Question

Liuyang has been known for centuries as the hometown of firecrackers and fireworks.   Today, nearly all adults throughout the province understand the process of manufacturing fireworks, and many of them have actually made fireworks at one point or another in their lives.   During peak periods, approximately one-third of the population is employed in the fireworks industry.   Many workers were farmers who only worked in the fireworks manufacturing facilities during peak periods.   They came

in from the farms year after year to help during high volume periods.

More than 500 firms manufactured fireworks in the Liuyang province. Most of the firms were small family-owned and operated workshops employing less than fifty people. Approximately ten factories employed up to 500 people. Only one manufacturer was a state-owned enterprise that employed more than 1,000 workers.   Labor accounted for no more than 20% of the cost of the fireworks, and wages were quite modest for the workers in these factories and family workshops.    The initial capital expenditure required to open a small family workshop was roughly $10,000.   The capital required to open a larger factory was approximately $125,000.   The technology of fireworks production had remained remarkably stable over the years, though new product variations had been introduced.   It was essentially a low-tech, labor-intensive industry.   The ingredients remained the same for years as well. The basic ingredients were gunpowder, paper, color ingredients, the fuse, and clay soil.   These ingredients were quite easy to purchase, and market prices tended to be quite stable for these inputs.

Most workshops and factories were very flexible in responding to fluctuations or changes in market demand or consumer tastes.   Most workshops and small factories did not engage in any research and development or product design. They simply copied other larger firms’ products, and they were allowed to do so because of weak intellectual property laws and regulations.   Companies competed mainly on price in this industry. Firms tended not to have recognizable brands that elicited consumer loyalty.   The export market was crucial for the Liuyang manufacturers.   The local government subsidized exports by as much as 20%, such that many small workshops could make a profit even if they sold their fireworks at below cost. The local manufacturers typically sold to large wholesalers and importers around the world.   These firms were very well-informed about the fireworks, and they tended to buy from many different manufacturers.     The fireworks industry has grown at a modest rate in recent years. Some countries regulated and restricted the sale of fireworks due to safety concerns. Some communities and organizations had turned to laser light displays as a safer way to celebrate holidays and other festive occasions.

a.     Make a five forces analysis of the fireworks industry. Analyze each force one by one and tell which force is strongest and which one is weakest? And how attractive do you think the firework manufacturing industry is? (4.5 points)

b.     What are the major relevant factors (identify at least 2 forces from PESTEL) of this industry? Explain the latest changes and whether they bring opportunities or threats to the industry? (3 points)

Answer 1

Case Highlights

· All adult knows the art of making firewoorks. One-third of population involved in firework during peak period

· Most of them are farmers

· Above 500 firms manufacture firework in Liuyang province – fragmented industry

· Factory size (employees)

· Upto 500 workers – 10 factories

· 1,000+ worker – 1 factory – state owned enterprise

· Less than 500 worker – 490 factories

· Labour cost = 20% of total cost in manufacturing

· Capital Expenditure (capex) = $10,000 – small factory & $125,000 – big factory

· Stable technology, no innovation

· Raw material – gun powder, paper, color, fuse & clay soil – all easily available

· No R&D – so less manufacturing coost, less complex process

· Intellectual property laws & regulation – very weak so easy to copy designs of bigger firms

· No brand loyalty, no established brand as such

· Exports were subsidized by government to extent of 20%, this gives competitive advantage to firms in other markets

· Major changes creating headwinds in demand – stringent safety regulations, laser light displays

a) Five force analysis of the firework industry

Competitive Rivalry – Low to medium

All of them manufacture same product

Same skilled workforce

Focus on export, enjoy similar kind of subsidy

Fragmented industry

Supplier power – Low to medium

Raw material are available easily

Very little specialization required to produce raw material

Strong supply chain

Significant capex required to set up factory, this means that significant amount oof achinary & tools are required. This gives some power to suppliers

Buyer Power – High

Most of the fireworks are sold to large wholesalers and exporters. This means that firework manufacturers have no direct access to market, as such they could not decide the selling price

These wholesalers and exporters purchase the end product from all manufacturer, since all the products are similar hence no competitive advantage among manufacturers, hence high buying power

Threat of substitution – Moderate to High

Since this industry is heavily depended on export and many countries are passing more stringent safety regulation, also advent of lasers have led to availability of alternative for light shows so threat of substitution in moderate in short run but might be high in long run.   

Threat of new entry – Low too Moderate

High capex requirement to establish new manufacturing unit

Fragmented industry

Majority of the population is farmer and work as labor in the firework factory

· Strongest Force – Buyer Power

· Weakest Force – Threat of new entrant

The firework industry in not attractive because:

· Industry growth is stagnant since last few years

· No innovation or R&D capability

· Fragmented industry

· Majorly depended on exports which is surviving due to subsidy from government. They will loose competitive advantage once government removes 20% subsidy on export as in most of the export cases their selling price is less than actual cost price

b) Environment (E) and Technological (T) are the most important factor due to following reasons:

Environment(E) : Some communities and organizations had turned to laser light displays as a safer way to celebrate holidays and other festive occasions. This is mostly due to adverse impact which is caused to environment due to burning of crackers

Technological(T) : Some countries regulated and restricted the sale of fireworks due to safety concerns. Since manufacturers of Liuyang province have no R&D capability so they might not be able to produce fire-works that adheres to new norms.

These are clearly a threat to manufactrers of Liuyang, but the one who will manage to overcome these threat through disruptive innovation would see a massive jump in its sales and hence the same factors which are threat to other manufacturers will create a tailwind for him.