Strategy of Zara - Essay Example

Table of Contents Executive Summary 2 Answer 2: Analyzing the internal environment 2 Analysis of Resource and capability 2 Analysis of the capabilities 4 Core competencies of Zara 4 Competitive strategy 5 Value chain analysis 6 Answer 3: PR Crises Analysis 7 Answer 4: Strategic Analysis 8 Business Level Strategy 8 Corporate Level Strategy 10 Future Strategies Suggested for Zara 12 Conclusion 16 Bibliography 19 Appendices 20 20 Executive Summary Zara gets strong financial backing from the parent firm Inditex. Logo and brands are the resources that have helped the company to achieve product differentiation and uniqueness. One of the biggest strength of the company is the cost effective business model and potent designer which would be hard to imitate by the competitors. In order to provide a trendy fast fashion image to the end users the brand looks create a time-effective manufacturing process. The process takes only four weeks. Zara has a flat leadership model where the store managers have the power to make decisions without consulting the senior managers. Zara also have a centralized distribution system. The company has been able to achieve vertical integration. However, keeping the mature economic condition of U.K. in mind the next objective of the firm is to enter the emerging economies. Hence, the company may have to decentralize the distribution system. The company has a cost effective marketing strategy. The firm is also looking to focus on digital marketing strategies. Answer 2: Analyzing the internal environment Analysis of Resource and capability Strong financial backing is provided to Zara by the parent firm Inditex. The parent firm has touched revenue of €13.79 billion. The retail chain however holds various trademarks. While talking about trademarks it needs to be mentioned that very recently Zara had defeated Louboutin in France in battle related to the mark of red soles. This helped the high street retailer to boost sales of the shoes. The exclusive logos and brands are the resources that have helped the company to achieve product differentiation. Also such resources have helped the firm to tangible the offerings and maintain a unique and strong brand identity. In this way Zara, has become one of the strongest apparel brands in the world. The retailers also have over 200 designers and 1751. The designing team of Zara is one of the strongest plus points. The team is continuously bus in new fashion related information. This allows the company to get a strategic advantage over the competitors. (Brown, 2009, p. 209). Add to this the company has also installed advanced and integrated IT and telecommunication system that helps the brand Zara to position themselves as cool and trendy. The communication system also integrates the management, designers, suppliers, manufacturers and customers. Zara also has a very unique inventory model as the company does not hold a large amount of stock at eh stores. The ability of Zara to adapt the rapidly changing trends of the fast fashion industry along with rapid rate of inventory turnover installs a sense of freshness and exclusiveness in the brand. Zara operates through a flat organizational structure and self driven leadership model. The founders of Zara Ortega and Castellano believed that in order to be successful Zara has to respond quickly to the market trends and this only possible if the company has a decentralized decision-making model. This is why the store managers of the company hold the power to select inventory for respective stores without consulting the head quarters. The main philosophy behind such organizational policy is to save time to support the JIT delivery model of Zara. In this way the lead time to deliver products to the shops gets shortened. This allows Zara to provide trendy products to the customers quicker than any other competitors. (Berger, 2006, p.36). Analysis of the capabilities In order to provide a trendy fast fashion image to the end users the brand looks create a time-effective manufacturing process. The process takes only four weeks to complete the whole cycle which includes the designing of clothes, manufacturing of clothes and final delivery of clothes to the retails stores. (Burgemeister, 2003, p. 192). Hence, the company has a distribution system that is lean and time-shortened in nature as compared to other competitors. As a matter of fact the time span of the whole distribution cycle is very short as compared to the average industry cycle of 6 months. When it comes to marketing the company focuses a lot lesser on advertisement. The total investment made by the firm for advertisement is very low as compared to the competitors. The company mainly operates through a cost effective marketing strategy. The main focus of the company is on shop merchandising and in store branding as well as providing quality product to the competitors. Zara also relies a lot on viral or word of mouth marketing to generate awareness and looks to maintain the image of uniqueness and quality (Wenderoth, 209, p. 359). Core competencies of Zara The strong human resource team of the company is most certainly one of the strong points of the brand. This is something that the probable new entrants as well as the existing players would find difficult to emulate. The ability of the designers to respond quickly can be very rarely seen in the fast fashion industry. Add to that the unique inventory model and the robust and time effective production and distribution model would also be hard to imitate. A part of the core competencies mentioned, economies of scale is also a huge advantage. The company can also use the economy of a scale as potential barriers against the threat of the new entrants. The company has been able to gain the