The Chinese Fireworks Industry

Case Title: The Chinese Fireworks Industry

Executive Summary

An organization can only improve its functioning, if it makes itself aware of its weaknesses and then acts to correct those deficiencies. The purpose of this case is to help Jerry Yu asses how attractive the fireworks industry is and to aid in his decision-makings of investment. This case is also conducted to diagnose the key issues that the company needs to address and to suggest alternative courses of action or give recommendations.

Jerry Yu is challenged to decide whether it is worthwhile to invest in the fireworks industry considering the threats it is facing and the weaknesses of the industry.

There are only two alternative courses of action. These are to invest or not to invest in the fireworks industry.

The tools that helped me analyze this case and led me to certain recommendations are the PEST Analysis, the Internal Factor Evaluation (IFE) Matrix, the External Factor Evaluation (EFE) Matrix, the Internal-External Matrix, and the Threats-Opportunities-Weaknesses-Strengths Matrix.

The fireworks industry has potential. Jerry Yu may invest in this industry. 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. The company must have a policy to asses the creditworthiness of their clients before doing business with them.

With the implementation of the aforementioned recommendations, high-quality products will be produced by Liuyang. The peopleЎ¦s perception of the danger that fireworks bring will gradually lessen. A strong brand name will be established and doors will open for the industry in places, domestic and foreign, that do not allow the entry of Chinese fireworks and those that totally or partially prohibit the use of them. Therefore, Jerry Yu should invest in the fireworks industry of Liuyang.

Methods of Analysis

PEST Analysis:

A PEST analysis is an analysis of the external macro-environment that affects all firms. P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the external macro-environment. Such external factors usually are beyond the firmЎ¦s control and sometimes present themselves as threats. For this reason, some say that Ў§pestЎЁ is an appropriate term for these factors. However, changes in the external environment also create new opportunities and the letters sometimes are arranged to construct the more optimistic term of STEP analysis.

Many macro-environmental factors are country-specific and a PEST analysis will need to be performed for all countries of interest. The following are examples of some of the factors that might be considered in a PEST analysis.

Political Analysis

Political stability

Risk of military invasion

Legal framework for contract enforcement

Intellectual property protection

Trade regulations & tariffs

Favored trading partners

Anti-trust laws

Pricing regulations

Taxation - tax rates and incentives

Wage legislation - minimum wage and overtime

Work week

Mandatory employee benefits

Industrial safety regulations

Product labeling requirements

Economic Analysis

Type of economic system in countries of operation

Government intervention in the free market

Comparative advantages of host country

Exchange rates & stability of host country currency

Efficiency of financial markets

Infrastructure quality

Skill level of workforce

Labor costs

Business cycle stage (e.g. prosperity, recession, recovery)

Economic growth rate

Discretionary income

Unemployment rate

Inflation rate

Interest rates

Social Analysis

Demographics

Class structure

Education

Culture (gender roles, etc.)

Entrepreneurial spirit

Attitudes (health, environmental consciousness, etc.)

Leisure interests

Technological Analysis

Recent technological developments

Technology's impact on product offering

Impact on cost structure

Impact on value chain structure

Rate of technological diffusion

The number of macro-environmental factors is virtually unlimited. In practice, the firm must prioritize and monitor those factors that influence its industry. Even so, it may be difficult to forecast future trends with an acceptable level of accuracy. In this regard, the firm may turn to scenario planning techniques to deal with high levels of uncertainty in important macro-environmental variables.

The Internal Factor Evaluation (IFE) Matrix:

The IFE Matrix is a strategy-formulation tool that can be utilized to evaluate how the company is performing in regard to identified internal strengths and weaknesses of a company. The matrix can be created using the following five steps:

1. Make a list of critical success factors: divided between strengths and weaknesses.

2. Assign a weight to each critical success factor. The value of these weights should be between 0 (not important at all) and to 1 (the most influential critical success factor). The total value of the weights should equal, but not exceed 1.

3. Assign a rating to each one of the critical success factors. The rating should be between 1 (minor) and 4 (major). Thus the scores are company-specific and the weights are industry-specific.

4. Multiply each factor weight with its rating this determines a weighted score for each critical success factor.

5. Sum the weighted score for each factor to find total weighted score for the company.

The External Factor Evaluation (EFE) Matrix:

1. Make a list of external factors: divided between opportunities and threats.

2. Assign a weight to each critical success factors. The value of these weights should be between 0 (not important at all) and to 1 (the most influential critical success factor). The total value of the weights should equal, but not exceed 1.

