HM Analysis: Ansoff Matrix, Five Forces and PEST

HM Analysis: Ansoff Matrix, Five Forces and PEST H and M is a Swedish worldwide company which operates in the fashion sector. Its main competitors are INDITEX, GAR and Arcadian Group. The firm offer fashion cheap quality products on more than 2000 stores placed in 37 countries including Europe, Asia, North America and Middle East. It tries to adapt their products and their business model to the new market to facilitate the entry in a different cultural market country. The company has a strong corporate social responsibility concept and is involved in community and environmental projects; however it has been criticized due to several scandals. Despite of the economic crisis which causes a huge drop in the consumption and therefore in the fashion spending; HM thanks to its policy of low prices is still a quite strong company and has a good financial reputation as its results and ratios show us. The profitability of this company is due to the coast leader strategy that it has followed, focused on the outsourcing of the manufacturing process to countries with low labour costs, which allows HM to sell cheap products and obtain high profits. Also the blame for this business successful is the differentiation strategy that they have developed with the help of celebrities and famous designers lines. Introduction to the company HM (Hennes Mauritz) is an internationally famous company which operates in the fashion industry and besides it also markets cosmetics and accessories. It was founded in Sweden in 1947 by Erling Pearson. In order to know its market share, we must say that in 2009, sales including VAT reached SEK 118,697 millions; furthermore, the number of employees is around 76,000  [1]  . Geographical markets The company has around 2000 stores in 37 countries worldwide, specifically in the European, Asiatic, North American and Middle East market. Germany represents the biggest market with the 25% of HMs total shares, followed by United Kingdom and Sweden. As curiosity we can say that Glasgow has 7 HMs stores. Related to the importance that online selling has nowadays, this service is now available in Sweden, Norway, Denmark, Finland, Netherlands, Germany, Austria and UK.  [2]   Brands and products HM Group includes the brands COS, Monki, Weekday, Cheap Monday and HM home. The firm designs cheap yet chic clothing, offering this to the different segment markets (ladies, men and kids). Mission, values and goals HM describes its mission as Fashion and quality at the best price. In connection to the values, this company is driven by simplicity, continuous, improvement, team spirit, cost-consciousness and entrepreneurship. A sentence that can summarize HM values is the slogan We believe in people. Finally, HM goals are to intensify the sales in the existing stores, as well as, to increase the number of new stores by a net 10% to 15% per year. Expansion and maintaining of financial stability are HMs strategic goals. The growth, which is fully self-financed, will proceed with an emphasis on quality and continued high profitability.  [3]   Corporate Social Responsibility The company guarantees that its products are manufactured under good conditions. According to Karl-Johan Persson (CEO at HM) Being responsible is not only the right thing to do, it makes perfect business sense. (HM 2010) According to the HM 2009 Annual Report, HM acts in many markets as both a buyer and a seller. This requires HM to act responsibly and in a sustainable way with respect to the environment and social responsibility.  [4]   HM is very concerned with the supply chain working conditions, so because of that its very careful choosing the countries for the production and it also imposes a strict Code of Conduct  [5]  to its suppliers. Around sixty auditors works checking that this Code is being respected The company has environmental requirements on suppliers, as a clean production chain, green transport and sustainability policy and vision by sustainable use of resources and healthy products like the organic cotton. According to projects and cooperation, HM has developed community activities, like education and employment of woman and youth, water and innovation of sustainable textile materials. Also the company has collaborated such as UNICEF and WaterAid  [6]  . Furthermore, HM reports activities and progress on its sustainability programmes annually.  [7]   However, HM has starred in several scandals, for instance because they discarded bags of unwanted clothes outside HMS store in New York. These clothes could have been used by needy families in case not to have been intentionally damaged to avoid re-use. Besides, in March 2010, the company was criticized by pro-Palestinian groups for opening its first stores in Israel at the time when the UN Goldstone report highlighted Israels alleged violations of international law. C:Userspelegrià ±Pictureshm protesta palestina.jpg Furthermore, the German edition of the Financial Times newspaper has uncovered an alleged organic cotton fraud by European brands HM, CA, and Tchibo (Treehugger 2010) 2. External Environment To seek the main factors impacting on the industry attractiveness and on the environmental stability for HM Im going to use the study of competitors and the PEST analysis. 