Assessing industry attractiveness of tea industry applying Michael

porter's five forces model

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 1% of the sale price as brokerage and also an additional 1% as
levied by the Bangladesh Tea Board on all producers.

In view of the upward trend in demand of tea in international as well as domestic market, one can
reasonably expect tea industry to be a prospective area of investment. However, the attractiveness
of the industry not only includes the demand of the product. It also comprises the strength of the
competition, suppliers’ power, investment warranted etc. Tea, being a major export item and a
popular drink of the country, the need for a comprehensive study on the attractiveness of this
industry as a potential area of focus can only be overemphasized. The present study is an attempt to
analyze the attractiveness of the Tea industry in Bangladesh from Producer’s (gardeners) perspective
based on Michel Porter’s (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 Porter’s 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

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change those rules in the favour 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 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)

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.

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3.0. Porter’s 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 industry of Bangladesh following factors can be
considered as the influential sources of barriers to entry:

3.1.1 Scarcity of Land

Tea is an agricultural product and the production volume, quality etc. depend on the nature, climate,
rainfall etc. (Islam, 2008). Tea is grown at only 80-300 feet above sea level. The main tea growing
areas in Bangladesh lie to the East of the Ganga-Jamuna flood plain - in the hilly areas bordering
India. Most of the tea grows in Sylhet, the North East part of the country. Tea is also grown in
Chittagong and the Chittagong hill tracts. The fact that tea is grown only in selected lands around the
country, it serves as a barrier for new entrants and thus increases the attractiveness the industry.

3.1.2 Brand Loyalty

Brand loyalty is the outcome of years of presence in the market with reputation as a supplier of
quality products which, in turn, calls for product innovation through superb R&D, momentous
promotion and continuous focus on customer choice. Brand loyalty make it difficult for new entrants
to enter into the industry and reduces threat of entry by potential competitors since they may see
the task of breaking down well established consumer preferences as too costly. (Hill & Jones, 2002).
In the Tea industry of Bangladesh, large buyers like Unilever, M.M. Ispahani, HRC etc. are found to
have loyalty to the tea of certain gardens - such as Kazi & Kazi, Madhupur, Longla, Kaliti, Nalua,
Phooltola, Daragaon, Deundi, Noyapara, Amrail, Shamshernager, Karimpur, Habibnagar, Baraoora,
Sathgaon, Luskerpur, Rajkie, Rasidpur, New Samanbagh, Rajghat etc. Over the years these gardens
have built a strong brand image because of their quality, appearance and liquor of tea. (S. Islam,
Personal Communication 14 March 2009). The loyalty of the huge buyers towards these gardens
make it difficult for new entrants to enter in the industry and thus it reduces the threat of entry by
potential competitors.

3.1.3 Economies of Scale

The cost advantage associated with large volume of output is called economies of scale. If this cost
advantage is significant, a new entrant faces the dilemma of either entering on a small scale and
suffering a significant cost disadvantage or taking a very large risk by entering on a large scale and
bearing significant costs of capital. Cost reduction through mass production of standardized tea and
spreading of fixed cost such as land, building, factory, administrative expenses, employee welfare,
etc over a large production volume of tea are the two most important sources of scale economies in
the context of tea industry in Bangladesh.

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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 don’t move or migrate in large
groups because of their lifestyle. As a result, some gardens have labour surplus and others have
labour shortage. Shortage of labour seriously hampers production and processing activities. In cases,
the gardens with scarcity of labour may hire labour from gardens with excess supply but at a higher
rate. Both labour shortage and surplus lead to increased cost of production. Gardens which have
excess labour need to incur cost for those additional labours which shrink their profitability. On the
other hand, gardens with paucity of labour also need to incur cost either in the form of disruption in
production activities or higher hiring cost.(S. Islam, Personal Communication 14 March 2009).

3.1.6 Government Regulations

Government regulations sometimes add up to barriers to entry in many industries. However, there is
no as such restriction observed in case of tea industry in Bangladesh. Rather the Government
provides incentives, such as, loan at a lower interest rate from banks, particularly from Krishi Bank to
invest in the industry. (S. Islam, Personal Communication 14 March 2009).

The table below summarizes the impact of the factors affecting the barriers to entry from the view
point of an existing firm. In the assessment column, a Plus sign (++) indicates that the factor
contributes positively to the attractiveness of the industry, while a minus sign (-) indicates that the
factor impacts negatively to the attractiveness of the industry.

