International Products Ltd *.

Koojaroenpaisan, Rawiporn ; Peterson, Robin

CASE DESCRIPTION

The primary subject matter of this case concerns marketing.. It has a difficulty level of five (appropriate for senior level). The case is designed to be taught in one class hour and is expected to require two hours of outside preparation by the students.

CASE SYNOPSIS

This case deals with a Thailand producer and marketer of clothing products that is locked in a struggle to produce quality products efficiently and sell them in sufficient quantity, both domestically and abroad. One individual, the president of the company, is responsible for developing corporate strategy. He is aided in this process by the advice of a consultant whom he has retained. The firm has been in business for a considerable time period and has enjoyed some degree of success. However, management is currently involved in decisions regarding whether or not to employ a company (rather than a private) brand, how to control the channel of distribution, how to generate products which meet consumer desires, and possible additions to the product line. These decisions are complicated by somewhat unstable economic, social, supplier, competitive, and legal/political environments which confront the clothing industry in both Thailand and in other countries where the products are sold.

INTRODUCTION

Mr. David Pongsan, President of International Products Ltd., is a business manager from a developing country (Thailand) who has been successful in creating a profitable firm largely through his own efforts. Further, he has been able to maintain his achievements during periods of national economic turmoil. However, the problem that he must now address is how to survive and prosper in an increasingly competitive global market.

One late evening, while relaxing after work in his luxurious home, Mr. Pongsan sat at his desk and reflected on the past. He began to mentally compile his business history, focusing on how he had built up the company through continual planning and determination. Most of the major difficulties, which had arisen in previous years, seemed to be under control. However, expected future competition brought about by globalization trends would require considerable deliberation on his part. He decided to confer with his business consultant.

During the first week of March, 2002, Mr. Pongsan invited the consultant to his home to share a pot of coffee and to exchange ideas about how they could prepare company strategy for survival in an increasingly uncertain market.

At the time, Mr. Pongsan seemed to be very eager to chat about his past and present efforts. The highlights can be summed up as follows:

PAST HISTORY

This man formed the enterprise at the age of thirty, while holding only a high school education. (Since that time he has continued his studies by enrolling in a marketing bachelor's degree program based in the Philippines). Previously, he had accumulated valuable experience in the textile business as a result of working for his father for more than 20 years.

During childhood years, Mr. Pongsan had assisted his father in operating a textile manufacturing firm. In the process, he had acquired numerous skills, such as, the ability to carefully purchase a variety of needed raw material cloth products in the Sampeng Market, which is located in Bangkok, the capital and largest city in Thailand. This involvement was invaluable in developing an understanding of the functioning of a firm in this industry. Part of this experience involved making the acquaintance of export agents, who ordered childrens' clothing, nightgowns, and undergarments-the main products of his father's organization. At this time, his responsibilities included marketing, contacting exporting agents, and acquiring insights and intelligence on exporting.

In 1972, this aspiring businessman formed a company which sold finished clothing products, mainly undergarments, to his father's business for resale. He purchased 50 machines with several hundred thousand baht from a wig sewing factory in Bangkok which had gone bankrupt. (A baht traded for approximately 2.3 cents in 2002). Some of the machines were in good condition, while others were in severe need of maintenance. He was not familiar with the mechanical aspects of the machines but recognized the importance of this operation, so he began to study machine mechanics under the guidance of a business associate.

Thailand witnessed a major political revolution in 1976. This event created unprecedented difficulties for businesses, both large and small. Government regulations dictated that David's machinists must always arrive at work between 9:00-10:00 p.m. and would have to leave before an 11:00 p.m. curfew. When a machine was no longer working properly and it was impossible to obtain a machinist to repair it on time, David had to fix it himself. At times he labored on the machines between 8:00 p.m. and 5:00 a.m. in order to continue the operation of the factory.

Prices were calculated so that the company earned ten percent of the selling price to the father's business. This percentage was customary in the industry. However, a major change was necessitated when an elder brother, who was taking over the management of the father's company, announced that, from that point on, David would have to seek new customers because the father's company would no longer purchase products from him. Further, he would not be permitted to manufacture products which competed with those of the father's company. He was somewhat shaken but not overly discouraged at this chain of events, because he was aware of means of locating export target markets and had accumulated numerous machines and equipment and a reserve of over 20 million baht.

