Team:ITESM-Guadalajara/Risk

RISK ANALYSIS

Risk is the variability of the expected result or action, and the best way to face it is to prepare in advance, this means adopting a preventive position according to possible contingencies that could happen in the future. Knowing which are the highest risk categories for Biophrame and formulating possible strategies to respond to each one was essential in our planning process. It is important to mention that risk doesn’t need to be seen just as a threat, it could be considered an opportunity to explore new horizons.

Understanding our Risks

In relation to the nature of our company, biotechnology, and as any startup, the main risks that we will try to mitigate are first presented in the following diagram, and further explained.

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Financial

In the financial category, the main issue that could occur is a liquidity trouble because of the high initial investment for the plant construction. Since we are new to the market, our sales will be done little by little while the clients get to know our product and the brand gains reputation. This liquidity difficulty will be slowed down by different funding options, highly related to the credit feasibility. Private source financing could not be easy to get due to the fact that we are a new company and we don’t have enough proof of having cash flow for repayment. Meanwhile, we will try to look for governmental funding and potential investors as first options. The public financial sector (e.g CONACYT, INADEM and SE) has financing programs for entrepreneurs and S&M companies, which give up to 1.5 million pesos approximately without the obligation of paying of paying the money back. Additionally there are programs that lend 30,000 to 500,000 MXN at an average 12% interest rate or lower. If these weren’t feasible or more money were needed, some type of crowdfunding will be done or as a last option founders will make some contributions to the equity account.

Besides the liquidity aspect, the market risk is also important, there aren’t many companies offering high purity Chitosan and there is a great demand from the Mexican pharmaceutical companies (106 tons per year). According to supply and demand forces, clients are prepared to buy the product at a high price (our reference price is the one of Sigma Aldrich), but in case we were overpricing it, the margin could be reduced because of our low production cost. At the first stage, all the operations will be done in Mexico so we avoid the exchange rate fluctuation, but for the future we will be exporting to North and Latin America (high consumption of Chitosan and short distance from Mexico), where taxes will have to be paid and exchange rate dollar-mexican peso and others will influence. Also, as we depend on the market price of the shrimp shell (supplier have high bargaining power), if supply decreases or demand increases, price will be higher, so to protect some quantity at a fix price we could use forwards.

Business In respect to the strategic category, we could face the difficulty of entering into the market without having built a strong and positive image of our brand, but with time, hopefully after a year, Biophrame Technologies will be known by some important pharmaceutical companies and research centers. This will be done through a committed and well structured marketing job, an outstanding quality product, and excellent service for both our actual customers and the potential ones.

There is also a risk related to the market dynamics. In case we realize that the pharmaceutical industry isn’t as profitable as we thought and it is more difficult to reach than we expected, either by fierce future competition or by the target market aversion to try our product, we could redirect the target market (because Chitosan is needed in many industries) and offer it for agriculture, textile or water treatment purposes. This means that instead of producing high purity Chitosan, a medium and low level will be perfect for them.

For the management part, the main risk lies in the planning process: our sales, net income and production forecasts could be more optimistic than reality, or by the other hand demand could be higher than expected. If we aren’t selling in Jalisco the quantity produced, we could sell it to the rest of the country, or to other industries. If demand is higher than expected, we’ll have to analyze our production capacity and suppliers’ capacity too, and decide according to those factors whether to focus only in the medium purity Chitosan production, or increasing the quantity produced while adding more suppliers to our base.

Operational

In the human resources field, the biotechnology and biomedical engineers are quite important for the technical process, because they are the ones who know about the bacteria, the process and other lab supplies. During the first years, some of the founders will perform these duties, but in case someone decides to leave its position, a careful recruitment and selection will have to be done for the replacement. We consider as an employee source the students of ITESM Campus Guadalajara, who have not only a great academic preparation but also ethical commitment with its society. It is critical that employees feel identified with the company’s philosophy and values to keep harmonious working relationships in Biophrame.

