Strategic Perspective of Zara - Essay Example

Strategic Perspective – Zara Case Study AFFILIATION: Introduction of ZARA ZARA is the leading Spanish retail store of clothing and accessories that was founded in 1975 by Rosalia Mera and Amancio Ortega in Artexio, Galicio. It is the flagship chain store of the Inditex group that has been meeting the demands of the customers at an exceptionally high level. According to Zhelyazkov (2011), ZARA follows a differentiation strategy of Porter’s generic strategies and focuses on enhancing the value chain by developing highly efficient and effective logistics, distribution and supply chain system. The three key success factors of ZARA are short lead times, limited number of products and extensive range of styles (Inditex, 2013c). Presently, ZARA is present in more than 73 countries worldwide and has been expanding at an accelerating pace on an international level. Currently, the group has about 6009 stores which are widespread in 86 markets; it implies that it is operating in four hundred cities in five continents. The net sales of the company as of 2012 were €15,964 million and ZARA has contribution of more than 30% in the total profit amount (Inditex, 2013a). The mission of the company is to offer all the customers a distinctive range of options for making a wise choice in the fast fashion industry. The brand ensures that the offerings comprise of inimitable and innovative products for enhancing the shopping experience of all customers. The store provides the uniquely designed products at reasonable prices that are created from excellent quality materials in accordance to the latest market trends (Zara, 2013). External Analysis of ZARA In order to understand the business environment in which ZARA is operating, it is crucial to monitor the changes that are taking place so that the retail store remains competent and proactive in its approach. As the customers of the fashion industry are always looking forward for fresh, modern and distinctive products all the time, ZARA has ensured that it develops its core competence in the manufacturing process (Bhardwaj & Fairhurst, 2010). Most of the clothing companies have to encounter problems in efficient management of their production procedure; ZARA has outclassed in this area by employing a supply chain system that is efficient, agile and capable of producing zero defect products (Hume, 2011). Hence, the store ensures that it is well-aware of the industry requirements and standards but it creates its own way of managing the business operations. The business model of ZARA is so competent that the rival companies cannot copy it at all and it is the primary source of competitive advantage for the brand in its market. Macro environmental Analysis In order to assess the external factors that impact the operations of ZARA, a macro environmental analysis is conducted. In this study, the political, economic, social, technological, environmental and legal aspects are covered so that an in-depth evaluation can be appropriately conducted. The detailed findings of the fast fashion industry’s macro environment are as follows: 1. Political – ZARA is affected by the political situation of the countries in which it is operating as the respective governments can intervene at any time in the economy and pass new laws and regulations that can impact its business. As the government has the power of changing the business policies, ZARA is vulnerable to such modifications in the local and international markets. The company has to remain alert about the political structures of the countries so that it can make its future decisions effectively (Deloitte, 2013). It even needs to gain the government support so that it can flourish competently and effectively on a global level. 2. Economic – All over the world, the economies are facing recession and the consumer spending power is declining. The majority of the customers are concerned about meeting their basic needs rather than investing in luxurious goods. The interest rate, inflation and exchange rates are rising at an accelerating rate globally and all these factors will definitely create obstacles for ZARA’s expansion plans (Deloitte, 2013; Eleto, 2011). It has become imperative for the company to ensure that it provides value added offerings to the customers at affordable prices so that they can fulfil their basic requirements appropriately. 3. Social – The customer preferences and choices are changing at a fast pace and they are more concerned about buying easily accessible goods rather than visiting the physical stores. Although ZARA is offering online shopping experience but it needs to develop a well-designed and highly integrated online marketing strategy that will attract both existing and new customers. It is expected that the digital media will rule the fashion market in the next few years (Mihm, 2010). 4. Technology – As the technological advancements are taking place quickly, ZARA has to avail the opportunity of utilising the latest machinery and IT systems that will ensure that its business operations become more efficient with the changing market dynamics (Thompson, 2012). 5. Environmental – A lot of environmental issues are prevailing globally and the companies have to ensure that they employ only eco-friendly procedures in their operations. The clothing firms have to ensure that they make valuable contribution in projects such as waste management, pollution reduction, controlling of carbon emission processes and etc. and even promote the recycling methods throughout the fashion industry (Lopez & Fan, 2009). 