Zara Company and the Growth Diversity - Essay Example

Strategic Review Report for Zara Company Introduction The report below covers Zara Company and the growth diversity it has achieved over the past years. Zara is a fashion and design company operating globally and which meets the customer’s demands instantly and affordably. The report analyses the strategies both business and corporate strategies that Zara should undertake to maintain and improve the growth of the company. The analysis of the internal and external environment helps to understand how the business operates and what challenges it may face during its operations and how best the company can overcome them. The external environment covers the analysis globally in apparel industries (Cunningham, 2012:34). External environment analysis The external environment will have an analytical review using the PESTEL and Porter’s five Forces model. Political segment-The current increasing political instability among many nations does not do any favors to business people. The war in many nations in Europe, for example nations in the Middle East like Iraq forces businesses to close down and others end up losing their items through theft. Thus, for an investor investing in another country it leads to double loss, which may impact so negatively to the trader such that closing down the business, may end up being the result. In addition, some powerful political figures in other nations where a trader may want to invest or has already invested may order the business not to have a permit to operate in that country or to close down immediately if it is in operation (Hill, 2010:63). This helps to serve the interests of the politician if they had a business similar to the new one in operation or the one to start operating, since by so doing they will have ensured that the competition is low if other such kinds of businesses operate in the country. This hinders the general growth and development of any business, hinders competition and the result is high prices for commodities, and consequently this is a practice that should remain disregarded completely in the society. Furthermore, employee’s rights and child workforce regulations remain vital to consider facilitating a legal and maintainable job environment in production. Moreover, since the growth of global trade, most producers have their bases in developing nations. The price influence of import and export taxes on the apparel organizations directly influences the progress of global retailers (Schermerhorn, 2011: 56). Economic segment- Because of weak currencies, low workforce costs and the chance to be near to customers, a business ought to look into the techniques to reap benefits from a different site. This is so because competition has already penetrated the newer market and persistently tries to balance the gains related to these markets. This has a great influence on the profits of the enterprise. The attainment of a stable economy has remained a big challenge to so many countries and thus current economic trends like inflation, unfavorable balance of payments among others pose a great threat to business people in many countries. These trends affect both the growth and profitability of the organization (Pahl, 2008:72). For instance, the purchase of clothing may simply remain a luxury rather than a necessity. Thus, when an economic recession occurs, it may cause a reduction in customers’ disposable earnings, and hence leading to reduced expenditure on clothing. Moreover, a higher rate of individual savings may have a negative influence on demand in the apparel industry (Cunningham, 2012:14). Socio-cultural segment- customers appear to use much money on electronics, travelling, healthcare, education, and leisure and spend less on clothing, which makes apparel industries to establish their organizations ecologically to meet customers’ demands. Many workers in the company are females, and they mainly do spinning, weaving, or hanging fabrics jobs whereas males take over technical works like machine supervision. The proportion of male to female jobs in these companies exhibits a great diversity across nations and regions (Daft, 2010:40). Technological segment- Technology in the apparel industry majorly involves intense application of human intelligence other than computers in the production process. In addition, digital technologies such as Location- Based Mobile Technology, which enables retailers to monitor and communicate with consumers, remain applied to cater for the faster reforms in the apparel industry. The vital element to success in retailing remains maintaining trends of current technologies, mainly those that would make the retailer’s commodity obsolete. With the fast growth of technological advancement in the 21st century, it is important that a business knows the technological advancements achieved globally by different quick fashion dealers (Barnes, 2008:76). Demographic segment- In an apparel industry, consumer needs vary depending on their ages. The aged people may raise the demand for looser fitting clothes. Moreover, demographic sizes can influence demand in various apparel ways. A high birth rate and the ration of a pregnant woman may trigger the development of baby and maternity clothes. In addition, most businesses target younger customers with disposable earnings. This is majorly in developing and developed countries. This provides a good population to trade with. Research indicates that many consumers have the will to try current brands and at the same remain cost and quality sensitive (Gitman, 2009:24). Legal segment- Due to the high workforce costs and restrictive workforce regulations, the manufacturing process in the current nations do not appear favorable because they