HBS case study 1: THE CHINESE FIREWORKS INDUSTRY

Five- Model analysis

Source: http://tonylamb.wordpress.com/2011/04/17/the-collapse-of-porter%E2%80%99s-five-forces-model/

Threat of New Competition & Intensity of Competitive Rivalry

Domestic competitors: According to exhibit one in the case, firecrackers and fireworks total revenue in China increased 36.01 percent from 2007 to 2009. As the hometown of firecrackers and fireworks in China, Liuyang naturally had increased revenue in firecrackers and fireworks. The revenue went up 68.33 percent from 750,000,000 USD to 1,262,500,000 USD.  Moreover, fireworks industry is a low- technology and traditional industry. The initial capital requirement for starting a fireworks- manufacturing facility was relatively low, less than 20,000 USD. Those reasons contribute that there are 2,702 fireworks manufacturers in the Liuyang District with an additional 2,144 in the surrounding areas. Fortunately, most factories were dominated by small family-owned –and –operated workshops and most of the employees in the factories were regular farmers who had learned how to make fireworks just by watching and following their elders.  As a result, those factories only manufactured fireworks instead of designing fireworks.

Strategy:  I believe there still have opportunities in this sunset industry only the company can focus on the product diverseness and SOP control to have more competitiveness to their rivals. First, I will concentrate on R&D to produce the fireworks that can shoot with long distance and with much safety no matter during the process of manufacturing or launching. R&D department also has to develop more environment-friendly fireworks by changing the materials making fireworks. Every new year eve, most of the big cities in the world including London, Sydney, Dubai, Rio de Janeiro, Las Vegas, Taipei, Paris, Hong Kong, Prague will schedule the large-scale fireworks display events. (1) Those displays all are high altitude fireworks. Second, traditionally, fireworks are used in specific occasions such as Chinese new years, or the religious events. People launch fireworks and firecrackers to expel misfortune.  However, more and more cities regulate the consumption and launch the fireworks and firecrackers because of increased concerns over environmental pollution and safety of human life and property. Launching wireworks becomes a luxury business program to attract domestic and international tourists. For example, the fireworks in Disneyland. (2) As a result, I will recruit more young employees with art and design background to arrange fireworks displays not only have simple symbols but also are brilliant shows. Furthermore, I will enforce training programs such as enhancing working safety classes and machining in factory. Experienced employees also need to learn new skills and learn how to produce more effect by machine. 

International competition: Although the trademarked brand “Red Lantern” had become well known to fireworks-lovers around the world, China-made fireworks have lower reputation in quality control, packing and timing control comparing to the products made m Korea and Japan. In addition, some fireworks merchants in Korea, Japan or Spain will buy the products from China and repackage them, or replace the fuses with better quality ones, then resell them for much higher price. Moreover, U.S. always plays the main role to import fireworks from China, but the growth rate in 2010 went down 8.5 percent. Is the lower price not the main reason to sell the products? (Table 1) 

Table 1.  The change of U.S import market for Fireworks in 2010

Source: http://pierstransportation.wordpress.com/tag/exports/

Strategy:  Those predicaments result from that Chinese companies don’t know the importance of brand identities. Creating a brand identity costs long period of time and money. However, once the brand becomes famous and international one, customers will trust the quality of the produces from the company and the value of company will also increase because of brand value. For example, the brand value of Apple is worth $153 billion or Google is $111.5 billion. As a result, I will reorganized my company structure and improve the equipment in my company to pass international identification such as ISO and put more budgets in marketing to enlarge the popularity of company. Company can sponsor the international events such as Olympic to advertise itself. Moreover, I will focus on the fireworks display design. What my company sells is not only the fireworks themselves but also the ideas how to present more colorful and plentiful modeling during the displays. We will put more creativity into the display to make impossible turn to possible and make all audiences impressed.  For example, Black Ceremony, which is a fireworks event at Mathaf, Arab Museum of Modern Art in Qatar on December 5, 2011 and was designed by the Chinese artist Cai Guo-Qiang (3). Most fireworks displays are launched at night. However, this event is a daytime fireworks show. Another example is the celebration for 100 years in Taiwan (4). The designer used fireworks to draw the picture of first Taiwanese president and number 100. Those are totally different with the stereotype of fireworks.

