Strategic Analysis of Zara - Case Study Example

Strategic analysis of Zara Contents Executive Summary 3 Introduction 3 Corporate Strategy 4 Hedley (1997) strategy and the business portfolio 5 Prahalad & Hamel (1990) the core competence 6 Internal Analysis 7 Evaluation of Strategy 10 SWOT Analysis 12 Conclusion 13 References 14 Executive Summary The entire study deals in strategic analysis of Zara. There are various strategic components covered in this analytical study. Zara has been operating in the fashion industry from the past many years and has secured high revenue margins. Strategic analysis as a topic is highly interesting as it facilitates identifying internal competencies of a firm. There has been wide array of frameworks used in the study such as Michael Porter’s five forces model, VRIN framework, value chain model, Hedley (1997) business portfolio and Prahalad and Hamel (1990) core competency model. Firstly these frameworks have been well described in the study and are then applied to a real time case study of Zara. Strategy implemented by the firm has also been evaluated on the basis of Rumelt’s framework. A proper SWOT analysis has been conducted so as to determine whether the firm uses its strength in order to explore market opportunities and reduce the degree of external threat. Introduction In this study strategic analysis of Zara will be conducted. Zara is a Spanish accessories and clothing retailer that has its headquarters in Arteixo, Galicia. The company was founded by Rosalía Mera and Amancio Ortega in 1975. Zara currently belongs to Inditex Group and is the largest retailer across the globe. There are other brands also owned by this fashion brand such as Pull and Bear, Oysho, Uterque, Bershka, Massimo Dutti and Stradivarius. In comparison to industry’s average production of six months, Zara create its new product within two weeks and gets them to respective retail stores. The company has majorly focused on trends of industry and believes in transferring fashion production to low cost countries. Zara mainly deals in women and men’s clothing. Its product segment is divided into many parts such as shoes, lower garment, cosmetics, upper garment, complements as well as fashion clothing for children. The sizes for women’s clothing greatly vary such as UK size 14 to US size 12. Zara offers wider range of products in comparison to other fashion retailers in the industry. 11,000 distinct items are produced by the company which is approximately 2000 or 4000 for other competitors. On the other hand, Zara has adopted vertically integrated mechanism in its business operations so as to manage each of the steps involved in supply chain like manufacturing, distributing and designing products. This brand has been successful over the past many years and has average annual revenue of €7.071 billion. In this context it is essential to highlight the strategic framework incorporated by the company. Throughout this assignment various strategic models will be analyzed and shall be applied on Zara for obtaining desirable results. Corporate Strategy The strategic business unit can be stated as a small profit centre within an organization whose main focus is to align all business operations with company’s objectives and gain desirable profit margins. Corporate level strategy of Zara is to be the most preferred fashion retailer across the globe. It has been able to achieve targets but the management still wishes to become an environmental friendly organization in the coming years. The mission of Zara is to manufacture products in most efficient manner and contribute largely towards society. Medium to long term direction of strategic business unit is to develop a loyal base of customers and offer most fashionable items much before it is introduced by the competitors. This unit majorly fits into supply chain of the firm. Since it wide scale of operations takes place on the basis of this unit. There are some essential elements which are prime focus of strategic business unit of Zara such as following customer oriented business model, offering best services or products, incorporating technology and high concern towards profitability, growth, survival and public image. There is a great deal of responsiveness within the strategic business unit of the company simply because it not only takes into consideration competitive analysis of market place but even gives equal importance to eco-friendly measures needed to design fashion items. Zara is famous for appropriate allocation of available resources within its business units. The company mainly allocates resources for eco-friendly business operations and prefers more to boost value chain or supply chain activities rather than investing in marketing campaigns (Pringle, 2008). Policy of zero advertising has set its higher brand image in the industry since the firm was more interested in spending a revenue percentage in opening new store outlets. In geographical context, Zara in the present scenario operates across 86 countries in every continent and across the globe, possessing a total number of 1,770 retail outlets. Hedley (1997) strategy and the business portfolio Hedley (1997) business portfolio and strategy is a theoretical framework which suggests the responsive view point of a business. Every organization comprises of a diverse business portfolio. Each of these business units has its own specific competitive area. It can be stated that though Zara operates in fashion industry it encompasses wide array of products in order to offer to end customers. For instance women clothing or men’s clothing sector is a separate segment and it targets high end customers. On the other hand, children clothing designed by the firm target middle to high income level customers. It has been observed that each of the product segments generate desirable revenue margins for the firm. Their competitive area lies in the increasing demand towards fashion apparels. However Zara do not imitate fashion shows but believes in creating their own designs so as to set their own trend in the industry. To be more precise each of the business segments is able to meet hidden demand of consumer market. Prahalad & Hamel (1990) the core competence Prahalad and Hamel (1990) stated that core competencies result into core products. The clear description about core competency