Insight to Furniture Industry in Mirpur | SMEs in Bangladesh | | Prepared For:Sheikh Morshed JahanAssociate ProfessorPrepared By:Group 1, Section B, BBA 20thMushreka Afroze Khan RH 68Adnan Faiaz Mahmud ZR 73Rezwan Arefin ZR 75S.M. Samiuzzaman ZR 77Wasif A. Khoda Rubab ZR 104Mehnaz Fatima Khan RH 107Ayman Ahmed ZR 108Sadia Afrin RH 117Ryan Fardin Sakib ZR 119Zahin Azad Moslem ZR 121Md. Samiul Hossain ZR 125Institute of Business Administration, University of DhakaApril 27, 2014 | |
Contents Introduction 3 Industry Overview 3 Furniture Industry in Mirpur 3 A Brief Introduction to SMEs 4 The Entrepreneurs 5 Current Scenario 6 Factors affecting Industry 6 Factors affecting company 6 Perception of Entrepreneurs 7 Triple Triangle Framework Analysis 8 Firm Level Factors 8 Industry Level Factors 10 Firm Level Industry 10 Sustainable Market Enterprise Competitiveness Framework 12 Grid of Institutional Mandate 14 SWOT Analysis 15 So what? 18 Conclusion 19
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Introduction
Industry Overview
Traditionally furniture industry in Bangladesh developed as cottage based industry. It is in the 90’s when the furniture industry in Bangladesh transited from cottage based industry to mechanized mass production oriented industries. The main varieties of products are wood, processed wood & Medium Density Fibre board (MDF), and laminated board, particleboard, rattan/bamboo and wrought iron furniture. Around 70% production of furniture sector of Bangladesh is home furniture and 30% is office furniture.
According the officials of Bangladesh Furniture Industries Owners Association (BFIOA), there are 28,000 furniture factories in Bangladesh (including all SMEs) among them 1,952 companies are registered member of furniture owner’s association. However, according to the baseline survey of furniture industry in Bangladesh by Dr. Ali Nesar Khan (2011), there are a total of 9,913 wooden and 2,628 non wooden furniture manufacturers in Bangladesh employing around 1,19,810 workers.There are a number of furniture clusters in Dhaka which are located at Badda, Sutrapur and Mirpur area of Dhaka. A number of large companies have their factory in Savar and Gazipur area. Number of large companies is few compared to the total number of furniture industry in Bangladesh. There are 15 large Furniture companies doing their business in the country which includes Otobi, Navana, Hatil, Partex, Brothers etc.
Furniture Industry in Mirpur
This cluster began its operation in 1991 and currently contains about 150 furniture manufacturers in the Mirpur area of Dhaka. Among these companies, there are 4 large furniture companies while the rest falling into the SME category as defined by the Ministry of Industries. All of these companies produce their own furniture either in their own shop or in a factory in another city. The furniture is then placed for sale in the same shop with the company effectively acting as both manufacturers and retailers. Most of these medium and small companies are sole proprietorships with a few being partnership.
A Brief Introduction to SMEs
Small and medium enterprises (SMEs) or small and medium-sized businesses (SMBs) are companies whose personnel numbers fall below certain limits. Small enterprises outnumber large companies by a wide margin and also employ many more people. SMEs are also said to be responsible for driving innovation and competition in many economic sectors. SMEs are recognized as engine of economic growth and employment generation for sustainable industrialization in both developed and developing countries of the world. In context of Bangladesh, there is no alternative of small and medium enterprises for rapid industrialization and national economic growth through lower capital investment and employment generation. The European definition of SME follows: "The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro."
In Bangladesh, enterprises have been categorized using the following definition (fixed investment implies exclusion of land and building, and valuation on the basis of current replacement cost only): * Small enterprise: an enterprise should be treated as small if, in today’s market prices, the replacement cost of plant, machinery and other parts/components, fixtures, support utility, and associated technical services by way of capitalized costs (of turn-key consultancy services, for example), etc, excluding land and building, were to be up to Tk. 15 million; * Medium enterprise: an enterprise would be treated as medium if, in today’s market prices, the replacement cost of plant, machinery, and other parts/components, fixtures, support utility, and associated technical services (such as turn-key consultancy), etc, excluding land and building, were to be up to Tk. 100 million;
For non-manufacturing activities (such as trading or other services), the definition: * Small enterprise: an enterprise should be treated as small if it has less than 25 workers, in full-time equivalents; * Medium enterprise: an enterprise would be treated as medium if it has between 25 and 100 employees
The SME Foundation is playing its role in helping the SME entrepreneurs including the women entrepreneurs by conducting various programs with an aim to develop the SMEs of Bangladesh. One of the major aims of SMEF is to bring the grassroots entrepreneurs into the main stream of economic development through employment generation, reduction of social discrimination and poverty alleviation.
