MG 2033: Quality Control

Assignment 1 : H&M

Group 20: Dominik Flum Thies Fingerhut

Introduction Hennes & Mauritz (H&M) is a 100 billion SEK company. It´s engaged in designing and retailing of fashion apparel and accessories. The company offers a range of apparel, cosmetics, footwear and accessories for men, women, children and teenagers. H&M primarily operates in Europe, North America and Asia, and has a presence in over 38 countries. The company is headquartered in Stockholm, Sweden. Approximately 87,000 people on a full-time basis are employed at H&M. Strategy According Michael E. Porter (1996), the strategy of a company, per definition is selecting the set of activities in which an organization will excel to create a sustainable difference in the marketplace and which is also supported by Kaplan, R. S. and Norton, D.S. (2010) and the strategy of H&M confirms this definition. “Fashion and quality at the best price“ (H&M 2011a). That´s how Helena Helmersson, Head of Sustainability at H&M, describes the business concept. This statement implicates the three main goals of H&M. First H&M wants to sell a wide range of fashionable products and not just ordinary clothes. “People who come to an H&M store must be able to find everything: the latest fashion, reliable classics and their personal favourites,” says Ann-Sofie Johansson, H&M’s Head of Design. For that reason H&M continuously develops its collections so that each customer can find something new every time they come into the store. The second point is, providing a high standard of quality. For H&M quality is more than a good product. It´s also about considering the environmental and human aspect of design and manufacturing. H&M’s environmental objectives are for instance the respect for nature, the sustainable use of resources, healthy products and clean production chain. This sustainability is supposed to give customers extra value when they shop at H&M. Besides the environmental aspect of sustainability there is a social issue. H&M’s social objectives are closely related to the Code of Conduct. This policy has been developed by H&M in order to maintain control among its many suppliers. All suppliers have to agree on the Code of Conduct, before becoming a supplier for H&M. As a consequence, one of H&M’s social objectives is to have full compliance with the Code of Conduct. Probably the key aspect of H&M´s strategy is the price. In the consumer's perception, H&M has been associated with affordable fashion. So this shapes the image of H&M. “To increase the number of stores by 10 – 15 percent per year” (H&M 2011a). Today H&M has around 2,500 stores and a presence on four continents. According to Karl-Johan Persson, CEO of H&M, the objective is to expand by 10–15 percent new stores per year. In 2011 H&M opened 266 stores. China, the US, the UK and Germany were the largest expansion markets. There were also store openings in five new countries: Romania, Croatia, Singapore, Morocco and Jordan. In 2012 H&M wants around 275 new stores. These facts show another part of H&M´s strategy: Global expansion. “Our global growth strategy is for each individual store to strengthen the H&M brand

while also contributing to increased sales and profitability,” says Head of Expansion Stefan Larsson. Due to continuous expansion it´s possible to search for promising markets, cost-efficient production and reduction of lead times. (e-Business Watch) The ruse at this, is to treat the entire world as one market. The plans and operations are same in all countries. Even H&M does not favor a specific country from any of its market areas, it implements its strategy similarly in all of them. (Czinkota et al. 1999, 473.) With the fast expansion all over the world, H&M is gradually becoming stronger and have a firm position in this industry. (H&M 2010b.) Other aspects of global expansion are the online and catalogue sales. In 2011, H&M has launched the new H&M online shop in the USA, the world’s largest retail market. Therefore it´s possible, that people can buy the products of H&M just by clicking the mouse. Reasons for success As stated by Porter (p. 61-78, 1996), “Trade-offs are essential to strategy. They create the need for choice and purposefully limit what a company offers.”According to this “Tactical choices” are the company’s individual definition of which activities should be executed and which not. The company uses various tactical choices to finally fulfill their main strategy. The strategy of H&M is both lower costs and differentiation: The main goal of H&M is to reduce cost in every step of the business in order to offer to the customers the best prices. Their management system is based on “continuous flow” principles that are performed by the supply chain management department. Because of that they are able to order each item at the right time for stores in order to have it just in time. In order to have a compromise between price, time and quality it is not always wanted to have a short delivery time. Another point in saving costs depends on the partnership with cheap suppliers and production firms in Asia, which produce fast and cheap. (H&M 2009) In order to have a competitive advantage they try to think and behave different than the competitors. This sector is highly competitive and H&M need to be different to increase the market shares and attract the customers. As example for differentiation, they regularly offer special limited collections designed by famous artist or designers such as Roberto Cavalli, Madonna and Karl Lagerfeld. (H&M 2009) In the last couple of years, H&M has reduced the average lead time by 15-20 % trough developments in the buying process. Short lead time and Flexibility reduce the risk of buying the wrong items and allow stores to restock quickly with the best-selling products. (Quelle????) H&M is really successful in becoming a fashionable brand, which nearly is affordable for everybody. In the consumer’s perception they have a more fashionable image than most of its low-price direct competitors. Hardest to copy

