Industry Analysis Based on Porter’s Five Forces Model We have analyzed the Leather Footwear Industry of Bangladesh with the view point of Porter’s Five Forces Model. The analysis of the industry is given below:
3. Potential Entrants of Leather Footwear Industries (Threat of New Entrants):
A factor that indicates that the likelihood of entrants coming into an industry and creating competition for existing companies is known as threat of new entrants. It is higher if there is an excessive profit to be earned or entrance barriers are lower. In Bangladesh the leading footwear companies are Bata, Apex Adelchi, Jennys Shoes, Landmark Footwear, Leatherex Footwear, Bay Emporium Footwear, Fortuna Shoes ltd etc. among them Bata and Apex Adelchi are the organized retail manufacturer and distributor who can boast of sizeable market shares. However, the entrants of new company can still be observed, which is due to low production cost, high quality, durability and attractive design of footwear from the countries like China, Thailand, India etc. The threat of new entry into an industry depends on
barrier to entry that is present, coupled with the reaction from existing competitors that the entrant can expect.
3.1.1 Barriers to Entry: The major sources of barrier to entry are: 1. Economies of Scale: Economies of scale refers to declines in unit costs of a product asthe absolute volume produced per period increases. New entrants in the leather footwear industry cannot easily take over the existing companies as the existing companies of Bangladesh have low production cost and is enjoying large economies of scale compared to its neighboring countries. So, the new entrants have to come in a large scale and risk strong reaction from existing firms or accept a cost disadvantage. 2. Product Differentiation: Product Differentiation means that established firms have brand identification and customer loyalties, which branch from past advertising, customer service, product differences, or simply being the first in the industry. The leather footwear industries of Bangladesh such as Bata, Apex are leading the market from the very beginning which has already created their brand name and customer loyalty. Thus new entrants have to invest a lot to build their own brand name. 3. Capital Requirements: They need to invest large financial resources in order to face the barriers to entry particularly if the capital is required for risky or unrecoverable up-front advertising or R&D. Capital may be necessary not only for production facility but also for covering start-up losses. The leather footwear industries currently have lots of financial resources by which they can now even enter any new industries. Such as, Fortuna has already entered in to food industries named “Fortuna Fried Chicken (FFC).”
4. Access to Distribution Channels: It refers to the access to favorable locations, proprietary technology or proprietary production material inputs which increase the entry barriers and decrease the threat of entry. The more the existing companies have tied up with these things the more the tougher new entry will be. In this case, Bata, Apex and Bay footwear Ltd has their own secured distribution channels which are barriers for the new entrants. So in this sector the new entrants must have strong and secured distribution channels of their own products to enter and compete into the industry. 3.1.2 Cost Disadvantages of Independent of Scale: Established companies such as Bata, Apex etc. have some critical cost advantages which can be barrier for the new entrants. Those factors are given below: 1. Proprietary Product Technology: The techniques and product technology of our existing footwear companies such as Bata, Apex, Bay and Fortuna are kept proprietary through patents and secrecy. 2. Favorable Access to Raw Materials: Established existing firms have locked up their access to the most favorable raw material sources earlier than the new entrants. 3. Favorable Locations: Established companies have already cornered their favorable locations to fulfill their product value and to stay in the leading position in the market. For example, Bata has its leather footwear factory in Dhamrai from where they can communicate and manage transport cost easily. 4. Government Subsidies: Bangladesh Government has already declared the leather footwear industry as the priority sector because it is creating great opportunity and entrepreneurship, employment and investment of higher value added products. In this sector Government subsidies may give these industries long lasting advantages. However, the leather industries have to be relocated because they are polluting the environment and they are now mostly depending on the loan for investment. Considering these situations, Government has recently stopped
paying initiatives in leather industries which is increasing the barriers for the new entrants. 5. Learning or Experience Curve: Their tendency is to follow or learn through the experience curve so that it can help to decline the cost and will help to increase the production as well as export of those products. For example, cost declines due to experience have increased the footwear businesses of Bata and Apex. As a result their production has increased and also the export of leather footwear also increased. 6. Government Policy: This is the last major source of entry barriers. Government can limit or even foreclose entry into industries with such controls as licensing requirements and limits on access to raw materials which is already being done by Bangladeshi Government in Leather footwear sectors. 3.2 Threats of Substitute Products: Substitute products are those products that can perform the same function as the product of the industry. There are a lot of substitute products of leather footwear like footwear of Rexine, Plastic, Rubber, and Jute. These substitute products give a great competition to the leather footwear in many sectors. Such as, 1. Buyers’ Choice of Substitute: Bangladesh is a country of middle class people. Here, most of the people are not willing to spend a huge amount of money for footwear. We all know that leather footwear is comparatively more expensive than other substitute product like, rexine, plastic, etc. Rexine is a product which fulfills almost all the requirements of leather and it looks quite similar. Also the substitute products are providing more advantages than leather like, i)
Water-Resistance: Bangladesh is a country of heavy rainfall and leather is not suitable for this kind of situation as it soaks water and become heavy. On the other hand, rexine, plastic, rubber, etc. are water-resistant.
