Competitive Forces and Strategic Issues Shaping Zara - Assignment Example

Competitive Forces and Strategic Issues Shaping Zara Name: Student Number: Course Code: Word Count: Date of Submission: Table of Contents 1.0 Introduction 2 2.0 Company Background 3 3.0 Porter’s Five Force Model 3 3.1 Customer Bargaining Power 4 3.2 Supplier Bargaining Power 4 3.3 Competition 5 3.4 Regional Acceptance 5 3.1 Threat of Alternatives for Consumers 6 4.0 Internal Strategy Audit 6 4.1 Model of Production 6 4.2 Internal and External Communication 7 4.3 Financial Analysis 8 4.4 Marketing and Logistics 9 5.0 Current Issues 10 5.1 Public Relations 10 5.2 Corporate Social Responsibility 12 6.0 Summary and Conclusion 13 7.0 Recommendations 14 8.0 References 16 1.0 Introduction From a global point of view, the international economy continues to grow in all aspects from size to diversity in terms of the products introduced in the markets. Continuous development and growth of the various industries of business also contribute to this economy. The development of an organization or international company is, therefore, defined by the success of the marketing strategies and competitive forces that it employs. Exploration of new foreign markets is a necessary and an almost inevitable strategy that almost every retail manager embraces. Nevertheless, it is not a guarantee this report seeks to analyze the competitive issues and strategic issues that Zara uses to enhance its performance, customer satisfaction, public respect and earn appreciable returns. Consumer decision making process to buy a product involves a number of factors including internal aspects. Attached to this process is the overall effect of firing up competition amongst the providers of the subject product. Consequently, competitive forces are tools that complement strategic management to oversee a realization of the set goals and objectives of an organization. This report approaches the analysis by applying the Porter’s Five Forces model to supplement a detailed critical analysis of the competitive forces and strategic issues that shape Zara’s operation. 2.0 Company Background Zara operates in design, manufacture, production and supply of clothing across preferences to its customers of the textile industry. Founded by Amancio Ortea Gaoa, whenever a person talks about Spanish fashion, the name of Zara comes up almost immediately, as a retail clothing company. The Zara clothing company is one of the most famous Spanish companies in the world and their Spanish clothes and fashion can be found on nearly every continent in the world with most of them in the Arab regions. It was first founded in 1975 (Pearson 2008) and since the first store it has grown almost unstoppable.  At first, Zara extended throughout the Galicia region as a trigger of growth pulled in the immediate five years. As written by Hansen (2012), the Zara clothes company began to expand outside of Galicia throughout the rest of the Spanish territory by exploring northwestern Spain and later on further parts. Within the first decade in the retail industry Zara had spread substantially through Spain and as reiterated by Pearson (2008), currently the company has 331 clothing stores distributed throughout Spain. So therefore Zara management implements strategies and concepts to ensure its growth through the industry but then leaves the strategic control of Inditex Corporation, which it belongs to. As theorized by Kotler, Armstrong, Wong and Saunders (2008), for a particular company to survive and participate effectively in the international market, efforts of improving management effectiveness are necessary. However, interest is in the competitive forces and strategies put in play by Zara as a member of Inditex to ensure a sense of decorum in its operation. 3.0 Porter’s Five Force Model It is an all-inclusive, and by style incorporation, leadership that is good leadership to wisely make decisions on what business analysis model to adopt. These models are theoretically based on competitiveness. Porter’s Five Force Model is an analysis model which examines the profitability of an industry, the business industry. This model of analysis provides an insight on the impacts of external factors on the competitive nature, and information on how the organizations compete internally. Importantly, a firm can use this model to establish and harness their competitive advantage. The five forces in Porter's model are the bargaining power of buyers and suppliers, threat of new competitors, threat of substitute products by other firms and competitive rivalry (Porter 2008). 3.1 Customer Bargaining Power The buyer power is one of the two straight forces that influence the appropriation of the value created by the business environment. The most important determinants of buyer power are the size and the concentration of customers on a product. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Articles show that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power. From the case study, Zara captures the bargaining power of the consumer and utilizes it to make the business better. These encompass identifying taste differences that matter to customers and performing key activities to satisfy the consumers. It also keeps upbeat with the current market trends and consumer behavior and so convince them into the shopping for their clothing products. 