Competitiveness of Sri Lankan Apparel Industry by jennyyingdi


									              International Conference on Management, Behavioral Sciences and Economics Issues (ICMBSE'2012) Penang, Malaysia

           Competitiveness of Sri Lankan Apparel Industry
                                             Rivini. Mataraarachchi, Nilanthi. Heenkenda

                                                                               causing decrease in contribution of apparel industry for
     Abstract- The Sri Lankan textiles and apparel industry has played          national economy mainly in terms of the employment [5]-[6].
a major role in the country's development. However, this sector's               Therefore, knowing what constitutes new sources of
competitiveness is decreasing due mainly to labor costs. As with the            competitive advantage and how these factors could be
country's economic development, the new sources of competitive
factors need to be strategically developed. The purpose of this study
                                                                                generated is critically important to set a future direction for Sri
is to explore what constitutes country's competitiveness in the global          Lankan apparel industry.
apparel market after losing its labor competitiveness and how country              The purpose of this study is to explore new factors for
effectively achieves it.                                                        country’s competitiveness in the global apparel market after
    This study employs Porter's diamond model as a theoretical                  losing its labor competitiveness and how country could
framework. Along with the theoretical model, this study employs                 effectively achieve it.
extensive literature reviews, examples of successful firms, and
questionnaires with field practitioners in the Sri Lankan apparel
                                                                                   The study employs Porter’s diamond model as a theoretical
industry.                                                                       framework [6]. Along with the theoretical model, this study
    Beginning with Porter’s four determinants new sources of                    employs extensive literature reviews, examples of successful
competitive advantage factors are suggested for the evolving                    firms, and ten interviews with field practitioners in the Sri
industry. Utilizing Strengths and weaknesses assessment, the future             Lankan apparel industry. The ten interviewees were selected
directions and solutions for the industry with the identified new               from leading Sri Lankan apparel and all were at the rank of
competitive factors were suggested.
                                                                                factory manager or higher. The surveys were conducted from
                                                                                January 2006 to August 2007, in western province, Sri Lanka.
     Keywords- Advanced factors, Apparel industry, Basic factors,
    Competitiveness, Diamond model                                              The questions included general firm information, the firm’s
                                                                                challenges/successes, and future goals. In depth interviews
                         INTRODUCTION                                           were carried out one hour in length and taped, with the
T      Na fully globalize market, the competition is fierce and
     different to what has been experienced so far by all the
players global apparel market. The apparel supplier’s market
                                                                                interviewee’s permission, for further analysis.
                                                                                   This study consists of three stages. Beginning with Porter
                                                                                (1998) diamond model, sources of competitive advantage
is now been replaced by a consumer’s market where the                           factors are analyzed under the present scenario of Sri Lankan
consumer demands products according to their preference [1].                    industry. The second stage provides the new sources of
Traditional order qualifying factors price, quality and on time                 competitive factors in relation to present state of Sri Lankan
delivery are only be entry qualifications to enter the global                   apparel industry and the third stage provides future directions
market where as order winning criteria for today is                             and solutions for the industry to cultivate the identified new
innovativeness, design, quick response and flexibility [2]-[3].                 competitive factors. The unit of analysis for this study lies in
Today, with the global recession consumers ask more value                       the Sri Lankan apparel industry as a whole, not individual.
for less money [4].
   Therefore building competitive advantage to satisfy new                           II.ASSESSING THE COMPETITIVENESS OF SRI LANKAN
consumer demand is essential in the new market. Being the                          APPAREL INDUSTRY USING PORTER’S DIAMOND MODEL
largest contributor to the Sri Lankan economy for last few
decades, Sri Lankan apparel industry should cultivate it’s                        A. Factor Conditions
competitive advantage in order to be sustainable in the global                    The factor conditions with respective to the Sri Lankan
apparel market. Traditional low labour cost advantage is now                    apparel industry can be discussed under the five different
moved to other countries such as Vietnam and Bangladesh                         headings according to the Porter’s diamond model.

