Strategic capabilities of H&M Essay.
This report analysis the strategic capabilities (resources and competences) of the H&M by using the strategic tools value chain, core competences and identify the strength and weakness of firm. It discusses the company financial position and their cultures. It also use TOWS matrix to recommend the strategies and use Ansoff matrix for method and direction. It also access or evaluate those strategies by using the Suitability, Feasibility, and Acceptability.
This report investigates the H&M strategic capabilities (value chain, resource audit and core competences).
Accounting ratios are used for financial position which helps to comparison with rivals. TOWS matrix will help in recommendation of future strategies and SFA criteria evaluate the strategies. Ansoff model is used for the new direction and method to the recommendation.
1.1. H&M Company Profile:
H&M was established in 1947 by Erling Persson in small town Västerås in Sweden. Its first was called Hennes, Swedish for “hers” selling only women’s clothing.
In 1964, the first store outside Sweden opens in Norway. In 1968, E. Persson acquired property and stock of hunting equipment shop named Mauritz Widfoss in Stockholm. Inventory of men’s clothing included in store prompting to expand business of men’s and children’s clothing. The store was renamed Hennes & Mauritz, which later became H&M (H & M Hennes & Mauritz AB, 2013) Now H&M is leading global clothing retailer with turnover including VAT of SEK150 billion and profit after tax with SEK 17.2 billion in 2013 and 3132 store in 53 countries around five continents and online hm.com online store is available in 9 countries.
H&M has more than 60 years’ experience in clothing market. It offers collection of women’s, man’s, children’s and cosmetics. The main business concept is to provide fashion and quality at the best price. (H & M Hennes & Mauritz AB, 2013) As it is seen in time line (Appendices 1). Clothing and fashion retail is hyper competitive market. H&M faces competition from the local chain, departmental store, individual shop and international chain. But in each and every market H&M is facing with international retailer. Zara, Gap, Uniqlo and H&M are the most serious competitors. (Penanster, 2012)
2. Value chain of H&M:
Value chain is the categories of activities in an organisation which create product & service. It helps strategist to think of an organisation in terms of set of activities – primary and supporting activities. These activities help to analyse source of competitive advantages. Primary activities are involved in physical delivery or creation of product or service. The importance each of these activities will vary between different types of organisation. Supporting activities helps to improve the efficiency and effectiveness of primary activities.
Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performanceby Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved Figure 1.1: H&M value chain
2.1Buying and Design Department:
H&M value chain has very important role of buying organization as it does not produce any good itself. It focuses on current fashion trend composition and gives to production section which is responsible to production office. It is entrusted to buying and design department. Department is located in head office where all the idea and collection produce. H&M has team of budget controller, 160 designers, 100 patterns designer and 100 buyers who constantly working on creating and latest fashion. Fashion has very short shelf life so it is risky industry so some part of collection will not receive by customers. It’s very important to find the balance between component and business concept- fashion, quality and best price. It also collaborates with famous designers to create more value to product and brand. (H & M Hennes & Mauritz AB, 2013)
2.2 Production supply
H&M do not own any production or manufacturing operation. Company have 22 production offices which are responsible for contract with 900 independent suppliers. It is cost effective, time saving and do what is best for company. So it is entrusted for independent suppliers and H&M crated code of conduct which allows controlling and ensuring quality of products. Production office are able to examine the sample garment as testing equipment are transferred so that it will reduce the time. So the communication between production office and supplier plays crucial role. (e.Business watch, 2011) H&M works hard on sustainability matter, including ethics and human rights, and works on a daily basis to offer sustainable collection customers. (THOMASSON, 2014) .
