Zara: Fast Fashion from Savvy Systems - Essay Example

Zara: Fast Fashion from Savvy Systems Contents Introduction and Key Issues 2 Situational Analysis 3 Environmental Analysis 4 Political 4 Economic 5 Technological 6 Legal 6 Industry Analysis 7 Markets: 7 Competitive Forces Model: 8 Internal Analysis 9 Financial Analysis: 9 Competitive Advantage: 9 Value Chain: 10 Current Situational Analysis 11 Strategic Option & Choice 12 Implementation Issues 14 Conclusion 14 Bibliography 15 Zara: Fast Fashion from Savvy Systems Introduction and Key Issues Zara is one of the prestigious and fast growing fashion clothes retail shop in the world. Starting from a small ship building in Northern Spain, it has grown itself to staggering 68 countries throughout the world with numerous stores opened up in all of the specific countries. Being head by the richest fashion executive of the world Mr. Amanico Ortega, Zara has become a major player amongst the big names of fashion industry. With its latest design and styles coming into the market almost every week, they tend to keep their customers and competitors constantly on their toes. This is the main reason why they have been able to sustain their demand for so long (Gallaugher, 2011). However, it is not like Zara is hundred percent accurate in its dealing and is flawless nature when it comes to issues. Some of the issues Zara might face in the future, or is facing currently are necessary to be highlighted. Due to their manufacturing and delivery done from a single source in Spain throughout the world, Zara faces an issue of the lack of a fall back in case of an emergency. As they pride on constantly changing the shelves of the shops with new clothes every four weeks, they have to constantly transport new clothing. With the rise in oil prices all over, their transportation costs are rising as well. With the economic downturn throughout the globe, people have started to switch to cheap clothing from other manufacturers such as Wall Mart (Gallaugher, 2011). Situational Analysis Zara’s entire business model focuses on two major aspects for information gathering, the time factor and the store. This shows how customer oriented the company really is. Constant monitoring and thorough market research has allowed them to provide unique and new styles for their customers. Zara generally focuses on producing a homogeneous product which caters for the global customer base. However, they make slight adjustments to different countries catering to their respective needs and culture. With the opening of their sister shops, they have been able to specialize according to different demographics across the globe (Lopez et al, 2009). The following graph illustrates the different sublets Inditex has opened up and their relevant percentage of inditex. This graph shows the importance Zara holds to the success of Inditex over the years. Source: Adapted from Lopez and Fin (2009). The major competitors for Zara amongst many others have always been Gap and H&M. Both these companies follow a very similar pattern as Zara when dealing with internationalization of their retail outlets. Environmental Analysis For conducting an environmental analysis of Zara, PESTLE Analysis was found appropriate. The reason a PESTLE analyses was deemed appropriate for a huge company like Zara, was because it is one of the largest fashion company in the world and it has globalized to such an extent that you can find Zara across the globe with stores reaching up to 1,723 worldwide including their extended stores (Gallaugher, 2011). Political Internationalization: During 1986 when Spain entered into the European Union, it opened up the entire trading barriers of which Zara took the most advantage. Through the concept of homogeneous products to every country, they continued to expand. They followed a single concept “national frontiers are no impediments to sharing a single fashion culture.” (Lopez et al, 2009). They have had to adhere to various government laws applied in various countries outside Europe for opening up their stores there. With the introduction of the new CEO it has opened up stores in Delhi, Mumbai, Bangalore and other Indian cities. It has also opened up 160 stores in Asia last year (Thompson, 2011). However due to the strict trading laws in India and China Inditex has to strictly adhere to them. In India the government only allows foreign investment if certain conditions are met. Zara has formed a joint venture with TATA there. Economic Zara has always been hesitant to shift to areas with a lower cost of production. Its competitors especially Gap has always rushed to areas where the cost of production are low, ignoring any environmental, ethical and reduction in quality of their products (Gallaugher, 2011). The other noticeable attribute of Zara is its no advertising policy. Mr Otega referred to advertising as a “pointless distraction”. Other competitors like Gap and H&M spend hugely on advertising to little avail as sales of Gap still fell when compared with those of Zara’s. This has considerably saved its revenue and profits as only 0.3% of the revenue of Inditex is spent on advertising on the contrary to 3.5% of the revenues by other fashion retailers. An average customer of Zara visits the shop almost 17 times a year, while customers of their competitors only visit on an average 2 or 3 times. Zara has also aimed to shorten their production life cycle. Most retailers on an average take six months to design followed by another 3 months to manufacture it. On the contrary within a span of 3 weeks the majority of the products would not be seen on shelves (Gallaugher, 2011). Social Most people follow fashion trends and designer clothes very carefully. Due to this tenacity in people, Zara provides “latest fashion in medium quality at very affordable prices” (Lopez et al, 2009). Zara caters to their customer’s needs very well. They tend to constantly monitor shopping trends and ask for feedbacks from customers in order to innovate frequently. They constantly gather data every day when the shops close and send them back to the headquarters for different trends and demands of customers (Lopez et al, 2009). Technological The R&D of Zara is top notch. They have automated robots which cut and dye their fabrics in 23 factories. As it is vertically integrated it produces almost 40% of its own material and clothes. Apart from this, their staff is equipped with PDAs to stay in touch with their head quarters and gather data on consumers daily shopping trends and requests. According to a research by Donald Sull, Zara spends less than a quarter of the total technology spending done by the average fashion industry (Gallaugher, 2011). Legal As far as the Legal issues are