H&M

Business Consultant
Report
INTB861, T5, 2015
 Prosenjit Chatterjee
Student ID: 15870267
Mob: +64 22 420 6053
Email: prosenjitchatterjee78@gmail.com
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EXECUTIVE SUMMARY

H&M is one of the leading brands in the fashion industry providing fashion clothing and
accessories to customers within an affordable limit. Since inception H&M was into much
slow progress averaging to 12 countries in 13 years until Karl-John Persson took over and
started a massive fast-paced expansion. H&M believed more in a Decentralised structure of
Organisation where basic values & beliefs, optimum utilisation of resources & capital. But
the central functions like Design, Buying, Technology and Logistics were much centralised.
Discussing about the strategies, H&M has incurred huge profit margin in realising from
location economies by outsourcing bulk production in order to achieve economies of scale.
The Structure of the company been a Decentralised one reduces burden from the
Management providing flexibility in decision making. In cost-responsiveness parameters,
transnational strategy though works well, yet the variable factors like customers’ taste and
preference or cost effectiveness to the product varies largely. H&M mainly have wholly
owned subsidiaries as they generally opt for renting store rather than buying properties.
Thus they chose the way for Direct Investments in emerging markets like Europe, Asia and
North America. But shifted to franchising as entry mode particularly to Middle East with legal
restrictions in place.
The value chain analysis greatly reveals H&M success story in product design with 200
designers and 100 pattern makers have a keen eye in deducing the latest trends. The
company’s integrated logistics function supports cost-efficient supply. It’s been claimed that
70% of production happens in Asia, while 30% in Europe. Still they’re much Europe
dependent, which happens to effect their lead time & product cost to some extent.
Distribution is the main nervous system of the company which provides a control over
supply and demand shifts channelizing to individual stores. HR Management recruits
competent staffs that represent the main human resources of the company.
With the procedure of Outsourcing, H&M can maintain the agility and flexibility in shifting
trends. With a lead time of 20 days to six months for a product to hit the shelves, 50
production offices work in direct contact with suppliers. Based on location and modes of
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outsourcing, H&M follows the offshoring model which helps them to adapt well in Global
markets.
OBJECTIVES OF THE REPORT
The purpose of preparing the report is to deduce the flaws in the entire functioning pattern
of H&M. Though in some areas they are exceedingly doing well yet some areas need to be
watched carefully to keep them ahead in the race.
METHODS OF RESEARCH
Methods used to prepare this report are theoretical based and entirely on personal
understanding to the application on the H&M case study.
CONCLUSION AND RECOMMENDATION
It can be briefly concluded that H&M is pretty Europe dependent even if their bigger crunch
of production and revenue comes from Asia. There are serious link problems between the
Senior Management and Designers working with the Productions offices all across the globe.
Rising production cost in China due to unavailability of cheap labour. As there is no direct
control of Head Office involved, the suppliers may compromise on quality to increase profit
margins.
It is thus recommended that markets in Japan, South Korea and Russia are still unexplored
whereas NZ and Taiwan has no Zara (competitor) presence. Setting up Regional offices in
Asia and North America can be an option to rule out connectivity issues. Multiple
Distribution Centres should be set up in Asia and North America to reduce shipping costs and
lead times to compete Zara. In order to minimise growing cost of Cotton, alternative
resources of fibre can be looked into.
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TABLE OF CONTENTS

1. INTRODUCTION 5
1.1 About the Company 5
2. FINDINGS & DISCUSSIONS 6
2.1 H&M’s Strategy of Business 6
2.1.1 Low Cost Strategy 6
2.1.2 Economies of Scale 6
2.1.3 Leveraging Subsidiary Skill 6
2.1.4 Cost-Responsiveness Framework 6
2.1.5 Internationalisation 7
2.1.6 Entry Modes 7
2.2 Analysing H&M’s Value Chain 8
2.2.1 Product Design & Development 8
2.2.2 Supply 8
2.2.3 Operations 8
2.2.4 Distribution 9
2.2.5 Marketing & Sales 9
2.2.6 After Sales Service 9
2.2.7 Support Activities 9
2.3 H&M’s Agility in changing with trends 10
2.3.1 Outsourcing 10
2.3.2 VRIO Analysis 10
2.3.3 Understanding Supply Chain Management 11
3. CONCLUSIONS 12
4. RECOMMENDATIONS 13
5. REFERENCES 14
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INTRODUCTION

