Zara: A Company Overview - Essay Example

? Case Study Analysis: Zara Executive Summary Zara is a well known Spanish clothing and accessories retailer. It operates in more than 30 different countries. Presently it is one of the leading fashions designing as well as manufacturing companies successfully providing services to the customers. This paper provides a brief overview of the company and its performance in the past few years. The macro environmental analysis of Zara has been done to analyse the effects of the external factors on its business operations. The industry analysis of Zara has helped to find out the current position of Zara in the fashion retail industry. The paper also reveals the strengths, opportunities, weaknesses and threats of the Company. The value chain analysis and the resource capability analysis of Zara reflect the systematic and effective management of the products and services which has helped the company to achieve a successful position in the retail industry. This paper also provides insights on the current issues regarding the violence of the CSR activities by the company. It has been identified that the company should plan for an effective cost structure to overcome the recent problems. Recommendations have been provided using porter’s three generic strategies and Ansoff’s matrix to help the company make suitable strategies for achieving competitive advantage through market penetration and product differentiation. Table of Contents Table of Contents 3 Zara: A Company Overview 4 External Analysis 4 PESTEL Analysis 4 Industry Analysis: Porter’s Five Forces Analysis 6 Value Chain Analysis 7 Resource Capability Analysis 9 Issues related to the PR crises of Zara 10 Strategy Recommendation 11 Strategy Evaluation 15 Conclusion 16 References 17 Appendix 20 Zara: A Company Overview Zara is a well known Spanish clothing and accessories retailer. It’s headquarter is located in Arteixo, Spain. The company was founded by Amancio Ortea Gaona. It is one of the renowned brands of Inditex which was founded in the year 1975. The company had a slow growth in its initial years of operations but expanded to a great extent after the 1990’s. Zara is successfully operating in more than thirty different countries. Presently it is one of the leading fashions designing as well as manufacturing companies successfully providing services to the customers. External Analysis The environmental scanning of Zara will be done using the PESTEL Analysis. Pestel Analysis helps in analysing the issues related to the macro environmental factors (Lorat, 2009). PESTEL Analysis Factors Analysis Political UK is presently facing various problems related to high public debt, high unemployment etc. The government has taken important measures like cutting down the budget to an extent of 23 percent for media department, 22 percent for sports and culture department in order to reduce the overall financial deficit caused due to the sovereign debt crisis and the economic recession (Lynn, 2010). The Government has also planned to decrease the corporate tax rate in order to facilitate the companies operating in the country to recover from their financial crisis condition. Economic The economic recession has affected the European countries including United Kingdom. This recession has resulted in the increased unemployment rate for UK. Economists have also forecasted the future rise of the unemployment rate in the coming years. The recession has resulted in the decrease in the purchasing power of the customers as well. Thus the fashion retailers will have to face a situation of demand crunch due to their operation in UK. Social The sovereign debt crisis along with the budget deficit in UK has decreased the purchasing capacity of the individuals and has also created a challenge in maintaining a standard life style. The working age population in UK is rising. The fashion retailers should focus on bringing a change in its product portfolio in future in order to satisfy the needs of the aging population of the country. Technological The retailers in UK are focusing on the implementation of latest technologies like RFID and ERP in order to increase the speed of the entire value chain process and decrease the cost of operations at the same time. According to Science and Innovation Investment Framework, there have been poor technological investment situation in the country (BBC, 2004). Thus the fashion retailers will have to face strict investment conditions in UK. Environmental The UK Government is taking steps towards the use of renewable sources of energy as its primary source. It is taking important measures for the purpose of reduction of carbon emission, from the activities performed in the industries, in order to maintain and satisfy the environment norms that have been specified in Kyoto Protocol. The government has also ordered the foreign companies operating in UK to reduce the carbon footprint by almost 20 percent in order to decrease the extent of carbon and sustain in market in UK. Legal The legal framework of UK supports the industrial development in the country. The apparel retailing industry being a part of the retail industry will be supported by the government in its future growth. The logistics system in the country has provided productive and supportive rules for safe business transactions. The country’s legal system has created an opportunity of liberalized capital movement. The country follows the laws mentioned in the European Union labour law in order to sort out the labour problems. Thus the fashion retailing companies operating in UK should change their HR policies in compliance with the EU guidelines. Industry Analysis: Porter’s Five Forces Analysis An industry analysis of Zara will be done to understand competitive intensity in the fashion retail