Financial Highlights of H&M and Zara - Assignment Example

INDUSTRY ANALYSIS Introduction In the modern business environment, companies achieve competitive advantage against the world’s best rivals because of pressure and challenge. They employ strategies that differ from each other and at the same time these companies benefit from having strong rivals, aggressive suppliers and ever-demanding customers (Porter, 1990). In the age of innovations, they use technologies and new ways of doing things in its broadest sense, perceiving the new basis for competing and searching for better means for competing in old ways. Innovation here is manifested companies it the new product design, new processes of production and marketing approaches. Competitive advantage is also taken for improving organizational performance and then it enables the company to return in asset and increase sales. Researchers argue that competitive advantage is able to predict the variance in the performance of a business and then explain the organizational consequences (Ismail, Rose, Uli & Abdullah, 2011). It is moreover the representation of a major determinant of corporate success or failure, if an organization is not capable to analyze its competitors’ strengths, weaknesses and strategies. This inability leads to the suboptimal performance in business (Sohel, Rahman & Uddin, 2014). For that purpose, analyzing the competitors is the critical need for the company’s strategy formulation and implementation of its competitive advantage. In the recent decades there appeared new techniques that help to formulate and implement strategy. Some of the popular is the Five Forces of Porter. In the following report, such analysis will be imposed to the well-known brands, companies with the world name, a Swedish multinational retail-clothing company H&M (Hennes & Mauritz) and Spanish clothing and accessories retailer Zara. The report will analyze and contrast the competitive strategy of these two companies and develop a competitive profile for each business. Financial highlights of H&M and Zara H&M is a Sweden-based company that operates in forty countries of the world and is known for such brands as H&M, COS, Weekday, Monki, Cheap Monday and Other Stories. The company sells products online through catalogue in Austria, Denmark, Germany, Norway, Finland and the UK. The recent launched store in U.S. (in 2013), the company has expanded its online operations to Australia (Business profile, 2015). According to H&M Group income statement, consolidated statement of comprehensive income (H&M Annual report, 2013), the company’s profit for 2012 was estimated in $ 16,867 m, while in 2013 it was calculated in $17,152 m. For the six month period in 2014 H&M has earned more than eight million dollars. The numbers of total comprehensive income show the increase in earnings of the company for 2013 and potentially will be higher in 2014. There is a considerable dept of the company, which liabilities in 2012 were calculated in $60,173 m, while for the six month period in 2014 they estimate $58,827 m. Liabilities have short terms , hence, the fair values of these financial instruments are considered as approximately equal to their book values (Six month report, 2014). Zara has its original stores are in Spain, however, the brand is now known in Europe, Americas, the Middle East and Asia. It operates in more than hundred countries and added its presentation in 2013 in Russia. According to Forbes (Loeb, 2013), the Inditex, the owner of Zara brand reported sales of € 15.9 Billion. Zara took 66% of total sales estimated in €10.5 Billion. The Annual report (2013) and Result Presentation (2014) displayed the main financial characteristics of the company. Thus, in comparison with 2012, the net sales came to $16,724 from 15,946. The stores sales have increased to 0,5%, 0.7%, 0.8% in European countries, Asia and Americas respectively. The Inditex Group, owner of Zara brand, has created 8,741 new jobs and its headcount went from 128,313 to 137,054. Morris (2014) reported about the top fashion retailers H&M and Zara have increased their sales which evidences about the benefits form a recovery in consumer spending in the main markets of Europe. Thus, the sales of Inditex rose 11% accelerating from 8% at the beginning of the year. H&M sales were rising in May and boosted 3-4% points by calendar effects. Zara is still growing and such can be shown in the results of the previous year where the company has increased its sales 8% (Indvik, 2015). The success of the company is dictated by the aggressive tactics of expansion similar to H&M’s, however, the focus is not paid on growing profit but on establishing new locations and areas for Zara’s stores. While the company is keeping on investing in the e-commerce platform, that can predict the increasing popularity of the brand by means of modern technologies. H&M is growing due to its strong earning that come back on the massive expansion from its 379 stores in U.S. and China (Fashion giant H&M to grow as profits soar, 2015). Despite being the second after Zara clothes retailer, H&M wins in terms of its online markets, which are helping and the strong collections which are the main reason for H&M success. Partnership with such designers as Versace and Karl Lagerfeld create a positive image for the company (Soderpalm, 2015). Competitive strategy of H&M and Zara Montgomery and Porter (1991), consider that the foundation of strategy formulation is closely coping with the competition. While in the