1.1 ABOUT THE COMPANY

HENNES & MAURITZ (H&M) founded by Erling Persson in 1947 in Sweden as a fast-fashion
business and presently having 2,206 stores around 43 countries along with 94,000
employees working in. In the year 2009 Karl-John Persson took over as CEO with a distinctive
business approach. Their business concept is to offer fashion & quality at the best price. For
them sustainability depends largely on the quality and part in their corporate values. H&M
aims for a sales growth around 20% each year. As we all know “To achieve greater success,
greater responsibilities needed to be shouldered”. These include involvement of different
suppliers, supplier factories, long-term availability of natural resources along with periodical
scrutiny of technology on stock maintenance and
structure of the company along with its supply
chain management.
Fashion Industry is largely identified of having
short lifecycles, short selling seasons and long
replenishment times. Hence in case of H&M, lack
of market analysis and entry mode at Senior
Management Levels which has largely affected
their business advantages as First-mover in
Southern Hemisphere and Latin America. Absence
of Leadership abilities with Shop Managers at
execution levels can create competitors. Beside
this presence of flaws in supply chain management has been analysed hereafter in this
report.
This report analyses these problems and offers recommendations on how to counter them
to improve growth and sustain their leading positions in the Global market. It has been
assumed that after sales service in value chain analysis of H&M is doing well as there is no
data about the cost of returned goods.
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FINDINGS & DISCUSSIONS

2.1 H&M’S STRATEGY OF BUSINESS

A course of action that a company adopt to achieve goals and objectives through creating
sustainable competitive advantage is termed as Strategy. It mainly focuses in creating value
for the customers and the company. (Fraser, Strategy, 2015)
2.1.1 LOW COST STRATEGY
Subsequently H&M followed this with a clear reflection of lowered price and higher margins
in all markets throughout the world (Fraser, Strategy, 2015). H&M in this respect has
tremendously experienced a Global growth by making fashion affordable for everyone. Thus
they were incurring huge profit margins in realizing from location economies by outsourcing
their bulk manufacturing units to low-cost countries with skilled and low wage workers.
2.1.2 ECONOMIES OF SCALE
H&M by 2011 was working with 747 suppliers of which 150 were considered long-term
strategic partners. Globally 1,652 factories were approved for making large volume of goods
for H&M in order to achieve economies of scale through mass production.
2.1.3 LEVERAGING SUBSIDIARY SKILLS
H&M more is a Decentralised Organisation. By Decentralisation we mean reducing burden
on the top management, permitting greater flexibility to respond to changes and resulting in
better decisions in close market. H&M strictly
considers its basic values & beliefs,
optimum utilisation of resources & capital, no-
nonsense decision making and delegation
of responsibility. But the functions like Buying,
Design & Logistics are much centralised just
to keep control over said functions and to
ensure decisions are consistent to organization’s objectives.
2.1.4 COST-RESPONSIVENESS FRAMEWORK
H&M has much Global Matrix Structure mostly believing in Transnational Strategy involving
layers of management. Transnational Strategy can be defined as an international business
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framework where a company’s global business activities are synchronised via support and
interdependence between Head Office & Internationally located subsidiaries or retail
outlets. Accordingly, H&M designers hold customer surveys, dialogue sessions and focus
groups and select trends from employees in the global stores & then add their own
creativity. But under the parameters of Pressure for Cost Reductions and Local
Responsiveness, the main problems are customers are powerful and can easily switch
suppliers equally depending on their preferences and tastes. As it applies in the fast-fashion
category, there are customers who are cost-conscious & always look for best bargains.
2.1.5 INTERNATIONALISATION
The Uppsala Model or the traditional model of Internationalisation is defined as where the
firm learns and gain knowledge from the domestic market with time and experience and
then gradually tend to invest more in global markets. In relation to the theory, H&M’s
progress in the initial stages was relatively longer and slower. Precisely, H&M’s expansion
process can be subdivided into 3 stages: (1) Domestic Market (1947-1964), (2) Slow
Expansion (1965-1998) and (3) Fast Expansion (2000-present) (Fraser, Internationalisation,
2015).
2.1.6 ENTRY MODES
H&M widely chose wholly owned subsidiaries as
entry mode to go Global. Instead of buying
properties, H&M opts for renting store premises
which will allow the company to obtain a tight
control over store’s operation and own the location
setting decisions. H&M always choose the way for
direct investments in growth prospect markets like
European, Asian and North American, however in
case of Middle East countries due to legal
restrictions in land owning they change their entry
mode to franchising to sell their products.
H&M as a company relied too much on Europe for major crunch of its sale but
realised lately that the emerging markets in Southern part of Globe and Latin America
cannot be overlooked in anyway. Probable unexplored markets to look into are Japan,
South Korea, Russia, New Zealand and Taiwan.
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2.2 ANALYSING H&M’S VALUE CHAIN

