Identifying weak points of existing supply chain and their impact on competitiveness. A study of the Ethiopian apparel manufacturing eco-system

Master's Thesis , 2016 , 151 Pages , Grade: A-10.0

Business economics - Trade and Distribution

This study focusses on reviewing apparel manufacturing eco-systems of Ethiopia, identifying missing inputs (weak points) of existing supply chain and assessing their impact on competitiveness of Ethiopian Apparel manufacturing firms.

Countries compete with each other to improve the standard of living and quality of life of their citizens, grow economically, attract foreign investments and tourists, maintain political stability and build their own brand image by using competitive advantage of their nations. Apart from favourable Macro environment (GDP, purchasing power, Economic freedom, easy of doing business, and political stability) low Production factors such as rawmaterials, related and supplying industries, electric cost and skilled and semiskilled manpower are the source of competitive advantage both to the countries and firms along the supply chain.

The textile and clothing industry have been one of the most dynamic and geographically mobile industries globally. The industry is made up of complex global production networks and due to the possibilities of minimizing the costs of production, many buying companies use suppliers located in developing countries and manufacturers of textile and clothing companies also relocate themselves in developing countries through foreign direct investment (FDI). Over recent years there has been an increasing amount of interest in Africa for investment as a continent with immense resources and potential. Ethiopia in particular has been singled out as a land of growth and investment opportunity.

Ethiopia grows some of the world‘s finest cotton and has a rich textile spinning and weaving history, yet its importance on a global scale remains insignificant. Having experienced average annual growth rate of 10.7% GDP growth consistently since 2006 and a stable political framework since 1995, it still remains largely, not yet used or taken advantage of it.

Although, favourable business environment is set by the government, there are ―missing inputs (weak points)‖ in existing supply chain which should be addressed. For example, in the case of garment manufacturing, trimming and accessories, packaging, certification bodies, spare part technology and machine maintenance companies and Ecommerce are missed along the supply chain.

iv

Acknowledgement

Foremost, I would like to thanks my Lord God, who is the reason for my

existence and gave me His grace to complete this work.

I would like to express my great appreciation to my mentor Mr. Pratik

Ghosh for his genuine advice, guidance, constructive criticism and all

sided contribution to the successful accomplishment of the study.

My sincere thanks also go to Raymond Silver Spark Apparel LTD, for

offering me doing graduation project in their organization and leading me

to know the working procedures in different departments in parallel to the

project. I would like to thank my mentors Mr. Prashant Jain (Deputy

General Manager ­Marketing & merchandising) and Mr. Vishal Bist

(Marketing Director) and co-mentor Chandan Patil (Manager-supply

chain) in Silver Spark Apparel LTD for their guiding with patient till the

completion of my project work.

Last, but definitely not least my deepest thanks to all, who has contributed

to the successful completion of my study.

NIGUSSIE GODANA

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Executive Summary

This project report provides an analysis of Ethiopian apparel manufacturing eco-system,

weak areas of existing supply chain and impacts of those weak areas on competitiveness

of international market. The study was initiated by Silver spark Apparel LTD

(Raymond), to get comprehensive understanding of overall business environment

(source of competitive advantage & disadvantage) of Ethiopian garment industry.

The study used both qualitative and quantitative research approaches and secondary and

primary data. Methods of analysis include trade performance, Porter`s national diamond

model analysis, supply chain analysis, and simple statistical tools i.e. percentages,

mean, and correlation. The analyzed data has been presented in the form of table and

figures.

Results of research analysed show that competitive performance of industry in

international market against competitors is poor in the areas of price, market share, and

on-time-delivery, capability to offer consistent and high quality product and adaptability

to small and large order size. It also shows availability of large pool of workforce at

lower cost with no national minimum wages; monthly wages of Ethiopian garment

workers was ranges $ 26-$80 ($26-$50 semi-skilled and $50-$80 skilled workers), with

labour cost per hour of $0.23 (about 11.5 times lower than china, 4.9 times lower than

India and 3.3 times lower than that of Kenya), weekly working hours of 48 and

overtime allowed per week was 20 hours. Electric cost is cheaper (USD per kWh $0.02

- $0 .04) than competitors. However, poor integration among actors in the supply chain,

underdeveloped infrastructure, poor productivity, electric outages and absences of

related and supporting industry in the supply chain are sources of competitive

disadvantage to the industry.

The study finds the overall government supports are positive. However, strategic

manufacturers and supplier partnership is at weakest state and advanced factors and

home demand are very poor. These and other major areas of weakness require further

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vi

investigation and remedial action by the government and supporting institutes together

with firms.

Recommendations discussed include:

Utilize a supply chain approach as a key tool for upgrading strategic integration

of different actors in the in entire supply chain of the industry.

Using Product diversification as source of competitive advantage

Improving productivity through Skills update and upgrade

Analyzing domestic demand of garment products and organizing industry

database

Increasing bases of related and supporting industry in the country.

Improving logistic services through development of basic infrastructure and

enabling access to quality communication system

The report also investigates the fact that the analysis conducted has limitations. Some of

the limitations include:

The data analysis based majorly on secondary data and primary data covers limited

number of firms due to lack of internets in most firms (in the questionnaires test period

it was designed for 55 firms but based on the information about access to internet the

firms were reduced to 15 based on export performance, year of establishment and

presence in the domestic market).

