Evaluate the external environment in which H & M operates in. 1.1. PESTEL Analysis
As companies begin to expand globally, it needs to understand the laws of each country. Since each country regulations are different, its needs to take special consideration before entering and investing into a new market in order to prevent violating any of them. This is especially true when regulations involving imports and exports are affected. While the restrictions of goods shipments may not be a major concern, selection and switching of suppliers relating to manufacturing and outsourcing can greatly affect profit margins, production costs as well as other incentives in different areas. Moreover, laws governing corporate social responsibility like minimum wages, child labour and other environmental issues affect organisational growth.
Due to inflation, the rising costs of raw materials like cotton are felt globally. This in turn forces manufacturers to increase their production cost and future affecting potential profits globally. As international trade liberalises, the demand for suppliers and manufacturers in low-wage countries increases and completion between fashion retailers intensifies. In-addition, the recent economic crisis has affected consumer spending patterns, forcing organisations to push their retail prices low to meet consumers lower spending power.
Different cultures have different fashion senses, likewise while consumers in Europe like Sweden embraces fast Fashion, Customers in Asia for example Singapore adopts fashion at a slow pace. To understand local fashion, most companies depend on home grown designers or in-house sales employees to pick up the latest treads to redesign their products. Moreover consumers globally are growing more conscious about the environment, which encourages the production of environmental friendly/sustainable products.
As technology develops, consumers are getting more informed of their purchase choices. Today most every individual are able to access the web to gather information, meet friends as well as purchase online. Hence it is not surprising that companies are upgrading their websites to gain attraction. To stay ahead, some companies are employing the latest IT systems to improve operation effectiveness and efficiency. For example, advance logistics capabilities allows organisations to control inventories better and reduce wastage, due to effective information sharing as well as proper empolyee training.
With the growing need to embrace green culture, consumers are more self-aware about their needs and would prefer to purchase from companies that are environmentally friendly and socially responsible.
1.2. Porters 5 Forces Analysis
1.2.1. Threat of entrants (Low)
Viewing from a Global perspective, it will be difficult for new entrants to gain huge economies of scales without investing huge initial investments, which includes inventories, start up fund and cost for advertising, research and development expenses, etc. Large international incumbents like Zara, Gaps and H&M had already established strong footholds in multiple countries and with many years of experience to deter new comers. Moreover new entrants will expect retaliations from financially strong incumbents in events like price wars. Being in the fashion industry also makes it difficult for new organisations to differentiate their products. Although access to distribution channels have eased due to information technology advancement, most of the good ones would already have been contracted by bigger competitors. Therefore, I would conclude that threat of entrants is low for H&M.
1.2.2. Power of buyers (High)
The bargaining power of buyers considered high because there are multiple alternatives like Zara, Gap, UNIQLO, etc. Moreover there is little or no switching cost involved when selecting fashion needs, thus resulting in little or no customer loyalty to the brands. Finally, H&M is required to monitor their needs as they are the end consumers of their products and is its main source of revenue.
1.2.3. Power of Suppliers (Low)
The bargaining power of suppliers is low because suppliers/manufacturers for the fashion industry are numerous. As international trade liberalises, H&M have more options to source and even backward integrate by buying or merging with suppliers to meet organisations requirements. In addition, with the opening of cheap labour markets like China and India, the switching cost between suppliers to ensure low cost and better quality is consider low.
1.2.4. Competitive Rivalry (High)
Rivalry is high because there are multiple players both large and small in the same business category as H&M. Moreover the recent recession experienced in recent years, have affected consumers spending and reduce demand thus intensifying competition. With more funds invested into research and design, firms are constantly renewing their products to capture market share, hence H&M have to be always vigilant to combat market changes.
1.2.5. Threat of Substitutes (Low)
Threats of substitute products are low, since apparels are irreplaceable. Although online competitors may erode sales from H&M physical stores, the firm is currently developing its online sales strategy in USA to increase recognition. Rivalry is high because there are multiple players both large and small in the same business category as H&M. Moreover the recent recession experienced in recent years, have affected consumers spending and reduce demand thus intensifying competition. With more funds invested into research and design, firms are constantly renewing their products to capture market share, hence H&M have to be always vigilant to combat market changes.
Utilizing the latest IT system allows H&Ms logistics to receive and transmit effective communication to not only make better decisions as well as to provide information based on customers needs and placement of products. In addition, renting of retail spaces in good locations can help reduce investment risk, attract more walk-in customers as well as to enable better flexibility and adaptability to the ever-changing environment.