6. Legal – In order to boost the economic performance of the domestic firms, most of the governments have imposed stricter import tariffs along with stringent international trading regulations. Every company has to be well-informed about the legal boundaries so that any form of legal violation is avoided. Some countries like EU, UK and USA have removed trade barriers so that they can exploit the opportunities that are available in various markets. The manufacturing companies like ZARA are given the chance of shifting their factories to low cost production countries like China and India so that they can take advantage of cost curtailing options (Deloitte, 2013). Porter’s Five Forces Model According to Jang et al. (2012), Porter’s Five Forces Model helps a company to assess the potential that is offered to the players of the respective industry. ZARA has to ensure that it studies the market characteristics by analysing the driving forces as depicted by Porter in his model so that it has the latest information about the attractiveness of the fast fashion sector. A comprehensive examination of the retail fashion industry after the application of Porter’s Five Forces Model is as follows: 1. Rivalry among competing firms – The main competitors of ZARA are H&M, Benetton and Gap; the rivalry is strong among the companies as each one of them is struggling to enhance their market share in the industry. 2. Threat of new entrants – In terms of distribution channel, the barriers to entry is low but it is strong for manufacturing companies because the cost of production in Spain is too high. ZARA is considered to be operating in both manufacturing and distribution sectors so it needs to monitor the trends of both industries. 3. Threat of substitutes – The threat of substitutes is low because it is the basic necessity for everyone. 4. Bargaining power of suppliers – There is a varying range of suppliers in the market and they have low power in the retail fashion industry. Since ZARA has its own suppliers from the Inditex group, it does not have to get worried about the problems in its supply chain. 5. Bargaining power of customers – The customer’s bargaining power is moderate as they can easily find the clothes of their choice. ZARA’s customers don’t exert pressure on the pricing policy of the company as they are provided value for money in terms of superior quality and durable clothing features. Internal Analysis of ZARA Since all organisations have to manage its resources efficiently, it is vital for them to keep a track of their internal strategic capabilities. In order to meet the requirements of its target market effectively, ZARA has ensured that it employs valuable resources in its operations so that it can exceed the satisfaction level of the customers. The key areas that have been worked upon by the store’s experts are the logistics, employees, marketing and operations (Willems et al., 2012). By availing the opportunities that are available in the market and minimising the effect of threats on its business, the brand has been able to maintain the competitive edge in the market for more than twenty years. In order to develop future strategies with accuracy, a thorough audit of the company’s internal sources is conducted and presented in the form of SWOT analysis and value chain analysis. Both of these tools constitute the evaluation of each and every important aspect of ZARA so that the true picture of its competence is revealed. SWOT Analysis Strengths ZARA’s strength lies in the fact that it employs the cost leadership strategy effectively by ensuring that the products are designed with efficient measures and by utilisation of the cost effective processes. In order to attain the desired level of efficiency, it has ensured that the life cycle of product is short so that there are no maintenance or storage costs for the company. In about two weeks, the company produces the latest collection and every design is unique and different from the previous collections. In order to respond proactively to the customer’s demands, the feedback from the store employees is taken as they are in direct contact with them. On daily basis, the customer’s feedback is taken and sent to its headquarter Atrexio, Spain so that the latest trend can be implemented quickly. ZARA has developed a competent and highly skilled workforce that is willing to enhance the performance of the company in the industry. Almost all the designers are fresh graduates from well-known fashion schools and they are skilled in designing excellent clothes from limited sources (Lutz, 2012). It has developed its own manufacturing plant so that the creation of products is not outsourced and the company can keep a strict control on its production process. The IT system is the latest one so that the operations of the company are effectively managed and decentralised decision making is prevalent within the organisation so that the management time is saved and utilised proficiently (Caraballo, 2011). Weaknesses ZARA needs to reconsider the options of utilising marketing mediums for promoting its offerings in the international market. For time being, word of mouth appears