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vii

Table of contents

Contents

page no

Acknowledgement ... iv

Executive Summary ... v

Table of contents ... vii

List of tables ... x

List of figures ... xii

List of Abbreviations ... xiv

1. Chapter one: Background ... 1

1.1 Introduction ... 1

1.2 Summary of research approaches ... 2

1.3 Statement of the problem ... 4

2. Chapter two: Review of the literature... 7

2.1 Theoretical Framework ... 7

2.1.1 Porter`s national Diamond model ... 7

2.1.2 Supply chain Management ...17

3. Chapter Three: Research methodology ...21

3.1 Research questions ...21

3.2 Objectives ...21

3.3 Methodology ...22

3.4 Research Design ...23

3.5 Data collection ...23

3.6 Sampling methods and size ...24

3.7 Significance of the study ...24

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viii

3.8 Limitation and delimitation...25

3.8.1 Limitation ...25

3.8.2 Delimitations ...25

3.9 Organisation of the study ...26

4. Chapter four: Research analysis and findings ...27

4.1 Overview of Ethiopian Economic ...27

4.1.1 Socio-political indicators ...27

4.1.2 Trend of economic development ...27

4.1.3 Foreign Direct investment trend ...30

4.2 Business and legal environment ...33

4.2.1 Political and regulatory environment ...33

4.2.2 Trade policy and market access ...33

4.2.3 Investment climate and incentives ...36

4.2.4 Easy of doing business and economic freedom: Ethiopia ...38

4.3 Global and Regional Market Trends in Textile and Apparel ...45

4.3.1 Global Apparel: overview ...45

4.3.2 Sub-Saharan Africa (SSA) Apparel Trade ...49

4.4 Ethiopian garment industry: overview ...51

4.4.1 Background ...51

4.4.2 Trade performance of Ethiopian garment sector ...52

4.4.3 Major Trade partners ...57

4.4.4 Men`s wear domestic market size and growth ...60

4.4.5 Key Market Growth Drivers ...63

4.4.6 Key Players in men`s wears ...65

4.5 Analysis of Ethiopian Garment manufacturing business

environment ...66

4.5.1 Factor conditions ...66

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ix

4.5.2 Demand conditions ...85

4.5.3 Related and supporting industry ...86

4.5.4 Firms` strategy, structure and rivalry ...89

4.5.5 Government and chance ...90

4.6 Apparel supply chain structure in Ethiopia ...92

4.7 Primary data analysis ...100

4.7.1 General business environment and principal problems to

garment industry ...100

4.7.2 Supply chain issues and competitiveness ...104

4.8 Findings ...114

5. Chapter Five: Conclusion and Recommendation ...121

5.1 Conclusion ...121

5.2 Recommendation ...121

5.2.1 Strategic recommendation ...121

6. Reference ...125

7. Appendices...130

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x

List of tables

Table 4.1 Trends of Economic development in Ethiopia, 2006­2014 ... 29

Table 4.2: Tariff reforms in Ethiopia ... 33

Table 4.3: Tariff structure of Ethiopia ... 34

Table 4.4: Historical Data: Trading across Borders and getting credit in Ethiopia 2006 ­

2014 ... 39

Table 4.5: Easy of doing business rank: Ethiopia and comparator economies (2016) ... 40

Table 4.6: Trends of Economic freedom (Ethiopia, Uganda, Kenya and India) ... 43

Table 4.7: Most problematic factors doing business in Ethiopia, Various Ranking ... 44

Table 4.8: Apparel* Exports, Sub-Saharan Africa, 2014 (Thousands of US$) ... 49

Table 4.9: Textile and Apparel Exports, Sub-Saharan Africa, 2014 (Thousands of US$)

... 50

Table 4.10: Apparel Export and Import of Ethiopia and its share in world ... 53

Table 4.11: Apparel share in total merchandise export, Ethiopia (2008-2014, %) ... 54

Table 4. 12: Share of apparel export in total merchandise of selected economies, %

(2010-2014) ... 57

Table 4.13: Top suppliers of textile and apparel products imported by Ethiopia

(2010/11-2014/15) ... 59

Table 4.14: Apparel production and trade statistics, Ethiopia, 2014 (USD) ... 59

Table 4.15: Ethiopia`s import and export value and trends of men`s wear`s (2010-2014)

... 62

Table 4.16: Men`s wears production and trade statistics-Ethiopia, 2014 ... 63

Table 4.17: Trends in value added, employment and establishments in textile and

clothing industry (at current market price) ... 70

Table 4.18: Effect of movement of REER on international competitiveness ... 77

Table 4.19: Average total duration of power outages (fluctuation and cut) in a month

(hours) ... 78

Table 4.20: Cost of doing business: Electricity as a constraint, comparison with selected

economies ... 79

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xi

Table 4.21: Communication system of Ethiopia ... 81

Table 4.22: Access and use of Internet and website by Ethiopian Textile and Apparel

companies ... 81

Table 4.23: Ethiopia Telecommunication system (2009-2014) ... 82

Table 4.24: Selected infrastructure indicators of selected economies/countries ... 83

Table 4.25: Trading across boarders; Ethiopia and comparator economies (2016) ... 84

Table 4.26: Imports of apparel inputs, by product group, 2010-2014 (US$, thousands) 98

Table 4.27: Comparative Garment Prices, Select Categories of Knit Apparel, 2014 ... 99

