Business mapping in a global textile context

 

This week you are required to submit a case study analysis. Your paper analysis should be between 3 – 5 pages, not counting the title and reference page. No submission should be fewer than 1050 words.

Include a clear and concise introduction.

Format your case study assignment paper so that the three questions asked below are clearly defined. Double space your work, cite your work, limit quotes, and edit your work well for spelling, grammar, and punctuation errors. If you use any quotes, you must increase the length of your paper to compensate. Make sure you have two additional references other than the text and use citations.

This case study analysis will be based on the 35 case studies in your textbook (page 540-541). You are to pick ONE (1) of the companies from your text. Choose a company different from the company you used for the week five paper. You may not have two papers about the same company. You may not use a paper or any part of a paper from a previous class. Name your selection on your title page.

No abstract is required.

Read the case study and answer the following questions in your paper.

1. Assess the effectiveness of your company’s leadership.

2. Discuss the basis of your company’s competitive advantage and the potential challenges to its strategy.

3. What growth strategies might your company pursue?

Submit your paper into the assignment section of the classroom.

Font and Spacing – Use Times New Roman 12 pitch font with double-spaced lines.

Length – Write a 3 to 5 page analysis not including the title page and citation page. No fewer than 1050 words!

Reference Page – Include all sources including your textbook on a Reference page

Utilize the APA Style for documenting sources. You will need to include at least 2 sources in addition to your text. Finally, remember Wikipedia is NOT a scholarly source.

Punctuation, essay format (thesis, supporting paragraphs with transition and topic sentences, and summary) grammar and documentation count toward your grade.

  • Introduction

    The apparel retailer H&M had 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 2,206 stores in 43 countries and 94,000 employees world- wide. ‘Fast fashion’ refers to a quick response to new trends and fashion items that are made available in stores immedi- ately thereafter. By the time Persson’s 34-year-old grand- son Karl-Johan Persson took over as CEO in 2009, H&M had become the 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 signi- fi cantly below those of competitors, with the fundamental principle being ‘Fashion and quality at the best price’.

    The new CEO aimed to sustain H&M’s remarkable annual growth rate of 20% as he stated in the 2011 annual report: ‘In 2010 we stepped up our investments in order to strengthen the brand further and secure future expansion.’

    H&M opened another 218 stores in that year with the most spectacular opening being on the Champs-Élysées in Paris. The following year yet another 230 new stores were opened, including 35 in China. However, Zara, the prime retail brand of Spain’s Inditex, opened 120 new outlets in China during that same year and later during the year Inditex overtook H&M to become the world’s biggest fashion retailer by market capitalisation. For the fi rst time H&M was seriously challenged by Zara’s rapid expansion, not least because of its fast growth in emerging markets. The increased competition and the fact that margins had started

    CASE STUDY

    H&M in fast fashion: continued success? Patrick Regnér and H. Emre Yildiz

    The case examines the role of strategic capabilities in building competitive advantage and the key issues to

    consider while evaluating the sustainability of competitiveness. H&M has enjoyed a leading position in the

    global fashion and apparel market thanks to its unique concept, business model and ability to combine elegant

    designs with affordable prices. That position, however, has been challenged by key competitors and H&M

    needs to consider this and evaluate the sustainability of competitive advantage in its strategic capabilities.

    The case explores the areas and functions in which H&M has enjoyed advantage vis-à-vis its competitors and

    how, if at all, this advantage can be sustained in the long term.

    ● ● ●

    This case was prepared by Patrick Regnér and H. Emre Yildiz, Stockholm School of Economics. It is intended as a basis for class

    discussion and not as an illustration of good or bad practice. © P. Regnér and H.E. Yildiz. Not to be reproduced or quoted without

    permission.

    to erode due to increased cotton prices and rising produc- tion costs in Asia put the H&M high-fashion/low-price for- mula 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 ques- tioned the sustainability of the formula.

