Strategic Analysis of Zara Inc - Essay Example

? Strategic review report and case analysis: Zara BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS 0 Industry analysis..................................................................................................... 2.0 Internal strategic audit............................................................................................. 3.0 Corporate reputation and stakeholder issues........................................................... 4.0 Proposing strategic recommendations for Zara....................................................... 5.0 Conclusion............................................................................................................... References EXECUTIVE SUMMARY Zara maintains many retail competitors, ranging from H&M to Benetton, each providing products with similar characteristics and moderately-similar pricing structures. It is a highly saturated market in which Zara maintains its international operations. Because of this, the business must be aware of the competitive forces that drive strategic needs. Research indicates these factors include intensive competitive rivalry, buyer power with consumers, and even threats of substitute products that can drive pricing lower. Research has also indicated much negative publicity for Zara, something requiring addressing by Zara executives in order to improve and sustain a quality brand reputation in its international markets. Though Zara is able to effectively create some barriers, such as new market entrants and by removing buying power by limiting outsourced supplier presence, Zara still requires more emphasis on understanding market characteristics effectively to provide relevant products and gain more brand loyalty. Recommendations for business improvement have been identified as conducting more intensive market research, more emphasis on the promotional function and utilisation of interactive marketing, decentralisation of certain business functions along the value chain, and building more self-owned manufacturing and supply capacity in order to gain competitive advantage. 1.0 Industry analysis Buchanan and Huczynski (2010) provide knowledge of contingency theory, a strategic model that indicates as circumstances in the market or industry change, the organisation’s structure must also be changed in order to adapt and stay relevant. Zara is a prime example of a business that understands the market characteristics and capabilities of major rivals, creating contingency strategies in order to respond (quickly) to changing market and industry dynamics. This is accomplished, of course, through maintaining a stance in which Zara executives routinely scan the external environment to identify threats and opportunities that could contribute to a better market position. Thompson, Gamble and Strickland (2005) offer the Five Forces Model proposed by Michael Porter identifying five competitive threats that are industry-related that will either enhance or disturb maintaining profitability and competitive advantage. The most intensive industry concern for Zara is threat of substitutes in its operating markets. H&M, Gap Inc. and Benetton offer similar fashion merchandise that is focused on either youth markets with a trends-focused set of buying characteristics or mass markets that are attracted to fashionable styles at affordable prices. Macro-economic theory indicates that threat of substitutes becomes a legitimate concern when the demand for the product has been affected by price changes associated with substitute products (Boyes and Melvin 2007). For Zara, substitute products include clothing sold at resale shops, such as with the emerging trend for retro-style fashions. In this environment, clothing is sold at a nominal price, but still offering consumers products that are deemed fashionable. The ability of consumers to procure merchandise and fashion accessories from a variety of lower-cost sales facilities has the ability to affect demand for Zara’s merchandise. Thus, Zara must be aware of alternative procurement options for consumers in order to remain relevant and also sustain consumer demand levels for Zara’s already lower-priced products. The threat of competitive rivalry is intense for Zara. Largely, it the marketing strategy (especially promotion) that serves to create perceptions in rival target markets that such competition as H&M and Gap Inc. can provide superior value. In 2012, the famous sports icon David Beckham was recruited to promote H&M clothing and ideology (H&M 2012). Beckham has a well-established brand reputation in the UK and abroad, which links a trusted celebrity with the H&M brand personality. When a celebrity is deemed to maintain three distinct characteristics, which include attractiveness, expertise and trust, celebrity endorsements maintain the ability to create positive brand perceptions with many consumer markets (Pornpitakpan 2003). Further, in 2011, Benetton utilised a photographic advertisement illustrating Venezuelan President Hugo Chavez kissing U.S. President Barack Obama as part of its corporate social responsibility campaign (Wells 2011). Benetton is famous for utilising socially-relevant promotions with the ability to shock or otherwise amaze consumer target markets in order to create instant brand recognition. The depth and prowess of competitive promotions with major competitors are significant risks for Zara in attempting to build brand loyalty. Brand loyalty is achieving preference for one company over another rival by building consumer attachments that favour the perceived value, service excellence, or product benefits provided by one retailer over another (Schiffman and Kanuk 2010; Abimbola 2001). Zara must be consistently aware of the competitive promotional strategies of competition and attempt to react to these powerful market-centric strategies in order to sustain