Chinese fireworks case

The Chinese Fireworks Industry (Case Analysis)

Written by:

Ruihua JiangSubject- Strategic Management

Presented By:Bishnu Neupane

MBA VI Trimester(2012/01)School of BusinessPokhara University

04/12/23 1Copy right@ www.bishnuneupane.com.np

Presentation Overview1. Case Summary2. Problem: Invest or not?3. Environmental Analysis

PEST Analysis EFE matrix Porter’s five forces model (Analysis)

4. Conclusion5. Recommendations6. Questions and answers


Case Summary

• Fireworks referred to any devices designed to produce visual or audible effects through combustion or explosion.

• Invented by a Chinese cook, while toiling in a field kitchen, happened to mix together Sulphur, charcoal and Saltpetre.

• In a thousand years modern design is developed.• First exported to Arabia in 7th century, Europe in 13th century,

widely used for religious festivals and public entertainment by 15th century.

• Liuyang is known as the hometown of fire crackers and fireworks of china.

• Export started by 1875 to Japan, Korea, India, Iran , Russia, Australia, US, UK etc.


Cont…

• Liuyang made firecrackers and fireworks won numerous awards over its long history.

• Fireworks is more than just a livelihood for the Liuyang people.

• Liuyang produced 60% of the global production.• Fireworks- two categories: display and

consumer fireworks.• Liuyang makes 13 different types with more

than 3000 varities.04/12/23 4Copy right@ www.bishnuneupane.com.np

Market• Over the past 50 years there had been a shift away from

firecrackers to fireworks.• In 2009, firecrackers made a less than 20% of the total

sales.• In china there are significant numbers of small family –

owned and – operated workshops with low tech and highly labor intensive industry.

• After 1949 gov. run factories replaced the family owned workshops.

• In 1979 most of the factories were broken up and became family run units of production again( privatization/ Low R & D).04/12/23 5Copy right@ www.bishnuneupane.com.np

Cont…• Legal restriction , local protectionism, cut throat price

competition, hard to penetrate distribution channel and bad debts were negatively the domestic sales of Liuyang fireworks.

• Offensive strategies set by the government.• “make believe firecrackers” already appeared a

substitutes in China.• Fireworks are now combined with modern

technologies like laser beams, computerized firing and musical accompaniment that makes more appealing.(Beijing Olympic).


PEST Analysis

Political factors

• Local governments have their own different regulations regarding fireworks consumption.

• 1/3rd had partially banned and allowed only in designated places in China.

• B2G & G2G contracts for large public displays• No pricing regulation, cut throat price competition was

abundant.


Economic Factors

• Low initial capital requirements for staring a fireworks.

• Low labor cost and everybody know how to make fireworks and firecrackers

• Improvements in the living standard of the people

• Low profit margin because of improper regulation regarding export policies.


Social factors

• Diversity of cultures reduces the seasonality of production.

• Majority of the workers were regular farmers who had learned how to make fireworks just by watching and following their elders.

• Cultural sentiments- used fireworks for frightening off evil spirits and celebrating good news at various occasions.

• Concerns over environmental pollution and safety to human life and property were necessary.


Technological factors

• There were hardly any R&D and improvements never reached beyond product variation.

• No initiative or professional human resources for technological innovation.

• Machines were rarely used because the work can be done manually and labor cost is cheaper than in investing in machines.

• Emerging electronic marketing.


Internal Factor Evaluation(IFE) matrixInternal Strength1. First to make varied and low priced products2. Low cost operating structure3. Availability of raw materials4. Customer appeal5. Broad geographic coverage

Internal weakness1. Slow production2. Low R&D3. Safety issues and environmental concerns4. Low quality products


External Factor Evaluation (EFE) Matrix• Opportunities-

1. offensive strategies of the govt.2. Not to stringent in the west3. Rise in foreign importers4. Internet 5. Increasing economic development

• Threats-1. Standards and safety regulations2. Low barrier to entry3. Intense price competition4. Abundance of piracy


Factors Wt Rt WS

Opportunities- 1. offensive strategies of the govt. 0.1 4 0.4

2. Not to stringent in the west 0.15 3 0.45

3. Rise in foreign importers 0.1 4 0.4

4. Internet 0.1 3 0.45

5. Increasing economic development 0.1 2 0.2

Threats-1. Standards and safety regulations 0.05 2 0.`1

2. Low barrier to entry 0.1 2 0.2

3. Intense price competition 0.1 3 0.3

4. Customers lack respect for contracts 0.1 2 0.2

5. Abundance of piracy 0.05 2 0.1

Total 1.0 2.804/12/23 14Copy right@ www.bishnuneupane.com.np

Five force model

SubstituteProducts

CompetingFireworks Industries

PotentialNew

Entrants

Suppliers Buyers


1.Substitute Products

• Use of balloons in celebrations instead of firecrackers

• Use of laser beams with audio-visual effects

• Make believe firecrackers

{Due to increasing concern of environmental issues and innovations of new technologies}


2.Threats of Potential New Entrants

• Low capital requirement for starting fireworks business.

