Chinese Fireworks Factory Case Analysis

1. What are the defining business and economic characteristics of the Chinese fireworks industry (Industry Characteristics)?  What is the industry like?   

• Market Size:  112.6 Million lbs.; $238,934 million as of 1996. Market size has grown steadily since 1992 and export sales alone expected to exceed $200,000 million in 1998.
• Growth Rate: 50% between 1990-1997 but declined to 16.7% between 1997-2003.
• Life Cycle: Mature
• Segmentation: Consumer & professional type of fireworks for public displays
• Economies of scale: Little opportunities for economies of scale because of the labor intensity
• Number of Companies in Industry: estimated to be 500 part time workshops and 5 full time factories that operate year round
• Economies of scale: Little opportunities for economies of scale because of the labor intensity
• Pace of technological change: little technological change either in products or manufacturing process
• Resource Requirements: Small family shop $10,000; large facility for display fireworks $120,000

1. What is competition like in the Chinese fireworks industry (Porter’s 5 Forces)?  Which of the five competitive forces is strongest? Which is the weakest?  What competitive forces seem to have the greatest effect on industry attractiveness and the potential profitability of new entrants?   

• Threat of new entrants – moderate to high; relatively cheap to enter the market, weak barriers into market, cheap labor found in China, licensing ease, supplies are abundant and cheap to procure
• Threat of competition amongst existing firms –  Strongest at the moment. Price cutting is intense especially domestically. There are also international threats with international competition from S. Korea and Japan.
• Threat of substitutes – Weak.  - e.g. electronic versions of firecrackers & balloons; new generation not buying in to traditional customs of a “loud” celebration; becoming more westernized
• Bargaining power of buyers – Moderate, most of the fireworks supplies are consumed domestically.  Recently however, the Chinese people have had their buying power rise and the Chinese government buys in bulk so that could sometimes cause a bidding war. Foreign buyers have a bit more bargaining power than do the domestic buyers since they are buying in bulk, well informed and tend to deal directly with the factory that makes them in bulk.
• Bargaining power of suppliers – Weakest; supplies are cheap and easy to obtain
• The competition amongst competing firms and local shops seems to be the greatest threat to new entrants as there are no price controls in place country wide. Licensing and trademark right are not enforced so locally owned small shops have no issues with copying others products and even illegally using their trademarked product and brand names. Also, these shops operate economically where they only open when needed ad hoc and then close down where there is no demand temporarily. In other words, they are vey flexible and open to the needs of the moment. Hard to compete with this type of operation. They are willing to even take a profit loss to make a sale because of tax incentive bonuses that the Chinese government will kickback to them as high as 20% which promotes further this type of competition.

1. How is the Chinese fireworks industry changing (Driving Forces)? What are the underlying drivers of change and how might those driving forces change competition in the industry?

• Use of internet for sales and growth. Technology is driving up sales and as much 20-30 percent of the sales inquiries and now through internet contact. Opportunity to expand into regions traditionally not buying fireworks
• Although the usage of fireworks and firecrackers by individuals may not rise and may in fact have a flat growth rate, governments and large public display events are starting to use much more technology laced and used in conjunction with rather than as a stand-alone product, therefore R&D needs to see where new technology demands will steer the market and may determine the needs going into next 1-3 years.
• Both domestic and international governments and citizens are becoming more and more environmentally conscious in their efforts to clean up potential sources of pollution (noise and chemical in this case) and safety concerns are being raised. R&D will need to continue to work on developing eco-friendly fireworks products as regulations become stricter against pollution and in a bid to make products that is more stable especially in the direct consumer market.

1. What does your strategic group map of the Chinese fireworks industry look like?  Which strategic groups do you think are in the best position?  The worst position?   

• n/a – there are no specifics given in the paper as to who competitors are and what their market position or strategy is
• However in an imagined scenario where some are in the high price range but low breadth of product lines such as a product specialist group, as it is usually the case, fireworks companies who are the “Ferrari or Porsche” of the group may have the highest net profit but growth wise it will always be the “Toyota or Honda” companies who has the biggest potential for market share and growth along with market flexibility when needs and threats change.

