Tea Industry

Tea Industry

Tea Industry
because of their lifestyle. As a result, some gardens have labor surplus and others have labor shortage. Shortage of labor seriously hampers production and processing activities. In cases, the gardens with scarcity of labor may hire labor from gardens with excess supply but at a higher rate. Both labor shortage and surplus lead to increased cost of production. Gardens which have excess labor need to incur cost for those additional labors which shrink their profitability. On the other hand, gardens with paucity of labor also need to incur cost either in the form of disruption in production activities or higher hiring cost. (S. Islam, Personal Communication 14 March 2009). 3.1.6 Government Regulations Government regulations sometimes add up to barriers to entry in many industries. However, there is no as such restriction observed in case of tea industry in Bangladesh. Rather the Government provides incentives, such as, loan at a lower interest rate from banks, particularly from Krishi Bank to invest in the industry. (S. Islam, Personal Communication 14 March 2009). The table below summarizes the impact of the factors affecting the barriers to entry from the view point of an existing firm. In the assessment column, a Plus sign (++) indicates that the factor contributes positively to the attractiveness of the industry, while a minus sign ( - ) indicates that the factor impacts negatively to the attractiveness of the industry. Table# 1: Impact of Factors Associated with Barriers to Entry Factors
Scarcity of Land

Tea Industry
Analysis Assessment
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Attractiveness of Tea Industry in Bangladesh: A Projection Based on Porters Five Forces Model
Mohammed Rafiqul Alam, FCMA* Dr. M. Tahlil Azim, FCMA** Eshita Islam***
Abstract : This study is conducted to determine the attractiveness of Tea Industry (producers/gardeners) in Bangladesh based on the well-known Porters Five Forces Model of Industry Analysis (1990). It includes identifying the barriers to entry, understanding the rivalry among established companies, determining the bargaining power of buyers, verifying the bargaining power of suppliers, and tracing the substitute products and their threats. An analysis of five forces it is observed that the threats from all five forces in the tea industry of Bangladesh are rather weak hence making it an attractive industry for long-term investment and financing, for both local and foreign investors.

work enables firms to develop strategies to deal with them. These strategies, in turn, can help to find unique ways to satisfy their customers in order to develop a competitive advantage over industry rivals. (Porter, 1990)

industry of Bangladesh following factors can be considered as the influential sources of barriers to entry: 3.1.1 Scarcity of Land Tea is an agricultural product and the production volume, quality etc. depend on the nature, climate, rainfall etc. (Islam, 2008). Tea is grown at only 80-300 feet above sea level. The main tea growing areas in Bangladesh lie to the East of the Ganga-Jamuna flood plain - in the hilly areas bordering India. Most of the tea grows in Sylhet, the North East part of the country. Tea is also grown in Chittagong and the Chittagong hill tracts. The fact that tea is grown only in selected lands around the country, it serves as a barrier for new entrants and thus increases the attractiveness the industry. 3.1.2 Brand Loyalty Brand loyalty is the outcome of years of presence in the market with reputation as a supplier of quality products which, in turn, calls for product innovation through superb R&D, momentous promotion and continuous focus on customer choice. Brand loyalty make it difficult for new entrants to enter into the industry and reduces threat of entry by potential competitors since they may see the task of breaking down well established consumer preferences as too costly. (Hill & Jones, 2002). In the Tea industry of Bangladesh, large buyers like Unilever, M.M. Ispahani, HRC etc. are found to have loyalty to the tea of certain gardens - such as Kazi & Kazi, Madhupur, Longla, Kaliti, Nalua, Phooltola, Daragaon, Deundi, Noyapara, Amrail, Shamshernager, Karimpur, Habibnagar, Baraoora, Sathgaon, Luskerpur, Rajkie, Rasidpur, New Samanbagh, Rajghat etc. Over the years these gardens have built a strong brand image because of their quality, appearance and liquor of tea. (S. Islam, Personal Communication 14 March 2009). The loyalty of the huge buyers towards these gardens make it difficult for new entrants to enter in the industry and thus it reduces the threat of entry by potential competitors. 3.1.3 Economies of Scale The cost advantage associated with large volume of output is called economies of scale. If this cost advantage is significant, a new entrant faces the dilemma of either entering on a small scale and suffering a significant cost disadvantage or taking a very large risk by entering on a large scale and bearing significant costs of capital. Cost reduction through mass production of standardized tea and spreading of fixed cost such as land, building, factory, administrative expenses, employee welfare, etc over a large production volume of tea are the two most important sources of scale economies in the context of tea industry in Bangladesh. 3.1.4 High Investment Entering the tea industry in Bangladesh requires a high initial investment, often costing as much as Tk.10,00,000,00 /-. It also takes a significant amount of time before firms start seeing this money pay off in terms of profit. Hence, the investment into the tea industry is a long-term investment and this serves as an immense deterrent for new entrants. (S. Islam, Personal Communication 14 March 2009). 3.1.5 Unavailability of Skilled Workers Tea garden workers are from different ethnic origin and belong to certain ethnic groups. Many of them came from India and settled here. They live in groups and dont move or migrate in large groups
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Figure #1: Porters Five Forces Model

