Chinese fireworks case

The Chinese Fireworks Industry
(Case Analysis)
Written by:
Ruihua Jiang
Subject- Strategic Management
Presented By:
Bishnu Neupane
MBA VI Trimester(2012/01)
School of Business
Pokhara University
01/31/15 1Copy right@ www.bishnuneupane.com.np

Presentation Overview
1. Case Summary
2. Problem: Invest or not?
3. Environmental Analysis
 PEST Analysis
 EFE matrix
 Porter’s five forces model (Analysis)
1. Conclusion
2. Recommendations
3. 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.

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).01/31/15 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) matrix
Internal Strength
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
Internal weakness
1. Slow production
2. Low R&D
3. Safety issues and environmental concerns
4. Low quality products

External Factor Evaluation (EFE) Matrix
• Opportunities-
1. offensive strategies of the govt.
2. Not to stringent in the west
3. Rise in foreign importers
4. Internet
5. Increasing economic development
• Threats-
1. Standards and safety regulations
2. Low barrier to entry
3. Intense price competition
4. 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 2.8

Five force model
Substitute
Products
Competing
Fireworks Industries
Potential
New
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}01/31/15 16Copy right@ www.bishnuneupane.com.np

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 structure
Favorable Moderate Unfavorable
Threat of New entrants
√
Bargaining power or
buyers
√
Threat of substitutes
√
Bargaining power of
suppliers
√

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.01/31/15 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 workers
3. 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/4eb39e44b307e87101f696

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