Another critical issue is the information confidentiality, besides the patents or any other IP right, this could be supported by non-disclosure agreements that will be signed by the employees, mostly because this is a biotech company, and the research & development activities are crucial to improve and remain in a strong competitive position. Espionage practices are frequent nowadays and as it is impossible to control it perfectly; the ideas mentioned above are helpful to control it, besides promoting loyalty within the company.

About the production process that will be performed, there is the risk that our purity level couldn’t be reached by the forecasted quantity, this is why we have thought as a two-facet project, looking for a medium purity level during the first year, learn from the possible process mistakes, improve the flaws and then work towards producing the high purity level. As technology improves, supplies such as tanks and lab equipment will be renewed, according to the financial capacity of the company.

Additional important aspects to consider are related to the daily operations, just in case an accident occurs inside the plant, some equipment stops working, or any damage to an employee happens, we will have the appropriate insurances.

External
a) Environmental

In the case that we are affected by a natural disaster or a severe environmental harm to the coast happens (e.g. petroleum spillage, plague). Especially if this happens in Culiacán or its surroundings because this could affect the quantity of shrimp shell that our supplier (Congeladora la Internacional) can give us.

Possible events that may happen as a consequence: temporary increase of the shrimp shell price that we will have to pay, unless some bargaining strategy could be done with them, contact other suppliers from our base who are located in a different coast area or even in our city (important restaurant chains and supermarkets), or in the worst scenario, if harsh scarcity occur for a long period of time, we will import the shell from other places in Latin America (Ecuador for example) because is geographically convenient and also the tariff regulations are flexible, thanks to the commercial agreements we have with them.

b) Legal

While at this time in Mexico there is great ambiguity for biological organisms laws, and few norms exist: the “Biosafety law for genetically modified organisms” (federal law in Mexico) and others regulated by the Mexican ministry of health (Cofepris), there is a high likelihood that regulations will increase, also because worldwide, there is a great trend and debate about the use of this type of organisms.

We will attach to the laws, but in case they become harsher than unexpected we will look for some alliances or networks with other companies using similar organisms in their processes, look for possible substitutes (for the organisms) that could perform the same function, or as a last option, change our target market and avoid any industry related to the direct human consumption.

Likewise, for the registration of the international patent, additional paperwork and fess are needed; all of this could take longer than the stipulated time. If a competitor doesn’t respect our patent, lawsuit will be performed and we will be compensated by all the fees that weren’t paid to us during the period.

c) Technological

Biotech industries rely highly on technological advancements, meaning that as time goes by, better equipment will exist and the plant will have to be renewed, where probably a high investment will be required. If we don’t have enough liquidity and investing on it is essential for the production process, then we will have to ask for a loan; identifying when is the correct time to do this equipment change is essential, taking into account the obsolescence and useful life of them. Another issue is the fact that Mexico is a developing country, and there is lack of technology and high tech raw material, so many supplies will be imported (extra time and tariffs).

d) Sociological

Not many Mexican citizens know what genetically modified organism means, while some countries around the world have a bad perception and restriction to their use, in Mexico it is just starting. It is true that many goods that are imported towards the country are produced with Genetically Modified Organism (G.M.O). Just to have an idea, more than 80% of the soybeans and corn grown in the U.S. in 2013 came from genetically engineered crops, according to the Department of Agriculture. About 75% of the foods Americans eat contain G.M.Os in some form. Positive and negative issues exist for absolutely every product in the market. If this becomes a severe issue, similar strategies explained in the legal section will be adopted.

Risk Factor Analysis

SWOT Analysis

About the Strengths and Weaknesses

First of all, what are the factors that make Biophrame Technologies unique?

We are proudly pioneers of producing Chiitosan in Mexico using a biological process. Unlike traditional companies who employ chemicals, we created a genetically modified microorganism (green process) to deliver a standardized quality product guaranteeing fulfilling of demand all over the year and at a lower price, partly because all the supplies are 100% Mexican. Biophrame is strategically located, in Guadalajara, Jalisco, the 2nd most important state in our country and where a future cluster of medical sevices will be developed.

