Zara Porter Analysis free essay sample

The diamond approach to the competitiveness of Korea’s apparel industry Michael Porter and beyond Byoungho Jin Oklahoma State University, Oklahoma, USA, and Hwy-Chang Moon Seoul National University, Seoul, South Korea Abstract Purpose – The Korean textiles and apparel-related industry has played a major role in the country’s development; however, this sector’s competitiveness is decreasing due mainly to labor costs. As with the country’s economic development, the new sources of competitive factors need to be strategically developed and cultivated. The purpose of this study is to explore what constitutes a country’s competitiveness in the global apparel market after losing its labor competitiveness and how a country effectively achieves it. Design/methodology/approach – This study employs two competitiveness models, Porter’s diamond model and a generalized double diamond model, as a theoretical framework. Along with two theoretical models, this study employs extensive literature reviews, examples of successful firms, and four interviews with field practitioners in the Korean apparel industry. Findings – Beginning with Porter four determinants (factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry), new sources of competitive advantage factors are suggested for the evolving industry. The generalized double diamond model incorporates international activities, which may occur either within a country or outside a country. Utilizing generalized double diamond model, the future directions and solutions for the industry with the identified new competitive factors were suggested. Originality/value – Based on the models and the identification of new competitive factors, the Korean apparel industry is reviewed, and recommendations are made for its continued growth in the global marketplace. Implications pertaining to the creation of a dynamic self-reinforcing diamond system were also suggested. Keywords Competitive advantage, Textile industry, South Korea, Modelling Paper type Research paper Introduction The textiles and apparel-related industry has played a major role in the development and economic success of South Korea (Korea, hereinafter. . This important industry cluster in Korea has accounted for 41 percent of its total exports during 1970 and nearly 30 percent during the 1980 (Dickerson, 1999; Porter, 1998). Korea represents the fifth largest exporter of textile and apparel-related goods in the world, followed by China, Italy, the US and Germany (Korea Federation of Textile Industries, 2002). However, its contribution to both the Korean and inter national competitiveness is The current issue and full text archive of this journal is available at www. emeraldinsight. com/1361-2026. htm The diamond pproach 195 Journal of Fashion Marketing and Management Vol. 10 No. 2, 2006 pp. 195-208 q Emerald Group Publishing Limited 1361-2026 DOI 10. 1108/13612020610667504 decreasing due to an increase in labor costs. During 2002, while it still maintained major trade surplus and remained as the country’s largest employer, it only accounted for 10. 1 percent of the exports, as compared to 41 percent during 1970 (Korea Federation of Textile Industries, 2002). In 2000, the hourly wage of Korea was $5. 73, as compared to $0. 41 in China, nearly 14 times higher than that of China. Due to high labor costs, more clothing companies have sourced clothing for domestic consumption from lower wage countries (Korea Federation of Textile Industries, 2005). Cheap labor serves as a developing country’s competitive tool in global markets. However, as in the Korean case, cheap labor lasts for only a short time. As with the country’s economic development, the new sources of competitive factors need to be strategically developed and cultivated. Therefore, knowing what constitutes new sources of competitive advantage is critically important to set a future direction. The purpose of this study is to explore what constitutes a country’s competitiveness in the global apparel market after losing its labor competitiveness and how a country effectively achieves it. Diversity between nations typically reflects different environmental conditions, which in turn affects the strategies, directions, and challenges of a specific industry. Therefore, it is essential to understand competitive factors within a specific country. This study chose the Korean apparel industry as it has passed the first phase and is actively seeking global competitiveness. This study employs two competitiveness models, Porter’s diamond model (Porter, 1998) and a generalized double diamond model (Moon et al. , 1995, 1998), as a theoretical framework. Along with two theoretical models, this study employs extensive literature reviews, examples of successful firms, and four interviews with field practitioners in the Korean apparel industry. The four interviewees were selected from leading Korean apparel and retail companies and all were at the rank of director or higher. The interviews were conducted from August 2000 to August 2001, in Seoul, Korea. Interview questions included general firm information, the firm’s challenges/successes, and future goals. Each interview was one hour in length and taped, with the interviewee’s permission, for further analysis. This study consists of three parts. Beginning with Porter (1998) diamond model, new sources of competitive advantage factors are suggested for the evolving industry. The second part of this paper introduces the generalized double diamond model (Moon et al. , 1995, 1998) to provide future directions and solutions for the industry with the identified new competitive factors. The last section concludes how a dynamic self-reinforcing diamond can be created, and suggests future studies. The unit of analysis for this study lies in the Korean apparel industry as a whole, not individual Korean apparel firms, following Porter (1998) example. That is, the purpose of this study does not lie in generalizing strategies for every Korean apparel firm. Porter’s four determinants and new