The Chinese Fireworks Industry

THE CHINESE FIREWORKS INDUSTRY – REVISED Ruihua Jiang wrote this case under the supervision of Professor Paul W. Beamish solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization.To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email  protected] uwo. ca. Copyright  © 2011, Richard Ivey School of Business Foundation Version: 2011-09-21 In February 2009, Jerry Yu was spending the Chinese New Year holidays in Liuyang (lee-ou-yang), a city known as â€Å"the home of firecrackers and fireworks,† located in Hunan Province in China.Jerry was an ABC (America-Born-Chinese). With an MBA, he was running a small family-owned chain of gift stores in Brooklyn, New York. Liuyang was his mother’s hometown. During his visit, his relatives invited him to invest in a fireworks factory that was owned by a village. Mr. Yu had been impressed by the extravagant fireworks shows he had seen during the festival; however, he wanted to assess how attractive the Chinese fireworks industry was before he even looked at the financial details of the factory. HISTORY OF FIREWORKS AND FIRECRACKERSFireworks referred to any devices designed to produce visual or audible effects through combustion or explosion. The art of making fireworks was formally known as pyrotechnics. Firecrackers were a specific kind of fireworks, usually in the form of a noisemaking cylinder. Firecrackers were often strung together and fused consecutively, a staple of Chinese New Year celebrations, weddings, grand openings, births, deaths and other ceremonial occasions. The main ingredients of fireworks had remained almost the same over the past thousand years: 75 parts-byweight potassium nitrate, 15 parts charcoal and 0 parts sulfur. It burned briskly when lighted, but did not erupt or make any noise. When it was found that a projectile could be thrust out of a barrel by keeping the powder at one end and igniting it, black powder became known as gunpowder. Today, smokeless powder has replaced black powder as the propellant in modern weaponry, but black powder remains a main ingredient in fireworks, both as a propellant and as a bursting charge. It was generally believed that the Chinese were the first makers of fireworks.The Chinese made war rockets and explosives as early as the sixth century. One legend said that a Chinese cook, while toili ng in a field kitchen, happened to mix together sulfur, charcoal and saltpetre, and noticed that the pile burned with a combustible force when ignited. He further discovered that when these ingredients were enclosed in a length of bamboo sealed at both ends, it would explode rather than burn, producing a loud crack. This was the origin of firecrackers. In fact, the Chinese word for firecrackers — bao-zhu — literally means â€Å"exploded bamboo. † Page 2 9B11M006The loud reports and burning fires of firecrackers and fireworks were found to be perfect for frightening off evil spirits and celebrating good news at various occasions. For more than a thousand years, the Chinese had been seeing off past years and welcoming in new ones by firing firecrackers. Fireworks made their way first to Arabia in the seventh century, then to Europe sometime in the middle of the 13th century. By the 15th century, fireworks were widely used for religious festivals and public enterta inment. Most of the early pyrotechnicians in Europe were Italians.Even today, the best-known names in the European and American fireworks industry were Italian in origin. From the 16th to the 18th century, Italy and Germany were the two best known areas in the European continent for fireworks displays. In 1777, the United States used fireworks in its first Independence Day celebration, and fireworks have become closely associated with July Fourth celebrations ever since. Up until the 1830s, the colors of the early fireworks were limited, but by 2009, there were six basic colors used in fireworks.LIUYANG — THE HOMETOWN OF FIRECRACKERS AND FIREWORKS According to historical records in China, firecrackers and fireworks â€Å"emerged during the Tang dynasty (618-907 AD), flourished during the Song Dynasty (960-1279 AD), and originated in Liuyang. † For more than 1,000 years, Liuyang had been known as the â€Å"hometown of firecrackers and fireworks of China,† a title that was officially conferred to Liuyang by the State Council of China in 1995. As early as 1723, Liuyang fireworks were chosen as official tributes to the imperial family and were sold all over the country.Exports started early: by 1875, firecrackers and fireworks were being shipped to Japan, Korea, India, Iran, Russia, Australia, England, the U. S. , and other countries. In China, the name Liuyang had become almost synonymous with firecrackers and fireworks. Liuyang-made firecrackers and fireworks won numerous awards over its long history of fireworks making. The long history and tradition had made fireworks more than just a livelihood for the Liuyang people. Almost every native person in the area knew something about fireworks making, or had actually made firecrackers or fireworks in their lifetime.As a result, Liuyang claimed an impressive pool of skilled labor. Firecrackers and fireworks had become the pillar industry of Liuyang, accounting for nearly 50 per cent of all jobs o r about one-third of the total population in the Liuyang District (including Liuyang City and the surrounding counties). In 2008, Liuyang claimed 2,702 fireworks manufacturers with an additional 2,144 in the surrounding area. In total, there were 6,458 fireworks producers in China. While there has been some trend towards consolidation in the industry, most factories were still owned either by villages or families.Among them, about a dozen or so were medium to large factories with employment between 100 to 500 workers. The rest were small workshops employing anywhere from 10 to 50 people, depending on market demand. Liuyang was the top fireworks exporter in the world, making up 60 per cent of global production. The trademarked brand â€Å"Red Lantern† had become well known to fireworks-lovers around the world. China now accounted for 89 per cent of worldwide fireworks exports with the vast majority of that coming from Liuyang.In addition, over the past ten years, China had bec ome the largest market for fireworks. The ratio of domestic use to exports was 6:4, and Chinese imports of fireworks were negligible. Page 3 9B11M006 The increase in demand in the Chinese market had only intensified the competition. All new demand was more than met by the Chinese fireworks industry. Thus, instead of seeing increased margins, the profit margins for many small manufacturers had shrunk over the past decade. In order to make up the difference, manufacturers were cutting corners.However, some of these cost cutting efforts came at the expense of safety. A 2007 factory explosion that left 11 workers dead was blamed primarily on decreased safety standards, which were blamed on a lack of money due to cut throat competition. In response, the government and company officials from Luiyang and surrounding areas agreed to regulate the price of fireworks with the hope of increasing profit margins. With higher profit margins, company officials vowed to increase workers safety. The Product Fireworks could be classified into two categories: display fireworks and consumer fireworks.The display fireworks, such as aerial shells, maroons, and large Roman candles, were meant for professional (usually licensed) pyrotechnicians to fire during large public display shows. They were devices that were designed to produce certain visual or audio effect at a greater height above the ground than the consumer fireworks, which the general public could purchase in convenience stores and enjoy in their own backyards. Display fireworks were known as Explosives 1. 3 (Class B prior to 1991) in the U. S. The consumer fireworks belonged to Explosives 1. 4 (Class C prior to 1991).The difference lay mainly in the amount of explosive components contained in the product. Canada had a similar classification system. In the U. K. , it was more carefully divided into four categories: indoor fireworks; garden fireworks; display fireworks; and display fireworks for professionals only. There we re many varieties of fireworks. Liuyang made 13 different types with more than 3,000 varieties. The major types included fountains, rockets, hand-held novelties, nail and hanging wheels, groundspinning novelties, jumping novelties, floral shells, parachutes and firecrackers.Historically, firecrackers made up 90 per cent of the total production and sales. Over the past 50 years or so, however, there had been a shift away from firecrackers to fireworks. In 2009, firecrackers made up less than 20 per cent of the total sales. The skill levels of fireworks-making had been greatly improved. For instance, the old-day fireworks could reach no more than 20 metres into the sky, while the new ones could go as high as 400 metres. Not much had changed in fireworks-making. Over the last few decades, numerous novelties were added to the fireworks family.However, innovation had never reached beyond product variations. The ingredients had remained more or less the same. The process technology had no t changed much either, although some manual processes, such as cutting the paper, rolling the cylinders, mixing powder, and stringing the cylinders could now be done by machines. Safety Issues The fact that fireworks were made with gunpowder and listed under explosives brought about the issue of safety. Numerous accidents related with fireworks had resulted in tragic human injuries and considerable property damages.As a result, fireworks had become heavily regulated in most countries. Page 4 9B11M006 According to the manufacturers, fireworks were the most dangerous during the production process. Powder mixing and powder filling, in turn, were the two most dangerous procedures. The workers had to abide by strict safety measures. Even a tiny spark caused by the dropping of a tool on the floor or the dragging of a chair could start a major explosion. The quality of the ingredients was also of significant importance. Impure ingredients could greatly increase the possibility of accidents .In Liuyang, almost every year, there would be one or more accidents that resulted in deaths and damages. With an ever increasing number of firms entering the industry, safety was an ongoing concern. Once the fireworks were made, they were relatively safe to transport and store. Even in firing, good quality fireworks rarely caused any problems if everything was done properly. Most of the fireworks-related accidents occurred during private parties or street displays, and quite often involved children playing with fireworks that needed to be handled by adults, or adults firing shells that required professional expertise.Most accidents were linked to consumer backyard events rather than to public displays. According to the United States Consumer Products Safety Commission’s (CPSC) data, injuries related to fireworks had declined substantially, even though their use had increased (see Exhibit 2). For 2009, there were an estimated 5,244 fireworks-related injuries, 30 per cent of w hich were caused by firecrackers and bottle rockets. Of all the injuries related to firecrackers and fireworks, most were treated in the emergency department. Eight per cent of patients had to be admitted to hospital, and 7 people died due to sustained injuries.Children from ages five to 14 were the most frequently involved in fireworks-related injuries. However, fireworks were not the only consumer product that might cause injuries to this age group. According to a 2008 CPSC Injury Surveillance Report, fireworks were actually safer than swing sets and baseballs. However, fireworks-related injuries were usually the most dramatic and the most widely publicized accidents, which partly explained the fact that fireworks was the only category among the products listed in Exhibit 3, for which prohibition, instead of education and adult supervision, was often urged.In the United States, multiple government agencies were involved in regulating fireworks. The Bureau of Alcohol Tobacco and Fi rearms (BATF) controlled the manufacture, storage, sales and distribution of explosives, i. e. , Class B fireworks. The CPSC regulated Class C consumer