economies of scale through a centralized distribution model and cost effective business model. Here it needs to be mentioned that keeping the globalization of the company in mind Zara may have to de-centralize the distribution network to some extent to reduce the market risks. Competitive strategy The cost effective model of the company has allowed the company to gain cost leadership in the fast fashion market. This has been well supplemented by the product differentiation strategy. Hence it can be said that company used a hybrid strategy. As mentioned before the overall business model of the company is quite cost effective. The company focuses on prodding quality trendy products at an affordable price. This has allowed the company to gain the advantage of cost leadership. Hereby it needs to be mentioned that product differentiation is a must in the fashion industry as there are various players in market providing similar products at almost the same price. Although Zara, focuses very little marketing and ads the company looks to achieve product differentiation through augmentation. Zara focuses on the store branding, lighting, merchandising, customer service, etc to achieve differentiation. Also the lean JIT model of the company allows the stores to get trendy fashion products in a very short time which are then sold to the customers. The life cycle of the products is also quite small as Zara looks to modify the offerings continuously (Zarrela, 2010, p. 45). Value chain analysis The core or the primary activities of the company would differ from the traditional activities mentioned in the value chain model. But the supporting activities would remain the same. Among the array of activities the core activities of the company includes ordering, developing and designing. Among these ordering happens to be most important (Kotler, 2001, p. 25). The company has a decision making system which is decentralized in nature. The store managers of the company have the power to select inventories without even consulting the senior mangers operating from the head quarters. The DC or the distribution centers control the inbound logistics of the company. (Cowan, 2005, p. 67). The DCs get the products in bulk. The company does not stock the products. This allows the company to nullify the inventory risks. The clothes designed in the factories are shipped to the DCs and then moved to the stores. Such lean and robust logistics system helps the company to introduce new products in the market within a very short time. As far as outbound logistics is concerned it needs to be mentioned that the company focuses very little on ads, as a matter of fact the spending is of 0.3% only, where as the competitors of Zara spends 3-4% on ads of the total revenue. Zara mainly relies on shop branding to crate brand identity. (Henry, 2008, p. 89). Zara sells the products through stores as well as online also. The core activities of the company are aptly completed by supplementary acts such as procurement, HR, infrastructure and also technological developments. The lean, robust and efficient distribution model, time-squeezed production process and unique inventory model has allowed the firm to gain such a brand image that would be hard to emulate by the competitors (Kolb, 2008, p. 92). Answer 3: PR Crises Analysis Though Zara has undertaken several social and corporate sustainable activities and made commitment for the sustainable growth of society and environment, but it is true that the organization is facing several serious PR issues (Berger, 2006, p.36). It is feasible that, in different countries the employees are unhappy due to huge work load. Lack of effective performance appraisal of the employees is harming the motivation level of the employees. The organization communication process is not transparent enough (Jobber, 2012, p.583). The organization management always overlooks the satisfaction factor of the staffs. On the other hand, the customers are treated as god by the organization basis on their business policy. Poor employee retention is the key affecting issue in the business process of Zara. Unfavorable work culture in Zara has forced the work unions to criticize their policy. Several media articles and news regarding these issues has affected the brand image of Zara. A Brazilian TV network has argued that, Zara has bought illegal items that are made by the immigrants within the unethical and illegal working condition. The news report in the specific Brazilian television has also demonstrated a similar incident that was taken place in Sau Paulo (Global-Labour-University, 2012, p.1). More than 50 workers had been released through a raid. The employees in Brazil were recruited for their own specific place. The organization has committed that they should be provided reasonable compensation that will be enough for improved life. But, it has revealed that, the works had to work for 16 long hours in a day for low salaries and wages. These were actually unlawful and unethical wages. The brand image was hampered due to these allegations. Though on the other hand, Zara has continuously denied the allegation, but the organization has failed to prove its point. Moreover, the organization had been accused that they have continuously appointed the child labor in order to reduce the cost and maximize the business profit (Torun, 2007, p.39). Afterwards, Zara has committed that they should operate according to the recruitment policy and business ethics. However, the Brazilian authority was not convinced by the commitment of Zara. Though it has been identified that, Zara has faced labor problems in different operating countries, but implementation of CSR strategies, effective customer retention strategy and sustainable business policy has Made Zara a popular and