3.2 Supplier Bargaining Power It is measured by the quality of service and how competitive the organization is in the market. Zara takes its competitive step by shortening the supply chain response from between 5 and 7 months to averagely 2 months (Pearson 2008). Aside from that, the company gives oral information to their customers rather than letting them get it electronically or other sources only. One-on-one communication enhances public relation and also enables Zara to get direct feedback from these customers. The supplier’s bargaining power is a essential to ensure that maximum profit is. As a result, the analysis of Zara’s bargaining power typically focuses on the size of the textile industry which is composed of a large number of retailers as well. 3.3 Competition As it stands on the global screen, the three closest competitors of Inditex as a corporation are Gap, H&M and Benetton. In the product positioning map, Zara, the flagship of this corporation, is relatively perceived as more fashionable than all the other three, with prices less than Benetton and Gap but higher than Hennes & Mauritz. Regardless of serious competition, Zara ventures into the industry ready to take the chances which is not the norm. The opportunities in these chances drive the management to adopt them. For instance, while fashion changes mean trouble, some of the companies, Zara on the other hand encourages these changes to put them in the competitive forefront. It practices fast-fashion which means that it produces new designs in an increased frequency and their cheaper versions increased in stores (Hansen 2012). 3.4 Regional Acceptance This is about the barrier of entry into a region as an investor that a firm could possibly face. Zara has invested in many countries internationally and so enjoys much of regional acceptance, especially in the Arab nations in which its presence is felt most. However, it is yet to invest heavily in places like Africa. This is about a potential market to which access is determined by the business laws governing that region (Bruner, Kumar 2007). Zara has a business system that is consistent and gives it a competitive advantage like successfully scaling up the distribution system. This is seen by the increased number of stores it has opened. Nevertheless, due to expansion in the international markets, there is some concern regarding its centralized logistics model. 3.5 Threat of Alternatives for Consumers The availability of alternatives to the consumer necessitates the consumer decision making process. Just like any other strategist would recognize, almost every company wants to do one thing better than the other to with the aim of making itself the best alternative. Zara adopts the concept of doing want the others have not done and in a way that only Zara can. Inditex Corporation sets the corporate strategy and approved the business strategies of the individual chains as well as controlling their overall performances. Zara, therefore, had the autonomy of operating independently, developing its own strategy, product design, sourcing, manufacturing and supply. This freedom made it possible to make major investments in manufacturing, logistics, and establishment of a just-in-time manufacturing system. 4.0 Internal Strategy Audit The internal strategies that Zara lays out to operate are necessitated by the everyday challenges and issues that it faces in the industry. Achieving competitive advantage is categorically a primary goal to every firm, organization or company that aims at advancing internationally. According to Kauffmann and Roesch (2012), this is achievable by designing and deploying marketing plans, logistics, production designs and business models with the ability to sense and meet demands of customers. The environment created by international marketing is engulfed in various factors that influence the expansion of an organization. Some of these aspects enhance while others hold back expansion, growth and development. These aspects are in particular categories of issues so as to facilitate a detailed understanding of the Zara’s position in the global marketing environment. 4.1 Model of Production Zara is principally the driver of the growth of the Inditex Corporation in terms of its profits and losses; Zara is the largest and most internationalized brand of Inditex's chain. Zara bases most of its production on the demands of the client and thus on demand manufacturing of a shop. This can be referred to as a pull strategy; it is a model of local production that enables Zara to provide much faster. Notwithstanding the feasibility of this model, as indicated by Ferdows, Lewis & Machuca (2005), it also reduces inventory costs, lowers margins by working with the most competitive offer and eliminates the need to resort to traditional sales in the sector to provide an outlet for surplus production. For this model is critical to have flexible production capacity to quickly adapt to changes in the always uncertain demand. Zara achieves the flexibility by subcontracting approximately 60% of its manufacture and production process. It therefore outsources some labor and professionalism but importantly, it does the crucial parts it like design by itself. Also important is the housing on one floor, of all related sections in the production line. 4.2 Internal and External Communication Medium quality fashion clothing availed at affordable prices; this is, in summary, the core concept of the business model by Zara. For this kind of model, vertical integration and quick-response is a vital factor.  Through the entire process of Zara's business system of designing, manufacturing, sourcing, distribution and retailing, four fundamental success factors are presented: short cycle time, small batches per product, extensive variety of product every season and heavy investment in information and communication technology.  