Hennes and Mauritz (H&M) is a fast-fashion global leader in the fashion industry. Hence, to have a holistic sustainable development point of view, we will examine and address the Marco-environment by looking at PESTEL analysis framework. The competitive forces within the fashion industry will also be revealed throughout the Porter Five Forces Model.
PESTEL ANALYSISCase EvidencePositive (Opportunities)NeutralNegative (Threats)
POLITICAL factors:Critical observation faced from the public on H&M’s overseas suppliers’ welfare and working conditions.The company is under critical observation on their supplier’s welfare and working conditions that has raised issue on upholding its branding (Yildiz, 2014,pg 580)This endangered H&M reputation as high-profile global leader in the fast-fashion industry. If the workers/suppliers are underpaid or given poor working conditions by such well known company, public will start to criticize on the company’s image. Hence, H&M would face strong political pressure from the concerned media, labor rights and health campaigners which will adversely affect their operation margins.
H&M is concerned with the increased of Cotton and production cost in Asia
Lower profit margin of the company due to increased of costs in Asia. (Johnson et al., 2014, pg 575)This implies that they would need to fork out more money to get the same quality and/or lesser quantity of raw materials in their production.
H&M faced inflation in 2011The business of H&M is facing more competitors due to the poor economic downturn and has affected how the customer spent (Johnson et al., 2014, pg 575)As economic is not doing well, customer who is more prone to price sensitive would purchase them and boost the company’s revenue. Since economic is bad, there is a tenancy that customers will not spend so much on apparel. Hence, they will choose to minimize their spending on changing their fashion apparel so frequently and would affect
the profit margin.
Customers are more cost consciousCustomers are looking for more low-priced and fashionable apparel in the fast-fashion industry.(Johnson et al., 2014, pg 576)When customer is more price sensitive, they would most likely to patron from H&M since is cheap. This increases revenue of the company.
Customer’s preferences on fashion trend changes.Customers have a wide range of garment to choose from and they tend to attract to new fashion trend easily. (Johnson et al., 2014, pg 576)
Fashion trend is unpredictable in nature and offers a wide range of garments for customer to choose from. Moreover, it can be based on seasonal. Thus, it is difficult to manage customer expectations and H&M may not be the solely apparel shop that customers want to patron. Hence, revenue will be affected.
H&M established strong social media presence internationally.H&M communicate with their customers through a wide range of social media platform. Eg: Facebook, Twitter, Instagram, YouTube and Chinese social networks. (Johnson et al., 2014, pg 579)With a well established social media platform, customers will be more expose to H&M brand. This allows customers to keep coming back and increase the revenue.It is a good method of advertising the company’s branding. However, it allows competitors to imitate easily. Eg: the design of the H&M apparel could be easily copied and resell it by their competitors at a much affordable price and affect the revenue.
H&M has adopted “Going Green” business idea with the use of natural materials in their apparel. H&M came up with a Conscious Collection concept of using sustainable materials. (Johnson et al., 2014, pg 580)This creates a positive brand image of H&M and recognition from the public of being ECO- friendly leading to increases the company’s profitability. Cost of using natural materials is high and may result in rising of manufacturing cost leading to reduce the profit margins.
Free trading among suppliers and manufacturers due to the international trade liberalized.The pact increases the number of supplier that allows H&M to work with them at a much lower price. (Johnson et al., 2014, pg 576)It allows H&M to source their suppliers easily at a lower cost. In return, save some operational costs and improve its revenue. Summary
Based on the PESTEL Analysis, the external environment of H&M is hostile as there are more threats than opportunities. This is mainly due to the high unpredictable of Socio-Culture factor where customer’s trend preferences and expectations on apparel are difficult to gauge and manage. Furthermore, Economic factor further intensifies the competition as it tends to control customer’s willingness to spend.
