Business and Management Decision-Making: H&M and Next - Coursework Example

Executive Summary

H&M and Next are ambitious fast fashion companies that have seen much growth and expansion in their respective markets. Comparatively, however, it would be appreciated that H&M is more forceful and dramatic with business expansion than Next. This is because H&M utilises an internationalisation model that has it expand to nearly every continent with a total of 3700 stores whiles Next largely focuses on the UK market. The international expansion of H&M has directly reflected in its revenue generation as the company outperforms Next financially. As investors, the first concern of Caifu Investment Ltd will be to make profits from its investments in one of these fashion companies. Based on this, it is very important that Caifu pays particular attention to current financial performance and prospects for growth. In terms of prospects for growth, it would be noted that H&M has a lot of potential as the company currently utilises a cost leadership strategic option, which means it sells its products at cheaper market prices. With such a strategy, H&M has a better potential to taking advantage of unharnessed market opportunities in emerging markets than Next. In terms of communication, it is noted that H&M and Next have almost the same advantages as the two companies use a divisional organisational structure, which makes communication more effective. Performing CSR is however challenged by this structure because it is sometimes difficult to reach consensus on what needs to be done for society by the various divisions under the structure. With all these points put together, H&M is seen to be a better option for Caifu Investment Ltd than Next.

Introduction

As the global business environment becomes competitive, both investors and corporate organisations have become concerned about ways in which they can maximise opportunities available for growth, including cross-border or international investment. It is therefore not surprising for investors in China to consider investing in European firms and vice versa. But as much as there are opportunities in international markets, it cannot be denied that there are also some challenges which often comes in the forms of general management issues and globalisation market issues (Kühlmann & Dowling, 2005). In order for a firm or an investor to succeed in an international market, it is important that both the opportunities and threats prevailing in a target market be weighed and assessed carefully so as to make accurate selection of an international market (Marks & Mirvis, 2001). As far as the high street fashion industry is concerned, some general management issues worth addressing have to do with cultural differences between international markets, such as those in China and Europe (Nahavandi & Malekzadeh, 2008). Globalisation also continues to make European market a bit saturated. On the back some of these and other available opportunities, a business and management analysis is done for H&M and Next to know which of these two companies will be the best business destination for Caifu Investment Ltd to invest in.

Company Profile

Both H&M and Next have some impressive company profiles capturing their history, resources, organisational and management structure, performances, and reputation. H&M which is a Swedish multinational clothing retailer is best known for its fast-fashion clothing lines. Operating in 61 countries across the globe, the company has more than 3,700 stores which are operated at different categories by 132,000 employees (Hennes & Mauritz, 2014). H&M has a rich operational history spanning from its formation days in 1947. International growth and expansion has been a major outlook for the company as it continues to add new stores to its list of existing ones. For example in September 2013, the company opened its 3000th store in a colourful event in China. As part of its international expansion focus, H&M has often used a versatile and dynamic management system which embraces cultural diversity in various countries of operation. This has been evident in the company’s ability to constantly blend local employees with foreign ones from Sweden in almost all its international markets (Hendriksz, 2015). The result of these has been financial growth because for the past 5 years, H&M has been experiencing growth in terms of revenue, operating income, net income, total assets, and total equity. As of the end of 2013, the company’s revenue was SEK 150,090,000,000 or $18,013,561,656 (Hennes & Mauritz, 2014).

Next plc, on the other hand, is a British multinational clothing retailer headquartered in Enderby, Leicestershire. The company currently has 700 stores, 502 of which are domiciled in the UK alone (Cave, 2010). The other 200 stores are located in different parts of the world but dominantly based in Europe, Asia and Middle East. As far as the UK is concerned, Next has showed great performance output since 2002, overtaking Mark & Spencer in 2012 as UK’s largest clothing retailer in terms of sales (Next Plc., 2015). The company is listed on both the London Stock Exchange and FTSE 100 Index. Next has been operating since 1864 when it was founded by Joseph Hepworth. Even though the company has not been as vibrant as H&M when it comes to international expansion through the opening of stores across the globe, it still has a lot of excelling prospects for sales in the relatively fewer places it is located. For example as of the end of 2015, the company’s revenue was $5,743,312,820 or £3,999,800,000 (Next Plc., 2015). Next’s operations are based on three major channels which include Next Retail, Next Directory and Next International. With these three channels, the company engages in massive local retailing, online retailing, and international retailing respectively.

