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Porter’s five force model

The textile and clothing industry is very dynamic in its nature. Things have changed within this industry very frequently before. Assignment Help tries  explain this dynamism with the help of well known Porter’s model which will conduct an industry analysis of the industry under the radar. According to (Porter, pp 4, 1985) “the collective strength of these five competitive forces determine industry profitability because they influence the prices, costs, and required investment of firms in an industry”. This model is one of the best tools available for analytical evaluation the competitive nature of the industry. Porter has further said that “every industry is unique and has its own unique structure [and this] five-forces framework allows a firm to see through the complexity and pinpoint those factors that are critical to competition in its industry, as well as to identify those strategic innovations that would most improve the industry’s […] profitability”. Hence we can say that the model will be useful in defining the most important forces those actually define the nature and amount of competitiveness within the industry and will explain that the way these forces can be deemed to be interconnected with each other. The fig. 2 presents the Porter analysis on Indian Textile Industry.

Fig. 2 Porter analysis for Indian Textile Industry Source: Indian Brand Equity Foundation, 2006

According to this model there are five forces which determine the competitiveness of an industry in the long-run. The five competitive forces are:

  1. The bargaining power of buyers
  2. The bargaining power of suppliers
  3. The threat of substitutes
  4. The threat of new entrants
  5. The rivalry among existing competitors

The bargaining power of buyers

The demand forces inside the industry can be evaluated with the help of bargaining power which the buyers of the industry possess. According to a 2007 research done Texsummit the current international textile and clothing industry stands at a value of 52 billion US Dollars. The dominating markets which define the trend in the business in textiles and clothing in the international scenario are US and European markets. It is expected, that in future demand for local made clothing and apparel will rise at a much increased growth rate since it has achieved a competitive edge over and above its neighbour nations. But in the global scene China will be the supplier which will see more demand for its supply with respect to India due to India’s incompetence related to several aspects like fragmented structure, technological obsolesce, rigid labour issues, lack of skill and training. But due to the fact that India is one of the lowest cost producer countries, most of the foreign buyers will try to hedge their risk factors by the process of outsourcing only from one country (www.equitymaster.com). But Rao has said in his 2008 work that “put the situation […] is about to change, with the government planning several initiatives to boost production of these textiles, and industry is also waking up to the potential of the segment”

The bargaining power of suppliers

The bargaining power of suppliers in an industry tries to evaluate the scene of the supply market of the textile and clothing industry. The main raw material of textile and clothing industry is cotton. India has always been a significant producer of cotton and due to this factor it has played a very important role in the world’s market for cotton. The textile industry in India achieves cost advantage in the segment of apparel as well as home textiles with the help of unending supply of local staple cotton which have been domestically produced. Further, Indian Government and other policy makers have taken definitive steps for improving the amount and quality of cotton yield for making sure that higher productivity can be achieved. India has now bypassed the United States and has become the second largest producer of cotton in the world in the year 2007. The following fig. 3 shows India’s growing cotton trend.

Fig. 3 Indian cotton trends: The new green revolution Source: The Financial Express 2007

The threat of substitutes

The factor of threat of substitutes is dependent upon several different factors. These factors are the relative price and performance of substitutes, consumers’ interest in the substitute products and the cost the consumers’ have to bear for switching to other substitutes (Porter, 1990). When a number of good substitutes are available in the market, it cuts down the profitability of a particular industry as well as the magnetism of the industry due to the necessity of price restriction in the industry. There are many low cost producing countries like Pakistan and Bangladesh where the labour cost is very cheap in comparison to other first world countries. These countries pose a threat towards the India’s textile export industry. Many researchers have put an emphasis to this point in the past.

The threat of new entrants:

This factor that is threat of new entrants helps in increasing the competitive nature inside the industry to a greater level. On the other hand the threat is also instrumental in bringing increased amount of capacity in the market. The seriousness and effectiveness of the threats posed mainly is dependent upon the entry or exit barriers which are present in the industry. It further is dependent upon the way the player who are already existing in the industry react to the new entrant (Porter,1979; Besanko, 2003). In the case of a quota free economy, all the players try to achieve expansion of capacity. But the implied result of it is huge number of domestic and small player entering the local market. This happens due to the fact that they do not possess the capacity to make any impact on the international scenario.