A company’s positioning within its market segment will determine not only which activities the company will perform but also how these will relate to each other. By creating a system of non-trivial activities supporting the strategy, the company will increase its chances to become more successful than its competition (Porter, E. M., 1996). Network, hierarchy Strong fame everywhere in the world thanks to its huge number of outlets good brand image cheap price The suppliers’ operations are audited by more than 30 Code of Conduct auditors who work at H&M’s production offices. And there are also more than 100 quality controllers who have the right to report any infringements of the Code of Conduct they find. Audit results are reported to the local H&M office and the CSR department, which is a corporate level department in Stockholm. Its manager reports directly arrive to the managing directors. (E-business watch 2011.) H&M is a big famous company but it does not have any factories of its own. It relies on a network of external suppliers managed through two departments: Buying and Production The company purchases costumes from about 750 suppliers, 60% of them in Asia and the remainder mainly in Europe (E-business watch 2011). There is a mediating function between the internal buying department and external suppliers in order to make sure that: l Buyers’ orders are placed with the right supplier. l The goods are produced at the right price and quality. l The suppliers conform to the company’s code of conduct as for working conditions. The decision of which supplier is the right one, is not only a matter of cost-efficiency but also depends on other factors such as transport times, import quotas and quality aspects. It can be shown clearly in the diagram below IT play a very important role in the whole process of value chain. Individual stores are linked to the logistics and procurement departments and the central warehouse. From central departments, it has possibility to follow sales of individual items to feed an intelligent procuring system. The company’s activity relies on IT integration between the central office and the production offices. H&M has 21 production offices totally. They must negotiate with the suppliers all over the world. Communication between departments takes place electronically, including design and product development. (E-business watch 2011.) From design, buying and logistics to marketing, store fitting and sales – all departments must create their own goals for achieving increased sustainability, and they must perform

and follow up their own activities to reach these goals. (H&M 2011) In the same time they really want to be different than the competitors in order to have a competitive advantage. This sector is really competitive and H&M need to be different to attract the customers and increase the market shares. To achieve this differentiation, they regularly offer special limited collections designed by famous artist or designers such as Roberto Cavalli, Madonna, Karl Lagerfeld and so on. (H&M 2009)

Sacrifices: It is important to choose a unique strategic position in order to succeed, but it is not enough in a long term point of view because it is possible for competitors to imitate your strategy. It is not possible to perform on all different markets in parallel without making the system too ineffective and therefore there have to be trade-offs with other positions. There are three main reasons for trade-off; inconsistencies in the company’s image and could otherwise lead to confusion among the customers, because of the activities themselves that sometimes just aren’t possible to carry out at the same time and finally because of limits on internal processes. According to Porter, E. M. (p. 61-78, 1996) H&M cannot focus on all markets and has to sacrifice some in order to be as effective as possible and to have a leading position on other markets. Their strategy is limited on the low price segment, they are not able to compete with the high end fashion labels because they haven’t got the image for that. Threats: Porter’s five forces were used to examine the current and upcoming threats of H&M. The five forces analysis deal with existing competitors in the industry, threat of market entrants, bargaining powers of buyers, power of suppliers, and threats of substitute products (Porter, M. E., 2008). Threat 1: Existing competitive rivalry between suppliers There is a big amount of competitive rivalry in the low-price segment like the English retail chain Primark, which try to copy the strategy of H&M. So that would be a big threat for H&M. But with their unique network system they should be prepared for the future. Threat 2: New market entrants Like it was mentioned before, H&M wants to increase the number of stores in the amount of 10-15 % per year. China, the US, the UK and Germany were the largest expansion markets. There were also store openings in five new countries: Romania, Croatia, Singapore, Morocco and Jordan.

This new gigantic market offers a lot of opportunities for H&M, but at the same time it is a big risk for the company’s future: To successfully enter a foreign market a lot of money needs to be invested. That often puts companies in a weak position. Threat 3: Bargaining powers of buyers Bargaining power is always a problem for low-price segments, because the customer always has a big range of choices. H&M tries to make a compromise between low prices and high quality to make themselves interesting for customers. Threat 4: Power of suppliers In the fashion industry the suppliers don’t have any power, because they have no ability to raise prices or reduce quantity because of the big amount of substitutes. Threat 5: Threat of substitute products In the clothes market exist a wide range of stores which differ in style, price and the variety of design. So the customer has a many alternatives to choose between all that stores. For staying in the market, H&M should always move and follow the needs of the customers to make them interested in buying their product.