Essentials of Strategic Management at H&M - Case Study Example

H&R Strategic Management xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Instructor xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Introduction “Without a strategy, an organization is like a ship without a rudder, going around in Circles. It’s like a tramp; it has no place to go (Joel Ross & Michael Kami).” Strategic management can be defined in various ways. According to Wheelen and Hunger (2003), strategic management can be defined as a set of managerial decision and action that largely determine log term performance of a given company. It mainly involved strategy formulation (long range planning or strategic), environmental scanning (both internal ad external), evaluation and control as well as strategy implementation. Strategic management is widely considered to be an ongoing process. Company background H&M is one of the fastest and largest clothing retailers. The company greatly pioneers “fast fashion” a term which is used to define clothing collection normally based on current fashion trends noted on the runways but which are manufactured and designed quickly, are affordable to individuals. By maintaining flexibility and efficiency throughout the company supply chain, H&M is able to respond the fast changes in fashion trends (Parkkali and Sallinen 2010.). By virtue of understanding its fashion and its adeptness in various anticipating trends, H&M enjoy having achieved popularity enabling the company grows at a formidable rate despite today’s overcrowding in the clothing and fashion industry. The company keenly understands its target market where their products are offered at low prices and are of high fashion. Through selling its broad range of fashion collections which are constantly renewed by way of offering attractive prices thus maintaining steady flow of customers. Based on its strategy, H&M continually carry out various quality control measures so as to maintain fie quality of their products. The company quality concept largely goes beyond the high quality displayed in their mechanism alone. H&M strives at ensuring that their products have been manufactured with least possible impact on the environment as well as under satisfactory working condition (Parkkali and Sallinen 2010). Mission Statement H&M Company describes its mission as “fashion and quality at the best price” this mission statement attracts its customer especially on today fashion trends. Vision Statement H&M business activities shall be run in a manner that is socially, economically and environmentally sustainable. By sustainable the company means that the needs for both the present and future generation must be widely fulfilled. Goals The company chief goal is to increase the number of stores by ten to fifteen percent every year. H&M therefore define their global growth strategy by using each individual store in strengthening the company brand which as a result contributes largely on increased sales and profitability. Corporate Responsibility According Parkkali and Sallinen (2010), within their corporate responsibility, H&M has two definable responsibilities which are categorized into environmental and social. Based on environmental responsibility, the company engages in creating awareness among their personnel and suppliers. The company realizes how the growth of cotton impact on the environment thus it is actively involved in reducing environmental impact of cotton growing. The two method H&M respond to this impact is through promoting organic cotton by way of demanding it ad improve on convectional cotton growing. Organic cotton is grown without any use of chemicals. The other method is through engaging in various initiatives which promotes greater environmental responsibility (Parkkali and Sallinen 2010). On the other hand the company corporate responsibility is focused socially. The company understands that quality entails making sure their products meet or largely exceeds customer satisfaction. These products have to go through one hundred and fifty quality controllers to ensure that the products meet both safety and quality standards. The company shoes its corporate responsibility through supporting UNICEF through creating awareness of children rights and protection. External environment According to Parkkali & Sallinen (2010), H&M external environment will be analyzed using PEST analysis of the various impact of external environment on the company organization. Based on political environment, H&M follows Swedish legislation since it is a Swedish brand. At times legislation applied is not favorable to the company since it abuses designed short term contracts. Further, if there are changes in the law H&M is forced to change its operation and objectives so as to fit the requirements. On environment, the company is highly concern with environment especially in ensuring that growth of organic cotton is increased. Most individuals have largely been involved in growing cotton against nature. Therefore, to ensure that the environment is protected and to create a company good image the company is involved in growing organic cotton as well as creating awareness on the importance of growing organic cotton. Based on the social environment, it is best described by the company mission statement. It is therefore significant that H&M strictly follow their mission. Within fashion trends which is the company environment, H&M need to be at the lead since that is the characteristic the company having built on social is that is good quality and fashion. Further, the company needs to widely consider environment so as to build strong relationship with their clients. It is evident that there are two technologies that will affect business are media technology and printing machines. Printing machines is needed in making clothes of certain color and pattern. Some clothes produced by H&M require special or a more complex printing machine to accomplish their various designs. On