Question

In Thailand, tea leaves are cultivated by a very large number of small farms that all produce beans of similar quality and taste at similar costs. There is tons of land and the equipment required is affordable enough to allow new farming businesses to start up under current market conditions. However, with better production techniques, especially alternatives to polluting fertilisers and deforestation, are needed in this industry. Using the theory and models of industry structure, examine this industry. Should government be worried about any aspect of how an industry with this market structure will do in such condition?

Answer 1

The industry structure model applicable to the tea industry in Thailand can be analysed with the Porters model :

The industries competitiveness can be analysed by checking five parameters:

(I) Competition in the industry: There is less competition in the industry as the industry consists mostly of small farmers, and the farmers produce similar products with similar costs. Improving the technology regarding the farming, processing and sales will have a great impact on the national income. With better production techniques, especially alternatives to polluting fertilisers and deforestation, the overall production can be increased and it will have an high impact on national income of the economy.

(II) Threat of new entrants: There is high scope for new entrants as they have so many tons of land and the equipment required is affordable enough to allow new farming businesses to start up under current market conditions.

(II) Power of suppliers: The tea industry consists of small farmers and hence the economies of scale advantage is not attained. Economies of scale has to be achieved by joining the small farmers production. The distribution mechanism or channels of distribution can be improved so as to capture more domestic and international markets and to strengthen the bargaining power of the suppliers.

(iv) Power of customers: The bargaining power of customers has little significance as the small tea farmers are supplying similar products. The low differentiation in products lead to homogenous price and low profit.

(v) Threat of substitute products: The product considered here being tea has a close substitute that is coffee. A change in the price of the close substitute coffee will have a high influence on the demand for tea. The farmers may easily shift their production from tea to coffee if the price of coffee is more than tea.

By considering these parameters the government can formulate a plan for the industry so that it can adjust its business strategy to optimally utilise its resources and generate more income. The government can seriously consider about improving the power of suppliers, increasing the number of new entrants and also regarding improving the technology. Using environment friendly methods of production, either in the case of use of pesticides or fertilisers is the need of the hour. The different countries has to be resposible regarding protection of the environment.