The H&M Business Model - Report Example

Introduction The five forces model of environmental threats is also known as Porter’s five forces model. The model s that in any industry there are five factors that can influence an industry. The following are the five environmental forces: Supplier power: Supplier power denotes the ability of suppliers to drive up the cost of production by asking for a high price. Buyer Power: The power of buyers basically reflects the elasticity of demand for a firm’s products; if the elasticity is high consumers can negotiate on prices by lowering demand. A large number of buyers mean that power of buyer is low. Competitive rivalry: Competitive rivalry basically refers to product differences, industry growth, industry concentration etc Threat of substitution: The threat of substitutes refers to the substitutes of a firm’s product. If these substitutes are good, revenues can go down for a firm’s product. Barriers to entry: Barriers to entry can range from government regulations to fixed capital expenditure, for entering an industry. High barriers to entry can reduce threats of competition thus substitution. Generic Business Strategies: According to Porter a firm can adopt four generic business strategies to gain a competitive advantage in an industry. The adoption of any strategy from among these four basic strategies depends on whether; scope of business’s activities is narrow versus broad and also on degree of product differentiation. The following are the four strategies with definition: Differentiation: This involves asking for a premium price for your product. In a differentiation strategy a firm usually selects one or more criteria used by buyers in the market and then uniquely positions the business to meet those criteria e.g. Mercedes, Apple etc. Cost Leadership: This strategy is usually used in industries in the maturity stage of the product life cycle. The main focus is to reduce cost of manufacturing a unit. This strategy is used by industries which produce standardized products, where large capital investments can achieve economies of scale e.g. Nissan, Dell etc. Differentiation Focus: In a differentiation focus strategy a business differentiates in just a few target market or segments. The competitors maybe fulfilling broader needs of the market and a niche may exist; which is crucial for differentiation focus e.g. Carrier. Cost Focus: The business in this strategy targets a small section of the market with lower prices. The section of business might be a very small section with a small customer base. Generic Value Chain: To understand activities that enable a firm to develop competitive advantage and create shareholder value, it is useful to separate the business unit into a series of activities referred to as the generic value chain by Porter. Following are the five ingredients of the value chain in order: Inbound logistics: Purchasing and warehousing of raw material and supply it into the manufacturing process. Operations: Transferring inputs such as raw material and labor into out puts of finish goods or services. Outbound Logistics: Warehousing finished goods and distributing them. Marketing and sales: Identifying customer needs and generating sales. Service: Customer support service after the delivery of products. Hennes & Mauritz (H&M) H&M mainly targets the stylish and trendy. The business creates low cost but stylish clothing, primarily for men and women in the age range of eighteen to forty five, childrens clothing, and its own brands of cosmetics. H&M is growing very fast and currently operates about eighteen hundred stores in about thirty five countries. It has direct sales operations in only some selected areas. Most of H&M’s clothing is made in Asia (60%); the rest is manufactured mainly in EU. If we analyze the environmental threats to H&M we can see that power of buyers is very low. This is actually one of H&M strategies. They have effectively diversified their market by opening outlets in many countries. This reduces their emphasis on a single market and increases their customer base. A large customer base reduces the power of buyers. H&M has used the same strategy to reduce the power of suppliers. They do almost 60% of their procurement from Asian countries. As the number of supplier increases their power comes down. The clothing industry has a large number of suppliers so this is not a threat for H&M. Industry rivalry is very high and in a mature market big players have to fight for market share. As market growth is small, the only way to increase market share is to acquire share of another firm. A major competitor for H&M is Zara. Threat of substitution for H&M is very high; this is because there are a lot of different manufacturers. With better designs and lower cost they can easily entice customers. The barriers to entry for this industry are low. This is because of reduced capital expenditure as a result of outsourcing strategies being adopted by new brands. H&M is operating in a saturating market which has reached maturity. In such a market a firm can adopt two strategies. Either it can differentiate its products, charge premium and increase profit margin. This results in an increase in price. An increase price usually means fewer sales. The other strategy is to lower the cost of production and charge a lower price. They are currently using the strategy of cost leadership. This can also be understood by their outsourcing strategy which is aimed at lowering production costs. The value chain of H&M is designed to support their aim of a low cost and high quality. Design and development of new products by H&M is in-house and centralized. The first two processes in the value chain are outsourced. Outbound logistics are controlled by H&M which uses its own warehouses and stores to distribute its goods. The marketing department is mostly controlled by the head office, which estimates sales from each outlet and controls marketing budget. After sales services are provided at the outlets, customers can return faulty goods to the stores. Conclusion H&M has successfully used its business model and value to chain to achieve success. The company realizes that threat for substitutes is high, along with industry rivalry. That is why they have kept their focus on cost leadership. The outsourcing aspect of their value chain is the key to their effective cost leadership, as it helps in lower costs. References H&M Hennes & Mauritz AB Overview. Hoveers (http://www.hoovers.com/company/HM_Hennes__Mauritz_AB/rffxfri-1.html) H&M Hennes & Mauritz AB Fact sheet. Hoveers (http://www.hoovers.com/h&m/--ID__100801--/freeuk-co-factsheet.xhtml) Porter, M.E. (1979) "How competitive forces shape strategy", Harvard business Review, March/April 1979 Martin, J. (1995). The Great Transition: Using the Seven Disciplines of Enterprise Engineering. New York: AMACOM. (1993-12-20). The Horizontal Corporation". Business Week.  Strategic Management. Quick MBA. (http://www.quickmba.com/strategy/generic.shtml) Business Concept Goals and Strategies H&M. Monster (http://company.monster.com/hennes/) H&M Hennes & Mauritz AB. Sourcewatch. (http://www.sourcewatch.org/index.php?title=H%26M_Hennes_%26_Mauritz_AB) Competitive Strategies. Tutor2U. (http://tutor2u.net/business/strategy/competitive_advantage.htm) Porter’s five forces: Assessing the balance of power in a business situation. Mind Tools (http://www.mindtools.com/pages/article/newTMC_08.htm) Read More