Zara - strategic review report for the CEO - Essay Example

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Zara - strategic review report for the CEO Table of contents Executive Summary 3 Introduction 4 Question In-depth analysis of the competitive forces and strategic issues shaping Zara’s industry from 2012 onwards 4 1.1 Macro-environment: PESTEL Analysis 4 1.2 Micro-environment: Porter’s Five Forces 5 Question 2 Internal strategic audit of the issues that Zara faces 8 2.1 Resources and capabilities theory - Value Chain theory 8 2.2 Value chain activities in Zara 11 Question 3 Identification of external stakeholder issues that Zara faces and assessment of their impact on the corporate reputation and brand equity 3.1 PR issues related to Zara 12 3.2 Organizational ethics theory – CSR 13 3.3 Culture and strategy in Zara – Schein’s model 13 3.4 Decision making in Zara 14 Question 4 4.1 Identification of the business level strategy of Zara 14 4.2 Corporate level strategies 15 4.3 Suggestion of strategies 16 4.4 Evaluation of three strategies using the RACES model 16 4.5 Implementation modes of the suggested strategies 18 References 19 Appendix 22 Executive Summary The continuous increase of competition worldwide is a key challenge that firms in all industries have to face. The development of a competitive advantage can help a firm to secure its growth in the long term. Still, not all firms are able to manage effectively market crises. Zara, a brand of Inditex, has achieved to establish its position as a leading firm in the global fashion industry. The strategies of Zara are reviewed in this paper in order to identify the key reasons of the brand’s success. These strategies are evaluated by referring to the organizational internal and external environment as involved in the brand’s operations and performance. Appropriate literature has been used in order to understand the brand’s current strategies and its prospects for future growth. The paper has been divided into four parts. In the first part emphasis is given on the analysis of Zara’s macro and micro environment. In this way, the effectiveness of the brand’s strategies, as aligned with the conditions in the brand’s environment can be evaluated. The second and the third parts of the paper focuses on the challenges that Zara has to face in regard to its internal strategic audit and the management of its stakeholders. In the fourth part, certain strategic options are presented, as available to Zara under current market conditions. The review of the organization’s environment has proved that the growth of Zara can be related to the interaction of a series of factors, referring both to the internal and the external environment of the brand; the brand’s success cannot be considered as resulted by chance. Introduction This paper focuses on the review and the evaluation of Zara’s strategies taking into consideration the conditions in the brand’s environment. Particular reference is made to the UK market, as the basis for analyzing the performance of Zara, both currently and in the near future. The strategic decisions of Zara are reviewed and evaluated in order to check the brand’s future prospects. In addition, this analysis helps to identify the strategic options appropriate for securing the brand’s further growth. Question 1 [1059 words] In-depth analysis of the competitive forces and strategic issues shaping Zara’s industry from 2012 onwards 1.1 Macro-environment: PESTEL Analysis PESTEL analysis, as a strategic tool, is based on the idea that the performance of an organization can be affected by six factors related to its external environment (Henry 2008). The PESTEL analysis of the UK fashion industry would refer to six elements of this industry (Bowhill 2008): a) Political; Political environment in UK is quite stable; government supports organizational growth in regard to all industries. Recently, on the 13th of March, the British government has asked for an inquiry in regard to the status of the country’s retail sector (Holland 2013), probably under the fear that governmental decisions do not effectively support the sector’s growth; b) Economic; the economy of UK is still powerful, at least compared the economies of other western countries (Verdict 2012). Still, the influence of the recent recession on the country’s industries, including the retail sector, is clear (Verdict 2012). In addition, the performance of the global economy seems to be rather disappointing, with signs for long-term decrease (Sivy 2013). According to the Graph in Figure 3 (Appendix), the GDP rate per capita internationally has been significantly decreased in 2010, compared to previous years. In a seminar developed by the Japan Bank of International Cooperation, the risks for severe economic downturns in the near future have been highlighted (JBIC 2013). It would be impossible for the British economy not to be influenced by the continuous deterioration of the global economy; c) Social; Britain is a country where business initiatives are highly supported both by the government and the public. In addition, in Britain social conflicts are quite limited, at least currently; d) Technological; the development of technology in all industries worldwide cannot be doubted. In fact, it has been proved that the technology market globally will be increased by 5.4% in 2013 and by 6.7% in 2014 (Bartels 2013); e) Environmental; environment has been a key factor for evaluating business performance. In this context, sustainability has been incorporated in the strategic plans of firms of all sizes. Aligning business strategies with the rules of sustainability is an effective method for a firm to increase its market competitiveness; f) Legal; UK’s existing legal framework is supportive towards business operations of different characteristics; however, emphasis is given on the monitoring of business activities so that the chances for misconduct are minimized. 