Threat of Substitute Products or Services

Although several modern technologies like laser beam or computerized firing already were applied in some performances, firecrackers still cannot be replaced especially in certain religious occasion such as in some Buddhism festivals because firecrackers present certain meanings and culture. Furthermore, fireworks can create several kinds of patterns in the air such as peony, ground bloom flower, ring… and so on. (5) It also can present different colors individually or entirely. As a result, No real substitutes could replace fireworks.

Strategy:However, fireworks and firecrackers displays can still combine with laser beam, computerized firing and music accompaniment to strengthen the visual, audio and emotional effects because fireworks cannot originate abounding sounds.

Customers

The customers in fireworks and firecrackers market can divided into individuals and business units such as government institutions, private associations or general companies. Every country has different regulations about manufacturing, selling and using fireworks and firecrackers. (5) Because more and more countries prohibit the public launching fireworks and firecrackers, the individuals market declined dramatically. In the contrast, the business units market went up because in the display fireworks market, the buyers were often central and local governments who purchase product for public shows on national holidays or special celebrations. The amount of fireworks used could range from 15,000 USD to millions USD, depending on the scale of a fireworks show.

Strategy:  Doing business with the China government is not an easy thing. First, interpersonal relationship is a very important element. Company should know someone who works in the government or has to have very good Guanxi with government institution. Sometimes businessmen already are accustomed to give commissions to the person who introduces the business. Second, the regulations in China government are changeable in policy and will be carried out completely or not depending on the executors. Bureaucracy is also a serious problem. In contrast, the export market is not an easy thing, either. The reputation from China is not very good. Jerry have to reverse the company imagine. First, company can attend more international exhibition to get popularity. Second, company should focus on quality control and time control. No company will continue doing business with a company which always delay deliver products even though the company got the good price in the beginning.     

Supplier

Since most of the factories in Liuyang are focus on manufacturing the fireworks, supplier will not be a problem if Jerry decides to have a design company of fireworks displays instead of a manufacturing factory. Jerry can implement vertical integration by investing in the purchase of suppliers and make every supplier with the same quality. Moreover, the costs of manufacturing fireworks are so low, one third of the sale price. (6) Jerry’s company can sale fireworks instead of manufacturing fireworks. 

Labor costs in China are very low compared with that in Japan and Korea. (Table 2-4) (7) As a result, fireworks made from China always have price superiority to provide lower price. Since Liuyang is Jerry’s hometown, Jerry can also understand the working culture in China and can more easily to manage the local employees.   

 

Year	National currency basis  (Yuan)	U.S. dollar basis  (US$)	Index1  (US = 100)
2002	4.74	0.57	2.1
2003	5.17	0.62	2.2
2004	5.50	0.66	2.3
2005	5.95	0.73	2.4
2006	6.44	0.81	2.7
2007	8.06	1.06	3.4
2008	9.48	1.36	4.2

Table 2.  Hourly compensation costs of manufacturing employees in China, 2002-2008

Source: http://www.bls.gov/fls/

Indicator	Unit	2008	2009	2010
Hourly compensation costs in manufacturing
Hourly compensation costs	U.S. dollars	27.80	30.36	31.99
Hourly pay for time worked	U.S. dollars	15.57	17.39	18.32
Hourly directly paid benefits	U.S. dollars	7.27	7.55	7.97
Hourly social insurance expenditures and labor-related taxes	U.S. dollars	4.96	5.41	5.71

Table 3.  Hourly compensation costs of manufacturing employees in China, 2002-2008 