fight for market share, competition is manifested by the main players and is also connected with the underlying economic, competitive forces that exist beyond the established sets of a certain industry. These forces are the customers, suppliers, potential entrants, which are less or more depending on the industry. Thus Porter defined the main forces that govern the competition in an industry, which are the threat of new entrants, bargaining power of suppliers, bargaining power of customers and threat of substitutes of products or services. Understanding of these forces assist an organization to animate positioning of the company, clarifies the areas for strategic change, highlights places where certain industry will have greater influence, opportunities and less threats. Applied to H&M and Zara performance, Porters five forces will enable the companies to see their main competitors, what buyers need in the rapid changeable business environment and what is the power of suppliers. Thus, in terms of competition in the industry, H&M faces certain challenges from the companies with the similar services and products that are able to offer the modern customer similar products, be it cheaper or more expensive units that are represented as by huge corporations as Zara as small retailers. Besides, due to the recession, there is observed a slow growth and a decrease of the demand in the apparel industry, which intensifies competition between such companies as Zara and H&M. According to Reuters (2013), Spain’s Mango takes on retail fashion rivals, the stores of which are recognizable by celebrities and it has pushed out to more markets that H&M. With the new strategy that Mango has, it creates a serious player in the retail industry. Cheap labor used in producing the products of Mango remains the central strategy for the company. H&M should consider it as well. Besides, H&M’s main competitor Inditex is still building its stores in Asia thus leaving H&M rushing to “catch up” with planned store openings (Stock, 2013). For Zara, the force of rivalry cannot be applied fully, as there are not so many fast fashion shops like Zara and such uniqueness allows the company to make profit from the public without spending much on advertisement. Besides, the company is focused on the high quality and cheap prices of its products; therefore, it can beat some of its main rivals such as GAP and United Colors of Benetton. The other Porter’s force, the threat of new entrants is also high for H&M. There is no need to invest large sums of money if an individual wants to start a retail business. Thus, such easy openness creates disadvantages for the company. However, while excellent quality is a central topic for H&M brand and there is a fashion for a low price, the company should not be afraid of being replaced. Besides, being a world-known brand, the company can allow itself enter new markets, according to Hansegard and Rolander (2014). It is targeting Australia and India in order to widen the range of its products and increase the influence of the brand worldwide. Zara is also a world-known brand, which organization is created with the professionals that are able to deliver good products in the shortest time. For the company that wants to enter the market, such Zara’s position would create obstacles in developing a new business. While power of suppliers is high for H&M as the company buys its products from about eight hundred independent suppliers, its cooperation is both a close and a long- term relationship. For Zara, such force is also high, as the company cooperates with more than a thousand of suppliers globally. However, according to the competitive theory (Hunt & Morgan, 1995), a company can improve its bargaining position by increasing the number of suppliers. Zara succeeded in this area. The power of buyers for the company depends on the needs and preferences of customers of this or other brand. As new companies and firms in the retail industry are opening every year, there is a great concern of the company about the buyers to be easy switched from H&M brand to another. According to official website of H&M, the company is a customer-focused company and it understands and meets buyers’ needs and puts them at the core of everything it does (Engaging with our stakeholder, n.d.). The strategy directed on customers is in the customer service available within an organization, market research and consumer media to keep abreast with the most recent trends of customers. H&M s own designers create broad range of products to offer inspiring fashion for everyone (Mohsin & Munawar, 2010). The power for substitutes does not mean that there is a certain substitute of apparel; however, there may be a substitute to retail as there is a great quantity of suppliers. Different external market conditions such as economic fluctuations create certain risk for Zara and its power of buyers. Being centered in Spain, this country is now one of the most affected by the recession, hence, business of Zara risks to come under the influence of such economic conditions. The Telegraph (2011) reported about the company to rise for the first quarter to €2.96 billion. Due to unique strategy of distributing its clothes, which will not be found similar within one office, fast response to city trends and a brilliant brand name, the company is able to create its own culture of buyers. Competitive profile for H&M and Zara H&M started its existence in the far 1947 with one shore opened in Sweden. Today the company