has been stated in figure 1. Figure 1: Core Competency (Source: Lasserre, 2012) As stated in figure1, core competencies result due to expertise, strategic fit and resource availability of a firm. On a broader context it can be stated that core competencies result due to experience possessed by key personnel of an organization. Zara’s major competencies are its brand image and strong financial arm. This has supported the company in terms of satisfying customers and developing innovative designs. Zara has wide range of business operations and hence it is essential that competencies are effectively shared amongst business units. In this model of Prahalad and Hamel more focus is not on diverse business portfolio but core competencies. There are a set of competencies possessed by any firm which is transferred to its core products. Zara’s competency is in its fashion centred knowledge and efficient supply chain operations. This has been transformed to its wide range of fashion clothing that is offered to customers located across the globe. Internal Analysis Michael Porter’s value chain model comprises of interrelated generic activities that helps to determine competitive advantage of a firm. The value creating activities are denoted by such model. Value chain is useful in terms of assessing weakness areas and then converting them into strengths for gaining profitability margins. Figure2 represents application of Value Chain model on Zara. Figure 2: Zaras Value Chain (Source: Proctor, 2014) As per figure2 it can be stated that number of operations are performed by Zara. The primary activities of Zara comprises of ordering, designing, manufacturing and fulfilment. It has been able to differentiate its brand image from others by incorporating value in every possible step from manufacturing to product distribution. Zara has decentralized and flat decision making process. Store managers of the firm can select their respective inventories and it is not dependent on decisions of headquarter. Distribution centres of the firm manage overall inbound logistics in relation to inventory control, warehousing and receiving of input materials. Stock keeping units at the company are technology based and inventory risk is reduced since there is no stock inventory (New York Times, 2012). Procurement, human resource management and technology development is similar to any other industry. However support activities of the firm are well performed with the help of IT department. Michael Porter identifies five forces that help and shape companies to determine the competitiveness degree of an industry. Zara’s internal analysis can be effectively conducted on basis of this model. Figure 3: Five Forces Model (Source: Lasserre, 2012) As per figure3, barriers to entry are high in the fashion industry. For sustained profitability in this sector high fixed cost is required by a business. On the other hand, lump sum investment needs to be done in in-store promotions, advertisements, etc. Zara is witnessed to spend the minimum in context of commercials and advertisements. In this industry there is long sales cycle which initiates storing that lasts up to one year. However Zara has set its mark by taking just two weeks to design products and deliver it to respective outlets. Developing brand equity is a major challenge for the firms entering into this industry. The threat of substitutes is moderate since switching costs of buyers is considerably low. There are several brands to choose from such as MANGO, Uniqlo, etc., making buyer propensity high towards substitutes. Copying of styles is quite common in this industry as customers prefer similar apparels even of lower quality. In such competitive market Zara has been able to maintain large base of loyal customers in comparison to its competitors. Buyer power is moderate because fashion wear is more appealing to consumer market (Porter, 2008). Lots of choices are available to customers when it comes to fashion wear but price is a major factor. For instance in European countries Zara is regarded as low end product while in emerging markets it is a high end product. There is low power of suppliers because fabric price is low, contract based stitching or cloth production is available and local cooperatives work without any such labour unions or contracts. Intense rivalry is observed in the industry due to high exit barriers. These barriers mainly exist due to high costs and excess levels of inventory which has lots of cash tied up. On the contrary, there are high advertising expenses that increase the level of competition. The VRIN framework is another strategic framework that is used to identify competitive position of a company. Zara as a fashion company has been able to achieve higher standards in the industry due to its innovative strategies. Figure 4: VRIN Framework (Source: Proctor, 2014) Figure4 clearly indicates that there are certain internal resources of a firm that outlines competitive position of a firm. Sustained competitive advantage can be achieved by a firm on the basis of these resources. For instance Zara utilizes its operational and financial resources in the best possible manner. It creates value by offering products as per consumer demand. On the other hand, Zara stays ahead of its competitors by investing less in advertising campaigns and allocating its overall revenue more in opening retail outlets. In social perspective, the company utilizes eco friendly measures so as to prevent any form of environmental damage through its business operations. However the company is able to gain competitive advantage only by delivering quality products to its customers and maintaining least sales cycle. Evaluation of Strategy Strategy evaluation can be best conducted on the basis of a framework suggested by Richard Rumelt in 1980. The term strategy is basically used for different business purposes. A strategy is basically set of plans or objectives undertaken by a company to gain competitive position in the market place. There are certain broad categories for evaluating business strategy of a firm. These criteria’s majorly comprise of consistency, feasibility, consonance and advantage. Consistency refers to a smooth flow of business operations that is there should be less inconsistent policies and goals within the system. Consonance states that a strategy