ii)
Comfortable: Leather is comfortable but it has a weight of its own. Compared to leather, the other substitutes are light and comfortable to wear.
iii)
Cost: Leather is very much expensive for the middle class people of Bangladesh. Thus, people are shifting to substitute products willingly which are less costly.
2. Relative Price-Performance of Substitute: It refers to the cost-effectiveness of the substitute products. Alternative products that provide overall savings to the customers, without influencing the quality of the customer’s products or services. The substitute products of leather footwear like, rexine is comparatively less costly and also by buying rexine footwear, consumers can have a taste of leather.
3. Number of Substitute Products Available in the Market: There are many types of footwear in the market but the major substitute of leather footwear is Rexine, Plastic, Rubber, Fabric, Jute, etc. Major portion of customer from leather footwear are diverting to Rexine footwear because it looks quite similar to leather but less expensive. 3.3 Intensity of Rivalry among Existing Competitors: Rivalry among existing competitors takes the familiar form of jockeying for position by using tactics like price competition, advertising battles, product introduction and increased customer service or warranties. Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position. The leather footwear industry is also thus facing such rivalry among existing competitors. Factors that increase competitive rivalry among existing firms include:
1. Competitors are Numerous but Roughly Equal in Size & Power: If there are more firms within an industry; there is an increased competition for the same customers and product resources. There is even greater competition if industry players are equal in size and power, as rivals compete for market dominance. It is seen that in the leather footwear industry, most of the companies from 109 firms are of equal size and power which increased competition for the same customers and product resources such as Bata, Apex, and Fortuna etc. 2. Industry Growth is Slow: When an industry is growing rapidly, firms are able to increased profits because of the expanding industry. When growth slows down and industries reach the maturity stage of the industry lifecycle, competition increases to gain market share. This is an example for Bata which is leading the market from a very long time. It reached to maturity stage and now competes to gain market share. Apex is also reaching the same stage gradually. 3. High Fixed or Shortage Costs: In industries where the fixed costs are high, firms will compete to gain the largest amount of market share possible to cover the fixed costs. This is what every firm is trying to reach the fixed costs and shortage its costs in the leather footwear industry. 4. Exit Barriers are high: When high exit barriers exist; firms will stay and compete in an industry longer than they would if no exit barriers existed. In leather footwear industries of Bangladesh exit barriers condition varies from company to company. For example Bata, Apex and other established existing companies cannot easily cross the barriers, considering the major sources such as specialized assets, fixed costs of exit, strategy interrelationships, emotional barriers, government and social restrictions. On the other hand exit barrier is low for those new firms entering into the industry. In addition, price competition is more likely to exist when,
1. The Products or Services Lacks Differentiation or Switching Costs: It encourages price competition to gain market share. For example, Jennys has solved the problem by using good quality imported machinery and technicians with most modern technology and made a marriage of state of art shoe making technique incorporating the famous Bangladeshi cow, goat, sheep leather and also specially imported kangaroo leather. Now Jennys has unbeatable technical and commercial team that can sense the rapid changes in eastern and western markets. As there are no quota and imported taxes for Bangladeshi shoes, Jennys has got the opportunity to offer a very competitive price which ultimately helps in switching buyers. 2. Competitors are Diverse in Strategies, Origins, Personalities & Relationships to their Parent Companies: Diverse competitors have different goals and ideas about how to compete and are continually running head-on into each other in the progress. Strategic choices that are right for one competitor may not be right for others. For example, Bay footwear ltd and Fortuna is following some new and different strategies as they are emerging and getting popularity rapidly in the leather footwear sector. 