H&M Company's Unique Business Formula - Case Study Example

Corporate Ventures Name Professor Institution Course Date Corporate Ventures 3. Associated CV and mode of corporate venturing Over the years, large firms have tried to understand the importance of investing in the start-ups (Covin & Morgan 2007). The increasing interest has been fueled by ever changing business environment. Owing to the dynamic changes in both external and internal external environment of a firm, it has become continuously significant to adapt structurally and strategically. Da Gbadji and Gailly (2009, p.3) stated that in the process, corporate venturing has been found to a suitable strategy not only just for innovativeness but also for creating entrepreneurial spirit. Despite the increasing need to adopt corporate venturing to increase competitive advantage, selecting the type of corporate venturing mode has been a problem to most managers (Lantza, Sahut & Teulon 2011, p.371). However, H&M has shown its prowess in strategic issues by selecting one of the best modes of corporate venture which has steered it to massive growth. H&M uses enabling investments to increase its competitive advantage in the world fashion industry. Therefore, this assessment will focus on enabling investments as a mode of corporate venturing (VC). This firm normally creates investment majorly for the strategic purpose; however, the company does not link the venture strongly with its operations. Lerner (2013) argued that the hypothesis here hold that a flourishing investment or venture will make a firm’s own businesses and undertakings to gain but the tight operational connection between the firm and start is considered unnecessary in getting the benefit. Many people normally do not understand how this works and consider it not actually true. However, from H&M’s practice, this is done through the concept of complimentary. H&M use this concept because they believe successful marketing of one product makes customers wants another (Siegle 2013). H&M often capitalize on this concept by applying its venture capital investments so as to spur the growth of environment it operates in which contain customers, suppliers, and third-party developers which product products which raises demand for the offerings of the company. Hansegard and Burkitt (2011) contended that in the recent when corporate venture had started gaining momentum, H&M sensed that they could take developing start-ups manufacturing complimentary goods. Demand for products from the new ventures could create even demand from the H&M Company. So H&M invested heavily in several firms whose products including women wear, children’s wear, men’s wear and accessories could spur sale for its own clothing. Chesbroug (2002) claimed that while the competitors like Zara look to set up new standards using VC investments, in H&M’s situation, the mode of investments has largely been intended at growing profits by increasing sales within the current set up. H&M in its strategies has created collaboration with of the known fashion designers and celebrities who have cloth lines to increase its brand strength. For instance, in 2004, some of the H&M selected stores were offering what is referred to as an exclusive collection by the known fashion designer called Karl Lagerfeld (H&M 2016). A research about the collaboration revealed that presence of large crowd at the stores within towns and bigger attracted by the marketing made the clothing to be sold out just within one hour. In 2005, H&M launched clothing by fashion designer Stella McCartney which massively boosted the sale of its products (Carreon 2011). In 2006, H&M launched clothing by ultramodern Dutch fashion designers Rolf and Viktor (H&M 2016). In 2007, the company launched an enabling investment (collaboration) of a clothing designer by the star musician Madonna (H&M 2016). The pop star has several fans and by H&M complimenting their products with those of Madonna, they stood a chance of increasing brand awareness and sales. According to H&M (2016), the company also collaborated with Beyoncé to increase its growth. The star musician was used by H&M as the face of their products in summer of 2013. The campaign that started in May of 2013 had the title ‘Mrs. Carter in H&M’ and focused strongly on the personal style of Beyoncé. Despite of the success, the massive venture capital investments of H&M has faced some mockery. Critics claim that H&M adopts what they call “drive-by investing.” the argument has been that H&M cannot perhaps manage its individual operations or efficiently monitor several investments the company has created in the last 10 years (Lerner 2013). However, some experts argue that criticism has missed H&M’s investment strategy point. Chesbrough (2002) argued that the value of the strategy to H&M depends on the rising demand for the company’s product created by the enabling ventures rather than its capability to coordinate own operations with its partner company. However, some scholars contended that H&M does not require to strongly manage and control each investment since it just co-invest in collaboration with Venture capital company which manages and monitor the growth and their performance (Lerner, 2013). 4. How H&M develops and manages Enabling Investment Enabling investment is a strategy which has its strength and weaknesses. The strength is manifested when the company increases brand awareness and even sales and profits (Burgelman, & Valikangas 2005, p.28). However, weakness can be depicted when the company receives negative brand reception. All these depend on how the therefore, management, structure, process, logistics, products and services and unique business formula. Management As stated earlier, company management now seeks strategies which can help them increase their market presence, grow market share and increase their returns (Campbell, Birkinshaw, Morrison & Batenburg 2003). Several top managers of companies have embarked on corporate to realize such objectives. Management determines the right mode of corporate venture through analysis. Ivano and Xie (2010, p.131) posited that in H&M’s enabling investment; the company normally carries out the market research of the strong brands which can be companies, fashion designers and celebrities across the globe. In their research, the management of H&M looks at the customer base, number of fans of such celebrities in social media sites and their images across markets (Anokhin et al 2011, p.137). In conducting research, the company is just implementing their role of due diligence to reduce the risk of negative brand image, bad reputation and potential loss which might arise from enabling investment. Benson and Ziedonis (2010, p.483) claimed that the company which wants to