    The increased competition for consumer spending in the fast-fashion business was further intensifi ed by the poor economic situation. With 70% 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.’ 2

    H&M relentlessly continued to emphasise the long-term view in its expansion strategy. For 2013 H&M planned a net addition of 300 new stores, with China, the USA and the UK expected to be the largest growth markets. H&M also planned to enter new markets, including South America (Chile and Mexico), Bulgaria, Latvia, Indonesia and Thailand. Despite these continuous aggressive expan- sion plans, analysts had some doubts:

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    576 H&M IN FAST FASHION

    ‘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 UBS 3

    The apparel industry

    The total market size of the global textiles, apparel and luxury goods market was worth $3049.5 billion (£2018.8bn; €2388.4bn) 4 in 2011, which corresponds to a compound annual growth rate of just 3.7% for the period 2007–11. 5 This slow growth increases competition, which is further intensifi ed due to a large number of small players; however, there are a number of large international incumbents including Inditex (Zara), Gap and H&M, with Zara being H&M’s most signifi cant competitor (see Table 1 ). A some- what smaller but new and vibrant player is the Japanese company UNIQLO, which has started to expand aggressively. Moreover, fashion, by its very nature, is unpredictable and fi ckle – trends are prone to sharp and unpredictable changes, which makes competition uncertain. The 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 look for bargains.

    Some of the players in the industry are able to act as both manufacturers and retailers. Examples of this are the Gap Corporation and Inditex: both manufacture their own products and sell them in their own stores. There are a multitude of suppliers for retailers to choose from. As inter- national trade liberalises, the number of suppliers globally increases and competition among manufacturers in low- wage regions intensifi es. Switching from one supplier to another is not a major issue, although it entails the risk that choosing low-cost suppliers may involve a more extended supply chain that may not be able to cope with sudden changes in demand in an industry which is susceptible to changes in fashion. There is also a risk that low-cost sup- pliers may not be up to quality standards.

    Entry to the retail industry does not require a large cap- ital 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 bring about the ability to build brands in multiple retail outlets, and considerably greater buying power when negotiating with suppliers (see Table 2 ).

    The spirit of Hennes and Mauritz (H&M)

    H&M is an abbreviation of ‘Hennes’ (the name of the fi rst 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 becoming 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 begin- ning 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 called ‘the primitive trade of buying and selling’ 6 with the essence of ‘tradesman-ship’. This was also main- tained 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 including thrift, no-nonsense decision making and delegation of responsibility. These are fundamental ingredi- ents of ‘the spirit of H&M’, which remained the shared and tacit understanding of how to do business in H&M. It is underlined by seven codifi ed core values: ‘(1) Keep it simple, (2) Straightforward and open-minded, (3) Constant improve- ment, (4) Entrepreneurial spirit, (5) Cost conscious, (6) Team work and (7) Belief in people.’ 7

    Another aspect of the H&M spirit is the extraordinary focus on employee involvement. This participatory manage- ment 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 defi ne 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. 8 Trying new things is also encouraged among purchasing man agers, but while trying something new and making mistakes is OK 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 specifi es 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.’ 9

    Swedish national values also play a role – including a humble, informal and non-hierarchical management style combined with the ‘democratisation of fashion’. Creative

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    H&M IN FAST FASHION 577

    Table 1 H&M and its multinational competitors

    Positioning and segments Business model Key figures Financials

    H&M H&M is a retailer of fashion apparel, cosmetics, accessories and shoes for women,

    men, teenagers and children. The Collection

    of Style (COS) offers customers a

    combination of timelessness and distinctive

    trends, for both women and men. The Monki

    stores provide innovative collections and an

    inspiring fashion experience characterised by

    playfulness and colourful graphic design.

    Weekday sells its own brands but also

    commissions design collaborations with

    independent fashion labels. The Cheap

    Monday stores combine influences from

    street fashion and subcultures with a

    catwalk vibe. The latest addition is the

    luxury store concept ‘ & Other Stories ’.

    The business is operated from

    leased store premises, through

    internet and catalogue sales

    and some franchise stores. H&M

    does not own any factories.

    Production is outsourced to

    independent suppliers. H&M’s

    growth target is to increase the

    number of stores by 10–15%

    per year, and at the same time

    increase sales in comparable

    units. This growth is entirely

    self-financed. The collections

    are created by 140 in-house

    designers.

    At the end of 2010, H&M

    had 2,206 stores which

    included 50 franchise

    stores, 35 COS stores, 48

    Monki stores, 18 Weekday

    stores and one Cheap

    Monday store. The group

    outsources product

    manufacturing to 700

    independent suppliers

    through its 16 local

    production offices in

    Asia and Europe. The

    company employs more

    than 94,000 people.

    The company

    recorded revenue of

    $16,137 million in

    the fiscal year ending

    November 2011, an

    increase of 1.4%

    compared to fiscal year

    2010. Its net income

    was $2,321 million in

    fiscal year 2011,

    compared to a

    net income of

    $2,880 million in

    the preceding year.