consumer belief that Zara can outperform value as compared to major competitors. Fortunately, Zara is able to reduce nearly all supplier power that can serve to create cost increases throughout the entire supply chain. Zara maintains control over approximately 60 percent of all manufacturing, giving them much more cost control capacity as it pertains to supply. Whereas other competition, such as H&M, relies on diverse and widely-dispersed vendors to ensure replenishment, Zara virtually eliminates the pricing negotiation power of its suppliers by raising switching costs for suppliers. These are significant cost and competitive advantages for this business that provide ample market authority for the firm. As it relates to buyer power, consumers are essentially the controlling gatekeeper in this fashion retail industry. Because the market is saturated and many competitors offer fashion-forward products at affordable prices, the switching costs for defecting to other retailers are very low for target consumers. In this market, buyers hold a very legitimate backward integration risk which gives them the power to buy from rival retailers in the event of pricing differences or availability of more relevant fashions. Zara is able to create some barriers to this threat, apparent in the firm’s ability to turnaround fashion from the drawing board to actual inventory availability in just 10-15 days, which provides options for consumers that are not relevant with such competition as Gap Inc. However, Zara must be diligent in understanding the impact of buyer power associated with price elasticity or the differentiation strategies utilised by competition in order to remain relevant in the minds of consumer markets. The industry life cycle model (ILC) describes three phases in which an industry evolves, including fluid, transition and maturity (McGahan, Argyres and Baum 2004; Klepper 1997). In the fluid stage, the market is fragmented as the business attempts to develop products and learn about consumer needs (Suarez and Utterback 1995). Zara has long since passed this phase. Zara is now in the transition phase, not yet having reached maturity, in which competitive marketing efforts have paid off by giving consumers the perception of value which, in turn, raises demand for Zara products. Zara is able to innovate and increase operational efficiencies which, in the transition stage, extends the product life cycle in the industry. Zara has significantly untouchable prowess in the transition stage unachievable by competitors, giving the business much more longevity (the brand) in the industry life cycle. Whilst competition is concerned about potential risks of being forced to exit the market, Zara should be able to sustain its competitive market position indefinitely for its innovative approaches to manufacture and design, coupled with promotional capability. 2.0 Internal strategic audit The systems view of the organisation describes a firm structure as being a holistic assembly of value-adding activities that must function inter-dependently in order to achieve market value and profitability (Maritz and Salaran 2010). These dependent systems are characterised as the value chain, a sequence of activities in order to deliver a valuable product to a market and its buyer segments. A retail business in this industry must understand how to exploit the competencies or improve weaknesses in such areas as marketing, human resources, logistical strategy, and sales in order to maximise efficiency, profitability and ensure a relevant product is delivered to favourable target consumers. To ensure this is occurring internally, value stream analysis is conducted by executives and managers of retail organisations. Zara outperforms all of its competitors in relation to logistical planning and execution. With the facilitation of technologies and vertical integration, Zara has been able to streamline its manufacturing and replenishment strategies to a lead time of only 10 to 15 days in many cases. According to the case study, Zara performs its manufacturing processes 12 times faster than Gap, Inc. when considering the role of designers in creating relevant fashion concepts, the time in tangible production, and the ability of the firm to distribute its finished product to its many retail stores domestically and internationally. However, this is not accomplishable without the recruitment talents of human resources experts in the organisation, competent procurement talent, and implementation of relevant technologies (such as business resource planning software) to assist in achieving rapid replenishment in-store. It is due to the fact that Zara maintains operational control over 60 percent of its manufacturing that makes this achievable, giving the business a substantial competitive edge over competition that sometimes sustain lead times of nine months to launch a new collection from the drawing board to the final inventory position. Zook and Allen (2001) identify that in most industries, competitors are not able to sustain their competitive advantages in areas of the value chain for too long as rivals will eventually begin replicating or benchmarking rival strategies. Fortunately, Zara is able to create effective barriers to value chain replication, especially related to manufacture and logistics, as no other industry competitor is as streamlined in these functions as Zara. Zara has achieved notable economies of scale by not seeking diversified supplier networks which tends to limit the scope of control of internal management teams related to meeting production and replenishment expectations. Suppliers in the market can increase lead times for necessary raw materials through inefficiency or over-capacity that limits other inter-dependent areas along the value network. Zara, however, does not have these concerns, having established an appropriate distribution philosophy and the tangible