Source: http://www.bls.gov/fls/

Indicator	Unit	2008	2009	2010
Hourly compensation costs in manufacturing
Hourly compensation costs	U.S. dollars	16.50	14.52	16.62
Hourly direct pay	U.S. dollars	13.36	11.68	13.36
Hourly social insurance expenditures and labor-related taxes	U.S. dollars	3.14	2.85	3.27

Table 4.  Hourly compensation costs of manufacturing employees in China, 2002-2008

Source: http://www.bls.gov/fls/     

   

Industry Life Cycle Analysis & Business model

Industry Life Cycle

Source: http://www.financewalk.com/2011/4-stages-industrys-life-cycle/industry-life-cycle1/

Every industry has life cycle includes introduction phase including early stages phase and innovation phase, growth phase, maturity phase and decline phase. The Chinese fireworks industry was no longer in a period of growth and had plateaued. As a result, it is maturity phase now. However, if we can input different strategy into this sunset industry, I believe fireworks industry will start another life cycle. Moreover, Jerry can use blue ocean strategy to focus on high-end market and provide unique products and service in order to gain high profits. Great business model can make company continue to survive in the market and changing business model when the market changes is the way that keeps company starts another life cycle. Fireworks industry is still a global opportunity because every country still has fireworks shows every year and the scare seems like larger and larger. The revenue in the international market still also grows up. So, I will suggest Jerry can invest money in the Chinese fireworks business.

Reference 

1.     http://www.travelburner.com/2008/01/11/the-10-best-fireworks-displays-of-new-years-eve-2008/

2.     http://disneyland.disney.go.com/disneyland/ fireworks/

3.     http://laughingsquid.com/black-ceremony-a-daytime-fireworks-show-in-qatar-by-cai-guo-qiang/

4.     http://sofunjean.pixnet.net/blog/post/24972179-%E5%9C%8B%E7%88%B6%E9%A0%AD%E5%83%8F%E7%85%99%E7%81%AB%E3%80%8C%E8%B6%85%E9%85%B7%E3%80%8D%E3%80%90%E5%9C%96%2B%E5%BD%B1%E3%80%91

5.     http://en.wikipedia.org/wiki/Fireworks

6.     http://www.libertytimes.com.tw/2011/new/apr/26/today-so5.htm

7.     http://www.bls.gov/fls/

How to make your company more effective? Is structure can be a solution?

Exploration means that an organization invests resources to develop the technology and skills that the organization has never engaged in. Exploitation refers to the situation that organization uses sophisticated technology and skills to improve the competitive ability and increase the efficiency in the organization. What exploration does is prepare for the future. In contrast, what exploitation does is increasing efficiency in dealing with everything now. Exploration and exploitation are both indispensable. The advantage of using structure in an organization is to resolve the conflicting points between exploration and exploitation and create a balance between these two activities. As a result, a good structure can make a company achieve the goal of balanced and sustainable development. How can we create a good structure? There are three important principles to consider: dividing groups by functional distinction; strengthening the interaction and coordination between groups; and a flat organization.

    First, dividing groups by their functional distinction can balance the exploration and exploitation functions in all kinds of departments. Division of labor is an important factor for organizational structure because through labor division we can accelerate the efficiency of transactions and maximize departmental functions. Since each department is responsible for different professional fields, larger companies will typically need to have an additional number of departments.

Evolutionary biologists have long maintained that the isolation of subpopulations can play a valuable adaptive role for a species. The ant is a typical example. There is usually only one egg-laying queen which takes responsibility for the long term survival of all ants in the ant colony. Other ants in the colony are divided into several groups in accordance with their functional contribution, including transport, feeding young ants, building nests, and so on. Ants create a sustainable life by division of labor. This is what we called “exploitation”.

We can apply the species concept to the structure of a company. Every department can use the features of exploration and exploitation to increase their competitiveness because they have different characteristics. For example, an insurance company is usually composed of many departments: product innovation and development; human resources; customer service; auditing; investment management; etc. The product innovation and development department will pay particular attention to the development of new products, using exploration. In contrast, there are many departments which focus on exploitation. For example, the role of audit department in the company is to encourage all departments in the company to work more efficiently and supervise all departments to ensure they follow company policy. This department uses exploitation in its activities.