Porter’s Five Forces Model
Threat of new entrants (High)
This is due to the low capital required for entrepreneurs to establish an independent retail which can be easily done through other channels. (Johnson et al., 2014, pg 576) For instance, blogshops, Qoo10 or Taobao to sell apparel. Power of Buyers (High)
The power of buyer is high as there is an overabundance of retailers in the market. For instance, Zara, Gap and Uniqlo. (Johnson et al., 2014, pg 576) This implied that customers have a wide variety of stores to shop around for bargainable apparel at the best prices. This leads the buyers to switch from one brand to another effortlessly. Power of Suppliers (Low)
The power of supplier is low as H&M has 140 in-house designers who come up with their own designs. (Johnson et al., 2014, pg 577) This implied that they have greater buying power when negotiating with suppliers as they are heavily dependent on H&M for manufacturing their designs.
Intensity of Rivalry (High)
This is mainly due to slow growth rate margin of 3.7% in the year of 2007-2011. (Johnson et al., 2014, pg 576) It increases the competition intensiveness when Zara and Uniqlo are expanding aggressively. This endangered H&M profit in 2011 and loss of $599 revenue is recorded in year 2011 (Johnson et al., 2014, pg 577)
Threat of Substitute Products (Low)
The threat of substitute products is low as apparel is a basic necessity for us.
Based on the Porter’s Five Factors Model, H&M is portrayed as the most unattractive industry as there are more high results achieved. However, they may continue to stay in the fashion industry as they are able to provide low cost value to their cost conscious customers. Question 2a
In this section, we will be identifying and examining the strategic capabilities of how H&M’s resources and competencies are contributed in sustaining its competitive advantage in its long-terms survival. Strategic Capability
Resources: What H&M has:Competences: What H&M do wellCase Evidence OutletsPhysicalAbility to open stores at attractive location
Leasing of stores allow H&M to establish a winning business location easily as they are able to shift and adapt quickly to the changing demand patterns in the fast-fashion industry. This creates more traffic flow of customer and in return increase business revenues since the stores are opened in hotspot shopping area.
Through leasing of space, it allows H&M to shift their business locations easily to meet the changing demands patterns in the predominant market. (Johnson et al., 2014, pg579)
H&M always opened their stores at the prime locations such as shopping centre or in city. (Johnson et al., 2014, pg579)
Well-build integrated IT infrastructure Ability to integrated all functions at all organization level
Information on stock taking is disseminated efficiently and effectively among the suppliers and the retailers. For example: Integrated Communication Technology (ICT) system. This increases the company‘s efficiency and productivity to respond to customer needs in a fast-fashion market.H&M had the most updated and developed IT system to support their stock taking process. It aids to provide information efficiently and effectively between the stores and their production team. (Johnson et al., 2014, pg579) Well-established Brand Image Ability to create brand awareness
Most of H&M adverting campaigns make use of top-notch celebrities. H&M has a brand value of $16.5 mil and was ranked 21st in 2011 as the top most valuable global brand in the Interbrand. (Johnson et al., 2014, pg579) Healthy Financial Position(Eg: Balance sheet, income statement) FinancialStrong conservative Fund Management (high liquidity status)
Profit margin of H&M among the competitors is recorded the highest at 19.04% as compared to (Zara) 18.53%, (Gap) 13.52% and (Uniqlo) 16.52% respectively. This indicates that H&M is more profitable and is in better control of its cost as compared to the rest.
Solvency ratio of H&M is reported at the highest of 73.28% as compared to (Zara) 64.99%, (Gap) 57.75% and (Uniqlo) 32.29% respectively. This indicates that H&M has more ability to service its long term and interest debts. Similarly, they are less risky to fall into bankruptcy situation as compared to the rest since they are more cash wise. (Investopedia, 2014)
Gearing ratio of H&M is reported at the lowest of 3.01% as compared to (Zara) 12.02%, (Gap) 21.89% and (Uniqlo) 10.55% respectively. This represents that H&M debt level is at 3.01% of its equity which is use for it’s continue operation. This means debts are easily recovered from their creditors and is unlikely to face bankruptcy in economic downturn due to conservative financial management. (Accounting Tools, 2014)Figures are extracted from the comparative financial data. (Johnson et al., 2014, pg 578) Designers,HumanAbility of Executing Marketing strategy
Prestigious designers were hired in strengthening their brand value and image which leads to attract more business and increase in profitability.
