H&M

Assignment 3

Weighting: 25%

Group Size : Individual or a maximum group size of 3 members (1-3 members)

NB! Only one submission (one member to submit) per group

Due Date: 24 September 2021 @ 24.00 Blackboard submission only

Special Instructions:

Use the enclosed case study as the basis for your arguments and this can be supported with secondary literature, BUT it is important not to change the context and the information given in the case based on secondary literature.

1. If a student’s name appears on two assignments a zero mark will be allocated

2. Only the students initials, surname AND student numbers must be entered on the assignment, if the student details are incorrect a penalty of -10% will be incurred by the ENTIRE group!

3. Late submissions are subjected to late submission penalties (20% if submitted after the due date and time, then 10% per day thereafter) a zero mark is allocated after 5 days.

4. Use Arial font size 12, 1.5 line spacing and single margins.

5. A maximum of 20% will deducted from your total score for poor presentation ito no Table of Contents, Introduction, Page numbers, conclusion..if no citations appear in the text an immediate -30% penalty is incurred).

6. A plagiarism percentage of between no more than 20% similarity will be accepted.

7. A minimum of ten (10) literature sources need to be used (excluding the prescribed text, so additional literature needs to be consulted and please note the enclosed article is merely a basis from which to conduct your additional research.

8. Content pages should not exceed 10 pages.

Name and Surname Student numbers

CRITERIA Exceeds

requirements

Meets requirements Does not meet

requirements

Presentation: Cover page,

Table of contents,Indexing ,Page

numbering,Layout ,Introduction (10)

Neat, professional

appearance; no

typing errors; layout

correct.,good

indexing and page

numberingTopic well

introduced

Some untidiness; only

few errors in typing and

layout. Appearance still

pleasing.Topic

introduced satisfactorily

Untidy; slovenly typing

and layout.Appearance

unprofessional. Topic

poorly introduced,if at

all,no page numbering

,poor indexing,no table

of contents, errors on

cover page.

10-8 7-4 3-0

Content (70) Full explanation. The

explanation is

detailed All relevant

supporting

information is

included.

The explanation is

satisfactory and

includes some

supporting information.

The explanation is

skimpy/ inaccurate and

irrelevant nformation

is included.

1. Evaluate H&M’s current and potential

grand (growth) strategies that they could

pursue based on the specific evidence in the

case study. (15)

15-10 9-5

4-0

2. Conduct a comprehensive evaluation of

H&M’s resources and capabilities, be sure to

include a detailed discussion to support your

choices (30)

30-21 20-10 9-0

3. Within the context of Question 2 apply the

VRIO framework to analyse the resources

and capabilities of H&M. Substantiate your

decisions. (12)

12-8 7-4 3-0

4. Considering the contents in the case

study propose a strategy that H & M could

implement to “future-proof” their business

in the complex South African market. (13)

13-9

8-5 4-0

Conclusions (Citations and Bibliography (20) All entries in

accordance with

accepted method,

Mostly correct, but a

few inconsistencies or

errors in Bibliography

In text Referencing and

bibliography

incorrect/incomplete/

30% Penalty if no citations or in-text

references are evident

Excellent conclusions

drawn

and in-text referencing.

Sound conclusions

absent.Weak

conclusions and

recommendations

TOTAL (100) 20-15 14-8 7-0

Introduction

The apparel retailer H&M has made an incredible journey, from a single store established by the

founder Erling Persson in Sweden in 1947 to a pioneering ‘fast fashion’ business with 3700 stores in

61 countries and more than 132,000 employees worldwide. ‘Fast fashion’ refers to a quick response

to new trends and fashion items that are made available in stores immediately thereafter. By the

time Persson’s 34-year-old grandson Karl-Johan Persson took over as CEO in 2009, H&M had become

global leader in the ‘fast-fashion’ segment with a distinctive business approach that challenged most

competitors. The business model, commonly referred to as ‘cheap-and-chic’, emphasised high

fashion at prices significantly below those of competitors, with the fundamental principle being

‘Fashion and quality at the best price’.

As the CEO of the company, Mr Persson emphasised the importance of maintaining the company’s

growth-based strategy, as he stated in the 2014 annual report: ‘2014 was a very good year for H&M,

with strong sales and profitability. We are continuing to add value for our customers and to invest

for an even stronger H&M. We will open a net total of 400 new stores and nine new online markets

in 2015.