To protect this idea from competitors, patent will be registered in the Mexican country, and international protection will be done in the future. As we know human resources are a key component, the founders of this company are a group of multidisciplinary graduates (business, biomedical engineering, biotechnology engineering, marketing, and animation and digital art) that together complement and get a global perspective according to the expertise area of each one. Thanks to the close relationship we have developed with our university ITESM campus Guadalajara, our pilot plant will be located in their facilities, reducing the initial investment cost at the beginning.

Our main weaknesses, and that we are taking hands on to improve on all these factors, are the following. As shrimp shell is essential for our process, we depend highly in our main supplier “La Internacional” (Culiacán, Sinaloa) which is one of the biggest shrimp shell processors of the country; this is why we have contacted other suppliers (including companies from Guadalajara and Torreón) just to prevent. As any startup we don’t have experience in the market and our brand is just new in comparison with some of the biggest multinationals who also offer Chitosan, such as Sigma Aldrich, the biggest sellers of biological products in Latin America, its important to mention that Sigma Chiitosan is produced by a chemical way. One of the greatest complexities for this project is related to legal regulations, due to the multiple paperwork and certifications we need to have to operate a company that uses genetically modified microorganisms, while traditional companies selling the same product don’t face it merely because they don’t produce it or because they use the chemical process). For the construction of our plant and the proper equipment (e.g. tanks and lab instruments), the initial investment is high, and probably at the beginning wont be easy to get a bank loan, but for the future it should be easier as soon as our sales increase, also there are governmental funding support to this type of projects.

About the opportunities and threats

What are the issues that could make Biophrame Technologies a sustainable company in all aspects (economically, environmentally, socially)?

Although our target market is the pharmaceutical industry, with our Chitosan purity level (medium and high) we are suitable for many other industries such as cosmetics, water treatment, food, textile, and more, meaning that our market could be increased considerably. Our main supply, shrimp shell, is abundant in the country, approximately 180 thousand tons per year, and 40% of the total weight of shrimp goes to waste; these two facts means that the risk of suffering seasonality in our production process is minimum, and due that a quite big quantity is considered as waste, we are giving a use to it, and so, being environmentally friendly. Shrimp shell substitutes exist (other shellfish such as crabs and lobsters, algae, fungus), and although the shrimp shell is the best option to get the desired purity level, other sources mentioned could give us a medium purity level. During the first years of operation we will focus in Jalisco market, but for the medium and long term horizon we are panning to open our market to the national and international level (North America and Latin America at first). Nowadays the quitosan buyers, including pharmaceutics, have low bargaining power, that could be seen in the high prices they already pay, mostly because the ingredient is essential for their products and few competitors exist.

About the potential threats; if a severe environmental issue occur (e.g. harsh hurricane, petroleum spill, plague) over the coast, specially the Pacific area where Culiacán, Baja California, Nayarit and Jalisco are located, will surely impact to our main supplier and probably the quantity we have agreed with them will be reduced for some time (this is why we have more potential suppliers). The shrimp closed season normative isn’t very strict in the present (it applies for certain species and the restrained period varies from one state to another), but in case it becomes stricter, shrimp shell suppliers will have to adopt special measures to avoid a harsh decrease in their sales. Also because the quantity we need to get, first a ton in a month, just few companies could supply that, the negotiating position of suppliers could be stronger. Nowadays legal regulation for this type of companies, such as Biophrame, is ambiguous because there aren’t direct competitors in the market, but if they add some norms and requisites, they will impact us both operational and economically. For future competition, we will be prepared by the following: the patent, the quality in our product and general service and the customer relationship management, all these will help us to retain our clients and so gain their loyalty. In case a bad perception from the use of biological organisms is faced, marketing strategies will be developed, and evaluation of a target market shift will be done.