Business Strategy - Zara - Essay Example

Running Head: Business Strategy - Zara Business Strategy - Zara [Institute’s EXECUTIVE SUMMARY This report includes critical analysis of Zara brand from the perspective of strategic management perspective. Zara is one of the most popular and famous fashion and clothing brands in the global fashion industry. It has continued to confront internal and external challenges; however, the company has been successful in resolving and responding to these challenges with its evolving strategic management. The report make use of different analysis tools, such as resource-based view analysis and SWOT analysis to evaluate internal and external aspects of the organisation. The report also includes discussion on the basis and sustainability of Zara’s competitive advantage in the global market followed by recommendations of a few strategic options for future sustainability and success. Table of Contents EXECUTIVE SUMMARY 2 Table of Contents 3 INTRODUCTION 4 PART I - COMPANY ANALYSIS 5 Organisational Environment 5 Resource-based View Analysis 6 Physical Resources 6 Human Resources 8 Organisational Resources 8 SWOT Analysis 9 Strengths 9 Weaknesses 10 Opportunities 10 Threats 10 PART II - STRATEGIC EVALUATION 11 Rising Production Costs 11 International Presence 12 Financial Results 13 PART III - SUSTAINABILITY OF THE COMPETITIVE EDGE 15 PART IV - STRATEGIC OPTIONS FOR GROWTH 17 REFERENCES 19 INTRODUCTION For centuries, clothing has remained an important aspect of human society. Even from the Stone Age until today, humans continued to use different materials to arrange clothing for themselves. In addition, as the years passed by and the human race evolved, affection towards clothing turned into a separate textile and fashion field that has now become a multibillion dollar industry with hundreds of organisations catering millions of people every day. In midst of such a competition, a few organisations have been successful in acquiring their brand image and having a name in the textile and clothing industry. ‘Zara’ (Inditex, 2011) is one of such clothing brands that although founded only four decades ago; however, it has been able to dominate the clothing and fashion industry not only in its founding country Spain but also all over the world. Particularly, ‘Inditex’ is the main company that owns the Zara brand along with different other brands, such as Bershka, Pull & Bear, Oysho, (Inditex, 2013) and recently, Zara Home with approximately eighteen hundred outlets in more than eighty-five countries (Inditex, 2015) that indicate the extent of success that Zara and mainly, Inditex has achieved in the industry. As result, Zara has often come under analysis for the purpose of studying successful companies and to understand strategies that the company employed since 1975, which has enabled it to become one of the most successful companies in the world. This report is also an attempt to analyse external and internal aspects of Zara along with evaluating company’s response to various challenges that it has confronted during all these years. Particularly, the report will focus on strategic management (David, 2013) of the company, and will put an effort to propose a few strategic options based on the analysis. PART I - COMPANY ANALYSIS Organisational Environment Interestingly, analysis of Zara’s organisational environment has identified it as an emerging brand even after forty years of its inception since it is surrounded by many competitors that are in the global competitive market for more than a hundred years. For instance, Levis is one of the major brands that give fierce competition to Zara, which was founded in the year 1853 by Levi Strauss & Co., and another major competitor in Zara’s surroundings is H&M brand, which was founded in 1947 in Sweden. This indicates that although Zara has been able to achieve enormous success but if compared, it is still a new brand in the market. Figure 1 below shows different brands that are competing with Zara in the fierce competitive organisational environment. Figure 1 Value of a Fan: Across Brands 2013. (Syncapse, 2013) Resource-based View Analysis The resource-based view is an effective approach to analyse internal environment of any organisation, which will now look at physical resources, human resources, and organisational resources of Zara. Physical Resources A major indicator of physical resources is the financial stability, which has been a great strength of Zara. Analysis of company’s reports (Inditex, 2015) indicates net profit of 2.5 billion Euros in 2014 as shown in Table 1 and a close 2.37 billion Euros in the 2013, which shows the extent of financial success that the company has achieved since its inception in the year 1975. Table 1 – Financial Revenues of Zara for the year 2013 and 2014 (Inditex, 2015) Besides financial revenues, Zara’s stores are another indicator of physical resources, which have now reached to more than 6,600 stores (Inditex, 2015) in more than eighty-eight countries indicating its global reach. Although Zara has expanded extensively during the last few years, interestingly, analysis (Loeb, 2015) shows that Zara has only fifty-three stores in all over the United States that point towards the possibility of enormous expansion in terms of Zara’s physical resources in case the company will decide to go deep down in the USA. Besides Zara brand, the