Good Case Study About Porter’s Five Forces Model

Introduction

The modern business environments is characterized by a lot of dynamism and unpredictability. Modern businesses are forced to exist in an environment laden with a lot of unpredictable external forces. The ability of the company to adjust its strategies and, in fact, adapt to the prevailing environmental conditions is what determines its survival. Change is key to modern business survival. In order to determine how to adjust itself, a business needs to first of all conduct an external analysis of its environment. Through this, the company is able to identify any weaknesses and act to correct them. In addition, a company is able to establish its strengths and opportunities and consequently capitalize on them for its own benefit. In this case study, Jerry Yu is pondering whether it is indeed a worthwhile venture to invest in the Chinese fireworks industry given the various threats and weakness of this industry. To help Yu with his decision, this paper will utilize Porter’s Five Forces Model to conduct an external environmental analysis. This will be followed by a stakeholder analysis where the objectives of the stakeholders will be assessed.

The Porter’s Five Forces model is an exceptional tool for assessing the attractiveness of investing in the Fireworks Industry in China. This tool particularly provides a model for identifying the main factors that influence profitability and competition in this industry (Porter, 2008). Through the analysis of competitive rivalry, the threat of substitutes, the threat of new entrants and the bargaining power of buyers and suppliers, it will be possible to establish whether investing in this industry is a viable venture.

Competitive Rivalry

The competitive rivalry in China for the fireworks industry is very high. This competition has been so intense that is has culminated in intensive price wars. There are more than 5000 locally based fireworks producers and unfortunately due to the high level of competition between them, there has been low price coordination. This has been very costly to the companies since they have stuck to traditional production methods and have also been using a lot of traditional ingredients which only raise the production costs. In addition, there is a lot of copyright and patent violation between competitors with some even going as far as stealing other’s design, producing products and then selling them at lower prices. Companies with effective marketing strategies are very few. This is perhaps why other competitors from foreign countries such as Korea and Japan have seen more success due to their emphasis on branding, outsourcing, and repackaging strategies. Although China is the leading country in terms of fireworks exports, the fireworks from China are priced very low when compared to others produced in other nations. This intensive competitive rivalry could hurt the business if it indeed decides to enter this industry. The fact that there are so many industries in the market, with most of them practicing unethical competitive strategies means that a company that decides to insert itself this industry will face massive competition.

The Threat of New Entrants

The threat of new entrants in this industry is very high. This is attributable to several factors. The first is minimal legal requirements to open a fireworks production company in China. In addition, there is minimal government supervision and regulation in China. Opening up a new fireworks production company is just a matter of writing a few applications which are accepted in no time. In addition, there is very little execution of intellectual law in the country and workers in fireworks companies can in fact steal the intelligence about fireworks production as well as the designs of their previous factory and set up their own factories. In addition, a fireworks industry is unlike many other industries because its initial capital investment is relatively low. This is particularly facilitated by the fact that most of the production process requires manual labor rather the use of heavy machines and, therefore, it’s relatively easy to open a new factory without incurring cost in terms of machinery purchase. There is also a high availability of resources that are used to make fireworks such as clay soil and gun powder. All these factors facilitate the entrance into the market of new companies and entities and, therefore, the threat of entrants into the Chinese fireworks industry is very high.

Threat of Substitutes

The threat of substitute in the fireworks industry is medium to low. Fireworks are very important products in China. Over the years, some new products have emerged, and these have been considered as substitutes or alternatives to fireworks or firecrackers. These new products have particularly been based on modern technology. Such products include computerized firing tools, balloons, and laser beams. These have been used in place of fireworks during performances and celebrations. However, the demand for fireworks still remains high in China. This is especially in religious ceremonies whereby the firecrackers are not only used for celebratory purposes but also as a representation of culture and religious meanings (for instance in the Buddhist religion). In addition, the demand for firecrackers has remained high because of their unique features and characteristics that include the ability to form patterns in the sky as well as the ability of the firecrackers to be manipulated into different colors. Therefore, although there are some other products that have sometimes been used in place of fireworks, the fireworks cannot really replaced, and this is why the threat of substitutes is rated as medium to low.

Buyer’s Bargaining Power

The Bargaining Power of buyers or consumers in the Chinese Fireworks Industry is very high. The primary reason for this is the existence of many competitors producing the same product. Because of this, the buyers have extremely high power when it comes out making demands about what they want because if one producer fails to meet these demands, the buyer can move on to the other (Porter, 2008). The Chinese Fireworks Market is primarily made up of two types of buyers, individuals and business entities and both have a great bargaining power and for a company to stay in competition, it must be willing to listen to buyers’ demand and cope with the enormous power that they have.

Supplier’s Bargaining Power

The bargaining power of suppliers in the Chinese Fireworks industry is medium to high. First of all, the ingredients required to make fireworks are relatively easy to obtain or procure, especially in a place like China and, therefore, the importance of suppliers is somehow diminished. However, there are some ingredients that that the company will have to acquire from suppliers. Given the high number of industries producing fireworks, the suppliers are unlikely to run out of business and they may, therefore, they may levy certain demands on companies with the threat of ceasing to supply the required materials or even the threat to shift to other producers if these demands are not met. This may, for example, include the demand for upfront payment. Therefore, because of the presence of many fireworks producing industries, the bargaining power of suppliers can be considered to be relatively high.

Stakeholder’s Analysis

This project will have a relatively large number of stakeholders. First is the senior management or the senior executives of the company hoping to invest in the Chinese fireworks market. The objectives of such stakeholder is profits maximization. Therefore, before they commit a company to an investment endeavor, or before they pump money into a new investment project, they will have to be convinced that it is viable. By viability, it means whether the project will yield good profits.
The next set of stakeholders are the shareholders. Just like the senior executives, many shareholders are motivated by profit maximization and will therefore support a project if it promises to bring good returns that will then be shared among shareholders as dividends (Bryson, 2004). Before an investment in the Chinese industry can take place, stakeholders will have to be convinced that it is a profitable venture.
The other important stakeholders are the customers. The customer objectives are to acquire the best possible products at the lowest prices (Bryson, 2004). Therefore, this is an aspect that has to be considered before any business decision is made. The project will only be viable if Jerry Yu’s company can be able to meet these customer’s objectives, that is, provide them with the highest quality of products ate the lowest price.
The other crucial stakeholder is the government. One of the government’s key objectives is to provide jobs for its people by helping new companies to establish themselves (Bryson, 2004). These companies also contribute positively to the economy. In addition, the government requires companies to be both environmentally and socially responsible. The government essentially sets the rules that guide business operations. The Chinese fireworks industry has it set of rules established by the government and the only way the company that invests in this industry will make it is if it is willing to follow these rules.
The other important stakeholders is the general public and the community. Apart from the expectation of job opportunities, the general public expects business enterprises to be socially responsible and, therefore, only business with clear social responsibilities policies will be able to survive and make it in the Chinese fireworks industry.

References

Bryson, J. M. (2004). What to do when stakeholders matter: stakeholder identification and analysis techniques. Public management review, 6(1), 21-53.
Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 25-40.