3. 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
4. Outline 1. Synopsis 2.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
5. 1.Synopsis <ul><li>1.1 About Liuyang </li></ul><ul><li>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. </li></ul>
6. <ul><li>1.2 About Jerry Yu </li></ul><ul><li>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. </li></ul>
7. <ul><li>1.3 About the report </li></ul><ul><li>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 . </li></ul><ul><li>At last, some recommendations are provided for Jerry. </li></ul>
8. 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?
9. Economic Environment Social Power Political Policies Technology Suppliers New entrant Suppliers Industry competitors Buyers Substitutes
10. 3. Analysis <ul><li>3.1 PEST Analysis of the General Environment </li></ul><ul><li>3.1.1 PEST Analysis of General Domestic </li></ul><ul><li>Environment </li></ul><ul><li>3.1.2 PEST Analysis of General Foreign </li></ul><ul><li>Environment </li></ul>
11. <ul><li>Advantages: (Advs) </li></ul><ul><li>Eased legal restriction of foreign direct </li></ul><ul><li>investment </li></ul><ul><li>Chinese fireworks market </li></ul><ul><li>----a magnet for foreign investors </li></ul>3.1.1 General Domestic Environment Political
12. <ul><li>Disadvantages: (Disadvs) </li></ul><ul><li>More regulations on cost-driven firms </li></ul><ul><li>Environmental concern </li></ul>Stringent Government Restrictions 1 2 Unordered Fireworks Market Discretionary copying of popular design regardless of intellectual property protection Local Protectionism 3 Government purchases are apt to local companies
13. Economic Advs: Climbing demands which are driven by economical growth, 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 workshops 2
14. Social Increased environmental consciousness Abundant diversities of means of modern entertainment Safety Concern 1 2 3 <ul><li>inherent explosive nature </li></ul><ul><li>low quality stuffing materials </li></ul>
15. Technological <ul><li>Advs: </li></ul><ul><li>Disadvs: </li></ul>Novelties on product varieties Inadequate innovation & stagnation of process technology Reasons ?
16. 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
17. <ul><li>Many fireworks-related injuries many countries make </li></ul><ul><li>restrictive regulations on fireworks </li></ul><ul><li>Esp. USA more complex </li></ul>3.1.2 General Foreign Environment 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
18. 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
19. 3.2 Five Forces Analysis of the Fireworks Industry
20. 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
21. 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
22. Foreign Competitors <ul><li>Products made in Japan and Korea </li></ul><ul><li>are superior in quality </li></ul>2 F oreign companies try to control more of the value chain, high markup 3 F oreign manufacturer outsource some manufacturing activities to China 1
23. Entry barrier 2 3 1 Capital 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.
24. Capital requirement : The initial capital requirement for starting fireworks 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.
26. Evaluation <ul><ul><li>low </li></ul></ul><ul><ul><li>low </li></ul></ul><ul><ul><li>sufficient </li></ul></ul><ul><ul><li>relatively effective </li></ul></ul>Conclusion: easy entry capital requirement labor cost labor force distribution channel
27. 3.2.3The threat of substitute products <ul><li>Due to the increasing environmental-consciousness and more diversities of modern entertainments, some substitute products have appeared. For instance: </li></ul><ul><li>1. laser beams with </li></ul><ul><li>sound effect </li></ul><ul><li>2.make-believe </li></ul><ul><li>firecrackers </li></ul><ul><li>3. The use of ballons </li></ul><ul><li>instead of firecrackers </li></ul><ul><li>in weddings </li></ul>
28. 3.2.3The threat of substitute products <ul><li>☺ Chinese tradition determines its uniqueness </li></ul><ul><li>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. </li></ul><ul><li>So, the threat from the substitutes of fireworks is small. </li></ul>
29. Domestic Customers Foreign Customers 3.2.4 The Bargaining Power of Customers Common customers Governments
30. Common customers Increasing economic development and living standards Rising in the past three decades Lifted Restriction Explosion Low
31. High Inviting bidding to decide on suppliers Large quantity —100,000 to several million Governments
32. Foreign Customers High Hiring agents Dealing directly with the factories No switching costs Very well informed
33. Low The raw materials are not difficult to procure. 3.4.5 The Bargaining Power of Suppliers
34. 4.Conclusion and recommendations PEST 4.1 Conclusion Foreign market Domestic market Restrictive regulations Fierce competit ion Easy foreign investments Diversified cultures Popular on-line selling Stringent regulations Eased legal restriction of foreign direct investment low initial capital Increasing costs, fierce competition Increasing demand Environmental consciousness, safety concern Wide varieties Inadequate innovation Low reputation in quality, packaging…
35. Five F orces Analysis Competition: fierce Threat of new entrants: small Threat from the substitutes: small Bargaining power common customers: low governments and foreign customers: high Bargaining power of suppliers:low All in all, it will be profitable for Jerry to invest the Liuyang fireworks industry.
36. <ul><li>Product differetiation </li></ul><ul><li>Quality control; </li></ul><ul><li>packaging upgrading; </li></ul><ul><li>timing control... </li></ul>4.2 Recommendations Corporate strategy Business strategy Functional strategy <ul><li>Brand-building strategy (I P) </li></ul><ul><li>Foreign expansion </li></ul><ul><li>esp. European market </li></ul><ul><li>R&D strategy (E C) </li></ul><ul><li>Innovation of products </li></ul><ul><li>Staff training </li></ul><ul><li>Yes, he should invest. </li></ul><ul><li>Issues for him to consider when capitalizing: </li></ul>