PORTERS FIVE FORCE MODEL (INDIA)

I. RISK OF NEW ENTRY BY POTENTIAL COMPETITOR

1. Brand Loyalty
The existing players have been in the industry for a long period of time and
have established a good reputation with their customers in domestic as well
as foreign market. This has resulted in the high brand loyalty by customers.
But this will not act as a potential barrier for other companies because most
of the Indian textile companies operate in B-To-B segment and all the players
keep competing among themselves for new consignments from the clients.

2. Absolute cost Advantage

Abundant availability of raw material is one of the key advantages of the
Indian textile industry; this also gives a major opportunity to Indian textile
industry and creates a barrier for foreign players to compete with Indian
companies in cost advantage.
India is more cost competitive vis--vis countries like Brazil, China and
South Korea in manufacture of textiles
Cost advantage arises mainly from the large pool of low cost but skilled
manpower available in India
Indias position is strong vis--vis other countries in most raw materials
Largest producer of jute
Second largest producer of silk
Third largest producer of cotton, accounting for nearly 16% of
global production
Third largest producer of cellulosic fiber/yarn
Fifth largest producer of synthetic fibers/yarn
Eleventh largest producer of wool
Cotton - Predominant fabric used in the industry
With 4.13 million metric tons of production, country accounts for
almost 16% of global production of cotton
India also leads the world in cultivated area under cotton
(roughly 8.82 million hectares in 2004-05)
Jute - Occupies an important place in the Indian economy
Has a strong contribution to direct employment as well livelihood
in the tertiary sector and allied activities
India leads globally in jute with its annual production of 7.5
million bales in 2004-05

 Silk - Highly remunerative cash crop, with minimum investment and

sustained attractive returns
India accounts for 18% of world raw silk production (15.74
thousand tones production in 2003-04)
India has the unique distinction of being endowed with all 4
varieties of silk - Mulberry, Eri, Tasar, Muga
Wool - With its annual production of 50.7 thousand tons of raw wool
fiber, India accounts of roughly 2% of global production

3. Economies of Scale:
The textile industry across the value chain is largely decentralized
Units mostly independent and small scale in nature, rather than
composite units undertaking all activities together
Large scope for entry of organised integrated textile manufacturers

4. Customer switching cost:

As earlier mentioned that the existing players are operating in this
industry for a long period and also have established long term relationship
with their customers. Over a period of time these companies have
customised their products as per the needs of the customers therefore
customers also prefer to still to the existing suppliers rather than moving to
others as there is a high switching cost involved here and if the customers
switch to new suppliers than again he need to train the suppliers as per their
requirements

5. Government Regulations:
Historically the textile industry in India has been reserved for the
small scale sector, which has been exempted from taxes, thus
discouraging investments in increasing scale
The government, through its various Budget announcements has
sought to rationalize taxes
Budget 2002-03: Textiles brought under the ambit of Cenvat
(credit for duties paid on inputs or capital goods) and
introduced on all yarns
Budget 2003-04: Cenvat extended across the entire textile
chain to include fabrics, made-ups and apparel; excise duty
exemptions on many sectors and processes, specially SSI
removed; excise duty rates reduced
Several government initiatives targeted to attract investments:
Technology up gradation fund scheme:

 Scheme launched in 1999 to provide firms access low interest loans for
technology up gradation and setting up new units with state-of-art
technology
Scheme has disbursed INR 91.61 bn till 31st December 2005
Policy related to foreign investment:
Up to 100% foreign direct investment allowed in textile and apparel
manufacturing industry, with approval of the Foreign Investment
Promotion Board (FIPB)
USD 1.02 bn of FDI in the sector approved between 1991 and 2004
Companies free to set up fully-owned sourcing (liaison) offices, as well
as marketing operations

II. THE EXTENT OF RIVALRY AMONG ESTABLISHED FIRMS

1. Industry competitive structure:
Since this industry is highly fragmented there is always high probability
during the boom phase that many new players could enter this industry
which would lead to a price war and ultimately end up with the bankruptcy of
some players or consolidation of industry. So, this is a treat to the existing
players.
But also the existing players work a lot on cost efficiencies therefore the
treat of new entrant is negated by the cost efficiencies of existing players

2. Industry Demand:
In the current scenario textile exports have declined drastically and even in
domestic demand there is a little slowdown. Due to which textile companies
are working on reducing cost by ways of reducing the work force, decrease in
operation cost etc. Also this will evoke more rivalry among the existing
players as they all will like to maintain their market share in spite of the
slump in industry

3. Exit Barrier:
This is not just a labour intensive industry but even the cost involved in plant
setup is very high along with that with the invent of many new technologies
many companies have adapted to modern techniques to remain competitive
in industry as well as to produce better products for their customers in lesser
time and with lesser cost.
Therefore because of high involvement and emotional attachment with the
business as it has been a traditional business for generations for many
companies they still prefer to stick and continue with the business. But in the
current scenario many textile mills have closed down because of deep cut in
demand and high operational cost due to severe global crisis.

III. THE BARGAINING POWER OF BUYERS

 Indian textile companies are facing a tough competition from Chinese,

Brazilian and South Korean companies as they are able to produce at a
lower cost compared to Indian companies
This industry is fragmented and there are large number of players in
the industry, therefore buyer get the option of choosing from many
suppliers
Indian textile industry is no more just a mass producer of textile rather
it has moved into niece segment and has developed capability to
produce finest quality of fabric which provides them distinctive
competencies against other countries as well as small players who
could cater to mass consumers only.
Therefore overall buying power of buyer will defer from company to
company. Companies like Arvind mill, Raymond, aditya birla group have
achieved certain degree of distinctive competencies therefore with them
buying power of buyer is negated to large extent against their competencies.
But many small companies who are mass producer of textile face a strong
buying power of buyer.

