ORIENTAL WEAVERS Strategic Audit

About Oriental Weavers:

Oriental Weavers (OW) is one of the most recognized brands in the machine and handmade woven rug and carpet industry today. Established in 1980 by Mr. Mohamed Farid Khamis, a leading Egyptian entrepreneur and industrialist, the company has grown under his leadership to become the largest machine and handmade rug and carpet manufacturer in the world.

OW is the acknowledged leader in design, quality and innovation within the industry. With a simple vision the company became a leading worldwide exporter and by far the largest player in the Egyptian Market.

OW is the flagship company of the Orientals Group, which is a multinational organization that incorporates several companies dedicated to the production of woven rugs and carpeting, along with companies in other industries such as petrochemicals, property and real estate development, agro-industries, and other investment activities.  

OW, located in the 10th of Ramadan City near Cairo, is completely vertically integrated thus providing the company with the advantage of manipulating and producing fine fiber and manufacturing the worlds most innovative rugs and carpets. Most of OW’s raw materials are produced within its subsidiaries.  Therefore, it is able to pass on the advantages of complete vertical integration to all its customers.

Oriental Weavers has received worldwide recognition throughout the last decade. Amongst the many awards and recognitions, these are some of the highlights.

      OW was awarded UNIDOs "Africa’s Innovative Company" award in the large-scale industries sector for the year 1998.

      OW has consecutively won the "Americas Magnificent Rug Award" from 1994 to 2000 and again in 2002, 2005 & 2006 for its innovative designs and exceptional service.

      OW has gained the title of "Favorite Area Rug Manufacturer" from industry magazines from 1997 to 2006 variably in service, design, and quality.

      OW was awarded the Super-brand status from 2004 to 2006.

Vision

OW’s vision is to enhance our lifestyle worldwide; tomorrow’s homes will require ever-fashionable and inspired floor coverings with distinctive characters at affordable costs.

Mission Statement

OW’s mission is to build a state of the art carpets and rugs company by achieving economies of scale, being aggressively market oriented, being export oriented and internationally competitive, and maximizing the use of local competitive advantages.

Commitment

OW is committed to the pursuit of continued excellence in the manufacture of exquisite rugs and carpets and surpassing all our customers, suppliers and employees expectations. In addition we abide by the following simple belief “everything bows to innovation”. Innovation is our pillar of strength and the driving force behind all of our accomplishments.

 

Strategy & policies

Vertical integration allows for greater cost reductions and complete control over the manufacturing process.  OW’s vertical integration strategy embraces the complete carpet care and rug manufacturing process, from spinning and dyeing yarn to locally producing the polypropylene granules used in making synthetic fibers and blends thus guaranteeing quality and value for every rug.

The company embarked on achieving complete vertical integration in 1983 with the establishment of 10th of Ramadan Spinning Company, to satisfy OW’s wool fiber requirements. 

Egyptian Fibers Company (EFCO) and Oriental Weavers Fibers (OWF) were established in 1987 and 1993 respectively, securing OW’s supply of polypropylene fibers.  Moreover, EFCO exports a portion of its production to Arab and European countries. 

Sphinx, the group’s U.S. distribution arm was established in 1991, and Oriental Weavers International (OWI), the group’s export-oriented facility was founded in 1999 in the tax-free zone in the 10th of Ramadan City.  Finally, in 2001, OW and a set of chemically inclined partners launched Oriental Petrochemicals Company (OPC), Egypt’s first polypropylene venture.

 

This venture was crucial to OWC in that it improved OW’s overall production efficiency significantly, relieved the burden of foreign exchange operating costs and completed OW’s vertical integration vision.

Having vertically integrated the carpet and rug manufacturing business, OW is now looking to continually expand to meet market demand as well as diversify into new complimentary business initiatives. 

This is apparent with OW’s new expansion plans apparent with the start-up of the new integrated plant in China, producing BCF yarn, wool spinning, and manufacturing rugs.  AS for diversifying, OW has launched new products such as the Axminster (Wall to Wall) carpets and the Gobelin tapestries. 

Also, a new factory to produce terry cloth towels and bed sheets is on the verge of starting production.  This factory is a joint venture with Miro Radici, one of Europe’s leading textile and energy companies.

Stock Information

OW became a joint stock company in 1986 and launched its IPO in 1997, offering investors a brisk expansion strategy, stable cash flow streams, and high dividend yields.  Over the past two and a half decades, cost and production optimization have translated into impressive bottom line results. 

Issued and Paid-in Capital

OW’s issued and paid-in capital is currently LE 283.3 million distributed over 56.66 million shares. 

The company had two major capital increases in 1997:

-      In May ’97, paid-in capital was increased from LE 60 million to LE 110 million distributed over 11 million shares with a par value of LE 10 each.

-      OW offered 2.5 million shares at LE 58.4 per share to the public in June 1997, in a bid to secure financing for the company’s capacity expansions.

Afterwards,

-      OW carried out a stock split in December 2003, taking the former 13.5 million shares up to 27 million shares.

-      A 1:3 stock dividend distributed end of December 2003, increasing paid-in capital to LE 180 million distributed over 36 million shares.

-      A 1:9 stock dividend distributed in the first half of 2005, increasing paid-in capital to LE 200 million distributed over 40 million shares.

In January 2006, OW concluded the procedures for the restructuring of its corporate structure.  The restructuring entailed the acquisition of the outstanding minority and Khamis family stakes in existing companies and consolidated businesses. 

This allowed OW to attain full ownership of existing consolidated subsidiaries, eliminate leakage from the bottom line, mitigate perceived and potential conflicts of interest, and gain full access to the 1.4 million m2 of China based manufacturing capacity. 

The restructuring also involved bringing in new entities in related businesses into the OW fold through the acquisition of a controlling stake in MAC and the full acquisition of EFCO. 

This allowed OW to achieve full vertical integration, add substantial value to both top and bottom lines, exposure to the fast growing home flooring segment, and achieve control of MAC whilst minimizing dilution impact on existing OW shareholders. 

The acquisitions they conducted via a share swap on a relative valuation basis with no cash changing hands.  This restructuring led to an issuance of 16.66 million new shares, raising the issued and paid-in capital to LE 283.3 million distributed over 56.66 million shares.

Oriental Weavers products

Area Rugs:

Oriental Weavers is the world leader in area rugs. Their area rugs are designed with functionality in mind.

The various lines are created and produced to suit a variety of flooring needs.

From traditional to transitional, from contemporary to tribal, a new product is introduced every two weeks on average.

Among the company’s most popular introductions are:

Andy Warhol

Oriental Weavers secured a licensing agreement with the Andy Warhol Foundation, paving the way for a new fashion forward line of area rugs inspired by the renowned American icon. The line features a variety of designs from contemporary to floral and spanning nearly 40 years of Warhol’s work in machine made constructions representing a variety of price points.

National Geographic

The National Geographic line is inspired by ancient heritage, nature and the environment. These inspirations are embodied in four distinct collections: Tropical Winds, West Indies, South America and North Africa. The Collection stays true to the spirit of exploration which National Geographic is renowned for.