Ability to keep up with latest fashion trend
Regular research was conducted to predict the latest trend that suit customer preferences. This aid in retaining customer’s loyalty leading to more profitability.
Famous designers like Stella McCartney, Viktor & Rolf, Madonna are used as their marketing strategy to relate to brand value and image of H&M. (Johnson et al., 2014, pg 579)
They work with customers to find out their preferences and trend through focus group discussion, surveys and having the White Room to find out the new trends, materials and colours.
As mentioned in the preceding analysis above, we can conclude that H&M has adopted a cost leadership business strategy. Mainly because of the core business model, “high fashion/ low cost”. Similarly, manufacturing are being outsourced to low labor cost countries in Asia, Far East and Africa. This let H&M to remain economic of scale that meets needs of the customer who is more prone to price sensitive.
Hence, we would recommend H&M to continue to adopt the cost leadership business strategy. This is because by keeping their cost low, they attract more price-sensitive customers and bring up their profit margin further. With this strategy, it enables H&M to grow further by entering into the new markets and products/service opportunities by incorporating the four core competencies of the ability to create brand awareness, ability to integrate all functions at all organization level with the use of IT system, a strong conservative fund management and the ability to enhance the employee’s performance which is implied by the Ansoff product/market growth matrix diagram as shown below.
With that said, H&M could look into new markets area by looking at other modes of channels to increase their revenue. This can be done by setting up online platform such as website or mobile apps which leverage on their strong IT system. The advantage is lowering operation cost and improves revenue. However, the down side of setting up online platform is that competitors are able to produce the same designs at a lower price. Next, H&M could look into acquisition of potential and worthy brand (be it local or overseas market) as mean to achieve expansion growth. H&M strong financial position permits this move. Moreover, H&M could leverage on its expertise on logistics and brand value to new acquisition to improve its business and revenue. The advantage is to achieve synergies between brands in form of spill-over effect and open up new market and products at the same time. The disadvantage would be the risk of the investment but that can be alleviated through careful market research. Similarly, H&M could work closely with their suppliers to achieve low production cost. This enables them to produce good quality of apparel at the best price by leveraging on its ability of their employee’s performance. This strengthens the relationship, resulting in cost savings and improve profit margin. The disadvantage is political risk would arise if the suppliers working condition and wages are not met up to the expectation of the public.
However, it can mitigate by reducing the pressure on company image through social media to uphold its brand value. Also, H&M might look at other materials asides from cotton to achieve Corporate Social Responsibilities (CSR). This leverages on improving the brand image as they are seen to be ECO-friendly. However, the price will be high due to materials cost is expensive and resulted in loss of revenue. This might not have great impact in the future sustainability if customer is prone to be environment conscious and don’t mind paying more for that comfortability. Alternatively, H&M could expand their strategy by offering new product and services such as fashionable maternity wears and undergarments for men. This helps to increase another streams of revenue for the company as more customers are targeted. Hence, H&M shall remain in the textile industry as they are able to leverage on their core competencies to out-win their competitors with the above mentioned recommendations.
Accounting Tools. (2014). Gering Ratio. Retrieved Aug 29, 2014, from http://www.accountingtools.com/gearing-ratio Investopedia. (2014). Solvency Ratio. Retrieved Aug 29, 2014, from http://www.investopedia.com/video/play/solvency-ratio/ Johnson et al., G. (2014). H&M in fast fashion: continued success? In G. Johnson, R. Whittington, K. Scholes, D. Angwin, & P. Regner, Exploring Strategy Text and
Cases Tenth Edition. Pearson Education Limited. Yildiz, P. R. (2014). H&M in fast fashion: Continued Success? In Gerry, R. Whittington, K. Scholes, D. Angwin, & P. Regner, Exploring Strategy Text and Cases Tenth Edition (p. 575 -582). Pearson Education Limited.