fireworks, and the Department of Transportation dealt with the transportation of fireworks. Although at the federal level, fireworks and firecrackers were allowed as long as the safety features were up to the standard, local governments would have their own different regulations regarding fireworks consumption.Out of the 50 states, one would allow only novelty fireworks, 5 had banned all consumer fireworks but allowed professional pyrotechnics, and 4 allowed customers only wire or wood stick sparklers and other novelty items. However, the remaining 40 would allow essentially all consumer fireworks. For display fireworks, permits would have to be obtained from federal and local authorities and fire departments. All legal consumer fireworks offered for sale in the United States had been tested for stability by the Bureau of Explosives and approved for transportation by the U. S. Department of Transportation.Because of the limited amount of pyrotechnic composition permitted in each individual unit, consumer fireworks would not ignite spontaneously during storage, nor would they mass-explode during a fire. Therefore, no special storage was required. In most of Europe, similar regulations were in place for safety considerations, only the requirements were regarded as less stringent. In Canada, however, regulations were extremely restrictive. However, over the past decade Chinese fireworks companies had made great strides in the Canadian market. In 1999, there Page 5 9B11M006 were no Chinese companies allowed to sell fireworks in Canada.By 2009, over 75% of all fireworks imports to Canada were from China. THE FIRECRACKERS AND FIREWORKS INDUSTRY IN CHINA The firecrackers and fireworks industry in China was dominated by small family-owned-and-operated workshops. It was essentially a low-tech, highly labor-intensive ind ustry. After 1949, government-run factories replaced the family-owned workshops. The increased scale and government funds made possible the automation of some processes. However, the key processes like installing powder, mixing color ingredients, and putting in fuses, were still manually done by skilled workers.The factories themselves were made up of small workshops that stood away from each other, so that in case of an accident the whole factory would not explode. For the same safety consideration, the workshops were usually located near a water source and in sparsely populated rural areas, to reduce the noise and explosion hazard. After the reform towards a market economy started in 1979, most of the factories were broken up and became family-run units of production again. It was hoped that this privatization might help to motivate people to increase their productivity and raise output.However, this move also served to restrict further technological innovations. There were hardly any research and development (R&D) facilities, nor human and capital resources allocated to R&D in most fireworks companies. The few resources that were available were all spent on product varieties. Even in Liuyang, out of the 400,000 or so people working in the industry, very few were engineers with advanced professional training. In response, the Hunan and other local governments began initiatives aimed at upgrading the traditional fireworks industry. Substantial amounts of money were spent on R&D.The Liuyang Firecrackers and Fireworks Authority reported that they had spent RMB 2,000 million in projects with the Beijing University of Technology and the Nanjing University of Science. Among these initiatives were environmentally friendly fireworks, which used cold flame fireworks technology. The majority of the manufacturing workers were regular farmers who had learned how to make fireworks just by watching and following their elders. They would come to work in fireworks workshops when there were jobs to be done, and return to till their fields if there were none. In Liuyang, for instance, few factories operated year-round.Most workshops would operate as orders came in. Since the fireworksmaking communities were very concentrated geographically and had lasted for generations, only a few places (like Liuyang) could claim a large pool of skilled fireworks-makers. Although Liuyang was by far the most well-known place for making fireworks in China, it faced increasing competition within the country. Also located in Hunan Province, Liling was another major manufacturing community of fireworks. Liling fireworks did not enjoy the same reputation and variety as Liuyang products, but they were fierce in price competition.In the neighboring Jiangxi Province, Pingxiang and Wanzai fireworks had become strong competitors both in price and quality, especially on the low- and medium-priced market. In the high-end product market, especially in large-type display fireworks a nd export market, Dongguan in Guangdong Province, had taken advantage of its closeness to Hong Kong and more sophisticated management and marketing practices, and snatched market share from Liuyang. By 2009, however, more than one third of all firms and 60 per cent of Chinese production remained in Luiyang.Page 6 9B11M006 The initial capital requirement for starting a fireworks-manufacturing facility was relatively low. To set up a factory with the necessary equipment for making large display shells would require around RMB1,250,000. 1 However, setting up a small family workshop making consumer firecrackers and fireworks would require less than RMB125,000. Consequently, the number of small manufacturers mushroomed after the government started to encourage private business ventures. While labor costs in the area were still low, they were steadily increasing.As a result of Chinese economic growth, wages had almost doubled over the past 5 years. This was in part because many workers we re moving into less dangerous occupations. Skilled workers engaged in major processes would earn an average of RMB1,200 to RMB1,800 per month. A non-skilled worker would be paid only RMB500 to RMB700 every month. In larger factories, labor costs were between 20 and 30 per cent of total costs. The main raw materials for fireworks were gunpowder, color ingredients, paper, fuse and clay soil. None would be difficult to procure.However, because of the growth in the Chinese domestic fireworks market, costs of raw materials were steadily rising. Another possible problem in supply was quality. Major manufacturers would usually establish long-term relationships with their suppliers to guarantee the quality of the materials. The small workshops would often go with the lowest prices, sometimes at the cost of quality, which could lead to fatal results. The number of small companies intensified competition. The private workshops were flexible and quick in responding to market demand. They did n ot entail much administrative cost.Compared to governmentowned or some collectively-owned factories, they did incur the costs of providing health care, retirement benefits and housing. They usually did not do any product research or design. Oblivious to intellectual property protection, they would copy any popular product design and sell it for much less. The resulting price drop had become a serious problem for the whole industry. As the profit margin kept shrinking, some workshops would hire cheap unskilled workers, and use cheap equipment and raw materials to cut down on cost. The results could be disastrous. THE DOMESTIC MARKETFirecrackers and fireworks had long been an integral part of any ceremonies held in China. Until recently, demand had been stable, but had risen in the past three decades because of increased economic development and living standards. Economically, market reform and unprecedented growth had given rise to the daily appearance of multitudes of new companies and new stores. As people’s income level and living standards kept rising, fancier and pricier fireworks and firecrackers were desired over the cheap simple firecrackers, thereby creating more profit opportunities for fireworks manufacturers.Almost every household would spend at least a couple of hundred RMB on firecrackers and fireworks during the Spring Festival. However, during the 1990s, increased concerns over environmental pollution and safety of human life and property led more and more cities to regulate the consumption of fireworks and firecrackers. Every year, high profile fireworks-related accidents were reported and emphasized on mass media before and after the traditional Spring Festival. Some articles even condemned firecrackers and fireworks as an old, uncivilized convention that created only noise, pollution and accidents.In a wave of regulations, city after city passed administrative laws regarding the use of fireworks. By 1998, one-third of the cities in Chi na had completely banned the use of firecrackers and fireworks. Another one-third only allowed fireworks in designated places. This led to a decline in domestic market demand. 1 In 2009, the exchange rate was around 6. 60 yuan per US$1. 00. Page 7 9B11M006 However, all this began to change in the mid 2000s. Demand began to soar when Beijing lifted a 12-year ban on fireworks in 2005. Other cities followed suit.In 2005, 106 cities eased restrictions on fireworks; in 2006 another 54 cities eased restrictions. This was followed by 40 cities in 2007 and another 79 cities in 2009. All this lead to an explosion in the Chinese domestic fireworks market. In the meantime, domestic competition grew intensely. The reform towards a market economy made it possible for numerous family-run workshops to appear. They competed mainly on price. Almost every province had some fireworks-making workshops or factories, many set up and run with the help of skilled workers who had migrated from Liuyang.These small establishments usually were located in rural, underdeveloped areas where labor cost was low. The manufacturing was done manually, sometimes without safety measures, using cheap raw materials and simplified techniques. The products were sold locally at low prices, making it difficult for Liuyang fireworks to sell in those areas. To make things worse, these products would often copy any new or popular product designs coming out of Liuyang or other traditional fireworks communities, even using their very brand names. In the past, fireworks were sold through the government-run general merchandise companies.Eventually, private dealers took over a large part of the business. Overall, the distribution system was rather fragmented. The old government-run channels were not very effective, especially for general merchandise. In the new distribution channels, wholesale dealers would get shipments directly from the manufacturers, and then resell to street peddlers and convenience stores. In the countryside, wholesale markets would appear in focal townships, with wholesale dealers and agents of the manufacturers setting up booths promoting their products.Small peddlers in the surrounding areas would get supplies from the market and then sell them in small towns or villages. The wholesale markets in China were important outlets for distributing general merchandise like fireworks. In the display fireworks market, the buyers were often central and local governments, who would purchase the product for public shows on national holidays or special celebrations. Obviously, a local company would have advantages in supplying to local government in its area. Large fireworks shows usually would use invited bidding to decide on suppliers.The amount of fireworks used could range from RMB100,000 to several million yuan, depending on the scale of a fireworks show. Account receivables and bad debt control was a problem not just for fireworks manufacturers, but for all businesses in China. Bad debts and lack of respect for business contracts had created a credit crisis in China. The bad debt problem greatly increased transaction costs, slowed down the cash turnover, and had become a headache for fireworks manufacturers. Some had chosen to withdraw from selling in the domestic market, although the profit margin was higher than in the export market.Legal restrictions, local protectionism, cutthroat price competition, hard-to-penetrate distribution channels and bad debt were impacting negatively on the domestic sales of Liuyang fireworks. In 1997, seeing the decline of its fireworks