The Industry’s First Ever 3 and 4 Million Point Rug

Oriental Weavers IS unparalleled within the rug industry in regards to technological innovation. OW introduced the worlds first 3 and 4 million point rugs which combined unique designs with innovative weaving techniques to produce a revolutionary new rug to the market.

Custom Carpets

Custom made rugs and carpets are a newly established division of Oriental Weavers, developed around a simple concept of customer involvement. From matching a swatch of fabric or a sketch, our designers can transform any idea into an exquisite rug or carpet.

What is envisioned by the customer will be directly translated and produced. No color, design or size is impossible. Custom made rugs and carpets by Oriental Weavers bring a unique and truly distinguishable product to any decor

Gobelin Tapestry

The art of Gobelin emerged in the mid-15th century, when Jean Gobelin and Philibert Gobelin established a dyeing factory on the outskirts of Paris. The family business flourished, and in the early 17th century King Henry IV of France turned the establishment into a tapestry factory under Flemish weavers.

The factory commissioned designs by the best artists of the day, setting high standards of execution and encouraging the training of new artisans. The result was the production of magnificent hangings, upholstery, and furniture in a richly ornate style.

Oriental Weavers has stayed true to the creative genius of ancient tapestry producers. Using modern yarns and techniques we have produced distinct collections incorporating the rich history of this century old art form. Choose from a multitude of designs in inspiring colors. With some tapestries there are matching cushion covers available. These collections will be an exquisite feature in any setting.

Picking your Rug

Understanding basic design concepts is very helpful when selecting your rug. A few basic principles in design coordination include:  

ω  Rugs create the mood. A rug’s shades add intensity and relevance to a space. For example, an area rug can open up and brighten a space by using lighter shades or in contrast, darker shades close it in and make it more intimate.

ω  Think Opposite! One design myth is that if you have a patterned sofa in the room then the flooring should be one solid color to avoid making the space seem too busy. If the proper care is taken to ensure the patterns complement each other, pattern on pattern is not only acceptable but can add depth to the décor. A good rule in selecting pattern on pattern is think opposite. If you have a small pattern on the fabric, look at rugs with large patterns.
florals, plaids, stripes and damasks can work together providing they have size distinction and coordinate in color.

ω  Texture adds depth. Adding a rug with looped pile or a combination of cut pile and loop pile on top of a smooth surface floor creates another layer to the design.

ω  Special shapes and sizes are important. Sometimes what is needed to make a space look unique is to avoid using the standard rectangular rug. By using a round, octagon or oval area rug you can enhance a space.

ω  Never try to match the main fabric color. Find a rug that uses as its main color the same family of colors found in the swatch you are coordinating.

Corporate Governance

OW’s Board – Duties and Purpose

OW’s board members are selected from shareholders by majority vote and renewed every 3 years. As is its responsibility, the BOD ensures that management is fulfilling its duties by monitoring the effectiveness of managerial decisions, strategic plans, and policies. 

The BOD has a periodical reporting system and convenes every month to review the main performance indicators of the company such as sales, financials, inventory, and productivity, as well as to review capital expenditure needs and status.

 There are committees that are responsible for various studies and analysis of topics (as well as others that are called upon as the need arises), such as sales, expenses, technical reviews, etc… that present the outcomes to the BOD.  The BOD reviews, approves, and monitors the long-term strategic objectives and business plans of the management team. 

The BOD assesses the major risks facing the company and the steps taken by the management to control such risks.  The BOD overseas the accuracy of the company’s financial statements, compliance with legal requirements, the qualifications and independence of the company’s external auditors, and the performance of the company’s internal audits.

The BOD reviews and updates the company’s Code of Business Conduct and Ethics to ensure compliance with applicable laws and regulations.

The BOD has complete freedom in consulting with or engaging external advisors in relating activities.  Any such expenses are fully covered by OW.

In-time Reporting

As effective and in-time reporting is essential to the BOD’s function, board members enjoy complete access to OW’s management.  Nevertheless, board members should ensure that such activity neither distracts management from the business of the day nor disrupts the functional organizational hierarchy. 

On the other hand, the BOD encourages senior management to bring managers to its meetings in instances where they can provide specialist insight related to their operation or bring to light opportunities that senior management deems deserving of the BOD’s attention.

Selection of the Board

One board membership is reviewed annually in regards to experience, understanding of manufacturing, distribution, financial expertise, and above all the perceived needs of the BOD at the time.

The selection of new directors is the BOD’s responsibility.  The BOD nominates qualified candidates to the committee which includes the Chairman of the Board.

New directors undergo a general orientation process as well as board meetings which are held in various locations to familiarize the members with the company and its facilities.

OW’s BOD includes two independent directors, one from Misr Insurance Company and the other from Misr Reinsurance Company.  The remainder of the BOD is composed of management. 

Meeting Procedures

Selection of agenda items for BOD meetings
As is in his/her capacity, the Chairman of the Board shall set the agenda for the board meetings in cooperation with the directors to ensure the inclusion of all items of importance to the BOD.  In addition, each director has the right to add items to the agenda and/or raise items during the meeting that are deemed important yet not included in the official agenda.  Al such additional items must be correctly minuted in the official records of the meeting.

 Board materials distributed in advance
 To ensure the effectiveness of the board meetings, each director shall attend all the meetings while all the necessary documentation shall be distributed ahead of time including but not limited to the agenda, data to be discussed and any relevant documents that shall enhance the preparedness of the attendees.

 Protecting Shareholders
No significant decisions are made without holding an Extraordinary General Assembly to discuss the matter and gain majority approval.  General requirements of the law to treat shareholders equally in access to information are followed.  These terms ensure the protection of all minority shareholders.

Corporate Social Responsibility (CSR)

Human Rights

Oriental Weavers adheres to the International Declaration of Human Rights. They maintain a set of transparent human resources policies and procedures for both management and labor. Governmental labor offices represent all employees, and the company’s wages, benefits, labor policies, and management procedures comply with and exceed domestic requirements.

They provide a number of additional benefits to the entire workforce including free medical care for employees and their families at a hospital established by the Chairman in the 10th of Ramadan city. Subsidized housing is also provided. The company has also established an annual raffle that applies to all employees. The raffle is run during the Holy Month of Ramadan and the subsequent winners are sent to Hajj, the holy Muslim Pilgrimage.

They have consistently cultivated a policy of fairness and equality for all employees. Employees are encouraged to air any grievances and contribute their ideas to the enhancement of production efficiency and working conditions. Oriental Weavers ensures that all business conducted with suppliers and service providers comply with the International Standards of Human Rights.

They have established a joint committee that is comprised of both management and Union Representatives to continuously monitor and resolve any employee grievances and to enact any recommendations made by the employees to ensure their comfort and safety.

In addition, a board has been put in place responsible for salary reviews and bonuses that is implicitly responsible for fairness in bonuses and is responsible for administering additional funds for any employees that require financial assistance.

Labor Standards

They have made it a policy from their inception of ensuring that senior management interacts with all employees and that boards are formed that have representatives from all departments. This ensures that no opportunity is missed for grievances to be aired and corrective action can be swiftly taken where need be.