1.2 Micro-environment: Porter’s Five Forces The Porter’s is used for evaluating the conditions in a firm’s micro – environment aiming to identify risks and opportunities available to the firm, either in the short or the long term (Hill and Jones 2007). In the context of this model, there are five forces that can highly affect the competitiveness of each organization: a) industry competition, b) pressures from suppliers, c) pressures from customers, d) substitute products and e) new entrants (Hill and Jones 2007). In regard to the retail industry of UK, the Porter’s Five Forces model could be developed as follows: a) Industry competition; the fashion industry of UK is highly competitive. Zara & H&M are the top brands while other brands, like Topshop, River Island and Next follow with quite lower level of performance (Warc 2012). In a relevant survey in which 40,000 asked to state their view as of their favourite fast fashion brand, Zara ranked first with a percentage of 33% (Waterlow 2012); H&M was second reaching the 26% (Waterlow 2012). All other brands were left well behind (Waterlow 2012). According to the case study, the key competitors of Inditex in the international market are three: ‘Gap, H&M and Benetton’ (case study, p.7). Among those competitors, H&M is considered as closer to Zara due to its practice to focus on low cost, like Zara (case study, p.7). Also, H&M has become quite fashionable but not at the level of Zara (case study, p.7). At this point, reference should be made to the industry life cycle (ILC) theory. In the retail sector, the above theory is transformed becoming the retail life cycle theory, which is based on the view that ‘all retail institutions are likely to pass four life stages: innovation, accelerated development, maturity and decline’ (Michman and Mazze 1998, p.47). Zara can be considered as being in the accelerated development stage, taking into consideration the firm’s ongoing expansion in the international market (case study). In a recent article, reference is made to the successful entrance of Zara in the high-street fashion (Cartner-Morley 2013), a fact that verifies the view that Zara is at an accelerated development stage, as stated above. b) Pressures from suppliers; suppliers in the retail industry, as also in the fashion industry, have quite limited power to ask for increase in prices since product differentiation in the particular industry is rather low (Verdict 2012). Therefore, the specific force is considered as low. c) Pressures from customers; the products offered by Zara could be possibly retrieved through other retailers, especially H&M and Gap that are the firm’s major competitors. On the other hand, Zara combines low prices with continuous update of stock (Verdict 2012). The specific force is considered as moderate. d) Substitute products; the appearance of substitute products would be quite difficult at the level that other firms could not easily adopt the firm’s strategies, especially its practice to minimize the time required for the product to reach the customer (Verdict 2012). This force can be considered as low. e) New entrants; as already noted, in the UK retail industry competition is high; however, in the country’s fashion industry a different trend appears: there are just few competitors that govern the market: H&M and Zara are the major brands in the fashion industry of UK (Verdict 2012); it would be quite difficult for new firms to enter the particular sector since they would not be able to respond to the market’s pressures and the consumers’ demands. In this context, this force also can be characterized as low. According to the above the industry can be characterized as attractive, based on the following facts: a) the forces in the industry are mainly low, only the pressure from customers is moderate where the industry competition is high, a trend that exists in most sectors; b) the industry is quite profitable, as proved through the firm’s financial results (Figure 1, Appendix). The Porter’s Five Forces theory in the above case reveals the force that shapes the industry is industry competition. Question 2 [1307 words] Internal strategic audit of the issues that Zara faces 2.1 Resources and capabilities theory – Value Chain theory The issues that Zara has to face in regard to its environment can be identified and critically evaluated using appropriate theoretical frameworks. Reference should be primarily made to the Resources and capabilities