   Sponsored by National Science Foundation Sri Lanka                             1. Human Resources
   Rivini. Mataraarachchi is with the University of Moratuwa, Moratuwa,           It is evident that cheap labor for production, which was the
Sri Lanka (0094773905153; fax:00942651787; mail:             main advantage for Sri Lanka, is no longer being crucial in
   Nilanthi. Heenkenda, was with University of Moratuwa, Moratuwa, Sri
Lanka. (e-mail:                                                achieving competitive advantage. There are other countries
                                                                                such as Vietnam, Madagascar that are emerging with lower

           International Conference on Management, Behavioral Sciences and Economics Issues (ICMBSE'2012) Penang, Malaysia

labour costs in the region. Apart from the rising labour wages,          technical knowledge and market knowledge. In a given
the average productivity of the Sri Lankan worker is also                country, knowledge resources exist in universities,
lower compared with other competitive nations such as China              government research institutes, private institutions or private
[5]. The rising cost of labour will act as a negative factor for         research facilities.
Sri Lankan apparel manufacturing industry.                                  Sri Lankan government universities are currently providing
   The skill level of Sri Lankan workers as a positive factor            the knowledge workers in the areas of technical and design
when considering the apparel manufacturing industry. Sri                 knowledge required for the apparel manufacturing industry.
Lanka has a highly trainable work force in the Asian region              Knowledge workers in the area of marketing are also provided
that has much higher literacy rate which is similar to the               by the private institutions. These can be taken as positive
developed countries [7].                                                 factors when considering the Sri Lankan apparel
   Considering the motivation level of the workers, to work in           manufacturing industry. On the other hand industry today
the apparel manufacturing industry at the operator level, it             lacks with market knowledge as not much market researches
should be noted that having apparel industry is the major                are carried out related to Sri Lankan apparel industry. Industry
employment provider for Sri Lankan economy there is a                    is also not much concern about the research and development
motivation in joining of female workers, to the industry. But            activities as well most of the apparel manufacturing
due to the poor social attitude, the motivation level of                 organizations are not involved in marketing activities.
continuing their jobs decreased.
   Modern management practice in apparel manufacturing                      4. Infrastructure
industry considers employees as a valuable asset. Most of the               Sri Lanka is having much advantage on the infrastructure
organizations have a good level of employer-employee                     conditions against other apparel manufacturing countries in
relationships. Instead of labour unions the apparel                      South Asia mainly due to its strategic location. Present
manufacturing organization in Sri Lanka has workers'                     expansion in Bandaranayake air port at Katunayake and also
councils, which are named as JCC (Joint Consulted Councils).             newly suggested port at Hambanthota area will provide
[8]                                                                      positive initiatives towards the transportation infrastructure as
                                                                         input/output port for apparel exporters.
   2. Physical Resources                                                    Also the efficiency in customs procedures complement each
   Considering the factor, land it should be noted that                  other in minimizing transit periods for shipments involved in
government provides Export Processing Zones (EPZ) in order               international trade have made Sri Lanka more internationally
to develop the factories in Sri Lanka. Today there are 12 new            competitive.
EPZs.                                                                       The rates of telecommunication charges (IDD rates) are
   All the zones are generally located in industrially developed         clearly cut down for certain countries (USA/UK) with the use
districts. Special efforts are made to promote zones outside             of new technology internet calling. This is a major advantage
Colombo, and certain complimentary incentives are offered to             for Sri Lankan apparel industry as most buyers are
the investors there. These include additional tax holidays,              concentrated in US & EU countries [11].
concessionary turnover tax and lower ground rent. [9].                      The cost of infrastructure facilities such as electricity and
   Raw materials base is a major weakness for Sri Lankan                 water remains higher in Sri Lanka providing negative factor
apparel manufacturing industry since large amounts of raw                conditions to the Sri Lankan apparel manufacturing industry
materials needed for the apparel manufacturing industry is               [12]. Zero import tariffs for raw materials, equipments and
imported. Over 80 % of fabric requirements and 70 % of other             machinery, which are imported for the use of Sri Lankan
accessories needed for Sri Lankan apparel manufacturing                  apparel manufacturing industry, will remain as positive factor.
industry is imported in 2001 [10]. However in 2004, the                  Also zero VAT structure introduced by the Sri Lankan
import of fabrics has been 57 % of the total requirements                government for the export industry is another positive
which have come down slightly with the expansion of the                  consideration [11]
domestic capacity in textile and accessory. This makes a
positive factor, since it gives evidence about the growth of                5. Capital
local raw materials base needed for Sri Lankan apparel                      Considering the investment policies in Sri Lanka it was
industry.                                                                evident that Sri Lanka provides positive facilities towards
                                                                         foreign investments. These investments provide the capital
   3. Knowledge Factors                                                  requirements needed for apparel manufacturing industries as
   The knowledge required for apparel manufacturing industry             well as raw material industries.[11]
to remain competitive in the global trade of apparel can be                 Also there are banks and other financial organizations
classified as knowledge in design and product development,               which provide special loans schemes and financial benefits for