These four elements are involved in every aspect of the business. The fourth factor, communication, is essential and a complementary of all the others. As mentioned earlier, this company invested in information technology to enhance communication amongst their staff. Between the customer and the company, they practice the provision of necessary information by oral means to their esteemed customers. This form is more effective since it gives the customer room to talk about their satisfaction and so the company does not only instill confidence in them but also gets feedback about how the public sees it. Zara's designers track consumer preferences on a year-round basis and place orders with both internal and external designers. In trying in meeting these customer preferences around there stores internationally, Zara has implemented the latest information technology tools to facilitate communication between stores and staff. Customized handheld computers support the connection between the retail stores. They easily augment regular phone conversations between the store managers and other specialists involved such as retail managers (Ferdows, Lewis & Machuca 2005). Through this system, there is proper communication between the different stores and the headquarters. 4.3 Financial Analysis A financial review of the textile industry would place H&M as the closest competitor to Zara in many dimensions. However, Zara’s financial performance in terms of returns has been on the continuous increase between particular years as the data below shows. Financial hitches are inevitable and that is the sole reason that Zara bases its exploration of possibilities in. Figure 1- Financial performance between 1996 and 2007. Source: www.inditex.ex Researches indicate that the performances of Zara and its closest competitor Hennes and Mauritz are comparable. The net operating revenues are closer to each other than with the other potential competitors, thought Zara leads in financial management in terms of net income. However, Zara has less in current assets compared to Hennes & Mauritz and therefore more liquid. From an economics point of view, one could conclude that this is because they have more fixed assets and turn their inventory over much more quickly. This can be owed to the kind of business model adopted of pull strategy and discussed thereon earlier. As reported by Udalova (2012), Inditex turns over their inventory about 4.42 times annually but then they make better use of cash that they have than Hennes & Mauritz. The idea is that cash invested to generate return so then the operating profit margin of Zara makes it more efficient financially than Hennes & Mauritz (Udalova 2012). Zara is much more efficient in generating a greater profit per currency unit, particularly the euro, than their competitors. So far, Inditex is leading in efficiency of economics operation compared to other companies due to the fact that they have higher margins. However, there is a lack of correspondence when its working capital is compared to that of Hennes & Mauritz. Working capital here refers to money available for addressing current obligations like a cost for resources and other necessitates not planned for in strategies. Due to the heavy investments that it engages in, Inditex has much less of working capital than H&M. The consequence of having small amounts to a working capital is that it could paralyze the company’s ability to address any liabilities that may arise unpredictably. 4.4 Marketing and Logistics A good marketing strategy scans the environments with markets for one's products, getting products that market and giving the consumers reasons to opt for the product you introduce in that market. For Zara, the selling fashion is secondary to selling clothes. This implies that their strategy lets the customer decide the fashion they desire and Zara provides it. As Dutta (2010) writes, having a high component of differentiation in the design helps the company to sell so much faster. The logistics bit of it is that Zara is capable of supplying clothing to all over their worldwide stores in a shorter period. Their production logistics gives the customer the impression that the available designs today may not be there tomorrow so one has to buy them now. This is the advantage of letting the customer’s idea appear in the design and producing them in not so large amounts. It is an opportunity cost strategy which has worked for them to increase the percentage of consumers who buy on entering a Zara store. Still of opportunistic strategies, Zara has had it competitors changing their strategic decisions, a trend that has either worked for these other retailers or brought no effect at all. Perhaps most significantly, the Zara model from the point of view of production is the local production to be able to supply the stores in the shortest possible time. By local, it is about the rapid response workshops, geographically close to the central store. However, this strategy has had to adapt to the new size of the company. From a particular perspective, the logistics of Inditex is inefficient, yet it is precisely this theoretical inefficiency, due to an oversized capacity, which enables you to reduce response times, increasing the logistical costs but get a much greater benefit by increasing their sales. Increased responsiveness comes along with the requirement that Zara has to turn to outsourcing of certain stages of production of commodities not subject to the prevailing fashion (Doole & Lowe 2008). 