From textiles and apparel to shoes, furniture and toys, Spain’s traditional manufacturing sectors are suffering. The origins of their illness are growing competition from China and Eastern Europe as well as a series of structural weaknesses, which have cast doubt on their ability to survive. José Pla Barber and Francisco Puig Blanco, professors at the corporate management department of the University of Valencia, have teamed up with Esmeralda Linares Navarro of the University of Murcia to complete a research project on the textile industry, one of the most affected sectors. The authors propose a series of “medications” for saving this sector from the dangers of the global environment. Their study, entitled “Crisis, management attitudes and strategy in traditional manufacturing: The Spanish textile sector,” was published recently by Universia-Business Review.
A structural crisis
The total liberalization of trade in textiles and apparel, which began in January 2005, led to the massive arrival of Chinese products in Europe. From 2001 to 2005, Spain lost about 60,000 workers in that sector. The industry tends to be concentrated in geographical clusters and industrial districts; employment in the sector has dropped by half or more so in some areas of Catalonia and Valencia. Meanwhile, academics, executives and Spanish institutions are looking for ways to keep these traditional manufacturing sectors alive. Everywhere around the world, companies are tearing their hair out trying to figure out what to do. From 1995 to 2005, employment in China’s textile sector grew from about 15 million people to 19 million people.
“More than a temporary crisis due to the spread between the euro and the dollar, or a general economic crisis or a war, what we are facing is a structural crisis because environmental factors are changing significantly,” José Pla Barber tells Universia-Knowledge at Wharton. Among the factors that have had a negative impact on the competitiveness of traditional manufacturing sectors are international stagnation that stems from political instability and the high price of petroleum; the economic recession that key European trade partners are going through; and the appreciation of the euro relative to the dollar. These factors have raised prices for European products in leading markets outside the European Union.
There are also competitive pressures from such emerging countries as China, Brazil and India, which have the advantage of low salaries and enormous production capacities, as well as pressures from the nations of Eastern Europe. In addition to their low wage rates, the countries of Eastern Europe have a high educational level and they are closer to Europe, both culturally and geographically.
And that isn’t all. “This type of company winds up having no customers,” notes Pla. The hypermarkets and big chains are already buying from China. Besides, it is very hard to get business because those big companies have centralized their purchasing departments, “thus reducing the number of suppliers they have, and establishing requirements for suppliers that can only be achieved by companies that have considerable size,” notes the article. Export customers outside Europe have also been lost “because we are now 30% more expensive as a result of the euro,” he adds. Finally, the third type of customer is the traditional retailer, such as the corner clothing shop and shoe store. In that regard, more and more consumers are moving toward such specialized shops as Zara, Ikea and Toys R Us.
According to Pla, internal factors also have an influence on the corporate competitiveness of traditional manufacturing sectors. From the organizational point of view, companies in Spain are too fragmented. They are too small; in these sectors, only 3% of all companies have more than 50 employees. In addition, given the family character of most of these companies, there is a shortage of professional managerial skills. On the other hand, there is a clear lack of definition when it comes to conceiving organizational structures and corporate strategies. Companies also display significant weaknesses such as a low level of differentiation that leads to price wars. Among other problems are the absence of a clear attitude toward cooperative strategy and a shortage of investment in marketing, research and development.
Three types of companies: ‘The short-sighted, the losers and the fighters
One goal of the study was to collect managers’ perceptions about the current state of the textile industry. It was also attempted to identify various groups of companies that had different perceptions and it described the characteristics of each group. The initial results produced a somewhat gloomy scenario. Half of the managers thought that conditions in the sector were either ‘ordinary’ or ‘bad,’ and 72% thought that conditions would continue without any changes or that they would get even worse. And 58% thought that someone else was responsible for managing change, not executives and managers.
The professors classified companies in their study into three groups. The largest group, which contained 47% of the sampling, was described as “the short-sighted.” These companies either had no strategy or they were reluctant to have one. For these companies, explains Pla, “the situation is something created outside; they are not responsible, and they are not the ones who should react” in their view. These are the sorts of companies “that do not realize what the situation is really about. Generally speaking, they are the smaller companies; companies that are family owned, whose managers are not well trained, and whose asset value takes a sudden turn for the worse.”