Risk of Entry by Potential Competitors

Absolute Cost Advantages Learning Curve Economies of Scale Access to Inputs Govt. Regulations Capital Requirements Brand Identity Switching Costs

Bargaining Power of Suppliers

Supplier Concentration Importance of Volume Differentiation of Inputs Switching Cost of Firms Presence of Substitute Inputs

Bargaining Power of Buyers

Buyer Volume Access to Information Brand Identity Price Sensitivity Threat of Backward Integration

Industry Attractiveness

Suitable land for tea production is inadequate. In last 25 years, there were investments in two new estates only. Brand Loyalty As tea is an undifferentiated product the extent of brand loyalty is limited in tea industry. Economies of Scale Cost reduction through mass production of standardized tea, and spreading of fixed costs over large volume of tea. High Investment The tea industry demands huge amount of investment with longer pay back period. Unavailability of Some gardens have labor surplus and Skilled workers some have labor shortage both of which increase cost of production for the existing firms. Government No government restriction Regulations

because of their lifestyle. As a result, some gardens have labor surplus and others have labor shortage. Shortage of labor seriously hampers production and processing activities. In cases, the gardens with scarcity of labor may hire labor from gardens with excess supply but at a higher rate. Both labor shortage and surplus lead to increased cost of production. Gardens which have excess labor need to incur cost for those additional labors which shrink their profitability. On the other hand, gardens with paucity of labor also need to incur cost either in the form of disruption in production activities or higher hiring cost. (S. Islam, Personal Communication 14 March 2009). 3.1.6 Government Regulations Government regulations sometimes add up to barriers to entry in many industries. However, there is no as such restriction observed in case of tea industry in Bangladesh. Rather the Government provides incentives, such as, loan at a lower interest rate from banks, particularly from Krishi Bank to invest in the industry. (S. Islam, Personal Communication 14 March 2009). The table below summarizes the impact of the factors affecting the barriers to entry from the view point of an existing firm. In the assessment column, a Plus sign (++) indicates that the factor contributes positively to the attractiveness of the industry, while a minus sign (__) indicates that the factor impacts negatively to the attractiveness of the industry. Table# 1: Impact of Factors Associated with Barriers to Entry Factors
Scarcity of Land

industry consists of large number of small and medium size firms none of which is in a position to dominate the industry while a consolidated industry consists of small number of large firms. Most commodity type products which are hard to differentiate results in fragmented industries that eventually depress industry profits due to price war among the rivals. (Hill & Jones, 2002). Bangladesh tea industry is a fragmented industry consists of five categories of producers such as, (i) Sterling Companies, (ii) National Tea Company (NTC), (iii) Bangladesh Tea Board (BTB), (iv) Bangladeshi Private Limited Companies (BPLC) and (v) Bangladeshi Proprietors. Following chart indicates the size of land and production volume of large, medium and small size producers in the tea industry of Bangladesh. Table #2: Ownership-wise Land and Yield
Category of No.of Tea Grant Area (ha.) Management Estates Tea (ha.) Sterling Co. BTB NTC BPLC Proprietary Total Small holding Grand Total 163 28 3 13 61 58 163 39 386.02(34%) 2559.39(2%) 11279.95(10%) 40652.05(35%) 21656.00(19%) 115553.41(100%) 96.35 Tea Area (ha.) 20219.16 1445.55 5583.66 15716.65 9345.85 52310.87 96.35 Land Use Production (%) (2006) 51% 57% 50% 39% 43% 45% 100 45% 1536480(3% ) 4760300(9%) 7205119(13%) 53345124 62615 Yield (Kg./ha.) 1063 852 771 1020 615 24027525(45%) 1188