The Entrepreneurs
The furniture businesses started in the region in various years with some being in operation since only last year. On questioning the entrepreneurs, 88% said that they had been in the furniture business prior to starting a business of their own while 70% said that their parents/grandparents had been businessmen albeit some of them not in the same industry as themselves. The number of employees varies among companies depending on their sizes with numbers ranging from as low as 5 to as high as 150. Size | No. of Employees | Avg. Monthly Expenditure | Small | 5-40 | <1lakh tk | Lower Medium | 40-100 | Between 1lakh Tk and 3lakh Tk | Medium | 100-150 | >3lakh tk |
Most of these owners did not complete college and cited the need to earn a living as the primary reason they started the business. They emphasized on the fact that they got into a business area where they knew a lot about. Consistent to this, it was found that prior knowledge in the industry was the primary motivator for these entrepreneurs to enter the furniture industry.
Current Scenario
Factors affecting Industry
According to the entrepreneurs, the furniture industry is currently going through a downturn with the whole industry experiencing low sales. They attributed this to these main causes: 1. Political Instability/Economic Downturn 2. Seasonal Demand 3. Condition of Real Estate Business
Insight:
1. Political Instability/Economic Downturn: The effect of political instability on the economy is directly affecting the furniture industry. The downturn of the economy has led to people having less disposable income and in turn being unable to create demand for the furniture. This has been cited as the primary reason by the entrepreneurs for the low sales of the industry as a whole. 2. Seasonal Demand: Demand for furniture is highest during winter during which most of the weddings take place. Adding to that, the heat of summer has restricted many customers from visiting the shops. 3. Condition of Real Estate Business: There is a simple relationship between the number of apartments bought and the demand for furniture.
Factors affecting company
All of these companies are affected by the factors that affect the industry as a whole. Beside these, the furniture companies are faring differently from each other based on other factor, as told by the entrepreneurs themselves: 1. Online Involvement 2. Keeping up with latest trends 3. Providing lower prices
Insight 1. Online Involvement: Currently, the extent to which the businesses have taken their products online has been the differentiating factor in the performance of these companies. A lot of companies are providing online catalogue of their products and a lot of customers tend to buy from these shops. This trend is causing other companies to go online as well. 2. Keeping up with latest trends: The furniture companies thrive on providing the latest trends in furniture to their customers. The haste with which these companies bring products of the latest trend dictates how many customers they can attract. 3. Providing Lower Prices: It is obvious that customers will fair in shops which will provide lower prices. This was seen prominent in the furniture industry where price variations were wide for the same product in different shops. These prices are dictated by factors such as supplier bargaining power and efficiency of labor (these will be further discussed later).
Perception of Entrepreneurs
The furniture business was seen as a highly profit oriented industry, with other business factors forgone at times to bring profit to the owners. This was evident from the survey where 70% of the entrepreneurs said making profit for the owners is the primary factor for achieving sustainable business competitiveness. Next was ‘Satisfying Customers’ which was chosen by 26% of the entrepreneur. However, 80% entrepreneurs said that satisfying customers is an important aspect of the business to achieve sustainable business competitiveness. However, ‘Serving society with the best’, ‘keeping suppliers and distributors profitable’ and ‘keeping employees happy’ turned out to be the least important factors as perceived by the entrepreneurs to achieve sustainable business competitiveness.
Most business owners said that these perceptions changed in them and the industry in a similar way over time. Previously the owners weighed the service provided to customers above most other things but currently that has significantly decreased. Almost 65% of the entrepreneurs surveyed gave a reduced rating over time to the priority they assign to satisfying customers. On the other hand, a staggering 90% of the entrepreneurs said that their perception about the importance of making more profit has grown over time. A significant statistic that was found was that these business owners said that both the industry and they are improving their perception over the importance of keeping employees happy. However, the number of employers showing this trend in the survey is small (only 57%).
