Hennes and Mauritz (H&M), Case Study Example

Executive Summary

Hennes and Mauritz (H&M) Group is a global enterprise that specializes in fashion. It has stores in many countries including Poland, Russia, Spain, Italy, China, Sweden, United Kingdom, United States of America, Germany, United Arabs Emirates and France. Currently, the firm faces a few challenges in its operations. The significant challenges it faces include exploitive supply chain, poor record of accomplishment on sustainability, and breach of patent agreement. The paper, thus, looks into these challenges in details and offers potential solutions including full compliance with the ETI Base Code of Labor Practice, venturing into the recycling practice, and acquisition of licenses for design patents. It further proceeds to explain on the various steps that H&M Group can undertake to fully comply with the ETI Base Code of Labor Practice.

Challenges Facing H&M Group

(a) Exploitive Supply Chain

The group depends upon supply chain especially in Europe and Asia. It has in excess of two million employees working in its stores (H&M Group, 2016-2017, n.p). It is thus a challenge to balance between compliance for the states using the capitalism especially in Europe and those adopting the socialism approach such as majority of the Arabic states. It is no wonder that H&M Group generally incurs hardships in balancing efficiency and low costs. The group has about 160 in-house designers and 100 pattern makers deciding on various collections hence efficiency. (Fernie and Grant, 2019, 7). In addition, it has a great supply chain. The above factors make its production more efficient but at considerably high costs(Fernie and Grant, 2019, 8). Socialism approach emphasizes on communal welfare hence need to maximize customer efficiency. Capitalism approach, on the other hand, requires firms to maximize on profits through cutting on costs. In addition, the external supply chain that the group adopts overlooks human rights hence need to consolidate the wages and rights. The graph below summarizes the data above to show the number of stores that H&M Group has worldwide as at the first quarter of 2020.

Source: H&M Group 2020

(b) Poor Track Record on Sustainability

The group experiences sustainability challenges. In 2017, H&M went on record for massively burning clothes termed as rejects (Hendriksz, 2017, n.p). The clothes had failed to meet the stipulated safety rules in Vasteras (Hendriksz, 2017, n.p). It is a move, to burn the clothes, that indicates the company’s inability to improve on its sustainability through the use of key financial tools like McKinsey’s 7s model and the Ansoff Matrix. McKinsey’s model lays down ways to improve departments and overall performance. The strategy and structure elements are the ones that will improve departments by making them focused, succinct and profit-oriented. The implication of the departmental improvement will in turn lead to improvement in overall performance (Hendriksz, 2017, n.p).Ansoff matrix is a four-segment matrix that indicates the levels of risk. It compares the degree of product as well as market level.Through the matrix, the challenge to the firm is whether to select diversification or product development for the products that they select as the indicated in the matrix outline below.

Ansoff Matrix

The challenge here comes from the fact that the group lacks an effective recycling strategy which implies that burning remains the sole strategy. One of their key goals is to transform into a fossil-free facility by 2020 (H&M Group, 2017, n.p). However, this remains questionable given their undesirable strategy. In addition, emission of toxic material into the environment is still at high rates making it a concern. There is likely to be more competition in the online shopping market. In fact, the data in the graph below indicate the continuous growth of the competition in this market over the years.

Source: Hendriksz, 2017, n.p

(c) Breach of Patent Agreement

In 2015, Stretchline Intellectual took it to court accusing H&M Group of breaching a patent agreement. The UK-based firm claimed that H&M Group had explored fashion patents that it initially owned (Patents Court, 2015, n.p). There was no clear clarity about the settlement agreement hence subjecting the case to a potential appeal from H&M Group (StrechtlineIntellectual Properties Limited v. H&M Limited, UK, Court of Appeal, (Civil Division) – (2017) EWCA Civ 199). In as much as H&M made a counter argument on grounds of misinterpretation, the court dismissed its appeal. It is a clear indication of failure to comply with legislation hence a challenge with legal issues as it applies to STEEPLE analysis. It applies to the STEEPLE test on four major factors; social, economic, legal and ethical. The firm will be taken to court which will give it a negative picture among existing and potential customers. The firm will then incur decreased profit margins and also find it hard to penetrate into new markets.(H&M Group, 2020).

