DEVELOPING A CHANGE STRATEGY FOR A MEDIUM - SCALE FIRM: A CASE STUDY OF VINH PHU TEXTILE COMPANY IN VIETNAM

by

Le van Hoa

A research study submitted in partial fulfillment of the requirements for the degree of Master of Business Administration

Examination Committee

Dr. Truong Quang (Chairman) Dr. Fredric William Swierczek Dr. Hans Stoessel

Nationality Previous Degree

Vietnamese Bachelor of Economics Engineering Hanoi University of Technology Hanoi, Vietnam

Scholarship Donor

Government of Switzerland

Asian Institute of Technology School of Management Bangkok, Thailand April 1999

Acknowledgements

I am very grateful to my supervisor Dr. Truong Quang, for his helpful advice throughout the period of the research. He encouraged my progress and provided valuable feedback in the early drafts until the completion of this report. I would like to extend my sincere thanks to my committee members, Dr. Fredric William Swierczek and Dr. Hans Stoessel who, in spite of their busy schedule, spent a lot of time to help me in making my research more appropriate. Specially, the author would like to thank the Swiss-AIT-Vietnam Management Development Program and the Government of Switzerland for granting him a scholarship to study at School of Management, AIT. I wish to express my thanks also to Economics and Management Department, Hanoi University of Technology, which provided me a brilliant chance to pursue my study as I had dreamed. The author is very grateful to his friends, employees, staff, and managers of all functions of the Vinh Phu Textile Company for their helps and support during the time of data collection for this research. The author would like to thank all faculty, staff and his friends at SOM and in AIT for their assistance and support during the time of his study at AIT. I would like to express my deep gratitude to my parents, my wife, my brothers and sisters, without their best wishes I would not have been so successful.

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Abstract

In late 1986, Vietnam started a comprehensive economic reform called doi moi (renovation) to change its centrally planned economy to a market economy. Since then, the business environment has been changing very fast. These changes have created opportunities as well as threats to local companies, especially in the textile industry. Due to inferior operation conditions, many of these companies do not perform well. According to the governments own estimates, about 28 % of the state-owned companies are losing money. Many depend heavily on government subsidies for survival. Vinh Phu Textile Company, like many other state-owned companies has undergone drastic changes. In the face of governments withdrawal of capital financial support, to survive and develop further in a competitive business environment, the company needs to build up its own comprehensive and achievable business strategy. This study focuses on developing a change strategy for the Vinh Phu Textile Company. Subsequently, a change strategy is developed and recommended to the company.

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Table of Contents

Chapter

Title

Pages

Tile Page..i Acknowledgement..ii Abstract..iii Table of Contents...iv List of Figures............vi List of Tables........vii

1.

Introduction

1.1 Rationale of the Research Study..........................................................................................................................2 1.2 Problem Statement...............................................................................................................................................2 1.3 Research Objectives.............................................................................................................................................2 1.4 Scope and Limitations.........................................................................................................................................2 1.5 Research Framework (Figure 1)..........................................................................................................................3 1.6 Research Methodology.........................................................................................................................................3 1.7 Organization of the Report...................................................................................................................................4

2.

Literature Review

2.1 Change Strategy...................................................................................................................................................5 2.2 Organizational Change........................................................................................................................................6 2.3 Concept of Corporate Strategy.............................................................................................................................6 2.4 Strategic Management..........................................................................................................................................6 2.5 Mission Statement.................................................................................................................................................7 2.6 Strategy Formulation............................................................................................................................................7

3.

External Analysis and Discussion

14

3.1 Macroenvironment Overview.............................................................................................................................14

iv

3.2 Industry Analysis................................................................................................................................................15 3.3 Summary of the External Factors.......................................................................................................................19

4.

Internal analysis of the company

22

4.1 Companys Mission............................................................................................................................................22 4.2 Company History................................................................................................................................................22 4.3 Company Objectives and Policy.........................................................................................................................23 4.4 Management of the Company.............................................................................................................................24 4.5 Human Resources Management.........................................................................................................................26 4.6 The Marketing Mix.............................................................................................................................................35 4.7 Manufacturing....................................................................................................................................................36 4.8 Finance 41 4.9 Contingency Strategies.......................................................................................................................................49 4.10 Summary of the Internal Factors......................................................................................................................51

5.

Developing a change strategy

55

5.1 Strategic Choice.................................................................................................................................................55 5.2 Mission of the Company.....................................................................................................................................59 5.3 A Change Strategy for Vinh Phu Textile Company............................................................................................59 5.4 Organizational Structure....................................................................................................................................61 5.5 Organizational Culture......................................................................................................................................63 5.6 People 63 5.7 Integrated Strategy.............................................................................................................................................64

6.

Conclusions and Recommendations

69

6.1 Conclusions........................................................................................................................................................70 6.2 Recommendations for Strategy Implementation.................................................................................................70

List of Figures

Figure 1. Research Framework

Figure 2. A Conceptual Framework for Change Strategy .....................5 Figure 3. Organizational Targets for Planned Change............................6 Figure 4. Demand and Supply for Fabrics 18

Figure 5. Overall Assessment of Industry Attractiveness Based on External Factors Analysis 21 Figure 6. Organization Chart of Vinh Phu Textile Co............................25 Figure 7. Leverage Ratios Figure 8. Liquidity Ratios Figure 9. Strategic Competence Framework Figure 10. Strategic Choice 44 47 55 59

Figure 11. Conditions for a Change Strategy of a Company................61 Figure 12. Proposed Organization Chart 62

Figure 13. The Proposed Distribution Channels 69 Figure 14. A Proposed Change Strategy for Vinh Phu Textile Company 72

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List of Tables

Table 1. Key Environmental Variables Table 2. Demand and Supply Table 3. Vinh Phu Textile Co.s Workforce

8 16 26

Table 4. Educational Degree of Employees (in 1998)............................29 Table 5. Experience and Skill Levels of Employees..............................32 Table 6. Market Penetration of the Company 36

Table 7. Actual Production and Capacity of the Company...................37 Table 8. Leverage Capital Structure Ratios of Vinh Phu Textile Co. (in %) 41 Table 9. Liquidity Ratios for Vinh Phu Textile Company......................44 Table 10. Profitability Ratios for Vinh Phu Textile Company...............47
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Table 11. Sources of Fund and its Weigh

50

Table 12. Strategic Choices for Vinh Phu Textile Co............................65

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Chapter 1

1.

Introduction

1.1

Rationale of the Research Study

Since late 1986, Vietnam has been gradually modifying its economic and development policies in order to liberalize and internationalize its economy. As a result, the business landscape in Vietnam has been changing very fast. Along with the opening of its economy to the world, international relationships and trade have been established. Government policies and regulations related to business operations have also been improved to facilitate business operations of state-owned companies and to attract local and foreign investments. As a result, companies have been facing new opportunities and threats. The response of the companies towards these changes has been mixed. There were many companies which maintained the status quo, struggled with the new reality or disappeared. By the governments own estimates, about 28% of state-owned companies are losing money. Many are heavily depended on the government subsidies for survival. Only few of them have survived the test by adapting new technologies, entering into new industries and markets, launching new products, changing company culture and reengineering organizational structure. Like many other state-owned companies, the challenges faced by the Vinh Phu Textile Company are very difficult. In order to adapt to the new market situation and to grow further, the company needs to develop a sustainable competitiveness strategy for change.

1.2

Problem Statement

Like any other SOEs in the textile industry, Vinh Phu Textile Company has been struggling very hard to survive as a result of current changes in the business environment. To overcome the survival test, it should come out with a comprehensive change strategy.

1.3

Research Objectives

The main objective of this research is to analyze business environment and the strengths and weaknesses of the company under study and then formulate a comprehensive and achievable strategy for its survival and growth in the future. The specific objectives of this research are: To analyse the challenges faced by the company To analyse the strategic choices made by the company To formulate an appropriate change strategy for the company To make recommendations for strategy implementation.

1.4

Scope and Limitations

The research study was carried out in North Vietnam and was focused on the textile industry. Vinh Phu Textile Co. was selected as a case study for this research. It is a state-owned company in the province of Vinh Phu. This research was undertaken purely from the viewpoint of strategy with the aim to define a change strategy for the selected company. Some limitations were confronted during the research: Most of the necessary data (e.g.: company performance, strategy, etc.) were not available. If the data sources were available, the owners were not willing to give them to the researcher or the data sources were not reliable. It was very difficult to gather information from Vietnamese managers. They were either reluctant to offer their opinions directly or not willing to provide researcher with sensitive information of their organizations. Some managers were not willing to cooperate, particularly in allowing complementary surveys with their employees. Furthermore, the research was taken place in December and January, which was a busy time for business, due to the celebration of the Vietnamese New Year (Tet).

1.5 Research Framework (Figure 1)

1.6 Research Methodology

Primary data was obtained through personal in-depth interviews with executives and the personnel of the Vinh Phu Textile Co. Primary data were also gathered through observation of the company during several visits of the author of this research. Secondary data were based on: Official statistics Government reports The annual reports of the Light Industry Ministry Companys annual reports Other sources such as: local journals, newspapers, published articles, etc.