implemented by a firm must possess adaptive response to critical changes occurring in external environment. Advantage indicates maintenance and development of competitive advantage through business strategy in specific area of operations. Feasibility criteria of strategy evaluation are fulfilled when a strategy does not build unsolvable problems or overtax available resources. Zara has adopted the most innovative business strategy. It belongs to fashion industry but does not incorporate traditional practices of this industry. Zara takes into consideration customer demand in the market and produces fashionable items as per the demand. The company’s strategy is well aligned with the proposed framework of Rumelt. Strategies are consistent because its main aim is to enhance levels of customer satisfaction and create value for society. Zara does not incorporate any inconsistent goals such as targeting different market segment or diversifying into completely different sector. In order to withstand fluctuating external environmental conditions, the firm focuses on industry trend and its strategy has always been to set a new trend in the market. Zara’s strategy is feasible since it effectively allocates available resources amongst supply chain operations to deliver products at right time and right place. On the other hand, advantage criteria are even met since till date Zara is known to be the largest fashion retailer across the globe. All its strategies have giving a sustained or competitive advantage because they are customer oriented in nature (Ulwick, 2005). Apart from meeting hidden demand of customers, the firm even focuses on developing brand image in the form of being an eco-friendly brand. Thus all these factors in business strategy of Zara contribute towards building its competitive advantage. SWOT Analysis SWOT analysis is a strategic tool used to identify internal strengths or weakness, and external opportunities or threats. Zara is way ahead of its competitors since unlike other players it does not analyze fashion shows to design seasonal clothes rather takes into consideration consumer demand. The company’s major strengths are its global outreach, strategic location, store image, unique distribution strategy, responsive employees, enhanced brand image and fast changing fashion collection. On the other hand, there are certain weaknesses possessed by the firm such as high price range, limited stocks, lack of marketing activities and a brand image which is closely tagged with other players. Market opportunities need to be explored by any company simply because it determines long term survival of a firm. The first major opportunity for Zara is increase in percentage of middle class in Asia. There is even an opportunity to lower costs by building distribution centre in various developing countries. Other opportunities identified for Zara in this study are effectively cooperating with new designers, putting across their innovative strategies amongst rising environmental concerns and focusing more on international recognition. Whereas external threats for Zara are fierce competition in the market place, wide array of lawsuits related to sweatshops, brand equity dilution and possible product imitation. The company uses its internal strengths to explore available opportunities and this has been reflected in its business strategies. For instance, it optimize strengths in order to explore opportunities like opening new outlets in Asia’s developing countries, building distribution centres in Asian countries to save costs, promoting brand image as an eco-friendly firm, and setting trends in the market place. On the contrary, Zara tries to eradicate its weakness by offering best fashion items which cannot be imitated easily by competitors. Threats like brand equity dilution has its effect reduced to a minimum by offering best services to customers along with innovative product line. Conclusion As per the study Zara occupies a competitive position in the industry. Fashion industry is an intensely competitive market segment. For sustainable growth in this sector one needs to be innovative and should know different mechanisms of controlling costs. Zara offers most fashionable and innovative designs to its customers. In order to compete effectively with rival companies Zara does not adapt the trend shown in fashion shows but believes in setting its new fashion trend. However there are some areas which need to be focused on by the company. For instance, price of Zara’s products are high and this results as a challenge for the company when it comes to expanding business operations to emerging markets. On a broader context, high income group people can easily afford such high end products but it becomes difficult for those belonging to middle income class segment. On the other hand the operational costs of the company have increased in the recent years. This is mainly due to excessive investment in commercials or marketing campaigns and in distribution centres. It is recommended that the firm create distribution centres in less developed countries. Zara can even launch a separate fashion clothing segment for middle income group people. This in turn shall help to acquire maximum market share in emerging markets like India, China, etc. With growing competition Zara also needs to invest more on advertisements along with opening new retail outlets across the globe. It is highly recommended that the company diversify into different market segments so as to cater hidden market demand. References Lasserre, P., 2012. Global strategic management. Singapore: Palgrave Macmillan. New York Times., 2012. How Zara grew into world’s largest fashion retailer. Available at: http://www.nytimes.com/2012/11/11/magazine/how-zara-grew-into-the-worlds-largest-fashion-retailer.html?pagewanted=1&_r=3&ref=magazine&adxnnlx=1352725405-jSS0/SqaGslCt/4JfgJjeg& [Accessed on 20th November 2014]. Porter, M. E., 2008. Competitive advantage: creating and sustaining superior performance. New York: Simon and Schuster. Pringle, H., 2008. Brand immortality: how brands can live long and prosper. Great Britain: Kogan Page Publishers. Proctor, T., 2014. Strategic marketing: an introduction. New York: Routledge. Ulwick, A. W., 2005. Business strategy formulation: theory, process and the intellectual revolution. USA: IAP. Read More