Table 4.28: Logistic cost from Djibouti to Addis Ababa and Addis Ababa to Djibouti

... 101

Table 4.29: Clothing, Comparative product trade performance, 2014 ... 106

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xii

List of figures

Figure 1.1 Summary of research approaches ... 3

Figure 2.1 Porter`s Diamond Model ... 8

Figure 2.2 supply chain management antecedents and consequences... 19

Figure 4.1 Age distribution of Ethiopian population ... 27

Figure 4.2: change in GDP composition from 2009 to 2014 ... 30

Figure 4.3: Foreign direct investment, net inflow-Ethiopia (2006-2014) ... 31

Figure 4.4: FDI net inflow comparison, Ethiopia with Kenya ... 32

Figure 4.5: Ease of doing business, Ethiopia (2007-2016) ... 38

Figure 4.6: Trends of Economic freedom (Ethiopia, Uganda, Kenya and India)... 42

Figure 4.7: Top ten exporters of apparel, 61 and 62(value in USD) ... 46

Figure 4.8: Trends in the relationship between consumers and manufacturers ... 48

Figure 4.9: Production trends in the apparel sector: ... 48

Figure 4.10: Composition of apparel export trade-structure by major products, Ethiopia,

%age (2014) ... 55

Figure 4.11: Composition of apparel import trade structure by major products, Ethiopia

(2014) ... 56

Figure 4.12: Export destination of Textile and apparel products of Ethiopia, 2014/15 . 57

Figure 4.13: Top importers of Textile and apparel products exported by Ethiopia (2010-

2014) ... 58

Figure 4.14: Total imports of shirts, trousers, suits and jackets/Blazers ... 60

Figure 4.15: Porter`s Diamond Models as applied to Ethiopian Garment industry ... 67

Figure 4.16: Urban youth unemployment rate, Ethiopia (2009-2013) ... 69

Figure 4.17: Labour cost in textile and apparel industry (USD per hr) ... 69

Figure 4.18 Trends of nominal exchange rate (ETB/USD) ... 75

Figure4.19: Movements in Nominal and Real Exchange Rates. ... 76

Figure 4.20: Internet price USD per month (10Mbps, unlimited data, Cable/ADSL) ... 79

Figure 4.21: Percentages of individual using internets, Ethiopia (2009-2014) ... 80

Figure 4.22: Apparel domestic demand growth, Ethiopia (2009-2014) ... 85

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xiii

Figure 4.23: Daily capacity of textile industry, Ethiopia (2009/10 & 2014/15) ... 88

Figure 4.24: Supply chain structure of Ethiopian Textile and Apparel Industry ... 93

Figure 4.25: Yarn import Value, Billion ETB ... 95

Figure 4.26: Export annual growth rate of Ethiopia Textile and garment products, %

(2009/10-2014/15) ... 97

Figure 4.27: Principal problem of Ethiopian apparel industry ... 102

Figure 4.28: General evaluation of Ethiopian garment industry manufacturing eco-

system ... 103

Figure 4.29: ICT as enablers of supply chain, Ethiopian garment industry ... 107

Figure 4.30: Information sharing level of Ethiopian garment manufacturing with

suppliers ... 108

Figure 4.31 Strategic suppliers` partnership of Ethiopian garment manufacturers ... 109

Figure 4.32: Inventory stocking period of selected companies, Monthly ... 110

Figure 4.33: Major reason of overstocking of garment manufacturing inputs ... 110

Figure 4.34: Perception of manufacturers` about future price of inputs ... 111

Figure 4. 35: Logistic performance index ... 112

Figure 4.36: Competition level of Ethiopian garment manufacturers in international . 113

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xiv

List of Abbreviations

AGOA

African Growth and Opportunity Act

BoP

Balance of Payments

CSA

Central Statistics Agency

CMT

cut-make-trim

DBE

Development Bank of Ethiopia

EIC

Ethiopian Investment Commission

ETIDI

Ethiopian Textile Industry Development Institute

FDI

Foreign Direct Investment

GSP

Generalized System of Preference

GVP

Gross Value Production

ITU

International Telecommunication Union

ITC

International Trade Centre

NGO

Non-Governmental Organisation

SSA

Sub-Saharan Africa

TVET

Technical and Vocational Education and Training

TPI

Trade Performance Index

UNIDO

United Nations Industrial Development Organisation

USAID

United States Agency for International Development

USITC

United States International Trade Commission

WTO

World Trade Organisation

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1

1.

Chapter one: Background

1.1

Introduction

Countries compete with each other to improve the standard of living and quality of life

of their citizens, grow economically, attract foreign investments and tourists, maintain

political stability and build their own brand image by using competitive advantage of

their nations. Apart from favourable Macro environment (GDP, purchasing power,

Economic freedom, easy of doing business, and political stability) low Production

factors such as raw-materials, related and supplying industries, electric cost and skilled

and semi-skilled manpower are the source of competitive advantage both to the

countries and firms along the supply chain.

The textile and clothing industry have been one of the most dynamic and geographically

mobile industries globally (Dicken, 2011). The industry is made up of complex global

production networks and due to the possibilities of minimizing the costs of production,

many buying companies use suppliers located in developing countries and

manufacturers of textile and clothing companies also re-locate themselves in developing

countries through foreign direct investment (FDI). Over recent years there has been an

increasing amount of interest in Africa for investment as a continent with immense

resources and potential. Ethiopia in particular has been singled out as a land of growth

and investment opportunity.

