Application of Porters Five Forces

Model of Competition

The following figure presents the Porters five forces in the woven garments
industry.

Rivalry among the Existing Competitors (High)

-Intense rivalry propagated by barriers to exit such as heavy capital
investment.
-High fixed cost leads to price war as all want to run at full capacity.

-On the domestic level firms do not have high difference in their size.

-On the international level, Chinese and Indian producers enjoy a monopolistic
advantage over the others which do not have domestic cotton production.

Threat of New Entrants (Low)

-Large start-up costs

-Low current prices relative to high capital investments
-Long time needed to pass test of quality.

Threat of Substitute Products (High)

Knitwear is the main substitute product for woven garments. Over the last few
years demand for knit is growing faster than woven wear.

Bargaining Power of Buyers (High)

European can buy from home textile producers of many other countries such
asChina,India, andPakistan.
-Due to the long-existing nature of the business, the buyers have information
about cost of production

Bargaining Power of Suppliers (High for cotton but low for labor)
-Domestic cotton production is very low inBangladeshcompared to its demand.

-Escalating growth in textiles and garments ofChina,India, and other countries

always keep the demand for cotton up. For example,Chinaalone eyes an
increase of 77% in its demand for cotton.
-Labor surplus in the country does not allow the labors ofBangladeshto
bargain over wage. In the year 2005, unemployment rate is 40% (includes
underemployment).

Rivalry among the Existing Competitors

(High)
The following woven garments industry characteristics make the industry more
competitive among the existing rivals:

Existence of a larger number of firms: It increases rivalry because more

firms must compete for the same customers and resources. The rivalry
intensifies if the firms have similar market share, leading to a struggle
for market leadership.

Slow market growth: causes firms to fight for market share. In a

growing market, firms are able to improve revenues simply because of
the expanding market. On the contrary on a stagnant market existing
rivals struggle to survive or expand the market share. The following
table provides the U.S. import in woven garments from exporting
countries.

Table 5.1
US Import in Woven Garments

Product

2005

2006

2007

Apparel
71950.84774585.63071447.529Woven Garments*6.0135.5885.257
OTEXA Trade data (Values are in Mn. US $)

* Product code 9912.62

The table shows a declining import trends. U.S. apparel market is the largest
export market for Bangladesh.

High fixed costs: result in an economy of scale effect that increases

rivalry. When total costs are mostly fixed costs, the firm must produce
near capacity to attain the lowest unit costs. Since the firm must sell
this large quantity of product, high levels of production lead to a fight
for market share and results in increased rivalry.

For woven garments industry the start-up cost is high. Typical minimum cost for
a single line to sew parts of garments for final sewing assembly at local garment
factory is as follows:
Table 5.2
Start-up Cost of Woven Factories
Description

Qty

Cost/Qty

Total

Sewing Machines

10

$300

$3,000

Metal Case to safe keep goods

$100

$200

Over Lock Machine

$600

Rent Advance (1 room)

$1,450

1 Generator

$1,400

Transportation and Sales

$300

Deposit for Inventory of Garments & Materials

$1,400

Legal registration, Tax & TIN No.

$400

Furniture: Table & Almirah Fixture

$700

Electricity, Air conditioner & other equipment

$2,800

Phone, Computer & other communication equip

$2,200

Total

$14,450

Source: Wikipedia Search (2008)

Low switching costs: Low switching cost increases rivalry. When a

customer can freely switch from one product to another there is a
greater struggle to capture customers. Bangladesh, India, China,
Srilanka, Nepal etc. are competing with each other for the same
market. Firms size and structure also almost same. So, the switching
cost for the buyer is very low.

Low levels of product differentiation: Woven garments industry is a

industry of low levels of product differentiation. This kind of industry
associated with higher levels of rivalry. Brand identification, on the
other hand, tends to constrain rivalry. Over the years woven products
remain the same. The main woven products of Bangladesh are shirts,
trousers, and jackets, mostly made from cotton. These three products,
the majority of which are woven, constitute over 40% of the total
apparel export of Bangladesh. Usually buyers specify the fabric and
design which make the industry of low level of product differentiation.

High exit barriers: high exit barriers place a high cost on abandoning
the product. The firm must compete. High exit barriers cause a firm to
remain in an industry, even when the venture is not profitable. A
common exit barrier is asset specificity. When the plant and equipment
required for manufacturing a product is highly specialized, these assets
cannot easily be sold to other buyers in another industry. Litton
Industries acquisition of Ingalls Shipbuilding facilities illustrates this
concept. Litton was successful in the 1960s with its contracts to build
Navy ships. But when the Vietnam war ended, defense spending
declined and Litton saw a sudden decline in its earnings. As the firm
restructured, divesting from the shipbuilding plant was not feasible
since such a large and highly specialized investment could not be sold
easily, and Litton was forced to stay in a declining shipbuilding market.

A diversity of rivals with different cultures, histories, and philosophies:

This makes an industry unstable. There is greater possibility for
mavericks and for misjudging rivals moves. Rivalry is volatile and can

be intense. The hospital industry, for example, is populated by

hospitals that historically are community or charitable institutions, by
hospitals that are associated with religious organizations or
universities, and by hospitals that are for-profit enterprises. This mix of
philosophies about mission has lead occasionally to fierce local
struggles by hospitals over who will get expensive diagnostic and
therapeutic services. At other times, local hospitals are highly
cooperative with one another on issues such as community disaster
planning.