5.0 Current Issues 5.1 Public Relations Apart from appreciable returns and competitive advantage, entities in any other business want to set a podium for themselves in the market. Public relations then become a vital aspect that one has really to earn from the customers.  Zara has a consistent business system that gives the company its competitive advantage.  One of these advantages is the economies of scale that Zara is able to utilize (Lukac 2006).  However, with continued growth, especially due to expansion in the international markets, there is some concern in regards to Zara’s centralized logistics model.  This becomes the first issue the strategizing management, especially the chief executive officer, should probably look into. The company is concerned with diseconomies of scale as it grows. To address this issue and increase capacity, Zara should consider taking their presence to areas that they have somehow sidelined like Africa. That leads to the other concern facing the company. It is about the area of international expansion and its geographic scope, which is a critical aspect of international business as noted by Goddard and Ajami (2006). The company realizes that it needs to continue to expand internationally but suitable regions to explore either unpredictable or they feel some factors limit their expansion. Some of these factors are political and others religious or even lack of lack of experiences about the subject regions. Some of the possibilities are Africa as mention earlier or to expand in Europe itself, with target on particular areas yet to be invested in.  Another region is North America, but this region suffers from retailing overcapacity and is less sensitive to fashion. It also has demand of larger sizes, higher operating costs, intense competition and weakening demand.  South America is much smaller and also subject to profitability pressures. Same as South America, the Middle East is also a small market but much more profitable.  Lastly, the Asian market is very competitive. Zara has implemented almost the same type of business model in almost all of its stores in the different regions. The practicability of this is questionable given that the behaviour of the customers in one region is different from those in another area. Consequently the question of which models to be used in each country is another issues that Zara faces, with the continued expansion, given credit when deserved, the company has experimented with franchising, joint ventures and other company owned stores.  The questions it faces now is the decision on which is more appropriate than the rest.  This comes into thought due to the fact that the company has its own models and strategies it wants to implement. These strategies and models may contradict or differ with those of the partners it considers for partnership (Goddard & Ajami 2006). Again, there is the aspect of either starting up chains or acquiring existing ones.  The real issue was to perform all these activities while maintaining profitability, public respect and corporate social responsibility and revenue growth requirements.  5.2 Corporate Social Responsibility A Report by Vu (2012) shows that the position of the Zara fraternity in terms of its relation to the public and its corporate social responsibility can be derived from the operating system designed by Inditex. The roles Zara plays to assert its social responsibility are evident and some are inevitable. First, letting their design be guided by the desires of the customer indicate their respect for the different cultures of the regions it has stores. Zara employs the locals of the region in which it establishes a new store (Craig, Jones & Nieto 2004). It therefore offers employment to the members of that society. It also articulates the responsibility of taxation by paying appropriate taxes of the region in which it operate. This is a factor considered before establishment in the different regions. Even though all the Zara stores operate in almost similar ways as designed by Inditex, they are decentralized in a sense that a community feeling is currently absent. This regards the human resource managers and so the different Zara employers in one region feel different from those in other areas. This translates to the varied opinions of the public since even though almost all stores have same internal architecture; personnel are different in respects of operation styles. The business operation model adopted by Zara demands that it develops partnership, an aspect it has to deal with. It also operates in the textile industry, an industry that is quite labour intensive. The fact that Zara is a fast fashion retailer and manufacturer makes it highly dependent on the labour that is available. These labour providers and other subcontractors hired by Zara are really the determinants of Zara’s efficiency depending on their compliance and performance. Zara has had a number of labor scandals most of which have been experienced in Asia and other incidences of poor employment treatments in Brazil. The Brazilian case was quite effective against Zara and so they responded by establishing a Corporate Social Responsibility department and an internal code of conduct to be adhered to by all of its staff, suppliers and contractors. Establishing this department in all of its offices formulated the sustainable strategy model to see the achievement of set goals. 