3. Assign a rating to each one of the critical success factors. The rating should be between 1 (the response is poor) and 4 (the response is superior). Thus the scores are company-specific and the weights are industry-specific.

4. Multiply each factor weight with its rating this determines a weighted score for each critical success factor.

5. Sum the weighted score for each factor to find total weighted score for the company.

The Threats-Opportunities-Weaknesses-Strengths Matrix:

This matrix helps to create four types of strategies: SO Strategies, WO Strategies, ST Strategies, and WT Strategies. There are five steps in developing a TOWS Matrix:

1. List a companyЎ¦s key opportunities, threats, strengths, and weaknesses.

2. By matching strengths with opportunities list these SO strategies.

3. By matching weaknesses with opportunities list these WO strategies.

4. By matching strengths with threats list these as ST strategies.

5. By matching weaknesses with threats list these as WT strategies.

Analysis

PEST Analysis:

ѓж Political Factors

Fireworks have become heavily regulated in most countries. In the US, at the federal level, fireworks and firecrackers were allowed as long as the safety measures were up to the standard but local governments had their own different regulations regarding fireworks consumption. Out of the 50 states, 10 would not allow any fireworks, 5 would allow novelty fireworks, and 18 would allow Ў§safe and saneЎЁ fireworks, while the remaining 17 allow essentially all consumer fireworks. In most of Europe, similar regulations were in place for safety considerations, only the requirements were regarded as less stringent. On the list of fireworks companies that were allowed to sell fireworks to Canada, no Chinese companies were found. One-third of the cities in China had completely banned the use of firecrackers and fireworks. Another one-third had partially banned their use, allowing fireworks only in designated places.

On national holidays, one local company would have advantages in supplying to the local government in its area because of government-to-government relationships in order to secure contracts for large public displays in each province.

There were no pricing regulations. Cutthroat price competition was abundant.

Prohibition, instead of education and adult supervision, was often urged.

ѓж Economic Factors

The initial capital requirement for starting a fireworks-manufacturing facility was relatively low because of low-cost labor and because everyone in the place knew how to make fireworks and firecrackers.

No regulations are imposed against piracy.

There was an increase demand for fireworks because of economic development and improvements in the living standards of the people but industry profit margin is low because of improper regulation regarding export policies.

ѓж Social Factors

For more than a thousand years, the Chinese had been seeing off past years and welcoming in new ones by firing firecrackers and fireworks because they found them perfect for frightening off evil spirits and celebrating good news at various occasions.

Fireworks were widely used for religious festivals and public entertainment all over the world like the celebration of the Independence Day in the United States.

Concerns over environmental pollution and safety of human life and property were increasing.

Majority of the workers were regular farmers who had learned how to made fireworks just by watching and following their elders. Almost everyone in Liuyang knew something about making firecrackers and fireworks.

ѓж Technological Factors

There were hardly any research and development and improvements never reached beyond product variation.

Machines were rarely used because the work can be done manually and labor costs cheaper lower than investing in machines.

The internet is proving to be an effective means of selling.

Internal Strengths:

Liuyang is known to be the first to make varied and low-priced firecrackers and fireworks throughout the world.

Low-cost operating structure: Labor costs are relatively low because there are many skilled workers.

Supply materials are readily available in the market.

Customer appeal: Fireworks shows are very appealing all over the world and are practiced during special occasions which decrease seasonality of the demand of such products.

Broad geographic coverage: Liuyang is exporting fireworks and firecrackers to Europe, US and other countries that avail its products.

Internal Weaknesses:

Slow production due to the use of manual labor instead of investing in high-technology machineries.

Falling behind in research and development: There are hardly innovations in the products because the company does not invest in R&D.

There are safety issues and environmental concerns.

Low-quality products are produced due to intense competition in prices.

Sub par profitability because manufacturers can hardly price above their costs due to availability of very cheap substitute products.

Internal Factor Evaluation Matrix

Weight Rating Weighted Score

Strengths

1. First to make varied and low-priced products 0.10 3 0.30

2. Low-cost operating structure 0.10 2 0.20

3. Availability of raw materials 0.10 2 0.20

4. Customer appeal 0.10 2 0.20

5. Broad geographic coverage 0.10 4 0.40

Weaknesses

1. Slow production 0.10 2 0.20

2. Falling behind in R&D 0.10 1 0.10

3. Safety issues and environmental concerns 0.10 1 0.10

4. Low-quality products 0.10 1 0.10

5. Sub par profitability 0.10 1 0.10

Total 1.00 1.70

Ratings: 1=Minor; 4=Major

Analyzing the IFE Matrix:

The highest possible score for the IFE matrix is 4.0 and the lowest possible score is 1. Dollar General Corporation scores 1.70 on the IFE matrix. This translated into the fact the company is very weak internally.