theory; the value chain theory is also another theory that can be used for developing the above task. The Resources and capabilities theory is based on the idea that each firm can be regarded as ‘a collection of productive resources’ (Drejer 2002, p.59). These resources can be of various forms referring not only to a firm’s infrastructure but also to its staff (Drejer 2002). From a similar point of view the capabilities theory accepts that each firm is distinguished in the market based on its capabilities (Drejer 2002). Zara’s resources could be described as follows: a) Financial; the funds available for the realization of the firm’s projects are high, since Inditex is a key competitor; in 2012 Inditex’s profits were increased by 22% (BBC News 2013). In 2012, Inditex achieved an important increase of profits, an achievement that was related to the following two facts: ‘the increase of the firm’s online sales and the high performance of the firm’s new stores in Asia’ (Bjork 2012); at this point a comparison should be made between the financial performance of Zara and that of its major competitor H&M. The financial results of the two groups, Inditex and H&M for 2011 are presented in Figures 1 & 1a (Appendix): in 2011 the net sales of Inditex reached the 13,793 billions of euros while for H&M the net sales of 2011 were estimated to 109,999 SEK. In terms of profits, the performance of the two firms seems to be at similar levels. b) Technological; the success of Zara has been based on technology. The firm has highly emphasized on Internet for promoting its sales, a practice that offered to the firm a significant advantage towards its competitors (Morris 2012). In Zara the value of technology, as a critical business resource could be made clear through the following explanations: Zara’s success is highly based on its unique distribution system (Hansen 2012). However, such system would not operate effectively unless it would be supported by advanced technology (Hansen 2012). It is at this point that technology, as a resource, is highly involved in the success of organization; c) Human resources; in Zara emphasis is given on low labour costs so that the chances for profits are increased. More specifically, countries that are characterized by low labour costs, such as Bangladesh and China, have been involved in the design and the manufacturing of the firm’s clothes (Hansen 2012); at this point, the firm is differentiated from its competitors that have not managed to develop the specific strategy, at least not equally successfully. Reference can be made to H&M, which has tried to reach the level of profitability of Zara but with no success. Reference can be made, as an example, to the competitiveness between H&M and Zara in the British market, a market where the domination of Zara cannot be doubted (The Business of Fashion 2013); in terms of its HR Inditex is in a superior position compared to H&M. The employees of Inditex are estimated to 109512 while the employees of H&M Group are just 64,784 (Figures 2 & 2a, Appendix), and d) Organizational structure; units in Zara have been set in such network that the time required for reaching customers is minimized (Hansen 2012). The firm’s effectiveness in managing its HR has been verified through the continuous strengthening of the organization towards its rivals (Bjork 2012). The resources of the organization, as described above, are used for producing capabilities. The interaction between resources and capabilities in Zara could be described as follows: the design of the firm’s clothes is assigned to firms located in countries where labour costs are quite low (Hansen 2012); the clothes produced in these countries are sent to the firm’s stores internationally (Hansen 212). The firm is able to monitor its orders having a unique order-tracking system (Hansen 2012); replacing goods available to public quite often, almost weekly has been the firm’s key advantage/ capability (Hansen 2012). This capability has been mostly achieved through the low-cost labour and the technology, as analyzed above. Another capability of the firm is the potentials of its clothes to cover all needs of customers. This capability is also related to low-cost labour that allows the design and the production of clothes within a low budget, compared to the rivals (Hansen 2012). Reference should be also made to the Value Chain theory, which is based on the view that each firm can be considered as ‘a chain of activities aiming to transform inputs into outputs that customers value’ (Hill and Jones 2009, p.81). In Zara, linkages between the Value Chain and the resources/ capabilities can be identified: a) Paying the suppliers at the time of products delivery so that delays are avoided requires the high availability of funds; b) advanced technology needs to be used so that the control over the orders and the replacement of stock is effective, c) the availability of products within a quite short period of time requires the availability of staff who will support the relevant production needs, d) the structure of the organization needs to be carefully planned so that the replacement of the stock to be developed appropriately, both in terms