Problem Statement

Research Objectives

Literature Review

Primary Data & other Secondary Data

Macro-environment

Analysis

Industry Analysis

Companys Analysis

Change Strategy

Conclusion and Recommendations

Figure 1. Research Framework

1.7

Organization of the Report

The outcome of this research will be reported in the following order: Chapter 1: Introduction Chapter 2: Literature review Chapter 3: External analysis and discussion Chapter 4: Internal analysis of the company Chapter 5: Developing a change strategy Chapter 6: Conclusion and recommendations

Chapter 2

2.

Literature Review

This chapter presents the relevant literature for the analysis and development of a companys change strategy.

2.1

Change Strategy

Organizations are compelled to change in order to cope with external and internal changing situation. There is a range of external and internal factors, which may necessitate change within an organization. External forces for change include factors such as government laws and regulations, technology, social and economic change, and changes in international agreements on tariffs and trade. Following Dawson (1994), the internal triggers to change are generally characterized as comprising technology, people, task, and administrative structures. A change in an organizations technology may involve the installation of a single piece of equipment or the complete redesign of a production process. The option of revising administrative structures involves redesigning the structure of an organization and reward systems. Changing the human aspect of an organization is a popular change strategy, and involves modifying attitudes, beliefs, values, technical skills and behaviors. These internal and external triggers to change are often interdependent. Hence, in order to develop a change strategy, a framework embracing the three most important components is needed (Figure 2).

Structure

People

Culture

Figure 2. A Conceptual Framework for Change Strategy Source: Truong Quang (1998)

2.2

Organizational Change

Planned change is carried out by people but needs the support of all components making up an organization, such as structure, culture, people, and technology. In organizations, planned change includes change targets as indicated in the following figure.

Purpose Clarify or create mission and objective

Objectives Set or modify specific performance target

Technology Improve equipment, facilities, and work flows

Strategy Clarify or create strategic and operational plans

CHANGE TARGETS

Structure Update org. design and coordination

Culture Clarify or create core beliefs and values

Tasks Update job designs for individuals and groups

People Update recruiting and selection; improve T&D

Figure 3. Organizational Targets for Planned Change Source: Schermerhoorn et al. (1997:403)

2.3

Concept of Corporate Strategy

According to Hill and Jones (1995), strategies are often the emergent response to unforeseen circumstances. According to these authors, strategy is more than what is a company intends or plans to do; it is also what it actually does. With this in mind, Hill and Jones has defined strategy as a pattern in a stream of decisions or actions (1995: 5), the pattern being a product of whatever intended strategies (planned) are actually realized and of any emergent (unplanned) strategies.

2.4

Strategic Management

The strategic management process has five components (Hill and Jones, 1995): The first component of the strategic management process defines the mission and major goals of the organization. The second component is the analysis of the organizations external operating environment. The third component serves to pinpoint the strengths and weaknesses of the organization. The forth component involves generating a series of strategic alternatives, given the companys SWOT (Strengths, Weaknesses, Opportunities and Threats). And the last component is the strategy implementation. The task of analyzing the organizations external and internal environment and the selecting an appropriate strategy is normally referred to as strategy formulation. In contrast, strategy implementation typically involves designing appropriate organizational structures and control systems to put the organizations chosen strategy into action.

2.5

Mission Statement

Typically, the mission statement defines the organizations business, states its vision and goals, and articulates its main philosophical values, (Hill and Jones, 1995).

2.6

Strategy Formulation

As already mentioned above, strategy formulation can be defined as the task of analyzing the organizations external and internal environment and then selecting an appropriate strategy. In order to carry out the strategy formulation task, three main activities are required to accomplish: research, data analysis and discussion, and decision making. Research is the first essential activity of strategy formulation. Research must be conducted on both aspects: internal and external. Internal research is needed to find out what are the strengths and weaknesses of the chosen company in terms of management, finance, marketing, manufacturing, materials management, inventory, and R&D, etc. Externally, research is required to understand the macro-environment in which the company is operating. The second activity required in strategy formulation is data analysis and discussion. This aims to match an organizations internal strengths and weaknesses with external opportunities and threats. The third required activity is decision-making. After analyzing, decisions must be made regarding to what objectives and goals are established, and which strategies are pursued to achieve those objectives and goals. After all, the top managers must select a comprehensive and achievable strategy from a number of alternative strategies. Key Environmental Variables Environmental variables can be divided into five categories:

Table 1. Key Environmental Variables

1. Market factors

2. Competitive factors

3. Economic and governmental factors Inflation Foreign exchange impact Currency transfers Wage level Raw materials supply Manpower supply Legislation Regulation Taxation Government support

Market size Market growth rate Product differentiation Price sensitivity Cyclicality Seasonality Captive markets Industry profitability

Competitive intensity Degree of concentration Barriers to entry Barriers to exit Share volatility Degree of integration Availability of substitutes Capacity utilization

4. Technological factors

5. Social factors

Maturity and volatility Complexity Patents Product R&D requirements Process R&D requirements

Ecological impacts Work ethics Consumer protection Demographic changes Degree of unionization Personnel adaptability to international markets.

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Source: Johri (1998) The Company Analysis In order to analyze the company to find out its strengths and weaknesses, an audit should be carried out on four aspects: management, marketing, finance, and manufacturing. The management audit Planning Planning consists of all those managerial activities related to preparing for the future. Specific tasks include forecasting, defining objectives, establishing strategies, developing policies, and setting goals. Planning is an integral part of a managers job. Planning is very important for implementing the strategy. If you made a well plan, you already succeeded a half, according to the author of the research. Firms that use formal planning approaches are generally more profitable than those do not. Planning allows the company to minimize the uncertainty in the future. In addition, planning helps the company adapt to changing environment. Organizing Organizational design involves selecting the combination of organizational structure and control systems that lets a company pursue its strategy most effectively that lets it create and sustain a competitive advantage (Hill and Jones, 1995). The primary role of organizational structure and control is twofold: to coordinate employees activities so that they work together to most effectively implement a strategy that increase competitive advantage, and to motivate employees and provide them with the incentives to achieve superior efficiency, quality, innovation, or customer responsiveness. Organizational structure and control shape the way people behave and determine how they will act in the organizational setting. Controlling Strategic control is the process of establishing the appropriate types of control system at the corporate, business, and functional levels in a company, which allow strategic managers to evaluate whether a company is achieving superior efficiency, quality, innovation, and customer responsiveness and implementing its strategy successfully. The primary function of strategic control systems is to provide management with the information it needs to control its strategy and structure. According to Hill and Jones (1995), an effective strategic control system consists of four steps: 1. Establish the standards or targets against which performance is to be evaluated. 2. Create the measuring or monitoring systems that indicate whether the targets are being reached. 3. Compare actual performance against the established targets.

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4. Initiate corrective action when it is decided that the target is not being achieved. Motivating Organization also strives to control employee behavior by linking reward systems to their control systems. The design of a companys reward system affects the kind of behaviors found in an organizational setting, clearly it also affects the kind of norms, value, and culture that develop in an organization. Generally, reward systems are found at the individual and group or total organizational levels. How to relate rewards to performance is a crucial strategic decision because it determines the incentive structure that affects the way managers and employees at all levels in the organization behavior. Organizational Culture Organizational culture may be defined as the specific collection of norms, standards, and values that are shared by members of an organization and affect the way an organization does business. Socialization is the term used to describe how people learn organizational culture. Since both an organizations structure the design of its task and reporting relationships and its culture shape employees behavior, it is crucial to match organizational structure and culture in order to implement strategy. The marketing audit There are some basic functions of marketing: 1. 2. 3. 4. 5. 6. Marketing research, customer analysis and market segmentation Purchasing and selling Product Price Place and Promotion

The financial audit In this section, a methodological approach is used to gather quantitative intelligence at the level of the firm, based on financial statements analysis. One of the most widely distributed sources of information of all firms in any industry are the set of two financial statements balance sheet and income statement, which must be made public periodically by all major corporations. It is only natural, then, to make use of that information for gaining certain understanding of the competitive position of different firms in an industry. The appropriate technique to perform this task has been known for many years, and it is called financial statement analysis. The production audit The production and operation of a business involves in all those activities that transform inputs into goods and services. There are five basic functions of production management: process, capacity, inventory, workforce, and quality.

12

Chapter 3

13

3.

External Analysis and Discussion

A component of the strategic management process is the analysis of the organizations external business environment. The objective of the external analysis is to identify strategic opportunities and threats in the organizations operating environment.

3.1

Macroenvironment Overview 3.1.1 Economic Factors

Since 1987, with the open door policy, the Vietnamese economy has been significantly improved. The peoples living standard has improved substantially. According to the annual reports of the Government Statistics Office in 1997, Vietnams GDP increased 8 % per year on the average between 1994-1997. But since mid 1997, the large-scale economic crisis, which started in Thailand, has spilled over the world and affected heavily on Asian region. Vietnam could not avoid being affected by this monetary and financial crisis. Consequently, the economic growth rate came down to 5 % in the last year, and the government expects that Vietnam will pick up the trend in 1999 by setting a 8 % growth target for 1999 (Nguyen Danh Bang, 1999). The inflation rate in 1998 was about 8.1 %. Despite the financial crisis in the region, the exchange rates of the VND against foreign currencies have been stabilized. As a result, there is almost no affect on the production cost of textile products, which depends heavily on imported materials such as cotton, yarn, etc. To stimulate investment in manufacturing sectors, the interest rates were reduced from 2.1 % in 1997 to 1.2 % in recent years (Nguyen Danh Bang, 1999). These conditions have maintained favorable business environment for all companies in the country in general, and for textile and garment industry, including Vinh Phu Textile Company, in particular. The continued economic growth will lead to increasing disposal income and increasing demand for textile and garment products, providing enterprises with opportunities to expand their production.