Currently
Making Profit
Currently
Making Profit
10 years earlier
Customer Satifaction
10 years earlier
Customer Satifaction
Insight: The perception of the entrepreneurs that making profit is more important than satisfying customers or keeping employees happy to achieve sustainable business competitiveness might be due to their lack of proper business education. About 10 years ago, most of these companies were family owned and grew from a long line of carpenters who specialized in the trade. These carpenters made premium quality products for their customers with minimum profit. However, most of the current furniture businesses have grown in intense competition and decreasing personal involvement with customers. This might be the reason for the industry perception to shift weight from satisfying customers to making more profit for owners.
Triple Triangle Framework Analysis
The Triple Triangle Framework has been used to explain the components which need to be focused upon in order to attain sustainable competitiveness in the furniture industry. The components are divided into 3 tiers namely, Firm Level, Industry Level and Macro Level based on which the competitiveness in this industry would be analyzed.
Firm Level Factors
Culture: The work culture in this industry can be divided into 2 sectors- the work practices inside factories and the work culture at the furniture showrooms. Working conditions inside the manufacturing facilities are poor and has no possible form of regulations. The workers are put to work in hot and humid conditions and any form of safety measures for usage of heavy machinery (electrical saws, curving machines) is non-existent. As for payment, the full-time workers, mainly the master carpenters get a monthly salary of around 10,000-15,000 BDT. Apprentices get around 3,000-4,000 BDT. Apart from this all workers get 100 BDT every day for lunch. As for the sales people in the showrooms, they do not have to face many hurdles. They get sufficient holidays during the festivals, receive annual bonuses and are given a salary ranging from 8,000-10,000 BDT. They also have fixed work hours since most of the shops open up at 10 a.m. and have to close down by 9 p.m. because of the government regulations on shop hours. In most cases, they work in a relaxed environment and their daily activities circle around interacting with customers, assembling furniture parts and managing the cash registry at most.
Capacity: The major problem for the furniture manufacturers is that they don’t get skilled manpower trained in different aspects of furniture manufacturing as there is no efficient training institute in operation in the country to train manpower for the furniture sector. Most of the people working in this sector have been trained on job. Lack of properly trained manpower is hugely affecting the productivity and the quality of the overall sector. It is, however, easy to train workers in Bangladesh. Both educated and little educated workers can be easily trained if they are given necessary environment, facilities and incentives. Moreover Bangladesh has a competitive edge in terms of hand carving. This skill is scarce in other countries, so Bangladesh can tap the export market by producing at low costs and exporting to countries like USA, UK, and Middle East where the demand for hand carved furniture is very high.
Capital: Gaining access to finance in this sector has proven to be difficult. Some entrepreneurs said that commercial banks with known officials were willing to lend without any sort of hassle, however public banks are too bureaucratic in their processing. Majority of the entrepreneurs complain that access to finance is very limited and bank loans are hard to obtain. Since most of these people are carpenter-turned-owners and lack credit worthiness, the risk of giving a loan and the interest rate charged by banks is too high. Entrepreneurs often seek informal sources of finance like lending loan sharks because they perceive the banking process as too complicated.
Industry Level Factors
Competitors: Since most of the furniture stores are regionally concentrated and they have more or less similar products, competition is quite high. The problems with these small enterprises are that they lack customer service quality and salespeople with good communication skills for which they lag behind in repeat purchase. Thus in order to sustain in this competitive landscape they have to keep their furniture stock updated with the on-going trend and provide good customer service quality in terms of skilled salespeople.
Customers: With rapid globalization, the change in tastes and expectations of customers, when it comes to buying furniture, is transforming as well. Seasonal influence plays a vital role in the demand for furniture. During winter and festivals like Eid, Puja and wedding, the sales hike. Since there are many local stores adjacent to one another, the customers roam around in several shops and finally choose a product. Furniture consumers have dissonance buying behavior, which means they have high involvement in buying but knows very few differences among the brands. Moreover since the furniture industry is highly linked with the real estate industry, the recent decline in the real estate sector has adversely affected the furniture sector.