6.0 Summary and Conclusion Zara springs out of the Inditex Corporation as a clothing manufacturer and retailer for children, men and women wear. The way in which its operation sets into the industry is almost an indication of a prior knowledge that the founder had. This is because Zara gets into the game with a different approach in aspects like business model, strategy issues and competitive forces implemented. But one can owe this to Amancio’s prowess in business which he had acquired as the management of Inditex, which is the corporation to which Zara is a member. Zara implements the operating system of fast-fashion, encouraging oral communication with customers, letting the customers desire influence the design and implementing state of the art communication systems between different stores. An analysis of the company by Porter’s Five Force Model exhibits its strategic measures and issues. In a nut shell, the analysis reveals that the Zara operation style, firs of all, studies the bargaining power of the consumer which is their consumption behaviour and utilizes it to enhance business. It is in this part that Zara opts not to produce the current fashion in the conventional seasons but designs fashion as desired by the consumer. It is produced as fast as it is required. The company’s marketing strategies are in a way such that it convinces the customer to purchase their clothes. The customers design is manufactured but in small quantities to ensure that they are all sold and the next design or fashion produced. Zara also recognizes the competitive nature of the industry and competes, not buy doing one thing better than their competitors but by operating in ways that only Zara can. On the issue of regional acceptance, it has spread through Spain and the Asian as well as Arabic world quite substantially. Even though it is yet to explore certain regions like North America, Central, East, West and South Africa, one can only appreciate it internationalization so far. The business model adopted which is a pull strategy has worked for them to this instance but the itches that it comes with cannot be thrown out of the window. The major drawbacks and supplier or employee scandals that Zara has had typically resulted from poor management. Moving forward, the financial analysis of Inditex with regards to Zara is quite more effective than that of its competitors. Zara has a better gain margin and invests most of its cash thus it has more value in assets that the other clothing companies. However, it has quite a low working capital, which may be of trouble though not regularly. It has also developed an admirable relation with its customers and the public. The difference in the aspect of corporate social responsibility whose good side has been overshadowed by the few scandals, it got engulfed in Asia and Brazil. 7.0 Recommendation The analysis brings to fore the necessity of a few key recommendations. The first of these is the view that Zara should expand further in Africa and even more in Europe. Given its centralized distribution system which is already located in Spain, it seems that it will have an easy time leveraging its existing system in regions within relatively close proximity to its main centers. In Africa, it has a store in Egypt so exploration of other African countries will be easily possible. A strategic recommendation involves the Asian market, which is considered a market of intense of competition. The Asian market is a huge one in scope but yet to be fully explored in its full potential. The huge but competitive Asia requires adequately sufficient strategies. Zara growth is continuous and so it must scale up its distribution system to support this growth internationally. Ideally, a system that works for a number of stores may not work for stores twice the number. The other is that expansion requires more capital; therefore, it should increase its working capital to realize the expansion project. 8.0 References Bruner G, Kumar A, 2007. Attitude towards location. Journal of Interactive Advertising, (17)5. Craig, A. Jones, C. & Nieto, M. 2004. Business of fashion case study. Philadelphia: Philadelphia University. Doole, I. and Lowe, R. ed. 2008. International marketing strategy: analysis, development and implementation. Stamford: Cengage. Dutta, D. 2010. Retail at the speed of fashion. New Delhi: Third Eye sight. Ferdows, K., Lewis, M., A. & Machuca, J. A. D. 2005. Zara's Secret for Fast Fashion [online] Available at: < http://hbswk.hbs.edu/archive/4652.html> [Accessed 31 March 2013]. Friedman, T. 2006. The World is flat. New York: Farrar. Goddard, G. J. and Ajami, R. A. 2006. International Business: Theory and Practice, M.E. Sharpe: New York. Hansen, S. 2012. How Zara grew Into the World’s Largest Fashion Retailer. New York Times, [online] Available at:< http://www.nytimes.com/2012/11/11/magazine/how-zara-grew-into-the-worlds-largest-fashion-retailer.html> [Accessed 30 March 2013]. Kauffmann, L. and Roesch, J. F. 2012. Constraints of Building and Deploying Marketing Capabilities by Emerging Market Firms in Advanced Markets, (20)4. Kotler, P., Armstrong, G., Wong, V. and John, S. 2008. Principles of marketing. Pearson Education. United States: Prentice Hall. Lukac 2006. Zara, Inditex and Amancio Ortega – the Responsibility of International Success, [online] Available at: [Accessed 31 March 2013]. Pearson, A. 2008. The Story of Zara –The speeding bullet. Unique Business Strategies. Porter, M. (2008). The five competitive forces that shape strategy. Harvard Business Review. 86(1) Udalova, J. 2012. Zara Report, [online]. Available at: [Accessed 31 March 2013]. Vu, A. 2012. Corporate social responsibility: The Inditex Group Case. Read More