3.1.2 Technological Factors

Technology plays a very important role in the drive for industrialization and modernization in Vietnam. Technology is the way to evaluate the development of one country. If Vietnam wants to compete in global market, it should invest significantly in technology to improve the production process and the quality of products. Although the industry output has increased substantially in recent years, according to an annual report of the Light Industry Ministry in 1998, 80 % of equipment and machines are old and outdated, many of them imported from China and other ex-communist countries in 1960s and 1970s. New machines designed by Vietnamese engineers make up only 8 %, and the rest are imported from foreign countries. Generally, Vietnamese technological ability is poor. The countrys backward technologies in use and limited ability to transfer and to apply new technologies in the production process are seen as one of the main reason for low productivity and quality.

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Up to present time, some modern equipment has been imported on a replacement basis to gradually improve the production process in textile industry. The modern technologies in spinning, weaving and finishing have enabled textile companies to increase the quality of products and to reduce production costs. Moreover, many foreign companies have come to Vietnam to establish joint ventures with local companies. All together, these have created good opportunities for the Vietnamese companies to acquire and add new technologies into their current production lines.

3.1.3 Social, Cultural, and Demographic Factors

With a total population of over 78 million in 1998, Vietnam really is a large market in Southeast Asia. The current income per capita, which is about USD350 now, is expected to be doubled in 2005 (Nguyen Danh Bang, 1999). This implies a large market for textile companies in Vietnam. The labor force in Vietnam is typically young. The people in the age between 15 and 44 accounts for 45 % of the total population. Vietnam has a potential in labor force not only in term of quantity, but also in term of quality if attention is given to human resource development. Officially, Vietnam has a substantially high adult literacy rate of 88 %, adding to a hard working and quick learning workforce.

3.1.4 Political, Governmental, and Legal Factors

Despite the collapse of socialist system worldwide, Vietnam still decides to continue the socialist path with some adjustments toward a market economy. It believes in achieving economic development on the premium of political stability. In Vietnam, a comprehensive legal framework for business is not complete yet and the existing laws do not cover all fields. Legal documents are continuously issued and changed, especially regulations on tax and import-export to cope with environments conditions. For example, along with the governments policies of export encouragement, companies are recently allowed to export their products directly to foreign customers without going through the assigned agencies. They also are permitted to import directly machines and materials needed for production. Hence, the companies can find out favorable markets for their export and import. Moreover, the government has banned import of fabrics and ready-made garments for sales in domestic market if not being permitted by the government since 1993.

3.2

Industry Analysis 3.2.1 Market Conditions

Textile products are crucial for our life. Because of continued economic development, the demands for textile products have been increased in the world. Textile products of Vietnamese companies are sold in both domestic and international markets. With the population of over 78 million, Vietnam represents a large market for textile companies. Moreover, relative high growth is expected to maintain in the coming years despite the current crisis in the region. These conditions give firms the opportunity to expand their production to exploit the growing demand for textile in the country. This trend is shown in the following table.
15

Table 2. Demand and Supply

16

1996 Demand - Fabrics of all kinds (million meters) - Hosiery (million pieces) Supply - Fabrics of all kinds (million meters) 540 100 240

1997 560 120 260

1998 570 135 280

17

M illion meters

- Hosiery (million pieces)

24

28

32

Source: Vietnam Textile and Garment Corporation, 1998.

60 0 50 0 40 0 30 0 20 0 10 0 0 19 96 19 97 Ya er 19 98
D a e n md Sp ul py

Figure 4. Demand and Supply for Fabrics Source: Vietnam Textile and Garment Corporation, 1998. According to the table above, the demand has steadily increased from 540 million meters in 1996 to 570 million meters in 1998. However, until now Vietnamese companies can only serve domestic textile demand by about half of the demand. Foreign textile products from some different sources supply the remaining fifty percent. The reason is that the capacity of textile factories is limited. At the same time, the textile industry faces additional difficulties such as lack of raw materials, obsolete and aging machines and equipment, and lack of spare parts. As a result, low product quality and productivity are seen as general weaknesses of Vietnamese textile companies in competing with foreign products. In recent years, a marked change has seen in the domestic market for textile products as the ready-made clothes have increased rapidly. Convenience in purchasing and consumption is becoming important. Apart from this, quality sensitivity becomes high among Vietnamese consumers. Next to affordable prices, durability of product is also essential for them. For the foreign markets, Vietnamese textile products are mainly exported to countries in Europe, North American, and Asia. European Community (EC), Canada and Japan have granted large import quotas of textile products to Vietnam. For these markets, import customers pursue strictly their requirements of quality, pattern, and design. On the one hand, this creates an opportunity for Vietnamese companies to improve their performance in order to reach international standard. On the other hand, they have to compete fiercely with foreign companies, especially those of Asian countries such as China, Thailand, Indonesia, Srilanka and Bangladesh, to mention but a few. As foreign markets are opening for Vietnamese textile companies, the latter need to prepare themselves well in terms of technology, human resources in order to get a firm foothold in these new markets.

3.2.2 The Competitive Situation

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At present, there are more than one hundred textile companies in Vietnam, of which, nineteen companies are considered as big ones. In terms of size, Vinh Phu Textile Company is classified as a medium-scale enterprise in comparison with its competitors. Actually, no company can dominate the market, nor has a strong effect on the textile product market in Vietnam. Most textile companies recognize that there is a fierce competition among existing competitors. They compete with each other not only in the domestic market, but also in the export market. They also have to struggle with imported products legally or illegally from other Asian countries such as Thailand, Taiwan, Singapore, etc., especially from China. The Chinese goods, especially Chinese textile products with cheaper price have flooded the Vietnamese market in the last years. If this trend continues, it will kill domestic productions. The local textile industry is composed of firms engaged in the manufacturing of textile yarns, threads, woven fabrics, knitted fabrics, and other textile related products. The three types of firms predominantly found in the industry are: 1. Integrated firms whose operation involves the three stages of processing: spinning, weaving and finishing. 2. Semi-integrated firms that consist of two stages: spinning and weaving or weaving and finishing. 3. Non-integrated firms that are involved only one of the three processes. There are three major centers of textile production in Hanoi, Nam Dinh, and Ho Chi Minh City. Besides, some textile factories are located in other provinces such as Vinh Phu, Nghe An, Hue, Nha Trang , and so on. According to the annual reports of the Ministry of Light Industry in 1998, the overall capacity of textile production is still limited. The spinning facilities consist of 864,000 spindles and 2000 rotors with a designed capacity of 87,000 tons per year. For the weaving facilities, the textile industry has 25,900 looms with a designed capacity of 450 million meters per year. The machines used in finishing process are not in a very good condition. They are worn out and can work only with cotton fabrics with width of 80cm. The lack of modern finishing equipment is one of the main reasons causing difficulties to most companies in competing with foreign products. Another report of Vietnam Textile & Garment Corporation in 1998 revealed that most equipment and machines in use of textile companies are too old and outdated. Although most companies recognized the need to renew their technology and to improve the production infrastructure, but they could not afford it because of severe financial constraints. Moreover, almost all of the textile companies do not have marketing activities. They do not even have a marketing strategy with a full marketing mix (4Ps). They just react to a certain situation temporarily. They spend little money on advertising. Most companies promote their products by traditional ways through catalogues, samples, and personal selling. The distribution channels are very poor and inefficient. Most of them do not have their own distributors or outlets.

3.3

Summary of the External Factors

19

According to the analysis above, the environmental opportunities and threats are identified for the textile industry as following:

3.3.1 Opportunities
1. The textile domestic production does not meet the actual demand of the market. 2. High market growth potential due to high annual economic growth rate and high annual population growth rate. 3. Along with the opening of its economy to the world, international relationships and trade have been established and developed. 4. Government policies and regulations related to business operations have been improved to facilitate business operations of state-owned companies. The government issued policies which are strongly stimulating the development of textile industry. 5. Abundant labor force and low labor cost. 6. Opening the economy allows companies to be able to obtain advanced technology and modern equipment (through own investment or joint ventures with foreign partners). 7. No company in the industry has much advantage over others.

3.3.2 Threats
1. Domestic textile manufacturers have to struggle with smuggling and imported products from neighboring countries. For example, Chinese textile products imported to Vietnam are very cheap and of the same or higher quality than domestic products. Meanwhile Thai textile products imported to Vietnam are of high quality with reasonable price to high price. 2. The competition between textile products of Vietnamese companies and those of other developing countries will be intensified in the international market. 3. Change in the customers taste. A large part of customers with high purchasing power prefer imported products because of high quality and high perceived value. 4. Vietnam textile industry depends on imported materials, thus the fluctuation of materials price will be a threat for all companies. 5. Under the common treaty of Asean countries, in the near future, Vietnam has to remove or reduce significantly its tariff for textile products. Hence, the competition between domestic textile products and imported products will increase significantly. A summary of the overall industry assessment is shown in the following figure.

