Question 1 P.ii-iii Using Michael Porter’s five force model, evaluate the importance of Barriers to Entry to the fast-fashion industry. Support your arguments with evidence from the case study. Question 2 P.iv-vi Conduct a value chain analysis to assess H&M’s capabilities and derive its core competencies. Question 3 P.vii Based on these competencies identify the generic competitive strategy which H&M is pursuing. Question 4 P.viii-ix It is suggested in the case study that the fashion industry is full of companies that have confidently expanded into international markets but later have been forced to retreat. Analyze the international strategy choice being pursued by H&M and assess the extent to which this is appropriate for its future development. Reference P.x Appendix P.xi-xii
The threat of entry of the fast-fashion industry is relating to its attractiveness, which is how profitable it is. The less new entrants are in the industry, the more stable the revenue of the firms are. Hence, several sources of barriers to entry are setting up in most of the industries to lower the threat of new entrants. Product differentiation of a firm can make themselves being unique from other branches which brings with a certain amount of loyal customers to them. Due to the economic growth, people are willing to spend not only for necessity, but also for stylish life style. The uniqueness of the product become one of the most important advantages to increase their customers’ loyalty. The entry barrier will be higher with product differentiation. Access to channels of supply and distribution is very important in the fast fashion industry. With the rapid development of Internet, thousands of suppliers in the fast-fashion industry can be found in a second.
In order to build up comparative advantage, retailers tend to find out supplier who provide the best quality with the least cost. Since larger firms can build up a good relationship with suppliers easily, due to the volume of orders and reputation of firms, new entrants are difficult to compete with them with their business size and bargaining power. H&M, one of the major retailer in the fast-fashion industry, she worked with 747 suppliers in which 150 of them are long-term strategic partners. It is difficult for the potential entrants to compete with her as they have been cooperate for long time. Economies of scale is an important barrier for the fast-fashion industry. It is because the larger the firm size, the easier the level of efficiency can achieve. The maximum volume of production keeps increasing for factories due to the improvement of technology. Mass production by large firms enables them to fully utilize their production capacity where small stores cannot.
Also, they are more capable to outsource their production in low-wage region, like Africa and South Asia, which lower their production cost. Moreover, large firm are easier in building brands in multiple outlets, like GU for UNIQLO. As there are several existing major retailers are in the industry, the expected retaliation makes the new companies difficult to enter the industry. Since the major retailers are in good relationship with their supplier and a greater extent in economies of scale. They are able to attack new entrants with different strategy, like cutting prices. The capital requirement to enter the fast-fashion industry is low. The major reason is that the industry is free to enter. There are a loads of single independent store in the industry which they can choose their products from thousands of suppliers and sell to customers through different ways.
The low capital requirement makes new companies enter the industry easier. There are no barriers erected by the government to enter the industry. As it is freely entrance, it enables new competitors to enter the industry easily. In conclusion, although the fast-fashion industry are free to enter with low capital outlay, the entry barrier are still high since the existing major retailer can provide differentiate products with access to channels of supplier and distribution. They also enjoy a greater economies of scale which enable them to attack new entrants in different ways.
There are many activities involved in running a business, both primary and secondary, which add value to the customer and increases the margin to the organization. In the H&M case, there are also involve several activities which forms core competencies for the firms. Primary activities comprise operation, marketing, service, outbound logistic and inbound logistic. Operation in H&M tends to empower their employees to make decisions. For instance, the window display of each store are guided but each store can have their own style which build up the uniqueness of each store to adapt the characteristics of customers in each region. In the aspect of marketing and social media, H&M promote their stylish design through different social network, like Facebook and Twitter etc. Information will be spread quickly through internet as people used to share their daily lives to public on the net. It strengthens the social awareness of H&M.
To enhance their service, H&M develop a smartphone app to promote their new collection and provide information about H&M. it convenient the customers, since most of the people are using smartphone and customer can easily gather information of H&M once they have downloaded the app. It strengthen the relationship between itself and customer. The logistic system of H&M are well-developed. H&M has an integrated logistic system which helps stores not to hold stock in their warehouse and transfer stock internally from different region. The system prevent the situation that stock stuck in stores and enable stores to swift the item they need from other region to satisfy the customer needs. The inbound logistic avoid the middleman which lower the cost. It is, however, the lack of middleman will increase the time for finding the suitable material or supplier.
The production cost may increase if a middleman is not hired. Secondary activities include firm infrastructure, human resource management, technology and procurement. The firm’s vision and mission set up an organizational culture which is benefit to the firm. Team work, entrepreneurial spirit and cost conscious are included in H&M’s core values. Each activity are following these values that organizational goals can be easier to achieve. The technology of H&M adds value to the whole operation process of the firms. It builds up a channel between designers and customers which designer can know about the latest trend. It also provides information to stores to know about the needs of customers for the swift of stock. The production cost reduces with the assistance of the technology. The procurement of H&M reduces cost by diversifying their suppliers in different region around the world. There are about 750 suppliers worked with H&M.
They are from some low-wage region, like Far East. To ensure quality of the production, H&M also audit their supplier to stick with their objective of “low cost, high quality”. The human resource management of H&M cultivate their staff to be responsible as a part of their store. It increases the loyalty of the employees to H&M which they are willing to maximize the interest of H&M. Also, they hire people who fits the core value of the firms. It strengthen the quality of staff and make sure they work with the firm’s core value. Value chain exists if there are linkages among the activities above. As the firm’s infrastructure defined the core value of H&M that they belief in people and team work. As a result, the human resource department have to hire people who has critical thinking and train staff to build up entrepreneurial spirit in their mind.
