Harvard Case - Sunton Manufacturing in Cambodia: Exit or Remain?
"Sunton Manufacturing in Cambodia: Exit or Remain?" Harvard business case study is written by Zhangfeng Fei, Paul W. Beamish. It deals with the challenges in the field of International Business. The case study is 10 page(s) long and it was first published on : Dec 21, 2018
At Fern Fort University, we recommend that Sunton Manufacturing remain in Cambodia and implement a strategic plan focused on enhancing operational efficiency, expanding into new markets, and strengthening its commitment to corporate social responsibility. This strategy will leverage Sunton's existing strengths, address current challenges, and position the company for sustainable growth in the dynamic Cambodian market.
2. Background
Sunton Manufacturing, a Taiwanese company, established a garment factory in Cambodia in 2005. The company initially enjoyed success, capitalizing on the country's low labor costs and favorable trade agreements. However, Sunton now faces several challenges, including rising labor costs, increased competition, and growing pressure to improve its environmental and social practices. The case study centers on the decision facing Sunton's management: whether to exit the Cambodian market or remain and adapt to the changing environment.
The main protagonists in this case are Mr. Chen, the CEO of Sunton, and Ms. Sok, the factory manager in Cambodia. Mr. Chen is concerned about the declining profitability of the Cambodian operation and is considering closing the factory. Ms. Sok, on the other hand, believes that Sunton can remain competitive by implementing strategic changes and leveraging the unique opportunities presented by the Cambodian market.
3. Analysis of the Case Study
To analyze Sunton's situation, we will utilize the Porter's Five Forces framework to assess the competitive landscape and the SWOT analysis to identify the company's internal strengths and weaknesses, as well as external opportunities and threats.
Porter's Five Forces Analysis:
- Threat of New Entrants: The Cambodian garment industry is relatively easy to enter, with low barriers to entry. This poses a significant threat to Sunton, as new competitors can easily emerge and compete for market share.
- Bargaining Power of Suppliers: Sunton's suppliers, primarily local textile mills, have limited bargaining power due to the large number of garment factories in Cambodia. However, rising raw material costs and potential supply chain disruptions could impact Sunton's profitability.
- Bargaining Power of Buyers: Sunton's buyers, primarily international retailers, have significant bargaining power due to the competitive nature of the garment industry. They can easily switch suppliers if they find better prices or quality elsewhere.
- Threat of Substitute Products: The threat of substitute products is relatively low, as there are few viable alternatives to garments. However, the increasing popularity of online retailers and fast fashion brands could pose a potential threat in the long run.
- Competitive Rivalry: The Cambodian garment industry is highly competitive, with numerous local and international players vying for market share. This intense rivalry puts pressure on Sunton to maintain cost competitiveness and differentiate its products.
SWOT Analysis:
Strengths:
- Experienced management team: Sunton has a strong management team with extensive experience in the garment industry.
- Established infrastructure: The company has a well-established factory in Cambodia with existing machinery and equipment.
- Strong relationships with suppliers: Sunton has developed strong relationships with local textile mills, ensuring a reliable source of raw materials.
- Access to skilled labor: Cambodia has a large pool of skilled labor, providing Sunton with a competitive advantage in terms of labor costs.
Weaknesses:
- Declining profitability: Sunton's Cambodian operation has experienced declining profitability due to rising labor costs and increased competition.
- Limited product differentiation: Sunton's products are largely undifferentiated, making it difficult to command premium prices.
- Lack of investment in innovation: Sunton has not invested significantly in research and development, limiting its ability to develop new and innovative products.
- Environmental and social concerns: Sunton has faced criticism for its environmental and social practices, potentially damaging its brand reputation.
Opportunities:
- Growing Cambodian economy: Cambodia's economy is growing rapidly, creating opportunities for businesses to expand their operations.
- Free trade agreements: Cambodia benefits from several free trade agreements, providing access to new markets and reduced tariffs.
- Increasing demand for sustainable products: Consumers are increasingly demanding sustainable and ethical products, creating an opportunity for Sunton to differentiate itself.
- Technological advancements: Advancements in manufacturing technology can help Sunton improve efficiency and reduce costs.
Threats:
- Rising labor costs: Labor costs in Cambodia are rising, eroding Sunton's cost advantage.
- Increased competition: The garment industry is becoming increasingly competitive, with new players entering the market.
- Global economic slowdown: A global economic slowdown could negatively impact demand for garments, impacting Sunton's sales.
- Political instability: Political instability in Cambodia could disrupt business operations and create uncertainty for investors.
4. Recommendations
To address the challenges and capitalize on the opportunities, Sunton should implement the following strategic recommendations:
1. Enhance Operational Efficiency:
- Invest in automation and technology: Implement automation solutions in key manufacturing processes to reduce labor costs and improve efficiency.
- Optimize production processes: Conduct a thorough review of existing production processes to identify areas for improvement and streamline operations.