concerned, Zara has to use proper measures in order to answer the different legal frameworks prevailing in all the different countries in which Zara operates. Environment Zara also led the way when it introduced a concept of going green in the fashion industry. They have gained a lot of support with the introduction of introducing the use of renewable bio-diesel for the fleet as well as other resources for its logistics centers (Gallaugher, 2011). Industry Analysis Zara has expanded itself into various markets all over the globe. The three major markets in which Zara has ventured into are the European, Asian and North American markets. Before conducting a thorough analysis of the competitors it is important to look at the various markets and analyze their fashion industries. Markets: The three different continents have three different types of markets. The European Market is one of the most lucrative markets for fashion. The markets in countries like Italy, Spain, France & Germany have the greatest potential then all the others and that is why Zara is focused on expanding itself in these countries. Italy has the most potential market as more than 1,000 Euros per capita are spent by the locals there, 61% of the market in Italy spends on clothing (Ghemawat et al, 2006). However Zara had just 36 stores all over Italy, while most of their stores were opened in Spain The following graph shows the breakup of the major countries where the most number of stores were Jan 2006 (Lopez, 2009). Source: Adapted from Lopez and Fan (2009). Only until recently Zara has opened up to 160 shops, and also tapping into the China and Indian Markets. The problems faced by Zara in these areas are that the competitors there have a very low cost of production. As they mainly do their production abroad, the cost factor might become a problem later. The US market is less fashion focused than European market; however they demand higher larger sizes. It was in US they met their vicious competitors Gap and H&M. North America was a tough place to penetrate at first for Zara due to it higher costs of transportations etc (Ghemawat et al, 2006). Competitive Forces Model: For Zara and the fashion industry IT holds a great influence as a competitive force. The five major aspects that have to be seen here are the Threats of New Entrants, Bargaining Power of Buyers, Bargaining Power of Suppliers, Threat of Substitute Products and Industrial The competition amongst the firms in the fashion industry are high for Zara. They have to not only tackle firms in the Spanish markets but also in North America, Europe and Asia. Due to the attractiveness of the fashion industry the threat of the new entrants coming into the market is also high. Even though the threat of new substitutes in the market is high, Zara is currently not pushed about it. The reason being many companies have tried to copy their entire system but have failed to do so because of not fully vertically integrated and not adding value in the supply chain. The major advantage for Zara is that the bargaining power of the suppliers is low because it does not rely on outsourcing. As they have successfully captured the consumer’s attention through fast fashion, the bargaining power of consumers is almost negligible for Zara. Internal Analysis Financial Analysis: After the recession Zara has slowly been on the rise as many retailers in Spain and other countries started to close down their shops (BBC, 2010). During the end of 2010 Zara saw a rise of 68% in the profits, while the net profit loomed to about 628 Million Euros. The positive currency effect and the rise in the consumer demand in Europe and the emerging market lead to this rise (Reuters, 2010). If we compare the net profit of Inditex in the first quarter of 2010 with the same period in 2009 there is an increase. Source: Adapted from BBC News (2010). Competitive Advantage: Zara is a fashion retailer that works very differently from all its competitors throughout the globe. Mostly the retailers focus on outsourcing most of the production while they try and only divert their attention in retailing the products. Working through the entire supply chain of their products and adding value to each sector they have earned a competitive edge in the market. Through vertically integrating their entire company, they have been able to produce the major chunk of their apparels and only 40% of the total production is outsourced. The flexibility of the production in Zara is one of the other competitive edges it has over its competitors. According to a statistics almost 85% of the production is done throughout a single season, which provides customers with constant new designs. Other competitors generally ask to deliver a new design request at least six months before a season so they can put it to production. So this makes customers wait for a span of just two weeks before a new design would be available, making them loyal customers. The centralized distribution facility has also given an edge over its competitors by reducing any time wastage and lags in the distribution. Another advantage is that due to its low advertising strategy, it is able to save a lot of time and cost as compared to its competitors. (Craig et. al, 2004). Value Chain: The entire logistics of Zara centers on the Japanese concept of Just in Time manufacturing. With this concept, Zara produces products when they are needed and distributes them. Most of the part of the clothing is purchased in house, supporting the Just in Time facility and reducing inventory costs. The vertical integration of the entire system allows smooth running and low amount of purchasing required by the company. The entire operations of Zara are supported by the information system installed and the use of technology to assist it. After producing the cloth, it is inspected, ironed and put on hangers so it does not wrinkle. Finally, price tags are attached and the products are sent to the retailers. Their own distribution system of trucks and cargo planes shift products on time reducing the time wastage. The JIT method allows no or less inventory for Zara. This results in lower products to be unsold by the end of the day. The Point of Sale system in the shops is linked with the headquarters tracking the sales of the entire day. Even the customers are asked daily about what new they might want and these details are sent to the headquarters. The organization is staffed with various designers and specialists who work on flexi hours (Gallaugher, 2011). Current Situational Analysis After looking at the entire scenario of Zara, it all seems to point towards a positive trend for Zara. For further analysis a SWOT is conducted. Strengths: The major strength of Zara