The determining feature of a good value chain analysis is its completeness. Identifying all the
areas in the value chain, it is to be analysed whether the primary and support activities are
working systematically. For H&M it’s a manufacturing type of value chain. Though it does not
own any factories yet it remains closely involved in production of its design.
2.2.1 PRODUCT DESIGN AND DEVELOPMENT
The design activity as a whole is the single most
important factor in H&M’s success story.
Design is centralised at Stockholm and includes a
team of almost 200 designers and about 100
pattern makers. Designers generally follow the
trend-setters, what’s popping, vintage looks,
what happening at music festivals. Its major competitor Zara is similarly and vertically
coherent and there is a little tangible resources involved.
But in terms of internal linkages, the design managers are in close links with
production offices around the world rather than the H&M’s Senior Management team. But
the designers and the merchandisers may sometimes be wrong in their prediction about
the latest trends. Rising production costs in China is a point of concern for H&M.
2.2.2 SUPPLY
There is no special mention that H&M is using transport deliveries of cloth or raw materials,
so the chances are that they use the same Logistics
Partners as many of its competitors. It’s integrated
Logistics functions supports cost-efficient supply of
goods and generates economies of scale by helping
H&M do bypass middlemen and buying the right product from the right market.
2.2.3 OPERATIONS
H&M uses 747 suppliers across the world. Approximately around 70% of clothes are
produced in Asia, while rest 30% in Europe. The company has introduced low level of vertical
integration in this activity in coordinating with the 50 production offices around the world.
These suppliers located around the world help H&M to update the latest fashions in trend
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and hence capitalise on the expertise in production and engage in identifying the latest in
demand.
H&M’s product positioning is much into inexpensive product category available
in the market. Relatively poor increase of profit in stronger competition has something to
be concerned about cost related to sales and can have a direct correlation with supply.
2.2.4 DISTRIBUTION
The combined direct distribution channel ensures the stores of H&M to receive shipments
on daily basis providing proper control over supply and demand shifts. Hence, stock piling in
the individual stores is minimal and they can be replenished as and when required from the
central warehouse. Internal shifting of merchandising comes handy too depending on the
shift of demand. But this may lead to increase in lead time.
2.2.5 MARKETING & SALES
H&M points to three main resources in its sales & marketing
area: (1) the intangible brand, (2) the tangible network of
sales outlets and (3) human resources as employees who sell
the product. H&M also established a strong social media
presence. It encouraged much of digital marketing & chose
the social media platform to share their ideas, opinions or
answering the queries of the customers.
2.2.6 AFTER SALES SERVICE
It has been assumed that this has been performing quite
well as there are no data recorded.
2.2.7 SUPPORT ACTIVITIES
Of the support activities, two elements are significant in reference to H&M. They are – (1)
HR Management and (2) Technology.
H&M is a more ethical company improving the working conditions and depleting natural
resources responsibly. These are the attributes that helps a company to build its Brand and
allows them to get differentiated from other Brands. The HR Management recruits
competent local staffs to get rid of cross culture barriers and maintains an “Open-door
Policy” in the company allowing all employees the right and scope to discuss any work-
related issue directly with management. Beside this internal promotion and job rotation are
two central policies of HR Management in H&M.
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H&M provides independent authority to the shop managers in order to take

decisions within specified parameters like Entrepreneurs as revealed in the theory of
entrepreneurship that individual owners or managers of existing companies can be the
same, who identifies, explores & evaluates the opportunities in the market. But they might
be wrong in their assessment leading to partial rupture in the profit margin.
Technology used by H&M was updated that prompts the comparisons in sales figures of
present and past period category-wise. Buyers also get enough out of this technology
regarding stock maintenance abreast. It involves strong competencies in electronic stock
checking and maintaining re-ordering level. The HO mainly rely on the IT integration for
communication with stores, production offices etc.