    Inditex (Zara)

    The flagship brand of the company is Zara .

    Zara also operates Kiddy’s Class stores, which

    specialise in junior fashion. The Pull and

    Bear format offers casual clothing. It caters

    primarily to young males and females and

    offers a range that starts from sophisticated

    urban fashions to casual wear. Bershka stores

    are large and spacious. They are intended to

    be meeting points for street fashion, music

    and art. Massimo Dutti stores are located

    in prime retail locations and offer basic,

    contemporary styles in next-generation

    fabrics including high-quality garments.

    Stradivarius is aimed at young fashion-

    conscious customers, offering international

    fashion with the latest designs. Oysho offers

    fashion trends in women’s lingerie and

    undergarments.

    With an in-house design and

    a tightly controlled factory

    and distribution network, the

    company has the ability to take

    a design from drawing board to

    store shelf in just two weeks.

    That enables Zara to launch new

    items every week, which keeps

    customers coming back again

    and again to check out the

    latest styles. The company

    also has a policy of zero

    advertising and instead invests

    its revenues in opening up

    new stores.

    Zara is present in 74

    countries, with a network

    of 1,608 stores located in

    major cities throughout the

    world. Pull and Bear has

    opened 626 shops in the

    main streets and shopping

    centres of 44 countries.

    Massimo Dutti operates

    630 stores in 60 countries.

    The Bershka sales format

    has 651 stores in 44

    countries. There are

    currently 515 Stradivarius

    stores in 37 countries.

    There are currently

    392 Oysho stores in

    23 countries.

    The company

    recorded revenue of

    $17,159 million in

    the fiscal year ending

    January 2011, an

    increase of 13.0%

    compared to fiscal year

    2010. Its net income

    was $2372 million in

    fiscal year 2011,

    compared to a

    net income of

    $1828 million in

    the preceding year.

    Gap Under the Gap brand, the company offers an extensive range of apparel at moderate

    price points. Banana Republic was acquired

    by the company in 1983. This brand offers

    sophisticated, fashionable collections at

    higher price points than the Gap brand.

    The Old Navy brand was launched in 1994

    to address the market for value-priced family

    apparel. The brand Athleta offers customers

    performance-driven women’s sports and

    active apparel and footwear for a variety of

    activities.

    The company operates through

    two segments: stores and direct

    sales. The stores segment

    includes the results of the retail

    stores for each of the company’s

    brands: Gap, Banana Republic,

    Old Navy and Athleta. The direct

    segment includes the results of

    the online business for each

    of the company’s web-based

    brands.

    The company sources

    private-label merchandise

    from approximately 590

    vendors and non-private-

    label merchandise from

    approximately 430 vendors.

    These vendors are spread

    across 50 nations. The

    company operates over

    3200 stores worldwide,

    and has around

    132,000 employees.

    The company recorded

    revenue of $14,664

    million in the fiscal year

    ending January 2011,

    an increase of 3.3%

    compared to fiscal year

    2010. Its net income

    was $1,204 million in

    fiscal year 2011,

    compared to a net

    income of $1,102

    million in the

    preceding year.

    UNIQLO The company is a retail chain operator specialising in in-house designed casual

    clothing for men and women. The company

    operates stores under the name of UNIQLO .

    The company is the leading clothing retail

    chain in Japan in terms of both sales and

    profits. UNIQLO is a member of Fast

    Retailing Group, which also operates other

    chain stores under the franchise names

    Theory (fashionable basic clothes that

    suit a contemporary lifestyle), Comptoir

    des Cotonniers (the brand nurtures a

    sense of natural authenticity and flattering

    femininity), Princesse tam.tam (corsetry,

    lounge wear and swimwear brand), and

    G.U. (an entirely new business model for

    a company offering extremely low-priced

    clothing in the Japanese market).

    UNIQLO has established a SPA

    (Speciality store retailer of Private

    label Apparel) business model

    encompassing all stages of the

    business – from design and

    production to final sale. By

    continuously refining this SPA

    model, UNIQLO differentiates

    itself from the competition by

    developing unique products.

    The company quickly makes

    adjustments to production

    to reflect the latest sales

    environment and minimise

    store-operation costs, such as

    personnel costs and rent. This

    is how UNIQLO provides such

    high-quality clothing at such

    reasonable prices.

    UNIQLO Japan operated

    a network of 848 stores

    at the end of June 2012.