All employees know they are part of the Oriental Weavers family they have all individually helped to build the company up to what it has become today.

Absolutely no form of forced or compulsory labor exists at Oriental Weavers.

Oriental Weavers only employs adults over 18 years of age. In addition they make it adamantly clear to all their suppliers and affiliates that Oriental Weavers will not conduct any business with entities that do so. They are very vigilant when it comes to ensuring that no child labor is used directly or indirectly in any component that is required in the manufacture of their product.

They have also established a committee that is responsible for this policy for any manufacturers they use overseas in relation to their hand-made products. Members of this committee are sent on random checking missions to ensure that no child labor is being used to produce the product. Should they discover any illegalities, contracts are terminated on the spot.

Oriental Weavers is an equal opportunity employer. Discrimination is strictly forbidden. Employment guidelines are maintained by the Human Resources Department that is responsible for the welfare of all employees and compliance to any changes in governmental amendments to the employment law.

Environment

Oriental Weavers abides by a corporate environmental policy that commits the company to among other things, consistent improvement of their production processes to minimize the adverse impact of their water, air, noise and solid waste emissions to the environment. Consistent with this internal policy, Oriental Weavers maintains 1SO 9001 (Quality Management System) and ISO 1400I (Environmental Management System) certification.

In addition to these international standards the company complies with a host of client specifications relating to the procurement and use of raw materials in the production process.

For example, European companies such as Ikea and Marks & Spencer require Oriental Weavers to comply with EU environmental and occupational health and safety standards while American companies such as Home Depot require compliance with USEPA standards.

Each of their major clients audits Oriental Weavers for compliance with their respective standards on an annual basis. They in turn extend these compliance standards to their own domestic and international suppliers of raw materials.

Oriental Weavers Industrial Safety and Environment department manages the compliance of the company’s operations with the standards noted above as well as with all standards for environment management and workplace health and safety enforced by the national Environmental Affairs Agency (EAA).

With a staff of 85, the department manages, monitors, and regularly reports on a range of parameters to the EAA in order to maintain their license to operate all facilities.

Oriental Weavers is committed to an effective environmental health and safety management system that ensures the company’s compliance with international and domestic performance standards in all its operations.

Oriental Weavers makes a conscientious effort through monitoring and investment in equipment upgrades to optimize resource input and minimize waste from production processes. For example, their natural wool and spinning and dyeing plant utilizes radio frequency dying technology that eliminates the need for steam boilers and eliminates noise and vibration in the drying process.

Process waste latex is collected and recycled back to the production process. Carpet pile brushing and trimming waste is captured via vacuum units, bagged and sold to independent contractors for the manufacture of automobile mats.

Oriental Weavers is committed to continuously initiating various procedures to recycle waste materials and to always research and develop new ideas in the field of environmental protection under the ISO-14001.

They will endeavor to decrease their emissions even more and continue to contribute to the protection of the environment.

The company was founded on the highest standards of ethics and the Chairman has always enforced the highest ethical conduct in all business practices.

The Board of Oriental Weavers annually reviews and, if necessary, updates the company’s codes of conduct and business ethics. 

The Company communicates annually to all Oriental Weavers employees the company’s values and codes of conduct and see that they adhere to it.


Financial Highlights

                        “2009 actual figures”                       

•   Sales value up 3.17% year over year (Y-o-Y) to reach EGP 3,551 million.

• Net Income after minority for the period reached EGP 312 million - an increase of 0.4%.

• EPS reached EGP 4.06 compared with EGP 3.98 in FY 08 - an increase of 2%.

• Adjusted EBITDA (1) value up EGP 678 million - an increase of 1% Y-o-Y.

• EBT down 1.2% Y-o-Y to reach EGP 397 million.

• Woven Segment sales up 6% Y-o-Y.

• Tufted Segment sales down 1% Y-o-Y driven by a price reduction of 6%.

•   Capital:

o   Issued and paid-in capital: 373 MEGP

o   Number of shares: 74 million shares

o   Par value of 5 EGP per share

o   Shareholders’ Structure:

§  The Khamis Family 68%  -  Institutions 24%  -  Retail 8%.

  

Notes on performance analysis

a)      Revenues grew at a 4-year CAGR “compound annual growth rate” of 13%

Over the 2005-2008 period, revenues exhibited a strong growth of 13%, reaching EGP 3,441mn (up from EGP 2,405mn in 2005). This strong growth was propelled by a strong increase in volumes, reaching 106mn sqm in 2008 (up from 87mn sqm in 2005). Exports/sales volumes decreased to 62% in 2008, down from 64% in 2007.

b)      High polypropylene prices pressured gross margin

Gross profit margin was pressured over the 2005-2008 period from a high of 40% in 2005 to a low of 36% in 2008 due to the three-year CAGR growth of 13% in polypropylene prices.

c)      EBITDA grew at a CAGR of 3%

EBITDA grew at a three-year CAGR of 3%, reaching EGP552mn in 2008 (up from EGP 505mn in 2005). However, EBITDA margin dropped from a high of 21% in 2005 to 16% in 2008 on increasing polypropylene prices. This was partially offset by lower selling expenses due to lower US sales.

d)     Export subsidies made almost 31% of net profits before taxes

OW receives an export subsidy - an average 7% of its export bill. Previously, the company had faced some difficulties collecting its export rebates from the government in due time. Currently, OW promptly collects export rebates as they come due.

e)      Fluctuating earning.

Over 2005-2008 period, earnings exhibited a slight growth from EGP 299mn in 2005 to EGP 315mn in 2008. Earnings were pressured in 2006 on higher costs. A 21% growth in earnings was exhibited in 2007 on EGP27mn non-recurring tax benefits resulting from OW Rug manufacturing’s net operating losses.

f)       Stable performance in 2009

OWC has survived the global economic crises relatively unscathed, backed by its expansion in the local market. Furthermore, OWC strengthened its position in the global markets, benefitting from the exit of several international manufacturers. OWC increased its US market share by 200 bps (to 25%) and its European market share by 100 bps (to 20%).

g)      Expected earnings growth of 4% in 2009

In FY09, earnings are expected to grow 4% YoY despite an estimated 2% lower EBITDA. Assuming that: (i) 23% higher YoY receipts of export rebates in light of the 50% increase in rates in 1H09, and (ii) 46% lower minority interest as a result of the lower earnings OW anticipates it be reported by MAC, OWC’s 53%-owned subsidiary.

h)      Hannover fair a success

The confirmed orders OWC received during the Hannover fair (held in January) surged 67% YoY. Industry experts revealed that the industry is starting 2010 on a confident note. Orders received from the Hannover and Atlanta exhibitions represented around 18% of OWC's export sales in 2009.