’ H&M opened another 379 new outlets in 2014 with the addition of flagship stores in key locations

such as Milan, Munich and New York, as well as expansion into new markets like Australia and the

Philippines. However, H&M was being seriously challenged by Zara, the prime retail brand of Spain’s

Inditex, which had already overtaken H&M to become the world’s biggest fashion retailer by market

capitalisation, based on Zara’s rapid expansion, particularly in emerging markets. The increased

competition, and the fact that margins had started to erode due to increased cotton prices and rising

production costs in Asia, put the H&M high-fashion/low-price formula and aggressive expansion

under scrutiny. Investors had come to trust H&M’s model that relied on a set of unique resources

and capabilities, but Zara’s success questioned the sustainability of the formula.

The increased competition for consumer spending in the fast-fashion business was further

intensified by the poor economic situation. With 70 per cent of shareholder voting rights controlled

by the company’s founding Persson family, H&M’s chief executive Karl-Johan Persson tried to calm

investors and emphasised the long-term view: ‘We have great respect for the economic climate. In

this situation it is extra important to have a long-term perspective and to always make sure we give

the best combination of fashion and quality for money in every market.’1 ‘… we are investing for the

future and we always have the customers in focus. Despite increased purchasing costs, we have

continued to strengthen our customer offering – for example, by not raising our prices to

customers.’

H&M continued to emphasise the long-term view in its expansion strategy. For 2015, 400 new stores

were planned, with China, the USA and the UK expected to be the largest growth markets. They also

planned to enter new markets including Taiwan, Peru, Macau, South Africa and India. Despite these

aggressive expansion plans, analysts had some doubts: ‘There are fears that the product is not good

enough, brand appeal is fading or that prices have been undercut by an even cheaper competitor.

These are big questions.’ Adam Cochrane, analyst at UBS3

The apparel industry

The total market size of the global apparel retail industry in 2014 was $1,317bn (£856bn,

€1,014bn),4 but with an annual growth rate of just 3.8 per cent for the period 2010–14.5 This slow

growth increased competition, which was further intensified by a large number of small players,

although the large international incumbents, including Inditex (Zara), Gap and H&M, continued to be

the market leaders (see Table 1). An example of the new and vibrant smaller players was the

Japanese company, Uniqlo, which had started to expand aggressively. Moreover, fashion is, by its

very nature, unpredictable and fickle – trends are prone to sudden changes, which makes

competition uncertain. End consumers have an enormous selection of garments to choose from and

will quickly adopt new trends. In the ‘fast-fashion’ category they are also extremely cost conscious

and will seek out bargains.

Table 1 H&M and its multinational competitors

.

Some of the players in the industry are both producers and retailers. For example, Gap Corporation

and Inditex both manufacture their own products and sell them in their own stores. Other retailers

have a multitude of suppliers to choose from. As international trade liberalises, the number of

suppliers increases and competition among manufacturers in low-wage regions intensifies. Switching

from one supplier to another is not difficult, although it entails the risk that choosing low-cost

suppliers may imply a more extended supply chain, less able to cope with sudden fluctuations in

demand as the industry reacts to changes in fashion. There is also a risk that low-cost suppliers may

not be up to the required quality standards.

Entry to the retail industry does not require a large capital outlay: setting up a single independent

retail store is within the means of many entrepreneurs and there are plenty of suppliers to choose

from. However, on a global scale, a few large corporations account for a major share of total

industry revenues. Their size and economies of scale (see Table 2) enable them to build brands in

multiple retail outlets, and exploit their greater buying power when negotiating with suppliers.

