Strategy and Ratio Analysis for Fu-wang Ceramic Industries Ltd.

Strategy Analysis

CHAPTER 3
Strategy Analysis

7. STRATEGY ANALYSIS

Industry Analysis for “FU-WANG CERAMIC INDUSTRY LTD”.

To find out the profit potentiality of the ceramic industry in Bangladesh we used Porter's Five
forces Model to have identify the profit potential of the Industry.

PORTER’S FIVE FORCES ANALYSIS FOR PROFITABILITY:

Threat of new
competitors entering
in the industry

Bargaining power Bargaining

of the industry’s Rivalry among power of the
suppliers current competitors industry’s
in the industry customers
customers

Threat of
substitutes
produced by others
industries

The main theme of Porter’s five forces:

The main theme of Porter’s five forces states that they are directly related with making or
sustaining the profitability of an industry. Among them three forces are vertical & they are
related with making the profitability of an industry. They are

• Treat of New Competitors

• Threat of Rivalry among the industries
• Threat of substitute products of other companies.

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The other two forces are horizontal forces and they are related with retaining or sustaining this
profitability. They are
• Threat of Bargaining power of the customers
• Threat of Bargaining power of the suppliers.

FINDINGS:
Our industry analysis was purely based on Porter’s five forces model. We analyzed the relevancy
of each of the five forces in the ceramic industry. We also analyzed the applicability & impact of
those forces in our industry and after the analysis it showed that though competition is increasing
day by day it is still profitable.

THREAT OF NEW COMPETETIORS ENTERING IN THE INDUSTRY:

Opinion about the criteria in a scale (Score 5)
Different criteria that
Strongly Strongly Obtained
support the threat of a Agree Neutral Disagree
Agree Disagree Score
new competitor: (2) (3) (4)
(1) (5)
Economics of scale is low √ 4
Capital requirements is low √ 5
Customer’s Switching cost
√ 4
is low
Incumbents do not control
the distribution Channel or √ 4
supply of raw materials
Incumbents lack of
√ 4
proprietary Knowledge.
Government does not
√ 1
subsidize incumbents
Government does not
√ 3
regulate prices or entry
Total Score 25 (High enough which justifies that threat of new entry is exists but low)

 Economies of scale: Economies of scale is high in the ceramic business as fixed

cost involvement is high.
 Product Differentiation: Product is almost undifferentiated in view of usage but
it is differentiated in design, quality, pattern etc.
 Capital requirements: Capital requirement is high in the small and medium
category and very high in the large category.
 Customers’ switching costs: As a product of specialty customer’s switching cost
is high.

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 Control over distribution channels or sources of supplies: Companies like “Fu-

Wang Ceramic Industry Ltd” have strong distribution network..
 Proprietary knowledge or technology: Incumbents have proprietary knowledge
or technology and using in full swing.
 Government Policy: As the ceramic industries in Bangladesh are totally based on
domestic raw materials (e.g white clay and mineral) and it is growing rapidly, government
sometimes control its price and new entry.

BARGAINING POWER OF THE INDUSTRY’S SUPPLIERS

Diff criteria that support Opinion about the criteria in a scale (Score 5)
the threat of bargaining Strongly Strongly Obtained
Agree Neutral Disagree
power of the suppliers Agree Disagree Score
(2) (3) (4)
(1) (5)
Suppliers Are concentrated
√ 2
heavily
Suppliers can integrate
√ 4
forward
Small percentage of
√ 4
suppliers are in business
Substitutes of their products
√ 4
are unavailable
Suppliers products are
√ 4
highly differentiated
Switching between
suppliers is difficult or
√ 2
costly.

Total Score 20 (High enough which justifies that Bargaining power of the
Industry’s supplier is low but exist.)

 Suppliers’ concentration: The main raw materials are white clay, mineral &
some chemicals. (The raw materials are available in the local mines market and they are
concentrated)
 Forward integration: Suppliers are not large in number and it is not difficult to
initiate forward integration due to huge requirement of capital expenditure.
 Portion of suppliers’ business: Suppliers are not large in number.
 Product differentiation: Supplier’s product is undifferentiated.
 Switching cost: Cost of switching from suppliers is high.
 So, bargaining power of the industry’s suppliers is high.

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BARGAINING POWER OF INDUSTRY’S CUSTOMERS

Diff criteria that support Opinion about the criterias in a scale (Score 5)
the threat of bargaining Strongly Strongly Obtained
Agree Neutral Disagree
power of the customers Agree Disagree Score
(2) (3) (4)
(1) (5)
Buyers are concentrated
√ 3
heavily
Buyers can integrate
√ 3
backward
Small percentage of buyers
√ 4
are in business
A number of Substitute
√ 4
products are available
Products are not
√ 3
differentiated
Switching cost to the buyer
√ 4
is less.
Large volume of purchases
√ 2
by a single buyer.
Buyers know about the
√ 3
production cost.
Total Score 26 (High enough which justifies that Bargaining power of the buyer’s
is low but exist.)