Threat of Substitute Products (High)

In Porters model, substitute products refer to products in other industries. To the
economist, a threat of substitutes exists when a products demand is affected by
the price change of a substitute product. A products price elasticity is affected
by substitute products as more substitutes become available, the demand
becomes more elastic since customers have more alternatives. A close
substitute product constrains the ability of firms in an industry to raise prices.
The competition engendered by a Threat of Substitute comes from products
outside the industry. The woven garments industry is facing challenge from knit
garments.

Bargaining Power of Buyers (High)

The power of buyers is the impact that customers have on a producing industry.
In general, when buyer power is strong, the relationship to the producing
industry is near to what an economist terms a monopsony a market in which

there are many suppliers and one buyer. Under such market conditions, the
buyer sets the price. In reality few pure monopsonies exist, but frequently there
is some asymmetry between a producing industry and buyers. The following
tables outline some factors that determine buyer power.

Global textile & clothing industry is currently pegged at around US$ 440 bn. US
and European markets dominate the global textile trade accounting for 64% of
clothing and 39% of textile market. With the dismantling of quotas, global textile
trade is expected to grow (as per Mc Kinsey estimates) to US$ 650 bn by 2010
(5 year CAGR of 10%). Although China is likely to become the supplier of
choice, other low cost producers like Bangladesh would also benefit as the
overseas importers would try to mitigate their risk of sourcing from only one
country.

The key apparel market for Bangladesh and other apparel exporting countries
are U.S. and EU Markets. Both the markets have the opportunity to buy from
Asia, Africa or Latin America. More over the buyers are in the market for a long
time due to the long-existence nature of the business. The opportunity to switch
the market for low cost and knowledge about the cost of production enable the
buyer with high bargaining power. The buyers are always demanding for better
quality and lower costs from the garments manufacturer. The following
recommendation in Bangladesh National MFA Forum conference action point
depicts the immense buyers bargaining power over the manufacturers.
Buying practices need to be reviewed, collaboratively, to ensure that a fair
price is paid for sourced products and to minimize the detrimental impact on
suppliers, specifically from unrealistic delivery schedules.

Bargaining Power of Suppliers (High for

cotton but low for labor)
A producing industry requires raw materials labor, components, and other
supplies. This requirement leads to buyer-supplier relationships between the
industry and the firms that provide it the raw materials used to create products.
Suppliers, if powerful, can exert an influence on the producing industry, such as
selling raw materials at a high price to capture some of the industrys profits.

Cotton, a key raw material in the textile and garment industry, accounts for
about 30% of the fabric cost and 13% of the garment cost. Bangladesh produces
cotton very low volumes. It Domestic cotton production is very low in
Bangladesh compared to its demand. Escalating growth in textiles and
garments of China, India, and other countries always keep the demand for
cotton up. For example, China alone eyes an increase of 77% in its demand for
cotton.

India has an abundant supply of locally grown long staple cotton, which lends it
a cost advantage in the home textile and apparels segments. Bangladesh
including other countries, like China and Pakistan, have relatively lower supply
of locally grown long staple cotton. The following graph shows the cotton
production and cotton required for textile and apparel by India, China, USA and
Pakistan. China, USA and India ranked 1,2 and 3 in terms of production in the
world market. Bangladesh produce only 15 Mn kg of Cotton where as its annual
requirements is 450 Mn kg.

Labor surplus in the country does not allow the labors of Bangladesh to bargain
over wage. In the year 2002, unemployment rate is 40% (includes
underemployment).

Threat of New Entrant

It is not only incumbent rivals that pose a threat to firms in an industry; the
possibility that new firms may enter the industry also affects competition. In
theory, any firm should be able to enter and exit a market, and if free entry and
exit exists, then profits always should be nominal. In reality, however, industries
possess characteristics that protect the high profit levels of firms in the market
and inhibit additional rivals from entering the market. These are barriers to
entry.

We have seen the start-up cost for woven garments is very high which made the
industry unattractive in nature. There exist economies of scale also. To be
competitive the factory will require a number of production lines. Such large
start up cost discourages new entrants in the industry. The following table shows
the growth in export is not proportional to the growth in number of woven
factory. The existing firms are more competitive in terms of passing the test of
quality with the buyer over a long period. So, the existing firms are enjoying
incremental export opportunity.

Table 5.3Factories Growth and Export per Factory

Year

No of woven factories

% Increase in the number of

factories

Avg. Export per factory

1992

756

16.13%

1.41

1993

1049

38.76%

1.18

1994

1249

19.07%

1.03

1995

1409

12.81%

1.30

1996

1552

10.15%

1.26

1997

1571

1.22%

1.42

1998

1656

5.41%

1.72

1999

1800

8.70%

1.66

2000

1899

5.50%

1.62

2001

2000

5.32%

1.68

2002

2099

4.95%

1.49

2003

2145

2.19%

1.52

2004

2181

1.68%

1.62

Source: BGMEA Research Department