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External  Environment  Analysis

Societal environment of Egypt:

 

1) Political

The Egyptian Constitution provides for a strong executive. Authority is vested in an elected president who can appoint one or more vice presidents, a prime minister, and a cabinet. The president's term runs for 6 years. Egypt's legislative body, the People's Assembly, has 454 members 444 popularly elected and 10 appointed by the president. The constitution reserves 50% of the assembly seats for "workers and peasants." The assembly sits for a 5-year term but can be dissolved earlier by the President. There also is a 264-member Shura (consultative) Council, in which 88 members are appointed and 174 elected for 6-year terms. Below the national level, authority is exercised by and through governors and mayors appointed by the central government and by popularly elected local councils. In March 2007, Mubarak introduced several constitutional amendments that would increase presidential powers and, more significantly, ban any political parties based on religion, race, or ethnicity. The amendments were put to a popular referendum and, despite low voter turnout and boycotts by opposition groups, passed with 75.9% approval.

Main political parties

The multi-party system was restored in 1976 by the then president Sadate. However, in practice it is the ruling National Democratic Party (NDP) which completely dominates the political arena. The Muslim brothers, a brotherhood created in 1928 by Hassan El Banna is the main opposition party of the country. They were banned but in spite of it, they were able to win 88 seats in the People's Assembly in the 2005 elections. The other opposition parties like Wafd, El-Ghad or the Nasserian Party are minority parties and were nearly wiped out in the 2005 elections.

Foreign trade

The Egyptian market is gradually opening up, especially after signing an agreement with the European Free Trade Association (EFTA) in 2006, and a free trade treaty with the United States. Its three primary export partners are the European Union, which represents more than a third of the trade, United States and Syria. Its three primary import partners are the European Union, the United States and China. Egypt mainly exports mineral fuels and oil, cotton, iron and steel. It imports mainly consumer electronic goods and capital goods, nuclear reactors and nuclear-powered boilers, cereals, food products and chemical products. Import volume has doubled and is twice the export volume, a fact which contributed to the deterioration of the country's trade balance.

2) Economical

In the past few years, the cabinet economic team has simplified and reduced tariffs and taxes, improved the transparency of the national budget, revived stalled privatizations of public enterprises and implemented economic legislation designed to foster private sector-driven economic growth and improve Egypt's competitiveness. Despite these achievements, the economy is still hampered by government intervention, substantial subsidies for food, housing, and energy, and bloated public sector payrolls.

The international economic downturn slowed Egypt's GDP growth to 4.5% in 2009, predominately affecting export-oriented sectors, including manufacturing and tourism. Unemployment is rising. In 2009 the government implemented a $2.7 billion stimulus package favoring infrastructure projects and export subsidies, and is considering up to $3.3 billion in additional stimulus spending in 2010 to mitigate the slowdown in economic growth.

In September 2009 - Egypt was ranked among the world’s 10 most active reformers for the fourth time. The country moved up to 106 from 116 among 183 economies worldwide in the overall ease of doing business ranking. According to the recently released report by IFC and the World Bank “Doing Business 2010: Reforming through Difficult Times”, Egypt made business start-up less costly, expedited the construction permit process, expanded the information available from the private credit bureau, and created commercial courts to speed up contract dispute settlements.

Being a former global leading reformer and a regional leading reformer in 2008/09, Egypt continued to make it easier to deal with construction permits by issuing executive articles for the 2008 construction law and eliminating most preapprovals for construction permits. Contract enforcement was expedited with the creation of commercial courts. Access to credit information has expanded with the addition of retailers to the database of the private credit bureau.

Facts and figures on the Egyptian economy:

GDP (purchasing power parity): $470.4 billion (2009 est.) country comparison to the world: 27 $450.1 billion (2008 est.) $419.9 billion (2007 est.)	GDP (official exchange rate): $188 billion (2009 est.)	GDP - real growth rate: 4.5% (2009 est.) country comparison to the world: 29 7.2% (2008 est.) 7.1% (2007 est.)	GDP - per capita (PPP): $6,000 (2009 est.) country comparison to the world: 133 $5,800 (2008 est.) $5,500 (2007 est.)
GDP - composition by sector: agriculture: 13.1% industry: 37.7% services: 49.2% (2009 est.)	Labor force: 25.8 million (2009 est.) country comparison to the world: 21	Labor force - by occupation: agriculture: 32% industry: 17% services: 51% (2001 est.)	Unemployment rate: 9.7% (2009 est.) country comparison to the world: 113 8.7% (2008 est.)
Population below poverty line: 20% (2005 est.)	Household income or consumption by percentage share: lowest 10%: 3.9% highest 10%: 27.6% (2005)	Distribution of family income - Gini index: 34.4 (2001) country comparison to the world: 90	Investment (gross fixed): 17.9% of GDP (2009 est.) country comparison to the world: 121
Budget: revenues: $48.86 billion expenditures: $61.61 billion (2009 est.)	Public debt: 79.8% of GDP (2009 est.) country comparison to the world: 15 86.5% of GDP (2008 est.)	Inflation rate (consumer prices): 10.1% (2009 est.) country comparison to the world: 193 18.3% (2008 est.)	Central bank discount rate: 11.5% (31 December 2008) country comparison to the world: 48 9% (31 December 2007)
Commercial bank prime lending rate: 11.82% (31 December 2008) country comparison to the world: 67 12.51% (31 December 2007)	Stock of money: $31.72 billion (31 December 2008) country comparison to the world: 27 $27.6 billion (31 December 2007)	Stock of quasi money: $112.2 billion (31 December 2008) country comparison to the world: 21 $102.6 billion (31 December 2007)	Stock of domestic credit: $126.5 billion (31 December 2008) country comparison to the world: 35 $113.9 billion (31 December 2007)
Market value of publicly traded shares: $85.89 billion (31 December 2008) country comparison to the world: 43 $139.3 billion (31 December 2007) $93.48 billion (31 December 2006)	Agriculture - products: cotton, rice, corn, wheat, beans, fruits, vegetables; cattle, water buffalo, sheep, goats	Industries: textiles, food processing, tourism, chemicals, pharmaceuticals, hydrocarbons, construction, cement, metals, light manufactures	Industrial production growth rate: 3.9% (2009 est.) country comparison to the world: 30
Current account balance: $-3.32 billion (2009 est.) country comparison to the world: 160 $-1.331 billion (2008 est.)	Exports: $22.91 billion (2009 est.) country comparison to the world: 64 $29.85 billion (2008 est.)	Imports: $43.98 billion (2009 est.) country comparison to the world: 48 $56.62 billion (2008 est.)	Reserves of foreign exchange and gold: $34.99 billion (31 December 2009 est.) country comparison to the world: 27 $33.85 billion (31 December 2008 est.)
Debt - external: $28.45 billion (31 December 2009 est.) country comparison to the world: 60 $32.12 billion (31 December 2008 est.)	Stock of direct foreign investment - at home: $66.43 billion (31 December 2009 est.) country comparison to the world: 44 $59.13 billion (31 December 2008 est.)	Stock of direct foreign investment - abroad: $12.23 billion (31 December 2009 est.) country comparison to the world: 43 $12.08 billion (31 December 2008 est.)	Exchange rates: Egyptian pounds (EGP) per US dollar - 5.6 (2009), 5.4 (2008), 5.67 (2007), 5.725 (2006), 5.78 (2005)

3) Sociocultural Environment:

Egypt’s total population stood at 80.3 million. Out of this approximately 90% are Muslims while the remaining are Christians. Most of the population inhabits the area near the Nile River and almost half of Egypt’s population is urban, living in the densely populated cities such as Cairo and Alexandria.