Industry Attractiveness

20

L Market factors Competitive factors Economic and governmental factors Technological factors Social factors Overall assessment

Current M x x

H x

L x

Future M

H x x

x x x

x x x

Figure 5. Overall Assessment of Industry Attractiveness Based on External Factors Analysis Notes: H = high, M = medium and L = low.

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Chapter 4

4.

Internal analysis of the company

4.1

Companys Mission

Officially, the main mission of the company is to produce and supply normally and carefully brushed cotton yard, PE (polyethylene) thread, mixed PE/CO (polyethylene/cotton) thread; cloth of various types and dyes, flower printed and colorfully struped/checked; working dress, jacket with good quality to the customers. The company continuously improves its product quality and service to satisfy customer needs.

4.2

Company History

Vinh Phu Textile Company is a state-owned company under the Vietnam Textile and Garment Corporation (Tong Cong Ty Det May Viet Nam). The company was established in 1977 (formerly called Vinh Phu Textile United Factory).

4.2.1

From 1971 - 1977

In October 1971, the construction of the factory was begun. After six years of construction, the factory officially operated in October 1977 on a relatively large scale. China supplied all tools and machines, and workers were instructed and trained by Chinese experts. Initially, the production scale of the factory encompassed: Total weaving machines: 2000 machines Total thread-reeling equipment: 148 rods Annual production/output: 50 millions meters In April 1974, the first machine (thread-reeling equipment) was installed. After six months, the thread-reeling line was set up completely. On 1st December 1974, the first kilogram of yard was produced. On 3rd February 1975, the first gray fabric meter was produced. In March 1976, the first finished fabric meter was produced, and at the end of 1976 the factory produced a total of nine million fabric meters.

4.2.2 From 1977 1987

On 19th October 1977, the factory was inaugurated. In this stage, like many other textile companies, Vinh Phu Textile United Factory produced textile products as indicated in the plan from the State Planning Committee. The company was not concerned much about the quality and how to sell its products because the government already predetermined who were its customers, and what was the price.

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4.2.3

From 1988 Onwards

During this period, the new economic management system was introduced. Being stimulated by market mechanism, the factory gradually brought into full play its own production capacity. Besides fulfilling production objectives, the factory had to seek the market and customers itself in order to sell products. In addition, the factory had to enhance product quality to gain customers acceptance and consolidate its market share. As a first move toward change, the name of the company was changed from Vinh Phu Textile United Factory to Vinh Phu Textile Company in 1991. In subsequent years under the new conditions of the market economy, the company faced several difficulties, but the company still strove to catch the market in order to maintain its production level. To do so, it retained its traditional products while investing machines and equipment for the new production line. Following the countrys economic reform in 1987, Vinh Phu Textile Company began to bear the full responsibility for its business operations. It had to design production plans and to undertake real marketing activities of its own. Under the current circumstances, the company not only enjoys opportunities but also faces new threats. The textile product market for the company is expanded. The firm can reach appropriate customers for its products. It is easier for the company to choose favorable suppliers. However, it lacks modern technology to cope with increasing competition in both domestic and foreign markets. In fact, the company was compelled to undergo drastic changes a result of the collapse of Eastern European countries and former Soviet Union and the on-going economic reform in Vietnam.

4.3

Company Objectives and Policy

More than 20 years of existing, Vinh Phu Textile Company has manufactured the following main items: Normally and carefully brushed cotton yard, PE thread, mixed PE/CO thread Cloth of various types and dyes, flower printed and colourfully struped/checked Working dress, jacket

The company now pursues the following objectives: In the long term, it seeks to maximize its profits. By doing so, it intends to expand its market share in five years by expanding sales in both domestic and foreign markets. To penetrate these markets, it will renew machines and equipment, improve product quality and retain low cost. In addition, it intends to follow the following policies:

Social responsibility: the company seeks to create or maintain jobs at least for all current employees. It also commits to providing a good working conditions for the workers.

23

Investment policy: the company implements an investment policy in which the old existing equipment is replaced gradually by modern ones. By so doing, the company can continue to produce at the current level while investing in new technology. At the same time, the company can solve the problem of severe financial constraints. New machines will be imported and installed. This replacement plan might prove, however, to be too slow. The old existing equipment needs to be replaced by new modern ones within the next five years. Otherwise, it will face difficulties in meeting customers needs and quality requirements. Technological and R&D policy: textile technology will be imported mostly from foreign countries. Advanced technology will be a priority for textile equipment imports. In addition, the company will concentrate its resources on the improvement and innovation of the existing products and on the manufacturing process. Management policy: streamlining the organizational structure in order to make it more efficient and effective. Marketing policy: the company promotes its products through traditional ways such as catalogues, samples, exhibition, and personnel selling. So far, it has not undertaken any marketing research. Sales agents and forward integration are not planned.

4.4

Management of the Company 4.4.1 Organizational Structure

The organizational structure of the Vinh Phu Textile Co. is based on functional specialization, typical for small and medium enterprises as indicated in Figure 6. The production task is divided among different production lines, such as spinning factory, the weaving factory, the finishing factory, the garment factory, and workshops such as energy, water, and mechanics supply, etc. All business units are reporting directly to both the director and the heads of the functional departments. There is a close relationship among production factories and functional departments. The departments are responsible for providing guidance, co-ordination, and control to the units. The organizational structure is designed in such way to facilitate the flow of information going up and down. For Vinh Phu Textile Company, the Board of Director includes three persons: the Director, the Technical and Production Deputy Director and the Welfare Deputy Director who share the collective responsibility for the overall performance of the organization. Under these are the heads of functional departments or workshops. All of them have universitys degrees either in textile technology or in business. These managers also participate in the development of the business plans of the company. The functions of departments consist of: The Administration Department

24

The Administration department is responsible for managing the workforce, wages and salary, replacement and recruitment in line with production requirements. The department is also responsible for participating in the development of a salary system and a reward policy for staffing and the promotion of the employees. In addition, the department takes responsibility for procurement of the company.

Director

Tech. & Production Deputy Director

Welfare Deputy Director

Tech. Dept.

Finance & Accounting Dept.

Adm. Dept.

Business Dept.

Service Dept.

Spinning Factory

Weaving Factory

Finishing Factory

Garment Factory

Workshops

Clinic

Child-care Center

Figure 6. Organization Chart of Vinh Phu Textile Co.

The Technical and Production Department This is an important department in the company as the main activity of the company is production. The technical department is responsible for the technology, technique, and product quality. This department researches to improve product patterns design and increase product quality, as well as to reduce production costs. The department is also responsible for production process and quality control. The Business Department

25

The business department is responsible for preparing the production plans according to the market demand. It also prepares purchasing and selling contracts, supplies materials for production. The business department takes responsibility for researching the market and finding out customer needs in order to make production plans. Based on competitors analysis, the business department decides on the pricing of companys products. In practice, this department partly undertakes the basic activities of marketing and sales. Financial and Accounting Department This department oversees the financial and accounting activities. It analyses the business results through the financial data and business information. It also considers fund resources that can be mobilized to finance the investment needs.

4.4.2 Planning
In the past, under the centrally-planned economy, the company did not have to make production plans. Plans used to be set up by the State Planning Committee and then passed on to the Light Industry Ministry to be distributed among production units under its supervision. At that stage, the production objectives were concretely worked out in details for each enterprise. The most important task of the enterprises director is to implement those assigned objectives. Since the Vietnamese economy changed to the market-oriented one, the company takes the initiative in developing its own operating plans. The plans are then submitted back to the Light Industry Ministry for approval. Including in the submitted plans, the company often presents several alternatives to government for consideration in order to help the company complete its objectives. The company has no long term planning.

4.4.3 Controlling
So far, the company has not established any clear standards or targets yet, against which performance is to be properly evaluated. This makes measuring or monitoring performance a difficult task. Actually, the company has not an effective and quality oriented control system.