2.3 Outbound logistics:
In fashion industry it is crucial for business to have lead time as short as possible. As fashion product have very short life cycle. At present lead time takes around three weeks to six month for H&M after pattern is created by designer depending on garment. H&M is aiming to cut lead time by using information technology and commutation (ITC), effective logistics and advance planning. Company has established effective buying process that allow store to be restored quickly with best-selling product during the season. New goods arrive at shop everyday so H&M can constantly renew range in shop that makes customer visit frequently. It is all possible by effective logistic and ITC system. (e.Business watch, 2011) Distribution channel of H&M most of goods arrive in Germany, Hamburg at distribution centre and ware house where all product are inspected before its transfer to other stores. Every country has their owned distribution centre so it’s quick to transfer from production office to distribution department and to store. All online demand is send by distribution centre. (e.Business watch, 2011)
2.5 Marketing and Sales:
All commutation is aimed for long term brand building. By internal or external commutation H&M always tries to maximise the consumer expectation and confidence in H&M Brand. H&M is concerned about healthy, positive reflecting value image of brand. They cancel the contract with top model Kate Moss after drug scandal when she was recorded using cocaine. (bbc.co.uk, 2005) Core competence.( Fashion, quality in best price)
Price: Best price is part of H&M business concept and one of the competitive advantages. They have several stages for price reduction. First of all most of the operation is performed by company and using only few middle man. Second they buy in large quantities as its market and sales is huge which subsequently help to reduce the cost. After that they collaborate with large number of supplier in different market, so they are able to use the advantage of each market where production can be done in lowest cost. Furthermore their 60 years of experience in this industry is another competitive advantages of company when coming to cost saving. H&M main concern in every stage is to reduce cost and to offer the best price. (H & M Hennes & Mauritz AB, 2013)
In present situation company must pay great emphasis in quality of products. It’s hard to please customer in this hypercompetitive market. Quality is important issue along with low price. H&M offer customer quality with combination of best price and fashion. They are more concern of customer satisfaction and brand image with it comes to quality. They can refund if some product is does not match the standard. H&M have maintained its quality not only in product, but also in environmental impact and fair labour practice. (H & M Hennes & Mauritz AB, 2013)
H&M one of the core business concepts is to look after the current trend and design new collection. H&M team up with famous designers such as Karl Lagerfeld, Stella McCartney and lately with Viktor & Rolf and offer fashion conscious customer exciting opportunity in H&M best price. H&M also have 100 designers, 50 patterns designer working on latest trend. Each collection must achieve the right combination of sustainable fashion, quality and best price. (H & M Hennes & Mauritz AB, 2013) Fashion can be cheap and ethical as H&M is lobbying in Bangladesh and Cambodia government to raise the minimum wages and for fair wages. (THOMASSON, 2014)
3. Financial analysis:
From the calculation of (ROCE) Returns on capital employed on 2012 is greater than year 2 013 hence, it shows that business was more efficient 47.12% in 2012 and 46.65% in 2013. Quick ratio suggest that firm is more leveraged in 2012 than 2013. It is clear that company have better position of cash on hand to meet account payable and other expenses in 2012 than 2013. “The minimum level of ratio is often stated 1.0 or 1.1 in successful firm that is regarded as having adequate liquidity, however it’s not unusual for acid ratio to be below 1.0 without liquidity problem…” (Mclancy, 2008). It is not risky business as it is above the minimum level. Interest cover ratio also reflects the inconsistent earning of the company.
But in the year 2013, company is more burdened by aggressive market expansion and brand expansion. It should be compare against industry average. Its interest covered ratio in 2012 is 4350 times and 2013 is 2502.8 times which 18047.2 is less than 2012, and both are above the industry average 22.58 times. (http://csimarket.com, 2013) From the stock turnover ratio it is clear that there is slide change in figure in 2012 it as 3.36 time and 3.29 in 2013. It implies slow sales which increase stock of company. The industry average is 5.28 (http://csimarket.com, 2013) and firm inventory is below the industry average which is serious problem and need to resolve as soon as possible by reducing the bulk buying process.
H&M story “never ending passion for fashion.” Ever since H&M founder Erling Persson opened the first Hennes store in 1947, the cornerstone of H&M has always been offering customers fashion and quality at the reasonable price. H&M journey continue with the business concept “Fashion and quality in best price” in sustainable way. H&M evolve with the new market, new concept and new innovation with endless love of fashion. H&M value are core of “the H&M way” and it is also known as H&M spirit. This is very successful business concept with the history of 60 years’ experience.
4. Strength and weakness of H&M:
Strong brand image
Low costs / cheap prices
Associated with celebrities and guest designers
Slow Distribution System
Amount of suppliers (required resource)
Buying large volume
H&M’s strength include strong brand image with reasonable price. H&M good brand image has motivated, attracted skill manpower and motivate them to unit and also benefited by its commitment. Its global presence and excessive expansion policy crated more value to its brand and associated brand. They offer quality clothing at affordable price by outsourcing the production unit, purchasing in bulk and reducing the middle man. Their entire concept of wide range and low priced wearing apparel has brought many loyal customers for many years. H&M is also associated with famous designer and celebrity which enhance the brand image. They also have many complementary businesses which help them in control and flexibility.
As company is core concept is to provide quality product in best price they want cut the expenses everywhere possible. So their distribution system is centralised and very slow to reach at store and customers. Customer is very disappointed as they are not able to get the order item in time of their need. (http://www.reviewcentre.com, n.d.). H&M is also expanding its market in overseas which is always challenging in the present market with its distribution system is very slow and macro- environmental factor like recession, unemployment and large number of production unit is difficult to control and maintain its structure. Buying large volume could also lead overstocking and later to lowering of the already affordable prices as some fashion doesn’t work in market of if it reach after the expire of certain fashion or season. 6. TOWS MATRIX:
The TOWS Matrix is simple tools for generating strategic options. It is very useful for company for making new strategies how to defend from threats and weakness and take advantages on strength and opportunities. It use internal and external environment SWOT (Strength, Weakness, Opportunities and Threats) and collaborating each other it identify some strategic option. (http://www.mindtools.com, 2014)
Strong brand image
Low costs / cheap prices
Associated with celebrities and guest designers
Slow Distribution System
Amount of suppliers (required resource)
Buying large volume
Rise of new market
Depreciation of Sterling
Increasing demand from aging population
High demand of sports/ leisure designer were clothing
Rise of emerging market as designer hub.