    UNIQLO International had

    a total of 275 stores as of

    May 2012. Of that total,

    135 stores are located in

    China, 16 in Hong Kong,

    75 in South Korea, 17 in

    Taiwan, 6 in Singapore, 5

    in Malaysia, 4 in Thailand,

    10 in the United Kingdom,

    2 in France, 2 in Russia

    and 3 in the USA. UNIQLO

    has around 70 partner

    factories, and roughly 75%

    of UNIQLO products are

    made in China.

    The company

    recorded revenue of

    $7835 million as of

    the end of August

    2011, an increase

    of 0.6% compared to

    fiscal year 2010.

    Its net income was

    $688 million in fiscal

    year 2011, compared

    to a net income of

    $787 million in

    the preceding year.

    Source : company websites

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    578 H&M IN FAST FASHION

    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.’ 10

    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 fi gures 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 turn- over, keeping the apparel on the sales fl oor up to date. All employees are also made aware of these results; and if sales are up from the previous day, the sales fi gures are applauded during store morning meetings.

    Limited attention to titles and work descriptions is also a characteristic of H&M: ‘At H&M we do not have any work descriptions. It provides considerable freedom, but it also makes it more diffi cult to blame someone else and claim that something is not part of your duties. Some love it, but others leave after a few weeks.’ 11

    In line with this emphasis on informality, indepen d- ent decision making is celebrated and decentralisation is encouraged within the limits of the organisational cul- ture. However, central functions like buying and logistics also have a considerable influence and the organisa- tion is in a sense ‘a peculiar mix of strong centralisation and delegation’. The fl at and simple organisational struc- ture has also been more challenging to preserve due to H&M’s tremendous growth. The company has a matrix country/function organisation, with each executive management team member for a function being respon- sible for the results of work within their function in each country.

    Table 2 Comparative financial data

    H&M 1 Inditex (Zara) 1 Gap 2 Uniqlo 3

    Key figures (thousand US dollars) Operating revenue (turnover) 16,137,877 17,159,719 14,664,000 7,835,853

    Income before tax 3,072,386 3,180,253 1,982,000 1,294,111

    Net income 2,321,088 2,372,369 1,204,000 688,928

    Cash flow 2,799,654 3,298,037 1,860,000 n.a.

    Total assets 8,830,140 13,460,382 7,065,000 3,081,094

    Shareholders’ funds 6,470,467 8,748,196 4,080,000 994,934

    Current ratio 2.70 1.94 1.87 1.07

    Profit margin (%) 19.04 18.53 13.52 16.52

    Return on shareholders’ funds (%) 47.48 36.35 48.58 130.07

    Return on capital employed (%) 46.11 32.51 n.a. 117.81

    Solvency ratio (%) 73.28 64.99 57.75 32.29

    Price/earnings ratio 19.76 19.86 n.a. n.a.

    Number of employees 64,874 100,138 n.a. 4,150

    Profitability ratios Return on shareholders’ funds (%) 47.48 36.35 48.58 130.07

    Return on capital employed (%) 46.11 32.51 n.a. 117.81

    Return on total assets (%) 34.79 23.63 28.05 42.00

    Profit margin (%) 19.04 18.53 13.52 16.52

    Gross margin (%) 60.47 57.48 44.55 49.14

    EBITDA margin (%) 21.49 23.71 17.89 n.a.

    EBIT margin (%) 18.53 18.31 13.42 17.70

    Cash flow/turnover (%) 17.35 19.22 12.68 n.a.

    Structure ratios Current ratio 2.70 1.94 1.87 1.07

    Liquidity ratio 1.77 1.49 1.10 0.72

    Shareholders’ liquidity ratio 33.24 8.35 4.58 9.48

    Solvency ratio (%) 73.28 64.99 57.75 32.29

    Gearing (%) 3.01 12.02 21.89 10.55

    Notes :

    1 As of 30 November 2011 and for 12 months

    2 As of 29 January 2011 and for 12 months

    3 As of 31 August 2011 and for 12 months

    Sources : Mint Global, Bureau van Dijk

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    H&M IN FAST FASHION 579

    Store operations and management

    The company always positions its stores in the very best locations, whether in a city or a small-town shopping centre. This has been a fi rm principle of H&M’s since the fi rst 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 cus- tomers the best possible shopping experience.