market (Porter, 1980; 1985; Ahlstorm and Bruton, 2009). Bargaining power of the buyers- Clothing is an essential need for the buyers while the same cannot be said in case of the fashion apparels. Thus the buyers have that power to select offerings of such fashion apparel companies which offer lower cost. Hence the bargaining power of the buyers increases. As the number of customers in the fashion retail industry is not very high, so the customer demand has a significant effect on the product portfolio of the fashion retail companies. Thus the bargaining power of the buyers is high. Bargaining power of the suppliers- The suppliers of the fashion retailing industry are mainly the cloth manufacturers, the wholesalers and the designers. The supplier sector in this industry is fragmented. The bargaining power of the suppliers in the developed countries have decreased as the companies in the fashion retailing industry are outsourcing the supply from countries like India and China having low wage manufacturers. The supplier power has also reduced to some extent because of the low switching costs available to the retailers. The diversification in the supply is lacking which is another important factor responsible for the weakening of the bargaining power of the suppliers. Threat from the new entrants- The amount of capital investment required to start a new business in the fashion retailing industry is very high which has increased the entry barrier for the new entrants. Meanwhile stringent government policies in many countries have restricted the entry of the retailers which do not have credentials and financial resources. Hence the threat of new entrants is low. Threat of substitutes- The purchasing pattern of the customers for the fashion retailing products is very different from that of the other apparel retail products. The retail channels providing online marketing can be a threat to the company. But this cannot cause a significant effect on the big players in the fashion retail industry. Thus the threat from the substitutes in the market is low. Rivalry among existing firms- The fashion retail market in a broader prospect is fragmented. It allows many small players to enter into the market. Some small retailers offer a particular category of product (for ex- children wear) whereas big players in the fashion retail industry offer all the three categories of products to its customers. The small retailers fail to maintain the diversification in their product line. Thus the rivalry of the existing firms is low. Value Chain Analysis The value chain analysis states the activities which are taking place in the business operation and finally relates them with the competitive strength analysis of that business (Dagmar Recklies, 2001). It helps in working out the maximum possible value for the customers (University of Washington, 2011). The activities of Zara can be integrated in the following manner Primary Activities: Design Zara chooses the latest trends of the apparel collection in order to differentiate its products. Its business model helps the company to replenish the entire stock within few days thereby reducing the risk related to the stocking of outdated fashion material. The company employs various fashion designers and other sourcing specialists who enable the company to lead the fashion retail market with latest trends and fashion. Manufacturing Zara sources the raw materials for manufacturing and production through various purchasing offices which are located in Barcelona and Hong Kong. It is also planning to source the raw materials from the eastern region in order to increase the variation in the company’s product mix. The suppliers belong to Europe, Central America, East Asia and South East Asia. The company starts planning for its procurement as well as designing at least four to five months before the start of actual selling season in order to attract more than 60 percent of the customers. Distribution Centres The centralized distribution model of the company helps it to achieve competitive advantage over its competitors. The distribution centre is complemented with an additional procurement centre located in Spain and other satellite centres in Argentina, Mexico and Brazil. Value Chain of the company comprises of four warehouses which receive the final or finished goods from the international as well as the domestic suppliers. The centralized system of distribution of the company helps it to replenish the stocks at least two times a week both internationally and domestically. Retailing Zara mainly focuses on offering fashionable and trendy garments at comparatively low prices to the customers. In case of manufacturing Zara uses vertical chain integration whereas in case of retailing the company uses the technique of forward vertical chain integration in order to match the apparel collection along with the demand of the customers. The stores operation of the company emphasizes on meeting the demand of the customers in the earliest possible time. The company replenishes its stock two times in a week which is not possible by its competitors in the fashion retail industry (Lutz, 2012). The company follows the strategy of zero advertising and spends only 0.3 percent for advertising purpose in order to plan for an effective cost structure. The company has a separate division consisting of specialized designers to renovate the design of the store to increase its brand visibility among the consumers. Secondary activities Technology Development Zara has made huge investment on IT of the company. The company uses eco friendly policies for manufacturing its products. Zara has integrated the concept of green supply chain management in order to decrease the green house gas emission effect. Thus the technology adapted by the company has helped it to