Firstly from the financial data, H&M has a high profit margin of 19.04% compared to its rivals, Zara, Gap and Uniqlo at 18.53%, 13.52% and 16.52% respectively, which proves that the firm have superior cost control. It also has a healthy solvency ratio of 73.28%, which meant that H&M is able to meet all its obligations namely short n long term liabilities. In addition, with a high liquidity ratio of 1.77, H&M will be able to settle its short term debt with ease, therefore proving that the firm is stable and will be able to withstand unexpected issues.
To further expand its reputation and fashion designs, H&M collaborated with famous designers like Stella McCartney and Versace. The firm have also successfully contracted high-profile celebrities for long-term advertising campaigns. In addition to its strong social media presence through Facebook, Twitter, Google+, etc, the firm has achieved high level of consumer awareness and was ranked 21st out of 100 most valuable global brands with a brand value of $16.5 billion in 2011 by Interbrand.
2.1.4. Human Resource Management
H&M has a policy of hiring locals whenever new stories are established; this allows the firm to easily tap into local culture and understanding of the based country. In-addition to align them to the corporate culture, formal training is being provided to adopt the core values of the firm. The strong participative corporate culture also allows employees make their own decisions during their work for the stores sales and image, if successful would be adopted by other store to generate more profits.
Unlike most competitors, H&M centralises its Design Department consisting for 200 designers and 100 pattern makers to achieve minimum time-to-market as well as effective information sharing between production offices globally. This way design could not only be created rapidly due to shared skills, rapid-response production can be immediately capitalised on the latest design trends. Having constantly redefining the firms production and distribution processes to combat the ever-changing business environment, H&M has managed to create a complex integrated logistics and production system that support cost-cutting measures and generates economies of scale. This system has enabled the firm to achieve quick turnaround timing of about 20days as well as reduction of production lead times of 15-20%. (b) Analyse the strategic capabilities providing competitive advantages for H & M
Focusing on the distinctive competencies of H&M, can we understand the competitive advantages of the firm?
3. Question 3
Apply the value chain model to analyse the strongest and weakest links in H & Ms global value chain by examining its primary and secondary activities.
3.1. Value Chain
To analysis a company, it is important to first understand its structure. Hence through Micheal Porters Value Chain which consisted of both Support and Primary Activities, then will we be able to understand H&Ms strongest and weakest links
3.1.1. Support Activities
126.96.36.199. Firm Infrastructure
Currently H&M group have over 2,205 stores in 43 countries and employed about 94,000 employees worldwide. Its headquarters is base in Stockholm, Sweden, where most of the firms central activities like buying, logistics, etc are centralised. With 50 production offices which handle about 1,652 factories globally, information is rapidly exchanged to achieve latest trends as well as timely Design to Production to Delivery process. With 70% majority voting rights held by the Persson Family, most corporate decisions are handled by them.
188.8.131.52. Human Resource Management
H&M embraces participative corporate culture, which focuses on employees involvement that encourages experimentation, trial and error learning, quick decision making, and willingness to take initiative to try new ideas. Mistakes are usually forgiven as long as it is not repeated. The firm also believes strongly in teamwork and expect great results. With little attention to titles and work descriptions, employees are encourage to challenge themselves to learn new skill or even have different job functions. To be social responsible, H&M also employs local staff for its new outlets and ensure fair treatment of global employees by signing agreements with suppliers to practice ethical business prescribed by law.
184.108.40.206. Technological Development
H&M a cloths retailer organisation, has utilized the latest IT systems to help improve organisations logistics and production capabilities as well as reduce significant costs. Having multiple stores globally, H&M is also investing in its online sales capabilities to attract global consumers.
Without owning any production factories or supply farms, H&M is greatly dependent on its suppliers capabilities. Small chances in raw material prices can great affect the profit margins of the firm, for example a slight increase in cottons prices will increase the cost of making H&M clothing. However without factories, H&M can easily switch suppliers to achieve better costing and quality. In addition to the firms huge purchases, it can easily control supplier to provide huge discount upon delivery of finished goods.
3.1.2. Primary Activities
220.127.116.11. Inbound Logistics
H&M do not own any manufacturing plants and has outsourced its production needs globally. Hence it relays on various suppliers to deliver the necessary inputs on its behalf.
18.104.22.168. Operations H&M utilizes a centralized in-house designing model, its design operation located in its headquarters in Stockholm. With 200 design and 100 pattern makers, the firm is able to quickly churn out multiple fashion designs decided by various well-know designers and markets analysis to meet the latest trends. Having direct connection with the production office also allows immediate production which enhances cost-efficiencies. Training is provided from workers to adopt companys values and provide better customer services.