One of Egypt’s biggest socio-economic problems is the high unemployment rate which has been growing over the years. The unemployment rate, which has averaged more than 10% over a decade, increased to over 12% in 2005–06. With the population growing at 1.8% per annum, the economic growth of 4.4% is not enough to curb the unemployment rate. While the average growth in employed population during the last five-year period stood at 2.3%, the rise in unemployed population has been much higher during the same period averaging around 8%. The high rates of unemployment and population growth coupled with meager wages in most of the public sector companies contribute to the poverty levels, with close to 20% of Egypt’s population below the poverty line. A big challenge for Egypt in the near future will be to create jobs, as the population within the 20–45 age-group constitutes around 65% of the total population.

The education indicators of Egypt project a poor image of the education system. Only about 58% of the population is literate and there is a big difference in the literacy rates for males and females. Male literacy rate is around 68%, while female literacy rate is just about 47%, indicative of gender disparity. The National Council for Women, a nodal government agency that works for the welfare of women in Egypt, aims to completely eradicate illiteracy among females.

The healthcare system in Egypt is underdeveloped with only around 29% of the population covered by governmental health insurance. Egypt’s public healthcare system is under-funded, with the government committing only around $1 billion in 2005–06 for upgrading the healthcare sector, which represents a meager 2.7% of the total state budget. The ministry of health is the largest institutional financier providing free healthcare services in Egypt but its reach is limited. Almost 65% of the Egyptian people pay for their own insurance through private and other health insurance organizations. The total spending on healthcare in Egypt is only about 4% of its GDP.

4) Technological Environment:

Egypt's IT spending is expected to increase from US$1.3bn in 2010 to US$2.1bn by 2014 and the Egyptian IT market growth is forecasted to remain below pre-economic crisis levels in 2010, but economic recovery, tenders delayed from 2009 and higher incomes boosted by pay raises for civil servants and other groups should help to keep sales on an upwards trajectory.                                                 .

A number of policies have been implemented to attract foreign investment in IT outsourcing, including local employment subsidies, lower corporate taxes and deductions for training costs. The Egyptian minister of state for administrative development has said that 200 government services will soon be available online through a new e-government portal. The portal will offer 70 services in both English and Arabic. According to the Ministry for Administrative Development, more than 20 government agencies currently offer services and licenses online.                                                   .

Egypt's computer hardware sales are projected at US$821mn in 2010 and are forecast to reach around US$1.3bn in 2014. Egypt's IT market will stay hardware dominated, with spending on PCs sustained by initiatives like the 'Computer for Every Student' and 'PC for Every Home' programs. Hardware accounted for an estimated 62% of Egypt's IT spending last year. Households account for 20-25% of unit sales, with almost 1-1.5mn households said to possess a computer at present.                                      .

Overall spending on software remains rather low, which reflects the relative immaturity of Egypt's IT market. One market driver has been a significant fall in software piracy, with the illegal software usage rate, as measured by the Business Software Association, falling a further 1% to 59% in 2008. While large corporations have long understood the business case for deploying technology, small and medium-sized enterprises is increasingly beginning to see such investments as important if they are to avoid being overtaken by more tech-competent competitors.                                         .

In 2008, Egypt continued liberalization of the telecoms market, with the award of a second national fixed license. This development, which followed the award of 3G licenses to three mobile telecoms service providers in 2007, is likely to drive new opportunities for IT vendors. As well as generating additional spending on IT products and services from the telecoms sector, the spread of internet should provide a boost to the PC market over the next few years.

The Egyptian IT services market is dominated by demand from government, finance and telecoms sectors, which account for more than 25% of Egypt's total spending.

5) Legal

A. Environmental laws

According to the Law 4/1994 for the Protection of the Environment, the Egyptian Environmental Affairs Agency (EEAA) was restructured with the new mandate to substitute the institution initially established in 1982. At the central level, EEAA represents the executive arm of the Ministry.                                                                       

The Principal Functions of the Agency Include:                                                                                                    

•   Formulating environmental policies.                                                                                                                   

•   Preparing the necessary plans for Environmental protection and Environmental development projects, following up their implementation, and undertaking Pilot Projects.                                                                                 

•   The Agency is the National Authority in charge of promoting environmental relations between Egypt and other States, as well as Regional and International Organizations.

B. Tax Rate

The standard rate of corporate income tax is 40%. The rate is 32% on profits arising from export operations and on profits of an industrial company as long as they arise from its industrial activities.

C. Withholding Tax

Any business operating in Egypt must withhold against any payments-- made to any contractor or supplier of goods or services-- the following basic percentages:

        i.            Contracting and supplying: 1%

      ii.            Services: 3%

    iii.            Commissions: 10%

    iv.            Professional fees (under LE 500): 10%

      v.            Professional fees (over LE 500): 15%

    vi.            Leasing of property or selling of goods for trading or manufacturing: 1% - 5% (to be added on the payee's tax liability account.

D. Corporate Tax Exemptions and Deductions

·      Almost all business expenses are deductible including depreciation, interest, royalties, rent, profit sharing payments to employees, legal expenses, pension and Egyptian state social insurance contributions.

·      Profits of companies located in the free zones.

·      capital gains are applicable in some cases of asset replacement.

·      All tax holidays granted under Investment Law No.8/1997.

·      Joint stock companies employing more than 50 employees and maintaining proper books of accounts are granted a tax holiday for a five-year period. Also, hotels and tourist projects are granted a tax holiday for a five-year period which can be extended to ten years if the project is located in a remote area.

·      For joint stock companies listed in the stock market, a deductible allowance is made that is equal to interest income, which can be earned on a bank deposit (currently 10.5 percent).

·      Ninety percent of income generated by companies from their movable capitals which have been subject to the new tax imposed by Law 187 of 1993.

E. Personal Income Tax

Taxable Income

Tax Law No. 187 of 1993 distinguishes among the following categories of income of individuals (as well as partners in partnerships):

• Salaries and wages.
• Commercial and industrial profits
• Income from immovable property
• Income from movable capital
• Noncommercial profits.

Taxation of Foreigners 

Foreigners that have been working in the country for more than 183 days with their annual salaries varying from LE 1.00 to LE 50,000 are subject to paying a 20 percent income tax. However, if the employee's annual income exceeds LE 50,000 then they will be liable to pay 32 percent income tax.

Social Insurance Contribution Rates

Wager	Employer(%)	Employee(%)
On basic monthly salary up to L.E. 500 / month	26	14
On variable pay (such as production incentive bonuses)-up to L.E. 500/month	24	11

Labor force and laws

Labor force

Government, armed forces & public sector : 36%

Agriculture : 34%

Private sector : 30%

The Egyptian labor market is regulated by the new unified Labor Law No. 12 for 2003. The new Law comprises 257 articles that address all the legal aspects regulating the Egyptian labor market. The new law aims at increasing the private sector involvement and at the same time achieving a balance between employees' and employers' rights. Amongst the most important issues that the new law addresses is the right of an employer to fire an employee and the conditions pertaining to this as well as granting employees the right to carry out a peaceful strike according to controls and procedures prescribed in the new law.