will increase the manufacturing costs. Moreover, accumulation of designers in Europe has an advantage since handling is possible because workforce regulations allow that. In case such apparel industry does not need to decentralize these activities, there are no policies guiding their conclusions since fashion industry is under no laws (Choi, 2012:32). Global segment-Because reduced workforce costs and enough raw materials remain plenty in a few developing nations like India, and China, many apparel industries try to work together with producers in these nations. In addition, sustainability techniques will remain established in the apparel industry under the leadership of the Sustainable Apparel Coalition like, Gap Inc., Patagonia, Nike, Levi Strauss, H&M, and Marks & Spencer. The high globalization and faster growth in technologies has led to various reduced cost-manufacturing stations to emerge. To lower the costs more and sustain quality, companies can have offshore manufacturing items to reduced cost site to reduce the costs. This will help with localization of the industry and take care of local preference. The reduction of the effects of trade values could assist in lowering transaction costs if a business plans to expand in the future outside its country’s borders (Steele, 2010:82). The industry environment: The Fast Fashion Apparel Industry (Porter’s Five Forces model) There are a number of industry innovations, and fast fashion is one. Other than applying the “designer- push” collections technique, these organizations adapt to new and upcoming patterns depending on changes in consumer needs in a few weeks, against a company average of the half year (Coyle, 2009:35). Threat of New Entrants In fast fashion, the threat of new entrants is minimal. The factors contributing to this include marketing, logistics, and manufacturing costs, which remain scattered over big manufacturing units in the fast fashion industry, which reduces completely the manufacturing costs. Young businesses find this very hard to attain, making it hard for them to compete, mainly when focusing on the vast first investments needed to penetrate this industry. Therefore, the industry is at maturity stage hence enjoying its benefits (Cunningham, 2012:24). Bargaining power of suppliers In the apparel industry, there exists so many suppliers and thus the bargaining power of suppliers is low. In addition, raw materials are enough and largely provided in a few developing nations like Vietnam, China and India. After all, it is not likely for a certain supplier to own all raw materials like cloth and cotton in the apparel industry that negatively influences the bargaining capacity of suppliers. This indicates that the industry has already grown, and it is now mature (Sabri, 2010:28). Bargaining power of buyers The buyers in an apparel industry have a medium bargaining capacity. Because consumers changing costs remain reduced and there is no increased brand loyalty in the apparel industry, consumers remain very free to select items across brands. Nevertheless, the huge number of consumers compared to fast fashion retailers, together with the reduced probability of consumer merging, reduces the bargaining capacity of consumers. This symbolizes that the industry is almost reaching the maturity stage along with the market growth rate (Pahl, 2008:32). Threat of substitute products Substitute products pose the greatest challenge to the fast fashion apparel industry. The origin of substitutes for fast fashion apparel retailers comprise high-end luxury retailers, and department stores, and discount retailers. This increased accessibility of substitute items exerts a big threat for fast fashion retailers. The worst of all is that the changing costs in this company remain reduced because consumers can quickly locate substitutes that have equal quality and price levels. Thus, the industry is still at the development stage along with the market growth rate scale (Schermerhorn, 2011: 76). Rivalry among competitors This occurs due to the huge number of international apparel retailers switching to the fast fashion design, like H&M, Topshop among others. In addition, many fast fashion organizations comprise of listed enterprises, and thus their management teams can never decide to quit the industry willingly. This is a good indication that the industry is at the development stage (Magretta, 2012:65). Internal environment Resources and capabilities theory Tangible resources In terms of finance, Zara receives strong assist from its source organization, Inditex, which has attained a profit of $1.9 billion Euros. Zara contains many various trademarks globally. Actually, in relation to Waterlow, Zara currently won a case against Louboutin in a France court which concerned trademark on red soles, which enabled Zara to further their sales from shoe manufacturing. Logos and exclusive brands constitute tangible resources that can aid Zara sustain its firm brand recognition. With the fast development in past years, Zara has proved itself as one of the most known fast fashion brands internationally (Canals, 2010:15). Intangible resources Zara has a professional designer body comprising of two hundred people who always provide the emerging news on new fashion trends so that they can regularly pursue the fast fashion market. Moreover, efficient information technology communication systems, aid Zara to appear trendy. In addition, merged information technology systems permit for a firm association between Zara’s designers, manufacturing facilities, and suppliers. Zara contains a new in-store stock design, which provides Zara with a competitive advantage on brand image as it remains considered always as an organization that can very fast reform and maintain