SWOT analysis

H&M

Next

Strengths

Weaknesses

Strengths

Weaknesses

• Strong international presence with 370 shops
• A strong employee force
• Strong financial standing
• Well known global brand equity
• Clothing lines for all ages

• Minimal diversity in product types
• High market concentration in most developed markets
• Often criticised for low quality clothing
• High dependent on international suppliers from Far East

• Excellent brand image in Europe
• Perceived high quality of clothing
• Stronger brand equity

• Over concentration of shops in UK and Europe
• Lack of control over garment production
• China recession affecting most Asian markets

Opportunities

Threats

Opportunities

Threats

• Clothing continues to be a global necessity
• Fewer international entry barriers
• Greater prospects in emerging markets
• Expanding online shopping

• Cultural differences in most international markets
• High intensity of competitive rivalry

• Increasing business and growth prospects for emerging markets
• Expanding access to electronic commerce
• High teen market

• Lesser known brand across international markets
• High intensity of competitive rivalry
• Rising labour cost in most production countries

From the SWOT in the table, it would be noted that there are areas of strength, weaknesses, opportunities and threats that are common to both companies. The reason for this as explained by Lubatkin and O'Neil (2007) is because both companies operate in the same industry. That is, while operating in the same industry, there are some industry-wide factors that directly translates into the daily operations of individual companies and thus influence their SWOT. With this in mind, it would also be noted that there were other areas that differences could clearly be established between H&M and Next. For example, H&M is seen to have a greater advantage or strength with its high international market presence but this is something that Next lacks. On the other hand, Next is well appreciated for its perceived high quality of products: it has been thought that H&M offers less quality products. In the opinion of Olie (2005), the product quality of H&M has not been of high quality because the company uses a cost leadership strategic option, which focuses on offering cheaper products.

H&M is faced with the threat of cultural differences in most of its international markets, where it is important that there will be a good balance between national cultures and organisational culture to ensure effective management and leadership at the organisational level. As a response to this, H&M is known to be using a type of transformational leadership style which is run on the principles of high levels of communication from management as a means of meeting goals (Kühlmann & Dowling, 2005). Through such transformational leadership, managers of the company are able to relate well with employees from different cultural backgrounds to ensure there is clear understanding of views and perceptions held by each person based on their cultural dimensions as reflected in Hofstede’s cultural theory. As a retailer, Next is also faced with the threat of rising labour cost in production countries, most of which are based in the Far East. The rising cost affects Next because it buys finished products directly from manufacturers. To respond to this, it is important for Next to use management and leadership styles which tend to minimise the internal spending of the company. This way, the additional cost of finished products will not translate directly into the prices of the company’s products due to high production cost.

Challenges facing both organisations in general management functions

At the management level, both H&M and Next have their own challenges that face them in the delivery of day-to-day activities. In a study by Walker (2012), two major management challenges that H&M was said to face are the issues of organising and controlling. These two challenges arise largely as a result of the company’s global size. That is, while operating over 3700 stores across the globe, there are instances where it becomes difficult to organise and coordinate the different international activities of the company. Writing on the issue of organisation in global firms, Lubatkin and O'Neil (2007) stressed that even though different international markets may have their own variables that influence the way business is done, it always remains important that there will be a central business model that can easily be identical through all its international subsidiaries, agencies, branches and franchise. Once such central business model exist, it becomes easier to develop a global brand identity, based on which brand image can be developed for the company. But in order to constitute such a central business model, it is expected that there will be a common modality for organising and controlling management activities (Malekzadeh & Nahavandi, 2008). In the case of H&M, such organising and controlling roles are not well performed. For example, there have been frequent reports of labour unrest and maltreatment of workers in developing countries such as Cambodia including reports of “fainting incidents and about living conditions resulting from low wages” (Butler, 2012).

Next also has some top management challenges that go a long way to affect the overall approach to leading at the firm. That is, a study by Liebelson (2014) has revealed that internally, there is a leadership crisis that makes it difficult for the company to clearly take a position on the type of strategic option to use. The management level conflict has often been centred on the selection of either the cost leadership strategic option and differentiation options. Leaders supporting the cost leadership strategic option are those outside Europe and arguing for the need for Next to offer cheaper products like its key competitors including H&M and Gap (Siegle, 2014). This position has however been refuted by those in UK and other parts of UK, debating that the differentiation option is the best. With the differentiation option, the company has produced high quality products that come at relatively higher prices. The justification given for the use of differentiation is that it helps to take advantage of the competitors whose products are criticised as being of low quality. The disagreements has negatively impacted on the company’s global business model even though the differentiation is largely used. Liebelson (2014) has argued that it is because of the unsuitability of the existing differentiation model that Next has failed to embark on comprehensive international expansion especially into emerging markets.