The Carpet Industry

Carpet industry history, developments and future trends

Regarding the role of Oriental Weavers in this industry, they are known as the "Trend Setters" Oriental Weavers major achievement in that aspect is to change the whole idea of carpet industry by innovation in first place the carpet design was simply based on what call the mirror effect with very few designs and limitations in coloring, and in order to compete they believe that the key component in their strategy is to be innovative.

Innovation has always been key , innovation not only puts them in the fore front of their industry, but also created the demand for new standards of quality and designs. They made history by pushing technology; incorporating creative solutions that have taken the industry by surprise year after year. They gave the world its first 2 Million points, then 3 Million points and recently the 4 Million point/m2 carpet.

The future trends for this industry, to answer that question you need to be aware of the global floor covering market, the hard floor covering represent around 70% of the flooring market globally and the remains is for soft floor covering, however to correct the conception that other floor covering like the hard wood, marble, etc.. consider a threat for the soft floor covering actually the carpet and area rugs consider complementary products to whatever kind of floor covering, in addition that the projected growth for carpet ranging between 3:5% globally.

Moreover, the global trend in the industry in general not only the carpet industry is to more affordable products in especially in residential level, and the concept of product that sell, on the other hand on other aspects of business such as the commercial like the hospitality, entertainment ,etc,.. that catered more to higher-end products there is booming globally in GCC region that benefits of petrodollars wealth, Egypt booming in real estate and tourism and even in the US market despite the slowing down in the economy as US become more and more favorite destination for tourists taking advantage of the weaker dollar.

OW are tackling these aspects first by the continues enactments in operations cycle to maintain the same quality with more affordable price point, simultaneously the company introduce new product (Ax-minister) catered to higher end with high net profit margins, for hospitality and contacts business, which consider the fastest growing segment in the business. 

        

Key success factors

of the carpet manufacturer in the Industry, applied on OW.

ω     In order to generate profit in this industry companies must have the economies of scale, especially that this industry is a very capital intensive industry which also justify why is it hubbed not in China nor Asia but in the US and Europe, and to frame OW in the overall picture, Oriental Weavers CAPEX expenditure from 2002:2007 is approx 1.7 billion, in addition many of their machinery become fully depreciated which will not be the case of someone deciding to establish a new factory at the same economical and vertical integration model of OW, the operating cost and considering the high depreciation cost will be unfeasible.

ω     The vertical integration model, vertical integration is key to growing the market for, economically - priced, quality carpets and rugs. They are a turnkey solution from producing the polypropylene granules used in making synthetic fibers and blends; spinning & dyeing yarn; weaving & finishing to packaging & delivery a fully integrated production process.

ω     The massive distribution network in local market as they have over than 200 outlets form small khan to 1000-m2 showroom, moreover the strong brand loyalty in the local market.

ω     OW exports to over than 100 with appareled roster of blue ship client and to work of them you must be massive in terms of volume and truly be considered as the world largest machine-made manufacturer worldwide, in other word the economies of scale the Group have.

ω     The effective tax rate for the group ranging between 13:15% which is far below any other competitors in Europe with tax rate of 30:35% or in China with corporate tax rate reach 33.5% .

ω     Effects of trade agreements like QIZ, FTA with turkey and EU-partnership in company’s exports and imports. Oriental Weavers is considered export oriented with more than 65% of the group output to export, therefore the effect for these FTA's is significant for the group and is considered one of the advantages for the group comparing to other competitors, in addition that OW International the biggest subsidiary is under the free zone system exempted from customs duties.

Competitiveness of the Market

External Environment Analysis summary - EFAS Matrix Table

External Factors	Weight	Rating	Weighted Score	Comments
Opportunities §  Improvements in local demand environment. §  Improvements in Export demand front. §  Extension of the current export rebate program (running to 2012) §  Launching a new fiber plant in the offered free zone area by the government (East Port-Said) §  Expansion to new markets	0.15 0.15 0.10 0.15 0.15	4 3 3 4 2	0.60 0.45 0.30 0.60 0.30	§  Private consumption has recovered from its lows, growing at 6-7% y-o-y for two consecutive quarters, consumer credit expanded to an EGP89bn record high and broader economic activity has built momentum for the fourth straight quarter. §  Evidence of  a correction in the global economy and a humble & slight comeback from the 2008 crisis. §  Export sales could increase when the Egyptian government extends the rebate program period §  OWC will launch the first phase of its EGP1.3bn industrial complex by establishing a new fiber plant with an annual capacity of 400k tons/year and an estimated Capex of EGP250mn. It is to be finished in mid-2011. §  Chasing Chinese forgery manufacturers to their already tapped markets through new distribution arms. As well as other non-entered yet markets
Threats § A highly cyclical industry § Fluctuations in costs of raw material (polypropylene) § Competition abroad	0.12 0.10 0.08	3 4 2	0.36 0.40 0.16	§  The carpet and rug industry is cyclical in nature. Demand is closely tied to housing activities, such as new construction and refurbishment. The industry is very sensitive to changes in broader economic indicators, such as consumer income, corporate spending, and interest rate levels. §  Polypropylene represented around 40% of total costs incurred in 9M09, prices are driven in large part by oil and gas prices, in addition to market forces. Which might impose a risk on OW margins §  Competition comes from major US players such as Shaw Industries, Mohawk, and Beaulieu of America. As well as Turkish & Belgian manufacturers.
Total	1		3.17

Corporate Culture at OW

Oriental Weavers believes that a strong code of ethics and values is crucial for the success of the organization. OW fully committed to servicing  personnel and meeting all their needs by providing various social benefits and services through programs such as housing schemes, sponsoring of annual pilgrimage trips, and providing medical coverage for employees and their families.

 

Corporate Resources

Marketing

Oriental Weavers operates in a number of markets; each with its own demographics, characteristics and drivers.

EGYPT; Oriental Weavers has always held a strong position in the local market with a domestic market share exceeding 85%. Because of its position as the undisputed leader in the local market, OW has historically focused its strategy on the international market (last year 65% of total revenues came from overseas). Yet, 2008 has seen the Company implementing a strategy of shifting a portion of product capacity to the local market in order to offset any possible slowdowns in the export markets. This strategy has been fruitful as local sales witnessed an increase of 29%, generating a local to export sales ratio of 40:60. In 2008, total sales from Egypt amounted to EGP 1.376 million.

This aggressive growth in the local market is the direct result of investing in new showrooms throughout the country to cater increasing the demand. OW currently operates a total of 108 showrooms and outlets locally, while MAC has 100 showrooms and EFCO presently has one mega showroom.

On November 11, 2008 OW proudly announced the opening of its El Baron showroom; this 3200 square-meter store in Katameya is the largest rug showroom in the Middle East. This showroom encompasses all brands of Oriental Weavers under one roof including La Boutique, OW Life-Style and OW Classics.

