Tea Industry

Tea Industry
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)

Attractiveness of Tea Industry in Bangladesh:

A Projection Based on Porters Five Forces Model

Figure #1: 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.

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

Bargaining Power
of Suppliers

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.

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

Tea Industry

Figure # 2: Domestic Consumption of Tea

45
40

38.79

35

43.3

37.44

36.95

32.11

30

Quantity in 25
Million Kg 20

43.32

41.5

22.2

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.

Analysis

Competitive
Structure

25.17

15
10
5
0

1997

1998

1999

2000

2001

2002

2003

2004

2005

Years

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.

Figure # 3: Global Consumption of Tea

3,500
3,000
2,500
Consumption 2,000
in Thousand
Metric Tones 1,500

Demand
Condition

1,000

Exit Barriers

500
0

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.

1996

1998

2000

2002

2004

Years

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
The Cost and Management, January-February, 2010

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.

Industry
Attractiveness

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

Bargaining Power
of Buyers

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

Threat of Substitute
Products
Switching Cost
Buyer Inclination to
Substitutes
Price Performance
Trade off of Substitutes

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.

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

Table. 4: Volume pf Purchase through auctions (2007-08)

__

++

Buyer

Leaf (in Kg)

M.M. Ispahani Ltd.

1,10,97,350

HRC Syndicate Ltd.

74,47,990

Abul Khair Ltd.

45,98,275

Unilever Bangladesh Ltd.

26,60,625

Elite International Ltd.

17,36,570

Shaw Wallace (BD) Ltd.

10,61,170

Tetley ACI Ltd.

9,46,605

M. Ahmed Tea & Lands Co.

7,61,640

Meghna Tea Co.

7,04,495

Agricultural Marketing Co. Ltd.

6,07,255

Bara Awlia Store

1,66,925

Chittagong Tea House

1,27,270

M.M. Tea Enterprise, Ctg.

1,22,485

Shawpna Tea House

58,630

Rose Tea House

56,650

Comilla Tea Supply

47,575

Tajnur Food Products

6,875

Nizam Tea House

1,650

Source: National Brokers Ltd

3.3.2 Dependency of Suppliers on Buyers

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
37

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
23

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

Analysis

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.
14

Assessment

Scarcity of Land

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

++
__
++
++

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

Analysis

Assessment

Purchase
Volume of
Buyers

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.

++

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.

++

Vertical
Integration

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.

++

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).
The Cost and Management, January-February, 2010

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).

++

__

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.....]

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

Analysis

Assessment

[ From Page 12 ]
Dynamic and Strategic Leading Roles to be Played by CEO in the Development of Stock Exchange: A Roadmap

Scarcity of Land

Suitable land for tea production is inadequate.

In last 25 years, there were investments in
two new estates only.

++

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

SWOT and find out the status leading to corrective actions where needed and
feasible.

Brand Loyalty

As tea is an undifferentiated product the

extent of brand loyalty is limited in tea industry.

__

Innovation of New Ideas, Concepts, Philosophy,

Method and Techniques for the Overall Development
of the Exchange

Economies of Scale Cost reduction through mass production of

standardized tea, and spreading of fixed
costs over large volume of tea.

++

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.

High Investment

The tea industry demands huge amount of

investment with longer pay back period.

++

Unavailability of
Skilled workers

Some gardens have labor surplus and

some have labor shortage both of
which increase cost of production for
the existing firms.

++

Government
Regulations

No government restriction

__

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

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

24

The Cost and Management, January-February, 2010

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.

++

++

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.

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).

Tea Industry

Assessment

++

3.1.1 Scarcity of Land

The Cost and Management, January-February, 2010

Table # 3: Impact of Factors Associated with Rivalry among

Established Companies

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.

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

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.

Factors

Absolute Cost Advantages

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

Rivalry Among
Established Firms

1% of the sale price as brokerage and also an additional 1% as levied

by the Bangladesh Tea Board on all producers.

The Cost and Management, January-February, 2010

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.

Risk of Entry by Potential

Competitors

industry of Bangladesh following factors can be considered as the

influential sources of barriers to entry:

Tea Industry

Tea Industry

3.4.3 Differentiated Product and Switching Cost

3.5 Threat of Substitute Product

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.

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:

3.4.4 Threat of Forward Integration

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.

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

Analysis

Assessment

Number of
Suppliers

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.

++

Importance of the Buyer Industry As the buyers

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

__

price and have more power over buyers.

Differentiated
Product and
Switching
cost

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.

__

Threat of
Forward
Integration

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.

++

The Cost and Management, September-October, 2009

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

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

Analysis

Switching
Cost

To switch from tea to coffee or any other soft drinks

involve higher monetary cost. This makes the tea
industry more attractive

Customers
Loyalty s

Loyalty of consumers towards tea compared to other

drinks is higher because of its low cost.

Assessment
++
++

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.

++

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.

++

Taste and
Preferences
Frequency of
Consumption

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

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.)

Tea Area
(ha.)

Land Use Production

(%)
(2006)

Sterling Co.

28

39 386.02(34%)

20219.16

51%

24027525(45%) 1188

BTB

2559.39(2%)

1445.55

57%

1536480(3% )

1063

NTC

13

11279.95(10%)

5583.66

50%

4760300(9%)

852

BPLC

61

40652.05(35%)

15716.65

39%

15815700(30%) 1006

Proprietary

58

21656.00(19%)

9345.85

43%

7205119(13%)

Total

163

115553.41(100%)

52310.87

45%

53345124

1020

96.35

96.35

100

62615

615

45%

53407739(100%) 1019

Small holding
Grand Total

163

115629.76 (100%) 52407.22

Yield
(Kg./ha.)

771

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

The Cost and Management, January-February, 2010

33

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.

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.

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

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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,
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The Cost and Management, September-October, 2009