Coursework Strategic Management

Table of Contents Executive summary: Hennes & Mauritz was established in Sweden in 1947 by Erling Persson. Today, the company operates in 38 countries and employs 87 000 workers all around the world. In 2007, H&M opened its first store in Shanghai, China and grew rapidly in Chinese market. The scope of the case study is to analyze the episode of international expansion to China of H&M. The case study begins with the rationales expansion to China of H&M. By pointing out the motives of marketing seeking as well as increasing global efficiency, the case study concludes that H&M expansion to China is reasonable. This case study also analyzes the effectiveness of H&M internationalization strategy in addressing global efficiencies and local differences. In the case of H&M expansion to China, the global strategy was adopted and be effective in addressing global efficiencies whereas local and regional differences acted ineffective. After its expansion to China, H&M needed to deal with a few organizational issues that arose. According to 7S model and CAGE framework, cultural distance geographic has great impact to the firm’s performance. However H&M addressed effectively in order to sustain in global market. Finally, the case study shows how H&M development of core competences was affected by its internationalization strategy. H&M expand in new market but they still maintain old core competencies. However, they need to change flexible strategy to fit with changing business environment. 2. Case study 2.1 Episode of international expansion of H&M: From the year 1964, H&M began the first expansion to Norway in Europe and after that it continued increasing competition in European market for the next 30 years, typically in UK, Switzerland, France, Denmark and Germany. However in recent years, H&M was not satisfied to stay in European market then they decided to expand the market to US in 2000. Next, by the time 2004, the company entered Canadian market and following Asian market in 2007. Comparing with the internationalization of Europe, H&M achieved higher speed of expansion and became more successful in Asian market. In 2007, H&M opened its first store in Shanghai, China and grew rapidly in Chinese market. China has been considered as a very potential market as it had vast opportunities in terms of political and economic. Chinese government has provided many favorable policies to attract foreign investment. After China participated to WTO in 2001, export of commodities to China was easier and flexible. This change provided consumer variety of goods to vary their choice hence increased the living standard of Chinese. Nowadays, China experienced a stable political environment as the government always attracts and welcomes important foreign investment. Investors were provided legitimate export rights to protect their market expansion. Chinese government charged low tax on multinational enterprise as well as offer various preferential tax policies to encourage foreign investment. For instance, the income tax on foreign companies was charged at 33% however if those enterprises operating their business in a special economic zone, the tax reduced to 15% (China.com, 2004). Therefore, H&M recognized that it was a good opportunity to enter Chinese market in order to maximize their profit. Moreover, since China reformed its economic policy in 1979 it achieved high level of economic growth. From 1979 to 2007, China experienced a stable increasing GDP with average rate of 9% per year (Trading Economics, 2007). Besides, the average annual growth of export was 18.1 % from 1979 to 2007. Nowadays, China was ranked as the fourth largest trading country, after the United States, Japan and Germany. The contribution of huge inflow from foreign investment which is consisted of over half value of trading activities made trade boom in China (Wayne, 2007). Therefore, countries with higher level of growth rate could bring greater economies of scale to boost benefits (Culem, 1988). As a successful enterprise, H&M business concept is to offer up-to-date fashion at the affordable price (H&M, 2007). In order to achieve this objective, the company processed its business through few middlemen and buying in high volumes. Moreover, H&M had a broad and deeply knowledge in designing fashion and being cautious at every single stage to buy the right goods from right marketplace. When H&M had cost advantage, it could have an efficient distribution. Besides, H&M target of growth is to develop the number of stores at the annual rate of 10 to 15 percent with an increasing profit. H&M’s international expansion was based on investing directly in foreign market in order to manage tightly on each single store. According to Hill (2007), the internationalization process which was called “wholly owned subsidiary”, helped enterprise lessen risks of control. 2.2 The rationales for international expansion: According to Bartlett & Beamish (2011), there are two traditional motivations for international expansion regarding market seeking and resource seeking. When a firm seeks for market, it expand abroad in order to compete with new rivals to fill capacity and develop economies of scale. For resource seeking, firms go overseas to exploit factor cost of inputs in labour and capital which is not available at home country. In this case, the rationales for H&M international expansion to China is market seeking. This motive concentrated on demand aspect because H&M conduct investment in Chinese market to find new players in order to secure suppliers. With a huge population of 1.3 billion and experienced fast economic growth, China was a potential market as it offered largest amount of clothing and textiles for consumer market. China has a high demographic dimension with its growing clothing consumption per capita every year provides lucrative opportunities for H&M. Besides, China was in the process change towards urbanization and industrialization and moving to become a market-based economy. This transitional episode induced large number of citizens living in rural areas moved to urban side. On the other hand, the demand for clothing consumption has increasing from both high-end and low-end market. The lifestyles of Chinese followed tremendous changes with the demand for fashionable dressing and quality garment made of pure cotton and natural fabrics. Innovative trend and low-priced fashion was becoming more popular in Chinese consumer’s market (International Trade Center, 2011). H&M can attract buyer with diversified choice of style and shorter product life cycles. Therefore H&M conducted investments on Chinese market to promote efficiency in order to generate scale economies and secure profit sanctuaries. 