trustworthy brand in global market (Selim, 2013, p.217). Answer 4: Strategic Analysis This strategic analysis part will assess the corporate level and business level strategy of Zara. Business Level Strategy Zara used to target young and educated individuals who like trendy clothes and sensitive enough towards the pricing of fashionable clothes. Zara’s target market is very extensive as the target market is not segmented by the age and lifestyle of the target audiences. Therefore, it can be state that, Zara’s business scope is fairly immeasurable. Basis on the business level strategy of Zara, the fast-fashion retail follows both cost leadership and differentiation strategy. The integration of these two differentiations and cost leadership strategy has been underlined below. Cost Leadership Strategy Zara has used the Haute Dressmaking design and it offers parallel clothing with low expenditure fabric in order to uphold advanced quality and accomplish low cost (Howe, 2004, p.173). Moreover, Zara has always focused on the short direct times that in revolve steers limited inventory. It has lowered the operational cost of supply chain. These two strategic approaches are the effective example of cost leadership strategy. Differentiation Strategy Zara has differentiated their business operation and design of products from its prospective competitors within the fast-fashion industry by providing lesser lead times. This is quite lesser comparing to the average industry standards. Every year Zara used to manufacture more than 11000 exceptional designs compared to the not more than 4000 designs by its competitors. Zara used to refill its retail outlets twice in each week. On the other hand, the other potential competitors of Zara used to refill once in each week. Zara manufactures the products in undersized units and achieves the benefit of scarcity in stores by replacing those old products with the new products with various unique designs. The designs of Zara’s clothes remain in the outlets of Zara for a shorter period time, i.e. less than 5 months. Only 10% of total designs used to remove from the stores by the fast-fashion chain compared to 16% of its prospective competitors. The in-store staffs always take the feedbacks of customers in order to find out the current trend, need and preference of the customers. Zara used to achieve the advantages of advanced Information technology in their vertically integrated supply chain network by maintaining and controlling an even flow of knowledge and information from upper end to lower end of the chain (Fernie, 2004, p.79). Corporate Level Strategy Zara’s corporate level strategy can be classified based on the Ansoff Matrix. Zara has followed the below strategic course based on Ansoff Matrix (Appendix-2). Market penetration Strategy of Zara Zara has encouraged its target customers to consume more number of products, when Zara has determined that there are lot of weaknesses and issues in its competitors’ product and marketing strategy. Zara has established an effectual in-store designing team of its Spanish outlets and efficiently controlled the distribution network after finding out problems and issues in the distribution channel of its potential challenger H&M (Granger, 2010, p.122). Zara has frequently introduced new unique designed trendy fast-fashion clothes in each week to pull the target customers continuously to make them check the latest and new collection of fashionable and trendy clothes. In the stores of Zara, the clothes travel quickly through the stores and used to reinstate by the newly designed fashionable clothes. Zara has effectively centralized their distribution network and half of the factories of Zara are located in Europe. The fast-fashion emerge has benefited Zara to shrink its exposure to gaffe of fashion. From the point of designing to manufacturing, Zara has effectively controlled their supply chain system. It is the most important reason of achievement for Zara. Effectual Vertical integration in supply chain system of Zara has ended its networking channel highly efficient, faster and flexible comparing to other potential competitors. Market Development Strategy Zara Initially, Zara has recognized prospective buyers group within the effectual sales areas. Moreover, Zara looks to vend its products in the new potential and emerging location. Inditex is Zara’s parent company. It is the important fast-fashion manufacturer in the globe. Zara is one of the greatest growing flagships of Inditex. Zara used to revolve its inventory twice in each week. Zara’s inventory-to-sales ratio is quite imposing. Zara’s profitability in the European Union operation is quite high comparing to its potential competitors. Product development Strategy of Zara The global leading fast-fashion retail chain used to introduce the new designs and as Zara has the rapid growth option from the thought to spot of sales. The average cycle is 6 weeks. Zara’s positioning can clearly point out that Zara is not a luxurious fast-fashion brand. Zara used to target the young and educated price sensitive people by introducing several stylish designed clothes in rational price level. Zara has always discriminated their product line by the persistent introduction of new and latest designed clothes in fewer quantities at quick speed and the reasonable price level of the fashionable clothes is the confirmation of the great scale customization inevitability of the target customers. Diversification Strategy of Zara The diversification growth can be achieved through the identification of potential opportunities related with the business. Zara is one of the leading players within the UK’s fashion retail industry. Zara has the emerging opportunity to expand their business in the developing market. The fashionable clothes