3.4 Bargaining Power of Buyers: Bargaining power of buyers mean the buyers/customers have little power to set the terms and conditions under which they will buy. Basically it is an advantage to consumers that comes from gathering together to put collective pressure on producers to lower prices or improve quality. Bargaining power of buyers in the leather footwear industry is increasing day by day as new footwear companies with optimistic future plan and changing trend and quality consciousness is increasing day by day. Individual consumers of leather products in this industry have much bargaining power in negotiating price concession or other favorable terms with seller, hence, the individual buyers mostly pay the seller’s posted price. People want durable shoes as well as modern designs, so to satisfy customers the companies have to keep up with the trend as well. In our country BATA and APEX are the main footwear industry but the substitute products are many more. These substitutes are fulfilling the same demands with some extra features. The entrance of foreign brands like Nike, Reebok does not make the scenario easier. More international buyers are moving towards Bangladesh as it has cost
competitiveness in terms of gas supply, cheap labor cost, skilled labor. As the number of sellers, both in local and international market, is growing, the bargaining power of buyers is being strong. Buyers are particularly powerful when, 1. It is Concentrated or Purchases Large Volumes Relative to Seller Sales: The leather footwear sellers are supplying footwear to a large number of consumers. The consumers who are fond of leather, always use or purchase leather footwear and also leather footwear are also use as a formal dress-up. In this scenario, the purchasers are much larger and so can exert pressure on the suppliers. 2. The products it Purchases from the Industry are standard or undifferentiated: Customer bargaining power is greatly increased when alternative suppliers are easy to find and competitors are played against each other. People can now easily evaluate which type of footwear is good for them and also they can compare prices by assessing the market or through Internet. This particularly happens when the footwear are not that much different from the others. 2. It Faces Few Switching Costs: The customers can easily switch to an alternative footwear company because they do not have to have any disadvantage for switching. Anyone wearing footwear of BATA can easily switch to APEX at their convenience. 3.5 Bargaining Power of Suppliers: Where very few products are chased by a large number of buyers there poses a bargaining power of supplier. In Bangladesh, there are many leather footwear industries. As we all know there are many steps needed to prepare the leather before manufacturing. This increases the production cost. Besides there are some other barrier like water effluent treatment plants, delay in payment by the buyers, slow process in sanctioning funds by bankers, unauthorized labor absenteeism, poor quality of equipment’s, political condition and government restrictions. Sometimes it is harder to fight back with all these problems. As a result the price of the product either increases or become stable at previous price. On the other hand
the substitute products, they do not have to face all these problems. They are independent to set the price at a lower rate and consumers found the substitute product with the same features with a lower cost, which grab the leather market customers and divert them to other substitute product market. The conditions making suppliers powerful are largely the inverse of those making buyers powerful. A supplier group is powerful if: 1. The Supplier Groups Possess a Credible Threat of Forward Integration: It provides a check against the industry’s ability to improve the terms on which it purchases. The threat of forward integration by the suppliers is high as brand identity is not a critical issue in the leather footwear industry in many cases in Bangladesh. 2. The Supplier Group’s Product is Differentiated or It has Built Up Switching Cost: Differentiation or switching costs cut off buyers’ options in playing one supplier against another. The bargaining power of supplier is moderate but the number of suppliers is huge. Moreover, the upcoming and other shoe companies buy in so much quantity that the suppliers have to satisfy them even if by increasing quality and by decreasing price. For Example Bata not only provide good quality in reasonable price but also it gives warranty for its products.