Collaborators: The collaborators mainly include the suppliers and distributors of the raw materials. The supply chain starts at the local forestry of Sundarban and Shalban. These timbres are locally processed and go into wood seasoning plants. The stores that have their own wood mills obtain these timbres, turn them into furniture and sell them. Majority of the SMEs selling however directly buy furniture or unassembled parts from local and foreign wholesalers. Previously contracts with local wholesalers were not required but that has changed. Store owners now need to invest a certain amount of money in the production process of the local manufacturers from whom they want to obtain the supplies. The suppliers of the raw materials have huge power and charge exorbitant prices since the availability of local timbre is low.
Firm Level Industry
Globalization and International Forces: Globalization helps create dialogues between people in different countries, companies and governments. Drilling down to more specifics, there are numerous upsides of globalization for suppliers, retailers and of course, consumers. Perhaps the most obvious is that access to globalization helps suppliers and retailers in terms of sourcing options. For example, suppliers now import furniture from countries like Malaysia, Myanmar and China. Consumers, meanwhile, also have the ability to access products from around the world. This wider panacea of what's available worldwide has also spiked demand for goods, which in turn increased production and helped create new jobs. Most of the raw material in this industry is now imported from foreign countries. Burmese Teak wood, imported from Myanmar is one such high quality, high priced material. Though the materials are not as expensive originally, high import duties on raw materials, ranging from 10.72% to 92.37% results the finished furniture being quite expensive.
Technology: Enterprises that mainly rely on imported furniture do not require much of technology. The furniture comes in separate parts and it only needs to be assembled to be ready for sale. However, problem lies with those producers who produce furniture domestically. In order to attain optimum productive efficiency, the technology of the manufacturing sector in this industry has to be improved. Most furniture manufacturers lack adequate knowledge about technology and still follow the traditional methods of furniture manufacturing as they are not aware of the modern methods. Surface finishing, an important aspect of quality, is done using traditional hand polish techniques over modern technology based methods. High volume production machineries are not used by the Bangladeshi micro and small-scale producers namely Planner machine, Molder machine, Panel & Band Saw machine, Mortiser, Sanding machine, Boring machine, Router, Grinding machine, Lathe, Edge bending machine etc. This is often a result of lack of capital and lack in awareness in available technology. This has an adverse impact on quality as well as the productivity.
State and Society: Most of the regulatory bodies of the furniture industry, namely BFIOA, BFEA, BFIDE, are absolutely dormant. Most of the small and medium firms are unaware of their existence let alone get any form of assistance from them. Those who do know about these do not want to get involved in these associations since they believe that this would not make their position any better. As for their responsibility towards the society, the owners are barely aware of the destructions that their business brings to the environment. They never consider how one of the key raw materials of their products, wood, results in tree-cuts, massive deforestation and soil erosion.
Owners: Most of the owners stressed on the importance of making profit even if it means reducing the quality of service to the customers or failing to keep employees happy. This is definitely not sustainable in the long term. This perception arises from the low level of education of the entrepreneurs which has narrowed down their vision in spotting effective means of carrying out sustainable business. With the business doing poorly in the recent years due to the inflation and political instability of the country, most enterprises have tightened their noose on the profit margin.
Customers: The customers in the furniture industry have a lot of bargaining power. Due to the highly competitive nature of the firms and the wide variation of prices available for similar products, customers are able to get the best value for money. The firms are realizing the need to form customer loyalty and form long lasting relationships with customers. As a result a lot of employers were seen to increasingly value customer satisfaction through warranty and free delivery. But in general for the SMEs, customer management is a skill that needs proper development. Some of the enterprises still have not properly grasped the idea of maintaining long standing profitable relationship with their customers.
Employees: Most entrepreneurs rated ‘keeping employees happy’ very low. This is primarily because of the lack of knowledge about proper management systems and the necessity to motivate human resources. Manpower in this industry is scarce and it is extremely hard to find skilled labor. Thus, it is important to hold on to the existing labor to run a sustainable business. Also the educated and skilled labors are less interested to work for SMEs and they want to work for the better paying larger organizations.