- Improve supply chain management: Implement a robust supply chain management system to ensure timely delivery of raw materials and finished goods, reducing lead times and inventory costs.
- Negotiate favorable contracts with suppliers: Leverage Sunton's strong relationships with suppliers to negotiate favorable pricing and payment terms.
2. Expand into New Markets:
- Develop new product lines: Invest in research and development to create new and innovative products that cater to specific market segments.
- Explore new markets: Leverage Cambodia's free trade agreements to access new markets in Southeast Asia and beyond.
- Develop a strong brand identity: Build a strong brand identity that emphasizes quality, sustainability, and ethical practices to differentiate Sunton from competitors.
- Implement effective marketing strategies: Develop targeted marketing campaigns to reach new customers and promote Sunton's products and brand.
3. Strengthen Commitment to Corporate Social Responsibility:
- Improve environmental practices: Implement initiatives to reduce waste, conserve energy, and minimize environmental impact.
- Enhance worker welfare: Improve working conditions, provide fair wages, and ensure compliance with labor laws.
- Engage with local communities: Support local communities through social programs and initiatives.
- Transparency and accountability: Publish annual sustainability reports and engage with stakeholders to demonstrate Sunton's commitment to ethical business practices.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: Sunton's core competencies lie in garment manufacturing and its mission is to provide high-quality products at competitive prices. The recommendations align with these core competencies and mission by focusing on improving operational efficiency, expanding into new markets, and enhancing brand reputation.
- External customers and internal clients: The recommendations address the needs of Sunton's external customers by offering high-quality products at competitive prices and meeting their growing demand for sustainability. They also address the needs of internal clients by creating a more efficient and rewarding work environment.
- Competitors: The recommendations help Sunton differentiate itself from competitors by focusing on innovation, sustainability, and brand building.
- Attractiveness ' quantitative measures if applicable: The recommendations are expected to improve Sunton's profitability by reducing costs, increasing sales, and enhancing brand value. While specific financial projections are not provided in this case study, the proposed actions are likely to lead to positive financial outcomes.
Assumptions:
- The Cambodian economy will continue to grow, creating opportunities for businesses to expand.
- The global demand for garments will remain strong, despite potential economic fluctuations.
- Sunton will be able to successfully implement the recommended strategies and achieve the desired outcomes.
6. Conclusion
By implementing these recommendations, Sunton can overcome its current challenges, capitalize on the opportunities presented by the Cambodian market, and position itself for sustainable growth. Remaining in Cambodia allows Sunton to leverage its existing infrastructure, skilled workforce, and strong supplier relationships while addressing the concerns of declining profitability and ethical practices. The company's commitment to innovation, sustainability, and brand building will enable it to compete effectively in the dynamic garment industry.
7. Discussion
Alternatives not selected:
- Exiting the Cambodian market: While this option would address the immediate concerns of declining profitability, it would also result in significant financial losses and damage to Sunton's reputation.
- Maintaining the status quo: This option would likely lead to further decline in profitability and market share as Sunton fails to adapt to the changing environment.
Risks and key assumptions:
- Economic downturn: A global economic downturn could negatively impact demand for garments, impacting Sunton's sales and profitability.
- Political instability: Political instability in Cambodia could disrupt business operations and create uncertainty for investors.
- Competition: New entrants and existing competitors could intensify competition, making it difficult for Sunton to maintain its market share.
Options Grid:
| Option | Advantages | Disadvantages | Risks |
|---|---|---|---|
| Exit Cambodia | Avoid further losses, reduce risk | Loss of existing infrastructure, damage to reputation, missed opportunities | Economic downturn, political instability |
| Maintain status quo | No immediate action required | Continued decline in profitability, loss of market share, damage to reputation | Increased competition, rising labor costs |
| Remain and adapt | Leverage existing strengths, capitalize on opportunities, enhance brand reputation | Requires significant investment and effort | Economic downturn, political instability, competition |
8. Next Steps
- Develop a detailed implementation plan: This plan should outline specific actions, timelines, and responsibilities for each recommendation.
- Secure necessary resources: Allocate sufficient financial and human resources to support the implementation of the strategic plan.
- Monitor progress and adjust as needed: Regularly track progress towards achieving the desired outcomes and make adjustments to the plan as needed.
- Communicate effectively with stakeholders: Keep stakeholders informed about the strategic plan and its progress, addressing concerns and fostering buy-in.
By taking these steps, Sunton can ensure a successful future in the Cambodian market and achieve its long-term growth objectives.
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Case Description
In January 2017, the founder of Sunton Manufacturing in Wuxi, Jiangsu Province, China, boarded a flight to Cambodia. He had to tackle the performance issue of the company's garment manufacturing joint venture (JV) there-after two years in operation, it had run out of cash. After meeting with his JV partner, he concluded that the existing JV in Sihanoukville was beyond repair. He now needed to decide whether to exit Cambodia or to remain there, albeit in a different city and with a new partner. A new factory would require further investment. If he quit Cambodia, could his company survive and develop in the future?
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