the dynamic fashion patterns. Faster stock turnover creates a feeling of freshness and exclusiveness to consumers (Peng, 2009:42). Capabilities Zara has a strategy of providing a fast fashion image to its consumers through a time compressed manufacturing process. It covers a maximum of only one month for a cloth to remain designed and produced in stores for sale instead of the half-year cycle it used to cover before. The upward integration design, comprising of own designers, producers, and distributors, avails a flexible structure for Zara to integrate fast fashion. Zara uses minimal on advertisement compared to their competitors. For example, Gap uses several television advertisements and magazine ads, but Zara maintains advertisements to the minimum possible level, giving way for high cost effective marketing techniques. Zara looks forward to availing reasonable quality items to their consumers and establishing brand awareness by talking to the customers directly, and sustaining an image for quickly adapting to the dynamic fashion patterns (Gitman, 2009:84). Core competencies: Valuable, Inimitable, Rare, Organized to be exploited (VIRO) Fast Responsive and Powerful Designer Team Unique In-Store Inventory Storage Fast Fashion Brand Image Time-Compressed Production Process Valuable Inimitable Rare _ Organized to be exploited The stable human resources’ team of Zara has value and is well organized, and thus those entering the market for the first time will require a certain amount of money to resemble it. Despite, one of Zara’s key competitors, H&M, having a firm design team providing a wide range of designs for men, youth and women, Zara’s quick responsive design team is termed rare in the fast fashion apparel industry. Therefore, generally, the quick response and strong design body remains the vital competency for Zara (Hill, 2010:93). Secondly, VIRO is of the opinion that the new design of in store stock is valuable, rare, costly to imitate, organized, and is a vital competency for Zara. Zara makes sure that its stock is quick moving and adapts faster to emerging fashion patterns (Badi?a, 2009:52). Value chain analysis Zara’s strong responsive team creates a high level of operational efficiency. The creative professionals who facilitate the flow of information from the stores and consumers to the designers bring the design process close to the people. The use of information technology in the shops facilitates free transfer of information from customers to the designers and vice versa. In the manufacturing area, the development teams in Zara have the responsibility of going to high fashion fairs and exhibitions to learn about the emerging patterns and introduce them into the company. Constant and thorough researches remain carried out throughout the week with a view of establishing customer preferences always (Werther, 2011:56). The product life cycles have a thorough review to establish that most of the products do not take a long time to produce to keep up with the dynamic trends in fashions. All these approaches aim at ensuring that Zara remain highly competitive in the market and that it offers products, which are upto date to its customers always. This helps Zara outcompete the other firms in the same industry, thus stand out as the most successful fashion, and design company in the world (Peng, 2009:42). PR issues faced by Zara Company since 2008 Going green and sustainability (CSR theory) Zara for the past few years has found itself in hot water in relation to its role of corporate social responsibility. The company considered as one of the most successful companies in the world, has recently remained accused by the Greenpeace Detox campaign body as the only company that sells designs that can emit poisonous gases to the environment thus depleting the ozone layer and enhancing pollution of the environment. The body accused the company of not being socially responsible towards the society where it has a location. Many large institutions have the mentality to ignore their corporate responsibility and at times even use the resources within them to influence policy makers so that they do not come under scrutiny whatsoever. The availability of wealth in these companies has made the companies to ignore their responsibility and focus only on maximizing their wealth not bothering whether there is anyone suffering somewhere or not (Magretta, 2012:45). However, the recent follow up with the Detox Company has left Zara with no option other than acting accordingly and responsibly. This made the company despite all the achievements feel guilty of its practices and decide to change and start going green just as the other companies. The company has made a decision to eradicate all harmful chemical discharges from its items and supply cycle by 2020. The body reminded the company that it should not wait for anyone to force it but should rather know that it is their responsibility to act accordingly (Canals, 2010:85). Cultural implications (organizational ethics theory). Zara operating internationally can improve the awareness of Zara’s commodities and the fraction of market composition. Nevertheless, there exist challenges. Adhering to local policies in a different nation is not a simple exercise because of the undefined laws and various policies. A good example is the Chinese government that focuses on expatriate organizations for thorough searching before allowing their enterprises. The previous year, China’s consumer dogs launched an attack on Zara for the low quality of garments produced and foreign institutions, which include McDonald’s and Carrefour faced consequences for minor faults in their work (Steele, 2010:12). Establishing important associations with local parties is very crucial. On the