4.5

Human Resources Management

The number of employees, educational levels, and labor skills can reveal the capacity of the company on human resources. As shown in Table 3, there are 2,195 workers working in the production line in 1998. They work in three shifts each day. The average age of the employees is 40 years. Eighty percent of employees are female. The average monthly income of the companys employee is VND380,000 in 1997 and 1998, an increase of 12 % as compared with 1996. In 1998, the average monthly income of employee remained the same with previous year (VND380,000). The reason is that, the company staged a loss of VND 124 million in 1998 (see Income Statement in Appendix 2), due to rising costs and flat sales. As a result, employees salary was delayed by two months since last year. Table 3. Vinh Phu Textile Co.s Workforce

26

Total number of employees Direct labor % of total

1996 2,679 2,162 81

1997 2,688 2,202 82

1998 2,675 2,195 82

27

Monthly average income per worker (VND1000)

338

380

380

28

Source: Vinh Phu Textile Co., 1998. The educational levels of the employees of the company in 1998 are shown in Table 4. From this, we can see that the education level of the staff and employees in the company is low which is a characteristic in textile and garment industry. The majority of the employees of the company has primary school level. Only 3.4 % of employee of the company has a universitys degree, and nearly 3.7 % of employee has a middle education level. Table 4. Educational Degree of Employees (in 1998)

29

Total of employees University High school Primary school

Number of employees 2675 91 100 2090

Percentage 100 3.4 3.7 78

30

Other

394

14.7

31

Source: Vinh Phu Textile Co., 1998. In Table 5, experience and skills of Vinh Phu Textile Co.s employees are much lower than in the neighboring PangRim Textile Co. This is because, in general, Vinh Phu Textile Co.s employees have lower education levels. A part from the technology factor, the level of experience and skills of the workforce are believed to have significant influence on the productivity and products quality, as specially when such modern techniques as TQM and quality circles are applied to group of workers. The company has some policies to improve the quality of work life (QWL) for its employees. It has a clinic to take care of its employees health, and a child-care center for the children of its workers. The company implements a reward policy based on the quantity and quality of products that an employee produced. If the employee produces more, he (or she) can get more money. In case the quality of products the employee produced is high (ranked A), the employee can receive 120 % of his normal salary. On the contrary, if the products are of low quality (ranked C), the employee can be fined by getting only 80 % of his normal salary. Table 5. Experience and Skill Levels of Employees

32

Total employees VPT Co. % PRT Co. 2675 100 2468 1 180 7 112 2 580 22 324

Experience and skill levels 3 694 26 362 4 549 21 514 5 420 16 506 6 162 6 416 7 90 3 234

33

100

13

15

21

21

17

34

Source: Vinh Phu and PangRim Companies, 1998 Notes: VPT Co. = Vinh Phu Textile Company PRT Co. = PangRim Textile Company Before 1986, the government provided funds for the training and developing human resources of the company. But after the company becoming independent following the open door policy, the workers have to pay all the training fees for their own. The company only provides teaching facilities for in house technical training courses.

4.6

The Marketing Mix

The marketing concept has just been imported into Vietnam since the Vietnamese economy changed from command economy to market economy in 1987. Therefore, marketing is still very novel to many people in Vietnam, especially in rural areas like Vinh Phu province, where the Vinh Phu Textile Co. is located. That partly explains why marketing activities practically do not exist or are not practiced in full in Vinh Phu Textile Co.

4.6.1 Product and Service

As mentioned earlier, the company mainly concentrates on traditional products, which it already has a steady market share. These products are: - Normally and carefully brushed cotton yard, PE thread, mixed PE/CO thread. - Cloth of various types and dyes, flower printed and colorfully struped/checked. - Working dress and jacket. Yarn is used to produce fabric. A small amount of yarn is also sold to other weaving companies. Only fabric is sold in both domestic and foreign countries.

4.6.2 Price
In setting price, the main criteria being considered are: - The competitors price - The production cost of the company. Because of low quality of products, the company often sets prices 5 to 10 % lower than the average price in the market.

4.6.3 Place
To distribute and merchandise products, the company has a representative office in Hanoi, three outlets in Ho Chi Minh City, and one outlet in Nam Dinh. Until now, there is still no outlet in the middle of Vietnam nor in mountainous provinces in the North.

4.6.4 Promotion

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Similar to other textile companies in Vietnam, Vinh Phu Textile Co. does not advertise its products on the media. Instead, the company just promotes its products through catalogues, samples, product-showroom, and personal selling. Sometimes, the company rents a space in trade fairs to promote its products. In general, Vietnamese textile companies spend a small amount of money on advertisement. The P&A (promotion and advertisement) expenses only occupy a tiny part in the total revenues (0.01%).

4.6.5 Marketing Research and Customer Analysis

Until now, there is no marketing research being done in the company. The company also has not made any customer analysis to define its potential market segments.

4.6.6 Market Penetration of the Company

For yard product: - weaving companies belonging to the Vietnam Textile and Garment Corporation including traditional weavings such as net, towel, etc. and weaving of towel for export. - open market For fabric products: - shoes industry in Vietnam - security organizations and the army - open market. The market shares of the company in each segment are shown in the following table. Table 6. Market Penetration of the Company Segment Yard products Categories Weaving companies Open market Shoes industry Security and army Open market % Market share 3 0.5 5 2 1

Fabrics products

Source: Vinh Phu Textile Co., 1998

4.7

Manufacturing

There are three main processes involved in the manufacture of textile products. They are spinning, weaving, and finishing. Each of these stages, however, includes several smaller steps to eventually produce their respective final products. They are yarns or threads in the spinning process, gray fabric in the weaving process, and dyed or printed clothes in the finishing process.

36

Table 7. Actual Production and Capacity of the Company

37

1996 1. Spinning - Designed capacity (ton) - Actual production (ton) - Production/capacity ratio (%) 2. Weaving - Designed capacity (1000 meters) - Actual production (1000 meters) - Production/capacity ratio (%) 3. Finishing - Designed capacity (1000 meters) - Actual production (1000 meters) 7,000 1,516 21.66 48,000 5,078 10.58 50,000 5,380

1997 7,000 1,545 22.07 48,000 5,600 11.67 50,000 5,685

1998 7,000 2,049 29.27 48,000 5,730 11.94 50,000 5,823

38

- Production/capacity ratio (%)

10.76

11.37

11.65

39

Source: Vinh Phu Textile Co., 1998 The actual production and the designed capacity of Vinh Phu Textile Co. are shown in Table 7. From 1996 to 1998, the actual production of yarns, gray and finished fabrics were relatively stable with a small increase in each year. Except for production of yarns, the actual production increased from 1,545 tons to 2,049 tons in 1998. This is because in that year the company had a contract from PangRim Vietnam Textile Co. (a joint venture with Vinh Phu mother company) to produce yarns. In general, this table shows that the designed capacities in use of spinning, weaving and finishing were very low, only about 10% for weaving and finishing, and a little bit over 20% for spinning. The production levels were low because the old and outdated textile equipment caused low product quality and high production costs. Moreover, some equipment could not be used any more because of lack of spare parts.

4.7.1 Spinning
Almost all of spinning equipment of Vinh Phu Textile Co. was installed in 1970s as a part of Chinese aid package. Some other equipment was bought from the ex-Soviet Union in 1980s. This equipment is very old and outdated, which had been responsible for low productivity, high consumption of materials, and low quality of yarns. Most of yarns are input for the weaving process. Thus, low quality of yarns will, in turn, lead to low quality of gray fabrics and finished fabrics.

4.7.2 Weaving
Like weaving equipment in the whole Vietnamese textile industry, almost all of weaving machines of Vinh Phu Textile Co. is backward, while most textile companies in neighboring countries have moved towards production of fabrics of broader width with modern technology (such as shuttleless and airjet loom technology). This makes very difficult for the company to achieve the high standards required by the export market and by some market segments in Vietnam. In addition, the old equipment causes yarns to break much more than the modern ones. As observed by a manager, for old machines in use in Vinh Phu Textile Co. each worker can control only five to ten looms, while for modern machines in neighboring PangRim Textile Co., each worker can control from twenty to forty looms.

4.7.3 Finishing
The situation of the finishing equipment is not better. They are too old and outdated, inefficient and costly to operate. Such equipment consumes much more dyeing chemicals and energy. Moreover, the general quality of finished products is low and not stable. All of the three processes such as spinning, weaving and finishing together determine the cost and quality of finished fabrics. For the old spinning, weaving, and finishing equipment, many of them cannot be used any more because they need to be repaired, and some components should be replaced.

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4.8

Finance

Financial condition is the best criteria to measure the competitive position and the overall attractiveness of the company to investors. Based on financial statements analysis, we can gather quantitative intelligence at the level of the firm. At the same time, financial analysis helps us understand the financial strengths and weaknesses of the company in order to formulate strategies effectively. For this purpose, financial data are used to analyze the companys overall performance and assess its current financial standing. Some ratios are calculated to clarify the situation of Vinh Phu Textile Co.

4.8.1 Leverage Ratios

Table 8 shows the leverage ratios, which indicate how heavy the company is in debt. Although the total of assets of the company improved during the period between 1996 and 1998 (see the balance sheets in Appendix 1), the rate of debt to total assets increased from 47 % in 1996 to 66.5 % in 1997 and up to 70 % in 1998. At the same time, the rate of debt to equity also increased from 89 % in 1996 to 234 % in 1998. This means that the company cannot pay back its debt. Table 8. Leverage Capital Structure Ratios of Vinh Phu Textile Co. (in %)

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Debt ratio Long term debt-equity ratio

1996 47 45

1997 67 134

1998 70 144

42

Leverage of total debt to equity ratio

89

198

234

43

20 5 20 0 10 5 10 0 5 0 0 Y ear 1 9 96 19 97 19 98 D t ratio eb L n termd t-eq ity ratio og eb u L erag o to d t to eq ity ratio ev e f tal eb u
Figure 7. Leverage Ratios

According to the table above, there has been negative development in financial structure of Vinh Phu Textile Company over the period between 1996 and 1998. The total assets increased over the period, in which its debt rose at higher rate than its equity. This shows the bad sign of the companys financial performance.