2.3 The effectiveness of H&M’s internationalization strategy in addressing global efficiencies and local and regional differences When multinational enterprises conduct business overseas, it was influenced by two conflicting environmental forces regarding pressure for cost reduction and local responsiveness (Bartlett & Beamish, 1998). The pressure for cost reduction forces foreign firms to cut cost as much as possible in every single activity. The pressure for local responsiveness forces firms to act in response to country-specific market situation. It is possible for enterprises address both conflicting environmental forces at once, yet each firm faces different issue to respond otherwise. For instance, in electronic industry, products are standardized to sell in different market. On the other hand, financial or insurance industry has to be differentiated to adapt country-specific condition. Furthermore, the level of competition varies from country to country so it makes the pressure for cost reduction dissimilar in different industries. As a result, firms adopt different strategic configurations to build up business. Those strategies are multinational, global, international and transnational. Global strategy focuses on efficiency through centralized global-scale operations. In this strategy, the number of subsidiaries and division are greatly mutually dependent in both operations and strategy. Global strategy concentrates on producing standardized goods to achieve efficiency through global expansion. While multi-domestic strategy respond to each country without consideration of what is taking place in other market place, in global strategy competitive activities integrated across countries. In Bartlett & Beamish theory, global strategy has diverse characteristics: centralized global scale operations, implementation of parent firm strategies, low pressure for local responsiveness and high pressure for cost reduction. In the case of H&M expansion to China, the global strategy was adopted and be effective in addressing global efficiencies whereas local and regional differences acted ineffective. Figure 1: International Business Strategy Model Back to H&M strategic configurations, the concept of company is to offer quality and fashion at the best price and develop the number of stores by 10 to 15 percent every year (H&M, 2011). Their global strategy for each single operation is to expand brand identity while increasing sales and profitability. They always focus on each individual outlet. H&M is a large company but it does not own any factory. The firm depends on strong relationship with suppliers. The method of production for H&M relies on customer driven so they provide wide range of fashion to satisfy the demand. H&M puts great efforts on researching and predicting the emerging trend. They adopt both traditional method as well as innovative method such as observing fashion street trends. This process is organized by central staff and national organization that has responsibility of detecting new trends (Ding Huiru, 2011). The mutually function between internal department and suppliers in order to ensure that the company are interrelated with right suppliers, the products have meet quality at the best price. Therefore, H&M can minimize the lead time through dealing with external supplier for checking and testing sample garments. Those activities not only enhance cost efficiency but also minimize the risk carried on throughout the year. As the developing of buying process, H&M lessened the average lead time of product life cycle by 15 to 20 percent in recent years. The company exploited the flexibility of buying productions and short lead time to reduce wrong buying decision. As a result, they can cut cost through bargaining power with supplier in order gain economies of scale. In addition, H&M offers two major collection designs per year in spring and autumn. For each season, the sub-collection is also introduced. Therefore, customers are provided variety of choice to satisfy preference. The aim of H&M is to find most advantageous occasion to generate more sales as well as increasing global availability and recognition. For the logistics and distribution, H&M in China acted as importer and wholesaler as well as a retailer. The firm manages every activity in value chain. The innovative technology development in China supported greatly for H&M logistics. They concentrated on reducing cost in every stage of operations in order to provide customer high value products with best price. At first, they have a simple supply chain management called “Just in time” system. It is important for H&M to purchase goods at the right time. Meanwhile, H&M acted different than domestic players in order to gain competitive advantage. In order to attract customers and boost the market share, H&M offered special limited fashion collection from well-known artist and designer. This strategy can increase the competitive leverage and counter-attack competitions (Mintzberg et al, 2003). 2.4 Organizational issues arose during the internationalisation and how were they addressed: Figure 2: McKinsey 7S model In order to analyse the effectiveness of business operational and to determine whether firms have achieved their vision and mission, the 7S frame helps company acquire appropriate strategy to improve performance. Tom Peters and Robert Waterman (1982) developed seven internal aspects aligning the 7S model. McKinsey 7S framework involves seven mutually dependent factors regarding “hard” and “soft” elements. Those hard elements are strategy, structure, systems and soft elements consist of style, skills, staff and shared values. The hard elements are easier for management to influence directly while soft elements on the other hand can be hard to measure because it had great impact from cultural distance. However, both elements are essential for the success of every organization during internationalisation process. This model is useful for H&M to examine organizational issues arose during expansion. As a successful enterprise, H&M business concept is to offer fashion at the affordable price (H&M, 2007). In order to achieve this objective, the company processed its business through few middlemen and buying in high volumes. Moreover, H&M had a broad and deeply knowledge in designing