IHSB BUSINEESS CARNIVAL

2023

CASE
STUDY
STRATEGY WARFARE
CAPITAL CHAOS
Karnival Knitwear
Ltd: A Case Study in the
Garment Industry

Introduction
Karnival Knitwear Ltd, a private limited company, is a prominent player in
the international garment industry. Based in a thriving industrial zone, it has
gained recognition for its quality products and timely deliveries. The
company primarily focuses on manufacturing clothing for international retail
clothing brands. Over the years, Karnival Knitwear has established itself as
a reliable and preferred supplier for various international brands, including
leading fashion labels. However, despite its success, the company faces
several challenges across its management, marketing, operations, and
finance and accounting departments.

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Company Background
Founding and Growth

Karnival Knitwear Ltd was founded in 1995 by Mr. Zarif Muztaba, a

visionary entrepreneur with a passion for textiles. The company started as
a small-scale operation with just a handful of employees and a modest
factory. However, over the years, Mr. Zarif Muztaba focused on his
manufacturing excellence, international clientele, it steadily expanded its
operations and garnered international recognition. By 2005, Karnival
Knitwear had a large, state-of-the-art manufacturing facility with hundreds
of employees.

Manufacturing Excellence

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Karnival Knitwear's success lies in its unwavering commitment to
manufacturing excellence. The company produces a wide range of
garments, including t-shirts, dresses, and outerwear. It prides itself on using
the latest technology and adhering to the highest quality standards.
Karnival Knitwear's adherence to international quality certifications has
been a key factor in attracting international brands.

International Clientele

The company's client portfolio is a testament to its capabilities. It includes

globally renowned retail clothing brands such as "Elegance Couture,"
"Urban Chic," and "VogueStyle." These brands entrust Karnival Knitwear
with their manufacturing needs due to its reputation for delivering
high-quality products within stipulated timelines. Below is a diagram about
percentage turnover sales of Karnival Knitwear in 2023 in some of their
largest markets.

Problem 1: Management Issues

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Leadership Transition

Karnival Knitwear is currently undergoing a leadership transition as Mr.

Zarif Muztaba, the founder, is looking to retire. The lack of a clear
succession plan has created uncertainty among the employees and
management. The transition is causing concern as the new leadership will
need to maintain the company's reputation and adapt to an evolving
industry. Currently, the firm employs an autocratic democratic style but
there is discussion about whether they should change to other styles like
democratic, paternalistic or laissez-faire.

Employee Morale

The garment industry is labor-intensive, and the factory workers play a

crucial role in ensuring product quality. However, low morale among
workers due to inadequate working conditions and remuneration has
become a growing issue. A disgruntled workforce can lead to production
delays and, in the long term, damage the company's reputation. It can also
lead to higher labor turnover. Currently, the business uses Taylor’s
economic man theory but there are internal discussions on whether or not it
is the right theory to follow. There are also discussions on whether or not
the firm should implement greater non-financial benefits.

Communication Problems in chain of command

Due to the tall chain of command, often information is not communicated

effectively among the business. This often causes managers and
employees to be hesitant when following a certain order, because of the
uncertainty in work conditions. There has been cases where the business
has failed to deliver products on time because of production issues.

Problem 2: Marketing Challenges

Shifting Consumer Preferences

The retail clothing industry is highly dynamic, and consumer preferences

can change rapidly. Karnival Knitwear needs to stay updated with the latest
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fashion trends and incorporate them into their designs to meet the
expectations of international brands. Failure to do so may result in a
decrease in demand. Karnival Knitwear's marketing team has the
unenviable task of keeping their products in tune with the ever-evolving
world of fashion. The market research team uses both extensive in-house
primary and secondary research from various sources. Primary research
includes interviews, surveys and questionnaires to gather in-depth
knowledge of consumer preferences. Secondary research includes
government data, sales data and internal records. The company was
initially founded on a straightforward strategy: delivering quality clothing to
international brands. However, in recent years, this model has faced
significant challenges.

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With the rise of fast fashion and changing consumer behavior driven by
e-commerce, the company's current designs have struggled to keep up.
International brands have started requesting shorter production cycles, and
the demand for trend-based garments is soaring. This presents a critical
dilemma for Karnival Knitwear. The company has been known for its
timeless, classic pieces, which require longer production lead times.
Shifting towards trendy, fast-fashion items would require significant
alterations to their operational processes, including their design,
procurement, and production cycles.

Brand Visibility

Despite Karnival Knitwear's quality products, the company struggles with

brand visibility. They lack a strong online presence and branding strategy to
market themselves directly to international consumers. This poses a
significant challenge in an industry where brand recognition is paramount.

The company has traditionally relied on its reputation for quality and
reliability to attract clients. Still, in an age of digital marketing and
e-commerce, this approach has its limitations. Karnival Knitwear's online
presence is minimal, and the company's website, while functional, is not
optimized for attracting and engaging with potential customers.

With international retail clothing brands increasingly connecting with

customers through social media and online advertising, Karnival Knitwear
is missing out on the opportunity to reach a broader market. The lack of a
robust digital marketing strategy means that they are not effectively building
brand awareness among end consumers, which could open doors to
direct-to-consumer sales and brand loyalty.

To make matters more challenging, Karnival Knitwear is not leveraging

social media platforms effectively to showcase their products. Their
competitors are excelling in this space, using influencer marketing and
engaging content to build their brands and expand their customer base.