4.8.2 Liquidity Ratios

Liquidity ratios measure how easily the firm can lay its hand on cash. These ratios are shown in the following table. The current ratios of Vinh Phu Textile Co. steadily decreased from 1.77 in 1996 to 1.44 in 1997 and down to 1.21 in 1998. This means that the trend is not good but the company can still meet short-term financial obligations. However, the quick ratios all are smaller than 1 and also declined in the period. The quick ratio in 1998 is 0.35, meaning that the company cannot meet short term financial obligations in case of trouble in sight, and inventories may not be sold at anything above fire-sale prices. It is very difficult for the company to borrow loans from the banks. Table 9. Liquidity Ratios for Vinh Phu Textile Company

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Current ratio

1996 1.77

1997 1.44

1998 1.21

45

Quick ratio

0.39

0.46

0.35

46

Liquidity Ratio

2 1 .5 1 0 .5 0 Y ear 19 96 C rren ratio u t

Figure 8. Liquidity Ratios

19 97

19 98 Q ick ratio u

As a result, shortage of cash flow, employees have not been paid on time since 1987. To the point, the company already stopped part of its operation and reduced work shifts.

4.8.3 Profitability (or Efficiency) Ratios

Profitability ratios are used to judge how efficient the firm is using its assets. These ratios are shown in Table 10. Accordingly, the sales to total assets ratios decreased over the last three years. This means that, the lower the sales to total assets ratio, the less the firm is working close to capacity. Table 10. Profitability Ratios for Vinh Phu Textile Company

47

Sales to total assets Net profit margin (%) Inventories turnover Average collection period (day)

1996 0.7 1.8 1.89 39

1997 0.6 2.3 2.04 45

1998 0.49 1.1 1.9 165

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Return on total assets (%)

1.3

1.4

0.5

The net profit margin increased in 1997 from 1.8 % in previous year to 2.3 %. But in 1998 the companys profit margin decreased to 1.1 %. This reflects the inefficiency in the expense structure of the company. This negative sign is also shown in the inventory turnover ratio. Similarly, the average collection period increased over the period, and this ratio of 165 days is very high in 1998. A high ratio is again an indication of a bad account receivable situation. The return on total assets increased in 1997 from 1.3 % in 1996 to 1.4 %, but reduced down to 0.5 % in 1998.

4.9

Contingency Strategies

According to the results of face-to-face interviews with managers and employees, and investigations of the actual situation of the company conducted by the author, the current situation of the company is not encouraging. As a matter of fact, the company is facing many problems, including the shortage of capital, debt overdue and backward technology. Almost all of machines and equipment are outdated. Moreover, the organizational structure is not efficient and effective, and the workers are not happy. When being asked how to rescue the company from the current difficult conditions and reverse the negative financial picture, the companys director said that if the company has the needed capital to carry out restructuring and modernize the production technology, it could overcome the current situation. Actually, it is not totally true and easy as that. To be able to get loans from the bank, the company must have a comprehensive and achievable strategy. In addition, to survive and grow further, the company must have a sustainable competitiveness strategy. Under the present circumstances, the company does not have either the capacity to develop a long-term strategy or the ability to implement it, if there is one. To help the company in this respect, there are three solutions to rescue the company, namely the equitization, joint venture, and loan alternatives.

4.9.1 Equitization (or Privatization)

The first solution is based on the State policy towards the state-owned enterprises. In the past, the company depended heavily on the government subsidies for survival. The termination of all kinds of privileges opens the way for privatization or equitization of those enterprises. In doing so, the company will issue shares and sell them to its employees and outsiders. This is considered a good way to get people involved in the companys performance. However, the company is not listed as a candidate to be equitized in the next five years. Until September 1998, there were only 38 companies out of 178 companies on the list having completed the first stage of equitization, and yet with many difficulties. The most difficulty is that it still lacks an effective method for assessing correctly the assets of the company to be equitized. So investors, especially the outsiders, do not dare to buy shares. All of these lead to the conclusion that the equitization solution is of low probability to be carried out.

4.9.2 Joint Venture

49

This solution relies on helps from the outside. Joint venture is considered the most appropriate way to acquire the capital pool, advanced technology and managerial expertise. A joint venture may permit local enterprises to increase its competitiveness in the local market by upgrading its production line and obtaining technical assistance from foreign firms. Joint ventures help the local partner gain easier access to technological information particularly from industrially developed countries (Truong Quang et al. 1997) that Vinh Phu Textile Co. badly needs. However, joint venture also brings with it many problems. The most typical are cross-cultural conflicts, ownership issues, and social problem, etc. In Vinh Phu Textile Company, the joint venture mode is not a desired form of strategy for change, and it is not a feasible solution. The trade union fears that such a joint venture with a foreign partner would inevitably bring about mass lay-off, a social consequence no one is able yet to resolve. After all, the joint venture solution seems to be of low probability to be implemented.

4.9.3 Own Rescue Plan

To overcome the current problems, the company needs capital for new investments (new equipment and new markets). There are three sources of capital from which the company can draw upon. They are government subsidy, bonds, and loans. Scenario 1: Government Subsidy: Except for special cases, e.g., those failures which would affect the national interests, the company cannot reverse the trend and continue to enjoy subsidy from the government. Scenario 2: Issuing bonds: Currently the government does not allow companies to issue bonds with the aim to raise capital for new investments. Scenario 3: The company borrows medium term loans from the bank: To be able to borrow money from the bank or from ODA source, the company must develop a comprehensive and achievable strategy. Moreover, having the capital is not enough, in order to survive and develop further, the company must have a sustainable comprehensiveness strategy. Table 11 summarizes the three scenarios and their weighting.

Table 11. Sources of Fund and its Weigh

50

1 2 3

Scenario Subsidy Issue bonds Loans/ ODA

Explanation The state cannot stand for any more The government does not allow the SOEs to issue bonds The company must prepare a comprehensive and achievable strategy.

Weigh M L H

Sustainable Competitiveness Strategy New technology New products New markets

Note: H = high, M = medium, L = low.

4.10 Summary of the Internal Factors

1. Company strategy: No long term strategy. Simple organizational structure, but not rational. Straight reporting line. Low education level and low degree of skill and experience. Unhappy. 2. Companys structure:

3. Companys people:

4. Companys culture: Workers are unwilling work for the survival of the company. Bad working atmosphere.

5. Companys functions: Management Relatively educated management team. Bad planning and controlling system.

Marketing - No marketing department and no related marketing activities.

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Manufacturing - Outdated and backward technology and equipment. - Weak materials management. Finance - Negative financial picture. - Severe financial constraints. R&D - Lack of R&D activities.

SWOT Analysis

52

Strengths low labor cost long history relative high educated management team

Weaknesses organizational structure no long term strategy lack marketing activities outdated & backward technology high debt, severe financial constraints low market share

53

Opportunities domestic production does not meet the actual demand high market growth potential textile industry is stimulated abundant labor force and low labor cost obtainable advanced technology government support

Threats from smuggling and imported products tough competition change in customers taste depend on imported materials

54

Chapter 5

5.

Developing a change strategy

Based on the results of the external and internal analysis in chapter 3 and 4, in order to overcome the current circumstances and develop further, the Vinh Phu Textile Company needs to develop a comprehensive and achievable strategy for change. At first, the company should build up a firm capacity for change, which is indicated in the following figure.

Status Quo
Strategic Strategic Options Options Chosen Strategy Structure People Culture New requirements
No Yes

Implementation Fit? Available? Communication Commitment Execution Measurement Feedback

Change Adjust Improve Create Figure 9. Strategic Competence Framework Source: Truong Quang (1997) As a precondition for embarking on change, there is a sense of urgency should be perceived by the management as well as all workers, that leads to the necessity to take immediate action to rescue the company from going bankruptcy. A change strategy is, thus, needed to be developed and implemented.

5.1

Strategic Choice

55

Why does the company have to develop a change strategy? In fact, the company is facing tough competition, shortage of capital, backward technology, while it lost all the subsidies from the government (Figure 10). Under these conditions, a change strategy seems to be the only alternative for the company to avoid bankruptcy. To begin with, the company needs capital to modernize their production technology and equipment, and to reverse the negative financial picture. Further more, it should reorganize the organizational structure to be leaner and innovative, to develop human resources and an active culture in which qualified workers are willing to work for the survival of the company.

56

Survival & Growth Why change?

Sustainable competitiveness Change what?

Efficiency/ Effectiveness How to change?

57

Continuous changing business environment Fierce competition Backward technology Inefficient organization Workers unwilling to work for the survival Losing State subsidy

Organizational structure: innovative/leaner organization High quality/ low price products Technology/machines and equipment Corporate culture: employee involvement Skill level

New investment New market development Renew technology Responsive to market conditions Innovative/ leaner organization Motivated workers Proactive approach Quality control Cost control Participative management

Regional financial crisis

58

Figure 10. Strategic Choice How to implement these changes? Only by fulfilling these measures with a well-designed sustainable competitiveness strategy and with a closely monitored implementation mechanism, would the company compete and survive in the fiercely competitive textile industry as today. However, designing a comprehensive and achievable strategy for a state-owned company is a very complex task, given the status quo of the company.

5.2

Mission of the Company

Based on the result of the interviews with the companys employees and managers, a typical mission of the company can be stated as follows: The vision: We drive to become the best textile products company in the North of Vietnam. The strategy: We will achieve our vision by: - Making total quality a way of doing business in Vinh Phu Textile Co. - Relentlessly pursuing of full customer satisfaction. - Continuous developing human resources and retaining a happy, satisfied workforce. - Producing superior returns for our stakeholders. The Values: Customer: we listen to our customers and improve our products to meet their present and future needs. People: our success depends on high-performing people working together, and teamwork are valued and recognized. Financial Responsibility: We are prudent and effective in the use of the resources entrusted to us. The new mission of the company should be communicated to all members of the company to ensure their commitment to the new course of direction of the company in the future.

