Business Strategy

Environmental Analysis of the Apparel Industry of Sri

Lanka
11/9/2014
Dilusha Ruvindi Jeewandara
ID Number - 21278320

Table of Contents
Executive Summary ................................................................................................................................. 3
Introduction ............................................................................................................................................ 4
PESTEL Analysis ....................................................................................................................................... 5
Political ................................................................................................................................................ 5
Economical .......................................................................................................................................... 6
Social ................................................................................................................................................... 6
Technological ...................................................................................................................................... 6
Environmental ..................................................................................................................................... 7
Legal .................................................................................................................................................... 7
Key Drivers for Change............................................................................................................................ 8
Porter's 5 forces ...................................................................................................................................... 9
Threat of New Entrants (Moderate) .................................................................................................. 9
Treats of Substitutes (Low) ................................................................................................................. 9
Bargaining Power of Suppliers (High) ............................................................................................... 10
Bargaining Power of Buyers (High) ................................................................................................... 10
Competitive Rivalry (High) ................................................................................................................ 10
Summary of Porters 5 Forces ............................................................................................................ 11
Appendix ............................................................................................................................................... 12
References ............................................................................................................................................ 14

Executive Summary
The Apparel industry in Sri Lanka is one of the most important industries for the country. It
has been developing in a rapid rate for the past couple of years bringing opportunities for
local as well as international individuals and groups. It has always played a major role when
it comes to the development of the country and by this study we are identifying different
factors in the external environment that would affect the apparel industry in adverse as well
as favourable manners.
In order to analyse the external environment of the apparel industry the author has chosen the
PESTEL analysis. The external environment will be analysed by its 6 main elements.
Looking broadly into the PESTEL analysis will give the readers of this report a better
understanding on the environment that the apparel industry is operating in at the moment.
Apart from that the author has also used Porters 5 forces to analyse the apparel industry. By
this model one can identify the competitive edges of the industry as well.
Hence this report provides an overall analysis of the external environment of the apparel
industry and its opportunities and threats alongside the key drivers for change.

Introduction
The apparel industry in Sri Lanka is one of the highest income generators for the government
as well as the highest industry which generates employment for the country. Apart from that
the industry also earns a plethora amount of foreign exchange for the country the government
has focussed more on its development in the recent years.
The apparel giants of Sri Lanka produces clothing wear for a large number of well
established and recognised brands in the world such as, Victoria's Secret, GAP, SOMA, Nike,
Lulu Lemon, Addidas etc. The brands have developed a strong relationship with the Sri
Lanka apparel industries and have become one greatest supporters for the economy of the
country.
Through the Board of Investment in Sri Lanka the apparel industry have attracted a large
number of foreign investments as well.
Hence looking deeply into the external environment that the apparel industry is operating on
is vital for the growth and sustainability of the industry.

PESTEL Analysis
Political

Tax Benefits given by the Government - (Opportunity)

The Government has proposed a 300% tax allowance for the research and development of the
apparel industry in Sri Lanka (CBSL Annual Report, 2013) This can be identified as an
opportunity for the apparel industry as by having the tax benefits the industry can invest and
focus on more exports as well as get more intellectual knowledge from the international
apparel giants.
Government Policies - (Opportunity)
The government has declared the Colombo and Hambanthota ports as free ports, while the
export processing zones in Mattala, Katunayake and Koggala were declared as bonded areas.
By these policy measures the government is trying to support the export industries such as
apparel in Sri Lanka. This one of the major opportunities the apparel sector could have for
having the free ports it can spreads its presence on a more broader range of economies as
well.

Figure 1 - Major Sources of Exports in Sri Lanka (Source; Annual Report of Sri Lanka,2013)

Economical

Volatile Exchange Rates of the Country - Threat

The Sri Lankan rupee has been volatile for the past couple of years appreciating and
depreciating on different levels, Through June 2013 to August 2013 the government has seen
a depreciation of the rupee by 5.01% against the US dollar, and by the end of 2013 the rupee
has depreciated against the US dollar by 2.75% making it Rs 130.75 (CBSL Annual Report
2013)

Volatile Inflation Rates of the Country - Opportunity

The monitory policy of Sri Lanka is expected to remain supportive to the private sector and
public sector growing economic activities. The current inflation rate of 4- 6% per year (CBSL
Annual Report 2013) would be a positive fact for the upcoming industries.

Social

The Attitude towards the Apparel Industry in the Country - Threat

This situation even though have changed in the recent years it did affect the apparel industry
in an adverse manner. The attitude of the population in the country towards the garment
industry was negative. Hence people were reluctant to be employed in an apparel
organization making the organization to face many difficulties. These attitudes still prevail
but people have managed to see through the negative vibes.

Technological

Advanced Research and Innovation - Opportunity

The apparel industry of Sri Lanka are currently on the phase of introducing new innovative
technological solutions for different apparel needs. Apparel companies of the island have
already established departments in order to cater just for research and innovation. MAS
Research and Innovation (Pvt) Ltd is one example of that. (ww.masholdings.com) Also the
government have given support to the public sector by forming a partnership with the private
sector to form the Sri Lanka Institute of Nanotechnology to develop more technological
solutions (www.slintech.lk)

Automation - Opportunity
The apparel giants of Sri Lanka are using automation to increase the productivity and reduce
the production costs. They have their own operating systems such as MOS, MAS Operating
System (ww.masholdings.com) in order to develop efficient machinery and have successful
automation in the company.