the other hand, technology will assists in H&M popularity through their websites and adverts. It is important to constantly update media and website technology to attract customers and maintain brand name (Parkkali and Sallinen 2010.). H&M SWOT Analysis Strengths H&M have a strong brand image Cheap price and low prices for their products thus attracting clients Weaknesses Excessive expansion which is couple amount of supplier which require resources. Slow distribution channels Opportunities Current economic crisis can increase or attract interest for other cheap clothes Possible launch of new supplier market across Asia Threats A lot of competitors within the fashion and design industry. H & M Company Financial performance The best measure of financial performance of a firm is not what the firm earns. It is how those earnings are valued by the investors (Horngren & Harrison, 2009). When analyzing the firm’s performance, investors will consider the risk inherent in the operations of the firm, the time pattern over which the earning rise or fall, the quality and reliability of reported earning among other factors. The management of the firm should try maximizing the wealth of the company’s shareholders through achieving possible value of the firm. For the purpose of financial statement analysis, emphasis will be made on the balance sheet and the income statement. The income statement reveals the performance of the company during a particular period of time, for instance, for the period ended 30th November, 2010. It shows the revenue from sales and various costs including interest expense and taxes which the firm has incurred during the period. The balance sheet states the firm’s assets, liabilities and equity as at a particular date (Hilton, 2004). The financial trends below cover the financial period for years 2010, 2009 and 2008. Vertical analysis of H & M financial statements income statement year 2010 % Change year 2009 % Change year 2008 % Change Net Sales 108483 100.00% 101393 100.00% 88532 100.00% Cost of revenue 40214 37.07% 38919 38.38% 34064 38.48% Gross profit 68269 62.93% 62474 61.62% 54468 61.52% Operating expenses 43610 40.20% 40830 40.27% 34330 38.78% Operating income 24659 22.73% 21644 21.35% 20138 22.75% Income before tax 25008 23.05% 22103 21.80% 21190 23.93% Income tax 6327 5.83% 5719 5.64% 5896 6.66% Net income 18681 17.22% 16384 16.16% 15294 17.28% Balance Sheet year 2010 % Change year 2009 % Change year 2008 % Change Current assets 40932 69.16% 36081 66.37% 35371 69.03% Fixed assets 18250 30.84% 18282 33.63% 15872 30.97% Total assets 59182 100.00% 54363 100.00% 51243 100.00% Current liabilities 13847 92.25% 11090 80.65% 11879 83.11% Long term liabilities 1163 7.75% 2660 19.35% 2414 16.89% Total liabilities 15010 100.00% 13750 100.00% 14293 100.00% Total Equity 44172 100.00% 40613 100.00% 36950 100.00% Total equity & liabilities 59182 54363 51243 Horizontal analysis of H & M financial statements Income Statement year 2010 % Change year 2009 % Change year 2008 Net Sales 108483 6.99% 101393 14.53% 88532 Cost of revenue 40214 3.33% 38919 14.25% 34064 Gross profit 68269 9.28% 62474 14.70% 54468 Operating expenses 43610 6.81% 40830 18.93% 34330 Operating income 24659 13.93% 21644 7.48% 20138 Income before tax 25008 13.14% 22103 4.31% 21190 Income tax 6327 10.63% 5719 -3.00% 5896 Net income 18681 14.02% 16384 7.13% 15294 Balance Sheet year 2010 % Change year 2009 % Change year 2008 Current assets 40932 13.44% 36081 2.01% 35371 Fixed assets 18250 -0.18% 18282 15.18% 15872 Total assets 59182 8.86% 54363 6.09% 51243 Current liabilities 13847 24.86% 11090 -6.64% 11879 Long term liabilities 1163 -56.28% 2660 10.19% 2414 Total liabilities 15010 9.16% 13750 -3.80% 14293 Total Equity 44172 8.76% 40613 9.91% 36950 Total equity & liabilities 59182 8.86% 54363 6.09% 51243 Category of ratio Financial Ratio Year 2010 Year 2009 Year 2008 Liquidity Current ratio 2.956 3.253 2.978 Profitability Net profit margin 17.22% 16.16% 17.28% Gearing Debt ratio 0.254 0.253 0.279 Solvency Debt to equity ratio 0.026 0.065 0.065 The improvement in the net profit margin can be seen to be due to the growth in the gross profit margin, which moved from 61.62% in 2009 to 62.93% in 2010. This indicates either a reduction in average unit cost and or an increase in sales prices, resulting in a strengthened profit margin The current ratio has decreased from 3.253 in 2009 to 2.956 in 2010. This indicates that the company has been increasing its short-term liabilities. The debt/equity ratio is very low at 0.065 in 2009 and 0.026 in 2010. This indicates that the company has very little fixed charge capital, preferring to rely on equity finance. This reduction in gearing is due to the redemption of some long term finance in year to November 2010. Competitive strategy H&M, retail clothing industry has laid down competitive strategy in order to maintain its performance in the business world. It has reconstructed the management structure in order to keep its strategy in the market (Gamble &Thompson 2011). The company has applied the Porter’s Generic Strategy, which has two headings, that is, differentiation and cost advantage and therefore, has resulted into three generic strategic: focus, differentiation and leadership. H&M, being an international company, has applied a broad scope target. In the cost leadership strategy, the company has laid a strategy of producing clothing at a customers’ friendly price at an excellent level of quality in order to earn better profits than the competitors in the market. This will ensure that incase of price war, the company will still maintain profitability as he rivals suffers losses. The company will be assured of remaining profitable for a long time. In order to maintain the strategy, the company has planned to get access to cheaper materials, access capital required for investment, improve its clothing design and improve the distribution channels. One of the strategies that it has applied is the improvement