newsletter FEB 2014
KZN CTC Newsletter 1st Quarter 2014 Welcome to 2014! We hope all our KZN CTC members have had a happy and refreshing December break. We speed full steam ahead into 2014 with many learning activities and resulting development opportunities in the first quarter and will be in contact with each firm to book your 2014 benchmarks. We would like to encourage you as members of the KZN CTC to participate fully in the activities and learning opportunities that you will be invited to in the coming year as we endeavour to support you in becoming best practice firms in South Africa and beyond.
About KZN CTC The KZN Clothing and Textile Cluster (KZNCTC) is a not-for-profit, public-private sector partnership designed to enhance the competitiveness of apparel, textile, footwear and affiliated manufacturers in KwaZulu-Natal. The cluster has firm-level members, ranging from machine suppliers to design/logistic houses, CMT’s, clothing manufacturers, textile mills and retailers. The member firms employ approximately 11 000 employees and our database extends to over 300 individuals representing a diversity of companies and other stakeholders in the value chain.
The structure of the cluster is such that it is governed by an executive committee comprising representation from local and provincial government, tertiary education institutions, clothing associations, other clusters or special purpose vehicles, manufacturers and retailers. The Cluster is funded through government grants, retailer donations and membership fees as well as manufacturer membership fees. The Cluster is a registered company with directors and is run as a “by industry for industry entity�, focusing on competitiveness enhancement and job creation/retention. The cluster runs programme content through three core programmes, namely World Class Manufacturing, Value Chain Alignment and Capacity Building. The KZNCTC is powered by B&M Analysts an organisation that provides high valued support services to advance industrial development.
About BMA Cluster facilitation services are provided by Benchmarking & Manufacturing Analysts SA (Pty) Ltd (B&M Analysts), an organisation that provides high value specialised support services to drive sustainable industrial development. Over the past 15 years, B&M Analysts has developed methodologies and skill sets that allow it to play a unique role in relation to supporting the competitiveness of value chains and the growth of industrial sectors. These services are tailored to support the
industrial development goals of government organisations, private sector organisations and public-private partnerships (PPP). B&M Analysts is a verified Level 2 B-BBEE contributor under the Codes of Good Practice for Broad-Based Black Economic Empowerment (B-BBEE). For more information on B&M Analysts please visit www.bmanalysts.com.
CONTENTS 4. Contents 1. About KZN CTC 2. About BMA 3. Contents 5. Recent Events 6. Feature Article: An Integrated Approach to Company Strategy Development 13. Upcoming Events 13. Industry News
Recent Events
Feature Article: An Integrated Approach to
Company Strategy Development
On 6 February 2014, Douglas Comrie, MD of B&M Analysts, delivered a presentation to executive members of the KZN CTC entitled “An Integrated Approach to Strategy Development”. This presentation was organised in response to the rapid upswing in demand for local manufactured goods and the need for manufactures to consider their strategic response. Drawing on the work of Oosthuizen, H (2007), Douglas presented a model of strategy development, which integrates three strands of information about the firm’s current strategic intent as well as the firm’s internal and external environment to arrive at a strategy (see diagram on the next page). Along with being an overarching statement about the firm’s competitive approach, the strategy also comprises a number of strategic “thrusts” which outline the firm’s tactical and operational direction in the coming years.
We now move onto discuss the three elements that feed into the development of the company strategy.
Strategic Intent A firm’s strategic intent is comprised of its mission, vision, goals and objectives and any firm strategy cannot extend beyond the confines of these fundamentals. • The firm Vision is essentially a dream. It is achievable, but not usually measurable. • The firm’s Mission asks the questions who, what needs and how? The mission is present orientated and will change over time. It includes responsibility to different stakeholders and responds to the nature of business. • Goals are broad. They should support the attainment of the mission. Financial, market and strategic goals are all appropriate. Goals should be specific and time related.
External Environmental Analysis An external environmental analysis gathers information about macro factors that have an impact on the firm as well as the nature of the industry in which the firm operates.
A PESTEL analysis helps one to understand the macro factors having an impact on the firm. PESTEL stands for “political, economic, social, technological, environmental and legal”. In the case of legal, for instance, shifts in BBB-EE legislation might have definite impact on the strategic thrusts of the firm in the coming years. In defining your industry’s characteristics, it is important to clearly define the bounds of your industry. Do you operate in the “textiles” industry, for instance, or the “apparel industry”? Once the industry is defined, Porter’s Five Forces Analysis, as represented below, helps one to understand the connections and power dynamics within an industry.
In assessing the competitive rivalry within an industry, one might conduct a competitive analysis by rating your and competitor performance against a set of key success factors as demonstrated in the table below:
The question one needs to ask oneself about information coming out of the PESTEL and Five Forces Analyses is “So What?” Which external environmental factors have an impact on my firm and determine success in the industry?
