Q1) Evaluate the external environment in which H&M operates in. External environment refers to the challenging and complexity in which the firm operates. It is important to highlight the factors of the external environment because it is very critical to the success of the firm. PESTEL model and Porter’s 5 Forces (P5F) models will be used to evaluate the external environment of H&M. These models will determine how challenging and attractive the environment is for H&M. 1. PESTEL
PESTEL highlights 6 environmental forces namely political, economic, social, technological, ecological and legal (Johnson, et al. 2014). This model analyses the general environment that influences the industry and the organisations in it as well as how challenging the environment is to operate.
H&M is subjected to political pressures from the labour rights movement especially in low-wage countries. H&M has outsourced its manufacturing line to low-cost countries. H&M has no or little control over the operation in those countries. Hence, the firm would be closely scrutinised by the labour rights movement to spot any abuse in the rights of employee e.g. poor working condition. Government expansion and international trade policies would greatly impact the growth of the industry and increases competition. Threat
H&M will not be spared from the increase in cotton prices and rising product cost in Asia. Economic downturn will have an impact on all the stakeholders in the environment especially the customers. Demand for luxury goods would decline for customers who are price-sensitive. They would then consider H&M competitors that offers similar goods which is are much cheaper than H&M or go for substitutes. Threat
Due to the ‘fast fashion’ business, customers taste in high fashion is constantly evolving. Customers are now more educated and their demand for good quality products at low prices have increased. H&M could meet the needs of the customer as it has the advantage of being a first mover in the fast fashion business. Opportunity
The emergence of technologies such as Facebook, Twitter, and YouTube allows organisations to reach out to its customers more quickly and effectively. H&M uses these online social platforms as a way to be closer to their customers as well as sharing and updating its activities to its fanbase. Opportunity
Due to education and high awareness of the importance of conserving and going ‘green’, H&M has created a special collection of clothing line using sustainable or eco-friendly materials. Opportunity
Legal refers to the restriction or liberalisation of legislative and regulatory constraints or changes. Organisation in the environment would not be able to avoid this particular external environment factor therefore organisation has to embrace this legal aspect. Liberalisation of the international trade has resulted in an increase of the number of suppliers globally and hence intensifying the competition among manufacturers in low-wage countries Threat
From the PESTEL analysis, H&M is in a moderately competitive environment where both threats and opportunities factors are in equal balance. Therefore, H&M has to exploit the opportunities available in social, technological and ecological factors. As for the threats, H&M has to embrace them and develop strategies to overcome or steer away from them too.
2. Porter’s 5 Forces (P5F)
P5F helps to identify the attractiveness of an industry in terms of 5 competitive forces namely; threat of entry, threat of substitute, power of buyers, power of suppliers and the extent of rivalry between competitors (Johnson, et al. 2014).
2.1 THREAT OF ENTRY
Scale of experience
Needs large capital to compete with the incumbents in the environment. Low
Access to supply /distribution channels
Plenty of suppliers available to choose from.
Costly to compete with incumbent as they have the economies of scale. Low
Legislation or government action
Liberalisation of international trade has resulted in the increase of number of suppliers. High
There is differentiation in style and concept of the apparel industry. High
High threat of new entries would indicate that the industry is attractive and and could decrease the profit margin of H&M e.g.UNIQLO. However, these competitors must have sufficient financial resources to compete with the current incumbent in the industry. These new entries would have to build up experience over time in order to be on par with existing competitors.
The competitive rivalry is moderately high because the market is fragmented and there are few major incumbents in the industry. With intense rivalry e.g. Zara, each competitor is vigorously competing against the rest in order to have a market share in this apparel industry.
From the P5F analysis, H&M is operating is a highly attractive market where the threats of entry is high, threats of substitute is low, power of buyer is high, power of supplier is low and high rivalry. Overall, H&M is operating in a highly competitive and attractive external environment. Therefore H&M must take steps to look into its resources and identify its strategic capabilities in order to stay ahead of the competition.
