Kandidatexamen i företagsekonomi Textilhögskolan 2014-09-05 Rapportnr 2014.1.12 Istanbul Apparel Manufac- turing Strategy Simon Robert Bo Daniel Campeau Simon Robert Bo Daniel Campeau - A resource-based case study Acknowledgements To my dear girlfriend, Gülşah Sezen for supporting and giving me joy at all times. Seni sevi- yorum herzaman! I am thankful to SIDA for granting me this Minor Field Studies Scholarship as well as to my supervisor Martin Behre and to all Behre Babies. Simon Campeau September 2014 “Whoever works is in fashion must be ready and prepared for change. Fashion is about change, it never stays the same.” - Planning Manager, L3 “We work day and night in this business!” - CEO, M, a Saturday afternoon following intense discussions with employees before com- mencing the interview. “China is a big super market; we are the [convenience store].” - CEO, M Abstract Swedish title: Klädtillverkning i Istanbul – En resurs-baserad studie om Istanbuls kläd- tillverkare och deras strategier English title: Istanbul Apparel Manufacturing Strategy – A resource-based case study Completed (year): 2014 Author: Simon Robert Bo Daniel Campeau Supervisor: Martin Behre Language: English Purpose: Finding which resources and capabilities are deployed among Istanbul-based apparel manufacturers, evaluating to what extent they are tangible, intangible as well as capa- bilities as well as lastly analysing them according to the valuable, rare, inimitable and non- substitutable framework. Design/methodology: The research design consists of a case study held at several firms. Empirical data was collected using semi-structured interviews. Empirical data: Empirical data was primarily collected at nine different apparel manu- facturers within the greater Istanbul region. Conclusion: Conclusions show that within the bundles of resources and capabilities, a large variation was noted with high international competitiveness. However there are areas such as design and quality which could be continuously developed among firms. In the end, whatever bundle of resources and capabilities a firm has, it’s the end price that speaks. Keywords: Istanbul, Turkey, apparel, manufacturing, strategy, strategies, resources, capa- bilities, resource-based view, RBV Sammanfattning Svensk titel: Klädtillverkning i Istanbul – En resurs-baserad studie om Istanbuls klädtill- verkare och deras strategier Engelsk titel: Istanbul Apparel Manufacturing Strategy – A resource-based case study Färdigställd (år): 2014 Författare: Simon Robert Bo Daniel Campeau Handledare: Martin Behre Språk: Engelska Syfte: Att finna vilka resurser och kompetenser som utnyttjas ibland Istanbul-baserade klädtillverkare samt att utvärdera till vilken grad de är materiella, immateriella eller kompe- tenser samt analysera resurser och kompetenser utifrån VRIN. Design/metod: Undersökningsmodellen utgörs av en fallstudie på ett antal företag och empiri har samlats genom semistrukturerade intervjuer. Empiri: Empiri har bl.a. samlats in vid besök hos nio olika klädtillverkare i Istanbul stad. Slutsatser: Slutsatser visar att en god variation på resurser och kompetenser återfinns hos klädtillverkare vilka därigenom håller en hög internationellt konkurrensmässig nivå. Dock finns omården såsom design och kvalitet som fortsatt kan utvecklas hos företagen. I slutändan visar det sig att trots det ovannämnda styr slutspriset med järnhand. Nyckelord: Istanbul, Turkiet, beklädnad, klädtillverkning, tillverkare, strategi, strategier, resurser, kompetenser, resursbaserad teori, RBV Table of Contents 1 Introduction ............................................................................................................ 1 1.1 Background ....................................................................................................... 1 1.2 Previous research ............................................................................................. 2 1.3 Problem discussion ........................................................................................... 3 1.4 Purpose and problem formulation ..................................................................... 3 2 Theoretical framework .......................................................................................... 5 2.1 Dimensions of manufacturing strategy .............................................................. 5 2.1.1 Delivery ....................................................................................................... 5 2.1.2 Quality ......................................................................................................... 6 2.1.3 Flexibility ..................................................................................................... 6 2.2 The Resource-Based View of a firm .................................................................. 6 2.2.1 Resources ................................................................................................... 7 2.2.2 Capabilities.................................................................................................. 8 2.2.3 Competitive advantage ............................................................................... 9 2.3 Discussion and critique ................................................................................... 11 3 Methodology ........................................................................................................ 12 3.1 Choice of methodology .................................................................................... 12 3.2 Pre-study participants ...................................................................................... 12 3.3 Sampling ......................................................................................................... 13 3.3.1 Sample criteria .......................................................................................... 13 3.3.2 Sample ...................................................................................................... 14 3.3.3 Method of firm contact ............................................................................... 