company has launched various other logos and brands that are acting as physical resources for the company providing financial revenues. Some of the famous brands of Inditex are “Pull & Bear, Bershka, Oysho, Zara Home, Uterque, and Massimo Dutti” (Inditex, 2015). All these brands including the most famous Zara has enabled the Inditex (2015) to become one of the most successful and market leader in the clothing and fashion industry globally. Analysis (Inditex, 2015) shows that the company invests very less amount of revenue in advertising and promotion as compared to its competitors, which is strange in this media-afflicted era. On contrary, Zara invests more in acquiring prime locations for its stores that are always located in best locations of the country. Whether it is USA or Indonesia, Portugal or United Kingdom, Zara’s stores will always be in the most prominent locations of the city that has been one of the major strategies of Zara to market its brand in the public. In addition, besides store locations, the interior decoration of Zara stores is also centralized, which means that Zara stores look almost alike irrespective of the country except a few alterations depending on the availability of infrastructure facilities and tools available. In this regard, despite of investing millions in advertisements and commercials like its competitors, Zara relies on its physical stores to provide a serene experience that may not create a need of any advertisement. This centralized approach in physical resources has helped the company in maintaining a global brand image that has resulted in huge revenues to the company as discussed earlier. In recent years, company has now invested in another physical resource that is PDA, which has now become an essential aspect of its stores worldwide that helps the company to remain in contact with each and every store in real time. For instance, Zara stores’ managers always have a PDA with them that allows them to inform the headquarters in Spain about a particular customer’s complaint or need of new stock, which enables Zara to provide an everlasting shopping experience to the customers resulting in eight percent of increase in company’s sales (Inditex, 2015). Human Resources According to Inditex (2015), the company employs approximately 128,000 employees in fifty-four countries excluding people working at its various stores in different parts of the world. In addition, Zara is famous for taking care of its employees; for instance, in March 2015, the company announced to include its 70,000 employees that are working for the company for at least two years in sharing the revenue growth after its eight percent increase in the net sales (Inditex, 2015). Besides, in-house employees, the Zara has been relying on contractors as a lot of effort-required work is outsourced by the company out of its Spanish factory, which has enabled it to maintain its rapid supply chain management (Scott, Lundgren, & Thompson, 2011) that has been one of the major strengths of the company. In addition, analysis shows that Zara has designed an infrastructure at its headquarters where designers work closely with manufacturers and people from the production department resulting in faster lead times (Bhagwat, 2011; Buchler, 2011) and better communication in the company. Organisational Resources Since the basic purpose of this section is to analyse strategic positioning of the company, this part will analyse organisational resources accordingly. Particularly, it has been an observation that Zara has employed a market-oriented strategy in maintaining its organisational resources. In other words, the company maintains a close-knitted relationship with its customers that are the sole decision-makers in the company as far as new styles is concerned. By considering customers’ demands and preferences, Zara determines to invest in different organisational resources required for customer satisfaction. Another key change observed in the functioning of Zara has been in the realm of environmental friendly products and services, which has been a heated topic in Zara courtyards. For this purpose, the Inditex (2015) released an Environmental Policy in 2011 that illustrates company’s commitment towards environmental and social issues and its compliance for ISO 14001 standard at its headquarters and production facilities in Spain. SWOT Analysis This section will include SWOT analysis of Zara brand, which will allow a critical perspective regarding its strengths and weaknesses, as well as opportunities and threats that company is facing while going through changes in its strategic position. Strengths One of the major strengths of Zara has been its production and distribution strategy that is centralized and vertical since the day one. Designers at the headquarters come up with designs which are then provided to in-house and outsourced manufacturers/suppliers, and to ensure quicker distribution, the company ensures working on similar pieces at the same time, which are then joined together for the purpose of stitching and fitting. Another strength of Zara that has enabled it to achieve success in short time is its global outreach and particularly its strategy to use stores and store experiences as a marketing and advertising strategy that has paid off well during the last two three decades (Tinsley & Ormsby, 2012). Fast changing collection of the dresses