3.2 Rivalry among Established Companies

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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).

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 industry’s demand condition is another determinant of the intensity of rivalry. Growing demand
of tea in the local and 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.

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

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gardens at a much higher rate than their investment. Increasing demand of tea both in local market
and international market attract the new investors to invest in tea industry and acquire garden,
which reduce the exit barriers to quit from the industry. In the period of last two governments, many
gardens were sold at rates more than double the invested amounts. However, no investor is found
to have interest about firms which require extensive rehabilitation both in fields and factories. So
these gardens find it difficult to quit from the industry. Thus based on the above discussion, the table
below summarizes the impact of the factors affecting the rivalry among established firms on the
attractiveness of the tea industry in Bangladesh.

Table # 3: Impact of Factors Associated with Rivalry among Established Companies

Factors Analysis Assessment

Competitive Bangladesh tea industry is a fragmented industry consisting of ++
Structure large number of small, Medium and big size producers. Rivalry of
the Companies is not that intense as the demand of tea is
increasing.
Low Switching Tea is difficult to differentiate which allows the buyers to switch _
Cost between producers at a low switching cost. However some
switching cost may be involved among some buyers if they want
to switch from Sterling Companies to other companies by
compromising on quality.
Product Tea is difficult to differentiate. Though Sterling Gardens ++
Differentiation differentiate their tea in terms of quality, and appearance of tea
due to trained 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.
Demand Increasing tea consumption both internally and internationally ++
Condition provide opportunity for the tea companies to earn greater
revenue without increasing the extent of rivalry.
Exit Barriers 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.

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

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When the buyers purchase in large quantities in such circumstances buyers can use their purchasing
power as leverage to bargain for 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 2019-2020.

Table. 4: Volume pf Purchase through auctions (2019-20)

3.3.2 Dependency of Suppliers on Buyers

When the suppliers depend on buyers for large percentage for its total orders buyers have more
bargaining power over suppliers. (Porter, 1990) In the tea industry, producers sell tea through the
brokers in auction. Tea brokers taste the tea and set the prices based on the several factors such as
quality, price received in previous auction by the similar tea, demand condition, production in
international market etc. Buyers need to purchase tea based on their estimated demand in the local
and international market for which they need to bid higher than their competitors. Increasing local
and international demand indicate that buyers will buy more to meet the increasing demand. So the
suppliers are less vulnerable in terms of purchase quantity of the buyers.

3.4 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 firm’s
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

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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 firm’s 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).

3.4.3 Differentiated Product and Switching Cost

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

3.4.4 Threat of Forward Integration

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).

3.5 Threat of Substitute Product

Products from one business can be replaced by products from another. If the firm produces
commodity product that cannot be differentiated easily, customers can switch away to a
competitor’s product with less consequences. On the contrary, there may be a distinct penalty for
switching if product is unique or essential for customer’s business. (AICC, 2004). The following
factors can influence the threat of substitute for the tea industry.

3.5.1 Low Switching Cost

When it is easy for a customer to switch to a substitute product at a less or no switching cost
substitute product poses greater threat (ICMBA, 1999). However, tea is a low cost product compared
to potential substitutes like coffee and soft drinks. Switching from tea to coffee for would involve
higher monetary cost and thus the threat of substitution is limited.

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3.5.2 Customers Loyalty
When customers have low level of loyalty and price is the primary motivator, the threat of
substitutes is greater (ICMBA, 1999). Being a traditional drink, loyalty of consumers towards tea in
comparison to other drinks is higher. Besides, if price is considered as the primary motivator,
consumers are likely to be more loyal to tea as it is relatively cheaper.

3.5.3 Income level of customer

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.

4.0 Summary and Conclusion

This study is conducted to determine the attractiveness of Tea Industry (producers/gardeners) in
Bangladesh based on the well-known Porter’s 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 long-term investment
which requires huge amount to invest with longer payback period. Some gardens have labour
surplus and some have labour 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) cannot force down prices in every situation. Tea buyers are also not in a position to
threaten to supply their own needs through vertical integration as a device for forcing down prices,
since all firms must purchase tea from the auction. Therefore, the bargaining power of buyers is
limited. The industry structure limits the power of suppliers. Tea producers procure their inputs and

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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 buyer’s (tea
gardeners) industry is not that important customer for the suppliers, the buyers are, in a sense,
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 become 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.

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