in reasonable price will automatically attract the people in the international market. The pace of Zara’s growth is slowing down gradually. It is one of the major weaknesses of Zara. Future Strategies Suggested for Zara Several critical issues and weaknesses of Zara may affect the organization’s growth strategy. Zara needs to undertake developing strategies in order to overcome those critical issues. Several recommendation plans has been proposed. While considering the economic factor, which also happens to be an external environmental factor, it can be said that, the fast-fashion industry of UK has affected due to the previous global recession. The industry has become mature enough. The organization should decentralize their production system. It will be cost effective. Moreover, Zara should concentrate on the establishment of the manufacturing firms in emerging economies like Brazil, China and India etc. (Schiller, 2006, p.88). While considering the social factors, which also happens to be an external environmental factor, it has been seen that, due to complex life style coupled with rising fuel cost and decreased disposable income has forced the consumers in UK to stay in house and shop from home (Belch and Michael, 2005, p.71). Therefore, Zara should focus on digital marketing strategy (search engine marketing, social media marketing, and mobile marketing) in order to reach up to the customers directly (Porter, 2008, p.344). It also need to be mentioned that majority of the people spend more time over the internet as compared to other media sources. Zara should continue the vertical integration supply chain network in the new operating countries. The socio-cultural and buying behavior aspects of the people should be monitored and observed by Zara (Tiits, Kattel and Kalvet, 2006, p.83). The organization should recruit local employees and should hire the local managers. This strategy will help to develop the economy of the operating country. After a long span of effective and successful operational time, they can construct new factories. It will help the organization to reduce its import-export cost of raw materials. Implementation of Models and Final Suggestions for Zara Basis on the certain criteria, the below discussed strategies can be implemented. Suitability, Acceptability and Feasibility This strategy will determine the suitability, acceptability and feasibility of the implemented strategies by Zara. Suitability The implemented strategy of Zara is suitable basis on the goals and objective of the organization. It is evidenced that, the leading organization is involved in attaining its goals and objectives by the help of the strategies. Acceptability In terms of Zara’s share holder point of view, the implemented strategy of Zara should be acceptable. The strategy of Zara is highly focused on the shareholders’ objective. Moreover, the adopted strategies can be resolute as sustainable strategies. These strategies are reasonable in terms of economy and environment. Feasibility Zara’s strategies are realistic as since last 20 years Zara has accomplished its most important performance indicators. The organization has needed the valuable financial and non-financial resources for strategy executions. STAIR Model Basis on the STAIR model, the main steps for performance change of Zara are highlighted below. Strategy Zara has designed and clarify the strategies in order to communicate with the external and internal stakeholders with a transparent viewpoint (Appendix-3). Target The leading fast-fashion retail chain has translated the business strategies into apparent tangible targets and exact objectives in order to follow the operational target and transfer those targets into key performance indicators. Assignment Zara needs to execute bottom-up organizational method and build up effectual action plan in order to attain success for the assigned tasks and projects. Implementation After assignment Zara should implement the planned action strategies through inner operational subsystem alignment. It will help them to execute the approved strategy as the bottom-up level method does not visible in the operational process of Zara. Results Lastly it is highly recommended that, the leading fast-fashion retailer should track the final performance against the recognized operational and planned goals according to the applicable action plan account. It will help them to review the executed strategies and help them to take appropriate actions based on the final result. Conclusion Zara is one of the popular and leading global fast-fashion retail brands. Zara has executed both differentiation and cost-leadership strategy. Moreover, the effective implementation of vertical integration into supply chain system has increased its core competency. Though it is one of the popular global brand, Zara can be affected by numerous problems through centralize manufacturing strategy. The business model of Zara is cost-effective. The organization has set up objectives and goals basis on their cost effective business plan. It is evidenced that, execution of the planned strategies have bought success to Zara. It can be state that, the organization should diversify their business with decentralize procedure in the emerging BRICK countries. References Berger, S., 2006, How We Compete. California: Currency Doubleday. Brown, L. 2009. Marketing and Distribution Research. New York: Ronald Press Company. Burgemeister, S. 2003. Market analysis. Berlin: GRIN Verlag. Cowan, A. 2005. Risk Analysis And Evaluation. London: Global Professional Publishing. Torun, F., 2007, Zara- A European Fashion Brand. Berlin: Grin Verlag. 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Appendices Appendix-1 Appendix-2: Ansoff Matrix (Zara) Appendix-3: STAIR Model (Zara) Read More