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1. 0 Introduction
Tea is the most popular drink in Bangladesh. It is also one of the major exportable commodities of the country. In the form of employment generation, earning foreign exchange and balancing trade deficit it plays an important role in the economy. The industry employs about 1,50,000 ethnic people (with about 5,00,000 dependents) living in far flung areas of the country. A total of 163 tea gardens produce approximately 60 million kilograms of tea annually (Bangladesh tea Board). Roughly about 25% all tea produced in the country are exported annually to countries like Pakistan, UAE, Kazakhstan, Uzbekistan, India, Poland, Russia, Iran, and UK, while the rest are sold in the local market. The total export earning is around 20 million US dollars. While the share of total foreign currency earning from tea has dropped substantially in recent years, the demand for tea in the local market has gone up significantly in the same time period. In last 10 years demand of tea had been increased quite sharply in local market taking the tea consumption to 48 million kg per year. On an average per capita consumption of tea in Bangladesh is about 390gms. The major players in the production and marketing process of tea are the Producing firms (gardeners), the tea brokers and organized buyers like, tea traders and exporters who buy tea in the form of an industrial good. Tea is plucked from the gardens and processed in the manufacturers' factories. Chests and packages of tea are then sent to the brokers who then use their in-house tea tasters to grade the tea, determine its quality and set a base price. Brokers also arrange to send tea leaf samples to potential buyers to help them determine their bidding price. The actual buying and selling takes place at an auction arranged by the brokers typically once in a week beginning early May of every year and spanning until the March of the following year by which the entire crop is disposed off. Tea brokers charges
* Mr. Mohammed Rafiqul Alam, MBA, FCMA , Adjunct Faculty, School of Business, Independent University, Bangladesh, Chittagong Campus, Mobile: 01711-300366, E-mail: ramctg@yahoo.com ** Dr. M. Tahlil Azim, Associate Professor, School of Business, Independent University, Bangladesh, Chittagong Campus, Mobile: 01711-300366, E-mail: tahlilazim@yahoo.com. *** Eshita Islam, Student, MBA Program, School of Business, Chittagong Campus, Independent University, Bangladesh 22

1% of the sale price as brokerage and also an additional 1% as levied by the Bangladesh Tea Board on all producers. In view of the upward trend in demand of tea in international as well as domestic market, one can reasonably expect tea industry to be a prospective area of investment. However, the attractiveness of the industry not only includes the demand of the product. It also comprises the strength of the competition, suppliers power, investment warranted etc. Tea, being a major export item and a popular drink of the country, the need for a comprehensive study on the attractiveness of this industry as a potential area of focus can only be overemphasized. The present study is an attempt to analyze the attractiveness of the Tea industry in Bangladesh from Producers (gardeners) perspective based on Michel Porters (1990) well-known Five Forces Model. Both primary and secondary data sources are used to conduct the study. Primary data sources include interviews and informal conversation with the industry experts. Secondary data are collected from relevant literature such as the Annual Report of Brokers Houses, Annual Bulletin of International Tea Committee, and other publications of Bangladesh Tea Board.

Rivalry Among Established Firms

Industry Concentration Industry Growth Exit Barriers Demand Condition Product Differentiation Switching Costs

Threat of Substitute Products

Switching Cost Buyer Inclination to Substitutes Price Performance Trade off of Substitutes

3.2 Rivalry among Established Companies Weak rivalry amongst the established firms offers an opportunity to raise prices and earn greater profits. On the contrary, strong rivalry leads to price wars and higher cost of doing business which ultimately limit the profitability and growth prospect of the firm. The following factors are seemed to have contribution in determining the extent of rivalry in Bangladesh Tea Industry. [ To be continued.....]

15815700(30%) 1006

115629.76 (100%) 52407.22

53407739(100%) 1019

2. 0 Porters Five Forces Model

The first fundamental determinant of a firm's profitability is industry attractiveness. Competitive strategy must grow out of a sophisticated understanding of the rules of competition that determine an industry's attractiveness. The ultimate aim of competitive strategy is to cope with and, ideally, to change those rules in the favor of firm. According to Michel Porter (1990), in any industry, whether it is domestic or international or it produces a product or a service, the rules of competition are embodied in five competitive forces: the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors (Porter, 1990) Industry attractiveness is the presence or absence of threats exhibited by each of the industry forces. The greater the threat posed by an industry force, the less attractive the industry becomes. Firms should attempt to seek out markets in which the threats are low and the attractiveness is high. Understanding what industry forces are at
The Cost and Management, January-February, 2010

The five forces determine industry profitability because they influence the prices, costs, and required investment of firms in an industry - the elements of return on investment. Buyer power influences the prices that firms can charge. The power of buyers can also influence cost and investment, because powerful buyers demand costly service. The bargaining power of suppliers determines the costs of raw materials and other inputs. The intensity of rivalry influences prices as well as the costs of competing in areas such as production, product development, and advertising. The threat of entry places a limit on prices, and shapes the investment required to deter entrants. In any particular industry, not all of the five forces will be equally important and the particular structural factors that are important will differ. Every industry is unique and has its own unique structure. The five forces framework allows a firm to see through the complexity and pinpoint those factors that are critical to competition in its industry.

Analysis
Suitable land for tea production is inadequate. In last 25 years, there were investments in two new estates only. As tea is an undifferentiated product the extent of brand loyalty is limited in tea industry.