           International Conference on Management, Behavioral Sciences and Economics Issues (ICMBSE'2012) Penang, Malaysia

the apparel industrialists. However according to the discussion             Since most of the apparel manufacturing organizations are
had with the SME sector representatives, finance remains as a            lack in their capabilities in designing, development and
negative factor in upgrading their technology needs                      marketing, there is a much demand for a centralized design
                                                                         and product development centers, which supports SMEs.
                                                                         Therefore centralized design and development agencies may
   B. Demand Conditions
                                                                         have an important role as supporting service for apparel
   Considering Sri Lankan local apparel industry the demand              manufacturers in Sri Lanka, who are not capable of having
conditions are not up to the level required to be competitive in         their own design and development centers.
the apparel manufacturing industry. Sri Lanka does not have                 On the other hand since most of the Sri Lankan
much fashion conscious/ brand conscious consumers when                   manufacturers have lack of knowledge in foreign markets as
compared with its export markets such as EU or USA.                      well as data on fashion forecasting, there is an emerging
Therefore it is difficult for the apparel industry to do proper          demand for a supporting service in the area of marketing
forecasting on upcoming fashion trends as well as to find                research and fashion forecasting agencies.
directions in making innovative products by observing the                   For the promotional purposes, it is better to have promoting
local demand conditions. The standards or the quality level is           or advertising agencies to promote the Sri Lankan apparel
not very high when compared with the foreign consumer in                 industry.
US and EU.
   On the other hand local consumer desires are not very
anticipatory with foreign consumer desires due to the heavy                 D. Firm’s Strategy, Structure, And Rivalry
difference of the culture and the economy level. According to               When considering the Sri Lankan apparel industry from the
one representative from reputed apparel manufacturing                    very beginning the Sri Lanka’s comparative advantage
organization who participated in the discussion survey,                  remained at the low cost. As mentioned under literature
pointed out that due to this industry loses a valuable input             survey the reason for moving the industry in to developing
which normally helps to develop and fine-tune the products.              countries is also under the given reason of low labor cost.
Local demand condition makes very low level of input to                     This makes the sense that Sri Lankan apparel industry has
market information about the consumer requirements in new                adopted the cost leader ship strategy which is not sustainable
product development.                                                     in long term.
                                                                            Since the industry was under quotas for about 30 years
                                                                         most of the Sri Lankan manufacturing organizations have not
   C. Related And Supporting Industries
                                                                         taken steps in building own competitive advantage in order to
   Considering the apparel industry the related and supporting           differentiate themselves from the competition. Since they were
industries comes under categories of product and service                 secured their market place under the quota system they did not
suppliers. When it comes to the product suppliers, raw                   want to take steps forward to remain competitive.
material suppliers such as fabric, accessory suppliers and                  However when looking at the present scenario with the
machinery/ equipment suppliers need to be considered. Even               removal of quotas Sri Lankan apparel manufacturers should
though the amount of local raw material suppliers consider as            adopt differentiation strategy where they should focus on
a weakness for the apparel manufacturing industry, the growth            delivering a product which is differ from other similar
of local raw material suppliers as well as equipment suppliers           category products catered by other competitors. In order to do
in recent years due to foreign direct investments can be given           that they should concentrate themselves in different
as a positive initiative.                                                differentiation factors which they are capable enough in
   The service suppliers for the apparel manufacturing                   providing such as ethical factors, quick response, innovative
industry can be given as IT solution providers such as saber             designs etc.
technologies, CAD/CAM solution providers such as DMS
technologies are of importance. Washing, finishing and                         III.NEW SOURCES OF COMPETITIVE FACTORS FOR SRI
various other service providers who support in enhancing                                 LANKAN APPAREL INDUSTRY
value addition of the final product is also act as strength for
the Sri Lankan apparel industry. Various buying offices                     Reference [14] divide the factors discussed under the
available in Sri Lanka to support the apparel manufacturers in           diamond model as basic factors versus advanced factors, or
coordination with the buyers, logistics companies such as                generalized factors versus specialized factors. A basic factor is
cargo and courier operators such as DHL and evergreen in                 known as inherited, such as low cost labor, while advanced
delivering sample packages in sample approval process act as             factors are known as which need to be developed, such as
other supportive industries for apparel manufacturing                    highly skilled and educated personnel [7]. He suggested that
organizations.                                                           competitive advantage based on basic or generalized factors is