competitive advantages To investigate why nations gain the competitive advantage in particular industries, Porter (1998) conducted a four-year study of ten important trading nations and suggested â€Å"the diamond model. Porter concluded that a nation succeeds in a particular industry if it possesses a competitive advantage relative to the best worldwide competitors. His model consists of four determinants: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. As this study looks into an apparel industry it is essent ial to interpret competitive factors within this industry and to examine what constitutes new competitive factors JFMM 10,2 196 as the industry evolves. Porter (1998) competitive advantage factors are summarized, and new sources of competitive advantages are suggested. Factor conditions According to Porter (1998), factor conditions refer to the factors of production that are necessary to compete in a given industry. He grouped the factor endowment into a number of broad categories, such as human resources, physical resources, knowledge resources, capital resources and infrastructure. He further discriminated among these factors: basic factors versus advanced factors, and generalized factors versus specialized factors. A basic factor is passively inherited, such as climate, unskilled and semiskilled labor, while advanced factors include conditions a nation creates, such as highly educated personnel. He suggested that competitive advantage based on basic or generalized factors is unsophisticated and often fleeting, contending that advanced or specialized factors are necessary for more sophisticated forms of competitive advantages. The advanced or specialized factors can be created through factor-creating mechanisms such as public and private educational institutions. Nations succeed in industries where they are particularly good at creating and upgrading the needed factors. Porter (1998) also argued that the standard for what constitutes an advanced or specialized factor tends to rise continuously as the states of knowledge, science, and practice improve. Thus, we suggest that new competitive factor conditions in apparel industry lie in advanced or specialized factors. Basic factors such as cheap labor for production are no longer viable in achieving competitive advantages since those factors can be successfully secured through global sourcing. Global sourcing has been considered a critical component in achieving competitive advantages (Frear et al. , 1992). Numerous apparel firms in countries where the apparel industry is advanced, such as The Gap, Liz Claiborne, Nike, and The Limited, source labor as well as raw materials globally without owning any production facilities. Then, the most necessary new factor conditions to compete should be sought in advanced or specialized factors, such as skilled human resources (e. g. creative designers), and production and process technology that are specific to global sourcing and management (e. g. EDI, information technology). These new sources of competitive factors can be easily observed in the most advanced fashion countries. France and Italy boast about their creative designers, and the US is active in developing production and process technologies such as quick response technologies and, currently, the Demand-Activated Manufacturing Architecture (DAMA) project (Techexchange, 2005). Demand conditions This determinant refers to the nature of home-market demand for an industry’s product or service. Porter (1998) views demand conditions in terms of the size of the home market and sophisticated and demanding buyers. That is, if the size of home demand is large, firms will invest to reap economies of scale. In countries where the domestic buyers (either industrial buyers or consumers) are the world’s most sophisticated and demanding, companies are forced to meet high standards, to upgrade, and to respond to tough challenges. Porter (1998) sees a wide variety of reasons for unusually demanding needs: social norms, distribution channels, and national passions. For example, the distribution channels of Italy contribute to the higher levels of consumer sophistication (Porter, 1998). That is, in Italy, shoes, clothing, The diamond approach 197 furniture and lighting are sold in greater proportion through specialty stores than in other nations. These sophisticated retailer’s pressure Italian manufacturers to constantly introduce new models and reduce prices. Italians are also known for their sophistication about clothes, food, and fast cars, the areas in which Italy had international success. The French have a national passion for the fashion industry, and it is no surprise that this country keeps its globally competitive position. Porter (1998) acknowledges that the size of domestic demand in a particular industry may be important to national advantage where there are significant economics of scale or learning, but he considered the presence of sophisticated and demanding buyers more important. As an industry evolves, domestic consumers demand diverse and higher levels of needs, such as creative designs, services, or brands along with competitive prices. In countries where the apparel industry is less developed, functionality and availability of apparel items may be enough to satisfy consumer needs. As the industry advances, domestic buyers demand a higher level of design to suit their taste as well as various items that are needed in their diverse lifestyles (e. g. time, place, occasions). These higher levels of needs can be epitomized in a brand since it encompasses creative design, service, as well as the diverse needs of different target markets. Branding in the apparel industry is even more critical since differentiation and evaluation among items often depend on the brand of the items. Brand here does not mean just trademark. Rather, it broadly covers what branded apparel conveys: a symbolic meaning or a unique design. In the countries where the industry is globally competitive, many brands are globally recognized. For example, France possesses