14 3.4 Methodology in practice .................................................................................. 15 3.5 Methodology discussion and reflection ............................................................ 16 3.5.1 Practical implications surrounding sampling, firm contacts and interviews 16 3.5.2 Alternative research designs ..................................................................... 17 3.5.3 Dependability, replicability and data quality .............................................. 17 3.5.4 Contribution to existing literature ............................................................... 18 4 Results .................................................................................................................. 18 4.1 Pre-studies ...................................................................................................... 18 4.1.1 The TGSD and ITKIB board member ........................................................ 18 4.1.2 The Swedish fast fashion customer .......................................................... 19 4.2 The apparel manufacturers ............................................................................. 21 4.2.1 The premium small-scale manufacturer (S1) ............................................ 23 4.2.2 The digital printer and rhinestone applicator (S2)...................................... 23 4.2.3 The mixed manufacturer with a large R&D (M) ......................................... 23 4.2.4 The highly fast fashion-oriented manufacturer (L1) ................................... 24 4.2.5 The large capacity fast fashion firm with backward integration (L2) .......... 24 4.2.6 The traditional manufacturer with two factories (L3) .................................. 24 4.2.7 The manufacturer with own brands (LB) ................................................... 25 4.2.8 The specialised manufacturer (LS) ........................................................... 25 4.3 Findings ........................................................................................................... 26 4.3.1 Current situation and future of Turkish apparel manufacturing industry .... 26 4.3.2 Changed demands and market conditions ................................................ 26 4.3.3 Future of interviewed firms and possible upgrading .................................. 27 4.3.4 Subcontracting .......................................................................................... 28 4.3.5 Marketing activities .................................................................................... 28 4.3.6 Environmental aspects .............................................................................. 29 4.3.7 Resources and Capabilities ...................................................................... 29 5 Analysis ................................................................................................................ 35 5.1 General background analysis .......................................................................... 35 5.2 Strongly supported operationalisations ........................................................... 35 5.2.1 Flexibility ................................................................................................... 35 5.2.2 Plants and Equipment ............................................................................... 36 5.2.3 Relationships............................................................................................. 36 5.3 Medium-support operationalisations ................................................................ 37 5.3.1 Firm culture ............................................................................................... 37 5.3.2 Skilful or experienced employee ............................................................... 37 5.3.3 Innovation capabilities ............................................................................... 37 5.3.4 Delivery ..................................................................................................... 38 5.4 Analysis of resources and capabilities in relation to the valuable, rare, inimitable and non-substitutable (VRIN) framework .............................................................. 38 5.4.1 Valuable .................................................................................................... 38 5.4.2 Rare .......................................................................................................... 38 5.4.3 Inimitable ................................................................................................... 39 5.4.4 Non-substitutable ...................................................................................... 39 6 Conclusion ........................................................................................................... 40 6.1 Firm recommendations .................................................................................... 41 7.1.1 Increasing productivity by larger turnover/employee ................................. 41 7.1.2 Quality ....................................................................................................... 41 7.1.3 Design, pattern-making and an own collection .......................................... 42 7.1.4 Considering an own brand ........................................................................ 42 7.2 Future research ............................................................................................... 42 References .............................................................................................................. 