sales, Liuyang Firecrackers and Fireworks Industry Department, the government agency in charge of the overall development of the pillar industry, decided to start an offensive strategy. First, it opened local offices in most of the 29 provinces, major cities and regions to promote Liuyang fireworks.Second, it regulated the prices that Liuyang fireworks companies could quote and sell i n export sales. Third, it resorted to a government-to-government relationship in order to secure contracts for large public fireworks displays in each province. One year after introducing the offensive strategy, Liuyang fireworks sales had increased. By 2009, they controlled an estimated 60 per cent of the global market. Page 8 9B11M006 Over the next ten years, many legal restrictions were lifted. One of the most notable legal restrictions to be eased was foreign direct investment.With huge growth in both the Chinese domestic market and with China nearing a virtual lock on export market, the Chinese Fireworks industry had become a magnet for foreign investors. Liuyang remained the center of the Chinese fireworks industry and an attractive region for foreigners and foreign firms looking at controlling the entire fireworks value chain. THE EXPORT MARKET Since the opening of the Chinese economy in 1979, exporting had become a major market for the Chinese fireworks industry. As one of t he most celebrated products out of China, export sales of fireworks had risen dramatically between 1978 and 2009.According to independent research, the recorded exports of firecrackers and fireworks reached US$675 million in 2009. This was up from an estimated US$143 million in 1994. The products from China were rich in variety and low in price, but also had a lower reputation in quality control, packaging and timing control, compared to the products made in Japan and Korea. China-made fireworks also would wholesale for much lower prices, usually 80 per cent lower than similar products made in Japan or Korea. There had been little overall co-ordination of export sales.As more and more companies were allowed to export directly, competition kept intensifying and the profit margins on export sales kept slipping. As a result, underpricing each other became a common practice. Therefore, despite its dominant share of the world market, the Chinese fireworks export industry enjoyed limited profitability. The export price of Chinese fireworks was between one-fifth and one-third the wholesale price in the United States. The importers enjoyed a high markup even after paying the 2. 4 per cent U. S. import duty.Of course, the importers had to absorb the cost of getting permits, shipping, storing and carrying the inventory for three to four months before making the sales. This gap pushed both domestic and foreign companies to find ways to control more of the value chain from production to retail. Besides suffering from low profit margin, the Chinese fireworks makers were also risking losing their brand identities. Given the low cost and reasonably good quality of the Chinese fireworks, many large fireworks manufacturers and dealers in the West started to outsource the making of their brand-name fireworks.Failing to see the importance of brand equity, the Chinese fireworks manufacturers were sometimes reduced to mere manufacturing outfits for foreign companies, gradually los ing their own brands. There were also fireworks merchants in Korea, Japan or Spain, who would buy the products from China, and then repackage them, or replace the fuses with better quality ones, then resell them for much higher prices. The export market was usually divided into five blocks: Southeast Asia, North America, Europe, South America and the rest of the world.The most popular market had been Europe, where the regulations on fireworks were less stringent, and orders were of larger quantities and better prices. The United States was considered a tough market because of complex regulations and high competition, nevertheless a necessary one if a company wanted to remain a viable world-player. While in the past, the Canadian market was virtually closed to the Chinese fireworks due to its regulations, by 2009 Chinese imports dominated the entire Canadian market. Page 9 9B11M006 The foreign importers were powerful buyers for several reasons.First, they were very well informed, bot h through past dealings with China and the Internet. Second, they were able to hire agents who were very familiar with the industry in China. Third, they could deal directly with the factories that were willing to offer lower prices. Fourth, there were basically no switching costs, so they could play the suppliers against each other. The diversity of the cultures in the destination countries greatly reduced the seasonality of the fireworks production and sales. As a result, orders evened out throughout the year. However, the peak season was still towards the end of the year.For the U. S. , it was before July 4. Usually, the importers would receive the shipment two or three months beforehand. While the U. S. was still China’s major export market for fireworks, other countries were also importing large quantities of Chinese made fireworks (see Exhibit 4). The Internet had become a marketing outlet for Chinese fireworks. 20 per cent to 25 per cent of the worldwide sales were thr ough the Internet. However, export sales were still made mainly through foreign trade companies or agents. In recent years, foreign investments were also funneled into the fireworks industry.In Liuyang, four of the large fireworks factories had foreign investments, made mainly by the fireworks trading companies in Hong Kong. In 2009, the Liuyang Fireworks Company was listed on the Toronto Stock Exchange (TSE), a first for a Chinese fireworks manufacturer. The Future of the Fireworks Industry in China The managers of the Chinese fireworks companies that Jerry talked to expressed mixed feelings towards the future outlook of their industry. One pessimistic view was that fierce competition and more stringent safety regulations were killing the industry.As the Chinese economy advanced, the government was forcing more manufacturing regulations onto firms that were driving up costs. Moreover, as people became more environmentally-conscious and more distracted by the endless diversities of modern entertainment, traditional celebrations using firecrackers and fireworks would die a gradual death. As to the function of attracting public attention for promotional purposes, fireworks also faced challenges from new technologies, such as laser beams combined with sound effects. In fact, â€Å"make-believe firecrackers† already appeared as substitutes in China.These were made of red plastic tubes strung together like firecrackers with electric bulbs installed inside the tubes. When the power was turned on, the lights would emit sparks, accompanied by crackling reports that sounded like firecrackers. These were being used at weddings and grand openings in cities where firecrackers and fireworks were banned. More interesting substitutes were spotted at some weddings in Beijing, where people paved the road with little red balloons, and made the limousine carrying the bride and groom run over the balloons to make explosive cracking sounds as well as leave behind red bits a nd pieces of debris.Also, more and more young couples were getting married in western styles, in a church or a scenic green meadow outdoors, where serene and quiet happiness prevailed over the traditional noisy way of celebrating. Therefore, some managers believed that firecrackers and fireworks were doomed to fade off into history. The more optimistic view, however, was that the industry would not die at all. If the right moves were made by the industry, it could even grow. Some said that tradition would not die so easily. It was in their national character for the Chinese to celebrate with an atmosphere of noisy happiness.Moreover, even in the West, the popularity of fireworks was not suffering from all the regulations. No real substitutes could Page 10 9B11M006 replace fireworks, which combined the sensual pleasures of visual, audio and emotional stimuli. For instance, the U. S. Congressional resolution in 1963 to use bells to replace fireworks in celebrating Independence Day nev er really caught on. Fireworks were also being combined with modern technologies like laser beams, computerized firing and musical accompaniment to make the appeal of fireworks more irresistible.The safety problem was not really as serious as people were made to believe, and would only improve with new technological innovations like smokeless fireworks. With the success of the fireworks displays at the Beijing Olympics, China’s brand as a world class fireworks producer was on the rise. With better management practices, perhaps margins could be increased. However, both sides agreed that the Chinese fireworks industry would have to change its strategy, especially in international competition, to stay a viable and profitable player. THE DECISIONWhile the Liuyang fireworks industry dominated the worldwide industry, Jerry had to decide whether he should invest in the industry. If he did invest, what was the best way to capitalize on the potential that remained unexploited in this industry? He wondered whether he could apply the industry analysis framework he had studied in his MBA program. Page 11 9B11M006 Exhibit 1 CHINA & LIUYANG FIRECRACKERS AND FIREWORKS: TOTAL REVENUE (US$000) 2007 2009 Total Revenue Domestic (estimated) All China 742,395 1,009,757 Liuyang 450,000 757,500 Total Revenue ExportsAll China 494,930 673,171 Liuyang 300,000 505,000 Total Revenue (estimated) All China 1,237,325 1,682,928 Liuyang 750,000 1,262,500 Sources: International Fireworks Association; ICON Group Ltd â€Å"The World Market for Fireworks: A 2009 Global Trade Perspective Notes: 1. Domestic Revenue estimate based on a 6:4 domestic to export ratio as reported by http://www. articlesbase. com. 2. Alternative sources put the Chinese domestic market much higher. 3. 2009 data and 2007 data are from different sources. Caution should be used when making comparisons.Growth rates of 15 to 18 per cent per year have been reported by other news sources (especially: http://www. newsreel network. com) Page 12 9B11M006 Exhibit 2 TOTAL FIREWORKS CONSUMPTION AND ESTIMATED FIREWORKS-RELATED INJURIES IN U. S. : 2000 TO 2008 Year Fireworks Consumption, Millions of Pounds Estimated Fireworks-Related Injuries Injuries per 100,000 Pounds 2000 152. 6 11,000 7. 2 2001 161. 6 9,500 5. 8 2002 190. 1 8,800 4. 6 2003 220. 8 9,700 4. 4 2004 236. 2 9,600 4. 1 2005 281. 5 10,800 3. 8 2006 278. 2 9,200 3. 3 2007 265. 5 9,800 3. 7 2008 213. 7,000 3. 3 Source: American Pyrotechnics Association. Exhibit 3 ESTIMATED EMERGENCY ROOM TREATMENT PER 100,000 YOUTHS (AGES 5 TO 14) FROM OUTDOOR ACTIVITIES (JUNE 22 TO JULY 22, 2008) Source: American Pyrotechnics Association As cited from the CPSC National Injury Information Clearinghouse 5,244 13,501 14,258 6,349 21,040 15,268 18,365 21,032 68,553 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 Fireworks Skateboards Fishing Swing Sets Swimming 4 wheel ATVs Sof tball Baseball Bicycles Page 13 9B11M006 Exhibit 4 FIREWORKS EXPORTS FROM CHIN A, 2009Country of Destination Rank Value (000 US$) % Share Cumulative % United States 1 301,500 44. 8 44. 8 Germany 2 83,553 12. 4 57. 2 United Kingdom 3 33,645 5. 0 62. 2 The Netherlands 4 32,586 4. 8 67. 0 Japan 5 26,764 4. 0 71. 0 Russia 6 16,157 2. 4 73. 4 Italy 7 15,967 2. 4 75. 8 France 8 13,574 2. 0 77. 8 Spain 9 13,009 1. 9 79. 7 Denmark 10 9,935 1. 5 81. 2 Canada 11 9,817 1. 5 82. 7 Poland 12 9,580 1. 4 84. 1 Taiwan 13 8,130 1. 2 85. 3 Finland 14 6,002 0. 9 86. 2 South Africa 15 5,623 0. 8 87. 0 Austria 16 5,488 0. 8 87. 8 Ukraine 17 5,445 0. 88. 7 Sweden 18 4,868 0. 7 89. 4 Albania 19 4,835 0. 7 90. 1 Argentina 20 4,793 0. 7 90. 8 Turkey 21 4,592 0. 7 91. 5 Belgium 22 4,583 0. 7 92. 2 Norway 23 4,336 0. 6 92. 8 Czech Republic 24 4,312 0. 6 93. 5 Venezuela 25 4,257 0. 6 94. 1 New Zealand 26 4,024 0. 6 94. 7 Switzerland 27 3,316 0. 5 95. 2 South Korea 28 3,104 0. 5 95. 6 Thailand 29 2,720 0. 4 96. 0 Indonesia 30 1,925 0. 3 96. 3 Other 31 24,731 3. 7 100. 0 Total 673,171 100. 00 100. 00 Source: Professor Philip M. Parker, INSEAD, copyright  © 2009, www. icongrouponline. com