• Low labor cost available in Liuyang.• Distribution channels.• Easy access of labor force, materials and

supplies.• Licensing easy.


3.Competing Fireworks Industries

• Growing industry• Intense price competition• Competitors:

– Other industries in Liuyang– Donggaun: near to Hongkong– Liling, Huan: Price competition, variety– S. Korea & Japan: Price, quality, innovations, branding– Pingxiang&Wanzai, Jiangxi: low and medium-priced

market.


Domestic Competition

Private Workshops

Flexibility

Cost

Copying

Quick and flexible response to market demands

Low cost of labor, production, administration, etc, which contribute to a lower selling price

Negligence to intellectual property protection and plagiarizing of popular design, which also lowered the cost


4.Suppliers

• Standard raw materials• Many potential suppliers• Substitutable inputs (material suppliers, labor,

suppliers, services, etc.)


5. Buyers


Cont…

Bargaining Power of Buyers• Domestic:

– Increasing living standard of Chinese people– Government: (high bargaining power)

• Bidding• Large scale buying (Bulk purchase)

• Foreign: (High bargaining power)

– Hiring agents– Very well informed– Dealing directly with the factories– No switching cost


Worksheet on industry structureFavorable Moderate Unfavorable

Threat of New entrants

√Bargaining power or buyers √

Threat of substitutes

√Bargaining power of suppliers √

Intensity of rivalry among competitors √


Jerry Yu must invest in Liuyang • The fireworks industry has potential. He just has to make sure that the

factory he is investing in would use high quality raw materials in producing the fireworks to lessen the possibility of accidents and to pass the standards and regulations for safety consideration in other countries, thus, improving the exportation of Chinese fireworks.

• Skilled factory workers should be hired and abide by strict safety measures. The company should also invest in high technology equipments and in research and development in order to cope up with and to exceed the improvements in the safety and style of the fireworks that are being undertaken by competitors.

• The workers should undergo continuous training programs in order to incorporate in the products the innovations that the research and development section comes up with. The company should also ask the government to impose penalties to pirates in order to protect the brand name and the intellectual properties of all the companies in the country.

• It must also encourage the government to make and impose policies in pricing to put a stop to cutthroat price competition and to protect the manufacturers.04/12/23 24Copy right@ www.bishnuneupane.com.np

Current Business Environment in China

• Based on a report by IMF


Recommendations

• Use high quality raw materials in producing the fireworks to lessen the possibility of accidents and to improve the exportation of Chinese fireworks.

• Skilled factory workers should be hired and abide by strict safety measures.

• should also invest in high technology equipments and in research and development.


• continuous training programs in order to incorporate in the products the innovations that the research and development section comes up with.

• The company should also ask the government to impose penalties to pirates in order to protect the brand name and the intellectual properties.

• It must also encourage the government to make and impose policies in pricing to put a stop to cutthroat price competition and to protect the manufacturers.

Recommendations


1. Product differetiation 2. Quality control; packaging upgrading; timing control...

Corporate strategy

Business strategy

Functional strategy

1. Brand-building strategy (I P)

2. Foreign expansion

esp. European market

1. R&D strategy (E C)

2. Innovation of products

3. Staff training

1. Yes, he should invest.2. Issues for him to consider when capitalizing:


Strategies

Strength-opportunities

1. Product innovation through R & D.

2. Invest in technology.3. Hire skilled

pyrotechnicians.

Weakness-opportunities

1. Invest in high technology equipments.

2. Invest in R & D.


Strategy

Strength-threats

1. Use high quality materials.2. Hire skilled workers3. Ask the government to

improve penalties to pirates and pricing regulations.

4. Assess credit worthiness of clients.

Weakness-threats

1. Employee continuous training program.

2. Induce price regulations from the government.


Ref

• http://www.netmba.com/strategy/• David, Fred R. Strategic Management, 8th Ed. New

Jersey 2007• Ease of doing business in China, a report by IMF,

http://wenku.baidu.com/view/4eb39e44b307e87101f69696.html?from=rec&pos=4&weight=4


http://www.netmba.com/strategy/



Chinese fireworks case

Technology

Transcript of Chinese fireworks case