of the quality of its product (Henry 2011). H&M Company has also utilized differentiation strategy that will call for unique offers in its services and products. The uniqueness will be valued by the customers who will then perceive the product better than those of the competitors. The company may then take advantage of the uniqueness of the products to raise a price on the product. This higher price may then cover the extra costs that have been incurred in the production of the unique product. Actually, the customers may not find a substitute for the products, so they definitely opt for H&M products. Using this strategy, the company will therefore, be able to have internal strength which includes: access to the leading scientific research, highly creative and skilled product development team, corporate reputation for innovation and quality. However, imitation by rivals and change in consumers’ taste may affect the strategy (Gamble &Thompson 2011). The company has also applied focus strategy to some extent. This strategy is aim at increase the degree of consumer loyalty to the company; this of course decreases or discourages competing companies. However, in applying the above competitive strategies, H&M may not bring the strategies to compatibility. For instance, it may risk producing quality products and the same time is a leader in cost. To achieve the compatibility, H&M may create separate units for every strategy. Using the resource based view, which is basically a business management tool used by companies to exactly determine the available strategic resources in the company, the H&M Company has been able to lay down competitive strategies against its competitors. Using this strategy, H&M Company, will be able to identify and therefore classify the company’s resources in terms of weakness and strength, identify gaps in the resources and significantly invest in the upgrading of the weakness, be able to combine the company’s strength into core competencies and specific capabilities and be able to select the best strategy that will exploit the capabilities of the company and competencies in relation to the external opportunities. In this strategy the company will have to make sure that the resources are valuable, rare, in imitable, that is, it is controlled by the company alone and non-substitutable which will assist the company from any substitution that may be done by the competitors. In applying these competitive strategy, H&M Company will therefore, be assured of a well competitive market whereby they will be able to control the business market while keeping their main competitors down (Johnson et al 2011). Strategic Direction of Development Companies at present are pursuing several strategies for growth in order to reach their specific goals and objectives. Different growth strategies are recommended for those companies that are operating in various types of markets. Every company needs a strategic growth direction and decisions rules are necessary so that the company may observe profitable growth. H&M Company, being an international company, has laid down strategic directions in the recent years. This may be illustrated using the Ansoff’s growth vector which is also referred to as Ansoff’s matrix. The theory has been widely used in choosing strategic growth. The company has applied the four strategic growths, that is, market penetration, development, product development and diversification (Henry 2011). It has been able to penetrate the market that already in existence. The company has also been developing expansion of its products in the market in the existence. This has been done through advertising, new branding of the products, cost effectiveness and improving the products and services that the company is offering at the markets. The company has gone ahead to introduce the same products to new markets. Finally, it has diversified its new products in order to capture more consumers. The strategies followed are as a result of the external environment, company performance and competitors’ actions. As a result of global, task and social environment, which comprise the external environment, the company has used the strategic growth to ensure political, social and economic issues in the world have not affected its markets. For example, due to political crises in one country, the company may apply the market development, in that it will seek to target new areas where there is peace and trade agreements are suitable for the company. In economic issues, the company has been able to utilize market penetration strategy through advertisement, increase sale forces tasks, introduction of loyalty scheme especially as a result of urbanization and globalization which has lead to high number of customers (Lowson 2002). In the social aspect, product development strategy has been fully utilized where, for example, incase of a situation where a consumers prefer fast food or diet food, the company has produced different variants to suit the consumers. In addition, concern o the production of environmental-friendly products has also driven the company to develop its product. These products which are environmental- friendly have definitely illustrated the very natural concern of the company. These strategies have also been followed in order to evaluate and counter the competitors’ action. The factors that have been applied in evaluation include: technology and product development, that is, alternative price and quality, market distribution pattern, services and products, strategy and brand reputation. The company, therefore, has been able in recent times to for example, used market development strategy to maintain their clients and make the regular ones into heavy customers through advertising, using various distribution channels and targeting different groups. This has been successful as the company has about 45% market as compared to other companies. H&M Company has also applied market penetration strategy to counter