Ethiopia grows some of the world`s finest cotton and has a rich textile spinning and

weaving history, yet its importance on a global scale remains insignificant. Having

experienced average annual growth rate of 10.7% GDP growth consistently since 2006

and a stable political framework since 1995, it still remains largely not yet used or taken

advantage of it.

With several government incentives in place, a priority given towards developing the

textile and clothing industry across the supply chain, a viable business environment and

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2

duty free market access to both US and EU, Ethiopia is now beginning to attract

international buyers and investors.

Although, favourable business environment is set by the government, there are missing

inputs (weak points) in existing supply chain which should be addressed. For example,

in the case of garment manufacturing, trimming and accessories, packaging,

certification bodies, spare part technology and machine maintenance companies and E-

commerce are missed along the supply chain.

This study focus to review apparel manufacturing eco-system of Ethiopia, identify

missing inputs (weak points) of existing supply chain and assessing their impact on

competitiveness of Ethiopian Apparel manufacturing firms.

1.2

Summary of research approaches

To understanding the business environment and identify missing inputs (weak point) of

existing supply chain and their impacts in the competitiveness of Ethiopian garment

industry, the following approach will be taken:

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3

Figure 1.1 Summary of research approaches

Understanding of garment

manufacturing Eco-system

Mapping of existing

supply chain system

Identification of the missing input

(weak point) across supply chain

Analysis impact of missing input

(weak point) on competitiveness

Socio-political indicator & trends of

economic development

Business and regulatory environment

Political & regulatory environment

Trade policy & market access

Investment climate & incentives

Easy of doing business & Economic

freedom

Factors conditions

Related &supporting industry

Demand condition

Global apparel market, production,

consumers and manufacturers relationship

trend

Ethiopia Apparel trade performance

Share imports & exports in the world trade

Growth rate

Concentration and diversification of

product, geographical direction of trade

Mapping Men's wears Domestic market

size and growth

Suit, Shirts, Jackets/Blazers, and Trousers

Secondary data

Qualitative and Quantitative research approaches is used

P

rimar

y a

nd se

cond

ary d

ata

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4

1.3

Statement of the problem

Nowadays, garment manufacturers are competing in fiercely competitive and complex

environments. In this very competitive, but lucrative, industry understanding

manufacturing eco-system of a country, identifying loopholes along the supply chain

and taking corrective actions is crucial for success of business.

Making correct decisions in a dynamic business environment is a major challenge for

textile and clothing firms all over the world (UNIDO, 2009). The challenge is more

intensive for developing countries like Ethiopia because of their poor infrastructure,

weak management, shortage of foreign exchange, lack of capital, limited research,

development practice, weak supply chain and technological obsolescence (CSA, 2008).

Theoretically, all the necessary ingredients

1

are available to transform Ethiopia into an

internationally competitive textile and clothing nation. In this regard, Ethiopia may have

more trump cards to play than any other sub-Sahara African country when it comes to

developing a competitive cotton, textile and garment supply chain. However, the very

low wages are offset by low labour productivity, capacity utilization does not presently

exceed 40-50%, and demand for fabrics fulfilled by import, financial operations with

foreign currency are difficult, high logistic cost, and factories suffer electricity and

internet interruptions. Indeed, Ethiopia's growth as a garment exporter will be slower

and more difficult than the government and local textile organisations predict (DE

Coster, 2014).

The performance of Ethiopian Textile and clothing sectors shows steady growth from

time to time (although very small in real value) but with far behind the plan and

performance is not proportional to Government`s support and availability of cotton and

labour resources for the sector. The performance of foreign currency earnings from

export of garment products was only 72 Million USD (2014/15), which was very far

1

low operational costs due to young, abundant and lower wage labor force and cheap electricity, 3m

hectares land for cotton cultivation, investment land at low cost, large numbers of textile schools and

vocational training institutes, Development of industrial park, financial and fiscal incentives, the country's

political stability and impressive macro-economic growth, the privileged trade relations with the US

(AGOA) and EU (GSP+ Everything But Arms), and its favourable geographic location, which enables

goods to be shipped in a relatively short time to Europe via Djibouti and the Suez Canal

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5

behind against GTP 1 plan (ETIDI). Textile and clothing export figures are very small,

make up only 0.01% of the total textile and clothing industry exports globally (ICT-

2014), in relation to Ethiopia's share of global trade.

Ethiopian textile and Clothing industry exploitation of AGOA market opportunity was

very limited. In 2013, Ethiopia`s market share of AGOA market is nearly 1.33%

(

www.AGOA.info

) and that of EU is also about 1% (Just-style). High cost of inputs,

low productivity, inefficiency of customs clearance, weak supply chain, delays in order

processing, logistic problem, lack of related and supporting industries and poor

performance and collaboration among the supporting institutes/stakeholders are the

major factors not properly utilize the privileged trade relation (US-AGOA and EU-

GSP+ Everything But Arms (

Rahel 2007

).

