Question 1. Using Michael Porter’s five forces model, evaluate the importance of Barriers to Entry to the fast-fashion industry. Support your arguments with evidence from the case study. (20%) Question 2. Conduct a value chain analysis to assess H&M’s capabilities and derive its core competencies. (35%) Question 3. Based on these competencies identify the generic competitive strategy which H&M is pursuing. (10%) Question 4. 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. (25%) Appendix
Global FactorsLocal FactorsIntegration Responsiveness Grid
Applying Michael Porter’s five forces model, it includes the threat of entrants and substitutes, bargaining power of suppliers and customers and competitive rivalry. Among all, barriers to entry could be an essential factor to the fast-fashion industry. Even so, the threat of entry is affected by several factors. Different sources of barriers to entry can act as a determinant on the height of barriers. As mentioned in the case study, fast-fashion industries doesn’t require a large capital outlay. Entry to the retail industry is so easy that can be set up with a group of suppliers being chosen from. Therefore, the level of impact of capital requirement to the barriers to entry is low. Secondly, economies of scale is a barrier to entry as its product unit cost will be lowered for the businesses which already attained a production volume so that it will be hard for the new entrants to compete. H&M’s prices have been undercut by an even cheaper competitor. In this case, economies of scale’s level of impact to the fast-fashion industry is high. For the absolute cost advantage, for incumbent companies who already have economies of scale can have a significant cost advantage over new entrants.
Additional costs may include the learning or experience curve, proprietary technology and government subsidies. Therefore, the level of impact is high for new entrants. Considering product differentiation, the level of impact is regarded as low as fast-fashion industry has a variety of choices in its suppliers that could be different from many others. Also, it can be overcome by creating in its own brand to avoid this kind of barrier. There may not be a difficulty in access to channels of supply and distribution to the fast-fashion industry because these channels are held by numerous suppliers. New entrants can set up their own like Gap Corporation and Inditex by acting as both manufacturers and retailers which results in low level of impact. The level of impact of the legal and regulatory barriers will be treated as low either. Various controls may be limited by the governments such as the licensing requirement or limit to access to raw materials.
These would not be applied to the fast-fashion industry as it generally has less control by the governments and usually bound by the legal system. Last but not least, the level of impact of the expected retaliation could be high since the size and duration of retaliation in fast-fashion industry are intense. These may threaten the new entrants including the price cuts. New entrants have less ability to make retaliation than those incumbents in view of experience and resources. To conclude, the overall height of barriers to entry is low which means a serious threat of entering fast-fashion industry. It implies an intense rivalry and an unattractive environment. Therefore, it is important to consider the barriers to entry in this industry.
The value chain analysis is mainly divided into two types- support and primary activities. This analysis is made to let companies determine where value is added to the customers and margin is increased to the organization. Under support activities, H&M’s firm infrastructure is easy and simple. Following Erling Persson’s basic values and beliefs, H&M intended to offer the fashion and quality at the best price. Also, the managers are given freedom and autonomy in decision-making processes which lead the success of H&M.For the Human Resources Management, H&M focused on one person’s qualities much more than qualifications which implies that opportunities are given to those people with lower academic levels. It was noticed that practical skills are more important to the company instead.
Internal promotion and job rotation are the crucial ingredients to sustain H&M’s continuous growth.Regarding technology development, H&M has been adopting the latest IT systems with continuous improvement. Intelligent use of ICT has been an effective tool in assisting H&M’s business which can be applied to the logistics and warehouse system. Moreover, H&M is tightly connected to the customers through social network and various phone apps.The fourth support activity is the procurement. As H&M does not own any factories so the manufacturing is outsourced to low-cost countries. Procurement is centralized in Stockholm. A good connection network can be seen between the production offices and the suppliers in order to reduce the lead times. On the other hand, the primary activities include five elements-inbound logistics, operations, outbound logistics, marketing and sales and service. H&M provided little information on inbound logistics which should include raw materials control and inventory control of input material. This may become a weakness in the management of H&M.For the operation of H&M, it opts for renting store premises to increase flexibility and adaptability.
In addition to this, H&M will do the product testing about the quality control. Furthermore, a new interiors program is created to catch up with the latest trend.Under outbound logistics, only transportation is handled by the external contractors. However, H&M deals well with the distribution by offering the best price to avoid middlemen. H&M is cost-conscious and thus can reduce the costs being incurred. Also, daily shipments are available to H&M which implies an effective and efficient shipment scheduling system.Considering the marketing and sales, H&M has been collaborating with 200 in-house designers and several famous ones. In addition to this, it has launched long-term advertising campaigns with high-profile celebrities which can indirectly boost the sales and build up its image. Online promotion is also available for customers for the latest updates.The last category is the service. Usually it refers to the after-sale service that how well a company can do on the quality control. H&M just put little focus on after-sale service such as the customer support.
This appears to be a weakness to H&M.Apart from inbound logistics and the service, other activities are considered as H&M’s strengths which makes H&M being world leader. Concerning the two types of the activities, there are three key linkages between them. From support to support activity, Human Resources management (HRM) is linked to technology development as the intelligent staffs are employed to assist in IT development and continuously making updates through the IT systems. As the advanced technology requires employees to apply the IT skills they have learnt, so there is an important relationship between HRM and technology development. For example, HRM acts as an important role to reply customers’ queries efficiently and let them know the latest trend of the company through social networks. From primary to primary activity, the outbound logistics is linked to the marketing and sales. When the products and services are delivered to customers, the next process will be about the packaging and promotion on the products.