The spirit of Hennes & Mauritz (H&M)

H&M is an abbreviation of ‘Hennes’ (the name of the first women’s apparel store opened by Erling

Persson in 1947) and ‘Mauritz’ (a later acquisition of a men’s clothing store). The company has

undergone a tremendous transformation from having just one store and a domestic focus to

become one of the world’s largest fashion retailers. As argued by one of the few journalists that has

access to the company: ‘The story of H&M does not really concern clothing, but from the beginning

one man’s vision – or rather unbreakable stubbornness, devotion to a goal and knowledge of human

nature.’6 Not unlike IKEA in furniture, the H&M philosophy is to make fashion affordable for

everyone: ‘Fashion and quality at the best price.’ The roots of the H&M ‘spirit’ can be traced back to

the 1940s, when Erling Persson started to conduct, what he calls, ‘the primitive trade of buying and

selling’7 with the essence of ‘tradesman-ship’. This was also maintained at the core of the

company’s culture when his son Stefan Persson took over as CEO in the 1980s. Even after Karl-Johan

Persson took over in 2009, the leadership style and organisational culture still relied on Erling

Persson’s basic values and beliefs, based on his strong business acumen and characterised thrift, no-

nonsense decision-making and delegation of responsibility. These are fundamental ingredients of

‘the spirit of H&M’, which retained the shared and tacit understanding of how the company does

business. It is underlined by seven codified core values.

 We believe in people  We are one team  Straightforward and open-minded  Keep it simple  Entrepreneurial spirit  Constant improvement  Cost-consciousness Another aspect of the H&M spirit is the extraordinary focus on employee involvement. This participatory management philosophy is one of the reasons why H&M is seen as a company where experimentation, trial-and-error learning, fast decision-making and willingness to take initiatives and try new ideas define the basic pillars of organisational culture. Another key ingredient in the culture of H&M is the active encouragement of this spirit at all organisational levels.9 Trying new things is also encouraged among purchasing managers, but while trying something new and making mistakes is acceptable, it is important that the same mistake is not repeated. Experimentation is also present at the store level, where interior decoration, lighting, colours, clothes displays and even locations are swiftly changed depending on sales and customer preferences. However, the range within which new ideas can be tried is clearly bounded by H&M’s core ideas and values. In a memo to its employees, H&M specifies this as follows: ‘Our employees all contribute to making H&M what it is today. We have a strong corporate culture – the spirit of H&M – that is based on simplicity, a down-to-earth approach, entrepreneurship, team spirit, straight lines, common sense and a belief in individuals and their ability to use their initiative. Swedish national values also play a role – including a humble, informal and non-hierarchical management style combined with the ‘democratisation of fashion’. Creative advisor Margareta van den Bosch comments: ‘We’re a very democratic society [in Sweden] … We keep what we do simple and we think it’s wrong that fashion should be the preserve of the rich. Despite this humility, results are central, something which is emphasised by Erling Persson’s early focus on ‘takten’ or ‘the pace’, which still remains a fundamental practice at all organisational levels.

It is a straightforward and persuasive weekly list that includes sales and other key figures compared to the previous day, month and year. On this list each manager can clearly see exactly how much has been sold of each individual product. The buyers use this information to reallocate production or shipments, reducing potential over-stocking problems. This itemised report also allows buyers to maintain a high level of turnover, keeping the apparel on the sales floor up to date. All employees are also made aware of these results and if sales are up from the day before the sales figures are applauded during store morning meetings. Limited attention to titles and job descriptions is also a characteristic of H&M: ‘At H&M we do not have any job descriptions. It provides considerable freedom, but it also makes it more difficult to blame someone else and claim that something is not part of your duties. Some love it, but others leave after a few weeks.’ In line with this emphasis on informality, independent decision-making is celebrated and decentralisation is encouraged within the limits of the organisational culture. However, central functions like buying and logistics also have a considerable influence and the organisation is in a sense ‘a peculiar mix of strong centralisation and delegation’ It has been a challenge to preserve the flat and simple organisational structure during H&M’s tremendous growth. The company has a matrix country/function organisation with each executive management team member being responsible for a function and for the results of work within their function in each country.

Store operations and management

The company always positions its stores in prime locations, whether in a city or a small-town shopping centre. This has been a firm principle of H&M’s since the first shop opened in 1947 and the principle is still strictly adhered to. The store is the most important communication channel H&M has with its customers and it must be inviting and inspiring; strengthening the brand and offering local customers the best possible shopping experience.

Instead of owning retail properties, H&M opts for renting store premises, which increases flexibility and adaptability. By renting space, the company is able to adapt more quickly to the changing demand patterns and location attraction in its key markets.