Availability, quality, and cost of input supply are important constraint in developing

competitive apparel firms. On average in apparel production, inputs (which represent

more than 70 percent of total production costs) are about 25 percent more expensive in

Africa than in China, a 20 percent production cost penalty. In most cases higher input

costs and low productivity wipe out Africa`s labor cost advantage. Input issues are

compounded by poor trade logistics, which add to the costs and delays of importing

inputs that cannot be sourced locally. Currency overvaluation and instability also

compound the input issues. Some countries are forced to lower clothing prices to

compensate for one or more deficiencies in their corresponding supply chains that make

them less desirable sourcing locations compared to others (mainly China). Being a low

cost supplier is generally a necessary but not sufficient condition that is going to

guarantee access to large retailers` global supply chain. For example, to a niche private-

label, multi-season fashion retailer, apparel suppliers` superior performance on order-to-

delivery times and consistent quality is typically more important than the price

differential that may exist between suppliers. Similarly, for large retailers, ability of

suppliers to handle large quantities of order with reliable delivery times through an

integrated global supply chains is critical. Therefore, a companys or countrys ability to

compete in terms of order timeliness and consistency and adaptability to small and large

size orders alike, as well as the ability to ensure seamless flow of goods and transactions

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6

across borders, are all considered increasingly important competitiveness indicators in

the clothing industry (Global Development Solutions, LLC-2011).

Due to lack basic knowledge of SCM and its conceptual framework Ethiopian textile

and clothing firms supply chains are far from world practices of supply chain trends.

Currently, policy-makers in Ethiopia encourage more competitive textile and clothing

firms to compete in local and global markets (

Admas University College, 2010

).

The cumulative effect of the above problems (mainly factors of production and related

and supporting industries) affect garment firms` competitiveness in the global and local

market. Therefore, the study examine apparel manufacturing eco-system, ascertain

missing inputs/weak points across supply chain (mainly upstream) and their impacts on

competitiveness of Ethiopian apparel industry.

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2.

Chapter two: Review of the literature

2.1

Theoretical Framework

To review the Ethiopian apparel manufacturing eco-system; thereafter to identify weak

point in existing supply chain and assess their impact on competitiveness, this paper

will use an integrated theoretical framework based on Porter`s national diamond model

and supply chain analysis literature. Porter`s national diamond model describes the

determinants (sources of national competitive advantages) that can affect the global

competitiveness of companies located in a country. Supply chain is explained to firstly

map the existing supply chain and secondly to identify weak points (missing inputs),

which have negative impact on competitiveness.

2.1.1

Porter's national Diamond model

Porter aimed at establishing a link between the academic literatures in strategic

management and international economics in his book Competitive Advantage of

Nations in 1990 and creates a base for developing national policies on competitiveness

(Davies & Ellis- 2000).

Porter contended that the greater numbers of trade-related theories have been only

focused on cost and a new theory was essential that should attract a comprehensive

understanding of competition that contains segmented markets, differentiated products,

the technological differences and economies of scale. He suggested that this new

theory should be able to define why firms from certain nations implement better

strategies than others competing in certain sectors (WATCHRAVESRNGKAN,

KARPOVA, HODGES, & COPELAND, 2010). For this purpose Porter made an

examination in ten countries (USA, Germany, Denmark, South Korea, Britain, Italy,

Sweden, Switzerland, Japan and Singapore) including different economic characteristics

of 100 sectors for four years to try to find the elements that determine the

competitiveness of nations and sub-sectors to determine what kind contributions

provided to the development of competitive structures of countries (OZ-2002). To

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8

answer the question why some regions are more competitive than others are and to

make clear how firms gain superior positions in certain sectors of the country on global

competitiveness, Porter developed Diamond Model to identify factors of competitive

advantage of countries and sectors and to create the theoretical foundations of this

interplay of country and industry competitiveness topics as a result of his analysis

(BARRAGAN, S., 2005).

The model creates a structure that determines the rules of competition in a sector and

makes it important to have a role to play based on the opinion of achieving a long-term

competitiveness (SUN, FAN, ZHOU, & SH, 2010). Porter associated the determinants

of sectors that state competitive advantage of nations with the value of a diamond. Four

corners of the diamond are factor conditions , demand conditions, firm strategy,

structure and competition and the presence of related and supporting industries. Also

luck and the government factors are included in the system. These factors are

described as factors affecting the competitiveness as a support of the four factors.

Figure 2. 1

Porter's Diamond Model (1990)

Gover

n

m

en

t

Chan

ce

Factor

Endowments

Related and

supporting

industries

Demand

condition

s

Firm Strategy, Structure and

Rivalry

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9

2.1.1.1

Factor endowments

Factor conditions are values of the firm`s skill to supply those factors of research

production that allow a unit to compete. They are the factors of production and

infrastructure necessary to compete in a particular industry (Barragan- 2005). A simple

definition for what the factor of production is concerns to the terms like capital, land

and labour. Porter regards this definition as too general, and not suitable to give open

insights to the competitive advantage, hence he argues that the factors should be divided

into categories that are more particular (Tasevska-2006).

Factors, as defined by Porter, may be divided into five broad groups. These factors can

be grouped into;

1.

Human resources (the amount, abilities and cost of staff etc.),

2.

Material resources (the abundance, quality, approachability and cost of the

state`s land, water etc.),

3.

Knowledge resources (the state`s stock of scientific, technical and market

knowledge bearing on goods /products and services.

4.

Information resources (universities, government research institutes, government

statistical agencies, business and scientific literature, market research reports,

databases etc.),

5.

Capital resources (the quantity and costs of capital available to fund the sector)

and infrastructure (the type, quality and user cost infrastructure available and

affecting the competition, including the transportation system, the

communication system, mail and parcel delivery etc.)