Solutions

(a) Full Compliance with the ETI Base Code of Labor Practice

The period ranging from 1997 to 2016 has seen H&M Group put in place measures to comply with both legal and ethical factors. The critical ones include the directives on the hiring age, ethical trading and wages. It is from these adjustments that the firm adapted the ETI Base Code of Labor Practice. However, the full compliance is yet to take place. An example is the ETI report suggesting that some of the wages in some regions is still very low to the extent that it is unable to sustain the employees (Ethical Trading Initiative, 2018, n.p). In as much as data on wages has remained confidential, it is understood that some employees of the firm have been unable to finance even their cost of living. The company needs to fully incorporate both the primary and secondary activities of Porter’s Value Chain to fully comply. Detailed discussion on this application will come later under the attainment of this solution. Therefore, the firm needs to adhere to all the important ETI recommendations as a way of attaining full compliance.

(b) Investing in the Garment Recycling Technologies

The issue of burning big volumes of clothes is a big challenge for H&M Group. The company has over the years struggled to develop solutions for recycling garments (Holbrook, 2019, 20). There are machines designed for recycling clothes (I: CO, 2019, n.p). The recycled clothes can then be available for sell or donations which would still promote the firm’s social position as PESTEL analysis suggests. As a sustainable business practice, H&M has been, since 2013, offering garment collecting as well as recycling services across its different stores. The company accepts unwanted textiles and clothes by any brand and in any condition, at any of its stores throughout the year. The clothes are sent to the its Ireland headquarter, who are its recycling and sorting partners and later reworn, reused, and recycled. Currently, I: CO plays the role of recycling the H&M Group garments. It then proceeds to rearrange before distributing the clothes accordingly. Recycling should always be quality sensitive.

Subjecting the level of recycling in the company to a SWOT analysis, a few things stand out. The key factors in SWOT include the analysis of strengths, weaknesses, opportunities and threats a strategy generates. For this particular strategy, there are strengths arising but the weaknesses still remain strong.For instance, I: CO still has a low level of technological advancement in carrying out recycles (Leblanc, 2019, 43). The effect is that high tones of clothes still go through the burning strategy. Therefore, the firm needs to make further investments in recycling firms to cut on costs and pounce on new opportunities such as new markets that will expand its customer base.

(c) Acquisition of Licenses for Design Patents and Holding Firms that Breach its Intellectual Property Rights Accountable

Patents have been a big challenge to H&M Group. Not only has it led to legal issues but also affected the public reputation of the firm. The group thus needs to purchase any design patent that has gone through development and licensing (H&M Group, 2020, n.p).It needs to incorporate the STEEPLE module in trying to comply with all the necessary ethical and legal regulations.The STEEPLE module will help the management to keenly analyze legal and ethical requirements for every state since they vary from one state to the other (Trademark Law, 2018, n.p).Above all, H&M Group needs to fully adhere to the highest level of the IP compliance standards.

The STEEPLE model will be good for H&M Group in as much as this solution is concerned.The social factors will require the firm to honor the societal norms hence acquire licenses for respective patents. It is a good move for the firm since it will build its public reputation (H&M Group, 2020, n.p). It will also access its technological position by checking whether it is technologically advanced to document its licensed patents on a digital platform or not. Digital or technological advancement will help H&M to always keep a keen eye on its licensed patents hence quickly notice about any firm that tends to violate these rights. Economically, STEEPLE is still good since H&M Group will be in a good position to keep a track record of its costs due to the fact that it will avoid extra costs that arises from the lawsuits relating to patent issues (H&M Group, 2020, n.p). Complying with intellectual property rights will all boost the firm’s compliance with the political, legal and ethical issues as their analysis will take place through the last three acronyms of STEEPLE. Other firms will not sue it since it will have followed the correct legal procedures in acquiring the licensed patents. Therefore, as per the above analysis, STEEPLE analysis is an overall good financial tool for H&M Group as discussed in each affected factor above.