With the assist of the secondary activities, the decentralization in operation can operate smoothly that staff will consider them as a part of the store. IT expert were employed to develop an IT system by the human resources department since H&M values a constant improvement. The development of technology in H&M helps with the outbound logistics. As there is program of is playing the top item in each stores. Managers can follow the data and swift inventory from region that have extra stock of the item. Also, the program can replenish stock when an item are going to be sold out that reduces the lead time and the distribution cost. The technology development in building up a smartphone app enhance the service to customers. It also setting up a channel between designers and store for the latest trend in the market to fulfill customers’ needs. The app also provide an opportunity for the marketing department to promote the new collections. In order to lower the production cost, a good procurement is important.
The merchandizer finds out many potential suppliers in different region around the world. The IT department is involved in searching and storing the huge amount of information of the suppliers. Once the linkages are well-developed, core competence will be generated. It also can be examined by the VRIN test. The operating style of H&M of empowering staff for decision making is a core competency of H&M. As it is valuable to the firm since the loyalty of staff ensure the efficiency of them and they are willing to maximize the sales of their store. It is rare, substitution and difficult to imitate for the loyalty of staff since personality cannot be duplicated. The logistic system of H&M is also a core competency of H&M.
As the system can reduce distribution cost and satisfy the demand of customer. Thus, it is valuable to H&M. Also, the knowledge of the IT experts cannot imitate. The system is rare in the market as most of the firms transfer stock from warehouse to stores instead of inter-stores transfer. Also, it is no substitutable due to the uniqueness of the distribution process from store to store. In conclusion, there are many activities involved in the business of H&M and they are linked to add value to the company. The operating style and the logistic system become the core competencies of H&M eventually.
Generic corporate strategy comprises the choice of lowering cost and differentiation. There is a chance for a firm to adopt a hybrid strategy which integrated in both aspects. According to the discussion above, H&M’s are adopting a hybrid strategy. H&M put a huge effort into reducing the production cost. For instance, the logistic system, that is, the core competency, reduce the distribution cost since the internal swift of inventory are more efficient instead of the traditional transfer method from warehouse to stores. H&M also reducing the cost by enjoying the economies of scale since it outsourced to low-cost country in Far East and South Asia. With their mass production, the production cost will reduce. Despite of low cost, H&M also pay attention to differentiate itself from other competitors.
Since the management philosophy is being ‘Fashion and quality at the best price’. Thus, there are about 200 in-house designers employed to design to forecast the latest trend and design to meet the customer satisfaction. Also, H&M audit the supplier to ensure the quality. With the high standard of quality for the products, H&M can differentiate from other competitor with a relatively reasonable low price. H&M adopt an integrated strategy to compete in the industry. The constant improvement in technology reduce the production cost and the fundamental value confirms their direction to be different from others.
The Integrated Responsiveness Grid is a method to help organization to decide their international strategy. Through filling up the score sheet, as shown in the appendix, H&M is able to position their international strategy. For the global factors, it is the score of whether H&M should adopt global strategy. In factor A, since the fashion is a global trend, design across are usually with not much difference. The only factor affects the design is the customs of each region, which have little influence on the design. Thus, a score of 4 in A is awarded. In factor B, there are not much standard for the industry. Thus, a score of 2 in B is awarded. In factor C, customer tends to buy locally in the industry. However, there are also ordering service from other countries. Thus, a score of 4 in C is awarded. In factor D, economies of scale is important to the fast-fashion industry. Since the greater extend of economies of scale the firm enjoy, the lower the average production it is.
Thus, a score of 5 in D is awarded. In factor E, due to the nature of the industry, a quick response is needed to satisfy the customers due to the unpredictable fashion trend. Thus, a score of 5 in E is awarded. In factor F, technical requirement for fast-fashion is low. However, there is a little influence on the culture factors for fashion design. Thus, a score of 2 in F is awarded. In factor G, since the market situation in different regions are different. The operating method may not be the same among regions. However, the experience in other region can be as a reference for the new stores. Thus, a score of 3 in G is awarded. In factor H, there are a thousands of small competitors in the fast-fashion industry who are focus the local market.
However, there are several major competitors who pursue global strategy that is more influential to H&M. Thus, a score of 4 in H is awarded. In factor I, customer behavior towards fashion is more the less the same in different regions. However, the purchasing pattern may vary due to the different purchasing power in different area. Thus, a score of 3 in I is awarded. In factor J, creativity is important to fashion industry which makes a huge demand in designer that are the experts in this area. Thus, a score of 5 in J is awarded. The global integration score is: (4+2+4+5+5+2+3+4+3+5)/10 = 3.7 Factor K to O refers to the local responsiveness score.
In factor K, since clothing is a kind of necessity so price may not very different across country. Thus, a score of 1 in K is awarded. In factor L, distribution channel are the same across countries. Thus, a score of 1 in L is awarded. In factor M, as the industry regulation has little difference in different are. Thus, a score of 1 in A is awarded. In factor N, fashion is about trends and customer satisfaction, customer is the main role of the industry, a high customization is required. Thus, a score of 5 in N is awarded. In factor O, as firms usually produce in low-cost region and transfer to local stores, transportation cost is not so different in different countries. However, a customer interface is needed to adapt customers’ opinion. Thus, a score of 3 in O is awarded. The local responsiveness score: (1+1+1+5+3)/5 = 2.2
According to the score sheet, as shown in the grid in appendix, H&M are suggested to adopt global strategy.
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