Assessment
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Source Bangladesh Tea Board (www.teaboard.gov.bd) Based on the production and the size of the estates, Sterling Company gardens and Private Limited Company gardens are the large gardens; Proprietary and National Tea Company gardens are medium sized while North Bengal and Tea Boards gardens are the small firms in Bangladesh tea industry. 3.2.2 Low Switching Cost Low switching cost increases the rivalry in the industry as the buyers can switch between the suppliers. Tea is difficult to differentiate which allows the buyers to switch between producers at a low switching cost. However, sometimes switching from the existing suppliers may tax the buyers in terms of problems in timely delivery, payment etc. The reputed buyers like Unilever (Bangladesh) Ltd, M.M. Ispahani Ltd. and HRC usually purchase the produce of Sterling Company gardens for their appearance, liquor, and quality. If these companies want to switch between suppliers they may have to compromise with the quality. However, the switching costs are very fractional as the quality of packaged tea marketed by the buyers depends on the blending of different types of tea from different gardens rather than the raw tea. 3.2.3 Product Differentiation Tea is a commodity type product which is difficult to differentiate. However, certain gardens, particularly, the Sterling Companies could manage to differentiate their tea in terms of quality, appearance and liquor owing to their state of the art technology, better inputs, skilled workers and professional management. As a result, Sterling gardens get higher prices for their produce in comparison to others. 3.2.4 Demand Condition An industrys demand condition is another determinant of the intensity of rivalry. Growing demand of tea in the local and
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[ From Page 12 ] Dynamic and Strategic Leading Roles to be Played by CEO in the Development of Stock Exchange: A Roadmap
Opportunities l Web based trading l Diversified products and markets such as derivatives, OTC market, Bond market etc., l Higher economic growth l More macro stability l Structural reforms notably privatization of SOEs l Specific policy changes notably domestic financial reform and capital account liberalization l Increasing focus on alternative investment l Attract more fund management companies l Attracting foreign companies for a listing at CSE l Growing interest of international investors l Increasing growth potential l Improving infrastructure such as deep sea l Product and service expansion Threats l Uncertainty about future political situation l Country economic slowdown l Global meltdown l Lack of investors confidence l New entrant such as national stock exchange l High interest rate offered by financial institutions l If nothing changes, growth potential will be restricted l Rapid technological changes l Failure to Copt with changing scenario It is to be noted that the elements under SWOT analysis may not be fully appropriate in all the cases. It is just a broad guideline. Concerned authorities will review the elements and select appropriate ones for identifying the 24 SWOT and find out the status leading to corrective actions where needed and feasible.

Brand Loyalty

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Innovation of New Ideas, Concepts, Philosophy, Method and Techniques for the Overall Development of the Exchange
After analysing SWOT, CEO will take every step to evolve innovative ideas through research, discussions, or imparting knowledge from field or global sources for implementation by which he will be able to utilize strengths, removing weaknesses, capitalize opportunities and minimize the risk of threats.

Economies of Scale Cost reduction through mass production of standardized tea, and spreading of fixed costs over large volume of tea. High Investment Unavailability of Skilled workers The tea industry demands huge amount of investment with longer pay back period. Some gardens have labor surplus and some have labor shortage both of which increase cost of production for the existing firms. No government restriction

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Conclusion
From the forgoing discussions it may be undoubtedly concluded that that CEO has a vital role to play in dynamic and stable growth of stock exchange. In this context, this concept paper provides ideas and understanding of the existing system, identifying the existing weaknesses and capability to handle these problems effectively. Innovation of sophisticated ideas for materialising SWOT is a continuous leading role to be played by the CEO of the stock exchange. These roles can be illustrated by a simple example. For instance, stock exchange may have so many lighting points of which some are not in operation, some are inactive and inadequate and some are found unnecessary. As a CEO, he has to take own initiative to operationalise all the lighting feasible points in order to overcome existing shortfall. Again, suppose stock exchange is automated vehicle, economy is a superhighway, CEO as a driver runs the vehicle as speedier as superhighway allows him. So he should be dynamic, updated at the time and should have vision, mission and objective in line with the vision, mission, and objectives of stock exchange. All these with result in stable and dynamic growth of stock exchange having a positive impact on sustainable economic development of a country like Bangladesh. r The Cost and Management, January-February, 2010 Government Regulations

3.0. Porters Five Forces Model in the context of Tea Industry in Bangladesh
The following sections discuss the status of each of the five forces with relation to the tea industry (Producers/gardeners) in Bangladesh so as to determine the industry's attractiveness. 3. 1 Barriers to Entry If the threat from new entrants into the product category is high, the attractiveness of the industry diminishes. On the other hand, if the risk of new entry is low the firms in the industry can take the advantage to raise price and earn greater profits. The strength of the competitive force of potential rivals is largely a function of the height of barriers to entry that make it costly for firms to enter an industry. High entry barriers keep potential competitors out of an industry even when industry returns are high (Hill & Jones, 2002). In case of tea
The Cost and Management, January-February, 2010