to be the best form of advertising for the brand but it needs to strengthen its position by employing the contemporary marketing tools; the competitors can take advantage of the company’s weak advertising strategy. ZARA has more than 50% of its stores in Spain and the adjoining countries (Hansen, 2012); this store is highly dependent on these markets for earning a good amount of revenue which makes it vulnerable to the drastic changes that can take place in the economies of these countries. Since it recruits the designers from Spain, there is a chance that they design the clothes in accordance to the local market preferences. ZARA has to ensure that its products reflect the fashion taste of international markets so that every customer remains satisfied with the offering. Opportunities ZARA can expand into the emerging markets where it has limited presence such as in India, China, Taiwan, Singapore, Egypt and others. Even the Asian market is an attractive option for ZARA as these regions are experiencing a surge in the consumer’s household incomes, increased awareness about global brands and growing population; ZARA can take the chance of gaining entrance in this appealing market (Dahan & Peltekoglu, 2011). As the latest trend in the market is of online retail shops, ZARA can enhance its presence in digital media by implementing the latest technology and IT systems. It can offer its entire range of products online or offer the customers to get their clothes designed in a personalised way by the store’s highly skilled designers; it will enhance the shopping experience of the customers. Threats The manufacturing companies are always paying attention to the options for locating platforms that can help them in curtailing the production cost. Majority of them are looking for production opportunities in India, China and Eastern Europe as they can reap the benefit of lowering the cost of procurement in these regions. The reduction in the cost of production will allow these companies to charge low prices on their products. These competitors are trying to reduce the lead time which is the core competence of ZARA and it is an important area of concern for the brand. There is an increase in the counterfeited goods and they affect the sales of the existing brand; it is a challenge for ZARA to ensure that such offerings don’t impact its brand value. As ZARA has its production facility in Europe where the labour cost is high, it can drive down its profit margin if it does not consider switching to other alternatives for manufacturing of its products. Value Chain Analysis ZARA ensures that there is a proper balance between in-house and outsourcing operations. The operations that enhance the cost-efficiency of the company via economies of scale are done in-house such as packaging, labelling, cutting and dyeing. The labour-intensive tasks required at the finishing stages are usually done by the subcontractors’ network that comprises of more than 300 firms and each one of them has specialisation in specific garment type or process of production. In order to respond quickly to the demands of the customers, the process is flexible and the production level is always kept slightly less than the expected level of sales so that the stock is always moving. It believes in having an under-supply of stock as opposed to stocking huge amount of inventory which is the industry norm. When the finished goods have been labelled, packaged and price-tagged, they are then transported by the third-party contractor either by road or air to their destinations. There is only one distribution centre that is located in the company’s headquarters i.e. La Coruna. All stores of ZARA gets fresh stock twice a week that has been pre-determined by the design department of the company (Zhelyazkov, 2011). The entire cycle of designing, production and marketing has declined to 22-30 days that is too less when compared to the industry average of nine months as the lead time. Figure 1: Designing, production and marketing cycle of ZARA Source: Lloyd & Luk (2010) The main factor that has supported such an efficient logistics and supply chain system is the investment in Information technology. The 500,000 sq m. and five storey centre of logistics comprises of about 200 kilometres of moving rails along with an automated routing system that delivers all electronically tagged garments at the proper bays of loading for dispersal through the third party distributors. Almost all the products can be dispatched within eight hours of their arrival and it has been found that almost 98.9% perfect and the shrinkage level is even less than 0.5%. Public Relations (PR) scandals of ZARA In the last few years, the brand equity of ZARA has been impacted by the legal issues that have been raised against its business operations. The proponents of the fast fashion industry are of the viewpoint that these fashion stores are taking undue advantage of the customer’s trust by looking over the health and well-being of the employees working in their stores and facilities (Bates, 2011). It has been reported by Dudley, Devnath and Townsend (2013) that the fast fashion stores like ZARA and H&M have become immune to the environmental issues and employees’ rights. In order to meet their policy of launching the latest collection every two weeks, ZARA overburdens its workers especially the ones who are working