Assignment no.

1
Financial Statement Analysis
Topic: Porter’s five forces model of Pakistan textile industry

Submitted to: Mam Sana Saleem

Submitted by: Group
Members
Wasim Cheema 70057284
Usman Zaman 70057
Arslan Arif 70057
BBA 7th
LBS

University of Lahore (Chenab Campus)

Porters Five Forces Analysis
Porter’s Five Forces is a framework for industry analysis and business strategy development
formed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial
Organization (IO) economics to derive five forces that determine the competitive intensity and
therefore attractiveness of a market. Attractiveness in this context refers to the overall industry
profitability. An “unattractive” industry is one in which the combination of these five forces acts
to drive down overall profitability. A very unattractive industry would be one approaching “pure
competition”, in which available profits for all firms are driven down to zero.
Following is the analysis of Porters five forces for the textile industry of Pakistan.
1.Threat of the entry of new competitors: According to Michael porter Profitable markets that
yield high returns will attract new firms. This results in many new entrants, which eventually
will decrease profitability for all firms in the industry. Unless the entry of new firms can be
blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).
But as competition in this industry is not only limited to domestic competitors but it is rather
global competition. Therefore, the porter’s forces are explained in this wide perspective
An explanation of Pakistan’s textile industry in this regard is a s following
Barriers to entry:
 Capital requirements: As the entry requires high capital therefore the entry barrier in
terms of required investment is high. Without any established client portfolio, it is
difficult to 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.
 Risk of Retaliation: 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 Pakistani textile industry though, has such large population
of manufacturers that any new actors may hardly be noticed by the competition, which
minimizes the risk for retaliation.
 Patents, rights: As the textile industry is a technology oriented industry but it can’t be
regarded as a high tech industry so there are no patents and other restrictions which may
prevent new entrants or serve as a competitive advantage for one company.
 Customer Loyalty: Considering the customers in Pakistan and dress patterns, there is
not much brand loyalty. However, in markets such as European and American where
Pakistan exports its textile products, brand loyalty is a hurdle in establishing customer
base.
 Absolute cost: Overall Pakistan has a cost advantage by having cheap labor available for
the whole supply chain of the textile industry, which serves as an attraction.
2.The Bargaining Power of Customers: Global textile & clothing industry is currently pegged
at around US$ 440 bn.US and European markets dominate the global textile trade accounting
for64% of clothing and 39% of textile market. With the dismantling of quotas, global textile
trade is expected to grow to US$650 bn by 2012. Although China is likely to become the
supplier of choice, other low cost producers like India and Pakistan would also benefit as the
overseas importers would try to mitigate their risk of sourcing from only one country. 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: Pakistan is a country where we have numerous players in
textile industry. 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 Pakistan,
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 Pakistan 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.
4.The intensity of competitive rivalry: The textile manufacturing segment in Pakistan is made
out of numerous manufacturers which all are varied in terms of size and power. It is a massive
sector with hundreds 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 Pakistan’s apparel manufacturers are pressured to lower
prices in order to stay competitive with companies abroad, the overall rivalry within the industry
is thereby increasing and is forcing companies to expand their customer base in order to keep
profits up.
5.The threat of substitute products or services: 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; there’s no substitute to apparel.
Short run Profitability: for short term investment is a risky because the competition is very in
every five factors. So, if you invest in this sector you must start early and have enough time
horizon for making thing possible for future.
Long run profitability: this sector is good for long run profitability if you succeeded to learn
about this sector. You will get enough profit at the end. But its take time and effort.