Zara Performance Case Analysis - Essay Example

Zara case study Contents Introduction 3 Analysis of competitive force and strategic issues 3 Porter’s five forces 3 Macro Environment 5 Internal Strategic Audit 6 Tangible Resources 6 Intangible Resources 8 Capabilities 9 External Stakeholders Issue 10 Strategic Options and Recommendation 13 Conclusion 16 Reference 17 Appendix 20 Introduction Zara is one of the largest international brands in the fashion sector and belongs to Inditex which is one of the largest distribution groups and operates globally (Zara, 2010). Zara is the largest division of Inditex and accounts for more than 75% of total sales of Inditex. Globally Inditex is presnt in 80 countries with more than 5500 stores out of which Zara has about 275 stores. In the past few years the company went for aggressive expansion and invested in 49 markets including Australia, Azerbaijan, Taiwan, Peru and South Africa (Dishman, 2012). Analysis of competitive force and strategic issues Understanding the competitive environment is one of the most useful tools which help in determining the importance of activities taking place in organisation (Mclvor, 2005, p.122). Every organisation makes use of the competitive force to determine the activities. The competitive force also termed as Porters five forces constitute of bargaining power of suppliers, customers, threat of substitutes, threat of new entrant and rivalry among firms (Henry, 2008, p. 80). Porter’s five forces Bargaining power of supplier: The apparel industry usually has their own suppliers and as result they do not have to depend on external suppliers. In addition there are lot many suppliers available in the apparel industry making the bargaining power low. Also it is not possible for a given supplier to dominate the apparel industry which tends to negatively affect the suppliers power (Data Monitor, 2010, p.16). In case of Zara, the brand gets about 50% of its raw materials from Inditex group and so it does not depend heavily on the external suppliers. Zara however reduces the supplier’s power by working together with the vendors and implementing in the process to make the manufacturing process effective and cost cutting. Therefore maintaining good relationship with its vendors has also helped Zara to lower the power and tilt the games in favour of Zara. Bargaining power of Buyer: buyers are the individual consumers and his fact weakens the negotiation power of the buyer. Retailers differentiate themselves through different style and offers which is being offered by each brands. However in cases where the retailers cannot go for forward integration and as a result the retailers are obliged to offer the consumers with what they demands, strengthening the power of buyers. But in overall case the power remains from moderate to high (Data Monitor, 2010, p.15). The buyer’s power for Zara can be said to be moderate as the consumers are ready to pay a high price for its products. Threat of Substitutes: Garments and clothing are among the essential consumer goods and there cannot be any real substitute for clothing and other garments. However talking about the product or brands, the threat of substitute is high. The availability of substitute product poses a huge threat to the fast fashion retailers and Zara stands among them. The switching cost is low making it easier for consumers to switch brands almost at the same price and quality. Zara has created a niche for itself and offers fast and trendy fashion at an affordable rate in stores where the consumers can find unique collection. Threat of new entrant: threat of new entrant is the apparel industry is quite high as it does not involve high capital requirements; low switching cost from the consumers makes the perspective of new entrant high. The fast fashion industry is growing and gives opportunity for the new entrant to enter the market leading to high threat. Rivalry: Rivalry among the apparel industry is high as brands usually follow the same strategy. Zara faces stiff competitors from brands such as H&M, Benetton and GAP (Ghemawat & Nueno, 2006, p. 4). Macro Environment The political aspect in the apparel industry is with regards to child labour and workers right and often considered to be important so to create legal and sustainable working environment (Suttle, 2011). In addition with the spread of international trade, manufactures have established themselves in the developing countries affecting the success of the retailers in the apparel industry. Economic factors tend to have both positive as well as negative impacts on the apparel industry. During economic boom the disposable income is high as result consumers are able to spend leading to increase sale of clothing and overall growth of the fashion industry. However recession has total opposite effect where consumers do not spend much and shop from cheaper brands (Suttle, 2011). For consumers across the globe, the motivation to buy fashion items is a desire and not actual needs and it highly depends on the disposable income of an individual. Factors such as lifestyles, culture, norms tend to affect the social factors in the apparel industry (Forum for the future, 2010, p.17). Advancement in technological have helped in changing the mind set of people against the fashion and retail sector. With the advent of latest machinery consumers have the opportunity of getting quick, easy to wear, handle and easy to care garments which at the same time are cost effective (Ijaz, 2013). With regards to protecting the environment, the clothing companies have joined hands to protect the environment and produce clothes in an environmental friendly manner. Zara has off lately started to follow the footstep and also created store with eco friendly environment (Crawford, 2012). Further sustainable strategies are being developed in the apparel industry and brands such as Gap Inc, H&M, Nike, Levis Strauss, M&S and Patagonia are the leading participants in the sustainable process (Kaye, 2011). Internal Strategic Audit Zara manages and owns