5.3

A Change Strategy for Vinh Phu Textile Company

59

A change strategy should encompass all the three important components of the company. In order to make a real impact on the existing organization as described below (Figure 11). An appropriate structure: lean and flexible, able to respond quickly to market requirements and dynamic enough to be creative and innovative. A motivated workforce: in which people are positioned in the right place accordingly to their qualification. At the same time, they are led by vision-driven leadership and rewarded according to their performance. An effective human resource development program is put in place to achieve both maximum productivity (for the company) and satisfaction (for individual). A winning culture: in which all employees and functions work together to achieve the common goals of the company, that is to keep the company survive and grow. Such a culture should be observed, shared and practiced by all members of the organization in an open communication and fully cooperative work setting.

60

Structure Appropriate

Competitive Advantage

People Motivated

Culture Winning

Figure 11. Conditions for a Change Strategy of a Company Source: Truong Quang (1998)

All these components, if created, adjusted and developed will contribute to strengthen the position of the company and help it sustain its competitiveness in the future.

5.4

Organizational Structure

In order to operate more efficiently and effectively in the market economy, Vinh Phu Textile Company needs to reorganize its organizational structure in a more appropriate setting. The new structure will consist of five departments as suggested in the following chart.

61

Director

Deputy Director

Production Department (including quality)

Marketing Department

Human Resource Department (including welfare)

Finance & Accounting Department

Administration Department

Figure 12. Proposed Organization Chart

Production Department: is responsible for: - quality of the product - design and pattern - production management - maintenance service

Finance and Accounting Department: is responsible for: - financing - cost control - cash flow management - purchasing/ procurement

Marketing Department: is responsible for: - marketing research/ customer analysis - distribution channels - promotion and advertising - selling

Human Resources Department: is responsible for: - human resource information system - recruitment and orientation - health and security - development and training - welfare of the employees

Administration Department - general activities - secretary pool - public relations and communication

62

The head of each department is a manager who is best qualified for his function. The board of director consists of the director, the deputy director and all functional managers. They are responsible for strategic development and the overall performance of the company. This structure promotes innovation, efficiency and effectiveness. The newly established marketing department, replacing part of the old business department and combining more activities of others, will demonstrate the commitment toward a customeroriented organization. With the new mission, marketing department is charged with marketing research, customer analysis, product development, sales, and other related marketing activities. It is also recommended that, each department in the company will determine its objectives along the line of the companys common goals. From here the objectives will be broken down to the individual unit. The aim of this is to pinpoint exactly what every employee should be doing and tie it directly to the formally established goals of the company. In this way, it is believed that efficiency standards will be determined and maintained.

5.5

Organizational Culture 5.5.1 Customer Responsiveness

To achieve customer responsiveness, the company must give its customers exactly what they want and when they want it. Consequently, the company must do everything possible to identify customer needs and to satisfy them. For this purpose, every ones job is designed in terms of how he or she can help achieve superior efficiency, quality, and innovation for the company.

5.5.2 Loyal Customers and Loyal Employees

Loyal customers are seen as a key strategic asset and resource that must be preserved and defended. Loyal employees are essential to maintaining a strong organizational culture, to improving efficiency in the value-delivery process, and to building long-term customer relationships. To survive the current survival test, the companys products must be able to compete in the domestic market and export to foreign markets. The company needs to be able to produce products with high quality at low production costs. In order to be able to do that, firstly the company needs to have qualified workers. But that is not enough if these qualified workers are unwilling to work for the survival and growth of the company. Hence, Vinh Phu Textile Company needs to create a corporate culture in which qualified workers are willing to work for the survival and growth of the company. To achieve this end, the company has to acquire qualified workers and motivate them and retain them to work for the company.

5.6

People

Employee productivity is one of the key determinants of the companys efficiency and cost structure. The more productive the employees, the lower will be the unit costs.
63

Currently, the employee productivity of the company is very low, 4 to 5 times lower than the neighboring company-PangRim Textile Co., as admitted by the companys director in an interview. To increase employee productivity, there are three main alternatives: training employees; organizing the workforce into self-managing teams; and linking pay to performance.

5.6.1 Employee Training

As discussed in chapter 4, almost all of the companys workers have low education level and are unskilled (see Table 4 and 5). To improve the employee productivity and the quality of products, Vinh Phu Textile Company should employ workers with higher skills. Because individuals who are more skilled can perform tasks faster and more accurately. They are more likely to learn the complex tasks associated with many modern production methods than individuals with lesser skills. Training can update employee skills, bringing the company productivity-related efficiency gains.

5.6.2 Self-managing Teams

Team members learn all team tasks and rotate from job to job. Team members can fill in for absent coworkers. Performance bonuses linked to team production and quality targets work as an additional motivators.

5.6.3 Pay for Performance

Because people work for money, so it is logical that linking pay to performance can help increase employee productivity. However, the issue is not quite as simple as just introducing incentive pay systems; it is also important to design what kind of performance is to be rewarded and how.

5.7

Integrated Strategy 5.7.1 Generic Strategy

To build up its own competitive advantage, Vinh Phu Textile Company should choose from three generic competitive approaches: cost leadership, differentiation, and focus. Each of the generic strategies results from the company making consistent choices on product, market, and distinctive competencies. The following table summarizes the alternatives appropriate for each strategy. Currently, Vinh Phu Textile Company has no distinctive competencies compared with its local competitors. The best option among the three generic strategies for the company is the focus strategy because of following reasons:

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Table 12. Strategic Choices for Vinh Phu Textile Co.

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Generic strategy Cost leadership

Product differentiation Low (principally by price) High (principally by uniqueness)

Market segmentation Low (mass market)

Distinctive competency Manufacturing and materials management Research and development, sales and marketing

Differentiation

High (many market segments)

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Focus

Low to high (price or uniqueness)

Low (one or a few segments)

Any kind of distinctive competency

Source: Hill and Jones (1995)

Constraints of its resources: Vinh Phu Textile Company has limited human resources, technology and capital. Almost all of the machines and equipment are outdated and they need to be improved or renewed by modern technology. All this requires heavily capital investment that Vinh Phu Textile Company now cannot afford. By following the focus strategy, the company can reduce its investment requirements. Meanwhile, a low cost or a differentiation strategy asks for huge investments for both renewal of existing equipment and expansion of production capacity in order to take advantage of economies of scale or obtain uniqueness. Moreover, the textile industry in Vietnam is a fragmented industry and it is at the growth stage. The task facing the company is to consolidate its position and provide the basis it needs to survive and grow. Due to limitations of its resources, pursuing a low cost strategy or a differentiation strategy can lead to stretch its already strained resources. On the contrary, a focus strategy allows the company to concentrate its resources on serving its customers better and compete more effectively.

Following the focus strategy, the company will focus on the markets in the North of Vietnam, Laos and Southeast of China. Besides producing normal fabrics to sell in the open market, the company can produce low quality fabrics to serve the shoes industry in Vietnam. In addition, the company can produce special fabrics to serve the army and securitys demand. When the company becomes strong enough, it can expand to other market segments. Based on the focus strategy, Vinh Phu Textile Company should try to improve its product quality. It should invest more in marketing and sales, research and development, production, human resources to build up distinctive competencies within these functions.

5.7.2 Investment Strategy

There is a second choice to be made at the business level, that is which type of investment strategy to pursue in support of the competitive strategy. Since the Vietnamese textile industry can be seen as in its growth stage, the most appropriate investment strategy for the Vinh Phu Textile Company with a weak competitive position is the market concentration strategy. This means that the company should seek to be more specialized in some ways and adopt a focus strategy to reduce their investment needs. Almost all of machines and equipment of Vinh Phu Textile Company are outdated. They need to be renewed. But because replacing all of existing machines and equipment requires a large amount of money that the company cannot afford at once or find financing sources. So they will be replaced gradually by modern ones.

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In the short-term: at the beginning stage of investment strategy, Vinh Phu Textile Company should concentrate its investment on improving and renovating the finishing production line. By this way, with not large investment requirement, it allows the company to improve immediately the finished products, especially in terms of pattern, appearance, color, and decoration. The company should also invest in marketing activities with the aim of consolidating and strengthening its existing position in the local market. In the long-term: all of old machines and equipment should be replaced by modern ones in the next few years together with recruitment of high skill workers, qualified engineers to handle new technology and more complex tasks of management.