Coffee and Starbucks Essay

Starbucks began in 1971 when three academics—English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker—opened a store called Starbucks Coffee, Tea, and Spice in the touristy Pikes Place Market in Seattle. The three partners shared a love of fine coffees and exotic teas and believed they could build a clientele in Seattle much like that which had already emerged in the San Francisco Bay area. Each invested $1,350 and borrowed another $5,000 from a bank to open the Pikes Place store. Baldwin, Siegel, and Bowker chose the name Starbucks in honor of Starbuck, the coffee-loving first mate in Herman Melville’s Moby Dick(so company legend has it), and because they thought the name evoked the romance of the high seas and the seafaring tradition of the early coffee traders. The new company’s logo, designed by an artist friend, was a two-tailed mermaid encircled by the store’s name. The inspiration for the Starbucks enterprise was a Dutch immigrant, Alfred Peet, who had begun importing fine arabica coffees into the United States during the 1950s. Peet viewed coffee as a fine winemaker views grapes, appraising it in terms of country of origin, estates, and harvests. Peet had opened a small store, Peet’s Coffee and Tea, in Berkeley, California, in 1966 and had cultivated a loyal clientele. Peet’s store specialized in importing fine coffees and teas, dark-roasting its own beans the European way to bring out their full flavor, and teaching customers how to grind the beans and make freshly brewed coffee at home. Baldwin, Siegel, and Bowker were well acquainted with Peet’s expertise, having visited his store on numerous occasions and spent many hours listening to Peet expound on quality coffees and the importance of proper bean-roasting techniques. All three were devoted fans of Peet and his dark-roasted coffees, going so far as to order their personal coffee supplies by mail from Peet’s. The Pikes Place store featured modest, hand-built nautical fixtures. One wall was devoted to whole-bean coffees; another had shelves of coffee products. The store did not offer fresh-brewed coffee by the cup, but samples were sometimes available for tasting. Initially, Siegel was the only paid employee. He wore a grocer’s apron, scooped out beans for customers, extolled the virtues of fine, dark-roasted coffees, and functioned as the partnership’s retail expert. The other two partners kept their day jobs but came by at lunch or after work to help out. During the start-up period, Baldwin kept the books and developed a growing knowledge of coffee; Bowker served as the â€Å"magic, mystery, and romance man. â€Å"1 The store was an immediate success, with sales exceeding expectations, partly because of a favorable article in the Seattle Times. In the early months, each of the founders traveled to Berkeley to learn more about coffee roasting from their mentor, Alfred Peet, who urged them to keep deepening their knowledge of coffees and teas. For most of the first year, Starbucks ordered its coffee beans from Peet’s, but then the partners purchased a used roaster from Holland and set up roasting operations in a nearby ramshackle building. Baldwin and Bowker experimented with Alfred Peet’s roasting procedures and came up with their own blends and flavors. A second Starbucks store was opened in 1972. By the early 1980s, the company had four Starbucks stores in the Seattle area and could boast of having been profitable every year since opening its doors. But the roles and responsibilities of the cofounders underwent change. Zev Siegel experienced burnout and left the company to pursue other interests. Jerry Baldwin took over day-to-day management of the company and functioned as chief executive officer; Gordon Bowker remained involved as an owner but devoted most of his time to his advertising and design firm, a weekly newspaper he had founded, and a microbrewery he was launching (the Redhook Ale Brewery). Howard Schultz Enters the Picture In 1981, Howard Schultz, vice president and general manager of U. S. operations for Hammarplast—a Swedish maker of stylish kitchen equipment and housewares—noticed that Starbucks was placing larger orders than Macy’s was for a certain type of drip coffeemaker. Curious to learn what was going on, he decided to pay the company a visit. The morning after his arrival in Seattle, Schultz was escorted to the Pikes Place store by Linda Grossman, the retail merchandising manager for Starbucks. A solo violinist was playing Mozart at the door, with his violin case open for donations. Schultz immediately was taken by the powerful and pleasing aroma of the coffees, the wall displaying coffee beans, and the rows of red, yellow, and black Hammarplast coffeemakers on the shelves. As he talked with the clerk behind the counter, the clerk scooped out some Sumatran coffee beans, ground them, put the grounds in a cone filter, poured hot water over the cone, and shortly handed Schultz a porcelain mug filled with the freshly brewed coffee. After three sips, Schultz was hooked. He began asking the clerk and Grossman questions about the company, about coffees from different parts of the world, and about the different ways of roasting coffee. Next, Schultz met with Jerry Baldwin and Gordon Bowker, whose offices overlooked the company’s coffee-roasting operation. The atmosphere was informal. Baldwin, dressed in a sweater and tie, showed Schultz some new beans that had just come in from Java and suggested they try a sample. Baldwin did the brewing himself, using a glass pot called a French press. Bowker, a slender, bearded man with dark hair and intense brown eyes, appeared at the door and the three men sat down to talk about Starbucks. Schultz was struck by their knowledge of coffee, their commitment to providing high-quality products, and their passion for educating customers about the merits of dark-roasted coffees. Baldwin told Schultz, â€Å"We don’t manage the business to maximize anything other than the quality of the coffee. â€Å"2 Starbucks purchased only the finest arabica coffees and put them through a meticulous dark-roasting process to bring out their full flavors. Baldwin explained that the cheap robusta coffees used in supermarket blends burn when subjected to dark roasting. He also noted that the makers of supermarket blends prefer lighter roasts because they allow higher yields (the longer a coffee is roasted, the more weight it loses). Schultz was struck by the business philosophy of the two partners. It was clear from their discussions that Starbucks stood not just for good coffee, but rather for the dark-roasted flavor profiles that the founders were passionate about. Top-quality, fresh-roasted, whole-bean coffee was the company’s differentiating feature and a bedrock value. It was also clear to Schultz that Starbucks was strongly committed to educating its customers to appreciate the qualities of fine coffees, rather than just kowtowing to mass-market appeal. The company depended mainly on word-of-mouth to get more people into its stores, then relied on the caliber of its product to give patrons a sense of discovery and excitement. It built customer loyalty cup by cup as buyers of its products developed their palates. On his trip back to New York the next day, Howard Schultz could not stop thinking about Starbucks and what it would be like to be a part of the Starbucks enterprise. Schultz recalled, â€Å"There was something magic about it, a passion and authenticity I had never experienced in business. â€Å"3 Living in the Seattle area also had a strong appeal. By the time Schultz landed at Kennedy Airport, he knew he wanted to go to work for Starbucks. Though there was nothing in his background (see Exhibit 2) that prepared him for the experience, Schultz asked Baldwin at the first opportunity whether there was any way he could fit into Starbucks. The two quickly established an easy, comfortable rapport, but it still took a year of numerous meetings and a lot of convincing to get Baldwin, Bowker, and their silent partner from San Francisco to agree to hire Howard Schultz. Schultz pursued a job at Starbucks far more vigorously than Starbucks pursued him. There was some nervousness at Starbucks about bringing in an outsider, especially a high-powered New Yorker, who had not grown up with the values of the company. Nonetheless, Schultz continued to press his ideas about the tremendous potential of expanding the Starbucks enterprise outside Seattle and exposing people all over America to Starbucks coffee—arguing there had to be more than just a few thousand coffee lovers in Seattle who would like the company’s products. Schultz believed that Starbucks had such great promise that he offered to take a salary cut in exchange for a small equity stake in the business. But the owners worried that by offering Schultz a job as head of marketing they would be committing themselves to a new direction for Starbucks. At a spring 1982 meeting with the three owners in San Francisco, Schultz once again presented his vision for opening Starbucks stores across the United States and Canada. He flew back to New York thinking a job offer was in the bag. But the next day Baldwin called Schultz and indicated that the owners had decided against hiring him because geographic expansion was too risky and because they did not share Schultz’s vision for Starbucks. Schultz was despondent; still, he believed so deeply in Starbucks’ potential that he decided to make a last-ditch appeal. He called Baldwin back the next day and made an impassioned, though reasoned, case for why the decision was a mistake. Baldwin agreed to reconsider. The next morning Baldwin called Schultz and told him the job of heading marketing and overseeing the retail stores was his. In September 1982, Howard Schultz took on his new responsibilities at Starbucks. Starbucks and Howard Schultz: The 1982–85 Period In his first few months at Starbucks, Schultz spent most of his waking hours in the four Seattle stores—working behind the counters, tasting different kinds of coffee, talking with customers, getting to know store personnel, and educating himself about the retail aspects of the coffee business. By December, Jerry Baldwin decided that Schultz was ready for the final part of his training—roasting coffee. Schultz spent a week at the roaster examining the color of the beans, listening for the telltale second pop of the beans during the roasting process, learning to taste the subtle differences among Baldwin and Bowker’s various roasts, and familiarizing himself with the roasting techniques for different beans. Meanwhile, he made a point of acclimating himself to the informal dress code, blending in with the culture, and gaining credibility and building trust with colleagues. Making the transition from the high-energy, coat-and-tie style of New York to the more casual ambience of the