various resources which can be categorized as tangible resources, intangible resources and organisational capabilities. The interaction which takes place between tangible and intangible resources helps in creating organisational capabilities which provides value to its end consumers. Tangible Resources Financially, Zara gets a strong support from its parent company, Inditex which has reported annual profits of 1.8billion Euros which is approximately 2.5billion US dollar in the financial year 2011 as compared to the previous year with a profit margin of 11%. The figures are even more impressive considering the slowdown of retailers such as Pull & Bear, Maximo Dutti or Bershka in European market (They Are News, 2011). Sales for Zara in the financial year 2011 grew by 10% and accounted to 8,938 million Euros and EBIT stood at 1,725 million Euros. During the period Zara began to operate in five new markets, Azerbaijan, Taiwan, South Africa, Peru and Australia (Inditex, 2011, p.27). Currently Inditex is highly dependent on Europe and 70% of sales in 2011 were from Europe and 25% of revenue from Spain (CORUÑA, 2012). Analysing the sales of previous financial years, it can be said that the Zara has been the cash generating brand for Inditex and sales has been steadily growing despite financial slowdown. In the 1st quarter of 2012 net sales reached €3.4billion a rise of 15% as compared to 2011. Gross profit of the company reached €2.1billion a rise of 18% and gross margin managed to reach 60.2%. Net income of the company accounted to €432million and Zara was to launch online sales in Chinese market by 2012. With regards to expansion and stores opening, Inditex plans to operate about 5,618 stores in 84 markets. Table 1: Total openings and stores of Zara (Source: Inditex, 2012) Therefore financially the flagship brand of Inditex, Zara has been performing well and with expansion strategy the brand has been able to create a brand image. It is thus assumed that performance of the brand to remain steady and to increase at a faster rate, approximately with 30% growth rate. Intangible Resources Zara has a different and hard to imitate the resources as compared to its rivals which also act as strength for the company. Most of Zara competitors happened to outsourced production in order to save money and in return increase the profit margin. The process caused issues with longer lead times which were foreseen by Zara and it kept its production in Spain which made it one of the most flexible firms in the fashion retail sector. The company thus used the recourses as its competitive advantage and gain upper hand as compared to other brands dealing with fashionable clothing. There is no doubt that Zara has valuable resources which might not be rare but are hard to copy or imitate. Thus in the fast moving fashion industry, hard and valuable resources have the potential to create difference (Peng, 2008, p.64). The company has various intangible assets that work together along with the tangible assets in order to provide value to its consumers. Zara has about 200 professional designers who continuously keep on updating new information on fashion trends so that they can pursue the fast fashion market (Inditex, 2011). Zara prefers to follow with designs which have evidences of customers demand unlike other fashion retailers which creates trends by pushing new lines through catwalk and fashion shows. Data of what actually gets sell and what the customers wants to see are send to “The Cube” where team of 300 designers crank an astonishing 30,000 designs each year as compared to 2000 to about 4000 items offered by big retail outlets such as Gap and H&M. The designers at Zara are mostly young and are mostly fresher from design school that have an urge to do something different (Gallaugher, 2008, p.3). Integrated IT system also allows Zara to have a strong relationship with its suppliers, designers and the manufactures and the facilities. The brand has a unique in-store inventory model which further provides Zara with competitive advantage. Zara is viewed as a company hat rapidly changes and is able to keep up with the changing trends in the fashion world (Caro & Gallien, 2010). Capabilities In order to give the customer a fast fashion image, the brand creates time compressed production process. The company selects suppliers from across the globe to produce its collection and has an extensive supply chain with presence over 40 countries (Inditex, 2011). It takes only four weeks time from design to availability in the stores as compared to traditional six month cycle (Mihm, 2010). The vertical integration model of Zara which constitute of manufactures, logistic and designers brings about a flexible structure for the brand to adopt the trend of fast fashion (Deschamps, 2012). Zara manufactures 60% of its own products and is able to be flexible in the variety, amount, and frequency of the new styles they produce. In fact the whole line of most fashion sensitive products is produced internally. In addition the human resource team of Zara is organised and valuable and so the possibility of new entrant is quite low as certain amount of capital is required to imitate Zara. Zara’s fast and responsive and powerful designers act as core competency for the brand. Zara is a private limited company and under the leadership of Mr. Pablo Isla Álvarez de Tejera, the CEO and Chairman of Inditex (Inditex-a, 2011) the company work together for the betterment of the company and for all its flag ship brands. The company has been generating profits and Zara has been the biggest contributor towards generating revenue and acts as cash cow for the company. Table 2, shows the VRIO analysis and it can be said that the unique business model adopted by Zara is rare, valuable, imitate and organised and is core competency for Zara. Table 2: VRIO Fast, powerful & responsive designer Team Unique in store inventory storage Brand image Supply Chain Valuable yes yes yes yes Inimitable yes yes yes yes Rare yes yes yes Organised yes yes yes yes