This new showroom will offer the widest range of collections from contemporary oriental and hand-tufted rugs, to imported modern Chinese and Indian hand-knotted rugs, authentic hand-made Persian rugs, and Gobelin tapestries.

Additionally, Oriental Weavers is proud to announce that it has open in 6th of October City, the largest rug showroom globally with a total area of 11,500 square-meters. The showroom has been  opened in the second half of 2009.

Another impressive store in the coastal town of Alexandria covering a space of 8500 square-meter has been opened early 2009. Finally two 8,000 square-meter stores were scheduled to open in the touristic cities of Hurghada and Sharm El Sheikh in 2009.

Other smaller showrooms have opened later in 2009 in the areas of Luxor, Bahteem, and Mit Ghamr:

Moreover in response to increasing demand for more upscale products in both the custom and contract markets, Oriental Weavers has further developed two new store brands, “la Boutique" stores, which targets those interested in custom made products, and "OW Lifestyle" stores, which addresses the new demand for ultra modern styles. There are eight La Boutique stores, and two OW lifestyle stores.

INTERNATIONAL MARKET;

GCC Countries: Oriental Weavers exports its products to many Arab countries, especially the GCC countries, which represented 6.3% of total sales for the year 2008.

North American Market: Oriental Weavers enjoys a strong presence in the North American Market. With a fully equipped distribution arm servicing the USA and Canada, Oriental Weavers is one of the main players in the region.

Moreover MAC (a subsidiary of the Oriental Weavers Group holds a 20% market share of the North American tufted carpet industry. However, as the West endured a financial crisis leading to low consumer confidence, Oriental Weavers suffered a decrease of 4% in sales to the US market.

The main subsidiary to be affected was Oriental Weavers USA (OWUSA). On the other hand, MAC one of the company’s main subsidiaries, managed to grow sales to the US by 12%. in total, the US market still managed to contribute to 28% of total sales for 2008.

Europe: Although the North American market is the largest market for Oriental Weavers in terms of exports, the company still has a major presence in the European Union, specially the UK, Germany and Italy. Revenues from the EU contributed 19.4 % of Oriental Weavers 'total export sales in 2008.

 

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Operations and Logistics

Integration allowing for synergies

OWC is a vertically and horizontally integrated rug manufacturer.

(a) Backward vertical integration

Backward vertical integration allows OWC to procure its fiber inputs locally, ensuring a guaranteed supply and giving OWC more lenient credit terms, greater cost reduction, and complete control over the manufacturing process. This is done through three companies, namely: OPC, EFCO, and Oriental Weavers Fibers (OWF).

The required polypropylene granules are provided by OPC, which supplies 80- 90% of OWC's needs. This reflects favorably on OWC’s raw material costs by reducing the stocking period from 6 months to only 1 month. The reduction is made possible by:

·         Lower transportation expenses

·         Lower finance charges.

Moreover, the Egyptian Company for Propylene and Polypropylene Production is expected to add further polypropylene capacities once it starts its operations in 2010.

OWF supplies around 50% of OWC's total fiber requirements and the remaining requirements are procured from EFCO. Meanwhile, carpet and rug production processes are carried out through:

·         Oriental Weavers Carpets (OWC)

·         Oriental Weavers International (OWI)

·          MAC & New MAC

·          OW China, and

·          OW USA

(b) Forward vertical integration

Internationally, OWC’s forward integration strategy paved the way for international recognition through its dedicated distribution arm, OW USA (Sphinx), and its worldwide warehousing facilities in the US, UK, Germany and Canada.

(c) Horizontal integration

In accordance with OWC’s management strategy of expanding into the home furnishing industry rather than remaining dedicated solely to floor coverings, OWC has diversified its portfolio to include new products: tapestries (Gobelin) and Axminster. These products are free of polypropylene, and thus, they are not exposed to risks associated with rising polypropylene prices.

 

 

 

Human resources management

Human rights:

Oriental Weavers adheres to the International Declaration of Human Rights. Ow maintains a set of transparent human resources policies and procedures for both management and skilled workers. Governmental labor offices represent all employees, and the company's wages, benefits, labor policies, and management procedures comply with and exceed local requirements.

Non-Discrimination Policy:

OW has consistently cultivated a policy of fairness and equality for all employees. OW is an equal opportunity employer and therefore discrimination is strictly forbidden within the corporation.

Labor Standards and Benefits:

OW provides a number of additional benefits to the entire workforce including free medical care for employees and their families at a clinic established by the Chairman in 10th of Ramadan city. Additionally, subsidized housing is also provided by the company. Rigid laws against child labor are also in place.

In addition OW makes it adamantly clear to all their suppliers and affiliates that Oriental Weavers will not conduct any business with entities that do so.

Plans regarding improving the company’s departments or products in the coming period:

Concerning the departments, the company continuously improves the quality of production and other operations aspects and most important the human asset of the company OW provides written documentation, workshops as well as on-site training. Production employees are all given on the job training under strict technical supervision.

Internal Factors Summary Analysis – IFAS

Internal Factors	Weight	Rating	Weighted Score	Comments
Strengths §  85% market share in Egypt §  Full control over the supply chain §  25% market share in US §  Strong presence in European and middle eastern markets §  Strong cash balance in March 2009 §  Flexible diversified portfolio §  Very Low tax rates compared with any competitor	0.10 0.20 0.10 0.05 0.05 0.05 0.05	4 5 3 3 4 5 4	0.40 1.00 0.30 0.15 0.20 0.25 0.20	§  Market domination, trend setter. §  Turn-key solution from producing the polypropylene granules to the biggest showrooms. §  MAC (a subsidiary of the OW holds a 20% market share of the North American §  The EU contributed 19.4 % of OW total export sales in 2008. §  Hannover exhibition, OWC received a 67% increase in confirmed orders, reflected the pick-up in international markets. §  Great flexibility to allocate capacities between local and international markets. §  Tax rate for the group ranging between 13:15%, competitors in Europe with tax rate of 30:35%
Weaknesses § Limited capacity VS order backlog § Fluctuating earnings § Heavy Debt § High CAPEX demands § Exposure to U.S market conditions.	0.15 0.05 0.05 0.05 0.10	4 3 2 3 3	0.60 0.15 0.10 0.15 0.30	§   OWC will increase its woven capacities by almost 3.4mn sqm by adding seven new looms to its plants. §  In 2007 on EGP27mn non-recurring tax benefits resulting from OW Rug §  Increase of debt during the next 3 years §  Business is growth-capped in future investments. §  Decrease in sales because of  decline in customers spending (MAC & Sphinx)
Total	1		3.80

Strategic factors Analysis summary (SFAS Matrix)

Selecting the most important opportunities and strengths from the EFAS table, and the most important strengths and weaknesses from the IFAS table, the SFAS table is constructed to show the following analysis:-