The reserve, plus funds from a sister's loan, was dedicated to the purchase of additional machines, paving the way for penetrating larger markets. His first large order came through a Thai export agent, who sold womens' and childrens' clothing to a Kuwait wholesaler, who in turn, sold to a Saudi Arabian customer. Following this, other Kuwaitee firms placed orders.

The company was named "International Products Ltd." in 1986. During that year, the firm earned 6 million baht. Over the next year, earnings rose to 40 million, well above the 20 million target that was expected. Operating profits permitted David to move his production facility from Bangkok to the Sankampaeng District in Chiang Mai-a large city in northern Thailand. The facility in Chiang Mai was formerly a silk factory.

The Sankampaeng District has distinct characteristics. It is the original and traditional garment industry area for the country. Historically, the residents were not attracted to agriculture, which is a large industry in the country. Rather, they preferred handicraft work. This helped to ensure a large and skilled source of labor. At the time, there were over 200 handicraft workers in the area, as many as were in Bangkok.

After operating his firm from the Sankampaeng district for several years, David decided to open a factory in the nearby Sanpatong District, the hometown of his wife. Initially, he installed a "training house" to train local workers in embroidery and sewing. Word of mouth among the villagers spread the message that this training would place local persons in a position to gain good jobs. The firm still utilizes the factory there, while the headquarters is situated in Bangkok.

During the time period 1989 to 1991, the company had expanded its market to Belgium, Germany, and Australia. In turn, the product line at this time was composed primarily of nightgowns but also included limited production of school track uniforms and casual clothing. At this time, the net selling volume to the Middle East decreased to about half of the company total. David came to the conclusion that this was not a stable market for his products and decided to focus on exporting quality merchandise to the European market, which was less competitive. Today, company products are sold by leading importers of nightgowns in Europe, such as, the British Home Store, Littlewoods, Mothercare, and Debenhams in England.

COMPANY OBJECTIVES AND OPERATIONS

The current objective of the company is stated as "the manufacturing and selling of quality nightgowns for women and children." Quality control standards are high, as the firm strives to produce products that are superior to those of domestic and foreign rivals and to provide reliable and fast delivery. The workforce has received extensive training and is subjected to close supervision. In turn, the firm is in compliance with Thai government quality and environmental policies, which promote efficiency in manufacturing, preservation of the natural environment, safety in the workplace, and low production costs.

ENVIRONMENTAL CLIMATE

In 2001, Thailand's economy was not prosperous. The recession in the United States, Europe, and Asia had a dampening effect on world economics and this carried over to Thailand, which witnessed a decrease in exports and an increase in Gross Domestic Product of only 1.4 percent. Consumption and investment in the country declined and competition in most industries advanced during this year. Other countries erected trade barriers which created obstacles for Thai products.

World economic predictions for 2002 were uncertain. The levels depended upon the efficiency of economic recovery measures to increase consumption and investment in dominant countries, such as the United States, Japan, and Britain. Further, the entrance of China into the World Trade Organization was expected to increase price competition in many industries, since China enjoys an advantage over many nations in manufacturing costs.

THE LEGAL ENVIRONMENT

Certain developments in the legal environment are of concern to the company. The Thailand Ministry of Commerce has adjusted textile quota regulations in order to promote and support access to free trade in the textile market. In the past, the government solicited orders from foreign importers and then allocated the orders to the various textile producers. Each producer was assigned a quota, which was the maximum amount of the government- solicited business that it could obtain. Now, however, individual firms are allowed to solicit their own orders. This policy favors companies such as International Products Limited, which has skills in finding markets and competing strategically. Other manufacturers and international textile exporters are not confident that entering free trade in the world market by cancelling the quota system will be successful for them, since they lack marketing skill.

Further, the Ministry of Commerce has appointed a committee, composed of members of the Thai Garment Industry Association, to study and develop measures for success in free market textile trade. For example, plans for personnel development, manufacturing information systems, and raw material acquisitions will be prepared and disseminated among the companies which compose the industry..