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3.2 Rivalry among Established Companies Weak rivalry amongst the established firms offers an opportunity to raise prices and earn greater profits. On the contrary, strong rivalry leads to price wars and higher cost of doing business which ultimately limit the profitability and growth prospect of the firm. The following factors are seemed to have contribution in determining the extent of rivalry in Bangladesh Tea Industry. 3.2.1 Competitive Structure Competitive Structure refers to the number and size of distribution of companies in an industry. Structure vary from fragmented to consolidated and have different implications for rivalry. A fragmented
The Cost and Management, January-February, 2010

Tea Industry
international market diminishes competition by providing greater room for expansion. Growing demands tend to reduce rivalry among the producers for all companies can sell their produce without taking market share away from others. Tea drinking in Bangladesh which started during the last century is now getting momentum with the pace of urbanization and improvement in the standard of living. The internal consumption of tea in Bangladesh is rising steadily. Figure # 2 and 3 illustrate the trend of domestic consumption of tea from 19972005 and global consumption of tea from 1996 to 2005 respectively. Figure # 2: Domestic Consumption of Tea
45 40 35 30 32.11 25.17 38.79 36.95 41.5 37.44 43.32 43.3

Tea Industry
price reduction. (Hill & Jones, 2002) Even though many different companies purchase tea from auctions in large volume to meet their local and export demands, the auction system restricts the buyers from using their purchasing power for price reduction. The following table indicates the purchase volume of some large and small buyers in 2007-2008. Table. 4: Volume pf Purchase through auctions (2007-08)
Buyer M.M. Ispahani Ltd. HRC Syndicate Ltd. Abul Khair Ltd. Unilever Bangladesh Ltd. Elite International Ltd. Shaw Wallace (BD) Ltd. Tetley ACI Ltd. M. Ahmed Tea & Lands Co. Meghna Tea Co. Agricultural Marketing Co. Ltd. Bara Awlia Store Chittagong Tea House M.M. Tea Enterprise, Ctg. Shawpna Tea House Rose Tea House Leaf (in Kg) 1,10,97,350 74,47,990 45,98,275 26,60,625 17,36,570 10,61,170 9,46,605 7,61,640 7,04,495 6,07,255 1,66,925 1,27,270 1,22,485 58,630 56,650 47,575 6,875 1,650 Vertical Integration

Tea Industry
The table below summarizes the impact of the factors affecting the bargaining power of buyers on the attractiveness of the Bangladesh tea industry. Table # 5: Impact of Factors Associated with the Bargaining Power of Buyers Factors Purchase Volume of Buyers
Analysis Different companies purchase tea from auction in large volume to meet their local and export demand, but due to the auction system buyers are not in a position to use their purchasing power for price reduction.

Tea Industry
Frequency of tea consumption is also high among the consumers compared to other substitutes. The higher cost and nature of other drinks make them expensive to be consumed as frequently as tea is. This limits the threat of substitutes and create opportunities for the tea industry to earn greater revenue. The table below summarizes the impact of the factors associated with the threat of substitute products on the attractiveness of the Bangladesh tea industry. incapable of influencing them to reduce price - which results in suppliers having more power over buyers. Switching cost is typically low for the buyers to switch between suppliers, but there are some suppliers of inputs who have differentiated their products in terms of quality and brand image. Suppliers of tea industry are not in a position to integrate forward and compete with the firms that are involved in tea production which limits the threat of forward integration by the suppliers. To switch from tea to coffee or any other soft drinks involve higher monetary cost which confines threat of substitutes. Degree of loyalty towards tea is higher than other substitutes because of its low cost, and image of traditional drink of the region. The people of Bangladesh became habituated to tea and for a large part of population it has became almost a necessity. Frequency of tea drinking is also high among the consumers in comparison to other substitutes. So threat from substitutes are also very limited. Thus, an analysis of five forces of an Industry, as identified by Michel Porter (1990), it can be concluded that the threats from all five forces in the tea industry of Bangladesh are rather weak hence making it an attractive industry for long-term investment and financing, for both local and foreign investors. r

both in local market and international market attract the new investors to invest in tea industry and acquire garden, which reduce the exit barriers to quit from the industry. In the period of last two governments, many gardens were sold at rates more than double the invested amounts. However, no investor is found to have interest about firms which require extensive rehabilitation both in fields and factories. So these gardens find it difficult to quit from the industry. Thus based on the above discussion, the table below summarizes the impact of the factors affecting the rivalry among established firms on the attractiveness of the tea industry in Bangladesh. Table # 3: Impact of Factors Associated with Rivalry among Established Companies Factors Competitive Structure
Analysis Bangladesh tea industry is a fragmented industry consisting of large number of small, medium and big size producers. Rivalry of the companies is not that intense as the demand of tea is increasing.