Environmental

Waste Management Laws - Opportunity

The government of Sri Lanka has kept its eye on the apparel sector industry for violation of
the waste management laws. The organizations have been strictly informed to have proper
waste management systems which would not affect the environment in any way. Government
officials have the authority to inspect these when required. The government also can take
legal actions towards organizations who do not adhere in to the environmental laws.
(Cbsl.gov.lk, 2014)

Legal

Maximum Working Hours - Threat

The government has imposed laws on all manufacturing organizations by the Factories
Ordinance of 1950, with a maximum of 48 working hours per week. (Cbsl.gov.lk, 2014)

Minimum Wage Rates - Threat

The government has imposed a minimum wage rate for all sector employees. The
government interferes in the wage rates by the adjustments of the Cost of Living Allowance.
In the year of 2013 the wages of private sectors governed by the Wages Board Trade has
increased by 5.7% (CBSL Annual Report 2013) .Refer Appendix

Key Drivers for Change

Technological - Advanced Research and Innovation
The implementation of Research and Innovation in the apparel sector has been one of the key
points when it comes to the growth of the apparel industry. Using technology in a broader
way was never a part of this industry but now organizations have identified the need and are
trying to fill the gap by doing innovative products. The apparel industry must be taken on to
the future since it is one of the most important industries a country could have and for that
concentrating on Research and Innovation is extremely important.
This new idea has become more and more important in the apparel sector nowadays since it
has brought a lot of new customers as well. And by having sectors like this will help people
identifying their hidden talents when it comes to innovation, hence this new concept could be
the key stone when it comes to polishing the younger generations ideas and thoughts, giving
them a better place in the international presence.

Political - Government Policies

The government of Sri Lanka is encouraging the apparel industry, hence it is introducing new
policies which are favourable to the apparel sectors and which will generate more income for
the government in return. Policies such as free ports and bonded areas is a legal framework
that could lead Sri Lanka into becoming a commercial hub. These kind of free ports and
bonded areas will be able to facilitate more international trade, develop the logistic service of
the country as well as the offshore businesses. Apart from these policies the Joint Apparel
Association Forum (JAAF) has been one of the key areas which looks on to ways of
developing the apparel sector in Sri Lanka. Hence these policies and acts that has been
imposed by the government can be identified as a key driver for the apparel industry as by
these the possibility of the apparel industry growing in to one of the largest in the world is
extremely high.

Porter's 5 forces
Threat of New Entrants (Moderate)

Economies of Scale
The apparel giants of Sri Lanka at the moment such as MAS Holdings, Brandix, Hydramani
are experiencing economies of scale. This basically means that the organizations are
producing their garments at a decreasing average cost focussed on the long run. Having
companies such as these in the industry makes new potential companies struggle when
entering the market.
Customer Loyalty
As the existing apparel companies in Sri Lanka cater mostly to the needs of the international
customers they have made a strong bond between each other. This customer loyalty is a
barrier for a new entrant as they would have to build the relationship with the most valuable
customers from scratch.
Government Encouraging Apparel Exporters
The Sri Lankan government is highly encouraging the apparel export market in Sri Lanka. As
this is one of the major contributors to the Local economy government is willing to give all
the support in order to bring the industry to even higher position. The government will
promote global market access in order to assist the apparel sector (www.erd.gov.lk)
High Capital Requirement
New entrants are always faced with a high level of entry cost. The apparel industry in Sri
Lanka requires a very high level of capital investment in order to be well established in the
country. This is another barrier which would affect the new entrants in a negative manner.

Treats of Substitutes (Low)

There are no substitute for the apparel industry is very low or NIL. As there are no significant
substitutes that have been identified for apparel, But in the future with new technological
advances this force can be of a negative factor for apparel industry as well.

Bargaining Power of Suppliers (High)

Powerfully Established Suppliers

Within the apparel industry in Sri Lanka there are already a plethora of well established
suppliers catering in to the different needs of manufacturing a garment. These suppliers have
been in the industry for a very long time hence their level of quality is equal to none. And
their efficiency levels have a bigger impact on the apparel manufacturers. Moving in to
another supplier would be costly for them as the switching cost is high.
Customer Specified Suppliers
Some of the customers in the industry require specified suppliers in order to get the supply
items for their garments. Because of this the apparel giants cannot switch to other suppliers
and even if they do that would take a considerable amount of time.

Bargaining Power of Buyers (High)

Powerful Buyers
The buyers in the apparel industry of Sri Lanka are very powerful. 65% of the countries
apparel export market is dominated by USA, while UK and The EU accounts for 19% and
30% respectively. (Sri Lanka Apparel Exporters Association)
Low Switching Cost
For Apparel industry buyers the switching cost is considerably low as they can switch
between the suppliers of apparel. With their strong negotiation capabilities the buyers have
got a strong say in the apparel industry. But at the same time the buyers do not want to switch
between their suppliers as they do not want to share the trade secrets with a huge number of
suppliers.

Competitive Rivalry (High)

Large Number of Competitors

The competitors in the apparel industry of Sri Lanka are extremely high they include
corporate giants such as MAS Holdings, Brandix, Maliban, Jay Jay Mills Lanka etc. The
companies strive to achieve more than what the other company can. Hence the competition
between the rivals are quite high.

High Fixed Costs

Since this industry requires a very high fixed cost they tend to decrease their cost or spread it
by gradually increasing the volume. At occasions they would cut their prices making a price
war between the rivals.

Summary of Porters 5 Forces

(Source; Author)

Appendix
1. SWOT Analysis of the Apparel Industry of Sri Lanka

2. Exports by Commodities - 2013 (Cbsl.gov.lk, 2014)

3. Exchange Rate Movements (Cbsl.gov.lk, 2014)

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