internal capability to achieve a finished product in just two weeks when required by market demand and preferences. Copacino (1996) describes the imperatives of establishing cooperative alliances along the supply network in order to exploit the talents and knowledge of vendors and enhance responsiveness. Zara’s internal management team is adept in these alliance developments which provide the retailer with the ability to control costs, ensure a willingness to respond to manufacturing or material supply needs, and establish a holistic customer relationship management system (a marketing function) to build better business-to-business partnerships. After the dying and cutting processes in manufacture, products supplied outside of Zara’s manufacturing network are then stitched through a variety of cooperatives that have been long-standing suppliers of Inditex. These relationships are so potent that many cooperative members do not even have contractual agreements (Gallaugher 2008). The executive competence and aptitude of managers in identifying logistic-related opportunities for improving supplier alliances gives the business abundant competitive advantage in terms of cost controls in lean production and ensuring responsiveness with important secondary suppliers operating outside of Zara’s internal manufacturing network. This is a non-replicable element of the value chain that provides Zara with the capacity to ensure a maximum of 15 days from shop floor to the sales register. Zara maintains a highly centralised organisational structure, one where decision-making occurs vertically rather than horizontally. It is a strong, operationally-focused culture (a lean culture) that focuses on efficiency and productivity, as well as team functioning, in order to sustain cost and competitive advantages (Caro 2008). Whilst many in business believe that a de-centralised organisation provides better opportunities for shared decision-making and innovation generation, Zara recognises the importance of sustaining a centralised business in order to ensure compliance and productivity that is absolutely critical to achieve rapid replenishment of product with new and interesting fashion changes. Schlosberg (2006) iterates that a decentralised culture is oftentimes ineffective in promoting team collaboration. Zara seems to understand this, being able to maintain tighter controls over employees in this centralised hierarchy which guarantees more compliance in team performance and team-based productivity. In fact, daily communications occur between management at Zara retail stores and executive leadership to ensure that all operational expectations are complied with, which reinforces the authority structures that drive efficiency in the Zara business model. Comparatively, other retail centres promote their decentralised methodologies which these firms believe contribute to better service excellence. Zara, however, is not focused on promoting service dimensions, instead on relevancy of product and speed-to-market of interesting and market-demanded fashion products. It is through the management talent of centralised power systems that are able to ensure that cost controls are maintained throughout the entire value chain so that lower prices can affordably be passed on to important revenue-building markets whilst still guaranteeing recapturing of operational expenses of manufacture and administration. It is the managerial strengths of maintaining a culture of team-based performance that outperforms nearly all of Zara’s main retail rivals. The effectiveness of the internal business model and culture of productivity is reflected by ratios of customers that frequently visit Zara stores compared to rivals. As supported by the case study, the ratio is 17:3 in favour of Zara. Without sustaining an internal system of managerial authority where decision-making remains at the top of the hierarchy, Zara would lose much of its competitive edge and witness reduced demand for its products. 3.0 Corporate reputation and stakeholder issues Zara is not isolated from the impact of negative publicity. Recently, Inditex was targeted as being a potential contributor to the unethical labour conditions in Morocco, a region that is a major supplier of products for Zara. Moroccan workers often are illegal labourers that are paid in cash disbursements in order to hide issues of taxation and hours record-keeping. This has ethical implications for Zara and its parent company Inditex as there is a growing trend within Western consumer markets related to demands for corporate social responsibility that serve as a purchase decision about whether to procure products from various retailers based on perceptions of ethical stance (Reuters 2007). With the acknowledgement that many customer segments would be turned off by perceived unethical behaviour within a retail business model, Zara must be keenly aware of the role of negative publicity in sustaining the relevancy and life cycle of its brand reputation. Zara was placed under investigation for the firm’s role in supporting Brazilian sweatshops that supplied many products for the company. The Brazilian government pressed a total of 52 charges against Inditex when the government stormed the alleged sweatshop and rescued a total of 15 workers, one of which was only 14 years of age (Burgen and Phillips 2011). It was further alleged that workers were forced to labour over 16 hours daily, splitting meagre profits of only $1.14 between the entire team of production labourers (Burgen and Phillips). In Argentina, yet another sweatshop-related inquiry was launched against Zara, indicating that child labour and degrading working conditions were being supported by the firm (Fashion Spot 2013). Repeated inquiries into Zara’s role in facilitating the existence and support of deplorable working conditions and exploitation of child labour is ever-prevalent in media coverage