is its vertically integrated system which helps to deliver fast products to its customers. The control of the entire supply chain helps them to adopt a value chain methodology. Every style introduced is catering to the latest trend in the market. A high customer interaction positively affecting the company. Weakness: The lack of advertising by the company. Apart from the online store in UK and few others no other online retailing is available. Opportunity: The emerging market in Asia and South America offer a huge opportunity. A huge online market which has not been tapped by Zara. Opening up of the production facilities in Asia and North America to reduce cost. Threat: Local and International Competitors. A disaster at the main headquarters without any fallback can be disastrous. Currency fluctuation can increase costs. Strategic Option & Choice After analyzing various aspects of Zara and the fashion industry, the next plan of action should be to choose a strategy for the near future. Before choosing an option, various alternatives should be overlooked by Zara. With the help of the Ansoff’s Matrix, an analysis of the different strategies followed by Zara is carried out . For Market Penetration, Zara focuses on increasing its sales by attracting customers to buy more from them. Through recognizing the weakness of its competitor’s penetration strategy, Zara focuses on providing the customers with new designs every two weeks. Controlling the entire supply chain from manufacturing to distribution has helped them to timely replace products for consumers and keep them interested. Not shifting to areas where cost of production is low has although helped Zara progress as a company but has posed as a challenge in terms of higher cost of productions. Other than that, to maintain its reputation and stock turnover they have to timely ship their products overseas to Asia. The next question to be asked here is that what is the market development strategy applied by Zara over the years. The first step Zara undertakes is asking for consumer feedback from the sales areas the moment they come to shop. Next Zara continues to focus on selling their products to new markets, which is apparent from the increase in the number of shops opened annually by them. The main focus of Zara is the product development strategy. Through constant feedback and research, they tend to influx the market with new products at a very fast pace, in small batches. They tend to focus on not producing more quantities of a single style, but on producing little quantities of varying styles. Their research team is relentlessly travelling to newer areas to find new fashion ideas and come back and report them to the headquarters. Finally, for the diversification strategy Zara could continue to look for new technology or markets to further diversify their risk. The entire system could be automated and the IS could transmit the data through different segments of the supply chain. For the future endeavors, due to the expansion of Zara to most of the countries in Asia they would be advised to further diversify themselves in terms of their technology and adhere to their customs if they want to successfully penetrate those. After applying the Porter’s Generic Strategies Model on Zara, the focus has shown a low price strategy being followed by the company. Zara, through vertical integration, controls the manufacturing of their products, thus reducing the cost of production much lower than their competitors. The medium quality applied by Zara, in contrast to the high quality products produced by the majority fashion retailers has reduced their cost even further thus reducing the final price as well. The cost leadership strategy of Zara has helped them become leaders in this business through increased sale of their products. The other reason through which Zara has been able to succeed in the market is through the differentiation strategy as well. They offer a unique service of providing the latest fashion according to the ever so changing demands of customers. Thus they offer unique products before their competitors do so. For Zara to sustain itself in the global markets they have to diversify their distribution channels to other areas of the globe as well. In case of any natural disasters or any other form of disaster they would be in a pickle. Other than that Zara need to diversify themselves more towards other forms of sales channels. They have two other options apart from the stores, which they have not utilized to a great extent. They can use the internet and the catalogue service to access to the untapped consumers. Furthermore they can also look to penetrate the Indian and Chinese markets by catering more to the niche market there. Especially in India and China there are numerous designers providing low cost products because of their very cheap labor. They can earn much more if they can cater to the niche and even increase the prices of their products. Implementation Issues For Zara to apply these strategies they would have to face some implementation issues and a proper response would be required. For the successful penetration and sustaining high sales in countries like India and China, Zara has to take care of the people around there. The people generally in these areas are highly culture oriented and cost conscious. Zara has to be particular when producing the designs that cater to the culture of these nations and do not offend them. Apart from that they also should look for catering to the niche market there as well. As Zara has not diversified much towards establishing their networks in Asia or North America, they might at some stage face difficulties. The entire process of Zara is following the concept of JIT and vertical integration. At some stage they might have to change the process a little by establishing distribution elsewhere. The process can also be hampered due to lack of technology advancement; hence they would have to focus on this as well. Apart from these things the strategy of not changing and remaining rigid to their old processes might not be feasible in the near future as the environment of the entire world is rapidly changing in terms of economics, politics, technology and other factors. Conclusion Apart from certain issues that Zara could face in the future, it has been successful all over the years through sticking to its current system. However, with the continued expansion of Zara into new areas and markets, a change would be required in the current process and system. These changes will not be major but minor changes in technology, network and supply chain and these would ensure further growth and success for the company. 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