A Journey over the Innovation of H&M PDF

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Nottingham University Business School MBA Programme [Innovation Management (N14M76 MY) (SPR 13-14)] A Journey over the Innovation of (Individual Report based on Group Project) [Racha Zohour Adi]; Student ID: [014132] Original Copy [2] Word Count: 3, 608 (Excluding Table of contents, References &...

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Nottingham University Business School MBA Programme [Innovation Management (N14M76 MY) (SPR 13-14)]

A Journey over the Innovation of (Individual Report based on Group Project)

[Racha Zohour Adi]; Student ID: [014132]

Original Copy [2]

Word Count: 3, 608 (Excluding Table of contents, References & Appendix)

Innovation Management N14M76 MY

[A JOURNEY OVER THE INNOVATION OF H&M]

Table of Contents

1.

INTRODUCTION ..................................................................................................................................... 3

2.

INNOVATION AT H&M .......................................................................................................................... 4 2.1.

The Innovation Space Matrix ........................................................................................................ 4

2.2.

Core Competencies ....................................................................................................................... 5

2.3.

Dynamic Capabilities ..................................................................................................................... 6

2.4.

Innovation Audit ........................................................................................................................... 7

A.

Strategy: ........................................................................................................................................ 7

B.

Processes:...................................................................................................................................... 8

C.

Organization:................................................................................................................................. 8

D.

Linkages:........................................................................................................................................ 8

E.

Learning......................................................................................................................................... 8

3.

BROAD RECOMMENDATIONS: ............................................................................................................ 14

4.

CONCLUSION:...................................................................................................................................... 15

5.

REFERENCES: ....................................................................................................................................... 16

6.

APPENDIX: ........................................................................................................................................... 19 1. 2.

H&M COMPANY PROFILE ................................................................................................................ 19 Roth ell’s Fi e Ge e atio s of I

o atio

Model ...................................................................... 20

3.

Po te ’s Fi e Co petiti e fo es: .................................................................................................... 21

4.

Financial Benchmarking: ................................................................................................................. 22

5.

An Example of Process Innovation:................................................................................................. 23

6.

H&M Organizational Structure: ...................................................................................................... 24

7.

H&M Sources of Innovation: ........................................................................................................... 25

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Innovation Management N14M76 MY

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1. INTRODUCTION I o atio is iti al fo a o ga izatio ’s g o th. I o atio a age e t apa ilities a e fu da e tal o petiti e d i e s fo a o pa ’s su ess Elisa, 2010). In its basic definition, I o atio is the successful exploitation of e ideas UK DTI 004) and in a more broad explanation, “u essful i o atio is the eatio a d i ple e tatio of e p o esses, products, services and methods of delivery which result in significant improvements in out o es, effi ie , effe ti e ess o ualit Al u 005). One of the most challenging competitive industries in terms of the need for constant innovation is apparel and textile sector. The textile and apparel industry is one of the most dynamic industries, which are subject to relentless change. Significant structural changes in global sourcing and price competition have been altering the concepts and business models of this industry which is characterized by high unpredictability and short product lifecycles. The latest trend in the consumer behavior is moving towards (Fast Fashion): consumers are migrating from luxury and costly items to more basic, practical and long-lasting models. Supermarket fashion has entered the competition such as Tesco, Carrefour and Wal-Mart, and customers are now able to purchase basic and cheap trendy clothes while shopping for food and other daily life products, which made it a convenient solution for buyers who are in tight time. Online fashion retailing is similarly growing. In apparel sales, Up to 15% is predicted to be through online purchases. Where the online retail market has reached $11.47 billion in 2013 and the size of the market is tripled (Mintel, 2008). These factors are putting more pressure on fashion companies to be more innovative in their products and processes to survive in the fierce competition through efficiency, rapidly and flexibly responding to demand where high quality, affordable price with quick turnover of stock and rapid replenishment are governing the sector (Arrigo, 2010). One of the pioneering companies to challenge the clothing industry by setting new business models and raise the competition is Hennes and Mauritz- commercially called (H&M). This report follows the group project on H&M’s i o atio Audit a d aims to provide a more detailed study for the innovative performance of H&M through exhibiting its innovation strategy and how ideas are promoted and impleme ted i the o pa ’s p o esses. Besides the organizational structure of H&M, the linkages and extent of learning and knowledge the company has grasped from the market. The report also provides some recommendations for a future innovation strategy which can better improve the position of the company. For H&M company profile, please check appendix.