achieve competitive advantage over its competitors in the fashion retail industry. Procurement Zara sources the raw materials from Spain, Greece and Italy. The main reason behind this is that the final products can be delivered to the destination point quickly. Infrastructure The implementation of the advanced information technology by the company has helped to run the business processes in an efficient manner. The organizational structure of the company has also supported the IT. Resource Capability Analysis The resource capability of a company plays a significant role in achieving competitive advantage over its competitors. Resource capability determines that how effectively a company can finance in order to provide quality products and services to its customers. The main resources that have helped Zara to achieve competitive advantage over the competitors are mainly tangible resources, intangible resources and finally the capabilities. It is a combination of these three resources that has helped Zara to achieve success in the fashion retail market. The tangible resources of the company are the raw materials, the capital invested, the logistics capabilities and the proper management of the business operations (Peng, 2010). The company has invested huge amount of capital to develop and implement advanced technology. It has sufficient amount of capital to continue its business operations also. The raw materials are sourced from special designers and other sourcing specialists, which have helped the company to provide good quality and latest trend fashion clothes to the customers and satisfy them. Zara changes the infrastructure of its store in every three years in order to give a good feeling to the customers and increase the brand attachment of the company with them. Zara changes almost 75 percent of the stores layout and the product display in every three weeks. The company uses Just in Time technology to control the manufacturing process, supply chain and the sales activity (Kasyuk and Reedman, 2008). It uses the JIT manufacturing system as well as the synchronized telecommunication system in order to control production, sales activity and the supply chain. JIT process has decreased lead time for the company. This technology has helped to reduce the lead time of the company. The intangible resources of the company are Goodwill, brand equity, reputation etc (Warren, 2009). The goodwill depends on the excellent product or service offerings by a company which is usually extended through word of mouth (Cruz, 2006; EmporisGmbh, 2012). The company has earned its goodwill in the fashion retail industry and has been successful in being counted among the big players in the industry. The quality product offerings by the company has not only helped it to earn a good amount of revenue, but has also helped to achieve a strong brand name. The company uses its human resources in the best possible way to provide high quality products to its customers. The human resource capability of Zara can be counted as one of the biggest potentials of the company. The employee capability is one of the imitable resources of the organization. The human- failure rate of designers is 1 percent in comparison to 10% of industry average. The organization should make effective use of its employees in order to achieve competitive advantage over the competitors. Issues related to the PR crises of Zara There has been some legal framework set for every organization which directs regarding what to do and what not to do (Haberberg and Rieple, 2007). Every company should try to practise their corporate social responsibilities while continuing their business operations in the market (Mallin, 2009; Innes and Norris, 2005). Zara does not reveal all the internal issues of the company to the stake holders. Moreover the management does not have a clear and transparent communication with the media. Mr. Amancio Ortega Gaona who was the former Chairman of the company has never given any interview to any journalist. The present chairman, Mr. Pablo Isla, does not like attending press conferences and interviews too. This reveals that there is only one way flow of communication in the company. This reduces the disclosure of the company’s information to the customers. This can sometimes hamper the bond and the relationship that has developed between Zara and its customers. Proper disclosure of the information about the company and its internal affairs to the stake holders is very important which might otherwise be a reason of dissatisfaction to them. This will affect the goodwill of the company leading to the reduction in its profitability. The company needs to improve its communication with the media and share the information related to the internal affairs of the company with the media so that the customers and the other stakeholders be satisfied. This will help Zara to retain the relationship with its stakeholders. Zara had some issues related to the violation of the organizational ethics and Corporate Social Responsibility. The workers were paid less instead of working for more than 16 hours per day. They were paid wages which was less than that of the legal minimum wage of Brazil. Inditex, the owner of Zara denied this fact and has put the blame on one of its suppliers (AHA) saying that they have violated the ethical code by the use of workshops which exploited the workers in an illegal manner. Zara was being counted among those companies who perform their business operations by means of unethical and unlawful activities. There are reports which reveal that the labours of Zara had allegations that they were not allowed to leave the office even after the completion of their working hours without asking the senior officials of the company. The company meets the demands of the customers by offering