Given the importance of Western Europe to the company, changes in the political climate in that region are of major significance. The European Union (EU) is a group of countries regarded as having the highest standards in the world for the physical environment and product safety. These standards and the laws underlying them require high levels of product quality. Some of these measures have created concerns among foreign managers who export textiles to the region. Companies desiring to do this must pass manufacturing process inspections which look for violations of product safety standards. In turn, this is viewed by some exporters as a trade barrier. Further, distributors who have difficulty meeting the standards of the European Union will be confronted with higher operating costs and higher risks of failing to meet the challenge of competitors.

REACHING TARGET CONSUMERS

The major market of the company is the European Union, and approximately seventy percent of the firm's output will go to England. In turn, International Products Ltd. will sell its products to European firms, who own the brands and are responsible for distributing the products. These firms usually develop the specifications for the products.

However. Mr. Pongsan realizes that selling company products under another firm's brand poses obstacles to growth. If the European enterprises are not successful in marketing the products, revenues may not be satisfactory. Further, the European companies may seek other sources of supply, if these sources can offer lower prices. Currently, David is considering a study of the potential benefits and obstacles associated with selling its products in Europe under its own brand name and drawing up its own product specifications.

As to the internal market, Thai consumers tend to emulate foreign culture in many elements of clothing and life styles. The greatest opportunity for success appears to be offering nightgowns which are popular in Europe for the Thai market. The firm is able to do this and has numerous patterns which are suitable for women of every age. Currently, competition in the internal market is not severe.

TECHNOLOGY

The textile industry is highly dependent upon manufacturing technology in order to generate a variety of products which meet consumer needs in an efficient manner. However, buying high technology machines requires substantial capital, ranging from five to ten million baht per machine.

International Products Ltd. has become a member of the "Thai Garment Industry Association", a trade association which has developed policies to advance the competitive capabilities of the Thai garment industry in order to fully access free trade markets by 2005. In turn, the association has developed time and motion and other study suggestions which can be employed by members to increase their manufacturing efficiency.

The Thai Garment E-Market Project of Thailand.com is a project that the association has created as a portal site. Its purpose is to facilitate the export of textiles through the provision of information on markets to Thai firms. Companies that are members of the association can be reached through this portal site. The project was initiated in 2001.

COMPETITIVE SITUATION

The worldwide economic downturn which commenced in late 2001 had a dampening effect on the Thai garment export industry. Revenues declined while the number of manufacturers remained the same. This set off considerable competition in the industry, which is expected to remain intensive. Most firms have experienced increases in labor cost, because the high demand for labor has increased wages and the combined effect of this and the increased competition has been lower profits for all producers.

Information from the Thai Garment Industry Association indicates that Thai garment exportation in the first three quarters of the year was $2,392 million in U.S. dollars, which has decreased 7.5% from the previous year. The largest declines were from the European Union countries (a reduction of 12.7%) and Japan (a reduction of 6.5%).

The major competitors for International Products Ltd. are new clothing manufacturing companies located in neighboring countries, mainly Vietnam, Indonesia, Bangladesh, and especially China, which is regarded as the most important new competitor. Firms in these countries have power stemming from joint ventures with other firms which have marketing knowledge and manufacturing technology. Some of these companies, such as those in Hong Kong, South Korea, and Taiwan, have switched their production to neighboring countries in order to take advantage of lower labor costs. In turn, these costs are relatively high in Thailand, when compared with those in Vietnam, Laos, and China. However, some Thai firms are able to remain competitive because of their advanced technological standards.

While firms in other countries have lower wages than those in Thailand, this is not expected to be an insurmountable competitive advantage. Brand image, experience, skills, quality control, technology, and marketing expertise are also important. The major competitors of the future are expected to be those which have these assets, and do not rely solely on low wage rates. Fortunately for the firm, International Products Ltd. is financially stable and is well endowed with production and marketing skills, and can be expected to remain as a contender in the marketplace. The advantages which the firm enjoys have led to considerable customer loyalty. However, there are firms in neighboring countries that also have these strengths, so the going will not be easy.

There are five Thai companies manufacturing the same type of nightgowns as International Products Ltd. However, these firms concentrate their efforts on other types of garments. Overall, nightgowns make up only about five per cent of their total sales, which amounts to 2.25 million nightgowns a year. This compares with International Products Ltd. total production of four to five million nightgowns a typical year.