The window display – where the customer meets H&M – is perhaps the most important ingredient of the stores. Guidelines for store design and display windows are created centrally based on a large ‘test store’ in Stockholm. Every two or three years a completely new interiors programme is created. Although centrally guided, every store is unique as it showcases different items in the window display, although they may come from the same collection. Displays, both in windows and inside stores, are changed frequently. This way, consumers are continually attracted to visit the stores to keep up with the latest collections.

In line with H&M values, decision-making is decentralised and store managers have considerable autonomy. The shop manager runs the business like an entrepreneur and is authorised to take independent decisions within the overall guide lines; essentially like running their own business. This increases employee loyalty and commitment to the organisation and is a great motivator.

Marketing and social media

H&M’s strong brand image is associated with value and stylish collections. In addition to 200 in- house collaborations with famous designers, there is a unique approach employed by H&M over recent years. This has included signature collections designed by Stella McCartney in 2005, by avant-

garde Dutch designers Viktor & Rolf in 2006, by Madonna in 2007, by the Italian designer Roberto Cavalli and Kylie Minogue in 2007, by Sonia Rykiel in 2009, by Versace in 2011, by Italian fashion label Marni in 2012, by Isabel Marant and Beyoncé in 2013 and by American designer Alexander Wang in 2014.

Highlighting the high level of brand awareness, H&M was ranked 21st among the top 100 most valuable global brands according to Interbrand in 2015, with a brand value of US$22bn. In comparison, Zara ranked 30th with US$14bn, and neither Gap nor Uniqlo made it into the top 100 list. H&M’s superior brand value vis-à-vis its main competitors can partly be attributed to its long- term advertising campaigns with high-profile celebrities. To maintain and enhance the value of its brand name, H&M spends around five per cent of its revenues on advertising.

In addition to conventional channels, H&M has also established a strong social media presence. The company aims to become part of its customers’ daily lives, through its pages on Facebook, Twitter, Instagram, Google+Google+ and YouTube, as well as the Chinese social networks Youku and Sina Weibo. Each network is updated on a regular basis. Through social media, millions of H&M followers share ideas and opinions and get quick answers to their queries. New fashion videos and reports are uploaded onto YouTube weekly and have had millions of hits. Through the H&M apps customers can explore the latest collections and campaigns, find out what’s new at H&M and locate stores. At its launch in August 2010, the iPhone app was the most downloaded application in almost all of H&M’s markets.

Design

Design is centralised at the Stockholm headquarters and includes a team of almost 200 designers and about 100 pattern makers. The centralisation of design allows for minimum time-to-market and the design team has direct contact with the production offices around the globe. This allows for a rapid-response manufacturing process to capitalise on design trends immediately. The design team works intensively with new trends, materials and colours from what is popularly known as the ‘White Room’ and is supported by the 50 production offices around the world.

Much effort is put into researching and predicting emerging market trends. H&M designers hold customer surveys, dialogue sessions and focus groups, and pick up trends from employees in the global stores and then add their own particular features. They need to have an up-to-the-minute fashion feedback focus and be conscious of the very latest trends. According to Ann-Sofie Johansson, head of H&M design department: ‘We try to look out for trendsetters, what’s popping, vintage looks, what’s happening at music festivals. The internet is getting more important as are catwalk shows, but these are more of a confirmation of what we know is out there’.13 She and her team pick up inspiration in several ways: notes from travels, fashion classics offered by Paris, Milan, New York, London and Tokyo, textile fairs, street fashion and exhibitions: ‘Celebrity inspiration is also important, as well as what bloggers are saying and old-fashioned sources such as music, magazines, movies and costume dramas’. However, H&M always adds its own touch to the design, creating collections that strike a good balance between the latest trends and the basics. Margareta Van den Bosch, creative adviser and former head designer says: ‘We get inspiration from everywhere, but the most important thing is to make it your own way. Quality means carefully testing everything before it hits the shops, from jeans to lipstick. But it also means H&M is a fashion house in its own right, with its own trends. We do not copy.’

Apart from size adjustments, for example in the Asian market, no special changes are made to to adapt the collections for specific countries. H&M argue that: ‘It is important that H&M keeps its own personality in each country, and fashion has become more global, more international’.15 Similar trends are appearing the world over. Of course this is also driven by economies of scale in buying and manufacturing.