other side, the black market for copying brand name apparel in Asia, commodities containing apocryphal labels of widely known companies, remains an obvious obstacle that brand name retailers encounter. Furthermore, black markets have multiplied in numbers of late. Good and poor quality copying majorly decrease the worthy of a brand since there is little appeal in possessing the original brand for comfort customers when they have the possibility of being questioned whether the product is a photocopy (Choi, 2012:72). In addition, taking into account the cultural situation, researchers have proposed that it is the culture of the Chinese to assume an existing form to study and show out artistic recognition. This can propose proliferation of enterprises that wish to imitate famous or brand name models. To worsen the situation, customer brand loyalty can remain hard to trace in China. In Shaghai, the most recognized chain cannot even orders special loyalty levels above 25%. Thus, for another chain from a different country to develop increased consumer loyalty remains a great obstacle. Loyalty schedules or incentives can aid add recurring consumer visits. Thus, an organization has a role to respect the culture of other people wherever it has set business in otherwise it will not have a peaceful trading environment (Barnes, 2008:46). Strategic analysis using the Ansoff Matrix Available from http://www.tutor2u.net/business/strategy/ansoff_matrix.htm [accessed on April 23 2013]. Market penetration The business should major on selling the items it already has to the markets in existence. Through this, the following objectives will have to remain achievable: The company will sustain or improve the market fraction of recent items- this will come through bringing together competitive costing techniques, sales promotion, advertising, and may be more assets committed to individual selling. The dominance of the developing markets will remain saved. The company will redesign a grown up market by forcing out competitors- this will need a tough promotional rally, aided by a costing technique structured to cause the market not business worthy for traders. The company will improve the level of consumption of its items by the original consumers- through bringing in of loyalty programs. This is a suitable and a feasible strategy to apply since very low costs will remain incurred hence acceptable by the stakeholders (Daft, 2010:90). Market development This is a growth technique where the company will aim at selling the items it has to new markets. This can come by: Identify new geographical markets- exporting the items across borders. Changing measurements or changing the packaging system. Changing the logistics channel, for example, changing from retail selling to use of e-commerce. Changing the costing regulations to impress various consumers or develop new market portions. This is a risky method but it is suitable and feasible since it rewards heavily once one succeeds. However, the stakeholders remain reluctant to accept it because of fear of backfiring (Cunningham, 2012:84). Product development The business will try to introduce new items in the current market. The business may need to establish unique competencies and redesigned items, which can please the customers in the current market. This strategy entails: Research, growth, and creativity. Full description of consumer requirements Appear the first one in the market. This is an acceptable approach by even the stakeholders since the current designs will bore the consumers and they will require new ones. It is a suitable and a feasible strategy to apply (Grant, 2010:22). Diversification This is where the business will try to trade its new items in a new market. The strategy is more risky since the business moves in an environment, which is so unique to it. For diversification to be a success, a business must have a clear idea of what it needs from the strategy and analyze the risks involved thoroughly well. This is a suitable and a feasible strategy since once it succeeds; the business will reap many profits. However, the stakeholders do not give in to the idea so easily (Pahl, 2008:62). Lastly, as the chief executive of the Zara Company, preference would remain the product development and diversification. In essence, preference would remain on product development because the new items introduced to the market by Zara Company would attract many customers. Having already established market presence, customers would have confidence in Zara products. Therefore, there is no fear of the products becoming outdated. Secondly, diversification would help the company grow in size and profitably and thus, the chief executive would feel proud of the achievements as a person (Krafft, 2010:54). Business level strategies Zara describes the markets it focuses on as “small, learned one that prefers fashion and remains cautious to fashion”. This targeted market remains wider since it has no lifestyle or ages portions. Therefore, the dimension of Zara’s enterprise is wide. Zara applies both the differentiation and cost leadership strategies in its operations. The system below outlines how the strategies remain followed by the Zara Company to achieve its objectives economically (Sabri, 2010:98). 1. Cost Leadership a. Zara as a cost leader must ensure the strategy of reduced prices through reducing lead times that responds by causing lesser stocks in the business hence lowering the cost incurred in the chain of supply (Kapferer, 2008:12). 