the effects of the rivals in various areas where, the rivals have been dong well. They have done so through; buying companies owned by competitors, promotion and launching prices and increasing the activities of sale force (Lowson 2002). The strategies have been followed as a result of the company’s performance. In recent times, the company’s performance has been overwhelming and therefore, has to maintain the market and the brand. The company has taken advantage of the brand loyalty to increase its market development strategy. To increase product development strategy, the company has continued to brand their product in a way appealing to the consumers. Despite the strategies have been effective in H&M, various limitations have been experienced. This include: in diversification, it is risky of achieving economies scales. However, market penetration is the least risky of the four strategies. Methods of developments In the H&M Company, there are some alternative in the strategic direction, the company relative to its marketing strategy. In order to determine the company’s strategic directions, various theories have been covered, that include, Porter’s Generic Strategies, review-based and Ansoff’s Growth Vector. For each of the directions in strategic development there are various different methods of development. A development method basically describes the ways in which a strategic direction is achieved or pursued. For example, there are three methods of development that Unilever has, as it pursuing growth strategy. These include internal development that involves the use of strategies that build on the company resources and capabilities. It mainly apply approaches such as developing and designing new products, implementing plans that will lead to launching of existing products to other new markets, opening business in new location, investing in both development and research to support the novel products, training of the company’s employees to ensure that that the best skills and technology is acquired, and investing in new technology or additional production to increase both sales volumes and outputs (Lowson 2002). This method of development is argued that it will ensure the company expansion to new markets and still control the existing as a result of the approaches above. It is then obvious that this will lead to improvement in competitive strategies and direction. The approaches are not easy though they are considered to be at a lower risk as compared to the rest. However, one major disadvantage of focusing on internal development or organic growth is that the speed of growth or change in the company may be very slow. Acquisition which is incorrectly referred to as mergers is the second method of development applied in the company. Merge mainly refers to the transaction that involves two or more companies in which the stock of the companies is exchanged as one of the company surviving. The companies undergoing the merge have to be somehow friendly and of the same size. The benefits of using this method, is that it is requires little or no resources, may be completed tax-free by the parties involved, it is also evident that the company will decrease the number of competition in a given market. This will definitely assist the company in its growth and have a competitive advantage over the main rivals (Henry 2011). New customers are then absorbed in the company make it more effective and efficient. Acquisition involves complete absorption of an operating company as a division of the acquiring company. However, H&M may not entirely benefit from this two, as they are limitations that are evident. These include: large business will pose a challenge in costs, clashes of culture may lead to reduction of effectiveness, and objectives of the different entities may clash. Formation of alliance and joint ventures is also used by the company. However, this has not been effective in the company as compared to the rest. Conclusion and recommendation After analyzing strategic management within H&M there were several recommendations that the company need to reconsider; The company need to develop its supply chain management so as to ensure the production process is reactive and fast so as to bring more profits H&M need to keep an eye on their competitors such as Zara strategy ad growth and constantly change on their strategy flexibility at all time. Clearly, H&M has a big market across the globe therefore, getting new market penetration and maintaining development efforts is a better strategy for the company There is need for H&M to create more effort on producing cheaper clothes with fashion design to reach out to their specialized customers. In conclusion, it is observable that H&M has a strategic management that is very competitive to enable it remain as the world largest fashion industry. The company needs to realize that due to development of internet and globalization, it is important to engage in knowledge development on its strategic management and how some strategic management theories need to be applied. The company also needs to reconsider its strategic plan to ensure that both long and short term objective are implementation for the future of the organization. References Gamble, J. E, &Thompson, A, 2011, “Essentials of Strategic Management”, New York: McGraw-Hill. Henry, A, 2011, “Understanding Strategic Management”, London: Oxford University Press Horngren, C. T., & Harrison, W. T. (2009). Accounting (7th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. Hunger, D and Wheelen, T. 2006. Concepts in Strategic Management and Business Policy. New Jersey: Pearson Education, Inc. Johnson, G, Scholes, K, and Wittington, R, 2011, ‘Fundamentals of Strategy”, New York: Prentice Hall. Lowson, R, 2002, Strategic Operations Management: The New Competitive Advantage. New York: Rout ledge. Parkkali, P and Sallinen, R. 2010. Strategic analysis of H&M. Savonia: Materials of Savonia University of applied sciences. Read More