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Problem 3: Finance and Accounting Complexities

Currency Exchange Fluctuations

Karnival Knitwear is involved in international trade, which exposes it to

currency exchange rate fluctuations. These fluctuations can affect the
company's profitability and financial stability, especially when operating on
slim profit margins.

The company primarily conducts transactions in US Dollars (USD) and

Euros (EUR) due to its international clientele. However, the currency
exchange rates between the USD and EUR have been volatile over the
past few years. The fluctuations in exchange rates can impact the
company's cost structure, revenue, and profitability.

Karnival Knitwear maintains foreign currency bank accounts to mitigate

some of the risks, but managing these accounts effectively is a complex

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task, and the company often faces issues with optimizing the timing of
currency conversions and transfers.

The company's finance team must find a way to navigate these fluctuations
while maintaining stable pricing for international clients. Additionally, they
need to find ways to protect the company's assets from unfavorable
exchange rate movements.

Cash Flow Management

With a significant portion of revenue tied up in raw material procurement

and working capital, Karnival Knitwear faces challenges in managing cash
flow efficiently. A lack of effective cash flow management may lead to
delayed payments to suppliers and difficulties in meeting financial
obligations.

Karnival Knitwear's financial stability is heavily reliant on a well-managed

cash flow. In the garment industry, significant capital is tied up in the
procurement of raw materials, and payments need to be made to suppliers
before the finished products are delivered to clients. This timing
misalignment can create cash flow issues.

Additionally, the company has a large workforce and must manage payroll
expenses. Ensuring timely payment to employees is vital for maintaining
workforce morale and productivity. Delayed salary payments can lead to
unrest among the workers, affecting production and potentially leading to
industrial disputes.

Striking a balance between ensuring sufficient cash reserves to meet these

financial obligations and managing working capital efficiently is a complex
task that the finance team at Karnival Knitwear is grappling with.

Due to internal diseconomies-of-scale the business is not able to deliver

their orders on time, which has resulted in Karnival Knitwear not being able
to benefit from trade discounts and offers.

Income Statement (Profit and Loss Statement)

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An income statement summarizes the revenues, costs, and expenses
incurred during a specific period, usually a year. It helps to assess the
company's profitability.

Karnival Knitwear Ltd Income Statement (Year Ended December 31,

2023)

Amount (BDT) Amount (BDT)

Revenues

- Sales ৳10,000,000

Cost of Goods Sold

Opening Inventory ৳4,300,000

+ Purchases ৳2,000,000

+ Cost of Production ৳3,000,000

Closing inventory (৳1,000,000)

9,300,000

Gross Profit ৳700,000

Operating Expenses

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- Marketing and Advertising ৳800,000

- Salaries and Wages ৳1,200,000

- Rent and Utilities ৳350,000

- Other Overheads ৳500,000

Operating Profit ৳(1,150,000)

Other Income/Expenses

- Interest Income ৳50,000

- Interest Expenses ৳(70,000)

Net loss ৳(1,170,000)

Balance Sheet

A balance sheet provides an overview of a company's financial position at a

specific point in time, detailing its assets, liabilities, and shareholders'
equity.

Karnival Knitwear Ltd Balance Sheet (As of December 31, 2023)

Amount (BDT) Amount (BDT)

Non-current assets

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Property, plant and equipment ৳3,500,000

Intangible assets ৳400,000

Other non-current assets ৳150,000

Current assets

Cash and cash equivalents ৳2,000,000

Accounts Receivable ৳1,500,000

Inventory ৳1,800,000

Other Current Assets ৳200,000

Total Assets ৳9,550,000

Shareholders’ Equity

Common stock ৳1,000,000

Retained earnings ৳3,600,000

Non-current liabilities

Long-Term Loans ৳2,000,000

Short-term loan ৳1,000,000

Other Non-Current Liabilities ৳300,000

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Current liabilities

Accounts payable ৳1,200,000

Other Current Liabilities ৳450,000

Total Liabilities and Equity ৳9,550,000

Cash Flow Statement

A cash flow statement provides insights into how changes in balance sheet
and income statement accounts affect cash and cash equivalents. It's
divided into three main sections: operating activities, investing activities,
and financing activities.

Karnival Knitwear Ltd Cash Flow Statement (Year Ended December

31, 2023)

Amount (BDT) Amount (BDT)

Operating Activities:

Net loss ৳(1,170,000)

Depreciation and Amortization ৳600,000

Changes in Working Capital ৳(1,500,000)

Cash Generated from Operations ৳(1,070,000)

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Interest Paid ৳(70,000)

Net Cash from Operating Activities ৳(3,210,000)

Investing Activities

Purchase of Property, Plant, and Equipment ৳(1,500,000)

Other Investing Activities ৳(250,000)

৳(1,750,000)
Net Cash Used in Investing Activities

Financing Activities

Proceeds from Long-Term Loans ৳2,000,000

Repayment of Long-Term Loans ৳(1,500,000)

Other Financing Activities ৳(350,000)

Net Cash from Financing Activities ৳150,000

Net Change in Cash and Cash Equivalents ৳(2,940,000)

Cash and Cash Equivalents, Beginning of Year ৳4,940,000

Cash and Cash Equivalents, End of Year ৳2,000,000

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The Problems identified from the case is listed below:
1. Management Issues.

2. Marketing Challenges.

3. Finance and Accounting complexities.

Each team has to prepare a presentation focusing on at least two

issues. They are expected to come up with several solutions to the
same problem to ultimately recommend a tailored solution for
Karnival Knitwear Ltd.

CORPORATE OBJECTIVE: Make profit of ৳1.5 million within next 2

financial years.

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