After division into a variety of departments, strengthening the interaction and coordination between all groups becomes an urgent matter. In addition, resources in a company are fixed in the short term. Because every department is independent and equal, the company needs to create horizontal communication between all of these departments. If the audit department exceeds its annual budget and excessively uses the company resources, the other departments can only use the diminished remaining resources. But the audit department needs to immediately communicate this to the other departments. Though independent, the audit department is horizontally equal to, and not superior to the others. With this horizontal communication bridge, a budget problem can quickly be sent company wide.

The relationship between exploration and exploitation is the same; independent, but equal. Because the company resources which focus on exploration are equal to the resources which focus on exploitation, the relationship between exploration and exploitation don’t conflict with each other. And, since every department is independent, with independent goals, each department will try its best to use their departmental resources for the most gain. This sets up an internal competitiveness, and a win-win situation. Each department is independent and flexible to change, but also tied equally to the other departments.

A well-known story says that a mouse is more flexible than an elephant because an elephant has a larger body than a mouse. It is said that sometimes when an elephant injured its foot, the elephant won’t recognize the injury until the wound is thoroughly infected. That is why it is important that each department communicate well with the other departments.

 The next step is to create a flat organization. Since departments in a large enterprise can be many and complicated, the managers in the upper positions don’t always know about the situation in the lower positions. If messages are conveyed slowly, distorted during transmission or even intentionally falsified to hide errors, the lead manager can make a wrong decision. The purpose of flat organization is to reduce the distance from the bottom to the top positions. In this way, managers can not only fully understand the different characteristics of the various departments but also properly allocate the resources to every department and enable the company to achieve balanced and sustainable development.

Green products---protect our environment and increase company profits

After I finish my blue ocean simulation, I deeply believe that being a boss is not a easy job. Boss has to consider how to make the strategy? How to cut costs? How to price the products? How to promote products? Every company wants to find white space and catch customers’ eyes and heart. However, not everyone like Steve Jobs can always invent new products and new trend. Moreover, the blue ocean strategy is providing good-quality products and service with low price. How can we achieve The goal? Old products with new functions or design or new knowledge still will create new market. Green products are good example. Green products can protect our environment and decrease the costs of company. We can edit the life cycle of products and analyze it. Let’s take marker pens for example.

Why did we choose markers? From the kindergartens to graduate schools, most of schools in United states use markers and white boards to illustrate lectures. As a result, there are more than 500 million marker pens manufactured in the world. Unfortunately, even though many people already recognized the importance of protecting our environment nowadays, we still don't have any specific institutions to collect our used marker pens and recycle them. Moreover, the companies selling marker pens in united states such as Crayola, Pilot, Sharpie don't have recycled plans and don't care about how their customers deal with the used marker pens. 98 percent of the marker pens will be thrown as a waste and bury into our landfill. However, 45 percent of a marker pens are made of plastic. If companies only care about reducing the costs and utilize undegradable materials to produce marker pens, those marker pens will stay in our land for thousands of years.

Before we analyze the LCA of marker pens ,we have to know how to make a marker and what are the components of marker pens.

Step 1 : First, heating the plastic resin then inject the molten resin into molding machines so marker barrels, caps and end plugs will be formed. Second, print the logo and other markings on the barrels before assembling the marker pens.

Step 2: The Hoppers will hold the empty barrels on the assembly line. One machine will build the whole process of assembling a entire marker.

Step 3: The reservoirs store the ink in the markers.

Step 4: Put the back plug into the barrels then seal with one end of the barrels.

Step 5: Pour Ink into the reservoir and fill it.

Step 6: Plug a nib, or marker tip into the other end of the barrels.

Step 7: The cap can protect the nib and prevent the ink from drying up. Then put different colors marker pens into a carton. Put 12 or 24 cartons into a box then ship them to the retailers by trucks, freighters or cargo aircrafts.

