mass market, as in the case of
alcohol?
If the legalization process continues and the market for marijuana grows, then strategies of the leading
players are likely to shape industry structure. The industry might become concentrated around a few
■ KEY TAKE-AWAYS FROM THE CASE DISCUSSION ■
