Zaras Fashion Industry - Literature review Example

ANALYSIS OF THEORY APPLICATION TO ZARA'S INTERNATIONALIZATION INTO AUSTRALIA THE APPLICATION OF UPPSALA MODEL According to Johanson and Vahlne (1977) internationalization is a process where organizations steadily increase their international participation. According to Rugman (1982) this is a way of diversifying risks. Several theories have highlighted this process of international progression of organizations. These theories give us an insight in to this phenomenon. Companies are motivated to go abroad by various factors; these factors are dynamic and follow a sequential process. According to Johanson and Vahlne, (1977), these factors include diversification, industry evolution, fast expansion of competitors and search for better alternatives such as tariff barriers and favorable regulations. Zara opened its first clothing store in 1975 in Spain where it was only selling men and women wear on retail. Currently, the Zara chains are over 1,000 worldwide, they have actually grown into retailing giant with outstanding record sales. Zara’s products are appealing worldwide, with a variety of men’s, women’s and children’s fashion wear, the company is enjoying unique styles on real world price. Zara’s fashion industry has different products that are often short-lived, element of style designed to capture the mood of the moment hence salable within a short period. Fashion products also has no stable demand, it demand is difficult to forecast. The demand it may be changed by weather, celebrities and media. This makes it hard to predict the market demand. The fashion products are majorly purchased on impulse, meaning the buyer makes decision to buy when confronted with the product. This means that the product should be available. (Christopher et al 2004). Australia is one of the popular emerging internationals markets targeted by various companies for expansion. Zara’s rivals in Australian market are also strategizing to enter the Australian market. This is because the market attracts more retailers as much as US and UK market in terms of consumer tastes. Uppsala Internationalization Model Johanson and Vahlne (1977) conducted extensive research on internationalization process. These are scholars from the University of Uppsala who developed a model after empirical study was conducted in Sweden to give an insight in to the progressive internationalization process of companies. This therefore is a pioneer model on internationalization process. The model emphasizes on the gradual increase, incorporation and use of knowledge acquired through sequence stages of internationalization process. The Uppsala model defines internationalization as a consequence of incremental decisions which increase the level of commitment across different phases and thus a sequential model; this sequence of stages is known as establishment chain. Companies are motivated by various factors to move to international markets, the factors can either be proactive or reactive. Proactive factors include increasing profit, innovative retailing, and economies of scale. Reactive motivation includes saturation in the domestic market, local restrictions minimizing risk of political instability through diversification. As Zara Company grows, the local domestic market becomes narrow and thus there is high demand to expand to markets abroad, this brings in a higher level of competition. Zara will not only compete with local Spanish brands such as mango, but will now compete with international brands such as Gap and H&M a European brand. As organizations continuously increase their participation in foreign markets, the internationalization process takes place across successive stages. The gradual increase in commitment and information is characterized in the whole process. Zara’s internationalization progression to Australia will start with exports to similar countries, this will assist the company avoid uncertainties. The Zara’s can then use independent representatives such as Westfield Sydney outlet to minimize resource commitment. The company can then establish a sales subsidiary and finally creating of manufacturing facility abroad. U-model stages of internationalization Johanson and Vahlne (1977) The stages of Uppsala model are flexible; the model pays attention to attention to psychic distance concept. Companies are known to be inclined to invest first in markets with language, culture, level of industrial development or political systems identical to their local markets. Most companies first select regions which are easier to understand and gradually increase international experience as they move to the directions of regions with different cultures. The psychical distance concept is crucial in internationalization; companies need to understand the market they choose to enter. Psychical distance involves the differences between countries on language, culture, political systems, social systems, business environment or traditions that may hinder the firms’ learning process of foreign market. The uncertainty is large when the psychic distance is bigger. The companies therefore fast operate in markets that are psychologically closer in order to easily identify opportunities and threats. As the psychical distance reduces, the companies consequently reduces their uncertainty hence gradually expand their markets as they gain experience. Experience increase market knowledge and skills, this is used with time to overcome bigger psychic distance. Johanson & Vahlne (1990) re-formulated the Uppsala model as a permanent interface between four factors. This model’s foundation therefore is that internationalization is the product of a chain of incremental decisions (Johanson and Vahlne, 1977); here they provided two aspects of internationalization variable i.e. state and change. The state aspects involve commitment to the foreign markets and foreign markets operation knowledge while change aspects involve performance of current activities and commitment decisions. Basic mechanism of internationalsation Johansson and Vahlne (1990) State Aspect A firm has a state of market knowledge and market commitment at any given time. These aspects have a great impact on what the commitment decisions and