IV. THE BARGAINING POWER OF SUPPLIER

Here again bargaining power of supplier dictated by the segment that they
are targeting to, for a niece players and companies who have achieved
operational excellence can dictate terms to buyers but for small players who
just produce for mass consumption do not have much say in the business
deal and the prices are mostly dictated by the buyer.

V. THE THREAT OF SUBSTITUTE PRODUCT

Textile itself is a very broader term and is a solution to a very basic need of
any human being therefore there is as such no substitute to this but within
the textile industry there are many substitutes to different category of
textiles. In India there are various types of textile produced from cotton, silk,
synthetic etc.
There is always a risk of substitution of one type with the other type also
there is constant research carried out to develop new types of textiles but
combining different textiles in different proportion. But in broader
perspective there is no substitute to textile.

PORTERS FIVE FORCE MODEL (INDIA)

1) Threat of New entrants

Indian Textile Industry is very dependent on personal contacts and experience. The new
actors would have to bring some kind of client base along with the new establishment.
Product differentiation may constitute a barrier of entry as manufacturers are heavily
dependent on references and word of mouth. Without any established client portfolio it
is difficult to attract, endure increased costs in creating sample collections to show
potential customers. Hence, in startup phase costs are not only associated with the
manufacturing required but also with the costs for designers and creating samples. In
the sense of reference dependency, barriers of entry are considered as very strong.
As the new entrant has limited experience in textile manufacturing and there are no built
up relationships with customers, they might experience disadvantages relative to the
established competitors.
Governmental policies do affect the business environment to some extent. An example
of this is subsidies, which are offered to companies establishing production in certain
regional areas.
In addition to these potential barriers of entrance, new entrants may have second
thoughts about entering the new market, if existing manufacturers may retaliate on new
entrants. The Indian textile industry though, has such a large population of
manufacturers so any new actors may hardly be noticed by the competition, which
minimizes the risk for retaliation.

2) Bargaining power of customers (demand scenario)

Global textile & clothing industry is currently pegged at around US$ 440 bn. US and
European markets dominate the global textile trade accounting for 64% of clothing and
39% of textile market. With the dismantling of quotas, global textile trade is expected to
grow (as per Mc Kinsey estimates) to US$ 650 bn by 2012 (5 year CAGR of 10%).
Although China is likely to become the 'supplier of choice', other low cost producers like
India would also benefit as the overseas importers would try to mitigate their risk of
sourcing from only one country. The two-fold increase in global textile trade is also likely
to drive India's exports growth. India's textile export (at US$ 15 bn in 2005) is expected
to grow to US$ 40 bn, capturing a market share of close to 8% by 2012. India, in
particular, is likely to benefit from the rising demand in the home textiles and apparels
segment, wherein it has competitive edge against its neighbors.

Hence, the bargaining power of customers is strong. For that reason, it is of importance
for a producer of apparel to differentiate their products or production so it will not
compete with price as primary mean.

3) Bargaining power of suppliers (supply scenario)

India is a country where we have numerous players in textile industry which all are
varied in terms of size and power. There has been increase in production and supply of
textile products in last few decades globally, mainly due to rapidly changing social and
economic structure of the countries worldwide. In past few years, especially after the
removal the trade related tariffs and non tariff barriers in 2005, Asian countries such as
India, china, Hong Kong and Japan have emerged as major players in this particular
industry, mainly due to their changes on economic front and infrastructure
developments.
The large number of available suppliers in India gives an initial indication of a weak
bargaining position for the supplier group.
Additionally, the supplier group lacks switching costs and has a low level of product
differentiation. This leads to great possibilities for textile manufacturers to scout the
supplier group for best terms and prices for production. As a result, manufacturers can
contact a large number of suppliers and play suppliers against each other. Such
behavior weakens the bargaining power for suppliers and as a result pushes prices
down and makes prices similar among suppliers.
An advantage which the Indian Suppliers group have capitalized on is,
Due to their ability to integrate forward in value added chain, they have achieved a
better bargaining position towards textile manufacturing.
As previously seen, companies in the textile and apparel sector have established
forward to create vertically integrated company groups.
Deep relationships between manufacturers and suppliers illustrate how important the
textile manufacturing industry is for the supplier group. An example of this is how
suppliers and manufactures interact in activities such as research and development
(R&D). By this process the supplier obtains knowledge on what customers downstream
in the value added chain demands.
4) Threat of substitute products
When using such a broad term as Textile, there are obvious reasons for identifying

substitute product groups proves difficult.

Of course, there are variations in types of clothing and material. Variations in textile
segment can also be identified as trends in fashion and styles. Hence products within
the apparel segment can act as substitutes but the general conclusion still stands;
theres no substitute to apparel.
5) Competitive rivalry within the industry
The textile manufacturing segment in India is made out of numerous manufacturers
which all are varied in terms of size and power. It is a massive sector with thousands of
companies producing apparel. The apparent high growth rate of total textile exports
indicates that the rivalry between manufacturers is low. The growth rate is high in some
product segments but even negative in others. Hence, the rivalry between apparel
manufacturers is diverse since they enjoy different growth rates.
Additionally, textile as a perishable product group is in the risk of temptations to cut
prices when demand slackens. For example, when there are recessions in the business
cycle apparel prices will drop significantly in price. Both these factors exemplify and
indicate that the rivalry between manufacturers is high.
As Indian apparel manufacturers are pressured to lower prices in order to stay
competitive with companies abroad, the overall rivalry within the industry gets
companies to expand their customer base in order to keep profits up. It is therefore
reasonable to believe that such expansions may occur on the behalf of competitors if
possible, and thereby increase the rivalry in the industry.