    Instead of claiming full ownership of the property, H&M opts for renting store premises, which increases fl exibility 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 part of the store. 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 cre- ated. 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 decentral- ised and store managers have considerable autonomy. The shop manager runs the business like an entrepreneur and is authorised to take independent decisions within the over- all guidelines, essentially like running one’s 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 designer collaborations with famous designers, there is a unique approach that has been employed by H&M over the years. This includes the 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 and by Italian fashion label Marni in 2012.

    Highlighting the brand’s high level of awareness, H&M was ranked 21st among the top 100 most valuable global brands according to Interbrand in 2011, with a brand value of $16.5 billion. In comparison, Zara ranked 44th with US$8 billion, and Gap came in at number 84 with US$4 billion. This huge difference can partly be attributed to H&M’s long-term advertising campaigns with high-profi le

    celebrities. In order to enhance the value of its brand name, H&M spends around 5% 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+ 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 already had more than 15 million hits. Through the H&M apps customers can explore the latest collections and campaigns, fi nd 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 minimal time-to-market and the design team has direct contact with the production offi ces around the globe. This allows for a rapid-response manufacturing process to cap- italise 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 offi ces 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-Sofi e Johansson, head of H&M design department: ‘We try to look out for trendset- ters, 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 confi rmation of what we know is out there.’

    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.’ 12

    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

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    580 H&M IN FAST FASHION

    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.’ 13

    Apart from size adjustments, for example in the Asian market, no special changes are made to the collection to adapt to the needs in specifi c countries. H&M argues that: ‘It is important that H&M keeps its own personality in each country, and fashion has become more global, more inter- national.’ 14 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 approx- imately 70% 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. 15 H&M also constantly redefi nes its production and distribution in response to changing market and production conditions to ensure that they continuously improve the effi ciency of the production fl ow. This way, H&M has been able to reduce lead times by 15–20% in recent years. 16 In 2011 H&M worked with 747 suppliers of which 150 were considered long-term stra tegic 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 offi ces 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 offi ce to identify the right suppliers to place orders with, in order to optimise time and cost decisions and ensure that these decisions follow H&M’s CSR policies. Each supplier owns or subcontracts multiple factories; globally, 1,652 factories were approved for making goods for H&M. H&M conducted a total of 2,024 annual audits of suppliers, of which 78% were unannounced. CSR has increased in importance for H&M. Being a high-profi le 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 over- seas 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 (the Con scious 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. 17

    Logistics: distribution, warehousing and IT

    Buyers and production offi ces 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 fl exibility in allowing stores to restock quickly during the season with best- selling products, H&M makes 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, which focuses on fl exibility and speed:

    ‘Lead-times vary from two to three weeks up to six months. The different lead-times refl ect 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.’ 18

    H&M controls virtually all logistics internally except for external contractors handling transportation. The integ- rated logistics function is a key business process for H&M that supports cost-effi cient supply of goods and generates economies of scale: ‘H&M can offer the best price by avoid- ing middlemen, buying the right product from the right market, being cost-conscious at every stage and having effi cient distribution.’ 19

    This integrated direct distribution channel ensures that H&M stores receive new shipments daily, giving the com- pany 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 fi rst region to the second. The distri- bution set-up also enables H&M to respond to market segment changes within a country.

    To support the swift and effi cient fl ow of goods, H&M logistics depend on effective information sharing and the latest IT systems that are continuously being developed. These systems not only allow for more optimal decisions regarding demand and supply, but also provide informa- tion for understanding customer needs and the placement of products.

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    H&M IN FAST FASHION 581

    Taking H&M’s mix of supply chain management, logis- tics and IT into consideration, the company is considered a world leader in these areas:

    ‘Its centralised logistics and warehouse system, close coordination of the procurement staff with the produc- tion offi ces, intelligent use of ICT [information and com- munication technologies] tools, purchasing fl exibility 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.’ 20

    Human Resource Management (HRM)

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

    Internal promotion and job rotation are two central ingredients in H&M’s HRM policies, and experience, loyalty and continuity are highly regarded. These two aspects are central to keep on cultivating and disseminating the H&M spirit and culture throughout the organisation. The steady growth in H&M provides 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 is 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 21

    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 pos- sibility to discuss any work-related issue directly with the management.

    Consequently, H&M values personal qualities much more than formal qualifi cations; 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 and attitude can not be taught. H&M is a fast company with a high tempo and needs employees who are self-driven, who like responsibil- ity and decision making and who 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 fashionable prices and catering for the dynamic tastes and preferences of customers can broadly be identi- fi ed as the main drivers of its success, perhaps its unique advantage lies in its 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 expanded into more than 20 countries with more than 1,000 stores.