5.7.3 Marketing Strategy

Market Segmentation and Target Markets Up to present, selecting a target market is still a new task at the Vinh Phu Textile Company. In the past, the company produced textile products and sold them in the market without any commiseration of what groups of customers would be served or what differences are there between the groups regarding such critical factors as product characteristic, quality, price, distribution channel and service. But today the business environment is different. The company has to identify who is its target customers and where in the market to position its products. Geographically, Vietnam is divided into three parts: the North, the Center and the South, in which the center is poorest region of the country. A large part of population is concentrated in the North (37%) and in the South (35%). Eighty percent of population is living in the rural areas. The South is very far away from the North (about 2000km); meanwhile the transportation means remain very poor and expensive. In addition, manufacturing and selling bases of Vinh Phu Textile Company are located in the North; and there are many strong textile competitors located in the South. So the best way for Vinh Phu Textile Company is to principally target the North Vietnam, especially mountainous provinces. In the international market, the company should focus on Laos and Cambodia. Target customers Because of low product quality and backward technology, the company should target those who are price oriented & do not need high quality. The company should focus on footwear industry, army and security organizations. Product Along with improving the product quality, Vinh Phu Textile Company should diversify into many kinds of fabrics which are attractive to different age groups. In fact, with the same kind of yarn, it can produce many kinds of fabrics according to the need of each customer group. In almost all of cases, the difference among the kinds of fabrics is identified by design, pattern, appearance, decoration, and color, but not by kind of yarn. Therefore, the finishing stage in production process plays a very important role to create different kinds of fabrics. Distribution

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To be convenient for Vinh Phu Textile Companys targeted customers in time and place utility, the company should formulate and follow an extensive distribution strategy to increase the distribution coverage through the improvement and the expansion of the current distribution network. To encourage the wholesalers and agents to buy the companys fabrics and increase the inventory level of the distribution channel, the company can provide favorable conditions such as discount prices and allowances when buying a large quantity. In addition, through an effective distribution network, the company can catch up market information and customer feedback. The effective distribution channels proposed for the Vinh Phu Textile Company are presented in the Figure 13. Promotion To boost sales, the Vinh Phu Textile company needs to undertake a promotion strategy aiming to persuade customers to buy its products, increase awareness and degree of loyalty in the customers. Some promotion tools that the company can use are: Advertising: It should use Vietnam Textile and Garment Magazine, and Light Industrial Magazine to advertise their products. These magazines are most concerned by wholesalers and garment companies. In addition, the cost for advertising in these magazines is not expensive. Participating in trade fairs: This is very useful promotion tool. Trade fairs provide excellent opportunities for the company to demonstrate and merchandize its products and attract more customers.

Vinh Phu Textile Company

Wholesalers

Agents

Agents

Retailers

Retailers

Retailers

Customers
Figure 13. The Proposed Distribution Channels

Chapter 6

6.

Conclusions and Recommendations

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This study has analyzed the current strategic situation of the textile industry in Vietnam by analysing the external and internal environment of the Vinh Phu Textile Company. Based on this analysis, the study has proposed a change strategy for the chosen company, which emphasizes on improving its sustainable competitive position and strategic capability. The following are highlights of the research.

6.1

Conclusions

Generally, Vietnam has created a favorable business environment for all companies in the country as well as textile and garment industry. The demand for textile and garment products is increasing providing textile companies opportunities to expand their production. With the current population of over 78 million, Vietnam is really a potential market. Textile is a particular industry that requires a large workforce. Hence, the textile industry in Vietnam can optimize its competitive advantages by capitalize on such aspects as abundant, cheap, hard working and quick learning workforce. Government policies and regulations related to business operations have been improved to support business operations of state-owned companies. In fact, the government has issued several policies which are strongly stimulating the development of textile industry. Although the majority of technology and equipment of Vietnam textile enterprises are backward and outdated, but the opening the economy allows companies to be able to obtain advanced technology and modern equipment from developed countries in various forms. The competition between textile products of Vietnam companies and those of other developing countries will be intensified in the international markets. Meanwhile, domestic textile manufacturers have to struggle with imported products legally or illegally from neighbor countries. All the strengths and weaknesses of the Vinh Phu Textile Company are found out in the internal and external analysis in terms of management, marketing, production and finance. In particular, the company has many weaknesses. For instance, most of the employees and staff of the company get low education level and low degree of skill and experience. In addition, many of the workers are unhappy and are not satisfied with their current jobs in the face of their meager salary being delayed for several months. They are unwilling to work for the survival of the company. Other weaknesses of the company are inefficient marketing, production, technology, and finance activities. The company is facing severe financial constraints and debt over due. However, the company has an advantage on low labor cost. The main part of this research is the development of a change strategy for the company based on the external and internal analysis. An adjustment in the organizational structure, organizational culture and people to materialize the new mission of the company is suggested in which an appropriate structure, a motivate workforce and a winning culture are the key conditions.

6.2

Recommendations for Strategy Implementation

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In order to implement successfully the change strategy and get the support from the government, the Vietnam Textile and Garment Corporation should first initiate a change strategy. In addition, the management team of the company should build up the following measures. Creating a corporate culture in which the workers are willing to work for the survival of the company. The company should employ workers with higher skills, able to absorb new technology. Take unpopular measures such as removing unnecessary people from the payroll of the company. Link performance bonuses to production team and quality targets. Link pay to performance. Developing an up and down information system to monitor and control performance. In order to overcome capital difficulties to import modern textile technologies from outside, the company should use counter-trade contracts signed with foreign partners. According to these kinds of contracts, foreign partners will provide the state-of-the-art textile technologies for the company. In the contrast, the company has to sell its products to them for a long run. These contracts can also be used in the case the company wants to import materials.

Some other recommendations are proposed to responsible authorities to consider and adjust policies in order to help the company implementing their strategy. They are: Providing support to the company so that it can invest in production lines in order to get the maximum effectiveness of invested equipment in the first stage. Creating a favorable framework for enterprises through such policies as: facilitating export for enterprises in difficult conditions taking effective measures to stop smuggled textile products nationwide and limiting import goods those can be produced in the country providing tax exemptions for the textile industry To ensure the feasibility of this change strategy, the company needs an effective and dynamic management, as well as the full commitment of both the management and the workers of the Vinh Phu Textile Company to improve its implementation capacity. Developing a change strategy is the core of this research. In the final analysis, a change strategy includes both organization change and business change as indicated in the following figure.

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Purposes

Change Strategies
Organization Change Structure People Culture

Goals
Competitive Advantage Technology Innovation Market share Customer loyalty

Effectiveness Efficiency

Productivity (Company) Survival & Growth

Competitivenes s

Business Change Product Price Quality

Satisfaction (Employees)

Figure 14. A Proposed Change Strategy for Vinh Phu Textile Company Source: Adapted from Truong Quang (1998)

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References and Recommended Readings

Brealey, R. A. and Myers, S. C. 1996. Analyzing Financial Performance, Principles of Corporate Finance. New York: McGraw Hill: 765-783. Dawson, P. 1994. Organizational Change. London: Paul Chapman. Hax, A. C. and Majluf, N. S. 1991. The Strategy Concept and Process, New York: Prentice Hall. Hill, L. and Jones, G. R. 1995. Strategic Management: An Integrated Approach. New York: Houghton Mifflin. Johri L., 1998. Lecture Notes. School of Management, AIT. Khandwalla, P. N. 1992. Organizational Designs For Excellence. New Delhi: McGraw Hill. Marshall, S. 1999. Nimble State Owned Firm in Vietnam Seek Buyer, The Asian Wall Street Journal, Vol. XXIII, No. 115: 4. Nguyen Danh Bang, 1999. Hopeful Future of doi moi (innovation) in Vietnam, Vietnam Investment Review. 6: 11-12. Schermerhoorn, J., Hunt, J. and Osborn, R. 1997. Organizational Behavior (6th ed.). New York: John Wiley & Sons, Inc. Swierczek, F.W., Bumbacher, U. and Truong Quang, 1997. Understanding International Joint Ventures in Vietnam. Bangkok: SAV/SOM. Truong Quang, 1997 and 1998. Lecture Notes. School of Management, AIT. Vietnam Light Industry Ministry, 1996-1998. Annual Reports. Vietnam Government Statistics Offices, 1997 and 1998. Annual Reports. Vietnam Government Statistics Offices, 1996-1997. Vietnam Statistical Yearbook. Vinh Phu Textile Company, 1996-1998. Quarterly Financial Reports and Documents. Vietnam Textile and Garment Corporation, 1996-1998. Annual Reports and Documents. Vietnam Textile and Garment Corporation, 1997. Vietnam Textile and Garment Magazine, 124 and 125.

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Appendix

Appendix 1. Balance Sheets of Vinh Phu Textile Co.

(In million VND)

1996 Assets Cash Accounts receivable Inventories Other current assets Total current assets Net fixed assets Total assets Liabilities & Equity Accounts payable Other current liabilities Total current liabilities Long-term debt Total debt Equity Total liabilities & equity 550 7,934 33,451 1,042 42,977 60,499 103,476 24,042 186 24,228 24,540 48,768 54,708 103,476 1997 2,294 12,000 34,485 1,782 50,560 113,382 163,942 35,227 1 35,228 73,751 108,980 54,963 163,942 1998 347 14,441 39,119 966 54,874 113,295 168,169 45,584 (224) 45,360 72,476 117,837 50,332 168,169

Appendix 2. Income Statements of Vinh Phu Textile Co. (In million VND) Sales Cost of good sold Other expenses Total operating costs EBIT Interest expenses EBT Taxes Net income 1996 73,676 63,199 9,128 72,327 1,349 1,297 52 52 1997 81,454 69,302 10,262 79,564 1,890 1,773 118 118 1998 81,537 70,265 10,407 80,672 865 989 (124) (124)

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