Buying, local production offices and corporate social responsibility (CSR)

H&M does not own any factories. Instead, manufacturing is primarily outsourced to low-cost countries with some 70 per cent of production in the Far East and South Asia and the remainder in Africa, Europe and the Middle East. With the focus on economies of scale, including low-wage and high-volume production, the company maintains low input costs and often has the latest trends in its stores within a month of the initial design.16 H&M also constantly redefines its production and distribution in response to changing market and production conditions to ensure that they continuously improve the efficiency of the production flow. This way, H&M has been able to reduce lead times by 15–20 per cent in recent years.17 In 2011, H&M worked with 900 independent suppliers of which 150 were considered long-term strategic partners. Buying is centralised in Stockholm and has always had a central role in H&M. Managers within this function have often been the best paid in the entire organisation.

To reduce lead times, the 50 production offices are in direct contact with suppliers and report back to central procurement in Stockholm. They mediate between the large network of independent suppliers and the central purchasing office, to identify the right suppliers to place orders with, to optimise time and cost decisions, and to ensure that decisions comply with H&M’s CSR policies. Each supplier owned or subcontracted multiple factories; globally 1652 factories were approved for making goods for H&M. H&M conducted a total of annual 3623 audits of suppliers in 2014. CSR has increased in importance for H&M. Being a high-profile and visible player in the textile and apparel industry, the company is under constant scrutiny in terms of working conditions and wage levels in the overseas suppliers they work with. Being fully cognisant of this, H&M pays particular attention to CSR and takes several actions throughout its value chain to keep its brand name away from the usual criticisms aimed at the textile industry. H&M also produces a special collection (Conscious Collection) using sustainable materials. The company has formulated seven commitments called ‘H&M Conscious Actions’. These include adopting ethical practices, improving working conditions and using natural resources responsibly. Other projects include community investments.

Logistics: distribution, warehousing and IT

Buyers and production offices are closely integrated throughout the value chain with distribution centres, warehouses and the stores around the globe. To reduce poor buying decisions and to increase flexibility in allowing stores to restock quickly during the season with best-selling products H&M made sure not to place orders too early. H&M puts more emphasis on economies of scale in its supply chain set-up compared to Zara’s focus on flexibility and speed: ‘Lead-times vary from two to three weeks up to six months. The different lead-times reflect differences in the nature of the goods. The trick is to know the right time to order each item. A short lead-time is not always the best, since the right lead-time is a matter of bringing price and quality into balance.’

H&M controls virtually all logistics internally except for external contractors handling transportation. The integrated logistics function is a key business process for H&M that supports cost efficient supply of goods and generates economies of scale: ‘H&M can offer the best price by avoiding

middlemen, buying the right product from the right market, being cost-conscious at every stage and having efficient distribution.’

This integrated direct distribution channel ensures that H&M stores receive new shipments daily, giving the company further control over supply and demand shifts. Store-keeping of merchandise is minimised and individual stores do not have backup stocks; they are replenished as required from a central warehouse. They also shift merchandise around internally depending on demand. For example, if a particular fashion proves exceptionally popular to men in a particular region, but not in another, they can shift inventory from the first region to the second. The distribution set-up also enables H&M to respond to market segment changes within a country.

To support the swift and efficient flow of goods, H&M logistics is dependent on effective information sharing and the latest IT systems that are continuously developed. These systems permit optimal supply and demand decisions, whilst also providing valuable information for understanding customer needs and the placement of products. Taking H&M’s mix of supply chain management, logistics and IT into consideration the company is considered a world leader in these areas: ‘Its centralized logistics and warehouse system, close coordination of the procurement staff with the production offices, intelligent use of ICT [information and communication technologies] tools, purchasing flexibility and overall a central governing model, has incredibly reduced the lead time and improved logistics to have lightning-fast turnaround speed of just 20 days, making it a truly unique supply chain innovator.’

Human resource management (HRM)

Key to the recipe of H&M’s success is its ability to establish a strong corporate culture with well- defined values, and to make sure its employees understand and internalise these values in their job. One important element to ensure that this culture continues to be integrated into HRM is the recruitment process and training.