External Stakeholders Issue Zara was facing certain issues with its external stakeholders, the customers, the suppliers even the lenders, partners, community and the society. Issues pertaining to Zara include quality of the material used to manufacture products, environmental issues and others which had adversely affected the brand image of Zara. Zara has expanded its operation globally and China is among them. According to some environmental group in China Zara has been accused of causing environmental pollution. The information accused the suppliers of Zara for discharging dangerous chemicals into the rivers of China and wasting water and reusing the equipment which was sealed off by the authorities. Zara is being counted in the top of blacklist for manufacturing below standard quality fashion brands for consecutive 3 years. According to analysts, although the fast fashion brand tends to keep design as their top priority in order to push sales and expansion but they would ultimately have to cater to quality in order to stay ahead of the competition arising in the local market (Morning Whistle, 2013). Zara is a global brand and such kind of act might negatively impact the brand image of Zara. China is considered as booming market and retailers have been targeting China and see it as an emerging economy with lots of scope and opportunities to grow. Thus the consumers have an option to choose from various other international brands with better brand image as compared to Zara. In the current situation, where consumers are concerned about the environment, news of Zara using below standard quality might highly affect the brand image and brand value of Zara. In addition to the environmental issue, Zara was also caught in “slave labour” scandal. However the company denied responsibility and instead blamed the suppliers and said that they had violated the ethical code of conduct (Moore, 2011). This action by Zara possibly might affect its relationship with its suppliers and it might face issues in the long run. In response to the pressure from environmental groups such as Greenpeace and also from the public Zara commits to go toxic free by 2020 and pay close attention as to where and how the items were manufactured. Zara plans to eliminate use of the hazardous chemicals like PFC and by the end of 2013 the suppliers of Zara will disclose data with respect to release of dangerous chemicals in the environment (Greenpeace, 2013). As part of Inditex strategy the company along with its flagship brands have implemented CSR to gain success. Some of the milestones for the brand were, in 1995 it established environmental friendly policy; in 1996-1998 it planned for energy efficiency and also for cogeneration plant; in 1999 it planned to control emission, waste and dumping of materials; in 2001, the brand created internal code of conduct; in 2002 it took admission to “Daw Jones Sustainability Index” and adoption of GRI. Zara in response to CSR activities have managed to achieve three milestones, firstly the design of the business which created value for the consumers, the society and for the community; Secondly, the control of suppliers responsible policies; third logistic for sustainable mobility plans and finally sales, to teach for a responsible way of consumption (Corporate Excellence, 2011). Inditex Sustainability Model (Source: Corporate Excellence, 2011) In relation to consumers along with the tractor effect that can exert so that the supply chain of Zara is applied to its maximum with maximum attention in order to detail the sustainable principles which tends to form part of CSR, Zara seems to incorporate on the label of its product the ecological information about the materials used, manufacturers, type of treatment applied and others. The motto of ecological clothing is “being fashionable without giving up respect for environment.” Strategic Options and Recommendation Zara has one of the most unique supply chains which shortens the production process and makes stocks available within four weeks time. And in some cases Zara also ensures delivery of products within 72 hours to all its retail outlets located across the globe. Zara does not outsource all its production activities and are carried out in Spain. The concept of outsourcing at cheaper rate is completely denied by Zara. Zara has its own working force and is considered to be good approach as it has less chances of getting involved in unethical practises. After much trouble and issues from the environmental groups, Zara has managed to develop a smooth image for quality management process in the clothing industry and has the opportunity unleash new domains. Thus it is not recommended to Zara to start outsourcing its activities which may further lead to question and confusion in employee relationship management and quality management. A healthy process which leads to expansion process and internationalisation should be considered by Zara. In the context of protecting the environment, the fast fashion industries were facing immense pressure to eliminate products and materials which has caused environmental pollution and also affected the health of consumers. He consumers along with the environmental groups demanded elimination of such products, in response to which Zara and other fast fashion clothing brands ensures to remove hazardous toxic by 2020. Therefore in order to become eco friendly and create a stable brand image the Inditex group has achieved eco friendly and eco efficient certificates. This option will help Zara to retain back the brand image among the target consumers and also potential ones. LEED which stands for “Leadership in Energy and Environmental design” is a famous and a certified tool which Inditex had acquired for Zara. The management believes to create competitive advantage with its CSR activities and ethical practises. The competitors of Zara have also implemented CSR activities and have taken steps to reduce toxic emission and so in order to stay ahead Zara should make new plans and create benchmarks in the