fashion and being cautious at every single stage to buy the right goods from right marketplace. However, as a global brand with centralized structure, H&M offered products which are not customized to individual market. As a result, competitors who have ability target specific customers group will differentiate their product better than H&M. If H&M can not satisfy the needs of customers in different part of Chinese market, they will fall the market share to rivalries that are performing better to meet customer demand. Moreover, H&M adopt global strategy to reduce cost of production. They always maintain low production expenditure in order to achieve scale efficiency. H&M have to place order with high quantity of items to deal at the best price. Therefore, this action creates an issue that H&M will have much inventory at each single store. This redundant inventory leads to cost waste so that the way of purchasing goods with supplier conflicts with firm’s strategy which requires short cycle time and low level of inventory. Moreover, H&M’s expansion strategy is to maintain close relationship with suppliers so they often stick with same supplier overtime or place huge amount of order with one supplier. Therefore it makes it more difficult to control the lead time and ineffective in responding to new market trend. It is better to place order with various suppliers to have diversified product rather than order with only few suppliers. It can cause the overload in production so that the outcomes are negative (Nawaz & Saleem, 2010). Furthermore, outsourcing strategy causes lack of direct control in the process of manufacturing. It made quality of products become vulnerable (Market Line, 2012). The organizational issues arose during international expansion of H&M to China cause by the distance in culture, administrative, geographic and economic dimension (Ghemawat, 2005). The culture distance between two nations affect strongly to the firm’s performance. Cultural dimension determine the way how people interact and conduct business relationship with another and with enterprises. Different in social, norms and language create barriers for H&M to run operation in Chinese market.. If other things are equal, trading activities between two nations that share a common language results better than two countries with different language. In this case, culture from H&M in parent company different from culture in China has greatly influenced to the organization. Chinese language was considered difficult for foreigners to learn. In parent country of H&M, the numbers of staffs who have ability to communicate in Chinese language are limited so it is a big challenge for H&M to operate in Chinese market. Moreover, the culture in Chinese depends on the norm of “Guanxi”. Domestic enterprises run their business through personal connection. It has a strong impact on shaping the beliefs of Chinese people. In order to develop operations, people in China have to maintain harmonious connection with people around them. Therefore it creates barriers to foreigners who concentrate on transactions rather than sustainable relationships. Besides, geographic distance has to be considered in terms of physical size of the country, transportation and infrastructure. Geographic distance affects the cost of transportation. Therefore companies that recognize the barriers need to move operations closer to target market because geographic distance may have a dampening effect on investment flow of H&M. In order to address those issues, H&M had suitable approach to put the vision and mission into practice. The firm added sustainable value to products to strengthen customer’s demand. H&M had developed “Conscious Action” to integrate sustainability in every step they do (H&M Conscious Actions Sustainability Report, 2011). Conscious approach is the way for H&M to work for a stable fashion. It is a method to manage operations based on vision and vision with an approach of economic, social and sustain. They broke the strategies into seven long term commitments which provide fashion for conscious customers, choose and reward responsible partners, be ethical, be climate smart, reduce and reuse recycle, use natural resource responsibility and strengthen communities. Moreover, H&M learned from their mistakes to improve performance. H&M stated that whenever difficulties occurred, as long as they can learn from them. They acquire market knowledge via research and communication with people in Chinese market. Staffing of H&M was trained to develop skills and working process. When it entered to China, the employees were supported from staff in Chinese market. Moreover before new stores are established, H&M focus on analyzing demographic, purchasing behavior of customers, competitors and traffic flow in host market. 2.5 Implication of internationalization on the developing core competencies: According to Prahalad & Hamel (1990) stated that one of the most powerful sources of competitive advantage is core competencies. They defined core competencies as bundles of skills and technologies that enable a company to provide a particular benefit to. These core competencies need to fulfill three key criteria regarding providing unique differentiation, transcending businesses and difficult for competitors to imitate. H&M core competencies which are to create fashion and quality at the best price are one of H&M competitive advantage. H&M accomplish the goal by working with more than 100 designers to innovate the latest fashion. Moreover the firm has more than 100 buyers who have responsibility for structuring the range planning. In addition, H&M has local operation office that is handling the task in contact with local supplier in order to buy at the right time and ensure the item is delivered at right time. By using independent suppliers, H&M can focus on manufacturing activities that produce most valuable items. H&M expand in new market but they still maintain old core competencies. However, the company should adopt the practice of its competitor like Zara in creating and developing trends. Moreover, they should pay attention to the price fluctuation in order not let them too high for their target customers. Besides, H&M should concentrate on their growth strategy to be ready to change in a flexibility way. H&M has lack of own supply chain so they should develop the own supply chain management in order to make the process of production become faster and active to generate more profit. 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