2.1 Competitors HMs main competitors in the most important markets are (Hoovers 2010): COMPANY COUNTRY BRANDS INDITEX Spain Zara, Oysho, Massimo Dutti, Pull Bear, Stradivarius, Zara Home and Uterqà ¼e GAP United States GAP, Banana Republic, Budgeteer Old Navy ARCADIA GROUP United Kingdom BHS, Dorothy Perkins, Miss Selfridge, Wallis, Topshop, Evans, Burton and Topman 2.2 Pest Analysis POLITICAL: HM is a Swedish brand so it has to follow the Swedish legislation, but also the laws of each country where it has establishments, for instance, in UK: The Consumer Protection from Unfair Trading Regulations 2008 which implement the Unfair Commercial Practices Directive in the UK. The Enterprise Act 2002 which has wide-ranging implications for businesses and consumers. The Electronic Commerce Regulations 2002 includes the information that the company must share with online customers and regulates advertising. Distance Selling Regulations 2000: these laws are aimed at businesses that sell goods or services to consumers by the internet, mail order, phone or fax. The Competition Act 1998 which forbid certain types of anti-competitive behaviour. Its also remarkable that in 2009 the Swedish corporate tax rate was reduced to 26.3 from its previous level of 28%. Trading agreements: most of the HM business is located in EU countries -such as Germany and the UK- without custom duties. ECONOMIC: Although the GDP dropped because of the crisis, it has increased by the 1.2% in the second quarter 2010.  [8]   Since March the 5th 2009, the official bank rate is placed in 0.5%  [9]  , because of that the investment cost is low. Consumer spending on clothing rose by just 10%  [10]  between 2004 and 2008, well below the 19.2% increase in overall consumer expenditure during this period. Even though 2009 has been characterized by deflation, the inflation rate is again positive (1.14 in September 2010)  [11]  . That is to say the demand is starting to rise. SOCIAL Due to the social and environmental conscience, HM has to adapt its policy and products to the new customer awareness. Fashion is more and more interesting for young people and that is the reason why this consumer group spends a high part of its incomes on clothes. Customers seem to prefer customized garments. These kinds of products are supplied generally by online sellers but can represent a competence. Fast changing fashion styles make the designers to be ready for a reply. HM is operating in Middle East and in Asia, therefore it should take into account the social and cultural differences (religion, language or roles of men and women in the society) TECHNOLOGICAL: Technology to make clothing: more updated machines are necessary to accomplish certain colours and patterns. The development of media technology and the internet will make HM popularity to rise. Online selling, available now in seven markets 3. HM financial performance To know HMs financial situation I am going to make an analysis of the most important financial variables and also to compare them with Zara and Primarks ones. Sales per year UK is HMs fourth largest market, contributing 6.4% of its turnover (Mintel 2010). 2005 2006 2007 2008 2009 SALES ( £) 400472 448583 527534 524531 565889 CHANGES IN SALES (%) 8,0986533 12,013574 17,600087 -0,569252 7,884758  [12]   In 2008, due to the financial crisis, UK suffered a huge drop in the GDP and in the consumption, for example the household clothing expenditure was 21,60  £ per week and in 2003 it was 27  £.  [13]  At the end of May 2010, sales rose by 15% due to the fact that 10 new stores opened. and at the end of May 2010, sales rose by 15% due to the fact that 10 new stores opened and at the end of May 2010, sales rose by 15% due to the fact that 10 new stores opened 14 In the previous graphic, we can see Primark has a bigger market share and besides it could profit of its low prices in the crisis, gaining ground to its competitors. Zaras turnover is lower than HM. Operating profit It has not followed any trend for the last five years, it has fluctuated depending on the year. 2005 2006 2007 2008 2009 PROFIT ( £) 44260 62013 53041 8767 10576 CHANGES IN PROFIT (%) -2,906658 40,1107094 -14,46793 -83,47128 20,634196  [15]   In the previous table, the most notable thing is the sharp decline that the operating profit had in 2008. The causes are the increase in selling and administrative costs. According to the 2008 Annual Report this is mainly due to an increased cost level relating to reinforcement of the organization in preparation for the long-term investment in store expansion, Internet and catalogue sales and new initiatives. 16 As we can see in this comparative chart, the three companies operating profit has followed a similar tendency with an important drop in 2008. We can also notice that Zaras operating profit in UK moves in negative numbers. Liquidity Analyzing the following table, we can conclude that HM has a healthy financial position, because in general to have a current ratio higher than 1,5 is a good sign, even more if its a fashion retail company. 2005 2006 2007 2008 2009 CURRENT RATIO 1.76 1.77 1.4 2.4 1.83  [17]   The liquidity or acid test ratio shows how liquid the company is relative to short-term liabilities. Stock is excluded as it can take months to turn into cash. As its higher than 1, we can say that the liquid assets exceed the current liabilities. 2005 2006 2007 2008 2009 LIQUIDITY RATIO 0.97 0.96 0.88 1.77 1.22  [18]   It can be said that HM has sufficient money available to meet its short-term commitments. Thanks to the next graphic we can conclude that in liquidity terms Primark can have problems because its current ratio is always under 0,5. 19 Solvency 2005 2006 2007 2008 2009 GEARING RATIO 34.61 81.82 110.09 52.24 51.12  [20]   The gearing ratio measures the proportion of the companys total capital that is borrowed. The higher the gearing ratio is, the bigger the proportion of the companies money that is borrowed and therefore the bigger the risk. In 2007 the ratio obtained was worrying because the loan capital was higher than the capital employed. This was due to the heavy investment that HM was doing in its international expansion and in new initiatives. 