Also three distinctions may be done among the factors. The first distinction divides

factors into basic or advanced factors. The second distinction is between generalised

and specialised factors. The third distinction is whether the factors are inherited (such as

location or natural resources) or provided by the nation. Advanced, specialised and

created factors provide more sustainable advantages than basic, generalised or inherited

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10

and are necessary to achieve sophisticated forms of competitive advantage (PORTER-

1998; NILSSON & PETERSON- 2002). Advanced and specialised factors, on the other

hand, are regarded as being a more decisive and sustainable basis for competitive

advantage (OZ- 2002).

Competitive advantage are dependent on how efficiently and effectively the factors are

used and the condition of these factors (the quality, significance and even shortage) is

more important than the subsidy and cost of them because it is admissible that easy

access to big quantity of factors results in a kind of inefficiency of their usage.

Moreover, if other three dimensions are in a favorable position for a sector, the pressure

of competition would be maximum and the firms are committed to exist in the sector,

this scarcity shortage of factors could be productive only if firms take the notify of this

shortage well.

2.1.1.2

Demand Condition

Porter (1990) suggests that the demand conditions which indicate the nature of home

demand formed the second broad determinant of national competitive advantage. This is

one of the most interesting dimensions as it relates to the nature of consumers in the

home market. Demand conditions are the pressures based on buyers` requirements

about quality, price, and services in a particular industry (BARRAGAN- 2005).

Demand conditions affect the forming of certain factor conditions. They have effect on

the pace and direction of innovation and product development

2

. For instance, Japanese

car buyers exert strain on Japanese car makers with regard to high quality standards

impelling them to develop the quality of their goods, operations, and activities, which in

turn makes ready the whole industry to compete internationally (BARRAGAN- 2005).

The combination of demand conditions is showed by three main characteristics that are

important to gaining national competitive advantage (TASEVSKA, 2006).

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11

1.

Home Demand Conditions: There are three characteristics of the composition

of home demand: segmented structure of demand, sophisticated and demanding

buyers and anticipatory buyers` needs. Nations achieve competitive advantage in

sectors or in sector parts where the home demand provides native firms a clearer

or earlier picture of buyer demands than foreign competitors can have (Tuna,

2006: SUN el al., 2010). This will make the industry (sector) ready to compete

internationally in next levels (BARRAGAN- 2005).

Porter (1990) argues that the sophistication of demand is much more significant than the

size of demand. When a sector operates in a sophisticated and demanding domestic

market it is compelled to innovate and sell better goods because the market needs high

quality.

2.

Demand Size and Pattern of Growth: Size of home demand, number of

individual buyers, and growth rate of home demand, early home demand and

early saturation. Porter argues that home market size is an advantage if it

stimulates investment and reinvestment or dynamism (TASEVSKA, G.M.,

2006). The existence of a number of individual buyers in a nation produces

better surroundings for innovation than is the situation where one or two

customers command the home market for a goods or a service (TUNA, 2006).

The rate of growth of investments in a sector is to a large extent a mission of

how quickly its home market is developing (NILSSON, & PETERSON, 2002).

Early home demand helps local firms to action sooner than foreign rivals to

become established in a nation. Also early saturation, the early penetration

supports native firms to become constituted (TASEVSKA, G.M., 2006).

3.

Internationalization of Domestic Demand: Mobile and transnational local

buyers and influences of foreign need. If state`s buyers for goods or service are

mobile or a transnational firm, an advantage occurs for the state`s companies as

the home buyers are also foreign buyers (TUNA, 2006).

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About the demand condition, Porter suggest that although, at any rate, a minimum

quantity of home demand is required to improve the sector to expand and develop, but

the quality of this demand is more significant than the amount of that. By quality of

demand, basically, Porter means how complex are features and specifications that

customers (principally home buyers) expect (MEHRIZI & PAKNEIAT, 2008).

2.1.1.3

Related and supporting industry

The existence of related or supplier industries in a nation is argued as the third

dimension of diamond model. The presence or absence in the nation of related

industries and supplier industries which interact (both horizontally and vertically) with

the target sector is a basic factor (TUNA, 2006; MEHRIZI, & PAKNEIAT, 2008). In a

broad view, Porter accepts that it is approximately unthinkable to find only a single

successful industry (sector) without strong and challenging supportive and related

industries. The relationships among these clusters of industries are crucial to the success

of a determined sector within a nation as they operate learning, innovation and

competitiveness, and are thought about put together the maximum synergies when all

requisite institutions necessary to operate learning, innovation, and competiveness and

economic agents are linked up (RASIAH, 2009). However, it is possibly unrealistic in a

developing country setting to look for all sectors that are related to one internationally

competitive sector to be competitive as well (OZ, 2002).

Related industries are those in which organizations can organize or allocate activities in

the value chain when competing, or those, that produce complement goods (PORTER,

1998; TASEVSKA, 2006). They are those that are some buyers, building factors and/or

technologies in general (MEHRIZI & PAKNEIAT, 2008). The supplier industries

creates potentials for comparative advantage by producing inputs, providing new

methodologies and opportunities to utilize new technology, transferring of knowledge,

innovations, etc. (TASEVSKA, 2006). The presence of related industries often results

in new competitive industries, and offers opportunities to informational and

technological exchange (PORTER, 1998).

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Competitive advantage in supplier industries gives potential competitive advantage to

firms in many other sectors in several ways.

1.