Pacific Northwest required a conscious effort on Schultz’s part. One day during the busy Christmas season that first year, Schultz made real headway in gaining the acceptance and respect of company personnel at the Pikes Place store. The store was packed and Schultz was behind the counter ringing up sales when someone shouted that a customer had just headed out the door with some stuff—two expensive coffeemakers it turned out, one in each hand. Without thinking, Schultz leaped over the counter and chased the thief up the cobblestone street outside the store, yelling â€Å"Drop that stuff! Drop it! † The thief was startled enough to drop both pieces and run away. Schultz picked up the merchandise and returned to the store, holding up the coffeemakers like trophies. Everyone applauded. When Schultz returned to his office later that afternoon, his staff had strung up a banner that read â€Å"Make my day. â€Å"4 Schultz was overflowing with ideas for the company. Early on, he noticed that first-time customers sometimes felt uneasy in the stores because of their lack of knowledge about fine coffees and because store employees sometimes came across as a little arrogant. Schultz worked with store employees on developing customer-friendly sales skills and produced brochures that made it easy for customers to learn about fine coffees. Schultz’s biggest idea for Starbucks’ future came during the spring of 1983 when the company sent him to Milan, Italy, to attend an international housewares show. While walking from his hotel to the convention center, Schultz spotted an espresso bar and went inside to look around. The cashier beside the door nodded and smiled. The barista (counter worker) greeted Howard cheerfully, then gracefully pulled a shot of espresso for one customer and handcrafted a foamy cappuccino for another, all the while conversing merrily with those standing at the counter. Schultz judged the barista’s performance as â€Å"great theater. † Just down the way on a side street, he entered an even more crowded espresso bar, where the barista, whom he surmised to be the owner, was greeting customers by name; people were laughing and talking in an atmosphere that plainly was comfortable and familiar. In the next few blocks, he saw two more espresso bars. When the trade show concluded for the day, Schultz walked the streets of Milan exploring espresso bars. Some were stylish and upscale; others attracted a blue-collar clientele. What struck Schultz was how popular and vibrant the Italian coffee bars were. Most had few chairs, and it was common for Italian opera to be playing in the background. Energy levels were typically high, and the bars seemed to function as an integral community gathering place. Each one had its own unique character, but they all had a barista who performed with flair and exhibited a camaraderie with the customers. Schultz was particularly struck by the fact that there were 1,500 coffee bars in Milan, a city about the size of Philadelphia, and a total of 200,000 in all of Italy. His mind started churning. Schultz’s first few days in Milan produced a revelation: The Starbucks stores in Seattle completely missed the point. Starbucks, he decided, needed to serve fresh-brewed coffee, espresso, and cappuccino in its stores (in addition to beans and coffee equipment). Going to Starbucks should be an experience, a special treat; the stores should be a place to meet friends and visit. Re-creating the Italian coffee-bar culture in the United States could be Starbucks’ differentiating factor. Schultz remained in Milan for a week, exploring coffee bars and learning as much as he could about the Italian passion for coffee drinks. In one bar, he heard a customer order a caffe latte and decided to try one himself—the barista made a shot of espresso, steamed a frothy pitcher of milk, poured the two together in a cup, and put a dollop of foam on the top. Schultz concluded that it was â€Å"the perfect drink,† and thought to himself, â€Å"No one in America knows about this. I’ve got to take it back with me. â€Å"5 Schultz’s Growing Frustration On Schultz’s return from Italy, he shared his revelation and ideas for modifying the format of Starbucks stores with Baldwin and Bowker. But instead of winning their approval, Schultz encountered strong resistance. Baldwin and Bowker argued that Starbucks was a retailer, not a restaurant or bar. They feared that serving drinks would put them in the beverage business and dilute the integrity of Starbucks’ mission as a coffee store. They pointed out that Starbucks was a profitable small, private company and there was no reason to rock the boat. But a more pressing reason for their resistance emerged shortly—Baldwin and Bowker were excited by an opportunity to purchase Peet’s Coffee and Tea. The acquisition took place in 1984; to fund it, Starbucks had to take on considerable debt, leaving little in the way of financial flexibility to support Schultz’s ideas for entering the beverage part of the coffee business or expanding the number of Starbucks stores. For most of 1984, Starbucks managers were dividing their time between their operations in Seattle and the Peet’s enterprise in San Francisco. Schultz found himself in San Francisco every other week supervising the marketing and operations of the five Peet’s stores. Starbucks employees began to feel neglected and, in one quarter, did not receive their usual bonus due to tight financial conditions. Employee discontent escalated to the point where a union election was called, and the union won by three votes. Baldwin was shocked at the results, concluding that employees no longer trusted him. In the months that followed, he began to spend more of his energy on the Peet’s operation in San Francisco. It took Howard Schultz nearly a year to convince Jerry Baldwin to let him test an espresso bar. After Baldwin relented, Starbucks’ sixth store, which opened in April 1984, became the first one designed to sell beverages and the first one in downtown Seattle. Schultz asked for a 1,500-square-foot space to set up a full-scale Italian-style espresso bar, but Jerry agreed to allocating only 300 square feet in a corner of the new store. There was no pre-opening marketing blitz and no sign announcing Now Serving Espresso—the lack of fanfare was part of a deliberate experiment to see what would happen. By closing time on the first day, some 400 customers had been served, well above the 250-customer average of Starbucks’ best-performing stores. Within two months the store was serving 800 customers per day. The two baristas could not keep up with orders during the early morning hours, resulting in lines outside the door onto the sidewalk. Most of the business was at the espresso counter; sales at the regular retail counter were only adequate. Schultz was elated by the test results; his visits to the store indicated that it was becoming a gathering place and that customers were pleased with the beverages being served. Schultz expected that Baldwin’s doubts about entering the beverage side of the business would be dispelled and that he would gain approval to take Starbucks to a new level. Every day he went into Baldwin’s office to show him the sales figures and customer counts at the new downtown store. But Baldwin was not comfortable with the success of the new store; he believed that espresso drinks were a distraction from the core business of selling fine arabica coffees at retail and rebelled at the thought that people would see Starbucks as a place to get a quick cup of coffee to go. He adamantly told Schultz, â€Å"We’re coffee roasters. I don’t want to be in the restaurant business . . . Besides, we’re too deeply in debt to consider pursuing this idea. â€Å"6 While he didn’t deny that the experiment was succeeding, he didn’t want to go forward with introducing beverages in other Starbucks stores. Schultz’s efforts to persuade Baldwin to change his mind continued to meet strong resistance, although to avoid a total impasse Baldwin finally did agree to let Schultz put espresso machines in the back of two other Starbucks stores. Over the next several months, Schultz—at the age of 33—made up his mind to leave Starbucks and start his own company. His plan was to open espresso bars in high-traffic downtown locations that would emulate the friendly, energetic atmosphere he had encountered in Italian espresso bars. Schultz had become friends with a corporate lawyer, Scott Greenberg, who helped companies raise venture capital and go public. Greenberg told Schultz he believed investors would be interested in providing venture capital for the kind of company Schultz had in mind. Baldwin and Bowker, knowing how frustrated Schultz had become, supported his efforts to go out on his own and agreed to let him stay in his current job and office until definitive plans were in place. Schultz left Starbucks in late 1985. Schultz’s Il Giornale Venture Ironically, as Schultz was finalizing the documents for his new company, Jerry Baldwin announced he would invest $150,000 of Starbucks’ money in Schultz’s coffee-bar enterprise, thus becoming Schultz’s first investor. Baldwin accepted Schultz’s invitation to be a director of the new company, and Gordon Bowker agreed to be a part-time consultant for six months. Bowker urged Schultz to make sure that everything about the new stores—the name, the presentation, the care taken in preparing the coffee—was calculated to lead customers to expect something better than competitors offered. Bowker proposed that the new company be named Il Giornale (pronounced ill jor-nahl-ee ) Coffee Company, a suggestion that Schultz accepted. In December 1985, Bowker and Schultz made a trip to Italy during which they visited some 500 espresso bars in Milan and Verona, observing local habits, taking notes about decor and menus, snapping photographs, and videotaping baristas in action. Greenberg and Schultz then drew up plans to raise an initial $400,000 in seed capital and another $1. 25 million in equity—enough to launch at least eight espresso bars and prove the concept would work in Seattle and elsewhere. The seed capital was raised by the end of January 1986, primarily from Starbucks and two other investors who believed in Schultz and his ideas, but it took Schultz until the end of the year to raise the remaining $1. 25 million. He made presentations to 242 potential investors, 217 of whom said no. Many who heard Schultz’s hour-long presentation saw coffee as a commodity business and thought that Schultz’s espresso-bar concept lacked any basis for sustainable competitive advantage (no patent on dark roast, no advantage in purchasing coffee beans, no way to bar the entry of imitative competitors). Some noted that consumption of coffee had been declining since the mid-1960s, others were skeptical that people would pay $1. 