competitive environment especially with regards to eco friendly practise. Zara is the leader in fast fashion industry. As new ranges of styles are frequently introduced in the market, Zara is moving parallel with the emerging market trends. The sales team at Zara communicate and inform “The Cube” frequently which enables Zara to response to the changing trends within two weeks. As mentioned earlier, Zara owns a team of designer who are efficient and innovative along with 300 stylish who takes the feedback from the stores directly and analyses the market and thus proposes new designs. As a result the new and fresh design reaches the stores and make the customer sees their idea into practical form. The main concept behind Zara this strategy is to stay connected with its customers, take their feedbacks and thereby introducing new products as per the demands of the target customers. Zara has been able to create an edge for itself and dominate its competitors as no other brand has the capability to implement fast delivery of inventory into the stores. Zara has focused consumers with short term requirements and through this was able to lessen the operating capital cost. Since market is hanging every day, it becomes necessary for Zara to implement new changes and strategy and introduce something which will be long lasting into the market, which will never be out of fashion. This particular style was not adopted and it’s a domain which customers will be willing to pay for in the longer time frame. There still exists a market segment which needs stylish fashionable clothes which has validity for longer period of time. Thus introducing new designs which will remain in fashion for a year or six months can open new dimension for Zara. Zara is a global brand and has opened up many stores in different parts of the globe and in a way it has satisfied the aim of becoming international brands but it has been achieved only through opening up of stores in various countries. In the current situation the expansion of market should consider high rates skills along with countries which offer favourable terms to invest. Activities of Zara from designing to shipment of consignments take place only in La Coruna. In context of this the management should take into account the risk of security and survival and so the business needs to be divided into other favourable countries where the production process is effectively looked upon and in a way make a mark in foreign countries. It will eventually lead to innovation and introduction of new designs to its product line. New response and new culture will help the company to introduce new concepts and new ideas and extend the target market. Next option available for Zara is to strengthen the corporate identity through which better market response can be implemented. A better image in the market ensures sustainability and survival for a longer period. Zara will be able to achieve competitive differentiation through sustainability and with well established and well connected corporate identify it will create emotional ties with its customers, suppliers, lenders; society and the community and ensure brand loyalty. As Zara has adopted the expansion strategy and plans to open up more number of stores across the world, a strong corporate identity will ensure success for the brand and retain back it customers in coming years. Analysing the strategic options, Zara while implementing the options might faces certain issues as the options identified are not easily identified ad achievable. Therefore Zara requires a strong management and leadership skilled individuals to further gain success in the competitive market environment. Zara has been operating successfully and analysing the trend Zara should enter new and expanded world market and target new and potential customers. In doing this Zara will require strong human resource management team to deal with the policies and other factors essential for success of the business. When Zara enter new market it might face issues with adjusting in new cultures, trends and employee’s behaviour and so HRM will play a key role in managing the issues and implementing new policies to achieve success in the foreign markets. In addition a consistent and continuous representation of Zara perspective in market will be highly essential in order to balance the image in the market. With regards to its supply chain management, if Zara does not develop distribution centres it will be tough to capture the market share in new markets. Conclusion Zara is enjoying competitive leadership in the fast fashion industry but with time Zara needs to implement new strategies and changes into its business model in order to cope up with the competitive business environment. Zara core competency lies with their designer who makes the stocks available in the retail stores within two weeks and so they should be enhanced and motivated for better performance. Zara supply chain is the shortest as compared to its competitors and achieves a competitive advantage. Zara off lately has undertaken online retailing and aims to penetrate into more countries and achieve success in the long run and ensure customer loyalty and sustain the brand image which it has created over the years. Reference Caro, F. & Gallien, J., 2010. Inventory management of a fast--‐fashion retail network. Operations Research, 58(2), 257--‐273. doi:10.1287/opre.1090.0698 Corporate Excellence, 2011. Zara: Managing chain of value and driving CSR with consumers. [Pdf]. Available at: [Accessed 16 February 2013] CORUÑA, L., 2012. Fashion forward. [Online]. Available at: < http://www.economist.com/node/21551063> [Accessed 14 February 2013] Crawford, T., 2012. Zara: Fast fashion, slow to Detox. 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Available at: < http://www.theyarenews.com/eng/2012/4/2/inditex-group-%28zara%29-reports-substantial-annual-profits-3135.asp> [Accessed 14 February 2013] Zara, 2010. About Us. [Online]. Available at: [Accessed 14 February 2013] Appendix Financial Data: Read More