Q2a) Identify and discuss the strategic capabilities of H&M. Strategic capabilities refer to the capabilities of an organisation that contributes to its long-term survival or competitive advantage (Johnson, et al. 2014). The components of strategic capabilities are resources (what the firm has) and competences (what they do well). The table below lists down all the resources and competences of H&M. This table also identifies the type of capabilities for each competences namely threshold and distinctive capabilities. Threshold capabilities refer to competences that are needed for the organisation to meet the necessary requirements to compete in a given market; and distinctive capabilities look into competences that are required to achieve competitive advantage (Johnson, et al. 2014). Resources
Type of capabilities
Competent leader who has a good business acumen
Stores position in the best location
Rapid expansion into other countries and new markets
Has 2206 stores in 43 countries
Ability to deliver collection within a month of initial design Distinctive
Efficient integrated logistic team
Owns its own clothing line and trends
200 talented designers and pattern makers
Empowerment of store managers with autonomy
Collaboration with famous designers to produce new collection Distinctive
Building creative window and store displays
Created a special collection using sustainable materials (CSR) Threshold
Pioneered in ‘fast-fashion’ business
Emphasize ‘cheap and chic’ business model
Instils the importance of core values in employees
Strong corporate culture (spirit of H&M) – Encourages experimentation, trial and error learning, decision making, initiatives, try new ideas Distinctive
Information technology (IT)
Efficient reporting of sales
Establishment of strong social media presence
Effective information sharing software
Based on the table above, H&M has more distinctive capabilities than threshold. H&M now could recognise the different types of capabilities and which are the ones the organisation should focus on and turn them into sustainable competitive advantage generating above average returns. H&M has to put more effort in the distinctive capabilities such as competent leadership, physical assets such as stores, its ever-changing collection of designer clothes, integrated logistics function, its talented employees, successful collaborations, creative window display, its fast-fashion business model, strong branding and lastly its strong corporate culture.
With the SWOT analysis, H&M has to continue its efforts strengthening its strength so that it would give the organisation an advantage over its rivals. As for its weaknesses, H&M could either eliminate or work on weaknesses by turning them into strengths. H&M should seize the opportunities when the time is right. Lastly, threats should be avoided or steer away from them.
Identify the key issues, challenges and opportunities facing H&M. The key issues of H&M are whether their existing resources, capabilities, practices and knowledge are sufficient to keep up with competition. Another key issue is the threat of new and vigorous entrants. The answer to these is yes, H&M could keep up with the competition due to substantial resources, strategic distinctive capabilities, strong value creating activities, strong practices and knowledge. H&M challenges would be revitalising and redefining its strategic capabilities in order to be sustainable in this apparel industry. H&M has to keep up with the latest fashion trends and continue to explore other avenues to create value to its value chain activities. Another challenge is to stay ahead of its competitors especially the threats by new and vigorous new entrants, by moving fast and reaching large market based by applying a simple business model – ‘cheap and chic’. The opportunities would be venturing into new areas where H&M has yet to explore e.g. online shopping, opening the largest store in the world on Fifth Avenue, New York. H&M has to evaluate if these opportunities could give them the competitive edge against its competitors and generating an above average returns.
Based on preceding analysis, formulate and discuss appropriate strategies that you would recommend to H&M in order for it to achieve above-average returns in the future. H&M is now operating a cost leadership strategy. This strategy involves becoming the lowest-cost organisation in the industry (Johnson, et al. 2014). Cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost (Ireland, Hoskisson and Hitt 2013) Based on preceding analysis, it is timely for H&M to review its business level strategy. Cost leadership strategy is not always the best strategy for H&M as there will always be the risk of being undercut on price especially during the economic downturn. Secondly, low cost has always been associated with cheap quality goods where products barely meet the market standard. H&M should be considering using the lock-in business strategy. This strategy is where customers become dependent on H&M and are unable to use another supplier without substantial switching cost. With this lock-in strategy, copycats and substitutes of H&M products would have a hard time attracting customers.
With customers securely locked in, H&M could charge prices which are well above cost. Lock-in strategies can be achieved in two ways mainly controlling complementary products/services and creating a proprietary industry standard (Johnson, et al. 2014). Another strategy which H&M could consider is differentiation strategies. Differentiation involves uniqueness along some dimensions that are sufficiently valued by customers to allow a price premium. Based on H&M’s strategic capabilities, one of its competitive advantage competences is having its own clothing line and trends. The fashion house could use this competency to carry out the differentiation strategy. With H&M’s large pool of over 200 talented designers and collaboration with famous top designers, customers would be willing to pay more for the latest style and fashion. With the unpredictability of the fashion industry, H&M has to be able to stay well ahead of its major competitors by reviewing its strategic capabilities from time to time. Capabilities need to change and evolved into dynamic capabilities. Only dynamic capabilities have what it takes to be the key driver towards strategic change. Like what fashion model, Heidi Klum, from the fashion industry always said, “Today you are in but tomorrow, you might be out!” The same goes to the chosen strategy of H&M, cost leadership might work today, but it won’t be the correct strategy tomorrow.
Ireland, R. Duane, Robert E. Hoskisson, and Michael A. Hitt. The Management of Strategy. Australia: South-Western Cengage Learning, 2013. Johnson, Gerry, Richard Whittington, Kevan Scholes, Duncan Angwin , and Patrick Regner. Exploring Strategy. Harlow: Pearson, 2014.