that serves to erode the brand reputation and equity of Zara. Why is this relevant to Zara in maintaining its rich history of integrity and brand competence in a variety of international markets? Deontological ethics theory indicates that it should be the first duty of businesspersons to perform good against others in society (Takala 2006). Under the deontological approach to corporate ethics, the duty of businesses is to improve the quality of life of individuals working as suppliers and promoting labourer equality (Takala). Consumer behaviour theory indicates that buyers make final decisions about which brand of product to purchase based on stereotypes and also first impressions (Schiffman and Kanuk 2010). When media publicity attempts to paint Zara in a negative light, those in society that share deontological views of corporate ethics can easily build a stereotypical view of Zara as an exploiting and hostile force that seeks profitability over the well-being and utility of its workers. The growing trend of consumers to demand ethical behaviour of businesses coupled with known consumption behaviour patterns poses a tremendous risk to Zara when attempting to build brand loyalty, which is the foundation of brand equity that allows a business to expand product lines and profitability. Fortunately, there is no evidence that Zara attempts to hide the aforementioned allegations, rather making simplistic statements that either deny the charges or agree to be supportive in cooperating with regional authorities to improve labour conditions in many supplier nations. Attempting to mask negative publicity is a significantly-risky business activity that can ultimately lead to further reputational damage (Kessler 2011). This is why most industry leaders develop corporate social responsibility press releases indicating the good duties that are being performed by the company in order to avoid the negative first impressions and stereotypes that are generated in consumer markets that also serve to erode desire to make consumption purchases. By identifying stakeholders that are positively impacted by Zara’s presence in a region, their employment practices, and focus on improving quality of life for many international citizens, it can supersede these negative connotations stemming from media publicity. The deontological approach to corporate ethics, as perceived by consumers, is a growing type of universalism about the ethical and moral stances of powerful retail organisations that outsource production and supply in developing countries. 4.0 Proposing strategic recommendations for Zara Improving the firm’s market position is accomplishable through the utilisation of more intensive and market-centric promotions. It was aforementioned that many competitors such as H&M are very adept in utilising relevant advertising and other promotional strategies in order to gain market loyalty and facilitate perceptions of value through marketing strategy development. Intensive research into Zara’s operational model did not indicate that the firm devotes significant capital investment into the promotional process, instead relying on word-of-mouth and its non-replicable fast fashion model to build a brand identity in international target markets. Zara should benchmark the promotional capabilities and strategies of Apple, Inc., a technology leader in the communications and personal computing industries. Apple is renowned for maintaining brand loyalty that is developed through promotional transparency and interactive marketing using social media networks to build customer relationships and satisfy their servicing needs. Apple performs what is referred to as movement marketing, a contemporary marketing strategy by which the firm ceases telling important target markets what they product, but instead expressing consistent and integrated communications depicting values and beliefs (Goodson 2011). When facing negative publicity that can erode brand sustainability and personality, Zara should be more interactive in utilising social media and press releases to allow consumers to witness the internal dynamics of the ethical and socially-responsible dimensions that drive internal culture at the firm. Consumers in most industries are highly emotional and many of their consumption decisions are driven by sentiment of social networks and their psychological relationships with a brand. Zara’s internal centralised culture of compliance and productivity does not afford the business with opportunities to build interactive and emotionally-charged relationships with consumers. However, major companies with established brand equity borne of brand loyalty are becoming more adept in creating psycho-social relationships with consumer markets in order to build a sense of ethical responsibility within target markets. If Zara were more proactive in consistently expressing their core values of CSR through movement or interactive marketing, the firm could more easily combat the negative press that serves to potentially erode their market position. It is further recommended that Zara consider improving its wholly-owned manufacturing facilities in order to remove the burdens that occur with the labour conditions either alleged or legitimate in foreign territories where products are supplied and produced. As identified by the case study, Zara maintains whole ownership over 60 percent of its manufacturing capabilities. Even though this would represent a significant capital investment to further diversify its own production facilities, Zara could avoid the negative publicity that is occurring in such markets as Brazil and Argentina where Zara is accused of facilitating illegal activities or deplorable working conditions. Capital investment, though large in this effort, is supported by Zara’s very positive cash flow and credit position on the market and would serve as long-term asset procurement that provides a