The components of markers includes

1.      Body including barrels, caps and end plugs accounts for 45 percent of a marker pen. The material made of body is plastic resin.

2.      Marker reservoir is made of polyester fiber.

3.      Marker felt tip is a fabric made from wool

4.      Markers require ink, and the pigments and synthetic substances used to make it. Toluol and xylol used to be common synthetics used as solvents in dye.

Increase the life of marker pens

As the ink in the marker pens does not contain toxic substances, we recommend that marker pen manufacturer could produce refillable marker pens and sell ink for refill at the same time. Producing refillable marker pens could reduce the use of plastics, wool where the most global warming potential came from in this LCA.

Recycle the used marker pens

Although all of the companies manufacturing marker pens don't have any plans to recycle the used markers, we still can find some group who care about our environment and they have some recycle plans. For example, Terracycle.com. People can send their reused marker pens to the company and gave 2 cents back. The company will collect all used marker pens, reuse the plastic resin and produce other plastic goods. Another non-profit company such as The Pen Guy also gathers the used marker pens too.

How can the company use the design to manufacture their products more sustainable?

Green industry and sustainability are two of most important directions in next economy. Companies can analyze life cycle of their products and try to reuse the waste to cut the costs. (I deeply believe that business men will care about our environment if what they did will benefit their business first….haa). As a result, the materials is very important. Companies can decide to use the materials with cheapest price or the materials more friendly to our environment. Besides the characteristic of materials, the design of products is also important. Excellent design not only can reduce the amount of materials using on the products but also can induce the opportunities that the materials can be reused by taking advantage of the feature of structure in the products.

For example, how does the biggest sport manufacturer, Nike, design their products and also take responsibility of their social duty? Nike sells about 225 million pairs of shoes a year. Since 2007, they have reduced nearly 15% emissions produced by our factories. They made a decision to focus on managing actual reductions. The commitments and investments toward:
-Eliminating toxics across the supply chain
-Driving sustainability through innovation
-Collaborating to accelerate industry change

The thoughts about sustainability start with design, considering new materials and approaches that may help design out unnecessary waste, chemicals, and energy.

“Nike Considered” is one of programs. To be qualified as CONSIDERED, the products must maintain 4 points:
-Must be made from recyclable materials. (i.e., 100% recyclable plastics or veg-tanned leathers.)
--Zero Toxins. Zero chemical adhesives. (no glue.)
---Using mechanics and engineering to put the shoe together instead of chemical solutions.
----Closed Loop Technology. (the shoe must be able to come back 100% as another shoe or something else. Nothing goes to waste.)

The design innovation can be seen in products like the "Considered" boot in 2005. The feature of the considered boot are:

-Lacing for woven vamp: Woven material serves multiple functions, reducing many materials need. The boot's single lace was woven between the leather and stitching to secure the upper portion to the sole, eliminating adhesives and making it an easier product to recycle.

-Leather upper: ”Nested” patterning of upper materials reduces materials wasted in cutting process and simpler design makes for fewer production steps, including less stitching.

-Interlocking midsole : Mechanical locking design of the bottom middle unit requires less labor and energy to assemble and using molding of Phylon midsole produces less waste.

-Modular outsole: Outsole made from recycled rubber waste from our contrast factories and modular outsole uses mechanical introducing designs with no need for adhesives, making it easier to separate and recycle.

It took about 2 years to see the project become a reality. The Nike Considered Boot also earned a Gold Industrial Design Excellence and Best in Show award from the IDSA (Industrial Designers Society of America).However, the sales in the market was not great. This product cost 190 dollars and only sold several months. Why?

It is obvious that customers always concern about the price, the practicability, the appearance, then finally our environment. So company has to think about how to use the recycled materials to manufacture the products and also focus on the price and the appearance now. The Air Jordan XXIII is another example. It launched in January 2008 and based on the “ Nike Considered Design”.

Our education helps us to care about others. Now company starts to care about our environment, how about the customers?

