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)

References

Cbsl.gov.lk, (2014). Annual Report 2013. [online] Available at:

http://www.cbsl.gov.lk/pics_n_docs/10_pub/_docs/efr/annual_report/AR2013/English/conten

t.htm [Accessed 5 Nov. 2014].

Srilankabusiness.com, (2014). Tax & Benefits For Apparel|Garment & Clothing Industry in

Sri Lanka. [online] Available at: http://www.srilankabusiness.com/apparel/tax-and-benefits-

for-apparel.html [Accessed 7 Nov. 2014].

Ministry, I. (2014). Textile Industry Development Division. [online] Industry.gov.lk.

Available at:

http://www.industry.gov.lk/web/index.php?option=com_content&view=article&id=118&Ite

mid=171&lang=en [Accessed 7 Nov. 2014].

Masholdings.com, (2014). MAS Holdings | Change Is Courage - The number one supplier of

intimate wear and active wear including sports and swim apparel in Sri Lanka and South

Asia. Our products include bra and briefs, swim wear. [online] Available at:

http://www.masholdings.com/mas_advantage/Research_Innovation.php [Accessed 7 Nov.

2014].

Admin, A. and Admin, A. (2014). Sri Lanka Apparel Brands Association to strengthen local

industry in world arena | Adaderana Biz English | Sri Lanka Business News. [online]

Adaderana.lk. Available at: http://www.adaderana.lk/bizenglish/sri-lanka-apparel-brands-

association-to-strengthen-local-industry-in-world-arena/ [Accessed 7 Nov. 2014].

Slintec.lk, (2014). History | SLINTEC. [online] Available at: http://slintec.lk/slintec/history/

[Accessed 9 Nov. 2014].

Doingbusiness.org, (2014). Labor Market Regulation in Sri Lanka - Doing Business - World

Bank Group. [online] Available at: http://www.doingbusiness.org/data/exploreeconomies/sri-

lanka/labor-market-regulation [Accessed 9 Nov. 2014].

Gic.gov.lk, (2014). The Government Information Center. [online] Available at:

http://www.gic.gov.lk/gic/index.php?option=com_info&id=1755&task=info&lang=en

[Accessed 9 Nov. 2014].

Weerarathne, B., 2004. Textile and Apparel Industry in Sri Lanka:An Empirical Analysis in a

Globalization Setting. East-West Center, International Graduate Student Conference,

Honolulu: Hawaii, February 19-21, 2004, East-West Center:Honalulu

Kelegama, S., Wijesiri,D., 2004.Overview of the garment industry in Sri Lanka. Kelegama S,

ed. Ready made garment industry in Sri Lanka: facing the Global Challenge. Colombo:

Institute of Policy studies. p13-45.

Board of investment (BOI)Sri Lanka. 2013. Labour standards & Employment relations

Manual. Board of Investment. Colombo.