How to Fully Comply with the ETI Base Code of Labor Practice

The company needs to incorporate both the McKinsey 7S and Ansoff Matrix to fully adhere to the practice.McKinsey 7S involves seven factors which into puts into two categories. The categories include the hard and soft elements. The hard elements include strategy, structure and systems. The soft elements include shared values, skills, style and staff (Hendriksz, 2017, n.p). Strategy involves the mode of leadership that the firm chooses. Here, it should select a trade union strategy. In this, each trade union will have an average of 300 employees of H&M Group for easy management and evaluation of wages. The structure will be such that the supplies will take place directly through the respective trade union members. The trade union members will get additional wages from the extra sales they make which form the third hard element, system. The firm will also strategically incorporate soft elements in its management to comply with ETI Base Code of Labor Practice (Hendriksz, 2017, n.p). It should set up great shared values such as commitment and fairness to encourage employee participation and equality. They should train the employees on the necessary skills so that they not only become efficient but also compliant with laborforce legal requirements. All the staff members should get sufficient wages that can sustain them.

The Ansoff Matrix is the other key model that this business requires in fully complying with the code. It is a four segment matrix that will guide key decisions of the firm’s hierarchy in adhering to all the requirements in with the ETI Base Code of Labor Practice (Hendriksz, 2017, n.p). The matrix appears as below:

Ansoff Matrix

It will guide the strategy of the firm. For new products venturing into a new market say for example recycled clothes into a new market like Iraq, the firm should use diversification strategy. However, it should use product development for such new products when it is venturing them into an already existing market. If the product is their usual existing product but they are venturing it into a new market, the firm should use market development. H&M Group should resort tomarket penetration strategy when venturing their existing products into the already existing markets (H&M Group, 2017, n.p). In the matrix, the movement from left to right indicates an increase in the level of the underlying risk and so does a downward movement on the matrix. The implication of such is that market penetration is the strategy bearing the lowest level of risk while diversification bears the highest level of risk.Therefore the firm should keep this in mind and adhere to several steps in fully complying with the recommendations in the ETI codes on employees.

There are various steps resulting from the discussion above on models that the firm should undertake in fulfilling this solution. H&M Group should start by strategically involving the employees who should have a say on prices as well as innovations. The operational approach should shift to internal global trade unions (H&M Group, 2017, n.p). The firm should finance research as well as development to capture the costs it will save from the recycling and reusing procedure. There should be specialization of all the outsourced firms for different regions. A good example is specialization in coats and jackets for the factories in Indonesia.

The next step should involve taking actions and living up to timelines. Trade unions with an average of 300 members each should directly carry out the designing of products. Any product that attracts the buyers should have a direct pay to the internal trade union members. Here, they will have the opportunity on how they can share their additional income. The firm should draft a structure that will see the standard wage take care of the living costs at minimum. The firm should also make suppliers fully informed about market demand and consumer expectations. Finally, the firm should proceed to deliver and evaluate the outcome. In so doing, there should be direct cooperation with the trade unions coupled with time to time external auditing of the ETI performance. The evaluation information should guide suppliers on underlying opportunities and threats so as to new the necessary adjustments where need be.

Recommendations

H&M Group need to adhere to several recommendations in order to make its operation more sophisticated than the present situation as the above discussion has revealed. It needs to put in place measures that will see it counter all the major challenges it faces. The firm needs to fully comply with the ETI Base Code of Labor Practice to avoid any kind of issues related to supply chain. It needs to invest in garment recycling technology as a way of cutting costs that arise from burning of clothes that do not meet some of the set standards. It needs to purchase licenses for design patents in order to avoid legal issues that emanate from breaching of such agreements. It should also hold responsible any firm that breaches its property rights. It should give priority to the compliance recommendation since supply chain stands in the discussions above as the major challenge.

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