3.4.3 Differentiated Product and Switching Cost Suppliers offering differentiated products point to high switching cost for buyers. In such cases firms (buyers) depend on the suppliers and consequently suppliers have the benefit of having more bargaining power over buyers. (Porter, 1990). Buyers in the tea industry in Bangladesh can switch between suppliers easily as there are large number of suppliers of inputs. The extent of differentiation is also limited. But there are some suppliers of inputs such as fertilizers, insecticides, pesticides, and medicines who could differentiate their products in terms of quality and brand image. Switching from those suppliers to others involve high switching cost in the form of poorer quality and inconsistency of delivery. These suppliers have more bargaining power over buyers. Examples of these suppliers include Chattral Hardware Store, General Hardware Stores, S.A. Enterprise, Hossain Enterprise (general hardware), KAFCO, Azim and Co. (fertilizers), Syngenta Ltd (insecticides and pesticides), TSA Enterprise Ltd (Machinery) etc. 3.4.4 Threat of Forward Integration

3.5 Threat of Substitute Product Products from one business can be replaced by products from another. If the firm produces commodity product that cannot be differentiated easily, customers can switch away to a competitors product with less consequences. On the contrary, there may be a distinct penalty for switching if product is unique or essential for customers business. (AICC, 2004). The following factors can influence the threat of substitute for the tea industry: 3.5.1 Low Switching Cost When it is easy for a customer to switch to a substitute product at a less or no switching cost substitute product poses greater threat (ICMBA, 1999). However, tea is a low cost product compared to potential substitutes like coffee and soft drinks. Switching from tea to coffee for would involve higher monetary cost and thus the threat of substitution is limited. 3.5.2 Customers Loyalty When customers have low level of loyalty and price is the primary motivator, the threat of substitutes is greater (ICMBA, 1999). Being a traditional drink, loyalty of consumers towards tea in comparison to other drinks is higher. Besides, if price is considered as the primary motivator, consumers are likely to be more loyal to tea as it is relatively cheaper. 3.5.3 Income level of customers Consumers of all income groups cannot consume the other substitutes like coffee, soft drinks etc. due to the higher monetary cost. Higher income segment of the market may be habituated or loyal to other substitutes, but tea has its everlasting appeal to the mass people. 3.5.4 Taste and Preferences Changing the taste and habit of customers is very difficult. Over time, the people of Bangladesh became habituated to tea and for a large population it has become a necessity. This is very difficult to change and hence the threat from substitutes is lower. 3.5.5 Frequency of Consumption Table 7: Impact of Factors associated with the Threat of Substitute Products Factors Switching Cost __
Customers Loyalty s Analysis To switch from tea to coffee or any other soft drinks involve higher monetary cost. This makes the tea industry more attractive Loyalty of consumers towards tea compared to other drinks is higher because of its low cost.

Assessment ++

4.0 Summary and Conclusion

This study is conducted to determine the attractiveness of Tea Industry (producers/gardeners) in Bangladesh based on the wellknown Porters Five Forces Model of Industry Analysis. The study includes identifying the barriers to entry, understanding the rivalry among established companies, determining the bargaining power of buyers, verifying the bargaining power of suppliers, and tracing the substitute products and their threats. As far as the barriers to entry in Tea industry is concerned, it is found that suitable land for tea production in Bangladesh is inadequate. In last 25 years, there were investments only in two new estates. Extent of brand loyalty of buyers is limited in tea industry though buyers are loyal to Sterling Companies due to better quality tea. Existing tea gardens have cost advantages - especially Sterling gardens, due to skilled or trained workforce, high reinvestment in gardens, and efficient management system. Investment in tea industry is a longterm investment which requires huge amount to invest with longer pay back period. Some gardens have labor surplus and some have labor shortages which also increase cost of production. Thus threat from new entrants is rather low in Bangladesh Tea Industry. Bangladesh tea industry is a fragmented industry in which certain companies, most notably the Sterling Companies, are in a position to dominate. Rivalries among the companies are not that intense as the demand for tea is increasing. Tea is difficult to differentiate, but there is some switching cost involved among some buyers if they want to switch from Sterling Companies' tea to other companies by compromising on quality. The Sterling gardens get higher prices for their crops compared to others. Increasing tea consumption provides opportunity for the tea companies to earn greater revenue without increasing the extent of rivalry. So rivalry among the producers is not that intense. Buyers are not in a position to dominate the tea industry as buyers need to compete in the auction to purchase tea by bidding for higher price than their competitors. Due to the auction system, buyers cannot use their purchasing power for price reduction. The tea producers have less dependency on buyers for large percentage of total orders. Even though, in auction, buyers can switch orders between firms (gardens) at a low cost but they (buyers) can not force down prices in every situation. Tea buyers are also not in a position to threaten to supply their own needs through vertical integration as a device for forcing down prices, since all firms must purchase tea from the auction. Therefore, the bargaining power of buyers is limited. The industry structure limits the power of suppliers. Tea producers procure their inputs and logistics from suppliers through competitive bidding. The tea producers have alternatives in selecting the suppliers, and the rivalry of the supply industry limits the power of suppliers. As the buyers (tea gardeners) industry is not that important customer for the suppliers, the buyers are, in a sense,