them products at the cheapest prices which is resulting in the poverty wage payment to the workers. Presently Inditex has made discussions with AHA in order to make arrangement to compensate the workers who have been affected. These workers are being committed to be provided with workshops which work in accordance with the legal framework that has been made for the manufacturers. This scandal has affected the reputation of Zara. It might lead to losing of the existing customers by the company. The company has promised previously that it will be providing a better life to its employees. The scandal related to the poor wage payment by the company has resulted in the dissatisfaction among the workers. Moreover the violation of ethics by the company has resulted in weakening of the reputation of the company. The overall effect was the public relation crises. The company should take steps to regain its reputation in the market. Important measures are needed to be undertaken to improve the condition of the payment of wages to its workers. Zara should implement strategies for cost optimisation of its operational activities. The vertical and horizontal integration of the value chain should be synchronised properly to plan for an effective cost structure. Strategy Recommendation Zara needs to choose the strategic options which will help it to gain competitive advantage over its competitors in the market and also reduce the threat that might arise due to the entry of the new competitors. Porter’s three generic strategies: The three generic strategies, as suggested by Michael Porter, help a company to choose and implement strategies which will help it to achieve competitive advantage in the market (Eldring, 2009). The three generic strategies are mainly the cost leadership strategy, differentiation strategy and focus strategy (Porter, 2008). Zara can implement the strategy of differentiation. Choice Rationale Advantage Disadvantage Implementation Differentiation strategy Differentiation in the product line of Zara will help it to strengthen its position in the fashion apparel industry and gain competitive advantage over its competitors by providing diversified products as compared to its competitors. It will attract the new customers. The differentiation makes it difficult for the competitors to copy the product line of Zara. This strategy helps to set the product line based on the changes in the customer choices and tastes with time. It helps the company to retain its customers and maintain long term relationship with them. The over experiment while implementing the strategy of differentiation might result in decreased return on investment. The differentiation might cause a shift from the existing product line to such an extent that it will be a reason of dissatisfaction for the loyal customers of the company. The company should source its raw material from expert designers and other sourcing specialists. The company should conduct local market research in a periodic manner to understand the local trends and patterns of the customer needs and choices. Ansoff’s Matrix The companies need to implement product and market growth strategies in order to achieve a successful position in the market. Ansoff’s matrix helps the company in implementing its growth strategies in order to reduce the threat from the new entrants (Mintzberg, Ahlstrand and Lampel, 2009). The four corner stone of Ansoff’s Matrix are market penetration, product development, market extension and diversification. Zara can use Ansoff’s Matix to reduce the competitive threat (Pettigrew, Whittington and Thomas, 2006). Zara can implement the strategies of market penetration and product development from the matrix. Choice Rationale Advantage Disadvantage Implementation Market penetration strategy Presently there is a financial crises situation all over the world. Thus it is very important for the company to retain its existing customers rather than investing huge amount of money for market extension. The financial performance of the company has been inconsistent over the last five years (as shown in Appendix 1). Thus this is not the perfect time to make investments for market extension. This strategic option will reduce the risk involved in manufacturing redundant fashion material. It will also reduce the risk involved in the expansion of the business operations in the unknown markets. This strategic option might provide limitations to the market diversification of Zara and will also provide chances to the competitors of the company to copy its value chain integration. Zara should encourage its existing customers to buy more from the company. This strategic option will help the company to strengthen its position in the existing market. The company replenishes its stock two times in a week. Thus the company can provide fresh stocks to its customers as compared to its competitors like Gap and H&M who deal with old stocks for a longer period of time. The market penetration and faster integration of the value chain will enable the company to provide satisfaction to the existing customers and bring in new customers. Zara need to shift the geographical base of the value chain operation to the local market in order to decrease the overall cost of operation and implement the market penetration strategy. The local brand ambassadors should be used by the company to promote its products in the UK market. New Product Development New product development by Zara will reduce the risk involved in entering into a new and unknown market segment (Risk involved understanding of the new market demand, low return on investment and various other external factors). It will strengthen the position of the company in the existing market. It will be difficult for the competitors who are the low cost retailers in the fashion retail