The rivalry among existing competitors

The amount of rivalry within the competitors who already exist in the industry is highly dependent on the following factors: the structure of competition, the structure of industry costs, strategic objectives, degree of differentiation, entry and exit barriers, and switching costs (Porter, 1990). The rivalry of Indian textile industry, globally, depends upon various factors like; India’s poor logistics, fragmented infrastructure and unskilled labour. These all factors are a major thumbs-down to Indian economy on the global front.

The analysis which was carried out with respect to Porters model, is instrumental in summing up the works done by Porter on the topic of competitiveness which has been immensely helpful in understanding the literatures which are relevant on this industry. This has proved that despite the structural inefficiency, the Indian textile and clothing industry has vast potential to successfully compete in the international business.

Productivity:

The productivity of a country depends upon the productivity of the companies operating in that country. Dowling has said that productivity is the one of the most important factors which determines a nation’s standard of living in the long run. This happens due to the factor that this is the root of growth of national per capita income. The income growth of few developing countries in percentage is given below in Table 1.

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Table1. Income growth of few developing countries Source: Dowling, 2008, pp 50

The literature discussion based on the topic of productivity can be grouped by three different measures. First is the output per worker. This helps in understanding the productivity of each person in isolation in active employment (Blake and Sinclair, 2003). The other way for measuring productivity is the measurement on the production based on time. This calculates the labour productivity according to the number of man hours for which work has been done. The third and last way of calculating the productivity is termed as the total factor productivity. It calculates output per unit of inputs (Blake and Sinclair, 2003). These different measures of productivity drive home the point that a rise in productivity is due to some factors like rise in physical capital, increased ability of the workers as well as total factor productivity (TFP) (Porter and Ketels, 2003). However, TPF (total factor productivity) does not refer directly to the capital and labour. It actually emphasizes on the factors like great innovations and better usage of updated technologies. The previous factors were a few of the competitive measures for a particular industry which generally enable the industry for competition with its international peer companies. Now, for understanding India’s performance over the time, it is important to understand the concepts of global trade which have been previously by several researchers.

Increase in global trade:

It has been viewed that these days all the sectors of a particular market have been globalised very strongly. It has played a huge role in transforming the entire economy and economical conditions of different developed countries. The following section of literature review will try to analyze the relevant factors of global trade in details.

Karagozoglu & Lindell had opined in the year 1998 that increased saturation of local home market, better future opportunities in the international scene and high return from the international organizations had became the important drivers of the act of internationalisation. One more significant reason why a country insists on driving the country’s firms to expand globally is to boost its foreign exchange reserves. Francis and Collins-Dodd, (2000) have also said that an approach which is practical coupled with factors like decreased conservatism helps a firm in achieving success with respect to export. Hence it can be said that companies which are in the field of global trading should be able to open up and expand their thinking process and internal regulations if it is important for them to growth and make a foothold on the global business scene.

Dowling in his work in the year 2008 said that “in the last two years, [the] exports have grown over 25% per year with China and India included and a very healthy 16% even without China and India from the Asia pacific region”. The domestic market as well as the global business has been rising with a significant growth rate. He has further said that “there are many traditional theories that exist on international trade with various competencies to gain competitive edge”. But the point he stresses most on is the modern global business theory which in turn bases itself on the concept of product differentiation and monopolistic competition for growing in the global scene. Table 2 below illustrates the growth pattern of merchandise exports in percentage in few of the Asian countries:

Table 2: Growth pattern of merchandise exports in few of the Asian countries, Source: ADB Dowling, 2006

According to the data and stats revealed by the United Nations, we can firmly say that there is a positive relationship between the factors like growth of a country in terms of its GDP and increase in the exports which has been one by the country. A past report past report published by the United Nations has said that, “International trade can help in economic growth and play an important role in growth divergence across countries. It can be done by improving export opportunities through economies of diversification or by introducing production activities previously undertaken in industrialized countries” (Dowling, 2008, p-21).

This study is done and compiled by Locus Rags to help students and scholars to gain an insight in current textile industry scenario.

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