Assessment ++ __

Quantity in 25 Million Kg 20
15 10 5 0

22.2

Producers sell tea through the brokers in auction and buyers need to purchase tea based on their Dependency of estimated demand in the local and international Suppliers on market. Buyers need to bid in the auction more than their competitors. So suppliers Buyers dependency on buyers for large percentage of total sales is less. Tea buyers are not in a position to threat to supply their own needs through vertical integration as a device for forcing down prices because due to the auction system all companies should have to purchase tea from the auctions. So if any company invests in garden and start tea production still it needs to purchase from auction.

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1997

1998

1999

2000

2001 Years

2002

2003

2004

2005

Tea is difficult to differentiate which allows the buyers to switch between producers at a low Low Switching switching cost. However some switching cost may be involved among some buyers if they Cost want to switch from Sterling Companies to other companies by compromising on quality. Tea is difficult to differentiate. Though Sterling Gardens differentiate their tea in terms of Product quality, and appearance of tea due to trained Differentiation and experienced workers, professional management and superior process that give the competitive advantage over other producers. So Sterling gardens get higher prices for their produce compared to others.

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Figure # 3: Global Consumption of Tea

3,500 3,000 2,500 Consumption 2,000 in Thousand Metric Tones 1,500 1,000 500 0 1996 1998 2000 2002 2004

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Comilla Tea Supply Tajnur Food Products Nizam Tea House Source: National Brokers Ltd

3.4 The Bargaining Power of Suppliers Suppliers can be viewed as threat when they are able to either force up the price that a company must pay for its inputs or reduce the quality of the inputs they supply, thereby diminish the firms profitability. On the other hand, when suppliers are weak, the firm enjoys an opportunity to force down prices and demand higher input quality. As with buyers, the ability of suppliers to make demands on a firm depends on their power relative to that of the buyer. (Hill & Jones, 2002). The following factors affect the bargaining power of suppliers. 3.4.1 Number of Suppliers When the inputs required are available only to a small number of suppliers then the suppliers have more bargaining power and are in a position to raise price and/or offer less quality of product or poor services. With respect to the tea industry, the suppliers are fragmented and consist of large number of small, medium and big size suppliers of different inputs including hardware, lubricants, fertilizers, insecticides, pesticides, medicines, C.I. Sheets, petroleum, tractors, bearings, machinery and spares, MS rod and sheets etc. So the industry structure limits the power of suppliers and almost every area they have to compete based on aggressive bidding. 3.4.2 Importance of the Buyer Industry When the firms industry is not important customer to the suppliers, the suppliers are less vulnerable as regard to the sales to the buyers which, in turn, implies that the suppliers will have little incentives to reduce price or improve quality (Porter, 1990). While the tea industry is important, the suppliers are not dependent solely on it. As Bangladesh is an agricultural country, there is huge market other than tea gardens. So, in line with this reasoning, the suppliers of tea industry in Bangladesh seem to have more power over buyers (gardeners).
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Suppliers are more powerful when they are in a position to integrate forward to industry and compete directly with the firm (Hill & Jones, 2002). However, as far as the suppliers of tea industry in Bangladesh is concerned, it is implied that they are not in a position to integrate forward and compete with the firms that are involved in tea production as it is a different sector and requires different expertise. Again there are some other factors such as scarcity of land, higher investment, unavailability of skilled workers, and economies of scale achieved by the existing producers etc. limit the threat of forward integration by the suppliers. Thus forward integration is not be a threat for the buyers (gardeners). Based on the above facts, the impact of factors associated with the bargaining power of suppliers on the attractiveness of the Bangladesh tea industry can be summarized as below: Table 6: Impact of Factors associated with the Bargaining Power of Suppliers Factors
Number of Suppliers Analysis The industry structure limits the power of suppliers. According to the requirements of the gardens, suppliers give price quotation and the tea producers give requisition to the suppliers that are price competitive.