Internal Analysis Key in understanding the internal dynamics of the firm are the following: • Current strategy and past performance • Where are sales derived from? Where are profits derived from? Where are resources focused? • Value chain past and present • ‘Support activities’ including firm infrastructure, HR management, technology development and procurement • ‘Primary activities’ including inbound logistics, operations, outbound logistics, marketing and sales and service
Once again the question, “So What?” has to be asked with regard to all the above information.
Company Strategy Having determined the firm’s strategic intent and summarised key internal and external firm and industry characteristics, one has to ask the question, “Now What?” What should the strategic thrust of the company be? A SWOT analysis (standing for Strengths, Weaknesses, Opportunities and Threats) helps one to answer this question. A SWOT analysis is useful in identifying: • • • •
Resource strengths and competitive capabilities. Resource weaknesses and competitive deficiencies. Market opportunities. External threats to a company’s well-being.
The first two items in the list above are derived largely from the internal analysis, whilst the last two are derived largely from the external analysis. Tactical and operational projects or “strategic thrusts” should be set in response to the outputs of the SWOT analysis.
Along with setting strategic thrusts, strategy development should also include setting an overarching strategy statement which outlines: • • •
The broad competitive approach to be adopted – specifically will your customer focus be broad or narrow and will your focus be on cost or the unique nature of your offering. Whether the strategy should be defensive or offensive What specific action plan is most appropriate?
Implementation and Evaluation Of course, the true success of a strategy will lie in effective implementation and constant evaluation against a set of key performance indicators. Key questions that one should ask oneself from the outset however are: • •
How easily can a competitor replicate the company’s strategic advantages? Do our offerings impact uniquely on a buyer’s purchasing criteria?
It is important to note, that a company strategy is constantly evolving and should be reviewed annually, even if some strategic thrusts within the strategy have a much longer implementation time frame.
Upcoming Events
Industry News SA cottons on to fast fashion 24 JAN 2014 LISA STEYN http://mg.co.za/article/2014-01-24-00-sa-cottons-on-to-fast-fashion
Retailers wanting to cash in on trends quickly have thrown local clothing makers a lifeline. South African clothing manufacturers are benefiting from retailers’ growing demand for locally made goods as fast fashion takes root. The industry, once in a bloodbath, has also stabilised as a result of government incentives that kicked in five years ago. But locally produced clothing is not just good for job creation, it makes business sense too – so much so that retailers are sourcing almost a third of
their clothing from local suppliers to respond to trends as they happen. Gathering statistics is difficult because of the large quantity of illegally traded clothing, but an estimated 25% to 30% of locally sold clothing is manufactured
domestically, according to Michael Lawrence, executive director of the National Clothing Retail Federation of South Africa. The federation is not allowed to gather trading data as it is deemed anticompetitive, but “what we have established is that, in real rand terms, there has been an increase in purchasing from local manufacturing in the past five years”, he said. The quantity of locally produced clothing sold in South Africa has remained at the 25% to 30% mark, although it has dipped below that at times. But demand has grown – it has “gone up dramatically in the past 10 years”.
Local demand Going hand in hand with the increased demand for locally made goods is the emergence of fast fashion – the industry has to supply goods to meet the latest trends quickly to maximise sales and grow profits. Johann Baard, executive director of Apparel Manufacturers of South Africa, said: “You can only do that if you can respond to point-of-sale trends and adjust your styles and colour ranges from one day to the next … and you can only to that if you have a supply chain on your doorstep.” He said the result is high stock “turns” or inventory turnover, as demand is based on what the customer wants and is not predetermined by retailers. “And the higher stock turns you generate from that, the higher profit to your business – higher than making the call beforehand where you get the cheapest source.” Major retailers agree: local manufacturing enables a quick response to the market and trends; lead times, from design to delivery, are shorter and markdowns
are reduced. Truworths, which sources about 35% of its clothing locally, said: “The major advantage of working locally is the speed at which we can develop product with the local supplier and the shortened lead time from design to delivery.”
Increased orders Edcon has increased local and regional orders to cash in on the benefits of a quick response. For the 2013 winter season, Edcon said 32% of Edgars and discount merchandise was sourced from local and regional suppliers. The Foschini Group was one of the first major retailers to begin sourcing locally, which it did in recent years. It said the slightly higher cost of local manufacturing is offset by providing larger volumes to domestic manufacturers and increasing efficiency. Lawrence said South Africa has among the highest import duties on fabric and clothing in the world. “When a finished clothing item attracts 45% at customs, it should be possible for it to be made cheaper locally,” he said. For K-Way, a South African outdoor apparel and hiking gear brand owned by outdoor-adventure store Cape Union Mart, there were always advantages to local manufacturing but the government incentives have been a lifesaver. The company bought the K-Way factory in 1981, which made losses in early years. “[Then] the rand was quite strong and, in many of the cases, the East was a cheap
and efficient supplier. Skills and innovation in the South African industry were not that sophisticated to keep up with what we needed,” said Cape Union Mart executive chairperson Philip Krawitz.