the LVMH group, a giant fashion group that has 60 prestigious brands including Louis Vuitton, Fendi, and Celine; Italy owns famous global brands such as Prada, Versace, Giorgio Armani, Missoni, and Benetton; England, Burberry and Hermes; Germany, Jill Sander, Hugo Boss, Escada, and Adidas; and the US, the Gap, Calvin Klein, Donna Karen and Polo Ralph Lauren. Related and supporting industries Porter (1998) asserted that the presence of supplier and related industries within a nation that are internationally competitive provides benefits such as innovation, upgrading, information flow, and shared technology development which create advantages in downstream industries. Therefore, national success in an industry is particularly likely if the nation has a competitive advantage in a number of related industries. One of Porter’s examples for this factor is the Italian ski boot industry and its close relationship with the leather industry. Because of the high quality of its leather, Italy can succeed in producing world quality ski boots. However, in today’s global apparel environments, raw materials are largely sourced globally, so having competitive supplier industries within a nation may not be as important as Porter (1998) suggests. Instead, related and supporting industries at the front-end, such as buying office, advertising, and information technology that support coordination of global sourcing or efficient management of the global supply chain, may be more important. For example, Liz Claiborne, Inc. sources from as many as 31 different countries using 240 factories. Therefore, coordinating the production and efficient communications with suppliers becomes critical. For this reason, most US apparel companies own buying offices overseas, which assist and coordinate global production and management. Hong Kong keeps its competitive position not because of factor or demand conditions but because of efficient coordination of apparel JFMM 10,2 198 manufacturing. Hong Kong serves as a business-networking center for apparel manufacturing (Lui and Chiu, 2001) with the production headquarters of large retailers like The Gap. Hong Kong’s first and largest buying office, Li Fung, was founded in 1906 and provides integrated service in what they call â€Å"a virtual factory† or â€Å"a private label manufacturing program. † This service includes assistance in product design through materials sourcing for its manufacture to the handling of logistics for delivery to the customer (George, 1998; Magretta, 2000). Firm strategy, structure, and rivalry The last determinant is firm strategy, structure, and rivalry, referring to â€Å"the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry† (Porter, 1998, p. 107). Porter contended that nations tend to succeed in industries where the management practices and modes of organization favored by the nation are well suited to the industries’ sources of competitive advantage. For example, many Italian firms are relatively smallor medium-sized firms that are privately owned and operated like extended families. Italian firms usually employ focus strategies, avoiding standardized products and operating in small niches. Consequently, Italy is an international leader in footwear and wool fabrics in which economies of scale are either modest or can be overcome through cooperation among loosely affiliated companies. Domestic rivalry is, arguably, the most important because of its powerful effect on all the other determinants. Porter took note of geographic concentration, which magnifies the power of domestic rivalry: the more localized the rivalry, the more intense the competition. One important source of competitive advantages in the apparel industry has been high quality design. Italy, France, and the USA have succeeded because of their innovative designs. However, a new and different source of competitive advantage in the apparel industry, agility, should be added along with high quality design. The apparel industry has been characterized by extensive and diverse sources of uncertainty due to fluctuating demands from fashion, and seasonal change and varying in style preferences. In response to market instability, apparel firms should react rapidly, thus â€Å"agility† becomes a means of achieving competitive advantage. Agility in the fashion business means more than just speed. Agility also means a firm can respond quickly, canceling lines that do not sell, avoiding clearance sales, and operating with small stockrooms and lower inventory holding costs (Mcguire, 2001; Vitzthum, 2001). Agility is the competitive weapon that Zara uses to achieve its success: it takes less than two weeks for a skirt to get from Zara’s design team to a store in Paris or Tokyo. Design-to-delivery is as much as 12 times faster for Zara than for its competitors. With shorter lead times, Zara can ship a greater variety of goods more frequently (twice a week compared with once every 12 weeks) than many of its competitors. Thus, those countries where their strategy, management style and domestic rivalry accommodate â€Å"high quality design with agility† will gain new international competitiveness and sustain their current positions. Table I summaries traditional and new sources of competitive advantage factors. In addition to these four determinants, Porter (1998) suggested two external determinants: chance and government. Chance events just happen; however, the nation with the most favorable â€Å"diamond† will most likely convert chance events into competitive advantage (Porter, 1998). Government can influence each of the four The diamond approach 199 determinants either positively or negatively. The complete diamond system is presented in Figure 1. Extending Porter’s determinants through internationalization As internationalization often explains national competitiveness in small countries like Korea, most of the new competitive factors can be maximized through â€Å"internationalization. † Therefore, the Korean apparel industry is further analyzed Porter (1998) determinants Traditional competitive advantage