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[A JOURNEY OVER THE INNOVATION OF H&M]

2. INNOVATION AT H&M 2.1.

The Innovation Space Matrix

According to Bessant and Tidd (2013), the innovation matrix tool clarifies the perceived extent of change towards the three types of innovation (incremental, radical and discontinues) for the 4 pillars of innovation (products, process, position and paradigm) and for services innovation. By applying this tool to H&M, it is found that there are no discontinues innovations produced by this company. It is a rare case in the apparel and textile industry and applies more to technology sectors. But there are incremental changes in terms of enhanced and modified p odu ts o lau hi g e a ds u de H&M’s a d po tfolio st ateg , such as COS as an upmarket brand with slightly higher prices. While the radical innovations of H&M in product lines are represented by: the launching of homeware and home accessories through (H&ME) brand, the accessories specialized store (&Other Stories), and seasonal collections designed by famous designers or endorsed by celebrities. These products are radical for H&M, but not new to the apparel and textile industry as other brands have already similar portfolio concepts, and it did not shift the paradigm for this industry thus it is irrelevant to be considered as discontinues innovation. The incremental changes in processes lead H&M to an extended network of reliable suppliers in many parts of the world as well as a global presence covering almost all regions. While the radical change in processes for H&M is launching of online shopping and delivery service in specific places in Europe and in the US. H&M made a radical change by positioning itself as an effective practitioner and promoter for sustainability through the launching for (Conscious Collection), where H&M promises its customers of completely sustainable products starting from raw materials and moving through operations and processes and ending by store delivery. H&M is the first reputable and valuable brand and fast fashion retailer to heavily invest in sustainability. The below figure illustrates these findings:

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Figure 1: H&M s Innovation Space Matrix – Source: Author

2.2.

Core Competencies

Companies like H&M who are market-driven are continuously striving for the development of their internal and external capabilities which identifies their core competencies which in turn differentiate those companies of their competitors (Prahalad, Hamel, 1990) and because a kets toda a e e ol i g o sta tl , a o pa ’s apa ilit eed to e d a i Tee e, Pisano, Shuen, 1997) for the purpose of rapidly and flexibly monitoring, aligning and responding to changes on all levels. There are multiple competitive variables such as cost and quality which are critical for success. However, those are not sufficient to attain preeminence over the competition. Therefore companies need to shift the focus of their strategies from striving to achieve the cost and quality model to more towards having the capability to innovate (Zucchella, 2004). The core competencies for H&M are the ability to provide latest fashionable trends at a low price, the deep knowledge and the capacity to research, predict and anticipate emerging trends, and with its strong branding, H&M is even a trend setter amongst fast fashion Page | 5

Innovation Management N14M76 MY

[A JOURNEY OVER THE INNOVATION OF H&M]

companies. All this ould ’t e possi le u less the e is a effi ie t suppl competency for H&M in comparing to most of the fast fashion brands.

2.3.

hai which is a core

Dynamic Capabilities

Dynamic capabilities represent organizational and strategic processes such as product development and alliancing. The strategic value relies in their capability to employ and manipulate the resources into value-creating strategies. Best Practices a oss the fi a e considered as dynamic capabilities. Their extensive structural patterns differ with market dynamics, sometimes they are robust and fluted routines in temperately vibrant markets and sometimes they are fragile and semi- structured in high-velocity markets and they develop via recognized learning mechanisms. Long-term competitive advantage relies in resources o figu atio s Eisenhardt & Martin, 2000). H&Ms dynamic capabilities are illustrated in the below figure:

Figure 2: H&M Dynamic Capabilities– Source: Author

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Innovation Management N14M76 MY

2.4.

[A JOURNEY OVER THE INNOVATION OF H&M]

Innovation Audit

A truthful assessment of innovation variables of a company such as the agility, creativity and innovation capacity is crucial in order to advance the innovation in the organization. The innovation audit tool designed by Tid, Bessant and Pavitt (2005) takes into account analytical and numerical questions that can predict what is hindering innovation in the organization. It also reveals about the o ga izatio ’s culture regarding empowering innovation. A deliberated unbiased audit can detect the key zones for enhancement in innovation processes and in corporate culture (Sloane, 2012). The questionnaire fo auditi g H&M’s i o atio has ee pe fo ed on two sides: by the team members and also by H&M employees at one of the local H&M stores in Kuala Lampur, Malaysia. The results are presented below and more discussion is provided further:

Figure 3: Innovation Audit for H&M– Source: Author

A. Strategy: The perceived strategy for both results (from team members and employees) is approximate. Main feature is that there are too many stores for H&M and the expansion is moving rapidly. Page | 7

Innovation Management N14M76 MY

[A JOURNEY OVER THE INNOVATION OF H&M]

B. Processes: The processes are perceived to be suitable and efficient for H&M employees more than the team members. C. Organization: O ga izatio ’s audit scored the same result approximately D. Linkages: The linkages perceived by the employees are higher than team results, which is due to different perception of the concept of linkages, for example, linking to celebrities such as David Beckham and Beyoncé was considered by employees as a great linkage, while team members found other pitfalls which will be discussed further in the linkage section. E. Learning: For learning and knowledge, team perceived that H&M is learning from the market better than what e plo ee’s thought. Each pillar of innovation at H&M will be discussed in the following sections and recommendations will be provided based on audit findings.