Internal promotion and job rotation are two central ingredients in the HRM policies, and experience, loyalty and continuity are highly regarded. These two aspects are central to cultivating and disseminating the H&M spirit and culture throughout the organisation. The company’s steady growth has been providing ample opportunities for employees to take on new challenges in another store, department, role or country. Aligning corporate and individual goals with development and growth strategies are essential for H&M: ‘The key words for continual growth are responsibility and commitment. We have committed employees and we are prepared to delegate responsibility at every level. I tell employees, if you do not grow, neither will H&M.’ Head of HRM, Pär Darj

A participative culture is thus central to the spirit of H&M and the leadership philosophy emphasises straightforward and direct relationships with employees. The HRM policies emphasise the core value – ‘We believe in people’ – and the open-door policy, granting all employees the right and possibility to discuss any work-related issue directly with management.

Consequently, H&M values personal qualities much more than formal qualifications: great school grades and all the university credits in the world are no guarantee of a job or a fast-track career. More than anything, H&M looks for people with the right personality – people can gather skills as they go along, but personality can’t be taught. H&M is a fast company with a high tempo and needs employees who are self-motivated, like responsibility and decision-making, and are capable of leading. A love of fashion combined with a focus on sales is perceived as a major advantage.

Internationalisation and expansion

While H&M’s skill in providing fashionable and elegant clothes at affordable prices and catering for the dynamic tastes and preferences of customers can broadly be identified as the main drivers of its success, perhaps their unique advantage lies in their ability to replicate the same business concept and ‘spirit’ across time and space. Since the 1990s, international expansion has been aggressive and the company has moved into Eastern European markets, the Middle East, Asian markets and Russia. By 2005, H&M had already expanded into more than 20 countries with more than 1000 stores.

Continuous growth by replicating the same business model and store concept thus defines the core of the company’s expansion strategy. Prior to moving to a new country or city, H&M first conducts a thorough evaluation of market potential. This is done according to factors like demographic structure, purchasing power, economic growth, infrastructure and political risk.

H&M’s policy is to recruit local people wherever they open a new store. H&M looks for those who have the ‘right’ personality and potential to understand and adopt the core values of the organisation. Another element is to use formal training programmes, as well as on-the-job training, to socialise employees into this culture and make sure that they understand and act according to the company’s core values. These socialisation mechanisms are the means by which H&M successfully adopts a ‘mental franchising’ model, in which the ownership of each and every store remains in the hands of H&M whereas the shop managers often run their shop as if it were their own.

All of these initiatives are essential elements of H&M’s constant growth strategy, where the ambition is to create and re-create businesses that reflect the basic and fundamental values and the overall H&M spirit. To this end, the company keeps formal rules and procedures to a minimum and prefers to equip its employees with tacit skills via experiential learning in the field. This way, H&M makes sure that those who work in new outlets are exposed to and infused with the original spirit. Combining this with the values of initiative-taking and entrepreneurship, H&M has been able to stay ahead of its competitors by moving fast and reaching large markets based on applying a simple business model universally, yet making subtle modifications and adaptations at the local level.

H&M’s growth to become one of the largest global fashion retailers is an incredible success story – from one store in 1947 to 4000 in 2015. In 2016, H&M planned to open another 400 stores and to pursue aggressive growth in its new luxury label format of stores called ‘& Other Stories’. However, fashion-retailing history is full of companies that have confidently expanded into new international markets but later been forced to retreat and drastically curtail their growth, e.g. Marks & Spencer, C&A, Benetton. The question for H&M and its third-generation leader Karl-Johan Persson is to what extent will H&M’s resources, capabilities, practices and knowledge be enough to keep up with the competition, including vigorous new players? Will these entrants be able to replicate H&M’s success?

Questions:

1. Evaluate H&M’s current and potential grand (growth) strategies that they could pursue based on the specific evidence in the case study. (15)

2. Conduct a comprehensive evaluation of H&M’s resources and capabilities, be sure to include a detailed discussion to support your choices (30)

3. Within the context of Question 2 apply the VRIO framework to analyse the resources and capabilities of H&M. Substantiate your decisions. (12)

4. Considering the contents in the case study propose a strategy that H & M could implement to “future-proof” their business in the complex South African market. (13)

Total:70