has allowed the company to create a base of responsive employees that are aware that if they like something in Zara’s collection, they should buy it right away. They are aware that the collection will end soon and new collection will replace it in the next four weeks, which is not the case with other fashion brands that usually launch their collections in every new season. Weaknesses As a result, limited stocks of Zara has come out as a weakness as well, as sometimes customers are unable to get hand to the latest collection and subsequently, go for other brands since they are interested in wearing something latest in fashion. Another weakness identified during the analysis is lack of investment in advertisements and commercials that has given a little head-off to its competitors that usually make efficient use of advertisements for marketing of their products. Opportunities Asian and American markets portray various expansion opportunities to the company, since there are very few stores in the United States, as well as in Asian countries, especially in Middle and South East Asia that have become a popular place for international fashion brands. Besides, the company can also benefit by looking at the opportunities of establishing distribution centers in developing parts, especially Asian that will help it to lower its costs, which is quite higher in Spain. Threats As discussed earlier, the company faces fierce competition from its competitors, especially H&M that is always giving a head-to-head competition to Zara. The company has also been confronting legal issues in the form of lawsuits filed by sweatshops that have come out in analysis as a threat to Zara. PART II - STRATEGIC EVALUATION The earlier section included critical analysis of external and internal aspects of Zara whereas this part will evaluate strategic management (David, 2013) of the company and the strategies that it employed to resolve challenges and achieve competitive edge in the market. Rising Production Costs During the last few years, the clothing and fashion industry, and particularly Zara have confronted increase in production costs due to increase in costs of raw materials, such as fabric and primarily cotton prices in the world market. For instance, in 2011, Chinese and Pakistani cotton markets showed twenty percent increase in their cotton spot prices (Bernstein Global Wealth Management, 2011), which was a challenge for clothing companies to maintain their profitability. In addition, as major suppliers of Zara is in Spain including its own headquarters and production facility, the company faced higher labor costs that resulted in rising production costs as one of the biggest factors challenging sustainability of Zara and mainly, Inditex. In addition, the company faced rise in unemployment rates that was an outcome of after effects of global recession (Euromonitor, 2012). Figure 2 – Strategic Positioning of Zara in the Global Fashion Market Analysis shows that to overcome this challenge of rising production costs, Zara employed a cost-leadership strategy (Sorescu & Bridges, 2011) along with its existing differentiation strategy, as shown above in Figure 2 and it seems like it paid off the efforts, as Inditex showed eight percent increase in its net sales in 2015 (Inditex, 2015). For instance, to reduce the costs, Zara maximized its approach to use cheap materials and imitated haute couture designs that it began in 2005 (Ferdows & Machuca, 2005; Tiplady, 2006) while maintaining its fitting and stitching standards to ensure its good brand image in the fashion and clothing industry. This although resulted in huge criticism (Berman, 2010); however, through this strategy, Zara was able to cater middle class streams of global consumer base that were hesitant to try out Zara’s clothing due to high prices. International Presence Another challenge that came across during the strategic analysis of Zara was the issue of maintaining stability in its international presence. Inditex was making revenues from Zara brand only (Inditex, 2015); however, catering a range of different customers inclined the company to launch several other brands that came under description in earlier section of the report, such as Zara Home that now is providing revenues of 2.4% to Inditex (2015). In this regard, expansion in terms of launching new brands helped the company in increasing its market share in the market and dominating the clothing industry to a great extent, which was mainly limited to high-fashion women earlier. Another critical challenge identified during the analysis was compliance of local laws and regulations that often created hassles for Zara to function in different countries. Particularly, its centralized production and distribution approach acted as strength as well as a weakness in this matter. For instance, centralization of production and distribution enabled the company to ensure highest quality standards required by local regulations (The Economist, 2012). In addition, this approach also kept away the decision makers from various loopholes that were creating problems for the company to maintain its domination in the clothing industry. To respond to this challenge, Zara came up with the strategy of creating a real-time communication network with the help of PDAs (Hume, 2011) in every Zara store that links store manager with people sitting at the headquarters. In this