H&M’s Entry Strategy into Japan

D­ana Dgg Gunnarsd³ttir kt. 250593-2799 Gerur Dra Aalsteinsdttir kt. 200993-2339 Nada r Emilsd³ttir kt. 090893-3439 International Business Teacher: Azorgeir PA¡lsson Contents Brief introduction of H&M Employees Turnover International operations Sustainability H&M’s entry strategy into Japan Choosing a market, timing and scale Entry mode Greenfield vs Acquisition References

Brief introduction of H&M

Hennes & Mauritz (H&M) is a Swedish multinational retail-clothing company. It was founded in 1947, when Erling Persson opened the first store in VAsters, Sweden. It is ranked the second largest global clothing retailer. Their business concept is offering fashion and quality at the best price. H&M has grown into a leading global fashion company. The company has over 116,000 employees and 3,132 stores in 53 countries. H&M does not own any factories but instead outsources its production to around 900 independent suppliers, mainly in Asia and Europe. These facilities are used for horizontal division of labour, rather than being integrated.. Many of their products are made in some of the world’s poorest countries, this creates millions of jobs for developing countries and therefore is not a bad thing. A clear business concept and strong values have taken H&M from a single store to a leading global fashion company, with a passion for fashion, a belief in people and a desire to always exceed customers’ expectations. “In a globalisised world, it is not a question for a company like ours to be present in emerging markets. It’s a matter of how we do it”.

Employees

H&M has around 116,000 employees, 77 percent of the employees are women and 23 percent are men. H&M’s design department employs 160 in-house designers and 100 pattern makers. The team is large and diverse, representing different age groups and nationalities who draw inspiration from every corner of the globe and a wide variety of sources.

Turnover

H&M’s yearly turnover grew 6% from 1 December 2012 to 30 November 2013). H&M Group had a 14.6 billion euro turnover last year, while gross profit grew from 8.1 billion euro to 8.6 billion euro and net profit reached 1.95 billion euro. The group has also opened another 356 new stores last year. Fourth quarter turnover grew from 3.7 billion euro to 4.1 billion euro, resulting in a 0.63 billion euro net profit. “2013 ended strongly with well-received autumn collections, which increased our sales in the fourth quarter by 13 percent in local currencies”, CEO Karl-Johan Persson said in a press release.

International operations

The company has a strong global presence. In 2013, 356 stores were opened around the world. That means on average more than one store opened each day in 2013. Before they open a store in a new country or city an assessment is made of the market’s potential. Factors such as demographic structure, economic growth, infrastructure, political risk, human rights and environmental sustainability are analysed. H&M stores are run by H&M, with the exception of some markets where we collaborate with franchising partners. Franchising is not part of the general expansion strategy. https://about.hm.com/en/About/facts-about-hm/about-hm/expansion-strategy.html Online shopping has also increased rapidly over the last years. Hm.com is one of the most visited fashion website around the world. In 2013 H&M offered online shopping in nine contries; Sweden, Norway, Denmark, Finland, the Netherlands, Germany, Austria, the UK and the US. H&M business concept is to offer fashion and quality at the best price and its strategy is to always have the best customer offering in each individual market. They achieve the best price by having in-house designers, buying in large purchasing volumes, having no middlemen, buying the right product from the right market, being cost-conscious in every part of the organisation and through efficient logistics. H&M is growing all over the world while maintaining quality, sustainability and high profitability. The general rule for expansion is that every store has to have the best commercial location. H&M does not have any factory of its own; their products are manifactured by 900 independent suppliers, mainly in Asia and Europe. They work in close cooperations with the suppliers to guarantee that the quality of the products and that the manufacturing takes place under good working conditions. H&M can be more flexible than many other retailers in lowering its costs, by not owning any factories. (International trade plays an important role in countries’ development by creating job opportunities and economic growth. H&M’s business helps create more than a million jobs, mostly in the textile industry in Asia.)

Sustainability

Sustainability is an inseparable part of the business and includes aspects such as ethics, human rights and the environment. Around 100 expert sustainability specialists are working to support continual progress in the area of sustainability and carrying out regular audits to ensure that the suppliers are abiding by H&M’s Code of Conduct. https://about.hm.com/content/dam/hm/about/documents/en/Annual%20Report/Annual-Report-2013_en.pdf On their website it says; ”žIt’s our plan for making fashion sustainable and sustainability fashionable.“ (https://about.hm.com/en/About/sustainability/commitments/our-seven-commitments.html) To do this they have to run the company in a way that is benificcial for the people, environment and their business. They have seven commitments to fulfill these standards. 1. Provide fashion for conscious customers 2. Choose and reward responsible partners 3. Be ethical 4. Be climate smart 5. Reduce, reuse, recycle 6. Use natural resources responsibly 7. Strengthen communities Companies that use a global standardization strategy focus on pursuing low-cost strategy on a global scale. They prefer to market a standardized product worldwide so that they can reap the maximum benefits from economies of scale and learning effects. They create value by reducing cost by using the ecpericence and operational skills gained from the whole operation. Locations are based on how and where parts of the value-chain are best located; Marketing at the headquarters and production in low cost countries. H&M uses global standardization strategy. As stated earlier, H&M focus on having the best price and uses outsourcing method in the production af the clothes.