2.4.1.

Strategy

a) External Environment around H&M The external environment around H&M is aggressively competitive. According to Michael Porter (2008) the Five Competitive Forces around H&M are examined (Please check appendix 2).

b) Expansion Strategy The expansion strategy of H&M has slightly shifted the focus of the company from achieving profits. In a financial performance benchmarking with INTEDIX group and GAP (please check appendix), it is shown that the profits for H&M are reducing and there is a slow growth of revenue. The revenue in turn is decreasing as stores are expanding. H&M is having 10-15% new stores annually and 90% of hosting countries are high income countries. This is in addition to the franchising business model in the Middle East. H&M targets many market segments with its brands and do promotion by designer collaborations, celebrities and social media. According to Delft Innovation Model, these collaborations represents an Open Innovation Strategy , a d as Closed Innovation , H&M has Increased the mobility of skilled labor force, extended venture capital and used external options for unused resources.

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c) Recommendations for strategy Improvements: Relook Expansion Strategy: H&M need to relook its expansion strategy through designing an innovative one that meets the company goals and which is clearly communicated to the entire organization so employees can better understand the overall vision of the company and contribute in improvement process (Tid, Bessant and Pavitt, 2005). By auditing the company strategy it is noticed that stores in countries where there is a high quantity of branches such as US and UK suffer from low Revenue per Store (RPS) and that there is a saturation in the number of stores which is above 200 for both countries. While stores like the ones in Japan, have a very high RPS (60% higher than US and UK). It is recommended to increase expansion in countries like Japan, South Korea and Russia rather than just focusing on US and UK. H&M should adopt a more innovative strategy and explore new markets such as New Zealand and Taiwan (especially with the nonexistence of Zara in those countries). As well as increasing its presence in Asia pacific countries where the global middle income is rising. Also the franchising model is low on profits and needs to be relooked. (Please check appendix for Financial Benchmarking) Increase Online Shopping Service: Online Shopping and delivery Service should be expanded to cover more areas especially where H&M does ’t ha e st o g p ese e. Currently H&M is providing online shopping in US where it has the maximum store number through all the group chains and where is the lowest revenue per store comparing to Japan and Russia. Focus on all Generations: H&M should focus on Gen-Y as their shopping behavior is less affected by the changes in economy, and should similarly focus on Gen-X and possibly provide a brand that meets this generatio ’s eeds more sedate and demure fashion). Baby boomers percentages are increasing in developed countries where society is ageing. Therefore it is innovative to consider a brand targeted to this generation.

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Innovation Management N14M76 MY

2.4.2.

[A JOURNEY OVER THE INNOVATION OF H&M]

Process

a) Scanning and Selecting Ideas: According to the portfolio selection process model, H&M first build the knowledge about fashio t e ds ased o i house desig e s’ o se atio s a d e pe tise a d ide tif the futu e opportunities and threats for the proposed designs. Secondly, H&M links between the built knowledge and the future business investment to ensure the feasibility and competency of the proposed designs and the level on which resources are available (for example: materials and suppliers, technological support). Finally, H&M pave the way for the business investment i.e. the designer collection by production of new collections and marketing the collection globally. With 160 in house designers and 100 pattern makers, H&M produces its wide range collections. The design team consists of diverse members who represent all diverse dimensions in o su e ’s data base, such as different age groups and different nationalities. Those teams draw inspirations from a large range of sources such as cinema, music, art, magazines, trade and catwalk shows, trend seminars and even street fashion. Then all these influenced ideas are filtered into continuously updated collections. According to H&M, The main philosophy in s a i g, ge e ati g a d sele ti g the desig s ideas is a out striking the right balance between fashion, quality and the best price. And it always involves sustainability awareness. That means a strong consideration for both people and the environment, all the way from the sketch book to the customer H&M Official Website, 2014).

b) Supply Chain and Time: The time variable for H&M is an essential aspect of the entire supply chain from the initial stages of choosing materials and designs down to launching multiple stores globally. Most H&M competitors stylists plans the collections for the coming seasons up to eight months in advance before they are launched to the market although this contains high risk due to unpredictability of demand and short clothing products life cycle . While H&M does ’t allocate that much of time to plan the new collection, simply because there is a system of monitoring large fashion houses collections and predicting the new trends in the market, so they design their items following those trends, also designer collaborations significantly minimize the collection planning time because designs comes directly from trend setters (Elisa, 2010). H&M outsources its products from a large network of suppliers ensuring a great consideration of people and the environment. Production offices are located in the sourcing markets for more effi ie of the suppl hai . Lead ti es i H&M’s suppl hai a e et ee th ee eeks to si

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months. Basics and children wear are ordered in high volumes in advan...