Value Chain Factors: Due to the scarcity of domestic raw materials, suppliers charge high rates for wood. The furniture manufacturers have little or no say in the prices of the timbre bought from suppliers. Local suppliers however are loyal to the firms and keep supplying to the same firm for long periods of time. With the increase in imports of raw materials, the manufacturers are still looking to build strong meaningful relationship with the importers of raw materials.
Society: There is no quality control for the products produced by the firms. Neither are there mechanisms in place to replant trees which were cut. These need to be addressed to run a sustainable business model where the businesses increase revenue through prioritizing social problems.
Grid of Institutional Mandate
Policy Advocacy: The main association of the industry is Bangladesh Furniture Industries Owners’ Association with separate regional associations. The associations are actively working toward policy advocacy. E.g. there is no tax incentive for export of furniture product at the moment. However, the industry is discussing with EPB so that tax incentive can be applied to the sector. Under the circumstances, EPB has given certain export target to this sector, which the association expects to achieve by this year. But the policies have hardly touched the SMEs, mainly because the small and medium enterprises still have not entered the international market. Improvement in the export related regulations benefit the large companies mainly (Otobi, Hatil, Navana etc) since they are the ones which are associated with Exporting furniture mainly. Proper initiatives and steps need to be taken to bolster the faltering interior market for the SMEs.
Knowledge: The association was found to be highly ineffective in creating and sharing market knowledge. Although they do provide periodic information about the availability of technology and capital machinery, otherwise they highly lack in providing useful information to the firms. Most small and medium firms try to collect information with their limited resources. Thus large organizations have a strong competitive advantage over the smaller firms since they are able to collect information regarding the local and international industry much more easily.
Business Development Services: The furniture firms severely lack business development services. There is no sustainable supply of labor in the industry. The association is not at all interested in providing mass skill development programs to improve the overall skill and attract better labor forces into the market. Proper management and marketing is non-existent. There is no effort from the association to improve these aspects of the furniture industry in Mirpur.
Networking Collaboration: Several associations together hold the ‘Bangladesh Interior Furniture and Decor Expo’ every year to promote sales of domestic furniture and attract international buyers. This has been seen by the entrepreneurs as being a massive chance to showcase their products and stimulate growth for the furniture manufacturing industry. Such initiatives should be increased from an annual basis to a quarterly basis, with regards to the blooming export industry. Also it would help highlight the smaller organizations, which are hardly showcased over the larger organizations due to the lack of marketing approaches on the smaller organizations part.
SWOT Analysis
Strengths
* Labor Cost: Labor Cost in Bangladesh is relatively lower than most other countries. Among the furniture exporting countries in Asia, the cost of labor in Bangladesh is the cheapest. This gives exporters the ability to produce at a much lower cost. * Hand Carving Skills: Bangladesh has a long-standing tradition of woodcarving; so expert wood carvers are easily available all over the country. But in other countries this skill is pretty scarce and so such furniture is very expensive. So Bangladesh has an opportunity to provide hand carved furniture at a much lower price and tap in the markets like USA, UK, Middle East, Europe etc. * Large Domestic Market: Bangladesh has at present nearly 66.65 billion BDT worth of domestic market with a growth rate of nearly 19%.
Weaknesses * Lack of local Raw Materials: Raw materials required for furniture production include timber, processed wood, hardware, upholstery fabric, fixtures, finishing chemicals etc. Majority of these raw materials have to be imported from abroad. Also the duty structure for these materials is not very advantageous to the manufacturers. So they are finding it difficult to place their products in the international market. * Low Management Skills: Management skills are very low within micro and small- scale furniture manufacturers, as most of them are uneducated. This is also a very significant weakness of the sector, which requires identifying such problems and solving them through training programs. * Lack of Proper Marketing: Marketing is usually non-existent for small and medium enterprises. The furniture companies hardly enter the marketing world which is mainly dominated by larger enterprises. * Lack of Quality Assurance: Quality issue is the main hindrance of enhancing export performance for the overall sector. The whole sector is severely lacking in quality assurance issue. The problem lies in skills of workers, production process management, and awareness on quality parameters, technology and so forth. Without solving these, regular export would be almost impossible. * Shortage of labor: Most of the labor in the furniture industry is undereducated. As the general education level improved over the years, it created a shortage of undereducated people who are willing to work in this sector due to the low levels of remuneration.