regard, while Zara benefited from its centralized vertical approach to maintain highest quality standards. At the same time, the company decentralized the structures by involving every store manager in providing information required for effective decision making. In this way, store managers can communicate with relevant departments in real time to provide feedback to a clothing quality, a design, color, or anything else that may help the company in fulfilling customers’ demands and preferences. In this regard, this centralized-decentralized strategy of Zara has been beneficial for the company since it was able to respond to these internal and external challenges while maintaining its success in the world market. Another strategy employed by Zara in this aspect was its investment in web sector (Berthon & Shapiro, 2012) that helped it to reach creative consumers on the internet through its official website, as well as through effective use of social media. Analysis shows that Inditex was reluctant in entering the web marketplace; however, the above-discussed challenges enforced the company to take emergent strategic decisions, and which allowed the company to increase its revenues resulting in launch of more online stores totaling twenty-seven online Zara stores (Inditex, 2015). Financial Results With employment of above discussed strategies to respond to internal and external changing situations, Zara was able to achieve positive financial outcomes indicating success of its strategies. According to Inditex (2015), the company’s employee count showed 137,054 employees in different parts of the world along with new 8,741 jobs at 6,683 Zara stores worldwide (Inditex, 2015). Moreover, the company announced twenty-three percent growths in its same-store sales during the last five years (Inditex, 2015) resulting in total net profit of 2.5 billion Euros with five percent growth from the year 2014. Figure 3 – Growth of Zara’s stores in the Global market (Inditex, 2015) PART III - SUSTAINABILITY OF THE COMPETITIVE EDGE Particularly, this section will include critical analysis of the basis of sustainability (Liabotis, 2007) of competitive advantage that Zara has been enjoying during the last many years over its competitors. Clearly, effective supply chain management is surely the fundamental basis that has always put Zara ahead of its competitors, such as H&M that usually take 5-6 months to launch a new collection; whereas, Zara comes up with its new collection every 5-6 weeks indicating the clear competitive edge in the market. Another basis that has enabled the company to acquire an edge is Zara’s commitment towards its physical assets, especially its stores that the company owns, which is opposite to what other companies usually do. Inditex owns most of the Zara’s stores that allows it to ensure a similar environment in all the stores resulting in a global brand image, which remains the same wherever the customers go irrespective of the country. Besides, Zara is famous for its fitting. A various competitors and substitutes have tried to imitate Zara’s designs but they failed to come up with same fittings. This indicates one secret (Hansen, 2012) of Zara that has allowed it to ensure its competitive advantage by controlling critical phases of supply chain, such as dyeing, cutting, and a majority of sewing. Owning these facilities enables Zara to make sure that it achieves what its creative individuals have designed. Another basis of competitive advantage that came across during analysis for this report is Zara’s strategy to localize the process of globalisation. In other words, Zara’s investment in the information and technology sector to involve store managers in effective communication between headquarters and every Zara store has been a major basis of its competitive advantage in the global market. This localization-gloablisation approach helps the company in sustaining effects that are detrimental for the company. However, analysis did not bring out everything positive in Zara’s strategies. Scrutiny of Zara’s reports and documents has indicated that Zara’s business model is quite unsustainable as compared to its competitors in the market that shows little probability of failure in the future. Particularly, Zara has been relying heavily on its Spanish contractors and suppliers resulting in fifteen percent higher production costs than the competitors. Although Zara saves a lot in revenue by cutting costs through lesser investment, for instance, 0.3% (Inditex, 2015) in the area of advertising, where its competitors invest hugely; still, the company will have to look towards developing parts to establish cost-effective production and distribution facilities. Analysis of Zara’s sustainability has pointed towards an imperative aspect of Zara’s approach that might become an impossible challenge to resolve for the company in future that is its investment in physical assets. Zara has been owning its most of the stores (Inditex, 2015) that are increasing its capital investment as the company plans to expand its store network globally. In case of a loss, the company will face enormous challenges in keeping its stores’ ownership and at the same time, continue sustainability of its brand image and the competitive advantage in the market. Another basis of Zara’s competitive advantage is its fashionable styles but when it comes to sustainability, substitutes