Strategic Factors	Weight	Rating	Weighted Score	Comments
Strengths §  85% market share in Egypt §  25% market share in US §  Flexible diversified portfolio	0.11 0.08 0.09	4 3 5	0.44 0.24 0.40	§ Market Domination § 20% MAC market share. § Great flexibility to allocate capacities between local and international markets.
Weaknesses §  Limited capacity VS order backlog §  Exposure to U.S market conditions §  High CAPEX demands	0.10 0.06 0.08	4 3 3	0.40 0.18 0.24	§ Increase in capacity by adding 7 new looming lines § Decrease in sales because of  decline in customers spending (MAC & Sphinx) § Business is growth-capped in future investments.
Opportunities §  Improvements in local demand environment. §  Launching a new fiber plant in the offered free zone area by the government (East Port-Said). §  Improvements in Export demand front.	0.10 0.12 0.08	4 4 3	0.40 0.48 0.24	§ Private consumption has recovered , consumer credit expanded and broader economic activity has built momentum . § OWC will launch  industrial complex by establishing a new fiber plant with an annual capacity of 400k tons/year. § Evidence of  a correction in the global economy and a humble & slight comeback from the 2008 crisis.
Threats § A highly cyclical industry § Fluctuations in costs of raw material (polypropylene) § Competition abroad	0.07 0.07 0.04	3 4 2	0.21 0.28 0.08	§   Demand is closely tied to housing activities, such as new construction and refurbishment. The industry is very sensitive to consumer income, corporate spending, and interest rate levels. §  Polypropylene represented around 40% of total costs incurred, prices are driven by oil and gas prices, in addition to market forces. §  Competition comes from major US players such, as well as Turkish & Belgian manufacturers.
Total	1		3.59

Strategic Alternatives and Recommended Strategies

Strategic Alternatives (TOWS Matrix)

 

Weaknesses	Strengths	Internal Factors IFAS External Factors EFAS
W1        Limited capacity VS order backlog W2        Fluctuating earnings W3        Heavy Debt W4        High CAPEX demands W5        Exposure to U.S market conditions.	S1    85% market share in Egypt S2    Full control over the supply chain S3    25% market share in US S4    Strong presence in European and middle eastern markets S5    Strong cash balance in March 2009 S6    Flexible diversified portfolio S7    Very Low tax rates compared with any competitor
W5 O2 O3 Diversification Concentric Strategy “C” W1 W2 O4 Cost Reduction Strategy “B”	S1 S2 S6 O1 Horizontal Integration strategy “C” S5 S7 O3 O4 Stability (No Change) strategy “C” S4 S6 O2 O5 Stability (PWC) strategy “C”	Opportunities
		O1   Improvements in local demand environment. O2   Improvements in Export demand front. O3   Extension of the current export rebate program (running to 2012) O4   Launching a new fiber plant in the offered free zone area by the government (East Port-Said)   O5   Expansion to new markets
W5  T3 Retrenchment strategy	S2 T2 Vertical Integration Strategy “C” S1 S6 T1 Stability (Profit) Strategy “C”	Threats
		T1    A highly cyclical industry T2    Fluctuations in costs of raw material (polypropylene) T3    Competition abroad

 

Review of Current Mission and Objectives

Oriental Weavers is the world’s largest machine woven carpets producer. Its global leadership is supported by diverse product mix, highly flexible and responsive production capacity, fully integrated supply chain and technological advantages. Its subsidiary MAC dominates world jet printed rugs, claiming one third of the global market.

They enjoy a unique business model that sustains growth witnessed in :

ω    A global, low-cost producer using efficiency, technology and geography to deliver superior margins

ω    Full integration – backward and forward – smoothes and optimizes costs.

ω    Economies of scale and scope.

ω    Flexible production capacity quickly responds to market conditions.

ω    Production across all price points fully penetrates markets.

ω    Global experience and presence ensures unmatched global market intelligence.

Strategic alternatives (selected)

 

1.      Growth strategy: Vertical integration

TOWS Matrix – Option S2 T2

This strategy is recommended to be adopted through the opening more polypropylene facitlites to control over the fluctuating  prices .

Pros	Cons
•          Increased control on the supply resources •          Limit the raw material prices fluctuations •          Increase competitive edge towards competitors •          Increase diversification	•          The fluctuating prices of oil can affect the polypropylene industry •          Over  integration of polypropylene industry can hurt OW’s main business

2. Growth Strategy: concentric diversification

TOWS Matrix – Option W5 O2 O3

This strategy should can be applied through introduction of new diversified products like padding, broadloom.

Pros	Cons
•          Increase market share in US •          More diversified portfolio •          The US market mainly imports these products •          Limited number of direct competitors	•          The expansion to the high risks in the US market •          The financial crises in US strongly affected  the spending of disposable income  •          The geographic location  is so far from the central management in Egypt

3. Retrenchment strategy :turn around strategy

TOWS Matrix – Option W5 T3

This strategy is to be adopted through the selling of OW USA subsidiary and keep MAC as the only subsidiary in the US.

Pros	Cons
•          Avoid the effects of the financial crises on the US market. •          Decrease the level of CAPEX •          It will give the opportunity to the board to focus more on the Asian markets.	•          Loose the market share achived in US •          Decrease in the growth rate of  OW worldwide •          MAC alone will have a limited opportunity with competitors.

Recommended Strategy

Growth Strategy: concentric diversification

TOWS Matrix – Option W5 O2 O3

This strategy should can be applied through introduction of new diversified products like padding, broadloom.

These categories show indications of becoming very successful categories for the company are projected to attribute some growth to OW USA. The company has made huge strides in taking a share of this market, which was previously serviced by a small number of rug underlay companies.

In the area rug business, OW USA is seeing vendor consolidation of suppliers, as a result of the financial difficulties and issues of service facing many of the smaller importers and rug suppliers. OW has raised its service level to take full advantage of this trend whereby retailers are moving away from large numbers of suppliers to fewer and more manageable ones, who can reliably handle a greater portion of their needs at higher service levels. giving OW USA a significant edge over competitor companies, which are “import only” suppliers in

the market. OW USA is also expected to do well in the moderately-priced woven patterned goods market. Mainly due to a limited number of direct competitor.

On a final note, the Company anticipates a brighter future in the US as market researchers forecast a 3% increase in the US flooring market between 2012 and 2017. Similarly, a 2.44% increase in the Carpet and Rug market is expected during the same period.

Strategy Implementation

·         OW has to invest in new production lines for the new products taking into consideration the capacities and the expected demand

·         OW should start products distribution agreements with large department store in US

·         OW should focus on cost reduction on its manufacturing operations through the application of advanced manufacturing techniques like just in time JIT and lean manufacturing

·         The expected cash inflows and out flows should be calculated so that no disturbance in the cash could affect OW USA current operations

·         Pro-forma financial statements should be developed depending on the expected cash investments and the expected sales and revenues.

·         OW has to study the American customers behaviors, preferred colors , quality their focus either it is price or cost oriented ,all these patterns can help OW to produce a highly competitive products and helps in increasing the market share in US.

Evaluation and control

1.      The main evaluation tool to measure the perfomrnace of OW in the US market is it market share percentage.

2.      To measure the effectiveness of distribution we can measure the rate of increase of distribution channels.

3.      COGS, inventory levels, and cycle times should be measured to evaluate the effectiveness of the manufacturing operations.

4.      The profitability measures like ROI ,ROA is very important

5.       Benchmarking against other competitors.

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