22.214.171.124. Outbound Logistics
Outsourcing of H&Ms goods transportation needs allows the firm to cut cost by reduction in labour chargers. Utilizing the integrated direct distribution channel that connects distribution centres, warehouses and stores, has ensured that individual stores needs are communicated resulting in timely delivery of goods daily.
126.96.36.199. Marketing and Sales
H&M philosophy is to provide affordable quality fashion to consumers. Benefiting from economies of Scales due to bulk purchases, the firm can negotiate with suppliers to provide huge discounts. Utilizing its philosophy, H&M has successfully communicated its position to the world through advertising means by working with famous designers, being long term advertising contract with famous celebrities, as well as its strong presence in social media. To further achieve its goals, the firm constantly revamp or renovate its stores every 2-3years to embrace the latest cultural trends, thus attracting its target customers.
H&M views services as a very important aspect of their business, formal training is provided for new employees to adopt its firms value. Moreover, employees are highly encouraged to adopt initiatives and new ideas to only improve the working environment as well as customers satisfaction. To maintain employees high moral which in turn lead to better services, H&M has introduced many employee welfare initiatives and was consider one of the best work environments. Hence from the above analysis, it can be seen that marketing and sales is H&M strongest link, due to its links to famous designers and celebrities, which attracted consumers to get knowledge of the brand.
Moreover, utilising social media also attracts the tech savvy users to share and expand the brand name at low cost. However, I would say that the firms weakest links is in its family business management, since most decisions is made internally and new management ideas from external means may be difficult to flow through. In addition, there is also a risk of business succession where the heir of the company is not as capable as its predecessor resulting in the firms failure.
4. Question 4
(a) Based on the preceding analyses, conduct a SWOT analysis on H & M.
H&M is a well-known clothing retail firm that specializes in fast fashion and cheap apparels for men, women and kids. Its strong marketing arm has managed to raise brand awareness among consumers globally. In addition to the firms commitment to procure sustainable materials for product design has future enhanced brand image. H&M differentiated itself by ensure their designs are unique and not copies from other competitors.
H&M is totally dependent on its suppliers for manufactured products, caused the firm to have limited control over manufacturers, which could lead to low quality products and negatively affect branding. With H&M core operation is highly centralized in Europe, leveraging of risk is weak. In addition, being a family own business, most corporate decisions are made internally, which may prevent external ideas to flow through preventing further growth,
Having huge experience in running world-wide business, H&M may expand further new penetrating new markets like Ukraine or Israel. The firm may also want to backward integrate its business process by absorbing various suppliers to better control its product quality.
Inflations and Currency changes can greatly affect the cost of raw material as well as production cost. Moreover with Chinas aggressive product piracy, H&M design could easily be copied and cost globally eating market share. Europes unstable economic nature due to crisis may force governments to raise corporate taxes to keep the economic afloat, which further affect profits. (b) Identify the key issues, challenges and opportunities facing H & M. As H&M centralized design processes, its products are not tailored to individual markets, thus allowing competitors who can better differentiate their products to target different consumer groups eating into the firms market share.
Focusing on cost leadership strategy, H&M have to ensure production cost is low to achieve profits. Hence to reduce cost of materials companies tend to order huge quantities of raw materials, which may result in overstock and incur unwanted inventory costs. Outsourcing of manufacturing reduces H&M direct control over the production process, thus making it vulnerable to quality issues resulting in bad reputation among consumers. In order to expand its presence globally, H&M may need to penetrate to new markets. It could also improve cost savings through backward integration by buying over various suppliers for its own requirements.
5. Question 5
Based on the preceding analysis, formulate and discuss appropriate strategies that you would recommend to H & M in order for it to achieve above-average returns in the future. After analysing the above information, I understood that H&M is adopting the cost leadership strategy to advance it goals. Since the firm focused on Economies of Scales by purchasing huge qualities of goods in order receive better discounts, have long term experience to monitor its cost savings as well as constantly redefining production and distribution to achieve cost efficiencies (Johnson, G. 2014). However the most important factor that H&M lacks is the control of input cost since the firm had totally depended on suppliers for its productions needs.
Hence, it is strongly recommended that the firm adopts backward integration by buying over or controlling various supplier/manufacturers in order to reduce its reliance as well as to be able to handle its input cost well. Even if that is not achievable, H&M could also hire service engineers to better train and monitor the suppliers progress through direct collaboration by planting its employees in manufacturing sites. This way, management will be more able to understand the quality and direct cost involved through the manufacturer plants production process, thus find ways to reduce cost and improve efficiencies. Finally to improve total sales, H&M should also seek to venture into new markets so as to increase income and create new opportunities.
Johnson, G. (2014). Exploring Strategy. 10th ed. Harlow [u.a.]: Pearson.