First, the firms have effective, rapid and early access to the most cost efficient

input (NILSSON & PETERSON, 2002). These sectors offer cost-effective

inputs, but they also take part in the upgrading process, thus encouraging other

firms in the chain to innovate.

2.

Second, even more important are the opportunities of continued co-ordination

between supplier and buyer industries, regarding innovation and upgrading

processes (NILSSON & PETERSON, 2002). The close proximity of related

industries provides a faster reply to market trends and changes, and makes quick

innovation easy. This confirms available access to the raw materials and abilities

required to make advantage through either low costs or differentiation.

3.

Third, competitive advantage occurs from close working relations among

supplier and buyer industries (PORTER, 1998; NILSSON & PETERSON,

2002). When native supporting industries are competitive, firms take advantage

of more cost efficient and innovative inputs. This effect (result) becomes more

reinforced when the suppliers themselves are powerful and important global

rivals.

Related and supporting industries directly or indirectly related to many different sectors

and a sector which covers all the players and are a clustering of the industry. Clusters

are inter-related firms and other enterprises that manage the competitiveness of a

determined sector (e.g., private enterprises of varying sizes, associations, suppliers,

customers, universities, financial institutions, training and other business service

providers, and other groups). Nation successful industries (sectors) are usually linked

through vertical (buyer/supplier) or horizontal (common general buyers, technology,

channels, etc.) bases. Vertical clusters create high quality, while the horizontal clusters

create highly competitive firms. Porter argues that the advantage of both supportive and

related industries counts on the rest of the Diamond, and its systematic character

(BARRAGAN, 2005).

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2.1.1.4

Firms' strategy, structure and rivalry

Three basic parameters of sector are covered in the fourth dimension of this model as

firms` strategy, structure and rivalry. Porter suggested that the strategy of firms,

the structure of industry and the rivalry have effects on the competitiveness of the sector

(MEHRIZI & PAKNEIAT, 2008). Firms` strategy, structure and rivalry get hold of the

hardiness of home competition. Whether a sector is extremely competitive domestically

will affect the rise in productivity required to compete internationally.

Firms` strategy, structure and rivalry are measures of situations that explain how a

sector is originated, systemized and managed and the nature of domestic competition

that could support a nation achieve a sustained competitive advantage. Porter attempted

to list some non-economic factors (such as traditions and values that affect the

motivation of companies for getting into the sector and the impact of spatial proximity

in this dimension (MEHRIZI, & PAKNEIAT, 2008). The aims, strategies, politics and

methods of organizing companies in sectors vary widely among nations and there is not

a unique business system that is universally suitable. National advantage emerges from

a good harmony between these selections and the sources of competitive advantage in a

specific sector. Porter suggests that domestic competition and the look for competitive

advantage within a region can help supply organizations with bases for succeeding such

advantage on a more global scale.

In the global competition the rivalry is very important if successful companies compete

energetically at home and constrain each other to develop and innovate. The pattern of

rivalry has effect to the process of innovation and the final plans for international

achievement (TUNA, 2006; PORTER, 1990).

The way in which firms are managed and prefer to compete and innovate is influenced

by national conditions. Cultural aspects play an important role. As most significant

national diversities in business practices and approaches can be put into words: the

training, backstage and the orientation of leaders, management manner and structures,

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hierarchic style, decision deciding, the relationship between work and management,

working morale, relationship with the consumers or interactions between companies.

These national diversities make advantage and disadvantages in competing in different

categories of sectors (TASEVSKA, G.M., 2006). Typical corporate aims and goals in

relation to models of commitment among employers are of special unique importance.

They are hardly affected by systems of ownership and control. Family-based business

that are controlled and managed by owner-managers will act differently than publicly

quoted.

2.1.1.5

Government and chance

Porter argues that, Government effect and chance events are two extra determinants that

can importantly affect the national system and are necessary to make the model

complete. Even though the chance and the role of the government in the Diamond

model are introduced as additional variables their role especially the government role is

very important and has significant straight affect to all of the main four determinants

(TASEVSKA, 2006).

The Role of Government, all the policies and regulations made by policymakers at all

levels of government (but particularly federal) can benefit or adversely influence the

competency of a country and an industry (BARRAGAN, 2005). Therefore, the

government improves or damages the national competitive advantage and effect the

competitiveness (MEHRIZI, PAKNEIAT, 2008). Its role is recognised most clearly by

analysing how policies affect each of the variables. In fact, the government forms and

affects the situations in the demand and factor conditions, as well as to the related and

supported industries and the firms` strategies, structure and rivalry (TASEVSKA,

2006). There are many policies that can impact each of the determinants in different

ways. For example, subsidies, taxes, financial incentives, education policies, public

procurement, antitrust laws, quality standards, capital market regulations etc. Antitrust

policy (prevents the companies from unfairly controlling prices) affect domestic

competition; regulation can change demand conditions; investments in education can

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alter the factor condition; Government acquisitions can encourage related and

supporting industries (TUNA, 2006). Government encouragement of joint ventures with

foreign firms will help the transfer of technology (BARRAGAN, 2005). On the other

hand, some policies implemented without consideration of their outcome and impact

can have opposite and undermining impacts on the national advantage. A paternalistic

government that protects indigenous firms from foreign firms is not encouraging

improvements in productivity or quality. Therefore, when the free market does take

place, these firms are not prepared for that challenge. It is evident that the impact of the

underlying determinants of national competitive advantage can be either positive or

negative, and the national competitive advantage will fail if the government policy

remains the only source of competitiveness (TUNA, 2006).