50 or more for a cup of coffee, and still others were turned off by the company’s hard-to-pronounce name. Being rejected by so many potential investors was disheartening (some who listened to Schultz’s presentation ? didn’t even bother to call him back; others refused to take his calls). Nonetheless, Schultz continued to display passion and enthusiasm in making his pitch and never doubted that his plan would work. He ended up raising $1. 65 million from about 30 investors; most of this money came from nine people, five of whom became directors of the new company. One of Howard Schultz’s earliest moves during the start-up process was to hire Dave Olsen, who in 1974 had opened a coffee bar, Cafe Allegro, near the busiest entrance to the University of Washington campus. Olsen was a long-standing Starbucks customer, having discovered the quality of Starbucks’ coffee beans, gotten to know the owners, and worked with them to develop a custom espresso roast for use in his cafe. Olsen’s successful Cafe Allegro had become known for cafe au lait, a concoction equivalent to the Italian caffe latte. When Olsen heard of Schultz’s plans for Il Giornale, he called Schultz and expressed an interest in being part of the new company—he was intrigued by the Italian coffee-bar concept and was looking for a more expansive career opportunity. Olsen not only had coffee expertise but also had spent 10 years in an apron behind the counter at Cafe Allegro. Schultz immediately picked up on the synergy between him and Olsen. His own strengths were in forming and communicating a vision, raising money, finding good store locations, building a brand name, and planning for growth. Olsen understood the nuts and bolts of operating a retail cafe, hiring and training baristas, and making and serving good drinks. Plus, Olsen was fun to work with. Schultz put Olsen in charge of store operations, made him the coffee conscience of the company, and gave him the authority to make sure that Il Giornale served the best coffee and espresso possible. The first Il Giornale store opened in April 1986. It had a mere 700 square feet and was located near the entrance of Seattle’s tallest building. The decor was Italian, the menu contained Italian words, and Italian opera music played in the background. The baristas wore white shirts and bow ties. All service was stand-up—there were no chairs. National and international papers hung from rods on the wall. By closing time on the first day, 300 customers had been served, mostly in the morning hours. Schultz and Olsen worked hard to make sure that all the details were executed perfectly. For the first few weeks, Olsen worked behind the counter during the morning rush. But while the core idea worked well, it soon became apparent that several aspects of Il Giornale’s format weren’t appropriate for Seattle. Some customers objected to the incessant opera music, others wanted a place to sit down, and many didn’t understand the Italian words on the menu. These â€Å"mistakes† were quickly fixed, without compromising the style and elegance of the store. Within six months, Il Giornale was serving more than 1,000 customers a day and regulars had learned how to pronounce the company’s name. Because most customers were in a hurry, it became apparent that speedy service was a competitive advantage. Six months after opening the first store, Il Giornale opened a second store in another downtown building. A third store was opened in Vancouver, British Columbia, in April 1987. Vancouver was chosen to test the transferability of the company’s business concept outside Seattle. To reach his goal of opening 50 stores in five years, Schultz needed to dispel his investors’ doubts about geographic expansion. By mid-1987 sales at the three stores were equal to $1. 5 million annually. Il Giornale Acquires Starbucks In March 1987 Jerry Baldwin and Gordon Bowker decided to sell the whole Starbucks operation in Seattle—the stores, the roasting plant, and the Starbucks name. Bowker wanted to cash out his coffee-business investment to concentrate on his other enterprises; Baldwin, who was tired of commuting between Seattle and San Francisco and wrestling with the troubles created by the two parts of the company, elected to concentrate on the Peet’s operation. As he recalls, â€Å"My wife and I had a 30-second conversation and decided to keep Peet’s. It was the original and it was better. â€Å"7 Schultz knew immediately that he had to buy Starbucks; his board of directors agreed. Schultz and his newly hired finance and accounting manager drew up a set of financial projections for the combined operations and a financing package that included a stock offering to Il Giornale’s original investors and a line of credit with local banks. While a rival plan to acquire Starbucks was put together by another Il Giornale investor, Schultz’s proposal prevailed and within weeks Schultz had raised the $3. 8 million needed to buy Starbucks. The acquisition was completed in August 1987. After the papers were signed, Schultz and Scott Greenberg walked across the street to the first Il Giornale store, ordered themselves espresso drinks, and sat at a table near the window. Greenberg placed the hundred-page business plan that had been used to raise the $3. 8 million between them and lifted his cup in a toast—†We did it,† they said together. 8 The new name of the combined companies was Starbucks Starbucks as a Private Company: 1987–92. The following Monday morning, Schultz returned to the Starbucks offices at the roasting plant, greeted all the familiar faces and accepted their congratulations, then called the staff together for a meeting on the roasting-plant floor. He began: All my life I have wanted to be part of a company and a group of people who share a common vision . . . I’m here today because I love this company. I love what it represents . . . I know you’re concerned . . . I promise you I will not let you down. I promise you I will not leave anyone behind . . . In five years, I want you to look back at this day and say â€Å"I was there when it started. I helped build this company into something great. â€Å"9 Schultz told the group that his vision was for Starbucks to become a national company with values and guiding principles that employees could be proud of. He indicated that he wanted to include people in the decision-making process and that he would be open and honest with them. Schultz said he believed it was essential, not just an intriguing option, for a company to respect its people, to inspire them, and to share the fruits of its success with those who contributed to its long-term value. His aspiration was for Starbucks to become the most respected brand name in coffee and for the company to be admired for its corporate responsibility. In the next few days and weeks, however, Schultz came to see that the unity and morale at Starbucks had deteriorated badly in the 20 months he had been at Il Giornale. Some employees were cynical and felt unappreciated. There was a feeling that prior management had abandoned them and a wariness about what the new regime would bring. Schultz determined that he would have to make it a priority to build a new relationship of mutual respect between employees and management. The new Starbucks had a total of nine stores. The business plan Schultz had presented investors called for the new company to open 125 stores in the next five years—15 the first year, 20 the second, 25 the third, 30 the fourth, and 35 the fifth. Revenues were projected to reach $60 million in 1992. But the company lacked experienced management. Schultz had never led a growth effort of such magnitude and was just learning what the job of CEO was all about, having been the president of a small company for barely two years. Dave Olsen had run a single cafe for 11 years and was just learning to manage a multistore operation. Ron Lawrence, the company’s controller, had worked as a controller for several organizations. Other Starbucks employees had only the experience of managing or being a part of a six-store organization. When Starbucks’ key roaster and coffee buyer resigned, Schultz put Dave Olsen in charge of buying and roasting coffee. Lawrence Maltz, who had 20 years of experience in business and eight years of experience as president of a profitable public beverage company, was hired as executive vice president and charged with heading operations, finance, and human resources. In the next several months, a number of changes were instituted. To symbolize the merging of the two companies and the two cultures, a new logo was created that melded the Starbucks and Il Giornale logos. The Starbucks stores were equipped with espresso machines and remodeled to look more Italian than Old World nautical. The traditional Starbucks brown was replaced by Il Giornale green. The result was a new type of store—a cross between a retail coffee-bean store and an espresso bar/cafe—that became Starbucks’ signature format in the 1990s. By December 1987, employees at Starbucks had begun buying into the changes Schultz was making and trust had begun to build between management and employees. New stores were on the verge of opening in Vancouver and Chicago. One Starbucks store employee, Daryl Moore, who had voted against unionization in 1985, began to question his fellow employees about the need for a union. Over the next few weeks, Moore began a move to decertify the union. He carried a decertification letter around to Starbucks stores and secured the signatures of employees who no longer wished to be represented by the union. After getting a majority of store employees to sign the letter, he presented it to the National Labor Relations Board and the union representing store employees was decertified. Later, in 1992, the union representing Starbucks’ roasting plant and warehouse employees was also decertified. Expansion into Markets Outside the Pacific Northwest Starbucks’ entry into Chicago proved far more troublesome than management anticipated. The first Chicago store opened October 27, 1987, the same day the stock market crashed. Three more stores were opened in Chicago over the next six months, but customer counts were substantially below expectations—Chicagoans didn’t take to dark-roasted coffee as fast as Schultz had anticipated. At the first downtown store, for example, which opened onto the street rather than into the lobby of the building where it was located, customers were hesitant to go out in the wind and cold to get a cup of coffee in the winter months. Store margins were squeezed for a number of reasons: It was expensive to supply fresh coffee to the Chicago stores out of the Seattle warehouse, and both rents and wage rates were higher in Chicago than in Seattle. Gradually, customer counts improved, but Starbucks lost money on its Chicago stores until 1990, when prices were raised to reflect higher rents and labor costs, more experienced store manag.