H&M’s entry strategy into Japan

This chapter is meant to give the reader a little inside into H&M‘s entry strategy. A good example to cover this topic is H&M‘s greenfield venture market entry to Japan in September, 2008.

Choosing a market, timing and scale

A good and successful entry strategy consists of three main parts. The first part relates to which market to entry and the time and scale of the entry. The second part is choice of entry mode and finally the last part is the importance of strategic alliances. Considering that H&M has a desire to grow and maximize its financial capabilities, it is only but logical that as it company it should consider increasing its stores in other countries. However which market to enter and when to take action can be a difficult decision to make. Naturally the decision is usually based on assessment of potential profits. The one thing in particular that made the Japanese market an attractive option for H&M was the vast amount of potential new customers. It needed to be taken into consideration though that Japan is considered to be one of the highest competitive markets when it comes to fashion but with good adaptation quality-wise Japan could be a feasible option. However timing might possibly have been better. The year before in 2007 H&M had made a successful invasion into China but at that time economy was blooming and it is safe to say that all criteria for successful invasion into a new market was met. That was not really the case with Japan. In 2008 economic growth had begun to decline, people had tighter budget than before and on top of that market reports showed that market for clothing was declining. That however was seen as an advantage as H&M offered less expensive products than say Dior, Armani and even less expensive stores like GAP and Japanese chain Uniqlo. Another thing that is important to think about when entering a new market is the scale of entry. It is well known that companies that have spent large sums of money on say have struggled to tmake it due to the high cost. That was not the case for H&M in Japan since the opted for just one store in September.

Entry mode

When the decision to enter a new market has been made the main question is which for to choose for the entry. There a couple of forms mentioned in the textbook including, export, the most simple form of entry, turnkey projects, licensing, franchising, joint venture and wholly owned subsidiaries. H&M’s overall global strategy consists mostly of wholly owned subsidiaries which is the case with the Japan store although the company has on some occasions gone for franchise agreements. A wholly owned subsidiary means that the store abroad is 100% owned by the parent company. The main advantage with such a form is that the company does not risk losing control over the competences that make their competitive advantage as control over operation. Besides having a wholly owned subsidiary gives firms a tight control over the operations overseas. However this the most expensive form of entry there is from a capital investment point of view. With increased cost come the increased risks. Also it is important to remember that companies expanding the operations abroad need to go through a certain learning process on how to do business in the market. This knowledge transfer process typically takes longer when the entry form is wholly owned subsidiary rather than partly owned by locals like in the case of joint ventures. (Gupta & Govindarajan, 2000). Govindarajan, V., Gupta, A.K. 2000. Knowledge flows within the multinational corporations. Strategic Management Journal. Vol. 21(4), p.473-496.

Greenfield vs Acquisition

There two main ways to establish a subsidiary on a foreign soil. One option is to build the unit form the ground up. This is called the Greenfield strategy. The other way is in the form Acquisition where the firm acquires existing assets in the new market. When H&M entered Japan the firm opted first the first one, the greenfield strategy. The book International Business: Competing in the Global Marketplace has these deffinitons for greendield and acquisition: Greenfield: A new facility built from scratch. Establishing a new operation in a foreign country. Building a subsidiary from the ground up Acquisition: Acquiring an enterprise in the target market. An acquisition of an existing one. Over most of the past two decades, between 40 and 80 percent of all FDI inflows have been in the form of mergers and acquisitions. ”The big advantage og establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants“. (bls 464 A­ le bA³k). In the beginning the first store opened was given the name Hennes, which in Sweden means ”Hers“, and only clothes for women were sold there at that time. The year 1968 Persson bought Mauritz Widforss, which was a haunting and gun store. This led to that he began selling mens clothes in his stores and gave the company a new name; Hennes & Mauritz, better known as H&M. Last year, H&M made its first acquisition since the company was founded in 1947, taking majority control of Sweden's Fabric Scandinavien in May. The four-year-old company owned two hip Swedish properties: Monki, a 12-store chain aimed at teenage girls, and the smaller Weekday, whose six stores sell a mix of outside labels and house brands such as A¼ber-trendy Cheap Monday jeans (which are also sold through 1,000 other retailers including Barneys New York). Both chains are still small in size and limited to Sweden, at least for now. But there's huge potential to make the new businesses more efficient and expand internationally by having access to H&M's sourcing and logistics.

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