Whether the customers choose the company depends on the quality of both products and services. It is said to be closely related because marketing and sales has usually become a must-do item for the large incumbents especially for the fast-fashion industry. For the last type of linkage from primary to support activity, it can be linked to five activities. Procurement, outbound logistics, marketing and sales, human resources management and technology development are all connected with each other in H&M’s operation.Although H&M didn’t own any factories, its manufacturing is outsourced in order to find some fashionable items with the lowest costs in response to the changing market which results in economies of scale. After the procurement process is done, it will be delivered to the customers from the warehouse. Under outbound logistics, it specifies the importance of the order fulfillment and on time delivery. As a large incumbent in retail industry, a budget is spent on the marketing and sales on the products being delivered to the consumers.
When doing the marketing and sales, IT skills and applications will be used to assist. In line with the promotion of its products, its brand name is highly attentive as well. Regarding the firm size and experience in the textile industry, H&M has been paying much attention on CSR keeping the brand name away from the criticisms which is treated as a kind of value driver that manage in its brand and reputation.For example, inventory will be shifted to the more popular regions from those with poorer sales amount in order to boost the sales. From this example, it can be seen that the intranet network is well-developed. From procurement to the technology development, they are all connected between each activity. Based on the 3 main linkages, the linkage between primary and support activity is the most important among all which is likely to be a core competence of H&M. To affirm whether it is core, the VRIN test can act as an effective tool.Whether it is valuable depends on the effectiveness of the value-creating activities and its future development. The most significant value-creating activity is Human Resources management. Responsible and skilled staffs are essential to H&M as they can apply their experience and techniques in meeting the latest trend and customer needs.
Trainings and duration of experience can definitely create value and be further developed.To define how rare it is, this should be compare with other similar competitors. Apart from the collaboration with in-house designers, H&M uniquely co-operated with different famous designers over the years from various countries.The fundamental concept that has already been embedded in the employees. It was said to be unbreakable stubbornness devotion to a goal by the journalists. This in fact is a competitive advantage which H&M can stick to the fundamental principle by offering fashion and quality at the best price and this will be difficult for others to imitate.
For the last aspect, the category of the human resources management and the procurement may be vulnerable to substitution. The staff’s mobility is relatively high in this industry as it varies with the times. This theory also applies to the sources of supplies. But the staff trainings can increase their loyalty to the company which becomes non-substitutable. All in all the competency mentioned is sufficient to meet the criteria of the VRIN test. Therefore, human resources management in the linkage between the primary and support activities can be treated as core competency that confer competitive advantage.
Based on the competencies stated in question 2, H&M is pursuing the Hybrid strategy which is the integration of both cost and differentiation strategies. H&M has been applying economies of scale that is achieving cost leadership. H&M’s core principle is to offer the fashion and quality at the best price. One of its core value is to be cost conscious. H&M is alert to the costs which aim to provide the most worthy price for customers. Bargaining power is particularly important in this industry as fast-fashion changes in a speedy mode. At the same time, H&M has also put a focus on differentiation. In building its reputation and image, H&M has spent a budget especially for advertising. Besides, working with different types of fashion designers creating innovative collections can lead product differentiation
. To compete with others in this industry, cutting cost is not the only way to survive. To become a stable yet significant player, product differentiation is more effective. Based on the analysis in question 2, H&M has already built core competencies in cost drivers and value drivers which generate efficiency and differentiation. Also, H&M can respond quickly to the changing environment to fulfill customers’ needs and technology level. So Hybrid strategy is adopted in H&M.
Based on the Integration Responsiveness Grid, H&M is likely to pursue globalization strategy. Globalization is the transition of industries from a multinational to a global competitive structure. From the global factors, H&M scores higher than that in local factors. There are different arguments that support H&M pursuing globalization. For the most significant factors, H&M is obviously buying centrally in Stockholm. Stockholm becomes the central purchasing office of H&M. Gaining economies of scale is one of its goal of H&M either. To fast-fashion industry, speed of introducing new products to changing environment is very important to meet the latest trends. As mentioned before, advanced technology is applied in H&M which can improve the quality of products and service. Customers around the world behave in the same way as H&M has been opening over 2,000 stores in 2010 which implies customers in different countries accept the products and services H&M delivered. These factors globalizes H&M. On the other hand, pricing strategy being adopted by H&M has been coherent across borders as it focused on offering the best price to all customers in different countries sticking with the spirit of itself.
There is no big difference in the distribution channels as it follows its own practice by distributing from distribution centers to warehouses to the stores. Business regulations and contexts also does not differ much from place to place. Customers contact and after-sale service are less focused by H&M which suggests low customization. Transportation is controlled by the external contractors which means local operations are not that essential. Concluded from the local factors, H&M is not likely to pursue localization. Furthermore, decision-making like buying and logistics are centralized at the Head Office which confirms its position using a global strategy. Global strategy also has another characteristic which offers standardized products to different countries. In my point of view, global strategy is very suitable for H&M in future development. In fast-fashion industry. H&M belongs to a vibrant player which should aim to be a global leader.
Also, it has already been achieving few tactics like economies of scale and increasing its bargaining power. However, there are several benefits and risks associated with the global strategy. By applying this strategy, H&M can achieve global economies of scale and brand consistency. Expanding the target customers as the whole world, independent management is also treated as its strength. For the risks that H&M might be facing, standardized products may not meet all customers’ needs as it might be lack of sufficient innovative ideas to suit everyone. Moreover, centralized decisions will be lack of innovation and creativity, though decentralization is now encouraged in H&M.