The second group, which comprises 20% of the sampling, is known as the “the losers.” Their reaction is either “extreme or radical.” The options that their company considered for dealing with the crisis were either to abandon the sector; become an importer, or outsource production. These companies “take a very pessimistic view of the changes and the new competitive conditions. They believe that the crisis has a structural character but it is one that they cannot control. Those two factors explain their strategy, which is based on pessimism and abandonment,” says the study.
The third group, which comprises 33% of the companies, is known as “the fighters,” and they have a strong will to survive. According to the study, their managers “perceive the situation in a more positive and controllable way, which validates their reactive strategy and, above all, their efforts to choose more innovative strategies in the face of struggle and change.” Usually, someone with university training is managing this sort of company, a fact that is a source of satisfaction for Pla.
The study attempted to associate attitudes toward crisis with certain organizational characteristics. The results showed that the organizational factors that most distinguish these groups are, first of all, whether a family is managing the company and, second, the educational level of its management. “Size is not the fundamental variable but the attitude of the managers is,” notes Pla. The study also found that small and family-owned companies have the biggest problems when it comes to dealing with change. “This shows up more clearly in traditional manufacturing sectors because those sectors tend to be concentrated in clusters where personal relationships play a determining role.”
Two new concepts of the company
The professors created two other new models of the corporation. Although they are radical opposites, both models can serve as a survival guide for companies. Both models show that the decision making process is a function of a company’s overall character.
The first kind of company is “the challenger,” the sort of company that is both “global” and “pro-active.” Through mergers and partnerships with other companies in its sector, “it can achieve enough size to gain economies of scale and reach. It can escape the limitations of small size,” says the study. As a result, it can generate truly necessary investments in research, development and marketing. This kind of company strives to develop strategies that are more appropriate in the current global environment. For example, it can commit to marketing its brands in foreign markets and to strengthening its own distribution networks. It can even commit to creating its own sales subsidiaries. It can take advantage of outsourcing in numerous locations; thus, it can manufacture abroad those products that do not generate much value added while maintaining production facilities at home for those activities that generate greater value added such as design and logistics. Finally, it can move forward by setting up its own shops and franchises.
Rather than grow larger, the second sort of company chooses to get smaller. This sort of company is called “the survivor” and it is both “local” and “reactive.” “As a result of its change in attitude, it seeks out specialization, differentiation and innovation in its own market niche enabling it to survive,” says the study. This sort of company has to pay a lot of attention to lowering its costs, minimizing its inventory and speeding up its response time. To compete, many of these companies need to resort to importing and to subcontracting in foreign countries. “Correctly managing your logistics activities is vital as is trying to differentiate your company from powerful providers from emerging countries.”
According to Pla, there are many examples of this type of company in every sector. In textiles, examples include Manterol and Atrium. In the shoe business, there are Panama Jack and Camper. In furniture, there is Kettal. “Some companies are involved in these growth processes through cooperation, mergers and so forth. Ultimately, these are the companies that will survive. There will be a lot fewer companies but those that remain will be more competitive,” he says.
In both kinds of models, explains the study, “it is becoming more and more clear that in the future, traditional sectors of manufacturing will play a less significant role and corporate competitiveness will depend on astutely managing markets; building and managing an efficient network of suppliers at home and abroad; and on distribution (logistics), marketing and design.”
The professors conclude by saying that solutions to the crisis really do exist. To succeed, companies need to behave like “the fighters.” In some cases, this will lead them toward a new concept of their company, involving a reconfiguration of their assets and their activities. The authors also warn that it will be the job of the manager to identify possibilities that will open up for his company and to look for specific solutions. There are no overall prescriptions; each company is different.
The authors encourage executives to have fewer preconceptions when it comes to hiring university graduates trained within corporations. “A public university is not so far from the (real) world. There are recent graduates who, if you give them a little training and a little experience in the company, can transmit a series of ideas and values that possibly escape those managers who are doing their day-to-day tasks. This kind of new blood can provide a lot of help,” concludes Pla. On the other hand, the study argues that traditional family-owned companies should break down their decision-making structures and try to let independent advisors join their boards of directors.