Growing importance of online sales
S-O Key Area (Offensive Strategy) 1. Excessive Expansions + Rise of new market and = Market Development 2. low cost / cheap price + Associated with celebrities and guest designers + High demand of sports/ leisure designer were clothing = Product Development
O-W Defensive Strategy (Needs Investment) 5. Growing importance of online sales + Slow Distribution System =
Public funding pressure
Issue of sustainability and ecology
6. S-T Defensive Strategy (Requires Careful Planning) Public funding pressure (Threat) + Economic Stagnation (Threats) + Low costs / Cheap price = Market Penetration
T-W Key Area (Exit Strategy?)
Figure of TOWS Matrix
Source:. (Ansoff, 1988)
Source: Adapted from H.I. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6. The two recommended Strategies for H&M for 2013- 2018 are as follows. Low cost / cheap price + High demand of sports/ leisure designer were clothing (Offensive strategies) Product Development. This (OS) quadrant opportunity and strength suggest how company can benefit from the strength on opportunities. It is concerned with offensive strategies which may lead them to hypercompetitive market and cost leadership strategies.
H&M one of the core advantage is fashion, quality in best price. Product development refers to the strategies by which an organisation delivers modified or new products to existing markets. (Johnson, et al., 2011)They have more than 150 designer and 100 pattern maker who can do research in sector and lots of experience in clothing industry so it’s easy for them as they have expertise. As H&M have global presence, associated with celebrities and guest designers they can enter in sports and leisure designer clothing in reasonable price which is core concept of firm.
Defensive Strategy (Needs Investment) Growing importance of online sales + Slow Distribution System (Market penetration) Opportunity and Weakness OW- quadrant suggest how company can overcome the weakness. Online shopping is getting very popular with the innovation and revolutionary technological invention where smart phone can do more than calling alone. It’s multi-functional such as sending and receiving email, watching movie, internet browsing, shopping. So its opportunity to enter in this market where you can reach and get access in world market without boundaries Market penetration refers to a strategy of increasing share of current markets with the current product range (Johnson, et al., 2011). As it is clear from the SWOT analysis that company distribution system is very slow. So it is very important for company to develop smooth distribution system.
Now ICT Information communication and technology very advance so with the help of ICT company can develop system that make fast distribution. So it is very important for business to build and establish its competence. (Johnson, et al., 2011) Suitability of Growing importance of online sales + Slow Distribution System (Market penetration online shopping which can fulfil global demand): Suitability is concerned with assessing which proposed strategies address the key opportunities & constraints an organisation faces, through an understanding of the strategic position of an organisation. (Johnson, et al., 2011).
H&M have 6 online store in which can distribute more than 15 countries but product doesn’t reach in time and most of time is too late as customers are so offset with its late delivery. H&M must compete with ZARA, Gap, Uniqlo as they are the main competitor. To compete with them H&M must establish quick distribution system by investing in ITC new software which is supportive to distribution channel. New market in china is growing every day as their economy is growing rapidly so it good to establish good online shopping store and distribution channel in each and every county with the partnership with FedEx International Shipping Services. Which will deliver all the online demand of H&M
Acceptability is concerned with whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders (Johnson, et al., 2011) looking at the financial performance company have positive outcome. Although their ROCE is decline by few percentage but 46.67% is promising. Quick ratio is above the industrial average so it shows they have enough cash in hand so they can invest on other sectors. Now interest covered ratio is far more grater then industry average as it is owed by equity holder. There is no risk of debt and interest payable or long term debt. As this company have much more money to spend so they don’t have any long term debt. It is very positive for company not have any debt and too much money to spend so it is acceptable strategies. As it is able to fit with in organisational value and culture and they have already started online trading it just need more attention and focus on distribution. As stake holder are happy with the company performing and working ethically and sustainably.
Feasibility is concern with weather a strategies could work in practice. ROCE is 46.67% in 2013 and 67.12% in 2012 which is good enough for retail industry. It means business is efficient although there is slide decrease in 2013. There is no gearing in this company as they are totally own by equity holder. As there is no gearing company don’t have any interest payable. (Appendices 2) But they do have to pay dividend. H&M is aggressively expending in and have got 3200 store in more than 53 countries. Their core competence is fashion, quality in best price. They have got 150 designer and 100 patternmaker how subsequently look after designing process. They have 900 independent suppliers so it help them to reduce the cost by completion among the suppliers.
In current situation H&M online shopping delivery is very slow. Customer review suggest that its delivery is not made in time. After they set a partnership with FedEx. Its delivery time will be quick and can deliver item within 5 working days after items is being ordered. Company have to change its distributor to satisfy the customer demand for quick delivery and its complexity of company structure. It also need to change its way of trading for globalisation and technological innovation. There may be some resistance for change although they have open online store in 5 countries they are not performing well they need to spend more in this sector to overcome this problem and change.