in the amenities in Bangladesh, India and China. It was even found that two of the company’s factories in Bangladesh caught fire, killing more than seven people. Similarly, ZARA had to suffer from the negative news created about Inditex manufacturing facility in Brazil. It was reported that the group was violating 48 labour laws of the Brazilian government by forcing the suppliers to work under slave-like terms and conditions (Bates, 2011). Such actions by the company impacted its brand reputation and it had to reinforce on an ongoing basis that it is avoiding these problems by developing an up-to-date and ethical Code of Conduct. However, Inditex has been emphasising its contribution in the environmental friendly initiatives by developing its Environmental Strategic plan which outlines the changes made by the company for promoting the utilisation of eco-friendly measures (Inditex, 2013b). Even ZARA has ensured that it promotes the concept of environmental sustainability by undertaking various Corporate Social Responsibility (CSR) initiatives. It has developed an Environmental Policy to ensure that it acts in accordance to the organisational ethics theory (Zara, 2013). The key factors that have been highlighted by the brand in its mission statement are as follows: 1. In the stores, energy is saved. 2. The shop is eco-friendly. 3. In transportation vehicles, biodiesel fuel is used. 4. The team promotes the idea of environment protection. 5. The commitment for environment protection is shared by the entire team of ZARA. 6. There is emphasis on less waste production and the utilisation of recycling methods. In order to encourage recycling methods, the security tags and hangers are gathered in all stores which are processed for getting transformed into a wide range of plastic items. Each year, millions of security tags and hangers are processes along with used plastic and cardboard so that the wastage production is controlled to a great extent (Zara, 2013). In order to ensure that the customers can contribute to the environmental protection measures, they are sold the goods in bags made of paper or biodegradable plastics. The paper bags are most commonly provided to ZARA’s customers so that they can be easily decomposed by a natural process ensuring a significant reduction in the environmental damage caused by the plastic bags. The company is showing strong support for the agriculture done in the ecological way so that the organic cotton can be used for production of some clothing materials. These materials ensure that the final product is free from chemical agents, pesticides and bleaches. Similarly, ZARA is focusing on manufacturing the footwear that is free from PVC (Polyvinyl Chloride). With the help of biodiesel fuel, the carbon dioxide emission is controlled which helps in reducing pollution in air by about five hundred tonnes (Zara, 2013). In order to promote the idea of animal welfare, ZARA ensures that its fur and leather are made from the animals that are reared in farm of livestock rather than from those animals that are sacrificed for skin sale. Hence, all of these initiatives by the company show that it is dedicated towards protecting the environment so that it can make valuable addition in the sustainable society development projects. The company is definitely engaged in fruitful CSR activities that are allowing it to enhance its brand equity and create a strong reputation in the market. Strategic options available for ZARA As there are some challenges being faced by ZARA in its fast fashion industry, it is vital for it to consider the strategic options that are available for sustaining its strong hold in the market. The biggest positive aspect of the company is that it has excellent economies of scale and it has successfully revamped its distribution network. On an international level, it is growing at an accelerating pace and it has eased its entrance in other markets by understanding the demands of each market prior to launching the store there. However, a centralised logistic system is a threat for its enhanced expansion plans. In order to increase its operational capacity, ZARA has to consider the option of expanding its distribution centres in other locations besides Spain. The Asian countries provide appropriate platforms for manufacturing companies as they have cheap labour and setting up the plant does not require high amount of capital. It has to strengthen its presence in other regions in addition to European countries as there is a lot of demand of its products in these regions especially Taiwan, Bangladesh, US, UK, India, China, Singapore, Italy and others. One of the most appealing target markets is North America as it has an increasing population along with rising household income; the consumers will be willing to spend their money on luxury brands especially in the clothing segment. The only drawback in this region is that there is intense competition in the retail fashion sector and this market has more demand for plus sized apparel. It is believed that the cost of operations in this area will be high and fashion market is entering the maturity stage. ZARA will have to develop a strategy that will allow it to compete aggressively and achieve the targeted results successfully. ZARA has the opportunity of targeting the market in South America but the only dilemma in the region is that it has