industry to imitate the diversified product line of Zara. The product development might to lead to the success of the company in the existing market but it restricts the operations of the company up to a limited market segment. Strategic collaboration with various fashion designers and other fashion apparel experts will allow the company to innovate its products. Strategy Evaluation SFA model is being used to understand the potentiality of the recommended strategies (Jeffs, 2008). Suitability This part of the strategy evaluation will be analysing whether the strategic options recommended for Zara are compatible for the present as well as the future external environment (ACCA, 2010). The strategic option that has been recommended to Zara using porter’s three generic strategies is differentiation of products. It will help the company to achieve its aim of achieving leadership in the fashion apparel industry. The strategic options that have been recommended using the Ansoff’s matrix are market penetration and product development. This will help the company to achieve competitive advantage over its competitors. Zara should take into consideration the environmental trends and the other external factors which might affect its business operations. The strategic options that have been recommended to the company do not involve its entry into the unknown and new markets. Thus it reduces the risk of any barrier from the political environment or the legal structure of the new market. The company is already well established in the existing market. As a result it has less threat from the external factors there. Thus the strategic options recommended are suitable for the company. Feasibility This part of the strategy evaluation will be analysing whether the resources of Zara has the capability to deliver the recommended strategies (ICSA, 2009). Zara already employs expert designers to provide quality and fashionable product to its customers. So the strategic recommendation of product differentiation will not involve very high cost. The existing distribution channel of Zara is very efficient. It provides fresh stocks to its customers in much shorter span of time as compared to its competitors in the market. The strategic options of differentiation or development of products and market penetration (remaining in the same market) do not involve very high cost too. Moreover the risk involvement in the strategic options that have been recommended is low. Thus the strategic options are feasible. Acceptability This part of the strategy evaluation covers the financial and the stakeholder aspect (Kew and Stredwick, 2005). Zara has achieved competitive advantage over its competitors in the fashion apparel industry. The strategic option of product differentiation and market penetration will help the company to increase its reputation in the existing market by increasing the return on investment. This will provide satisfaction to the shareholders who have made huge investments on the company. The profitability of the company is expected to increase after the implementation of the recommended strategic options which will be beneficial for the stakeholders. The aim of the company to achieve leadership in the fashion retail industry will be achieved by the implementation of the suggested strategic options. Thus from the stakeholder’s aspect the recommended strategies are acceptable. The strategic options that have been recommended to Zara for achieving competitive advantage over its competitors in the fashion retail industry are suitable, feasible and acceptable. The companies should make proper use of their human resources, tangible resources and other technological skills in order to design and implement their strategies. Conclusion Zara is one of the leading companies in the fashion retail industry. The centralized distribution system of the company has helped it to provide fresh products to the customers in short period of time. Moreover the company provides quality products to its customers at comparatively lower prices. This helps the company to retain its existing customers and bring in more customers. Zara has been involved in a scandal that it is providing poor wages to its workers after making them work overtime. The company should focus on its cost structure so that it can reduce the unnecessary costs and increase the profit margin of the company and pay appropriate wages to the workers. The strategic options of product differentiation and market penetration will help the company to strengthen its position in the industry. References ACCA, 2010. Strategic choice – John Son and ScholeS Suitability, Feasibility and Acceptability Model. [pdf] Avalilable at: < http://www2.accaglobal.com/pubs/hongkong/students/newsupdate/archive/2010/25/learning_strategic_choice.pdf> [Accessed 22 April 2013]. Ahlstorm, D. And Bruton, G. D., 2009. International Management: Strategy and Culture in the Emerging World. Connecticut: Cengage Learning. BBC, 2004. Science & innovation investment framework 2004 – 2014. 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Pettigrew, A. M., Whittington, R. and Thomas, H., 2006. Handbook of Strategy and Management. Thousand Oaks, California: SAGE. Porter, M. E., 1980. Competitive Strategy. New York: Free Press. Porter, M. E., 1985. Competitive Advantage. New York: Free Press. Porter, M. E., 2008. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York : Simon and Schuster. University of Washington, 2011. Value Chain Analysis. [online] Available at: < https://depts.washington.edu/oei/resources/toolsTemplates/value_chain_analysis.pdf> [Accessed 22 April 2013]. Warren, K. C., 2009. Developing Employee Talent to Perform: People Power. New York: Business Expert Press. Appendix Appendix 1: Financial Statement of Zara (Source: Inditex, 2012) Read More