(The source of pics: Nike website)

Food War

Last time we discussed about organic food and Whole Food Market, this topic makes me think about “FOOD”. Several days ago, I read a news told that the population in the world is rapidly increasing. According to the current estimates (by U.S. Census Bureau) , the world population reached 6 billion in 1999 and the new projections indicate that the 7 billion marker will be reached in 2012 and 9 billion in 2044. World population will increase almost 50 percent in 50 years. Can our planet handle it?

When world population continues to go up, how about our arable land? About 11 percent of the Earth's surface is used to grow crops, and about 27 percent is used to keep livestock and other food sources. Land that is used to grow crops is known as arable land, which is different from agricultural land. About 38 percent of the land in the world is agricultural land, which includes arable land, land used for growing fruit and land used for grazing livestock. There is only 12 million square miles (7.68 billion acres) of arable land on the planet. However, arable land is being lost at the alarming rate of over 38,610 square miles (24.7 million acres) per year. Twenty-four territories in the world have no cultivated land now, including Monaco, Macau, Greenland, Gibraltar and Christmas Island. More and more countries, especially developing countries, prefer industry to agriculture. As a result, is our food enough to supply all the human in the world in 10 years?

Food will because the most serious problem in this century. The country which can produce much amount of agricultural products will become more stronger country. New problems always can create new solutions and make new industry. As a result, I believe the next economy will come back to “Agriculture”.
There are two ways to increase the amount of agricultural produces. One is increase the amount of products per unit. We can improve our agriculture skills or transfer crop genes to achieve the goals. Organic farming skill also will increase the amount of agricultural produces. Other way is increase the arable land. Since the land in the world will not easy become bigger, we can take advantage of garden and all kinds of flowerpots to increase the arable land. I believe city farmer will become a emerging work. People can use their roof garden and courtyard to plant the vegetable and fruit. Planting not only can provide the opportunity to exercise but also help people reduce pressure.

Do organic foods really have more nutrition?

People nowadays all want to live more healthy to keep our body strong, at lease far away from hospital. I think this is why Whole Food can be so popular and make a profit in United State. However, do organic foods equal to the food with more nutrition? The answer is no.

Organic food is the food which made from organic materials. Organic vegetables and fruit have to produced according to certain production standards, meaning they are grown without the use of conventional pesticides, artificial fertilizers, human waste, or sewage sludge, and that they were processed without ionizing radiation or food additives. As a result, if people know how to wash and deal with conventional food, in the point of view on food nutrition, we don't have to spend more on organic food. So, is this viewpoint will affect the sales in Whole Food?

I hope it will not because organic food indeed helps us to protect our environment. Organic farms do not consume or release synthetic pesticides into the environment. Some of pesticides have the potential to harm soil, water and local terrestrial and aquatic wildlife. They will damage our surrounding permanently. In addition, organic farms are better than conventional farms at sustaining diverse ecosystems, i.e., populations of plants and insects, as well as animals. When calculated either per unit area or per unit of yield, organic farms use less energy and produce less waste such as waste such as packaging materials for chemicals.

According to the survey, the customers in organic stores or supermarkets have more income and higher education than the customers in conventional stores. I hope they will concern about our planet as well as their bodies so they will continue to shop in the organic stores. After all, the price of organic food is two times more expensive than the price of conventional food. But if they don’t think so or our economy continues to go down, the managers in Whole Food have to think different business model to attract their customers.

P.S.I believe Whole Food Market already knows this viewpoint so their core values are not focus on ”Organic food makes you more healthy”.
Their core values are as blow:
• Selling the Highest Quality Natural and Organic Products Available
• Satisfying and Delighting Our Customers
• Supporting Team Member Happiness and Excellence
• Creating Wealth Through Profits & Growth
• Caring about our Communities & Our Environment
• Creating ongoing win-win partnerships with our suppliers
• Promoting the health of our stakeholders through healthy eating education.
(source: Whole Food website)