              International Conference on Management, Behavioral Sciences and Economics Issues (ICMBSE'2012) Penang, Malaysia

unsophisticated and can be taken off by another competitor,                              in the areas of design & product development, marketing,
whereas advanced or specialized factors are more                                         material sourcing, and inbound/outbound logistics. To
sophisticated and build more strengthen competitive                                      facilitate these requirements steps needed to be taken in
advantage for an industry. Therefore traditional competitive                             country level for train and educate the respective resource
factors vs new competitive factors for Sri Lankan apparel                                personnel.
industry can be given as in Table 1.                                                        Government should ensure that the education system related
                                                                                         to Textile and apparel is outstanding to cater the above
                                 TABLE 1                                                 requirements. Procedures need to be made in order to link the
                                                                                         Sri Lankan universities with the Sri Lankan apparel
 Porter’s                 Traditional              New          competitive              manufacturing industry to adopt the specialized needs of the
 determinants             competitive              advantage factors                     industry. This can be facilitated by establishing knowledge
                          advantage factors                                              transfer from foreign universities where the above mentioned
    Factor conditions       Basic factors:            Advanced        factors:
                                                                                         areas of education is highly adopted.
                            such as unskilled      Access to skilled human
                            labor and raw          resources such as design,                When consider the organizational level strategies, the
                          materials                technical and marketing               apparel manufacturing organizations need to concentrate more
                                                   expertise.     Specialized            on their Human Resource Developments (HRD). Government
                                                   factors such as production            should support the investment towards the human resource
                                                   and process technologies.
    Demand                Local       consumers    Access to consumers
                                                                                         development through encouraging organizational investments
 conditions               who          Demands     demanding higher levels               in HRD through elimination of taxing the training benefits.
                          functionality     and    of needs                                 Through building good relationships with the apparel
                          availability        of                                         retailers, apparel manufacturing organizations would be able
                          apparel items
    Related        and       Presence of back-        Presence                of
                                                                                         to get the training benefits in the areas of design, product
 supporting industries    end suppliers.           internationally                       development and material sourcing, in which the apparel
                             (e.g.          raw    Competitive        front-end          retailers are more experienced in carrying out those activities
                          materials                industries.                           for years.
                             Producers)               Collobarative service
                                                   related activities with
                                                   customers/suppliers.                     B. Strategy Formulation: Expand the Demand Conditions
                                                      Organizations         that
                                                   promote              modern              Moving in to new markets, where Sri Lankan apparel
                                                   technologies in handling              manufacturers are capable enough in selling their products
                                                   global      sourcing     and          under their own brand name will allow apparel manufacturers
                                                   management (e.g. EDI)
                                                                                         to capture the future demand to certain extent. Presently the
     Firm’s strategy,        Cost leadership          Differentiation                    preferential access to India and Pakistan provide under ILFTA
 structure and rivalry                                -Differentiation                   and PSLFTA facilitates to Sri Lankan apparel manufacturers
                                                   through more ethical                  to penetrate in to these markets easily. Targeting more fashion
                                                                                         conscious consumers in the respective markets will allow Sri
                                                   through lower lead time.              Lankan manufacturers to capture the market trend to certain
                                                      -Differentiation                   extent as well as will allow them to provide full service from
                                                   through     high    quality           design to delivery of the product.
                                                   through          innovative             C. Strategy Formulation: Expand The Related And
                                                                                         Supporting Industries
                                                   through           Customer
                                                   relationship management
                                                                                           1. Backward Integration
                Source: Reference 14, Modified using survey data                           Considering the Sri Lankan situation, due to the higher
                                                                                         capital requirement and due to the unavailability of local raw
                                                                                         material base (Cotton, Wool etc.) having local textile mills to
                                                                                         meet the total requirements needed for apparel manufacturing
                                                                                         industry is a difficult task even though it is noted that even
  A. Strategy Formulation: Expand the Factor Conditions                                  with less backward linkages, the apparel industry in Sri Lanka
  Sri Lanka should concentrate on high service related skills                            has contributed significantly.

           International Conference on Management, Behavioral Sciences and Economics Issues (ICMBSE'2012) Penang, Malaysia

