Case Study:
The Chinese Fireworks Industry
By: 亓文杰 张艳艳 张敏 邹爱丽 杨立超 张安冬 罗喻
Outline
1. Synopsis1. Synopsis
2.Problem Statement2.Problem Statement
3.Analysis
3.1 PEST Analysis of the General Environment
3.2 Five Forces Analysis of the Fireworks Industry
4. Conclusion and Recommendations
1.Synopsis
1.1 About Liuyang
Liuyang, a city in HunanProvince, is known as the “the home of firecrackers and fireworks”. The fireworks making in Liuyang has a long history and tradition in China, and enjoys high reputation in the domestic market. In addition, it was the top fireworks exporter in the world, covering 60% of the global production.
1.2 About Jerry Yu
Jerry Yu, who was running a small chain of gift stores in NewYork, was asked to invest in a fireworks factory during his visit to Liuyang. He was impressed by the extravagant fireworks shows he had seen during the spring festivals. He’d like to know more about the development background and specific situation of the Chinese fireworks industry before his investment.
1.3 About the report
This report intends to make a detailed and comprehensive analysis in terms of the general environment and fireworks industry itself based on the PEST and Five Forces Model.
At last, some recommendations are provided for Jerry.
2. Problem Statement
2.1 Should Jerry invest the Liuyang fireworks industry?
2.2 What was the best way to capitalize on the potential that remained unexploited in the industry?
Economic Environment
Social Power
Political PoliciesTechnology
Suppliers
New entrant
Suppliers Industry competitors Buyers
Substitutes
3. Analysis
3.1 PEST Analysis of the General Environment
3.1.1 PEST Analysis of General Domestic
Environment
3.1.2 PEST Analysis of General Foreign
Environment
Advantages: (Advs)Eased legal restriction of foreign direct
investment
Chinese fireworks market
----a magnet for foreign investors
3.1.1 General Domestic Environment
Political
Disadvantages: (Disadvs)
More regulations on cost-driven firms Environmental concern
Stringent Government Restrictions1
2 Unordered Fireworks Market
Discretionary copying of popular design regardless ofintellectual property protection
Local Protectionism3
Government purchases are apt to local companies
Economic
Advs:
Climbing demands which are driven by economicalgrowth, increasing income level and living standard
Disadvs:
shrinkage of profit margins for many small manufacturers
Constant increasing costs of labor and raw materials 1
Intensified competition : set-ups of private workshops2
Social
Increased environmental consciousness
Abundant diversities of means of modern entertainment
Safety Concern
1
2
3
inherent explosive nature
low quality stuffing materials
Technological
Advs:
Disadvs:
Novelties on product varieties
Inadequate innovation & stagnation of process technology
Reasons?
Small family-owned-and-operated workshops
Lack of professional training
Lack of investment into R & D
No initiative or professional human resources for
technological innovation
Many fireworks-related injuries many countries makerestrictive regulations on fireworks Esp. USA more complex
P
S
The diversity of the cultures in foreign countries reduce the seasonality of the fireworks production and sales
T
The Internet become a marketing outlet for Chinese fireworks, 20%--25% of the worldwide sales
3.1.2 General Foreign Environment
Advs
Disadvs
In recent years, foreign investments are funneled into the Chinese firework industry, especially Liuyang.
1)the industry’s status in foreign market ■a lower reputation in quality, packaging and timing control ■ fierce competition , limited profitability
2)Foreign competitors ■ Japanese and Korean products are superior ■ foreign companies try to control more of the value chain ■ foreign manufacturers outsource their brand-name to china,
Chinese industry losing brand identity.
3 ) Foreign buyers powerful
E
3.2 Five Forces Analysis
of the Fireworks Industry
3.2.1 The Competitive Rivalry
Liling,Huan:uncompetitive in reputation&variety,but competitive in price
Dongguan: closeness to Hong Kong and sophisticated marketing and practices and management
Pingxiang&Wanzai, Jiangxi: competitive in both price and quality, low and medium-priced market.
Liuyang: “the home of firecrackers and fireworks”. South Korea &Japan:
Quality, innovation and brand identity
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
Foreign Competitors
Products made in Japan and Korea
are superior in quality
2Foreign companies try to control more of the value chain, high markup
3Foreign manufacturer outsource some manufacturing activities to China
1
Entry barrie
r2
3
1Capital requirement
Labor forces and costs
Distribution channel
3.2.2 The threat of new entrants
According to Porter’s five forces model, easier for market entry, more competition; On the contrary, more barriers to entry means less threat of new entrants.
Capital requirement: The initial capital requirement for startingfireworks manufacturing facility is low. Setting up a small family workshop, < RMB125,000 a well-equipped factory, only RMB1,250,000
Labor forces and labor cost: The majority of the workers are regular farmers. Only a few places (like Liuyang ) have a large pool of skilled fireworks-makers. Besides, the labor costs are still very low, though they are steadily increasing.
Distribution channel:
manufacturers wholesalers
street peddlers and convenient stores
consumers
capital requirement
labor cost
labor force
distribution channel
Evaluation
low
low
sufficient
relatively effective
Conclusion:
easy entry
3.2.3The threat of substitute products
Due to the increasing environmental-consciousness and more diversities of modern entertainments, some substitute products have appeared. For instance:
1. laser beams with
sound effect
2.make-believe
firecrackers
3. The use of ballons
instead of firecrackers
in weddings
3.2.3The threat of substitute products
☺Chinese tradition determines its uniqueness
Although some substitute products have appeared, no real substitutes could replace fireworks in China, because it is in the national character for Chinese to celebrate with an atmosphere of noisy happiness.
So, the threat from the substitutes of fireworks is small.
Domestic Customers
Foreign Customers
3.2.4 The Bargaining Power of Customers
Common customers
Governments
Common customers
Increasing economic development and living standardsRising in the past three decades
Lifted Restriction
Explosion
Low
High
Inviting bidding to decide on suppliers
Large quantity—100,000 to several million
Governments
Foreign Customers
High
Hiring agents
Dealing directly with the factories
No switching
costs
Very well informed
Low
The raw materials are not difficult to procure.
3.4.5 The Bargaining Power of Suppliers
4.Conclusion and recommendations
PEST
4.1 Conclusion
Foreign market Domestic market
Restrictive regulations
Fierce competition
Easy foreign investments
Diversified cultures
Popular on-line selling
Stringent regulations
Eased legal restriction of foreign direct investment
low initial
capital
Increasing costs, fiercecompetition
Increasing demand
Environmental consciousness, safety concern
Wide varietiesInadequate innovation
Low reputation
in quality, packaging…
Five Forces Analysis
Competition: fierce Threat of new entrants: small
Threat from the substitutes: small
Bargaining power common customers: lowgovernments and foreign customers: high
Bargaining power of suppliers:low
All in all, it will be profitable for Jerry to invest the Liuyang fireworks industry.
1. Product differetiation 2. Quality control; packaging upgrading; timing control...
4.2 Recommendations
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:
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