    Continuous growth by replicating the same business model and store concept thus defi nes the core of the com- pany’s expansion strategy. Prior to moving to a new coun- try or city, H&M fi rst 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 strategy is to recruit local people wherever it opens 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 core values of the company. 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 ingredients of H&M’s constant growth strategy, in which the ambition is to cre- ate and re-create 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 instead prefers to equip its employees with tacit skills via experiential learn- ing in the fi eld. 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 univer- sally and making subtle modifi cations 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 2,500 in 2012. In 2013 H&M was plan- ning to open another 300 stores and also plans to open a

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    582 H&M IN FAST FASHION

    much anticipated new luxury-label format of stores called ‘& Other Stories’. It also plans to develop online sales in the USA and open its largest store in the world on Fifth Avenue, New York. However, fashion retailing history is full of companies that have confi dently expanded into new international markets, but later have been forced to retreat and drastically curtail their growth – from Marks & Spencer to C&A and 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 new and vigorous entrants? Will these entrants be able to repli- cate H&M’s success?

    Notes and references

    1. As quoted in Financial Times , 29 September 2011: ‘H&M continue

    aggressive expansion’ by Clare MacCarthy.

    2. As quoted in Financial Times , 29 March 2012: ‘H&M to launch new

    line of stores’ by Michael Stothard.

    3. As quoted in Financial Times , 26 January 2012: ‘H&M defend

    strategy as margins fall’ by Michael Stothard.

    4. $1 = £0.65 = €0.77. 5. Marketline (2012) Industry Profile: Global Textiles, Apparel &

    Luxury Goods. Ref. Code: 0199-1016.

    6. Pettersson, B. (2001) Handelsmännen , Månpocket: Stockholm, p. 21.

    7. H&M website: http://about.hm.com/AboutSection/en/About/Facts-

    About-HM/About-HM/Business-Concept-and-Growth.html

    8. Pettersson, B. (2001) Handelsmännen , Månpocket: Stockholm, p. 91.

    9. http://about.hm.com/content/dam/hm/about/documents/en/

    Corporate%20Governance/Remuneration/Presentation%20HM%20

    Incentive%20Program%202010_en.pdf

    10. As quoted by Daily Mail / Mail online : ‘H&M: Meet the brains behind fash-

    ion’s megabrand’ by Jo Craven: http://www.dailymail.co.uk/home/

    you/article-1249693/H-M-Meet-brains-fashions-megabrand.

    html#ixzz27Tr5wTLk

    11. Jan Jacobsen, as quoted in Pettersson, B. (2001) Handelsmännen ,

    Månpocket: Stockholm, pp. 261–2.

    12. As quoted by The Star online : ‘High street label H&M serves up

    inspiring fashion at affordable prices’ by Patsy Kam: http://thestar.

    com.my/lifestyle/story.asp?file=/2012/9/20/lifearts/12000618&se c=lifearts

    13. As quoted by Chinadaily.com , ‘H&M: from the inside’ by Nishita

    Mehta-Jasani.

    14. Margareta Van den Bosch, creative advisor, as quoted by Chinadaily.com ,

    ‘H&M: from the inside’ by Nishita Mehta-Jasani.

    15. Capell, 2002, Business Week.

    16. The European e-business market watch: http://ec.europa.eu/enter-

    prise/archives/e-business-watch/studies/case_studies/documents/

    Case%20Studies%202004/CS_SR01_Textile_2-HM.pdf

    17. h t t p : / / a b o u t . h m . c o m / c o n t e n t / h m / A b o u t S e c t i o n / e n / A b o u t /

    Sustainability/Commitments/Communities.html

    18. Kihlén, T. On Logistics in the Strategy of the Firm , Linköping

    University, Sweden.

    19. Annual Report 2011.

    20. Pal, R. (2011) ‘Identifying organizational distinctive competence by

    business mapping in a global textile context’, Journal of Textile and

    Apparel Technology and Management , 7(4), pp. 1–23.

    21. Annual Report 2008.

    Recommended videos

    http://www.youtube.com/watch?v=CHYogtRrrUY – interview with CEO Karl-Johan Persson by Bloomberg on strategy, costs and internet sales

    (note: the correct name for the interviewed current H&M CEO is Karl-

    Johan Persson).

    http://www.youtube.com/hm – official YouTube channel of H&M where

    video clips on new campaigns and promotions are shared.

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