21 The chart shows us that Primark has solvency problems so it could have problems if interest rates are going up. On the other hand, Zara is solvent. Investment In this paragraph I have used the ROCE (Return on capital employed) which measures whether or not a company is generating adequate profits in relation to the funds invested in it and is a key indicator of investment performance. 2005 2006 2007 2008 2009 ROCE 63.1 82.06 69.44 7.43 6.16  [22]   In retail lower figures would be experienced, ranging between 5% and 15% and in the last two years, is where HM is placed. We can see that this ratio had a sharp drop in 2008 but before this year this company was extremely profitable. 23 Primark is the best performance in this area and Zara has seriously problems above all caused by the negative numbers in its profits. 4. Competitive strategy 4.1 Porters five forces analysis In this paragraph, Im going to use Porters five forces analysis to determine the intensity of competition and profitability that can be expected in the fashion retail sector. C:Userspelegrià ±Picturesporters-five-forces-model.jpg  [24]   Threat of new entrants UK market is not saturated There are not barriers to entry in distribution due to the low capital required to open a new store. However, in manufacturing there are important barriers to entry due to the scales economies and to the high investment capital required. Fashion products have a high margin. Threat of substitute products For the fashion sector we must talk about replacing brands, not products. There are a lot of fashion retailers in the market which HM is present. Besides, the demand is very variable in this market because of the continuous changes in customers needs and requirements. Relation between quality and price is improving because of the outsourcing of manufacturing in countries with lower labour costs. Bargaining power of buyers One negative aspect is the almost nonexistent loyalty in the cheap fashion segment. Also the switching costs are low. Price is a very important variable for customers. Among the positive aspects its important to say that the volume of purchase is small, that is to say a single buyer is irrelevant for the company. Apart from customers association, they are not very well organized to defend their interests. Bargaining power of suppliers It is not very high because there are a lot of suppliers in countries with low labour costs. That is to say, retailers can impose the demanding conditions because they have more power than suppliers. Rivalry among existing firms in the fashion industry There are a lot of existing local, national and international competitors. The opportunities to growth are not very high because of the maturity of the sector. The price variable is very influential in consumers when considering alternatives. The quick changes in customers requirements do not permit to develop strong scale economies. In this market is very important the good image of the brand worldwide.  [25]   7.2 HM competitive strategies Cost leadership It is a strategy based on scale economies and in the outsourcing of the manufacturing process to countries with low labour costs. In this way the company can offer low prices  [26]  without losing quality and besides being profitable. Thanks to it, the company can self-finance to increase the number of stores and the sales. HM mission is offering quality at the best price. Differentiation strategy This strategy was implementing few years ago. Celebrities and famous designers have created exclusive collections for HM  [27]  . Thanks to these collaborations, the company achieves to differentiate in the fashion retail market. This phenomenon is called masstige  [28]  , and can be defined as an alliance between a prestigious brand and a mass consumer brand. Thanks to it, consumer can buy a branded product at an affordable price. Masstige is formed by two words mass market and prestige Customers perceive that HMs have an added value in comparison with other competitors and they are willing to pay a premium price for them. It the short run the company improves its turnover and in the long term it builds a stronger brand awareness and prestige that it could use to penetrate in difficult markets. 5. Strategic directions of development I am going to use Ansoffs matrix to analyze the main strategic directions followed by the company through the product and market: C:Userspelegrià ±PicturesAnsoff-Matrix.gif  [29]   Market penetration: This strategy is used to increase existing products sales in the current market. This can be achieved gaining competitors customers and encouraging them to acquire more companys products. HMs key for market penetration is offering fashionable clothing with cheaper prices than other competitors like Zara  [30]  . Doyle (2002) argues that the foundation of a successful brand is quality. The company is very concerned about that, therefore it has comprehensive quality control methods which guarantee customer satisfaction. Thanks to the strong advertising campaigns the company has increased its popularity worldwide helped by the globalization of fashion trends and lifestyles. Market development: Lynch (2003) says it involves targeting new segments of a market, identifying new uses for the companys products or entering new international markets. HM internationalization strategy is based on entering one market at a time. Although the standardization of HMs products, the company introduces slight variations to be adapted to the new market culture. According to the new market segments, the company has launched COS (Collection of Style) with more expensive and smarter clothes than the HMs common one. Product development It can be defined that offering really new and innovative products to the current customers. HM develop this strategy, for example, through strategic alliances with famous designers and fashion icons like Karl Lagerfeld, Madonna or Roberto Cavalli which improve HMs prestige worldwide. Furthermore, the company concerns about research and development, for instance, it introduced environmental friendly materials like organic cotton in its 2008 Spring Collection and then along its entire range of products. Also it is important to underline here that HM has created perfumes, cosmetics and beauty products. Besides as I have said in the introduction HM has a home line available on the internt. C:Userspelegrià ±Pictureskarl.bmp . Diversification: This strategy is the riskiest because it means to develop new products and entering new markets. HM has been focusing in fashion items like clothes, jeweler, shoes, bags or accessories so it has not developed very much this strategy. Only they have performed a diversification strategy, specifically household items through HM Home.  [31]   The company has also developed curious products such as the stuff pack for the computer game The Sims 2 called Fashion Stuff Pack in June 2007 in collaboration with Maxis game developers. 2 6. Methods of development In this section, I am going to analyse the methods of development used by HM in the recent years, and besides the benefits and challenges that each one involve. Lynch (2003) said that HM has followed a forward vertical integration strategy as method of growth. This means that the company develops activities oriented to customers, the final product and the distribution network (retailing) more than related with suppliers (backward integration). Thanks to this strategy, the company can collect information about sales and customers needs to reply quickly to changes in the fashion market. HM and Zara are known as fast-fashion retailers. This has permitted them to expand successfully in Europe, Asia and America. However, they have a different internationalization strategy, because HM tends to adapt its products and strategy o the new market while Zara reproduces the original successful business model in all the markets. Zara prices vary depending on the country while HM has the same price in all the markets in which it is present HM is a strong financially company which seeks to maintain a good profitability in its growth strategy. We can say that the growth is substantive but also controlled. The growth goals are to increase the number of stores by 10-15% per year, as well as increasing sales in existing stores. In the last five years, the company has had a great growth in number of stores, turnovers and earnings per share. Focusing on HMs geographical expansion, its first store abroad was opened in Norway in 1964. Then it continued with the expansion in UK, Denmark, Switzerland and Germany. In the 1990s, it opened stores in Finland, France, Belgium, Austria, Portugal, Spain and the Netherlands. The first store in US was opened in New York in March 2000. The first store in Asia was in Dubai in 2006, and thanks to a franchising strategy. After this, it entered to East Asia by opening stores in Hong Kong and Shangai  [32]  in 2007. Japan in 2008, Russia in 2009 and Corea in 2010 were the following countries to enter. The two first Israeli stores opened in 2010 and as I said in the introduction there were pro-Palestine group protests. It is planned to open new stores in Croatia and Singapore for 2011. HM main method of entry is an organic growth by opening is own stores in the new market. But we can see also that since 2006 the company has followed a franchising strategy in Middle East to open 3 stores in Dubai in agreement with M.H. Alshaya, a company from Kuwait specialized in holding franchises with international retail brands. In this paragraph I am going to use the SPACE matrix (Strategic Position Action Evaluation matrix) which is a management tool used to analyze a company and to determine what type of strategy it should undertake. Rowe et al. (1989) developed this model based on four important variables: The stability/ turbulence of the environment Industry attractiveness The competitive advantage The companys financial strength Throughout this report I have analyzed these variables, therefore it can be argued that HM is a strong financially company, as the sales, profits and financial ratios show. To determine the industry attractiveness it is useful the Porters five forces seen in the section 4. Following with the environmental stability we can use the PEST analysis done in the section 2 and for the competitive advantage it has to be taken into account the strategic directions and the methods of development. After having analyzed all these points and drawing the SPACE matrix, it can be concluded that HM should follow an aggressive strategy. HM has a strong competitive position in the market (a known brand worldwide) and a quite good financial position to support this strategy. It needs to use its internal strengths to develop a market penetration and a market development strategy. In fact it is the strategy that HM has been followed in the last years, as the expansion to Asia and Middle East show (market development strategy) and opening more and more stores in the existing markets such as Europe (market penetration). As recommendations, it can be suggested that the company entered South American market by performing a market development strategy. HM has not arrived yet to this market and it would be very interesting due to there are a lot of customers in this market interesting in buying fashion cheap clothes and the company could adapt quickly to the South American market culture, gaining ground to its competitors within a market full of opportunities to growth. On the other hand as a market penetration strategy it can be suggested to follow with the opening of new stores in the current market, increase the size of the existing stores and try to manage present products and services more effectively.