can easily imitate these styles, they are already doing so since there is no rocket science behind Zara’s style, and they can be achieved through standardized machines, which pose questions regarding sustainability of company in terms of dominating the clothing industry. PART IV - STRATEGIC OPTIONS FOR GROWTH Although this report identified Zara as one of the most successful and popular fashion and clothing brands in the industry, still, there is a huge room of growth for Zara to fill in the coming years. Before recommending appropriate strategic options of growth for Zara, this section will include PEST analysis table that will open further windows for better proposition. POLITICAL ECONOMIC SOCIAL TECHNOLOGICAL Europe has liberated import quotas that has benefited Zara positively At the same time, local regulations in other countries continue to create hassles for the company Zara is enjoying economic stability as it recently announced 8% increase in its net sales Financial revenues of 2.5 billion Euros in 2014 Fashion industry is now booming as recessionary effects are now almost finished Zara brand has focused primarily in Europe for many years, which indicates potential growth for company in Asian region, particularly China and India Standardization and centralization does not allow company to integrate socio-cultural aspects of each country, which is a challenge Zara and particularly, Inditex has continued to focus on technology, especially PDAs to ensure effective communication with all the stores in real-time that is a strength Zara needs to invest more in web technologies indicating a huge room for growth in this field Table 2 – PEST Analysis of Zara Zara has already achieved significant outcomes through its efficient supply chain management (Pahl & Mohring, 2009) and effective strategies, the company can still invest in further expansion to enter into the markets that are still full of opportunities and Europe is surely one of them. Particularly, Zara has put most of its focus in the Spanish market followed by its stores network in eighty-eight countries; however, the company has still not touched various regions, particularly in the Eastern Europe that has a market size worth billions of Euros (Chopra, 2009), and thus, expansion in this direction can be fruitful for the company. Besides European expansion, analysis in the above sections identified an urgent need of production and distribution centres in the developing world, which will be an efficient strategic move for Zara to cut down the costs that have been giving competitive edge to its competitors in the global markets. Particularly, China seems a viable market offering viable opportunities for expansion in terms of production-distribution centres having lowest labor costs in the world. In addition to expansion, success is another imperative aspect of the company that requires considerable attention since the founder Ortega and Castellano are near to their retirement, and therefore, the company will need to devise strategies to ensure peaceful and constructive succession of top-level management. It is assumed that Ortega’s daughter will probably take things in her hands to take care of family ownership; however, the company will have to decide whether it should continue with its centralized approach or should go for decentralization of power in the company. Furthermore, analysis of Zara’s strategies has indicated strict standardization of almost every aspect of the company, which might be detrimental in the future. For instance, Zara’s top-level management ensures that all the stores look alike, even uniforms of the employees look similar in every store, and so the styles and fittings of the clothing, which received little criticism in the American market, as there were fitting problems in the U.S. market. As a result, a little bit of relaxation in Zara’s standardization seems a good strategic option that will enable the company to diversify its presence and come closer to the localization aspect in the globalization and internationalization of Zara brand. Another area where Zara needs to focus is online presence of the company. Although company (Inditex, 2015) has announced launch of more online stores in 2015 and 2015, however, Inditex will have to invest more in making efficient use of online marketplace that has resulted in huge revenues for various company in the global market. Lastly, from this range of strategic options, the most viable and needed strategic option available for Zara is establishment of production and distribution centres in Asian continent, particularly Chinese market that will help the company in reducing higher production costs, as well as the Chinese market will open up new avenues for the company to expand in the Asian region. The labor costs are usually lowest as compared to existing production facilities in Spain and Europe; however, for implementation of this strategic option, the company will have to invest in training and development of human resource at new production and distribution facilities to ensure sustainability of the competitive advantage in the global clothing and fashion industry. REFERENCES Berman, B. 2010. Competing in Tough Times. New Jersey: FT Press. Bernstein Global Wealth Management. 2011. Inditex and H&M. Bernstein Press. Berthon, P. R. & Shapiro, D. 2012. 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