Chance events are usually improvements outside the control of the companies. Chance

events are regarded by definition as beyond the control of firms (companies) but may

make forces that remold the sector structure, allowing shifts in competitive position

(OZ, 2002). Namely, such events avoid the advantages of previously constituted rivals

and make potential that a new nation`s companies can replace them to succeed

competitive advantage in response to new and different conditions (TASEVSKA,

2006).Chance is composed of factors (mainly external to the sector) that are not well

foreseen and (almost influenced by sector) such as new inventions, political decisions

by foreign governments, wars, rapid changes in financial markets or exchange rates,

surges of world or regional demand, discontinuities in input costs, other radical

technical changes.

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2.1.2

Supply chain Management

Companies have traditionally viewed themselves as entities that exist independently and

have to compete against each other in order to survive. However, such mindset cannot

be sustained as no organization can operate alone in complete independence. Firms are

finding that they can no longer compete effectively in isolation of their suppliers or

other entities in the supply chain and are realizing the benefits of collaborative

relationships within and beyond their own organization (Cox et al., 1995).

Christopher defined supply chain (as cited in Mentzer et al., 2001, p. 3) as the network

of organizations that are involved, through upstream and downstream linkages, in the

different processes and activities that produce value in the form of products and services

delivered to the ultimate consumer. SCM can be defined as a set of approaches that

efficiently integrate and coordinate the materials, information and financial flows across

the supply chain so that merchandise is supplied, produced and distributed in the right

quantities, to the right locations, and at the right time, in the most cost-efficient way,

while satisfying customer requirements (Hilletofth, 2009; Hugo, Badenhorst-Weiss &

Van Biljon, 2011; Shukla, Garg & Agarwal, 2011).

Hence, it may be concluded that supply chain is characterized by

The flow of goods, services, money, and information both within and among

business entities including suppliers, manufacturers, and customers;

It also includes all types of organizations engaged in transportation,

warehousing, information processing, and materials handling. Sourcing,

procurement, production scheduling, manufacturing, order processing, inventory

management, warehousing, and;

Finally, customer service is the functions performed throughout the supply

chain.

The ultimate goal of SCM is to meet customers` demand more efficiently by providing

the right product, in the right quantity, at the right location, on the right time, and in the

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right condition. The objective of SCM is to achieve a sustainable competitive advantage

(Handfield, Monczka, Giuinipero & Patterson, 2009). Pathak (2015) also suggests that,

supply chain management practice is becoming extremely important to achieve and

maintain competitiveness. Supply-chain competitiveness is a holistic matter that

requires each partner within the supply chain to align their structural elements. Some

important elements of supply chain competitiveness as established by various

researchers are cost, logistics, flexible supply chain, quality, delivery, product

availability, innovative products, value added product and customer supplier

relationship (Nowell, 2005; Cooper et al., 1997).

The supply chain in the textiles industry is complex. Often the supply chain is relatively

long, with a number of parties involved (Jones, 2002). Consequently, careful

management of the supply chain is required in order to reduce lead times and achieve

quick response.

It is common practice for retailers to deal with manufacturers, with centralized buying

and considerable negotiation on prices, quality and delivery schedules (Bruce and

Moger, 1999). However, Popp (2000) suggests that in addition, in many chains there is

an intermediary, often an import or export agency, acting as a significant figure within

the chain. The addition of the intermediary has come about as a result of increasing

globalization within the industry. Globalization of the textile and clothing supply chain

is currently intensifying, with many companies either sourcing components from

overseas, or moving manufacturing to countries with lower labour costs (Jones, 2002).

In addition, the fashion industry is characterized by a number of factors, namely a short

lifecycle, high volatility, low predictability, and high impulse purchase (Fernie and

Sparks, 1998). The upstream (supplier) and downstream (customer) linkages and

Information sharing to be positively related to both supply chain performance and

export performance. The best predictors of export performance were found to be (in

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order of decreasing importance): supply chain performance; supplier linkages; and

linkages (supplier and customer taken together).3

In manufacturing industries, the levels of inventories at all stages (i.e. raw material,

work-in-process and finished goods inventories) indicate the firm`s competitive

positioning, strategies, internal processes and relationships with suppliers and

downstream customers.4

Figure 2. 2 Supply chain management antecedents and consequences

Source: John el at., 2001

3

Sherwat Elwan Ibrahim, Olayinka Ogunyemi, (2012) "The effect of linkages and information sharing on

supply chain and export performance: An empirical study of Egyptian textile manufacturers", Journal of

Manufacturing Technology Management, Vol. 23 Iss: 4, pp.441 - 463

4

Nag, Barin; Han, Chaodong; Yao, Dong-qing. Journal of Manufacturing Technology Management.

2014, Vol. 25 Issue 3, p351-370. 20p. DOI: 10.1108/JMTM-06-2012-0062. , Database: Business Source

Complete

• Grade: A-10.0
• Author: Nigussie Godana (Author)
• Publication Year: 2016
• Pages: 151
• Catalog Number: V385920
• ISBN (eBook): 9783668618329
• ISBN (Book): 9783668618336
• Language: English
• Tags: ethiopian, Business environment, Apparel, Supply chain, Porter's Diamond model, Competitiveness