Strategic Management at Zara - Case Study Example

Executive Summary This research is a management report addressing the strategic and the business analysis of Zara, the clothing company. The report starts by giving an initial overview of the company, followed by the reports objectives. The major objectives of the report were to analyze the company’s operation and the strategies followed by the company, an industry analysis of the company followed by a macro-economic environment analysis. The company has been performing exceptionally well since its inception and lately it surpassed the revenue figure of its major competitors GAP. Purpose The primary purpose of this Management Report is to provide an analysis of the strategic situation of Zara, the clothing retailer. This report further examines the manner in which the organization operates and also provides a good picture of its potential for growth and development. Company Profile Zara is a renowned brand and flagship chain store of Inditex Group. It has gradually gained major popularity since its first store was opened in Spain. “The company is known for needing just two weeks to develop a new product and get it to stores, compared with a six-month industry average, and launches around 10,000 new designs each year. Zara has resisted the industry-wide trend towards transferring fast fashion production to low-cost countries”. (Zara, Bloomberg.com) Report Objectives The objective of this report is to examine the business operation of Zara over the last few years and to collect enough evidence supporting the Case Study “Zara – A Cut Apart From Competition”. The case Study has put forward the manner in which the company has operated in recent years and the fact that it took many long years for Zara to cross the leading America brand GAP and become the global leader in the fashion and clothing industry. Such an analysis is done by examining a few things; The Company’s Operation and the Strategy Followed Porter’s Five Forces Analysis Impact of emerging Trends from the Macro-environment The Company’s Operation and the Strategy Followed Zara has operated with an aggressive policy towards the business. It has proven many theories wrong, theories related to economies of scale, supply chain, etc. The company’s operation can be divided into philosophy, capability and payoff. Zara has kept a philosophy to keep 5 fingers touching the factory and five touching the customer i.e. they have kept a very quick movement between the production of their stock and the immediate transfer of that stock to the stores. Their main capability is to design, produce and deliver in 15 days as compared to the six month industry average. This is the major area in which the company has excelled over its competitors and has kept them way behind and it is because of these unique strategic capabilities that the company took over the clothing industry giant GAP in their first quarter of 2010. (kyero.com, 2010) Unlike other Clothing Manufacturers, Zara has kept half of its production and delivery in Spain. Their logistics service has been excellent in providing the latest fashion to their stores around the globe. Zara’s main and the innovative approach is their fast fashion trend, which makes their product available in stores after just two weeks in the designing process. Besides such a fast and flashy approach, they keep their production limited i.e. the batch of clothing in merchandise is only available for just that two weeks time period and after that it is not available in the stores. This approach of scarcity and the customer’s perception towards rarity has helped Zara to boost their Revenues significantly. (The secrets of the success of Zara, 2008) Zara often beats the high fashion markets and offers similar products made from cheaper fabric at comparatively much lower prices. These low prices are aided by a unique pattern of activities followed by the company in it supply chain, the company has kept an efficient logistic system and this has helped the company to enjoy sustainable competitive positioning and differentiation. It has been often said that to achieve sustainable advantage, a firm or an organization should have a mix of both, operational efficiency as well as strategic positioning. Operational efficiency is the art of performing activities in such an effective manner that it outplays your competitors. Zara has kept a linked system of its demand and supply chain whilst its competitors like H&M rely on outsourcing their labor to Asian countries such as China. Zara’s competitors, by doing such an act, try to minimize their cost by outsourcing to such cheap labor countries, while Zara has been able to nullify this cost by having a better logistic system with quick inventory turnarounds. Zara has efficiently used up Porter’s Value chain Model, the value chain model asks an organization to emphasize on activities that create value in the eyes of their particular customers. Zara has worked efficiently with the primary and the secondary activities of the Value Chain. The company has created major brand image in the eyes of its customer over the years. Zara’s strategic positioning can be described by its salient feature of not dividing or segmenting its customers into age groups, the company has kept an open arm for fashion lovers of every age and this act has been highly admired by its customers. The company has offered highly customized products at comparatively cheaper prices. (Tripa et al, 2007) Porter’s Five Forces Analysis The Porter five forces need to be examined in any industry to ascertain the risk, the competition and the available market share for a company. This model evaluates five different perspectives to analyze the market and the industry: Threat of New entrants; Although the threat of having new fashion clothing company enter the market is relatively high, Zara enjoys its dominant position in the market and the major market share in the industry. The company has created such brand image within its customers that it would really be difficult for a new entrant to deter from keeping the position that it currently acquires in the market. The Bargaining Power of Suppliers; The bargaining power of suppliers in Zara’s case is not high and it would be difficult for the suppliers to exert pressure upon the company. The Bargaining Power of Customers; This bargaining power too is not high enough. Although customers are a major force in any industry, Zara’s excellence and innovative idea of vibrant