better liquidity position. This is a strategy for long-run liquidity that would preserve the business against any sudden drops in revenue created by changing market conditions, the economic environment in international sales markets, or new market entry by competitors that might be able to replicate Zara’s fast fashion model. To avoid reaching the maturity stage along the industry life cycle, Zara should be conducting market research analyses in order to keep up with changing trends in consumer behaviour and fashion consumption. Research did not indicate that Zara is adept in this function, which is often considered critical from a sales and marketing perspective. By creating qualitative or quantitative market research studies utilising large samples of younger, fashion-centric buyers, Zara can faster respond to changing design needs that will be considered relevant. It has been established that Zara is able to avoid high inventory holding costs by moving inventory quickly with very little excess that is either subject to clearance pricing or destruction. Utilising surveys and questionnaires, as well as focus groups, Zara can gain a better understanding of what is driving sentiment toward the brand and then create responsive strategies by which to combat negative consumer connotations or improve on its strengths in business strategy. The market research process allows for coding of findings, either subjective or statistically-supported, so that targeting and segmentation can occur more effectively. The results of market research studies also provide a business with opportunities to improve on promotion (advertising) that maintains communications and actors that are relevant to the lifestyle needs of Zara’s diverse buyer segments. It seems that Zara is dependent on word-of-mouth and the tangibility of non-replicable replenishment strategies to maintain its market reputation, which is not necessarily sustainable over the long-run with the risk of emerging competition or better improved rival business strategies to gain market attention and interest in their competitive brands. Finally, it is recommended that Zara analyse which areas of the business should be decentralised whilst still maintaining its authority hierarchy that drives efficiency and performance. Zara must be innovative in its fashion production, supported by the firm’s presence of market-relevant designers that consistently come up with new fashion concepts. Innovation, therefore, is a key success dynamic that continues to bring demand higher for many of its unique product offerings. Business theory indicates that a decentralised organisation is able to produce faster innovations through sharing of knowledge between tacit and explicit knowledge holders and communities of practice. For instance, sales and marketing could be decentralised for horizontal decision-making so that communities of practice with procurement (as one example) are enacted for better knowledge management. Research, again, did not indicate that Zara had considered decentralising some of its business functions as a means of producing more valuable knowledge gained through interactivity with knowledge holders. If Zara considers certain divisions moving information horizontally, it is likely that business solutions for innovation generation can be created in more rapid succession, thereby improving its market position and increasing demand for Zara’s fast fashion products. If Zara follows the aforementioned recommendations, it will improve its market position among competition that seem to be consistently adjusting and adapting to changing market conditions in order to outperform competition and achieve competitive advantages. Though Zara currently maintains a strong brand personality, long-run equity can better be achieved by improving marketing, improving responsiveness to negative publicity, decentralising certain business functions, and improving innovation. 5.0 Conclusion Zara, as shown by the research in the report, has substantial competitive advantages over competition. The industry, largely, is favourable for supporting Zara’s current business strategy, but there are weaknesses that Zara should focus more intently on in order to sustain these advantages. This included recommendations for creating more effective promotional strategies, utilisation of more interactive marketing, creating new company-owned manufacturing to remove reliance on outsourced suppliers, performing market research more often, and decentralising certain business functions. It is only through these developments that Zara will be able to remain sustainable over the long-run. References Abimbola, T. (2001). Branding as a competitive strategy for demand management in SMEs, Journal of Research in Marketing & Entrepreneurship, 3(2), pp.97-105. Boyes, W. and Melvin, M. (2007). Economics, 7th edn. Cengage Learning. Buchanan, D.A. and Huczynski, A. (2010). Organisational Behaviour, 7th edn. Essex: Pearson. Burgen, S. and Phillips, T. (2011). 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New York: McGraw-Hill. Wells, J. (2011). Why is President Obama kissing Hugo Chavez?, CNBC. [online] Available at: http://www.cnbc.com/id/45326469/Why_Is_President_Obama_Kissing_Hugo_Chavez (accessed 4 April 2013). Zook, C. and Allen, J. (2001). Profit from the core: growth strategy in an era of turbulence. Bain and Company, Inc. Appendix A: The Corporate Value Chain Source: [Adapted From] RSP. (2012). What is a Value Chain?. [online] Available at: http://www.ruralsupportpartners.com/value-chain-resources.php This value chain model illustrates the complex relationship between suppliers, consumers, and supplementary service providers in retail. Accompanying the model are the many different stakeholder groups involved in facility investment management, politics, and many other value-adding activities necessary to sustain the business model at Zara. Read More