PRODUCT STRATEGIES

Virtually all of the product line is made up of nightgowns for women and children. In turn, nightgowns can be divided into three classes, all of which are produced and sold by the firm. All three are available in 100% woven cotton, 100% cotton single, lyra, and satin.

1. Night dress: A long loose garment with no sleeves..

2. Night shirt: A long knee-length shirt with long sleeves.

3. Kimono: A long loose garment, knee-length, long and wide sleeves, worn with a belt.

For products sold in Thailand, International Products Ltd. has licences for Disney characters, Garfield, and Pooh Bear. These characters are portrayed on the nightgowns sold by the company. The brand name which the firm is employing to build the market in Thailand is "Bed Time Story".

PRICING STRATEGIES

The company sets competitive prices, just below industry averages, thereby accepting slightly lower than average margins. This policy enables the firm to operate on a low-margin, high-turnover basis, and to benefit from economies of scale brought about by large sales volumes. The production facilities are efficient, because of advanced machinery technology and machine operator skill, allowing the firm to keep manufacturing costs at reasonably low levels and prices that are competitive with some rivals with low labor production costs.

DISTRIBUTION STRATEGIES

International Products Ltd. produces for marketers of quality garments in England and other members of the European Union, such as France and Ireland. Some of the British marketers of company products have well-known brand names, such as the British Home Store, Littlewoods, Mothercare, Debemhams, and Dunnes Store. The British wholesale distributor is a large and well-known company "Halle Model". Recently, a few marketers have considered bypassing this distributor and placing their orders directly with International Products Ltd.

In the past, the major reason for utilizing the distributor in England was that the International Products Ltd. brand name was not known in the country. However, it is believed by company management that the firm may now enjoy sufficient recognition among potential buyers to merit a break from the distributor. Further, many customers have come to the conclusion that purchasing through a distributor is no longer a necessity-direct purchase may be preferable. Hence, the company has moved in this direction and now has a sales office in England.

The transportation system has been developed and refined over a period of time. A racking system in the factory arranges the products for movements into containers, which are suitable for shipment by truck. When a truck arrives at the warehouse, the workers will make up the shipment and move them from the rack into the container, where they are assembled and the container is filled and loaded onto the truck. From this point, the shipment moves directly to the customers' warehouse receiving dock.

VISION

Management is considering the use of a company brand name on all of its offerings, both within Thailand and abroad. It has utilized the "Bed Time Story" brand in Thailand, beginning in 2001. The firm will export products to increasing numbers of countries, attempt to sell more products in Thailand, and continue to offer high product quality that meets both domestic and international standards.

MARKETING OBJECTIVES

The firm has developed marketing objectives for the foreseeable future. These are as follows:

1. To maintain and increase foreign sales volume.

2. To achieve domestic sales of not less than 50 million baht.

3. To increase domestic sales by ten percent each year.

4. To increase the gross profit margin ten percent each year.

5. To increase domestic market share ten percent each year.

6. To design at least six new nightgown patterns per year.

7. To improve the transportation system by adopting the Just in Time system in three years.

COSTS, EXPENDITURES, AND FINANCIAL STATUS

Direct labor accounts for twenty to thirty percent of the total manufacturing cost. This makes it difficult to compete with Vietnam, Laos, Bangladesh, and Pakistan companies for the low-end market. Raw materials make up approximately sixty to sixty five percent of the manufacturing cost. The remainder is manufacturing overhead. The gross profit is approximately fifteen percent of total costs and the net profit about nine percent of total costs. Selling and administrative expenses are fifteen percent of total sales. The company pays a corporate income tax of thirty percent of the net profit. In 2001 company sales were 500 million baht, ten percent above the figure for 2000.

The total assets of the company are 180 million baht. Current assets make up about sixty percent of the total and fixed assets approximately forty percent. Current liabilities are about seventy five percent of total assets and long-term liabilities about ten percent.

OPPORTUNITIES AND OBSTACLES FOR THAI PRODUCERS

Mr. Pongsan has stated an opinion that the textile industry in Thailand has been successful in the past and should continue to operate in this manner. Basically, Thai workers are generally well trained and adequately skilled and firms in the country will benefit from this resource. However, new technologies at home and abroad could lead to new product patterns, product standards, and methods of production. This being the case, producers in this country must pay strict attention to technology, in order to remain competitive in the future.