of time and of the quality/ type of products involved. Using its resources/ capabilities in the above ways Zara is able to keep the value of its customers improved. Value chain in Zara would be evaluated by identifying primarily the type of strategy on which the key decisions of Zara are based. In this context the following three strategies should be reviewed: a) the cost leadership strategy which indicates the efforts of a firm ‘to minimize its production costs, as possible’ (Ireland, Hoskisson and Hitt 2011, p.101), b) the differentiation strategy; the differentiation strategy reflects the following phenomenon: a firm tries to achieve a competitive advantage towards its competitors by adopting a strategy that it is differentiated, in regard to one or more of its aspects, by the strategy of the competitors (Ireland, Hoskisson and Hitt 2011). Zara has managed to offer to its customers a continuously updated stock of clothes at low prices; this strategy differentiates the firm from its rivals. In other words, in terms of its value chain, Zara is characterized by improved customer value. In addition, Zara has managed to keep its operational costs quite low, a fact that leads to cost leadership. The review of the firm’s practices leads to the assumption that Zara does not focus solely on cost leadership strategy or on differentiation strategy. Rather, the strategy used in Zara is hybrid strategy; emphasis is given both on low cost and on differentiation so that the competitiveness of the firm in the global market is secured. 2.2 Value chain activities in Zara The competitiveness of Zara has been highly related to its value chain activities. The core value chain activities are the following: a) each order is entered in the firm’s central system so that the actual performance of each store in regard to each item/ product can be monitored; the ordering system of Zara also helps the firm to keep the stock of its stores continuously updated; clothes are replaced almost weekly by tracking previous clothes collections, as promoted to each store (Hansen 2012), b) the design of the firm’s clothes is based on outsourcing, as also the production of the clothes (Hansen 2012); countries with quite low design and production costs are used for increasing the firm’s competitiveness both in regard to cost and in regard to the time required for new products to enter the market. Question 3 [686 words] Identification of external stakeholder issues that Zara faces and assessment of their impact on the corporate reputation and brand equity 3.1 PR issues related to Zara In Zara there are certain PR issues that should be handled carefully, with no delay, otherwise the firm’s image in the market could be severely harmed. Reference can be made, in particular, to the following issues: a) the employee scandal to which Zara was related in the past. In 2011, the Brazilian authorities have asked for an inquiry in regard to the employee relations in Zara (The Guardian 2011). The inquiry revealed that Zara hired employees at quite low salaries so that its profits are significantly enhanced (The Guardian 2011). In 2013 another claim for slavery conditions in regard to employee relations in Zara appeared. This time the allegations involved in Zara’s employees in Argentina (WorldNews 2013); b) the use of toxic materials in the firm’s clothes has been another important PR issue for Zara. According to a recent report of Greenpeace, the products of major retailers, like Gap and Zara, has been exposed to toxic water in Indonensia (Greenpeace 2013); these clothes can cause severe health problems to consumers. Zara has not denied the above allegation (Greenpeace 2013). In fact, the firm has assured that by 2020 all its products will be ‘toxic free’ (Greenpeace 2013). 3.2 Organizational ethics theory - CSR The promotion of ethics in regard to all organizational activities is an indication of a firm’s emphasis on Corporate Social Responsibility. In Zara, the promotion of ethics has been proved problematic. Reference can be made not only to the employee relations scandal, as analyzed above, but also to another scandal in which the firm was involved: the pollution of water resources in China, as this pollution has been caused by the activities of well known firms, including Armani and Zara (China Dialogue 2012). In this context, the strategy of Zara could be considered as opposing to organizational ethics. Reference should be made to a particular aspect of organizational ethics: the stakeholder theory which is based on the idea that a firm’s success can be secured only if the firm’s activities address equally the interests of all stakeholders (Fernando 2010). 3.3 Culture and strategy in Zara – Schein’s model The firm’s reputation that it has been severely harmed by the events mentioned above could be restored through the introduction of changes on organizational culture. In this case, reference should be made to the Schein’s model. The particular model is based on the following idea: ‘events can change our views on culture’ (Murray, Poole and Jones 2006, p.102). In the case of Zara, the Schein’s model (Figure 4, Appendix) would be used for introducing changes in organizational culture. Particular emphasis should be given to the change of the firm’s employee relation’s practices and its ethical priorities, as of the material used in the production of its clothes, as analyzed earlier. In Schein’s model reference is made not only to those elements of organizational culture that are visible but also to non-visible elements of organizational culture, such as Values and Assumptions (Figure 4). 