unstable and volatile political situation along with low geopolitical attractiveness that can cause significant reduction in the profit margins. Moreover, the Middle East market appears to be the most feasible option as ZARA has limited presence in this region. There are only few countries present in this side of the market which can provide an opportunity of earning sufficient amount of revenue. Other areas that are attractive for the company are South Asia and South East Asian markets. In order to enhance the brand equity, ZARA can implement more environmental-friendly projects that will make valuable contribution in promoting its image as a CSR conscious company. It can even think about changing its operational procedures in Bangladesh, Brazil and other outsourced countries by redesigning the Code of Conduct so that it incorporate all the mandatory ethical standards. ZARA needs to organise events that will help it in revitalising its good reputation that has been impacted by the cases filed by the international governments for violating the ethical practices of businesses. Recommendations In order to make effective use of the strategic options that are available for the company in the fast fashion industry, following are some of the recommended course of actions that can be employed by ZARA: 1. The expansion in Europe can be done at a further level by entering into Italy. Since Italy is close to Spain, it can ensure that its products are transported conveniently to the stores in this region. It can even exploit the opportunity of developing a distribution centre in the area as it will be a nearby proximity for the company. The people of Italy are fashion conscious so they will be willing to buy the company’s products which are developed in accordance to the latest market trends. 2. ZARA can avail the opportunity of expansion in Eastern Europe as H&M and Benetton are already present in this region. Many new countries are becoming members of European Union and the retail store can expand into these areas to achieve a dominant position in the European market. 3. Since the brand has limited presence in the Asian markets, it should try to offer its products in these regions. Initially, it can do test marketing to get feedback about its acceptability in these areas. As China and India fall in the Asia region, ZARA can start its manufacturing facility in one of the regions so that it can control its distribution cost to a great extent in this market. 4. The other reason that the Asian markets are attractive is that the consumers are becoming fashion conscious and they want to buy the international brands to fulfil their desires of owning and using foreign products. In order to reap the benefits of this area, ZARA will have to develop a decentralised distribution system in Asia so that it can apply its business model of maintaining low level of inventory and implement short lead time and product life cycle concepts. 5. By creating a distribution centre in Asia, ZARA will be able to create a classy distribution centre as it will be able to supply products to a much diverse range of markets. The demand and supply will be effectively managed and the growth objectives of the store will be successfully attained. 6. Since ZARA has to cope with the increasing labour cost in the European markets, it needs to employ an efficient IT system that will allow it to shift the production method to complete automated system. The company can consider the option of revamping its production process that will allow it to increase the efficiency level of its production and meet the demands of the customers at a much faster pace. 7. Since its brand reputation has been impacted by the litigations filed by the Brazilian government and incidents that took place in Bangladesh, it will have to get more involved in the CSR activities that will allow it to manage its corporate reputation globally. In order to promote the idea of protecting the environment and making valuable contribution for the society well-being, it can organise events for creating awareness about environmental protection measures and guide people about the ways that can be employed for making the world a better place to live. Conclusion ZARA is definitely the market leader of fast fashion industry that has been setting various trends within the market for many years. The core competencies of the company are effective utilisation of stores, creating the value added products by responding to the customer needs promptly, eliminating the unnecessary steps of production to have shorter lead times and excellent quality products, reaping the benefits of having excellent geopolitical location and expanding robustly in the international market. In order to strengthen its presence in the industry on a global level, ZARA should try to follow the above mentioned recommendations as they will allow to the company to save huge amount of cost and develop more enhanced brand equity in the market. By availing the opportunities available in other regions, it will be able to earn good amount of profit margins and gain advantages of an excellent range of internal variation. References Bates, C., 2011. Zara under investigation for sub-contracting slave-like suppliers. [Online] Available at: [Accessed 2 April 2013] Bhardwaj, V. and Fairhurst, A., 2010. 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