2. Differentiation a. Zara should single itself from its fellow traders by availing lead times that remain much reduced compared to the standards in the industry. b. Zara manufactures around 11, 000 models yearly as compared to around 4, 000 models manufactured yearly by its competitors. c. Zara restocks its store two times a week other than only one time as many of its competitors do. d. Zara must ensure manufacturing is in small portions and benefits from insufficiencies in stores through bringing new models instead of the old ones. Therefore, consumers who discover that a specific model has run out of stock can purchase a unique model owing to the loss of the chance to buy it next time. This is a straight assurance that consumers attend Zara’s stores about 17 times yearly averagely compared to three times for other competitors. e. Zara models should remain in stock for only about four months, and they remain taken out for disposal. An average of 10% of the models remains carried out of the stores by Zara unlike the 17% carried out by its competitors. f. Zara identifies the requirements of consumers through the feedback mechanism from consumers, and thus they remain updated on the customer tastes and preferences. g. Zara should benefit from information technology in upward merging of the chain of supply through sustaining a streamlined flow of data through the chain (Badi?a, 2009:32). Corporate level strategies The corporate strategies belonging to Zara resemble that of the source company Inditex Group. The classification of its strategies will follow the Ansoff Matrix at this level of analysis. Thus, according to Ansoff Matrix, Zara has the below strategies to follow: a. Market consolidation and product development- This comes through Zara bringing in the current fashionable models from the model stage to logistics within a period of 2-3 weeks, which is much shorter than the average time for the industry. b. Market development- Achieved by taking items to new markets through opening up of warehouses in new sites and nations. Zara has had about 1500 warehouses in 78 nations, as at December 2008, around the world and continues to expand up to date. c. Diversification- Achieved through taking of new products to new markets. Zara has a reputation of designing new models of clothes and taking them to other countries to sell there where they fetch many cash since their cost is within limits (Coyle, 2009:45). Other strategies Functional level strategy The models of Zara transform each week, and this leads to production mechanisms that need to have the flexibility to sustain these reforms. Therefore, Zara applies flexible manufacturing technology that decreases set up period for tools, increase usage of machines by better programming, and improves quality control in every stage of the production process. The several functional strategies belonging to Zara are as listed below (Mceachern, 2012:76). Marketing strategy Material management strategy R&D design Human resource strategy Infrastructure Global level strategy Zara had about 1500 warehouses in 78 nations by December 2008, and the expansion has not stopped yet since the company is eager to reach great heights by having a branch in almost every nation. The desire to expand creates opportunities for the company to market its items, and the key elements that contributed to Zara to reach international heights include: Quick development in the market in Spain. The high need for Spanish products in other nations. The great rivalry with the other competing firms in the industry. The key factors that contributed to Zara to expand internationally included: a. Need to enhance the growth of its market by taking advantage of its “instant fashion” technique, to add its market proportion and reap more profits. b. The notion of Zara of supplying its consumers with the current design at the cheapest price made the company distribute less amounts to the warehouses. Therefore, to reduce the price, it grew internationally to take advantage of a kind of economies of scale (Schermerhorn, 2011: 56). Strategy evaluation Functional level strategy This strategy concerns itself with the daily operations of the company and focuses on the key issues of the organization like, the human resource, marketing among others. This strategy remains found in every organization and contributes to the collective responsibility of the concerned parties to take action in their roles respectively. This strategy remains suitable, feasible, and acceptable by everyone who is a party to the company since it is like the heart of every institution. Some of the implementation techniques, which can apply in this strategy, include: Exporting- Zara sold its items abroad to a few markets, which they considered not profitable to open up a new production facility such as in Monaco. This has helped reduce costs in a great deal. Franchising- Zara opens up warehouses in several cities by means of franchised agreements evading establishment costs and threats of opening up a foreign market alone (Hill, 2010:23). Global level strategy This strategy involves high costs and risk taking. It requires the organization to have full preparations and knowledge of what it wants to achieve to succeed in the plan. The strategy is suitable and feasible one, but many stakeholders shy away for fear of risking capital to venture into a new market and items and then lose it.To conclude, Zara should venture into the new market through introducing its products to the world and venture into creativity world by designing new models and selling them. This will help Zara to continue expanding profitably and establish itself as a strong force in the market. Some of the implementation techniques applied in this strategy include: Joint ventures- For a long time, Zara has penetrated markets through joint ventures to benefit from partners skills of the new nation. It has formed joint ventures in Italia, Germany, and Japan. 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