Opportunities
* Potential in Export Market: Recently Asia has become a large furniture exporter. It is because of a global trend where furniture buyers of Europe and Asia are shifting their sources to Asia for enjoying various comparative advantages. If Bangladesh can improve the product quality by utilizing its cheap labor and keeping the production costs low, furniture industry can fetch huge profits. * Global Export Facilities for Bangladesh as LDC: If quality can be matched with the global market requirements, Bangladesh would be able to enjoy Global Export Facilities as LDC under present bilateral treaties, which allows the importers from respective countries import furniture from Bangladesh paying zero or reduced import duty in their country. * Demand in Shipbuilding industry: There is a huge demand for ship furniture which are yet unmet. The furniture companies can supply these ships with furniture and claim huge amounts of profits.
Threats
* Disrupted Electricity: Frequent disruption in electricity supply is severely affecting the furniture manufacturers especially to those who are in a transition phase of moving to mechanized process from hand process. If this doesn’t get solved in the near future, the growth of the sector would be affected. * Political Instability: Political instability, violence etc. have severe adverse impact on country image and finally affect the export potentials. Besides, excessive number of strikes affects the productivity, fails to keep export shipment commitment to buyers, which finally hinders export growth. * Unfavorable tax and duty policy: Furniture export from Bangladesh is heavily dependent on imported raw materials, which have an extremely high import duty. But the present system is so difficult and time consuming that in maximum cases there’s no way to get the duty drawback. With this duty structure and drawback system, the furniture exporters of Bangladesh can hardly be competitive in export market. * Lack of Finances: The restriction in borrowing money from credible sources is proving to be a threat to the entrepreneurs as they have to go to unofficial lenders who charge very high interest. This increases their cost of capital and jeopardizes their business.
So what?
The Discrepancy: SMEs vs. Large Organizations
There is a clear cut discrepancy among the larger firms and the smaller firms in the industry. The larger firms have been doing well in the recent times compared to the smaller ones. Some of the Key reason behind these are: 1. Better Financial Backing: Larger organizations are able to finance themselves better than the smaller ones mainly because they are able to obtain bank loans more easily and they are better suited to pay them off. 2. Better Labor Pool: Due to the fact that larger organizations are able to pay their employees better, the most skilled labor forces are usually attracted to these organizations. Thus it leaves the semi-skilled and skill-less workers for the smaller organizations. Also the larger firms can afford to train their employees to keep them upto date. 3. Information Collection and Technological advantage: The larger firms are able to use their resources to collect information and use the latest technologies. These always provides them with an edge that the smaller organizations cannot fight against. 4. Marketing and Customer Base: The larger organizations are creating very strong brand images about their organization which help them attract new customers easily. Strong customer base helps them create a strong lasting relationship with their clients. 5. Export Market: Maximum of the export to the international market is carried out by the larger enterprises. This not only provides them with ways of expanding their business but it also helps them with a steady source of revenue.
Recommendations for SMEs
Small and Medium enterprises are the backbone of this country, providing many jobs and aiding in the development of Bangladesh. From the knowledge gained so far about these enterprises, a variety of problems were found that needs to be addressed. A plan has been developed which tries best to address some of the key problems. 1. Ancillary Services: The primary plan is to develop a consultancy service for these furniture firms which have very little knowledge about planned business operations. This service will aim at providing them with proper marketing tools as well as advice on improvement of management. This will cut costs and increase revenue for these firms. 2. Seasoning Plants: A seasoning plant can be set up near Mirpur to improve the quality of timbre which is used to make the furniture. This improvement in quality will take the furniture industry one step closer to realizing its potential in exports. 3. Online Marketplace: Due to the widespread availability of internet nowadays, an online marketplace for furniture will be opened. This will aim at bringing buyers and sellers together and increasing demand for the goods. 4. Tree Plantation: Land can be leased for tree plantation and these trees can then be sold to furniture manufacturing plants. This will address a massive problem of shortage of raw materials for the furniture manufacturers.
Conclusion
There is ample opportunity for growth in the furniture industry in Bangladesh. These entrepreneurs are the real heroes of the country as they create jobs and contribute to the development of the country. If we can treat these SMEs with the respect they deserve and provide them with the necessary resources, they can surely uphold the name of Bangladesh in the international stage. These SMEs are the answer to a brighter future for Bangladesh.