44 Appendix 1. Categorisation of Resources and Capabilities .................................. I Appendix 2. Empirical support of Resources and Capabilities ........................... IV 1 Introduction This thesis studies Istanbul-based apparel manufacturers’ strategies with the aim of identify- ing resources and capabilities and to what extent they are sustainable. Constructs derived from the school of the Resource-Based View are used. In general, Turkey is a large and well- known apparel manufacturing country but changing market demands and conditions for firms involved is a possible risk for loosing competitive advantage. This highlights the importance of this thesis. Furthermore there is no previous research investigating Istanbul apparel manu- facturers from a resource-based view and especially not by investigating firms’ unique cur- rent strategies as well as resources and capabilities. Below, a brief modern history as well as the current state and challenges of the Turkish apparel industry in general are presented. 1.1 Background Turkey has a long textile and apparel manufacturing tradition. In the 1980s Turkey shifted up and started exporting partly as an effect of liberalisation policies initiated by IMF and the World Bank (Öz, 2002). The industry grew tremendously and became leading in the niche of full-package manufacturing (Neidik, Gereffi 2006). In the 1990s, Turkey was a leading ex- porter of apparel to the EU largely as an effect of signing a customs union agreement in 1996, facilitating exports to the EU. In the 2000s, Turkey began focusing more on brand develop- ment and design and today has some internationally recognizable brands such as Mavi and Sarar (Culpan & Ekin 2009; Tokatli & Kizilgun 2004; Tokatli 2007). The government has been supporting through export subsidies and employee conditions have improved (Culpan & Ekin 2009; Karabag, Lau & Suvankulov 2014). Also business associations have been support- ing (Neidik, Gereffi 2006). Today, Turkey reaps advantages from its geographical position, lying proximate to its largest export market, the EU-countries. Turkey’s total clothing and apparel exports amounted to over US$ 17.5 billion in 2013 (almost 12% of total exports). This makes Turkey the fifth largest apparel exporter in the world (Karabag, Lau & Suvankulov 2014). Turkey is consid- ered to have numerous competitive advantages within their apparel manufacturing industry which they are known for; flexibility, speed, efficiency and being hard-working (Tokatli 2008). The workforce is plentiful and consists of highly qualified labourers. A prime area of competence is knitwear as well as production of cotton and man-made fibers (Tokatli & Kizilgun 2009). As exporters they are known for having vertical capacities for upgrading and including higher value-added functions (Karabag, Lau & Suvankulov 2014). Furthermore Turkey is the 8th largest cotton producer in the world with a little more than 500 000 tons pro- duced every year. Turkish apparel manufacturers also follow ISO and European environ- mental standards. The government still supports the industry in many ways, both through sub- sidies but also through the branding program Turquality, strengthening the image of “Made in Turkey” (Eren-Erdogmus, Cobanoglu, Yalcin & Ghauri 2010). 1 However, the industry is changing with increasingly demanding customers. Within especially fast fashion; a sourcing strategy consisting of several seasons per year as well as short lead times, suppliers become highly dependent of buyers and unpredictable, last-minute, irregular orders create challenges (Tokatli, Wrigley & Kizilgun 2008). Furthermore, shifting market conditions are a fact (Culpan & Ekin 2009). Turkish wages are comparatively high; US$ 4.5/hour compared to China’s at a little less than half or Pakistan’s US$ 0.58 (Werner Interna- tional Management Consultants 2011). Another current issue is that Russia for many years has been dependant on imports from Turkey largely through an illegal trade. This trade is largely decreasing; the Russian apparel industry is developing (Culpan & Ekin 2009). In many cases, Turkish apparel manufacturers are small and medium enterprises (SMEs) and still family-owned (Culpan & Ekin 2009). This inhibits them from creating economies of scale. From a strategic point of view, the management has very little education and under- standing for marketing and management. Managers of apparel manufacturing firms in Turkey were found to be largely unaware of changing external factors and were unstructured with no clear strategy (Culpan & Ekin 2009). A low cost strategy is often used and only few consider differentiation as a measure for creating competitive advantage (Culpan & Ekin 2009). This thesis investigates which current strategies Turkish apparel manufacturers have and to what extent resources and capabilities are strategically valuable. Turkish apparel manufactur- ers must realise globally changing demands and incorporate these strategically valuable re- sources and capabilities in their strategies. In the 1990’s, high quality and short lead times compensated for the high costs but these advantages are diminishing with increased globalisa- tion (Neidik & Gereffi 2006). 1.2 Previous research The following section presents previous research in the field of apparel manufacturers’ strate- gies and general manufacturers’ strategies from a resource-based view and from a non- resource-based view. Several studies have been made on the Turkish apparel industry’s competitiveness (Culpan & Ekin 2009; Karabag, Lau & Suvankulov 2014; Kok & Coban 2005; Neidik & Gereffi 2006; Öz 2002) and the new demands that apparel manufacturers have to face today for survival, many with focus on fast fashion (Tokatli, Wrigley & Kizilgun 2008; Tokatli & Kizilgun 2009). Examples of new and greater demands that are placed upon apparel manufacturers are speed, punctuality, flexibility in specialised fields and even becoming responsible for aes- thetical decisions such as design. The Turkish suppliers have no choice but to cope with the changes or they risk not surviving. Karabag, Lau & Suvankulov (2014), state that innovation and R&D create sustainable competitiveness in combination with Culpan & Ekin’s (2009) suggestions of intellectual property such as fashion design or the physical asset advanced technology (Tokatli & Kizilgun 2010). Turkish apparel manufacturers have to some extent also engaged in upgrading their business models, i.e. forward or backward integration. In the apparel manufacturing industry this refers to upgrading from e.g. a Full Package manufacturer 2