1. What key factors determine the success of fireworks manufacturers (Key Success Factors)?  

• Low-cost production efficiency (achieve scale economies, capture experience curve effects)
• Access to relatively cheap labor
• Quality of manufacture (fewer defects, less need for repairs)
• High utilization of fixed assets (important in capital–intensive/high-fixed-cost industries)
• Low-cost plant locations
• High labor productivity (important for items with high labor content)

Low-cost product design and engineering (reduces manufacturing costs)

• Ability to manufacture or assemble products that are customized to buyer specifications
• Breadth of product line and product selection

1. What recommendation would you make to Jerry Yu concerning an investment in a Liuyang fireworks factory? Is this an attractive business to be in? Are conditions in this industry such that a new entrant had good profit prospects?  What strategy options should a new entrant consider in trying to break into the fireworks manufacturing business in a successful fashion?   

• There is potential in the industry for Jerry to seriously consider.  There is a low risk factor and barrier to his entry are almost non-existent. The industry has potential for further growth especially if he differentiates himself from the rest of the competition. In other words, do not enter the market trying to replicate the other 500 small shops who use cheap labor, make cheap products, and engage in over the top price cutting as a new entrant. Instead, utilize modern technology, concentrate on exports to outside of China where the bigger growth potential is. Hire and continuously train to push for better and safer products that internally could be marketed as the safest fireworks in the world, create a niche, eco-friendly company as motto. Invest in R&D, develop a more specialized segment for his products. E.g. fireworks only no firecrackers or offer more colors than competition, safest products, cleanest products, etc. Perhaps market your products with a twist to some of the harder to import to countries such as donating a dollar for every 10 pounds of fireworks sold to charity of customer’s choice etc.
• Quality control and differentiation.
• Expand into untapped markets, especially into Europe, Canada, and South America.
• Build a brand image as the safest fireworks maker in the world or most eco-friendly or socially responsible company depending on your market audience
• Train staff ongoing basis to produce high quality products that your competitors can not compete with
• R&D new innovative products, e.g. rudimentary animated fireworks

1. Though a difficult task, I want you to use the Hambrick Model and determine what type of strategy would you use to enter this market.  Be creative.  You will need to make assumptions (just let me know what assumptions you are making).

• Arena – We will manufacture and sell the most “green” or environmentally friendly fireworks in the world. We will offer the full array of products from those most popular with individuals up to those requested by the largest public display shows. We will concentrate our efforts in the sales to North America, Europe, and South America markets to governments, corporations and to individuals. We will target any economic region with a GDP of over $5000 per capita.
• Vehicles – We will concentrate our efforts in internal R&D and look to opportunities to acquire any targets if market analysis confirms viability. If we are looking to expand into relatively new regions we will look first at joint ventures or acquisitions of existing firms to gain a foot hold in the region such as in South America. We want to create a new brand image and do not want to be associated with companies who have been cited in the past for violating environmental laws or safety concerns due to inferior product manufacturing.
• Differentiators – We will use the differentiation method of becoming the premier provider of the safest & eco-friendly fireworks products in the world. We will not compromise our safety or commitment to producing the greenest products in the market. We will let our customers decide upfront if they would be willing to pay for the safest and cleanest fireworks in the world, superior than any of our competitors can provide. We will be socially responsible global citizens and donate $1 per every 10 pounds of fireworks bought by our customers to any charity of their choice.
• Staging – First stage: We will acquire small companies and become a dominant supplier regionally first, then move on to working on becoming a bigger market presence in the province and then country. Second stage will be domestically imaging our brand as the safest and cleanest in the world. We will invest in R&D to produce clean and safe fireworks known for their high quality. We will hire the right people to train and develop to ensure marketing campaigns to go open up in North America, Europe, and South America through mergers or joint ventures.  Final stage is when we are able to get a foot hold in the above-mentioned market regions and become established we can look to expand to other emerging regions for market penetration for growth while continuing to develop new innovative products for sustainability.
• Economic Logic – We aim to be profitable by offering premium products at market premium prices. Our product branding campaign will make sure our potential customers understand that when they buy our product, they are getting the safest and most eco-friendly fireworks on the planet and therefore known they are paying a premium but do not mind because they are getting a product that no other competitor can match.
• The assumption I am making in the scenario above is that certain countries and the governments care more for safety and eco-friendly products because of their constituents and therefore will allow our products in to their country. Also, it is assumed some of these same customers will pay a premium for this brand imaging. There will always be people who only want the cheapest priced product available and those are not the customers we are targeting. I am also assuming that the demand for fireworks do not decline in the near future but rather rises.