Organisation structure, ethics and CSR

Communication is a critical aspect of organisational management at both H&M and Next. The importance of communication is reflected in almost all organisational operations including issues of ethics and corporate social responsibility (CSR) (Malekzadeh & Nahavandi, 2008). H&M and Next have both attempted several social campaigns, especially those that have to do with the promotion of green practices. In doing this, various formats and channels of communication have been used in interacting with stakeholders, including written communication, television and radio, internet and social media, and face-to-face interactions (Rondinelli & Black, 2000). A careful study of the websites of both companies shows that H&M has a stronger internet and social media presence than Next. Next on the other hand have utilised more forms of written communications including the issuance of press releases and letters, which have often targeted specific media houses. Comparing the two, it would be said that the use of internet and social media is a more modernised approach to communication that comes with better reachability than traditional methods involving written communications (Marks & Mirvis, 2001). The reason for this is that there is now higher internet penetration and the extent of use of social media by people have increased tremendously over the past decade. As a result of this, using internet and social media as a channel of communication allows for greater reach and ensures that the public understand the CSR agenda of the companies including such initiatives as charity works, green products, sponsorship programs, and public advocacy events.

When it comes to issues of ethics, H&M and Next exhibit much similarity in the format or channel of communication. That is, both companies use written and face-to-face communication more often. Visit to the premises of both H&M and Next will reveal written codes of ethics and codes of conduct pasted at various vantage points for employees. There are also some of the codes written and delivered to employees in brochures when they are first employee by the companies. Olie (2005) analysed and justified the use of written forms of code of ethics by saying that this medium makes it easier for documentation and references to be made. That is, whenever a person is in doubt or there is the need to make reference to know whether a person has breached any part of the code, it is easier to make reference to the written documents which are always same for all other employees. Written forms of communication have also been described as being ideal for future reference purposes and for keep records (Nahavandi & Malekzadeh, 2008).

Communication within the rank and file of the two companies is largely affected by the type of organisational structure used. Because of their large sizes and international expansion agendas, both H&M and Next utilises the divisional organisational structure. The divisional structure has also been described as the product structure and it is made up of self-contained divisions which are either autonomous or semi-autonomous (Rondinelli & Black, 2000). Each division of the companies allowed greater autonomy to have their own budgets and decide on management issues including strategy, talent management and marketing (Rondinelli & Black, 2000). Because of the divisional structure, communication across the organisations can be considered to be more effective and efficient. This is because one piece of message that needs to be communicated is not done across the entire workforce. Rather, each division is responsible for its own communication channel. This means that a message may be communicated to one division that is totally of no relevance or importance to other divisions. The organisational structure also has a lot of positive influence on the ethical standards of the companies but not CSR. That is, it is easier to monitor employees for their ethical conducts within the divisions, where sanctions and rewards are recommended and applied at the local divisional levels. When it comes to CSR, it is often difficult for the public to appreciate the individual social responsibilities played by the various divisions. Because of the divisional structure, it has often been difficult for the companies to embark on comprehensive enrolment of green initiatives at the corporate level.

Conclusion and Recommendations

From the analysis above, it can be said that both H&M and Next have showed great potential for growth and expansion across the global market. This is notwithstanding the fact that both companies have their own challenges and limitations. As far as Caifu Investments Ltd is concerned, it would be admonished that the fact that there are some challenges and issues with the strategic growth of the companies at the management should not mean none of them is worth their investment. Rather, it is important to weigh out the options of merits and demerits associated with doing business with either of them. From a professional point of view, it would be recommended that H&M has a better growth and management prospect as against Next. First, the massive international expansion being undertaken by H&M is motivation for Caifu to invest in it. Second, the fact that H&M utilises the cost leadership strategic option means it is in a better position than Next to take advantage of the growth and expansion opportunities within emerging markets. Third, it has been found that most of the challenges faced by H&M are at the employee level rather than management level as it is the case with Next. In such a situation, it is easier for H&M to put its house in order and focus on growth agenda. Based on these points, it would be recommended that Caifu Investment Ltd select H&M ahead of Next.