 Buyer’s concentration: Generally middle , higher class people buy the

ceramic tiles for construction and decoration and they are concentrated.
However, bulk purchase is made occasionally.
 Product differentiation: Products are enough differentiated.
 Backward integration: Chance of backward integration is very low.
 Buyer’s knowledge of the production costs: Buyer's hardly know the
production cost.
 Switching cost to the buyers. Switching cost to the buyer is comparatively
high.
 Products are differentiated.
Though some of the above criteria adjudge the buyer’s bargaining power but by overall judgment
it may be said that bargaining power of the buyer is not low.
So, bargaining power of the industry’s customers is low but exists.

THREAT OF SUBSTITUTES PRODUCED BY OTHER INDUSTRIES

Opinion about the criteria in a scale (Score 5)

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Diff criteria that support

Strongly Strongly
the threat of substitutes Agree Neutral Disagree Obtained
Agree Disagree
produced by other (2) (3) (4) Score
(1) (5)
industries.
Industry producing
substitutes is highly √ 4
profitable.
Substitute products are
improving in its price √ 4
performance relationship.
Total Score 8 (High scores that indicates that threat of substitutes is negligible.)

 Profitability of the substitute products. Because of the high competition & indifferences in
the raw materials substitute products are difficult to produce and their profitability is also
minimum.
 Price performance relationship of the substitute products: With respect to PRAN
products, which may claim itself as the best in Price Performance relationship, the substitute
products cannot perform better than it.
So the threat of substitute is negligible.

RIVALRY AMONG EXISTING FIRMS:

Diff criteria that support Opinion about the criteria in a scale (Score 5)
the strong rivalry among Strongly Strongly Obtained
Agree Neutral Disagree
the existing firms Agree Disagree Score
(2) (3) (4)
(1) (5)
Large number of
√ 4
competitors
Industry is growing slowly. √ 3
Large percentage of cost is
√ 2
fixed.
High storage cost of
√ 5
products.
Products are differentiated √ 4
Buyers have low switching
√ 2
costs.
Exit barriers are high √ 1
Total Score 21 (Higher than average which justifies that rivalry among existing
firms are moderate.

 Large number of competitors: In the group of ceramic industries in Bangladesh it is true

that there are many competitors.

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 Industry growth: Industry growth is rapid in the domestic market. However, as these kinds
of products are of great demand in overseas countries the growth is also mentionable.
 Fixed cost: As the ceramic industry is ranked, as the small industry and the capital machinery
are more costly with respect to other industries, fixed costs are high.
 Storage costs: It is true that if we want to store the ceramic products, the storage cost is not
high and less requirement of storage cost.
 Scope for product differentiation: As the products are mainly technological, too much
products differentiation is possible.
 Buyer’s switching costs: Buyer’s switching costs are moderate.
 Exit Barriers: As in the ceramic industry the capital equipment are of costly, so the exit
barriers are high.

From the above discussion we can say that there is high rivalry among existing firms in the
Ceramic Industry.
Porter’s five forces model for Food Processing & Beverage industry at a glance:

Threat of new
competitors
High

Bargaining Power Rivalry among

Bargaining power
of Suppliers existing firms of Buyers
Low strong Low

Threat of
Substitutes
Low

So from the above analysis of Porter’s five forces it is clear that in the group of ceramic industry
in Bangladesh except the threat of new entrance or competitors the other threats are low enough
to justify higher profitability in this category. So we can say that industry’s profitability is
higher.

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SUMMARY OF STRATEGY ANALYSIS

Different companies adopt different strategies to win over the competitors in the market. And in
adopting strategy they highlight one of the following set of controllable tactical marketing and
strategic tools are -
• a) Product
• b) Price
• c) Place
• d) Promotion
Normally a firm blends these to produce the response it wants in the target market to expand
market share & ensure even more market penetration, “Fu-Wang Ceramic Industry Ltd” is
adopting the strategy of cost leadership. By adopting this strategy they can go for even more
competitive pricing via discounting, lucrative package offer etc.
Why this strategy? We know to become a successful profitable organization a company can
adopt several types of strategy, which may be product, price or distribution oriented. The
company may adopt the branding strategy that is based on strong promotional activities to
create the brand awareness among the people, it can adopt product development strategy that is
based on High Research & Development Program or the company can adopt cost leadership
policy that is to minimize the production cost to offer it at a lower price than the competitor.

In case of “Fu-Wang Ceramic Industry Ltd” which has already been a renowned company in
the field of ceramic floor & wall tiles products, it does not need to promote its brand. Again as its
product already has been renowned as the symbol of quality so it can also bypass the costly
research & development activities. Again from Porter’s five forces analysis for profitability we
can see that the only threat in its profitability is the threat of new entrant or competitors. And to
successfully become a market leader at this situation, no strategy is more effective than the cost
leadership strategy. And in adopting this strategy “Fu-Wang Ceramic Industry Ltd” has
sufficient ground to become successful. As the costing of a product mainly depends on it’s raw
materials and “Fu-Wang Ceramic Industry Ltd” has its own source of white clay and if they
can shortly overcome the barrier of government order of collecting this raw material they can be
successful at a comparatively lower price.

And adopting the Cost Leadership Strategy for “Fu-Wang Ceramic Industry Ltd” has been
successful so far. Because of reducing the cost they have successfully made their product
available at a competitive price. It has become an icon for its quality. It has taken a permanent
shape at the heart of every customer for its quality & at the same time competitive price.