factors New competitive advantage factors Factor conditions Basic factors: such as unskilled labor and raw materials Advanced factors: skilled human resources such as creative designers. Specialized factors such as production and process echnologies that are specific to handling global sourcing and management (e. g. EDI) Demand conditions Demanding functionality and availability of apparel items Demanding higher levels of needs such as brand name and service Related and supporting industries Presence of internationally competitive back-end supplier industries (e. g. raw materials producers) Presence of internationally competitive front-end industries that efficiently coordinate global supply chain management (e. g. buying office, advertising, information technology) Firm strategy, structure, and rivalry Organization and strategy of most pparel firms are suited to industries’ source of competitive advantage: high quality design Organization and strategy of most apparel firms are suited to industries’ source of competitive advantage: high quality design plus agility Table I. Traditional versus new competitive advantage factors using Porter’s diamond model (1998) Figure 1. Porter’s diamond model JFMM 10,2 200 using Moon et al. ’s (1995, 1998) generalized double diamond model. Moon et al. (1998) argue that sustainable value added in a specific country may result from both domestically owned and foreign owned firms. In addition, they contend that as today’s sustainability often comes from geographic configuration spanning many countries, firm specific and location advantages present in several nations can contribute to a nation’s competitiveness. Therefore, these international activities, which may occur either within a country or outside, a country need to be incorporated in the explanation of national competitiveness. Figure 2 presents the generalized double diamond model, where the inside diamond represents the domestic situation and the dotted line denotes the international dimension. The difference between the international diamond and the domestic diamond represents international or multinational activities (Moon et al. , 1998). Unlike Porter, if we double the diamond using domestic plus international activities, the above identified new sources of competitive factors can be maximized through â€Å"internationalization†. Below we further analyze the Korean apparel industry with the aid of the generalized double diamond model. Korean factor conditions The competitive advantage factor of the Korean apparel industry has mainly been cheap labor. However, as wage costs rose, the country began to outsource labor and raw materials globally. Acknowledging that unskilled labor is no longer a viable factor, Korean companies all alike are eager to create change. Education is the top priority of all Korean parents and a proven proactive factor for the development of the Figure 2. The generalized double diamond The diamond approach 201 Korean economy (Chung et al. , 1997; Porter, 1998). At the prestigious Fashion Institute of Technology in New York, Koreans represent a significant portion of foreign students. The training of creative designers would be a new competitive advantage. This new factor can be achieved through internal development or internationalization. For example, the Korean apparel industry can: . Work toward higher international recognition of its designers. . Hire foreign creative designers to work for them. . Co-develop designs with foreign creative designers. Korean designers are starting to gain some recognition. Hanii Yoon and Gene Kang of Y Kei, received a rising star award in the women’s apparel category during 2002. The award is annually, given to eight brilliant, creative, and promising designers, by the Fashion Group International of the US (Winters, 2003). To gain international recognition, more Korean fashion designers present their design lines in Paris and Tokyo collections. Younghee Lee has presented her line in the Paris Pre? t a Porte collection more than 20 times for 11 years. Icinoo was invited to the Tokyo collection during 1990, and she also has presented her lines in Paris since 1993. Judging from the national zeal for education and fashion, Korea is likely to be in a favorable position to produce creative fashion designers. Another new competitive factor for this dimension is production and process technology. Generally the Korean technology infrastructure matches that of most advanced nations (Porter, 1998). Especially in the internet industry, Korea ranks the third in the world in internet, just after the US and Canada (Ipsos reid, 2002). In terms of broadband access such as cable modem, DSL, and other broadband technologies, Korea ranks first as of September of 2002; whereas, the USA ranks sixth, Japan ninth, Germany twelfth, France sixteenth, and Italy twentieth. More than 20 out of 100 Koreans have broadband internet access at home (OECD, 2002). However, for specialized production and process technologies that are specific to global sourcing and management such as EDI, the Korean apparel industry has invested less at the industrial and national levels for two reasons. First, the size of the Korean apparel industry is relatively small: only $11 billion compared to $200 billion, or approximately one twentieth of the US market. The benefits obtained through such investments may not be significant in the smaller market. Second, the land size of South Korea is half that of the Florida peninsula. Therefore, the benefits of having process technology are significantly less than a country with a large land size. Once the Korean apparel industry has bigger markets by expanding internationally, companies may recognize the importance of production and process technologies to handle large volume orders more efficiently. Korean demand conditions Korean consumers are notorious for being demanding. As one manager of a multinational company operating in Korea once confessed, â€Å"once we can satisfy Korean consumers, then we are sure of our success in other countries, too.