Brand loyalty for most Thai company offerings appears to be reasonably good. Mr. Pongsan believes that most customers do not have a strong desire to change their suppliers, unless such a change would be clearly needed. It appears that many Thai firms enjoy a relatively secure customer base.

An ever-present obstacle is competition from manufacturers in Vietnam, Indonesia, Bangladesh, and China, all of whom have low labor costs. Further, some of these companies gain technological advantages by joint venturing with firms from Hong Kong, Korea, and Taiwan. Thai manufacturers must remain alert to changes in the competitive strategies and tactics of these companies.

The producers in Thailand have numerous supporting industries, such as their suppliers-companies which produce various kinds of cloth, thread, decorations for clothing, and other items--which serve their firms. Companies that generate raw materials, for instance, receive virtually all of their orders from Thai enterprises. However, the raw materials producers have been reluctant to make investments in production and in marketing. This is because they perceive the Thai garment industry as occupying the maturity stage of the market, with intensive competition and pressure on profits. Over the past few years, Thai producers have seen their share of the world market slip from first to third place.

CURRENT COMPANY PROBLEMS

Mr. Pongsan and his consultant deliberated on the strategies which would be in the best interests of the firm. They agreed that the major problems of the company were as follows:

1. The company does not use its own brand name for exports at the consumer level. Distributors are the major customers of the company, so in the absence of a brand name for International Products, Ltd., they exercise considerable control over prices, terms of sale, and other marketing variables.

2. The company has very limited control over its channel of distribution. It produces nightgowns only when distributors send in an order, making production less efficient than if it engaged in continuous production.

3. The firm lacks information on target consumer behavior and major trends in the target market.

4. Major customers are interested only in purchasing nightgowns, although the company capable of producing other textile products.

5. The manufacturing process wastes more than 1.5 percent (the standard level of the industry) of the raw material inventory.

6. Manufacturing efficiency is less than that of producers in Europe and the United States, due to lesser technological development in Thailand.

MAJOR CONCERNS FOR THE PRESIDENT

There are several matters which particularly worry Mr. Ponsan and his consultant. These are as follows:

 The company must acquire raw materials from many domestic
 suppliers. However, these suppliers do not devote a great deal of
 attention to product standards. Management has conducted meetings
 with suppliers in order to stress the importance of quality
 standards and to make suggestions to the suppliers on this issue,
 but very limited progress has been achieved. The suppliers are
 unwilling to undertake major investments for quality improvement,
 due to the low profit margins and high wage costs in the industry.
 Until the suppliers raise their standards, the company will not be
 able to effectively penetrate some foreign markets, such as that in
 the United States.

 The local culture, as it affects the work force, poses certain
 problems. Employees are not as productive as management would like
 them to be. Work force absenteeism and tardiness at the plant are
 deemed excessive by management and productivity has not reached
 desired standards, despite the efforts of the company to train its
 employees.

 A final concern of management is that the firm's products are not
 sold to export consumers under its own brand name. This has limited
 progress toward the establishment of consumer oriented marketing
 programs and the movement of company products into countries which
 are currently not served.

PHILOSOPHY OF MANAGEMENT

Mr. Pongsan holds the belief that a good administrator must manage in such a manner that he creates a maximum of advantages and a minimum of damages for the firm. When negative happenings occur, the reasons for their existence should be discovered and eliminated or minimized. He feels that a good administrator should be able to solve problems quickly, make decisions without undue hesitation, and not avoid responsibility. He is of the opinion that confidence, diligence, and wisdom are needed in order to accomplish company goals. The overall objective of the firm is profit maximization in his view.

WHERE TO GO FROM HERE?

Mr. Pongsan and the consultant are in the process of deliberating what they should do next. They have discussed the possible avenues which could be explored, but have not yet settled upon any specifics. They feel that changes in marketing are necessary, but what ones? Their choices will have a major impact upon the profitability of this company in the future.

* The name of the company and the name of its president have been disguised.

Rawiporn Koojaroenpaisan, Chiang Mai University

Robin Peterson, New Mexico State University