change in their stock every 2 weeks really diminishes the chances of the customers to apply such bargaining power. Competitive Rivalry; The competitive rivalry is quiet high; the company has major competitors like H&M (Hennes & Mauritz), C&A (Clemens and August) and the American chain Gap. With such intense competition in the industry, Zara not only has survived the competition but it has also taken over as a leader in the industry. Recently, Zara’s revenues “rose to 1.9 billion Euros from 1.68 billion Euros during the quarter, and grew 7% for the year to 11.08 billion Euros, outstripping those of U.S. apparel giant Gap (GPS 23.30, +0.23, +1.00%), on an annual basis”. (kyero.com, 2010) Threat of Substitute Products: There is always the threat of substitute products; there are definitely other cheap clothing products available for customers who might not be fashion conscious. This risk cannot be minimized as such but due to the differentiated image of Zara, the company need not worry about any such threat. The Porter five forces analysis clearly suggests that the Zara that the company has acquired the major market share as compared to its rivals, hence its risk of operating in the industry seem very much lower. Macro-Environment Analysis The macro environment of any organization can be analyzed by applying various models and techniques but by far the best is the PEST or the PESTEL analysis. Political Government is responsible for providing a stable framework for economic activity and, in particular, for maintaining and improving the physical, social and market infrastructure. It would be high far important for Zara to analyze each and every country in which it operates it stores. Any further plans to open any outlet should be properly analyzed, firstly by analyzing the political situation of that particular country. Zara has not been facing any such political issues in any of the country in which it operates. The recent opening in India too has been a great milestone for the organization and the company has been receiving great gesture politically on its opening in India. This Indian opening of Zara has been as a result of joint venture between Zara and the Tatas. (Evancarmichael, 2010) Economical The economic environment affects firms at national and international level; both in general level of economic activity and in particular variables, such as exchange rates, interest rates and inflation. Zara has to keep a clear track of such factors as either one of these factors moving in an adverse way would affect the business operation in a negative manner in that particular country for e.g. the company had to face the current shift in Inflation which led to Spain’s inflation rate turn to negative, this effect has been canceled out by the government by increasing the Value added Tax from 16 to 18%, although Zara has denied to forward this increase to its customers, it may have to face some problems with its revenues and costs. (Tehran Times, 2010) Social The social and the cultural environment look upon the beliefs and the attitudes of people towards anything, although Zara has kept a good image with its customers by offering such high quality fashionable products at a low cost, it was once linked with a negative issue of exploiting child labor in Portugal. This affected the business negatively and created a wrong perception in the eyes of its customers. (Sunday Times, 2006) Technological Zara has used the latest available technology in its operation. Its ability to cater its customer every 15 days with the latest fashion can be deemed as a new and great step towards the company’s great future. Environmental The company has been heavily committed towards the environmental sustainability. The shops are created in such a manner to save energy, their eco-efficient shop and their ability to waste less and recycle more has been their popular step towards better environment. All this has created an environment friendly image of the company. (Zara Website) Legal Zara has to operate in each and every country according to the laws and regulation of that particular country. In India, the company has opted for a joint venture scheme to align with the legal laws and regulation of India. (Evancarmichael, 2010) Conclusion and Recommendation According to the research carried out, the company has a great prospect and it can prosper in this fashion industry with great acceleration. The company’s path towards the Indian market should prove a profitable venture for the company as India is almost the second largest country by population and it is a very profitable market if handled with a good strategy and with the innovative strategy that Zara has adopted over the years, time may not be far away when Zara would be opening more than a dozen store in India. Zara should try and build a decentralized distribution and production area in all the major regions in which it operates. With such increase in the distribution and production area, it would be easy for the company to penetrate new markets and decrease the complexity of the process. Except this, Zara should maintain its current Value chain; in fact this value chain should be expanded into more regions in which the company operates. References ANNALS of the ORADEA UNIVERSITY, Fascicle of Management and Technological Engineering, Volume VI (XVI), STRATEGY AND SUSTAINABLE COMPETITIVE ADVANTAGE THE CASE OF ZARA FASHION CHAIN, Sunhilde CUC, Simona TRIPA, 2007 http://imtuoradea.ro/auo.fmte/files-2007/MIE_files/Sunhilde_Cuc_2.pdf Inditex Profit Jumps 17% Q1 2010, kyero.com, 19th Mar, 2010 http://news.kyero.com/2010/03/19/inditex-profit-jumps-17-q1-2010/ Spain’s core inflation turns negative for first time, Tehran Times, May 16, 2010 http://www.tehrantimes.com/index_View.asp?code=219541 Spanish Retailer, Zara Decides to Form a Joint Venture with the TATAs, rather than franchise, Evancarmichael, 2010. http://www.evancarmichael.com/Franchises/4263/Spanish-Retailer-Zara-Decides-to-Form-a-Joint-Venture-with-the-TATAs-rather-than-franchise.html The secrets of the success of Zara, Posted by Daily news 20 October, 2008 http://www.dailynews.rs/news/2008/10/the-secrets-of-the-success-of-zara/ Zara Official Website, Environmental Policy http://www.zara.com/#/en_GB/LegalTerms/ Zara put on the back foot over Portuguese child labour claim, Sunday Times, 2006 http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article670351.ece Zara, Bloomberg Businessweek, Bloomberg.com http://bx.businessweek.com/zara/news/ Read More