Uneployment Assignment Example | Topics and Well Written Essays - 2500 words

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Competitors and Competitive Rivalry Research Paper

Competitors and Competitive Rivalry - Research Paper Example It sells its products in physical store format along with online stores (Goldberg, â€Å"Why the toy industry isn’t having any fun†). The first company to start a television campaigning. The shop owners provide excellent customers service by catering to individual customer’s needs for all festive occasions. The brand is established since the year 1920 Weakness The company targets pet owners because it specializes in making customized stuff toys for the pet owners (Goldberg, â€Å"Why the toy industry isn’t having any fun†). The company lays emphasis on the manufacturing of core products like greeting cards and other gifting products. Opportunity The threat of substitutes is low for the company because there are few companies who manufacture customized stuff toys for pet owners. ... The company lays special emphasis on the manufacturing of greeting cards and has lost its exclusivity of producing stuff toys. The company has slowly lost its reputation as a leading stuff toymaker. The competition in the toy industry is very intense and the profitability of the company is decided by certain factors like quality of the stuff toys, price and play value. Among the top stuff toy companies Build a Bear and Pillow Pets are expected to maintain its market position and also yield a decent amount of profits even in the current situation (â€Å"Build-A-Bear Workshop, Inc. Competition†). Pillow Pets has not been able to manufacture stuff toys on a large base but Hallmark has been an established stuff toy maker and greeting card manufacture since 1910 (Linders, â€Å"Competitiveness Proofing Toy Related Industry †). Emerging Trends & Future Competition in Stuff Toy Industry The current scenario in the stuff toy industry is weak and the industry has been witnessing decreasing trend in the purchase of the stuff toys and pillows. The US stuff toy industry has been witnessing weak sales and it has currently generated profits of $ 17 billion (â€Å"Annual Sales Data†). The worldwide sales of the stuffed toy have also decreased since 2010; the profits amounted to $83.4 billion in the year 2012 (â€Å"Annual Sales Data†). However, certain series of toys imitated from the popular movies like Skyline series have remained popular among the children and teenagers. The Disney series has also been popular and has gained worldwide popularity. By observing the current trend it has been noticed that the stuff toy industry has been witnessing declining sale and only certain series have been generating huge amount of revenue amidst this economic slowdown. The

The co-chaperones of heat shock proteins and disease Literature review

The co-chaperones of heat shock proteins and disease - Literature review Example From the accidental discovery of the HSPs, they continue to display important roles in the cell integrity. Research shows that the dysfunction of Mitochondrial in the skeletal muscles has been said to be important in a manner of T2DM. They do this by either reducing the ability to oxidize the fatty acids that lead to the accumulation of deleterious lipid species in the surrounding tissues such as the liver and the skeletal muscles and also by altering the cellular state of Redox. This mini-review will focus on defining and analyzing the functionalities of the heat shock proteins. The presence of environmental stress in a cell stops or slows its ability to carry out most of its functions. These features include transport processes, RNA, DNA and protein synthesis. The model of the stress response by the HSPs is usually an abrupt rise in the external temperature known as the heat shock. Ferruccio Ritossa did the discovery of the heat shock response in 1962; he discovered them when he noticed an enlargement in some of the special sections of the heat shock puffs made after a heat treatment of the flies [1]. It later came clear that the segments contained particular forms of proteins known as the heat shock proteins. These types of proteins are induced by a massive variety of impulses apart from the thermal shock in the cells of an organism. HSPs usually play an important part in preventing various diseases with a fast rising role in the field of clinical practice. The functions of the HSPs in usually essential for the homeostasis of all the living cells, and often become vital in diseases when our bodily cells have to keep up with a stressful environment. The advancement of our knowledge of the functions and the biochemistry of HSPs enable us to acquire more tools to give a mark to the patients. The advancements also make us to have close observations and improvements in the

Will a global society and economy still need a dominant, Essay

Will a global society and economy still need a dominant, professionally-run global press Describe what it would look like or what would replace it. Consider what its role and influence would be - Essay Example Due to technological revolution, there has been a fast development of the digital communication through the global press (Flew, 2007). For capitalists, they argue that the human races is entering the golden age where all that people would need to do is to sit back and let the markets and technology do the shopping for them. This is because the global press industry is changing quite fast and hence a demand for instant coverage and the need to decrease the budgets with the sole objective of releasing ethical news. With all eyes on globalization, change in technology and ethical transmission of news with emphasis on deadline ethics, professionally run global media will change how individuals think with the contemporary society (Flew, 2007). Whereas previously the media system were primarily remote, in the past few years we have witnessed the growth of the professionally run global press with two distinct but related facets. This is because professionally run global press is cutting across the world by facilitating faster cross cutting of the world through technology. This is to aid the firms in the global economy to capitalize on the potential of growth abroad without being impacted by flurry competitors given that the local economies already is saturated with incremental expansion. The other facet is that the consolidations and convergence all depend about the day given that some of the global media houses are increasingly becoming concentrated. This is because the major players in the media industry are majorly branches of the global media conglomerates due to the onset of mergers and acquisitions (SHERMAN, (2002, October 2). It is a fact that the global American media leaves many gaps to be desired whether you want news about the media, the war on terrorism, global trade or simply general information and the understanding of the majority of the world’s population who are non-Americans. This has made the reporting of news difficult due to the

Philosophy Nr.2 Essay Example | Topics and Well Written Essays - 1000 words

Philosophy Nr.2 - Essay Example Therefore, it is essential to have social discipline in any society. Individualism is the basic principle on which the societies of the present age are founded. Every person wishes to procure, whatever he feels that he is eligible to obtain. In this manner, the individualist theory of justice has been transformed into a crucial collective theory of the present age (Aron 26). In instances, wherein individual distinction prevails in society; the principle of collective consciousness, which is controlled by mechanical solidarity, remains in existence. Values, sentiments and morals should be the same for all the people. In cases, where these common principles are impaired, society will be exposed to the danger of disintegration (Aron 26). Individualism in Europe chiefly emerged on the basis of the thoughts of John Stuart Mill and Friedrich Nietzsche. John Stuart Mill’s renowned essay On Liberty, declared that individuals should exercise sovereignty over their mind and body. Nevertheless, he was convinced that his ideology did not subscribe to the selfish ideas, propounded by Adam Smith. He believed that individuals should have the freedom to investigate moral, religious, and feminist ideas (Individualism). As such, Mill focused on personal freedom, which he considered indispensable, for achieving the greatest good of the greatest numbers. According to Mill, individual dignity depends on personal freedom (Individualism). Ultimately, this would lead to the exploration of the unconventional ideas. The individual was viewed by Plato and Aristotle, as a social and political being. In the Republic, Plato contended the state was responsible for molding the individual psyche, via its educative and socializing functions. He also promoted the views of Socrates, who stated that dialogue between the people, led to the formation of a knowledge base and principles of virtue and morality among them. (Self and

Poverty As a Social Evil and its Various Aspects Essay

Poverty As a Social Evil and its Various Aspects - Essay Example This essay stresses that poverty is a social evil and root cause of a number of problems caused to man, two of which have been greatly dealt with in the paper. Most people that are poor or living below the poverty line are not even able to afford square meals and provide their family with the same. They have many mouths to feed and an unstable source of income which forces many of them to even resort to actions like begging for food. Most of them do not have a house or a roof to live under and thus are subject to the worst kind of diseases. They are not able to help their situation because of the perpetual state of poverty that they lie within. Even food and shelter becomes a distant dream for such people and they become socially excluded from a lifestyle of being able to achieve these basic resources from society. This paper makes a conclusion that the question lies in whether or not such people should be provided with external assistance by others in order for them to be able to gain basic food supplies and a place to live in with their families. Governments in many countries provide the socially backward classes and poor people of the society with these basic amenities. There are a number of food programs taken up in such developing and under developed countries where poor people are given food grains so that they can sustain their lifestyle and be able to feed their families.

Journaling Essay Example | Topics and Well Written Essays - 1000 words

Journaling - Essay Example daily behaviors about how to realize and reach a middle ground to be able to be an effective teacher-journalist in class in a class which shows affection to learning. Wages are what a worker gets from money or solid appreciation of their work. This differs according to education and constitution the worker belongs to and works in. It is negotiable and thus the worker could offer more for his working time the more the appreciated he is and the effect of such behavior is the giving efficiently into the work done. If improperly done, the law has the right on the side of the customer and employer to cut down the wages until proven better in the way of handling the work(referring to the worker)if the worker does not efficiently prove him or herself worthy of the wages they get they are either fired or demoted or given a lesser salary or wages than the primary wages they have been given before the time of the inefficiency. The fact that workers could be differentiated among due to racial or religious backgrounds is uncontroversial but is not the purpose of this essay unless referred t o later on when wanted. When a worker deals with the surrounding environment they are affected upon and affect upon and this is directly proportional or inversely proportional according to the manner that the environment is dealt with and how the worker is dealt with. The main thing is that the more appreciated the environment is to the worker the more efficient the worker works and thus the increase of productivity and quality and quantity of the product. But is the wages a measure of such appreciation? sometimes ,if not under constrictions of strict law rules or employers who employ their relatives and friends who could not efficiently work in their positions, the wages to a great sect, if not most of the sect, deal with wages as being the best thing to measure the way that performance in such field by the worker has been progressing. The worker applies his methods of working and of