create a corporate investment then creates a business plans which include terms and conditions, number of years of contracts, how to share benefits and how the relationship will be managed. The management then presents their business plan to the start up for review and the corporate capital investment can then ask the company about the product information. When the agreement is reached, the H&M normally supply the start-ups with their product to compliment with theirs. Dushnitsky and Lenox (2005, p.619) opined that initially, the company invites the start for launching their products to show some endorsement for the brand. Later, the start-up can display the larger company’s products during their marketing or activities. The arrangement is managed on benefit perspective. When the company increases its brand awareness and profits resulted by the association, H&M normally increase their contract for more years to continue with success. On the other hand, when no much positive effect has been witnessed on the company product, it will automatically not renew the agreement (Ernst, Witt & Brachtendorf 2005, p.235). Remember the agreement is made on a win-win situation. The company capitalizes strength of the venture while the venture investment also benefits financially or strategically. Gompers, Kovner and Lerner (2009, p.821) asserted that for successful relations, the managers provide good incentive which can motivate the start-ups to continue with positive association. A good management must clarify the goal of the organization to the start-up before the engagement is made. In this way, the venture will understand whether the goals have been achieved or not. Management often monitor progress, tries to improve the product features and marketing so as to market attraction (Hill & Birkinshaw 2008, p.425). The change in market environment and increase in competition prompts the managers to innovate increase chances of competition and survival in the market. This report has established that most companies adopting enabling investment do not go for ventures with related products or substitutes because it can create rivalry. Structure Structure in this context means how the enabling investment is consisted. MacMillan, Roberts, Livada and Wang (2008a) the structure therefore involves team people or team from the company and one from venture who manages the relationship. In H&M structure, their team representing them in enabling investment comprise of the CEO, few middle level managers and a lawyer. The CEO and middle level managers with the help of an expert draft the contract. The lawyer provides legal counsel to the company on various issues about the contract entailing failure to honor the contract and termination of the agreement (McMillan et al., 2008b). Just like the company, the venture also has their team, expert and legal officer who represent them on the negotiation table. In most cases, both H&M and venture have set up a joint monitoring team who manages enabling investment and report to the company about the progress in terms of performs and projected results (De Kalbermatten 2013). Process The process of adopting an enabling investment is a long and thorough one. Maine (2008, p.4561) claimed that since it a strategy which is aimed at improving the operation and performance of the business, decision have be made from both sides which is only achieve after analyzing the business environment, performance of the two companies and benefits. For H&M, a decision to take part in en enabling investment involves board of directors and middle level managers. These stakeholders can decide to set up a team to conduct a research on the venture and report back for final decision. When H&M decides to adopt an enabling investment with a certain company or prominent fashion designers, the process can take a long or a short time depending on the speed of decision making of the two (Lindsey 2008, p.1137). As stated earlier, once the H&M identifies their venture target, they contact the management about their intention. When the company receives a positive reception from the management of the venture, they present they plan formally to be reviewed. Hellstrom (2007) stated that H&M enabling investment business plan with the venture normally include the name of products, price and other related factors. After review, the venture communicates their thought particularly if they agree to the offer through a term sheet. The H&M and the venture then meet to negotiate compensation. The next process normally involves the legal counsel. Van Dyck and Aelbrecht (2011) pointed out that the lawyers from both divide then meet to finalize the agreement of term sheet where terms of the investment are stated. The document should give more information about the books, financial statement, suppliers, customer base and employees of the organization (Maine 2008, p.363). The process of closing is the last activity in process. The process can be speed up within just few weeks. However, it can also take long to allow the company or the venture to find more information concerning each other. Logistics H&M top managers understands that for a company to be successful, right or service must arrive at the market at the right cost and right time. In other words, logistics has to be effective for a product be efficiently delivered to the market (Staffordshire University n.d). The same concept therefore must also be used when company create corporate venture for the smooth running of the contract. As company which is located in Sweden and has created enabling investment with companies and personalities in other countries, logistics can be a problem. However, H&M has developed one of the best logistics and supply chain which enables it to reach its ventures on time and with the right products. Staffordshire University (n.d) opined that first; H&M has a good relationship with suppliers hence they communicate and delivers product raw materials on time to have a good time for production and delivery into the market. The company has automated its logistic to efficiency and effective of its operation in regards to material handling, communication and delivery into the market (Hasan & Alim 2010). Furthermore, as an international company, it uses the best transport on the lead required for a product to reach the venture. For quick delivery, H&M prefers air over other transport modes such as rail, ocean and road (Staffordshire University n.d). The products usually reach at a distribution centre situated near the venture physical location and assorted before distributed to target venture. The company also implements green logistics for sustainability because most ventures now want to associate with companies which part in reduction of climate change (Hasan & Alim 2010). H&M have adopted the concept of simplicity, transparency and reliability in its logistics to ensure efficient flow of material and products from suppliers to ventures (Staffordshire University n.d). Products and or services H&M offers to the market a wide range of products which permit the consumers to look for one which suits their personal style (Staffordshire University n.d). These products are always produced with extensive client in mind and H&M’s intention is to meet several different requirements and tastes. In other words, H&M collections are usually designed for everybody with a taste for fashion. The company deals with women, men and children wear hence targeting three major customer segments (Staffordshire University n.d). However, since the competition has become very stiff in fashion industry, the company now uses various strategies to reach these segments. Enabling investments is one the major strategy which has since been adopted by H&M. The company use enabling investment associated with women to target women consumers with cloth of every age. For instance, H&M compliments its product with those of fashion enthusiasts and designers such as Stella McCartney, Jeanne Lanvin, Madonna and Beyoncé to popularize its clothing among women. As started earlier, the company has in different times launched wears associated with these women in show which also had their products displayed. The company also has created enabling investment with men to grow its brand awareness and increase profit in this market segment. H&M has in the recent past complimented its product with those of men designers like Maison Martin Margiela, Alexander Wang and Olivier Rousteing. Association with these talented designers creates a perception of high quality, comfortable, seasoned and modern styled and clothing. Unique business formula Deducing for the excellent performance is vital for the survival of the company. Staffordshire University (n.d) claimed that H&M’s unique business formula relies on trendy and quality. The company has a research department is always focused on the market to understand the needs of the customers. As a result of the market research, the company produces clothing which is not only trendy but also set trends. The company sets trends for classic, modern, women, men and children wear. Another secret for survival in the market has been producing high quality wear which last for years (Staffordshire University n.d). The practice has also been emulated by associating with ventures which are known for trendy and quality clothing. Versace and Balmain which collaborates with H&M are some of the known fashion houses recognized for trendy and quality wear (H&M 2016). The unique business formula has made H&M the second leading fashion retailer worldwide after Zara. 5. Organization’s and CV's Entrepreneurial Intensity Entrepreneurship has always been considered as a factor for wealth and value creation (Dushnitsky & Shapira 2010, p.994). In the recent years, H&M has shown its understanding of this concept and put it into practice to enhance its wealth or shareholder returns. Apart from clothing, the company has ventured into other product portfolio including cosmetics and home furnishings. H&M has set up cosmetics department which offers a number of skin cares, body care and makeup products (H&M 2016). The new department is continuously updated and given new looks with new scents, products and colors which reflect modern fashions. Since the company does not have its own production plant for cosmetics, it has formed enabling investment with other companies which produces products which complements H&M’s fashions. H&M (2016) claimed that the company has an enabling investment contact with L'Oreal, Shiseido and Oriflame Company. H&M has a code of conduct clauses which ensures ventures has to guarantee their packaging; labeling and contents satisfy EU safety requirements and quality. Entrepreneurial nature of these companies has ensured they remain innovative and unique in terms of product development (von Krogh, Battistini, Pachidou & Baschera, 2012, p.912). Dushnitsky and Lenox (2005) pointed out that Shiseido for instance has a strong entrepreneurial intensity and has used aspect to make products which suits individual needs. In their enabling arrangement, Shiseido makes personified beauty products to H&M to complement its clothing (H&M 2016). H&M has continued with their entrepreneurial activities in other areas such as creating home furnishings like curtains, bed covers, Duvets, carpets and cushion covers. Again the H&M made this possible through enabling investments. Home furnishing was launched in the market in 2009 and been sold online in Germany, Sweden, Finland, the UK, the US, Denmark, Norway and the Netherlands (H&M 2016). 6. Further analysis of the mode of CV (enabling investment) Ethics H&M concept with regards to ethics cuts across association with reputable businesses, suppliers and customers (H&M 2016). In addition, the company conforms to ethics of responsible trade practices, quality and customer safety. Siegle (2013) contended that the company has a research department which conducts various studies in the market to establish credibility and reputation of their target venture before embarking on negotiation on a possible collaboration. Similarly, the company is ethical in their operation approach and takes responsibility for their action. In the process, they have created code of conduct which specifies how they work with the suppliers (H&M 2016). In the code of conduct of ethics, suppliers are mandated to offer the company quality and safe products which cannot harm employees and their customers. H&M (2016) affirmed that company implements a code of conduct based on ILO convention. The company is also aware of human right violation risks and only deals with companies which comply with labour laws and human rights. On the other hand, H&M understand that they have a role to play in contribution in betterment of human right and ensuring good working condition hence they encourages their suppliers and venture to do so (Dana 2014). Other ethical issues that are highly managed by H&M include child labour, fire safety, advertising, freedom of association and wages. Dana (2014) stated that in their ethical codes, H&M prohibits child labor and also outlaw association with companies or individuals involved with the act. According to the company, child labor also entails using children or minors in inappropriate ads. Reference Anokhin, S., Örtqvist, D., Thorgren, S & Wincent, J 2011, Corporate Venturing Deal Syndication and Innovation: The Information Exchange Paradox, Long Range Planning, Vol. 44, pp.135-151. 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