3.4 Decision making in Zara The alignment of the firm’s strategy with ethics would help towards the improvement of the firm’s reputation. However, the enhancement of ethics across the organization cannot be achieved unless the firm’s leader takes appropriate initiatives. A commonly used decision-making approach, such as the inspirational approach, could not necessarily promote the firm’s efforts to promote ethics. The inspirational strategy, as part of the decision making process is based on leader’s capabilities and instincts (Burton and Obel 2004). The above strategy is not considered as appropriate for Zara. Rather, the Garbage-Can Model of decision-making would be rather preferred. The specific model is based on the following view: decisions can be considered as consisted of ‘problems, solutions, participants and choice opportunities’ (Harris 2006, p.186). The above elements should be taken into consideration every time that a decision would be required. However, the level at which each of these elements would be taken into consideration is not standardized (Harris 2006). It is implied that leader should decide which of the above elements of the decision making process would be mostly used for developing a specific organizational decision. Question 4 [1166 words] 4.1 Identification of the business level strategy of Zara The evaluation of Zara’s strategy through the Resources/capabilities theory (Drejer 2002, p.59) and the Value Chain theory (Hill and Jones 2009, p.81) has revealed that the brand does not focus solely on improved value chain or on cost leadership but it combines elements of both these strategies. In this way, the brand’s strategy can be characterized as hybrid strategy. 4.2 Corporate level strategies According to the case study, the business model of Zara is unique (case study, p.8). It is explained that the whole business is depended on four factors: ‘short cycle time, small batches per product, extensive variety of product every season and high investment on information and communication technology’ (case study, p.8). At this point, the Ansoff Matrix could be used for identifying the strategies of Zara at corporate level. The Ansoff Matrix proposes four options for organizations that aim to promote their growth: ‘a) market penetration, b) market extension, c) new product development and d) diversification’ (Cheverton, Foss, Hughes and Stone 2004, p.131). Using the Ansoff Matrix, the business strategy of Zara at corporate level would be evaluated as follows: a) Market Penetration: the firm tries to ‘keep its supply chain response short’ (case study, p.1); in fact, the time required for such response has been decreased to just 2-2 ? months (p.1); it is implied that firm tries to focus on market penetration, which is the first option available in the Ansoff Matrix (Cheverton, Foss, Hughes and Stone 2004); b) Market extension; in the case study it is explained that Zara needs to expand globally but the terms under which this strategy would be developed are still not clear (case study, pl.10), c) New product development; the firm tends to promote products of standardized characteristics; no reference is made to efforts for introducing new products in existing markets; d) Diversification; as a strategy is not used by Zara; the firm has not tried ‘to introduce new products in new markets’ Cheverton, Foss, Hughes and Stone 2004, p.131), as this option of Ansoff Matrix requires. 4.3 Suggestion of strategies After reviewing the performance of Zara in regard to its strategy, the following suggestion is made: the firm should keep its existing strategies. Reference is made, in particular to the following strategies of the firm: a) ‘Keep product inventories fresh’ (p.1); b) ‘emphasis on internal communication’ (p.2) and c) use of ‘simple and effective IT systems’ (p.2). These strategies of Zara are evaluated above using the RACES model. 4.4 Evaluation of three strategies using the RACES model In any case, the suggested strategic options should be checked, as of its appropriateness for securing organizational growth. Such evaluation could be developed using a relevant strategic tool, such as the RACES model. The specific model helps strategic leaders to evaluate the effectiveness of their options. The above model emphasizes on five terms; a strategic option should be considered as effective only if it would meet these terms (Haberberg and Rieple 2008). It has been proved that even only four of these terms are met the strategic option chosen is expected to be quite effective (Haberberg ad Rieple 2008). The terms included in the RACES model are the follows: a) Resources; each strategic options is depended on the availability of adequate and appropriate resources (Haberberg and Rieple 2008); b) the strategic option chosen