External Opportunities:

Offensive strategies implemented by the government give opportunities for a broader scope of target market of Liuyang fireworks and firecrackers.

Not so stringent regulations in the United States and in Europe make exportation possible in large areas.

Foreign importers are the powerful buyers.

The internet proves to be an effective means of selling the products.

There is an increase in economic development and living standards.

External Threats:

Standards are being set by different places for safety regulation.

There are almost no barriers to entry because there are very minimal capital requirements and almost everyone in the place knows how to make fireworks and firecrackers.

Very intense price competition: There is a very intense price competition to the point that manufacturers are already pricing below cost or at negative profit margin and are only relying on the tax refund set aside by the government to encourage export. Other manufacturing communities are emerging especially in places close to Hong Kong.

Customers lack respect for business contracts and do not pay debts causing losses in the company.

Piracy is abundant.

External Factor Evaluation Matrix

Weight Rating Weighted Score

Opportunities

1. Offensive strategies by the government 0.10 4 0.40

2. Not so stringent regulations in the West 0.15 3 0.45

3. Rise of foreign importers 0.15 4 0.60

4. The internet 0.15 4 0.60

5. Increase in economic development 0.15 4 0.60

Threats

1. Standards and safety regulations 0.05 2 0.10

2. Almost no barriers to entry 0.05 1 0.05

3. Very intense price competition 0.10 2 0.20

4. Customers lack respect for contracts 0.05 1 0.05

5. Abundance of piracy 0.05 2 0.10

Total 1.00 3.15

Ratings: 1=poor; 4=superior

Analyzing the EFE Matrix:

The highest possible score for the EFE matrix is 4.0 and the lowest possible score is 1. The company scored a 3.15 on the EFE matrix. This means that the Liuyang fireworks industry has adequately positioned itself to take advantage of opportunities which arise as well as the ability to handle and cope with threats which may also arise.

The Internal-External (IE) Matrix

The IE matrix helps to make more sense out of the EFE and IFE matrixes. The IE matrix is based on two criteria the score from the EFE for its y-axis and the score from the IFE for its x-axis. After you plot the point, the IE then provides a strategy for the company to follow.

Dollar General Corporation is in cell III.

The Internal-External Matrix

Internal Score

4.0 Strong

3.0 Average

2.0 Weak

1.0

High 3.0

To

4.0

3.0

I

Grow

II

And *****

III

Build

Med. 2.0

To

2.99

2.0

IV

Hold

V

And

VI

Maintain

Low 1.0

To

1.99

1.0

VII

Harvest

VIII

Or

IX

Divest

This means that the company should continue to grow and build. The company should pursue on market penetration, market development, and product development.

The Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix:

This matrix helps to create four types of strategies: SO Strategies, WO Strategies, ST Strategies, and WT Strategies.

Strengths:

1. First to make varied and low-priced products

2. Low-cost operating structure

3. Availability of raw materials

4. Customer appeal

5. Broad geographic coverage Weaknesses:

1. Slow production

2. Falling behind in R&D

3. Safety issues and environmental concerns

4. Low-quality products

5. Sub par profitability

Opportunities:

1. Offensive strategies by the government

2. Not so stringent regulations in the West

3. Rise of foreign importers

4. The internet

5. Increase in economic development SO Strategies:

1. Product innovation through R&D

2. Invest in technology

3. Continuous training for workers WO Strategies:

1. Invest in high technology equipments

2. Invest in R&D

Threats:

1. Standards and safety regulations

2. Almost no barriers to entry

3. Very intense price competition

4. Customers lack respect for contracts

5. Abundance of piracy 1. Use hi-quality raw materials

2. Hire skilled workers

3. Ask the govЎ¦t to impose penalties to pirates and pricing regulations

4. Assess creditworthiness of clients 1. Employ continuous training programs for workers

2. Induce pricing regulations from the govЎ¦t

From the TOWS Analysis, there are strategies that were developed: 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. The company must have a policy to asses the creditworthiness of their clients before doing business with them.

References:

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

http://www.zianet.com/parrotfan/Projimo/Evaluation.htm

http://www.gwu.edu/~crn40013/strataud/MSDW.htm

David, Fred R. Strategic Management, 8th Ed. New Jersey 2007