Bibliography
AICC (Agricultural Innovation & Commercialization Center). (2004). Industry Analysis: The Five Forces. Retrieved September 2004, from the Agricultural Innovation & Commercialization Center retrieved in June 2009 from www.agecon.purdue.edu/planner. Bangladesh Tea Board. (2001). Strategic Plan for Marketing of Bangladesh Tea, Chittagong Bangladesh Tea Board. (2006). Various Information and Statistics on Tea Industry. Retrieved June, 2009, from www.teaboard.gov.bd Hill, W. L., Charles, and Jones, R., G.. (2002). Strategic Management. New York: Houghton Mifflin Company:. ICMBA (Internet Center for Management and Business Administration.) (1999). Porters Five Forces: A Model For Industry Analysis. Retrieved July 2008, from www.QuickMBA.com International Tea committee. (2006). Annual Bulletin of Statistics. Lehmann, R. D. and Winer, S., R. (2005). Product Management. New York: McGraw Hill. National Brokers Ltd. (2006). Annual Report. Chittagong Porter, E., Michael (1990). The Competitive Advantage of Nations, New York: Free Press

Demand Condition Exit Barriers

Increasing tea consumption both internally and internationally provide opportunity for the tea companies to earn greater revenue without increasing the extent of rivalry. High fixed cost or investment in plant, garden or equipment constitutes the barriers to exit from the tea industry in Bangladesh. But as there is scarcity of land for tea production, firms are in a position to sell off their gardens at a high price.

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3.3.2 Dependency of Suppliers on Buyers When the suppliers depend on buyers for large percentage for its total orders buyers have more bargaining power over suppliers. (Porter, 1990) In the tea industry, producers sell tea through the brokers in auction. Tea brokers taste the tea and set the prices based on the several factors such as quality, price received in previous auction by the similar tea, demand condition, production in international market etc. Buyers need to purchase tea based on their estimated demand in the local and international market for which they need to bid higher than their competitors. Increasing local and international demand indicate that buyers will buy more to meet the increasing demand. So the suppliers are less vulnerable in terms of purchase quantity of the buyers. 3.3.3 Vertical Integration When the buyers can use the threat to supply their own needs through vertical integration as a mechanism for forcing down prices then the buyers have more bargaining power (Hill & Jones, 2002). Tea buyers are not in a position to threat to vertical integration to force down prices due to the auction system. All companies have to purchase tea from the auction. Even if any buyer has its own tea production, they need to purchase from auction. Only James Finlay Bangladesh Ltd and Duncan Brothers are allowed to collect their tea from their own gardens based on their local and export demand the rest of the tea of their gardens are sent to the brokers to sell through the auction.
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Both the charts show an upward trend which indicate that the consumption of tea in domestic as well as global market has been increasing which consecutively, speaks for less rivalry among the competitors. 3.2.5 Exit Barriers Exit barriers are economic, strategic and emotional factors that induce firms in an industry to continue even in the face of low return. If exit barriers are high companies may turn out to be locked into an unprofitable industry. (Hill & Jones, 2002) In the tea industry of Bangladesh, high fixed cost or higher investment in plant, garden, equipment etc could constitute the barriers to exit for any firm. However, as there is scarcity of land for tea production, companies are in a position to sell off their gardens at a much higher rate than their investment. Increasing demand of tea
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3.3 The Bargaining Power of Buyers The buyers may be the customers, individual or organizations who ultimately consume the products or they may also be the organizations that purchase for resell to the end users. Buyers can be viewed as a competitive threat when they are in a position to demand lower prices and/or better services which, in turn increase the costs of doing business. On the other hand, when the buyers are weak, a firm can raise its prices and earn greater profits, thus making the industry more attractive. (Porter, 1990) In case of tea industry in Bangladesh, the companies that purchase tea from auctions to market it either in local or export market can be considered as buyers. The following factors can influence the bargaining power of buyers for the case of Bangladesh Tea Industry. 3.3.1 Purchase Volume of Buyers When the buyers purchase in large quantities in such circumstances buyers can use their purchasing power as leverage to bargain for
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Dependency of industry is not that important, the suppliers Suppliers on buyers are unable to influence them to reduce Buyers price. Suppliers have little incentives to reduce

Importance of the Buyer Industry As the buyers

price and have more power over buyers.

Differentiated Product and Switching cost Threat of Forward Integration

Extent of differentiation is limited - which indicates switching cost is less for the buyers. But there are some suppliers of inputs who differentiated their products in terms quality and brand image and these suppliers naturally have more power over buyers. But the intense competition in the supply industry limits their power. Suppliers of tea industry are not in a position to integrate forward and compete with the companies that are involved in tea production, as it is a different sector and require different expertise. Thus forward integration will not be a threat for the buyers.

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All income group consumers cant consume the other Income level of substitutes due to higher monetary cost. Hence, the customers degree of loyalty towards tea is greater and threat of substitute is very marginal. Taste and Preferences Frequency of Consumption People of Bangladesh gradually became habituated to tea and for a large population it has became almost a necessity much more so than other substitute products. Frequency of tea drinking is also high among the consumers in comparison to other substitutes. The higher cost and nature of other drinks limit threat of substitutes.

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