estimates three thousand stores worldwide (The H&M way, n.d.). While the company’s journey continues, it opens new markets, established new concepts and approaches. The current competitive strategy, according to Forbes (Dishman, 2013) is the implementation of sustainable initiatives, by which the company wants to reduce the environmental footprint. The company is entering the new market- India. Despite being the second after Zara company, H&M provides it is granted the approval of Indian FDI Promotion Board in order to invest $131 million for its fifty locations. H&M continuing to push global expansion efforts and is now focusing on the inward by integrating operations and improving the sales channels. Unlike Zara’s short supply chain, H&M already keeps the close tabs to the new suppliers and partners. The strategy of going to India means that the company will capitalize on the proximity to more than a hundred supplier factories, creating an advantage to adapt for the local demands. Zara’s Indian Inditex Trent is also making profit in two out of three years (Malviya & Bailay, 2013). Despite many considerations about the mysterious leaders of Zara, the company still remains the leader in the retail industry. Hansen (2012), reports that Zara is surrounded by modesty with compact cars, clean taxis and the desire to implement the new austerity plans. The company’s owner is the pioneer among the fast fashion companies that are also claimed to imitate the latest fashions and the speed their cheaper versions into their stores. In terms of improvement, there is one essential gap, which people who know much about the fashion clothes, speak out. This gap is the copies of other designers, which is usually denied by the company. However, according to the New York Time (2012), the company was taken to court with such issue. Despite the fact that the company is fast in dealing with such cases, the gap still remains. H&M also delivers shipments of new items that are imitated from the famous fashion designers. However, Inditex and Zara do not usually discover they do imitate other companies. H&M attracted a great interest around the world with its expansion in 2011. It grew by 15% in new stores and in 2011 it opened more than two hundred of new stores. However, the company should maintain a long-term perspective and despite the high sourcing costs, it should abide the strategy of further strengthening and offer the customers the best products and sustain its market position in relation to the competitors. The company takes market share and customer survey that it carries in the markets where it operates. The company leaves a great potential to the expansion of Asia (Managing Director Karl-Johan Person’s presentation at the AGM, 2012). The question of vulnerability of Zara refers to the other manufacturers, as fashion is very opinion-based industry, there can be a lot of claims about how Zara copies other designers. While the company is not considering the significant expansion to the U.S., the question of copying arises from time to time. However, the market demands of U.S. can become a challenge for Zara and its activities. Moreover, the company should weight all the benefits of shifting production to Asia and take all the factors of transportation and labor costs into consideration. The most vulnerable position of H&M is that it is often compared to the major rival- Inditex. The similarity is considered when Zara owner is opening one store a day, while H&M is launching hundred stores in a year (Mark Ritson on branding: Inditex shows H&Ms vulnerable side, 2006). In the business environment, low margins and anti-trust laws or involved scale can provoke strong retaliation. The aim of retaliation is to force the company to look beyond its strategies and toward those of the competitors in order to become achievement oriented (Hooley, Piercy & Nicoulaud, 2008). In case of H&M and Zara, entering the new market is the move of retaliation because that will let the companies to differentiate their strategic approaches and find another way of delivering products. While Zara is the company that is ready to the ever changeable conditions, it is more likely that this company will use its full potential in the new markets. H&M at the same time will also make its best to earn another point in the competition with Zara. It has started the expansion in Asia. As the global strategies remain in place, companies should be able to handle the imminent threats of the economic crisis. For that purpose, in terms of markets, companies should realize that finance, corporate assets, consumer goods and services as well as natural resources are the main trends that come under the influence of different economic conditions (Meyer, 2009). In the short term, there is a reason to retain cash flow to increase flexibility, in the long-term businesses should look for the opportunities to reserve cash with liquidity constraints. As to the corporate assets, companies should avoid the high leverage to reduce the risk of bankruptcy and implement strategies to inhibit organizational inertia before the crisis. In terms of consumer goods, it is good for the business to position the company in segments with growth potential in the long term. References 2014 Results Presentation, Official website for Inditex, [online] Available at: http://www.inditex.com/documents/10279/144955/INDITEX_Resultados14_Eng.pdf/a83094ff-ca26-496d-be1c-c4e4d461a4d6 [Accessed on May 4, 2015]. 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