   Therefore expanding possibilities of raw material base                   Due to the fact that most of the preferential access to
through internationalization is very important. The expansion            markets are given under Rules of Origin criteria based on the
of regional raw material base will allow Sri Lankan apparel              value addition in Sri Lanka it is very much beneficial in
manufacturers to reduce the lead time in raw material                    opening up of supporting industries which add value to the
procurement as well as the shipping cost. Here, the                      products catered. Finishing, dyeing and washing industries
government support is an important factor to facilitate                  together with printing and embroidery are major industries
integrative approach among the south Asian countries,                    which Sri Lanka needs to be concentrated on as supporting
especially India and Pakistan to make a collaborative                    industries for apparel manufacturing organizations.
approach in facing the challenges of global apparel trade.                  This will open up two main opportunities for the apparel
Since India and Pakistan are major raw material suppliers in             manufacturers other than preferential access. First is that this
the world this initiative will provide a better opportunity for          will allow Sri Lankan apparel manufacturers to add more
Sri Lankan apparel manufacturers. The collaborative approach             service to the apparel retailers since these supporting
facilitated by government will also provide apparel                      industries will facilitate the Sri Lankan designers to create
manufacturers to source higher quality raw materials, which              new, innovative ideas for the design and development of new
meet the requirements of apparel retailers.                              products. Facilitating research and developments in the areas
                                                                         of washing, printing, graphic designing etc will make Sri
   2. Forward Integration                                                Lankan designers to participate in the new product
   Providing full service is a demanding factor in present               development process in collaboration with foreign designers
apparel trade. Through the industry survey it was evident that           in apparel retailer’s country.
most of the Sri Lankan apparel manufacturers are not in a                   Secondly this will allow apparel manufacturers to cater for
position having their own design and development units as                apparel retailers who demands small batch orders with quick
well as marketing units. Therefore centralized design and                response. That is by keeping inventories of grey fabrics
product development centers including material sourcing is an            imported can be quickly printed or dyed and finished
emerging supporting industry for the apparel manufacturers.              according to the apparel retailer needs.
Establishment of centralized centers to provide full service                Government should improve benefits to facilitate FDI for
will be a great opportunity for SMEs.                                    these supporting industries in order to gain the advantage of
   To facilitate this, government support is a major factor.             foreign investors.
Government should facilitate in building up these design
centers and to make proper coordination in between the SMEs                 4. Encourage Information Communication Technology
and apparel retailers. At the initial stage foreign designers,           Providers/ Manufacturing Specific Technology Providers
technical expertise can be hired from other countries in order              Information communication technology is a major
to make the process streamline and to let local designers to             requirement in present apparel market. This facilitates the
work with them. Traditional buying office concept can be                 rapid information flow internally as well as externally to
provide more service to the apparel manufacturers as well as             integrate the whole apparel supply chain. Supply chain
to the apparel retailers.                                                integration is known as a major competitive factor in today’s
   Another weak point of Sri Lankan apparel manufacturer in              apparel market since apparel supply chain consist with various
providing full service is the lack of market knowledge. This             dispersed activities in different areas of the world. The
area was lacking in well reputed apparel manufacturers in Sri            availability of the specific technology for the apparel
Lanka according to the discussion survey. Therefore the                  manufacturing is another important factor for the apparel
knowledge on market trends and fashion forecasts is an                   manufacturing organizations.
important factor in the present environment. This should be                 Therefore industries which provide these facilities should
initiated as a centralized unit where the information related to         be opened up in Sri Lanka. Introducing new suppliers in the
the market trends and fashion forecasts need to provide to               above areas is important in order to identify new technologies
apparel manufacturers. Building up own fashion forecasting               is very important. It will help the manufacturers to get up to
units with market research agency at the apparel retailer’s              date information about the new technologies available. These
company will be a major positive factor towards this                     will allow Sri Lankan apparel manufacturers to be matching
requirement. Collaborative partnerships with foreign based               up with their apparel retailers.
fashion forecasting agencies is another step that can be
facilitate by the government or any centralized trade
                                                                            D. Strategy Formulation: Expand The Firm’s Strategy,
association unit in Sri Lanka.
                                                                         Structure & Rivalry
  3. Encourage Value Addition through Supporting Industries                 To be sustainable in an industry, firms should adopt a
                                                                         strategy whether to be cost competitive or differentiation.

           International Conference on Management, Behavioral Sciences and Economics Issues (ICMBSE'2012) Penang, Malaysia

Unfortunately there is no strategy development in most of the                                       ACKNOWLEDGMENT
apparel manufacturing organizations in Sri Lanka. However it               The authors would like to acknowledge National Science
should be noted that organizations need to think long term.              Foundation for providing financial assistance for the research.
Otherwise they will continue as “cut and sew entities”, a                Also the Sri Lankan apparel industry, Ministry of industries,
position that would not be easy to defend in the new                     Institute of policy studies and Export Development Board for
competitive environment. Since Sri Lankan apparel                        providing required data for the project.
manufacturing industry is losing it’s advantage over lower
cost, it is better to formulate a strategy in differentiation.                                          REFERENCES
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   Further research could be done in assessing the capabilities               Available at:
of South Asian region under the Porter’s diamond model in
order to observe how Sri Lankan apparel industry could be
positioned in the South Asian regional context in order to
expand the factor conditions, demand conditions, related and
supporting industries and Firm’s strategy, structure and rivalry
in order to be competitive in the global apparel trade.


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