2.3 H&M’S AGILITY IN CHANGING WITH TRENDS

2.3.1 OUTSOURCING
A crucial point to the success and
profits that H&M has attained is
by outsourcing all its production.
By outsourcing H&M is able to
meet their goal of being highly
fashionable and yet affordable.
Outsourcing can be termed as
turning over an activity to
outside supplier who will perform
the activity on behalf of the focal firm. Fashion changes in the industry within a very short
span of time; hence there is a high level of uncertainty. With a lead time of 20 days for the
products to hit the shelves, they’ve 50 production offices in direct contact with suppliers and
report back to HO. Based on location and modes of outsourcing H&M follows Offshoring
model which states outsourcing its production to a foreign firm. It also helps to adapt the
evolution of the dynamic market. (Fraser, Production & Logistics, 2015)
2.3.2 VRIO ANALYSIS
According to the VRIO framework - ‘V’ stands for Value as it can be said that the design of
the product on the price factor indeed brings a value, ‘R’ stands for Rarity as it can be said
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that the design of clothing within today’s fashion industry is not at all rare, ‘I’ stands for
Imitate as it can be said that from the product standpoint design is not at all costly to imitate
but with on time’s standpoint due to intensive change in fashion trends it often becomes
costly to do so and lastly is ‘O’ stands for Organization to be exploited as it can be said that
H&M’s designs, technology, HR Management and logistics are organizationally embedded
which can be exploited to compete in the world market while on the other hand the
production is mainly outsourced to suppliers, who perform under strict scrutiny and CSR
guidelines.
2.3.3 UNDERSTANDING SUPPLY CHAIN MANAGEMENT
The concept widely covers the speed and flexibility in the Supply Chain Management which
can be stated as planning and managing of all activities involved in sourcing and
appropriation of all logistics management activities. It also includes coordination with
suppliers, service providers and customers. In correlating 3A’s to the theory of SCM - Agility
is the key factor as H&M’s team of 200 designers and about 100 pattern makers in order to
reduce lead time is working closely with 50 production house across the globe under direct
supervision of the HO. This allows a rapid-response manufacturing process to capitalise on
design trends immediately. Logistics also play an important part here for delivering the
goods to the Central Warehouse to be distributed to the individual stores depending on the
demand. Adaptability is the ability to change in the supply chain configurations in response
to change in demand or trends of fashion.
Accordingly technology has been
constantly updated so that the buyers,
employees including the HO are all
abreast (Fraser, Production & Logistics,
2015). Alignment is the interest of all the
parties involved in the supply chain from
the raw materials to the end products
hitting the shelves of the stores all working with a sense of ownership for H&M.
H&M is taking more lead time in comparison to Zara (two weeks) which may
have something to do with Distribution. Besides this suppliers may compromise on the
quality to increase their profit margins. Loss of control is inevitable in this pattern of
supply chain.
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CONCLUSIONS

 Less dependency on Europe for major crunch of its sale but realised lately that the
emerging markets in Southern part of Globe and Latin America cannot be overlooked.
 The design managers are in close links with production offices around the world rather
than the H&M’s Senior Management team. But the designers and the merchandisers
may sometimes be wrong in their prediction about the latest trends.
 H&M’s product positioning is much into inexpensive product category available in the
market. Relatively poor increase of profit in stronger competition has something to be
concerned about cost related to sales and can have a direct correlation with supply.
 Rising production costs in China is a point of concern for H&M.
 H&M provides independent authority to the shop managers in order to take decisions
within specified parameters. But they might be wrong in their assessment leading to
partial rupture in the profit margin.
 Suppliers may compromise on the quality to increase their profit margins. Loss of
control is inevitable in this pattern of supply chain.
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RECOMMENDATIONS

 Probable unexplored markets to look into are Japan, South Korea and Russia. New
Zealand and Taiwan also to be taken into account as Zara is not present there.
 Lower-Middle Income economy country like Philippines can also be considered for
market evaluation.
 Expansion of E-commerce market in Japan, South Korea and France.
 Some Regional offices should be set up in Asia, North America to sort out connectivity
issues with Senior Managements.
 Status conscious people might try to avoid H&M to look classy than general mass.
 Create Multiple Distribution Centres in Asia and North America to reduce more shipping
costs and lead times to compete Zara.
 Shifting to proposed Vietnam location from China can be a good option to bypass rising
production cost issue.
 H&M should be more streamlined about the flexibility in Delegation of Authority from
the Shop Mangers to executive level. Too much of R&D in the mode of Innovation can
be costly in this stage of cut throat competition.
 In order to minimise the growing cost of Cotton as resources, some alternative
resources of fibre to be looked into like Hemp or Flax etc as these sustainable material
may cost 80% less than Cotton.
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Fraser, A. (2015). Strategy. In Week 2 Session 4. AUT.

Fraser, A. (2015). Internationalisation. In Week 3 Session 6. AUT.

Fraser, A. (2015). Production & Logistics. In Week 5 Session 9. AUT.