should be ‘Acceptable to most powerful stakeholders’ (Haberberg and Rieple 2008, p.521); c) it should be Coherent with existing strategies’ (Haberberg and Rieple 2008, p.521); d) it should be Effective (Haberberg and Rieple 2008); effectiveness in the above case means the appropriateness of the suggested strategic option for resolving the problems for which the particular option has been proposed (Haberberg and Rieple 2008); and e) it should enhance the ‘Sustainability of the firm’s competitive advantage’ (Haberberg and Rieple 2008, p.521). The evaluation of the three strategies suggested above through the RACES model would be developed as follows: a) First strategy: ‘Keep product inventories fresh’ (p.1); a1) Resources; designer teams cooperate with the firm for securing the continuous update of inventories; a2) Acceptable; this strategy is already applied, a fact that implies that major stakeholders have provided their consent; a3) Coherent; the specific strategy is coherent with the other strategies of the firm; in fact the Business model of the firm is based on the ‘extensive variety of product every season’ (case study, p8); a4) Effective; the strategy is already used for years, being part of Zara’s business model; its success is clearly implied; a5) Sustainability; the business model of Zara, in which this strategy is incorporated has been characterized as unique (case study, p.8). Therefore, the uniqueness of this strategy, as part of the business model can be considered as fully verified. b) Second strategy: ‘emphasis on internal communication’ (p.2); b1) Resources; the firm’s units have been developed in such way so that gathering all individuals who have a decisive role in the production process, in the same floor is feasible; b2) Acceptable; the strategy is not new; it is already used for years a fact that leads to the assumption that stakeholder are aware and agree; b3) Coherent; the strategy is aligned with the firm’s business model which focuses on communication technology (case study, p.8); b4) Effective; the strategy has been used for years and no failures, at least not major ones, have been reported; b5) Sustainability; the ability of the strategy to offer a competitive advantage is derived from the fact that the strategy has been incorporate in the firm’s business model (case study, p.8); also, no similar strategy seems to exist in competitors, especially in H&M; and c) Third Strategy: use of ‘simple and effective IT systems’ (p.2); c1) Resources; the firm’s IT systems are appropriately tuned so that their terms of operations are simple; c2) Acceptable; the fact that the strategy is already in use for many years leads to the assumption that it has been accepted by the firm’s stakeholders; c3) Coherent; according to the case study the high investment on information is key part of the firm’s business model (case study, p.8); the coherency of the strategy with the other strategies of the firm can be clearly assumed; c4) Effective; the effectiveness of the strategy is made clear through the high performance of the business (Figure 1, Appendix); c5) Sustainability; the specific strategy offers to the firm a competitive advantage since the complexity of IT systems is often the key reason for severe failures in business operations. 4.5 Implementation modes of the suggested strategies In the case study it is explained that the firm has tried to use different implementation strategies, including ‘joint ventures and franchising’ (case study, p.10). It has been proved that company owned stores would be preferred (case study, p.10). Indeed, a percentage of 90% of the firm’s stores are company owned (case study, p.10). This strategy should be also used in regard to the strategies suggested above, which, actually, are already implemented in the organization. References Bartels, A., 2013. Global Tech Market To Grow By 5.4% In 2013 And 6.7% In 2014. FORRESTER. Jan 3, 2013. Available at http://blogs.forrester.com/andrew_bartels/13-01-03-global_tech_market_to_grow_by_54_in_2013_and_67_in_2014 BBC News, 2013. Zara-owner Inditex's profits rise by 22%. March 13, 2013. Available at http://www.bbc.co.uk/news/business-21769261 Bjork, C., 2012. Inditex Goes From Strength to Strength. December 12, 2012. The Wall Street Journal. Available at http://online.wsj.com/article/SB10001424127887323981504578174594294529474.html Bowhill, B., 2008. Business Planning and Control: Integrating Accounting, Strategy, and People. 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Available at http://article.wn.com/view/2013/04/03/Zara_probed_over_slave_labour_claims/ Appendix Figure 1 – Financial results of Inditex (source: FY2011 Financial Results, p.8) Figure 1a – Financial results of H&M (H&M 2011 Financial Report, p.2) Figure 2 – Resources in Inditex/ employees Figure 2a – Resources in H&M/ employees Figure 3 – World GDP Growth, per capita (source: IMF, 2009, as cited in http://www.clevelandfed.org/research/trends/2009/0509/01intmar.cfm) Figure 4 – Schein’s model on culture (source: http://www.jucs.org:8080/ujs/jucs/Journal/Volume%209/Issue_9_7/the_strong_effects_of/Bohinc_T.html;internal&action=buildframes.action&Parameter=1367108362175&ctx=eKS Read More