Finance and Public Administrators Research Paper

Finance and Public Administrators - Research Paper Example There are also a number of roads that need to be repaired and the plan is to start with the ones that have the greatest need. In addition to those capital requirements the expenses relating to the day to day operations of the city needs to be taken into account. Non-profit organizations play a useful role in the city and so a certain level of funding is normally made available to them so that they can continue to achieve their goals. The Budget According to Horngren et al (2000, p. 178 -180), a budget is the financial plan of an organization which is communicated in quantitative terms. It forms a blueprint for management to follow in an upcoming period and outlines the operational goals for a specific period of time. It states where financial resources will come from and what they will be used for. Planning is achieved through the budgeting process and forms the basis for decisions made by management. Horngren further states that budgets represent a major aspect management control sy stems. As long as they are administered in an appropriate manner they have the following characteristics. they compel planning they provide criteria for performance; and they promote the coordination and communication of activities in the organization. Planning is a major function of the budget as it seeks to quantify the plan. The plan specifies the type, quantity and quality of services that will be provided, estimating the costs and deciding how they will be paid for. The Council prepares the estimates of income than will be generated from various services provided at a cost by the city. These services include and are not limited to transportation, water and sewage. Other income generators include property tax and corporation tax, and income tax. The expenditure includes both capital and current expenditures. The performance criteria are useful both for staff and for sub-contractors who perform jobs in the city. They set the standard for achieving the goals and objectives of the departments. In coordinating and communicating the plan all the management personnel in these departments coordinate the tasks for their subordinates so that the goals of Council will be achieved. The objectives of the departments are communicated in such a way that they are clearly understood by employees. Controlling and administering the budget helps to ensure that resources are obtained and expended based on plans. Budgets are used to monitor the flow of resources to ensure that they are used as intended and that there are no significant over-runs. According to Chan (2009) the annual budget prepared in the public sector is not only a planning document but also includes projections of revenue collection as the law authorizes well as information on expenditure that has been proposed by executives and approved by the legislature. This implies that the budget is used as tool for management control as well legislative oversight. Any transactions and activities undertaken have to be i n keeping with the budget. Chan (2009) indicates that this type of accounting is described as management accounting in business and budgetary accounting in the public sector. It is in this same way that the City Council will go about controlling and managing public funds. Table 2 shows a summary version of the city’s budget for the fiscal year ending 31st March 2012. Summary of Budgeted Expenditure for the Fiscal Year Ending 31 March 2012 Budget Allocation/Revenue $10,000,0000

To Maintain A Commitement To Professionalism Essay Example for Free

To Maintain A Commitement To Professionalism Essay To maintain a commitment to professionalism I must remember that the parents are the primary teachers and I am there to support them. To me professionalism begins at the top, therefore in order to maintain a commitment to professionalism I will perform my job to the best of my ability. In order to help nurture the potentials of the children there are goals and activities that must be set forth. My goals for children are to instill a sense of well being and accomplishment, while infusing knowledge. In order for this to be accomplished this will not only include the students but also their families and teachers. Some of my goals include commitment , organization, and helping promote learning and child development. I will continuously observe the children to gather information about their skills so I can plan appropriate activities. Skills will include writing, language, use of materials, and fine motor skills. I will work with other professionals and parents to help me make a decision on the needs of the children and families. I find that meeting the needs of the children requires strong commitment. Working with children also takes time and dedication. I complete developmentally appropriate curriculum for each age group, even if it means doing extra work at home. In order to maintain professionalism I believe its important to communicate. I communicate not only with the children but with the parents and teachers. Its always good to know what area a child is lacking in during school, that way I can provide extra help when they are under my care. There are many different activities that I do with each age group of children in order to achieve my professional goals. These activities include open ceremony and discussion time. In this time the children are able to talk about their day at school, their weekend, or any other topics that they bring up. Other activities include homework, kids literature, indoor and outdoor games, arts and crafts, music, and science. During theses activities I am able to see the different skills that the children can perform.

Marketing management Essay Example for Free

Marketing management Essay Slide 9.1 it’s good and good for you Chapter 9a Developing new products and  managing the product life cycle Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.2 New product development and product life-cycle strategies Topic outline †¢ †¢ †¢ †¢ †¢ New product development strategy New product development process Managing new product development Product life-cycle strategies Additional product and service considerations Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.3 New product development strategy Two ways to obtain new products Acquisition refers to the buying of a whole  company, a patent or a license to produce  someone else’s product. New product development refers to the  development of original products, product  improvements, product modifications and  new brands through the firm’s own product  development efforts. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.4 New product development process  Major stages in new product development Figure 9.1 Major stages in new-product development Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.5 New product development process (Continued) Idea generation Idea generation is the systematic search for new product ideas. Sources of new product ideas †¢ Internal †¢ External Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.6 New product development process (Continued) Idea generation Internal sources refer to the company’s  own formal research and  development, management and staff, and intrapreneurial programs. External sources refer to sources outside  the company such as customers,  competitors, distributors, suppliers  and outside design firms. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.7 New product development process (Continued) Crowdsourcing Inviting broad communities of people—  customers, employees, independent  scientists and researchers and even the public at large—into the new product  innovation process. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.8 New product development process (Continued) Idea screening †¢ Identify good ideas and drop poor ideas. †¢ R-W-W screening framework: – Is it real? – Can we win? – Is it worth doing? Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.9 New product development process (Continued) Concept development and testing Product idea is an idea for a possible product  that the company can see itself offering to the market.  Product concept is a detailed version of the  idea stated in meaningful consumer terms.  Product image is the way consumers  perceive an actual or potential product. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.10 New product development process (Continued) Concept development and testing Concept testing refers to testing new product concepts with a group of target consumers to find out if the concepts have strong consumer appeal. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.11 New product development process (Continued) Marketing strategy development †¢ Marketing strategy development involves designing an initial marketing strategy for a new product based on the product concept. †¢ Marketing strategy statement includes: – Description of the target market – Value proposition – Sales and profit goals. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.12 New product development process (Continued) Marketing strategy development Business analysis involves a review of the sales, costs and profit projections to find out whether they satisfy the company’s objectives. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.13 New product development process (Continued) Marketing strategy development Product development †¢ †¢ †¢ Involves the creation and testing of one or more physical versions by the RD or engineering departments. Requires an increase in investment. Shows whether the product idea can be turned into a workable product. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.14 New product development process (Continued) Marketing strategy development Test marketing is the stage at which the product and marketing program are introduced into more realistic marketing settings. Provides the marketer with experience in testing the product and entire marketing program before full introduction. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.15 New product development process (Continued) Types of test markets Standard test markets Controlled test markets Simulated test markets Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.16 New product development process (Continued) Marketing strategy development †¢ Advantages of simulated test markets – Less expensive than other test methods – Faster – Restricts access by competitors. †¢ Disadvantages – Not considered as reliable and accurate due to the controlled setting. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.17 New product development process (Continued) Marketing strategy development When firms test market †¢ New product with large investment †¢ Uncertainty about product or marketing program When firms may not test market †¢ Simple line extension †¢ Copy of competitor product †¢ Low costs †¢ Management confidence Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.18 New product development process (Continued) Marketing strategy development Commercialisation is the introduction of the new product †¢ When to launch †¢ Where to launch †¢ Planned market rollout Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.19 Managing new product development Successful new product development should be: †¢ customer-centred †¢ team-based †¢ systematic. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.20 Managing new product development (Continued) New product development strategies Customer-centred new product development: new ways to solve customer problems and create more customer satisfying experiences. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.21 Managing new product development (Continued) New product development strategies Sequential new product development:  company departments work closely  together individually to complete each  stage of the process before passing it  along to the next department or stage. †¢ Increased control in risky or complex projects but may be slow. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.22 Managing new product development (Continued) New product development strategies Team-based new product development: Various company departments work  closely together, overlapping the steps  in the product development process to  save time and increase effectiveness. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.23 Managing new product development (Continued) New product development strategies Systematic new product development: innovative development approach that collects, reviews, evaluates and manages new product ideas. †¢ Creates an innovation-oriented culture. †¢ Yields a large number of new product ideas. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.24 Product life-cycle strategies Product life cycle Figure 9.2 Sales and profits over the product’s life from inception to decline Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.25 Product life-cycle strategies (Continued) †¢ Product development – Sales are zero and investment costs mount. †¢ Introduction – Slow sales growth and profits are nonexistent. †¢ Growth – Rapid market acceptance and increasing profits. †¢ Maturity – Slowdown in sales growth and profits level off or decline. †¢ Decline – Sales fall off and profits drop. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.26 Product life-cycle strategies (Continued) Figure 9.3 Styles, fashions and fads Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.27 Product life-cycle strategies (Continued) Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.28 Product life-cycle strategies (Continued) Introduction stage †¢ Slow sales growth †¢ Little or no profit †¢ High distribution and promotion expense. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.29 Product life-cycle strategies (Continued) Growth stage †¢ †¢ †¢ †¢ †¢ †¢ Sales increase New competitors enter the market Price stability or decline to increase volume Consumer education Profits increase Promotion and manufacturing costs gain economies of scale. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.30 Product life-cycle strategies (Continued) Maturity stage †¢ †¢ †¢ †¢ †¢ Slowdown in sales Many suppliers Substitute products Overcapacity leads to competition Increased promotion and RD to support sales and profits. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.31 Product life-cycle strategies (Continued) Maturity stage modifying strategies †¢ Market modifying †¢ Product modifying †¢ Marketing mix modifying Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.32 Product life-cycle strategies (Continued) Decline stage †¢ Maintain the product †¢ Harvest the product †¢ Drop the product Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.33 Additional product and service considerations Product decisions and social responsibility Public policy and regulations regarding developing and dropping products, patents, quality and safety. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013 Slide 9.34 Additional product and service considerations (Continued) International product and service marketing—challenges †¢ Determining what products and services to introduce in which countries †¢ Standardisation versus customisation †¢ Packaging and labelling †¢ Customs, values and laws. Kotler et al., Principles of Marketing, 6th edition  © Pearson Education Limited 2013