Government incentives “Everyone tried to persuade me to close our factory. The executive director renamed it Philip’s Charity – that’s how it existed for several years.” But the government introduced incentives in 2009 that, subject to meeting the criteria and rules of the system, allowed it to offer conditional grant finance to increase competitiveness in the sector and encourage clustering. “The investment i ncentives absolutely transformed it for us,” said Krawitz. The K-Way factory could afford to buy the best machinery available and the result was a “highly profitable” and stable entity that is producing garments of “outstanding quality”. But the most important change, according to him, was moving from an adversarial relationship with the union to a co-operative one. “Productivity has little to do with labour [and] everything to do with management,” Krawitz said. K-Way has doubled its operations and the number of people it employs since 2004.
Poor implementation There has been a lot of talk of quick response for the most part, but its implementation has been thin, according to Justin Barnes of the KwaZulu-Natal and Cape clothing and textile clusters. He said the principal reason for
developing a quick-response programme was because “that’s the way the whole world is going”. The retailers in Europe that are growing rapidly are those buying large quantities from proximate suppliers in southern Europe and Turkey. Those buying from Asia are losing market share, Barnes said. “In Asia they can buy cheap, but they are buying what they think the customer wants 12 months before they buy it. The QR [quick response] model mitigates all of that risk; you only produce what the market consumes.”
Cost pressures Baard said there are mounting cost pressures overseas, particularly in the coastal south of China. Chinese private-sector wages rose by 14% in 2012 and global retailers are looking elsewhere as a result. This presents a “window of opportunity” for South Africa, said Baard. But one big competitive issue remained: duties of up to 22% on fabric, which was the single biggest input cost. Despite this, the local textile industry has continued to shrink. Garth Strachan, chief director of industrial policy at the department of trade and industry, said the incentives have worked relatively well but there are still problems because of high input costs. Local suppliers are unable to supply the fabric required at competitive rates. “While we look at saving textile companies, we are keen to ensure input costs to clothing companies are relatively competitive. “We are working with clothing manufacturers, textile companies and the unions to see if further tweaking of incentives could achieve a lower cost of inputs,” he said.
Industry pins hopes on incentive agreements South Africa launched its employment tax incentive programme this month but efforts to implement similar schemes, aimed at encouraging companies to employ young and new workers, have been running in the clothing manufacturing sector since 2011. The results have been mixed so far but employers, at least, say they point to a possible shift in approach to wage negotiations that includes productivity and performance. In 2011 a wage agreement, hailed as a landmark at the time, was struck between the South African Clothing and Textile Workers’ Union (Sactwu) and clothing companies that were party to the clothing manufacturing national bargaining council. It allowed employers to take on young or new workers at wages reduced by 30%, provided the companies could grow the number of jobs by 15%. But only 350 jobs were created, chiefly in the Western Cape, in about 700 factories nationally, and the deal was cancelled in 2012, according to Sactwu general secretary André Kriel. A wage model that had “failed so spectacularly” could not be continued, he said. But another version, which was started in September 2012, is being tried. It allows compliant companies to hire new workers at 80% of the starting wage but it has a compulsory productivity incentive that allows workers to earn the full wage, and potentially more, provided they meet productivity targets.
Too early to tell “It is much too early to say whether this will be successful to help grow jobs,” Kriel said. “In this model, we are more interested in what productivity gains can result, what the consequent competitive advantage improvements are and, yes, ultimately, whether these factors combined will result in new employment growth.” According to Apparel Manufacturers of South Africa executive director Johann Baard, the poor response to the 2011 scheme was owed to two major factors. First, there was unhappiness among workers receiving the lower wage on the same production lines as those receiving the full wage; and second, there were cases of good machinists who earned the entry-level rate yet outperformed their counterparts and who insisted after a few weeks on being paid the full wage. “When these problems emerged, they served as a disincentive for factories to take up the deal,” he said. Although the scheme’s initial results were “disappointing”, the fact that 350 more people were employed who might otherwise not have been is a positive sign, Baard said, especially in a sector in which one worker supports an estimated six dependants. Despite these lacklustre beginnings, unions are increasingly understanding that employees equate to members and that the fortunes of companies and workers are “joined at the hip”, he said.
Market punishment “If we don’t work together, the market will punish us,” he said. The industry is at a crossroads, where business as usual would hasten the downward spiral of a shrinking manufacturing footprint, he said. More innovative approaches to collective bargaining and wage negotiations, including an emphasis on productivity and increased performance at plant level was needed and these types of deals were an important step in this regard, Baard said. But the unions are being more circumspect and the uptake has again been slow. “We will take stock of the overall effect at the end of this year,” Kriel said. – Lynley Donnelly Lisa Steyn is a business reporter at the Mail & Guardian.
Your Ideas If you have any ideas for improvement or would just like to get in touch, contact: Shaun Gannon – KZN CTC Project Manager 031 764 6100 (office) 084 755 8172 (mobile) shaun@bmanalysts.com
newsletter FEB 2014