current firm’s activities. This in turn affects market knowledge and market commitment. (Aharoni, 1966). Performance of the current activities and commitment decisions are affected by the Market knowledge and market commitment. This therefore changes the commitment and knowledge in the model. According to Williamson (1985), firm aims at making high long-term profit which is equivalent to growth, and apart from profit, the firms strives to minimize risk taking. All these efforts determine decision making at all levels of the firm. U-models assume that internationalization state affects perceived risks and opportunities that will influence commitment decisions and current activities. More than 75 percent of total Inditex sales are accounted by Zara; this therefore makes Zara the largest division. Due to organizations superior performance, Zara can take advantage of the Australia market. Zara selection of foreign market was determined by various factors. This includes sales potential, risk, demographic size, geographically close countries to minimize transport cost and cultural closeness reduces uncertainty. A futuristic view of Australian environment enabled Zara select the market. Market commitment Johanson and Vahlne pointed out that market commitment is composed of two factors; these are amount of committed resources and level of resources committed. The resource commitment can therefore be high or low. Market knowledge Commitment decisions are made considering market knowledge. the different kinds of knowledge such as current and future markets, environmental conditions, according to Johanson and Vahlne (1977) Market knowledge is important when it comes to internationalization process since it determines the willingness to make commitments. The way knowledge is acquired determines its nature (Penrose, 1956). Knowledge can either be taught or transferred or is natural to the person who has it. There is objective knowledge, experiential knowledge and explicit knowledge. Here the organizations first develop their products and services in the domestic market, as the activities increase, the company knowledge and resources increases and the perceived risk reduces. This is done as the firm understands the foreign market. According to Johanson and Vahlne (1977) knowledge can be classified in to three depending on its nature. These are objective knowledge, general knowledge and market-specific knowledge. Market-specific knowledge This knowledge is gained by experience in the market and is specific to a specific location. The knowledge focus on specific characteristic hence hard to transfer. Example of this knowledge is the deep knowledge consumer behavior or business culture. Penrose, (1956) pointed out that external environmental analysis assist in revealing the organizational values, use of resources and technology, health, competitive rank in the market, political climate, overall image and areas that needs improvement. Zara’s competitive advantage is on pricing, the company has positioned itself as a substitute for price-conscious and trendy consumer. This will assist the current consumers who want to spend less on clothing and channel disposable funds to healthcare, education, electronics, travel and leisure. General knowledge This knowledge has a wider scope, it is acquired after more experience in the international market operations, and it can be applied to various markets in deferent countries. Examples include common marketing strategies, management methods, general customer notions and demand characteristics. According to Penrose, (1956), there are forces outside the organization environment that affect organization’s performance; such forces include customers, suppliers, public pressure groups and government regulation agencies. Australian market attracts more retailers because in as much as it is similar to US and UK market in terms of consumer tastes, the Australian market is not developed but has distinct lack of fashion and variety is an untapped potential. Objective knowledge This knowledge is more specific compared to general knowledge. It refers to the king of information gathered by a firm before target market entry, the knowledge is easy t attain since sources are publicly available. Examples include market size, government regulations and customer’s power. Zara’s rivals in the market are also strategizing to enter the Australian market. These rivals include Gap plans and Forever 21 of the US. This will give Zara a closer competition given that other international retailers such as Witchery and Country Road are in the market. The first entrants such as Monsoon Accessorize and Mango will give Zara a better insight into the market performance since the companies have been competing with Zara in other markets globally. Change aspects Current activities The current activities of a firm give the biggest source of experience. Uppsala model clearly differentiate the market experience and firm experience based on the field of experience. Firm experience it is intrinsic to the company while Market experience is acquired by use of management with enough experience in the market concerned. The more the firm uses these management staff with experience, the more it gains experience as a firm and improve profit. Zara is facing a big challenge in the dynamic nature of external environment, these forces are such that they drastically change affecting the organization objectives, strategies and even success. The forces include government regulations, consumer preferences, new competitors and material acquisition. Some of these challenges are overcome by Zara through experience in efficient scheduling. Zara is very efficient in scheduling. The company has a Centrally Managed Inventory where delivery of products to all stores worldwide is controlled and timely. The design cycle time is reduced, there is actually timely response to consumer needs such that items that sell well are quickly altered or new designs entered to maintain market leadership. Commitment decisions This is the second change aspect. Commitment decisions are made when the firm has identified opportunities or challenges in the market. The firm therefore makes decisions based on experience or previous identical situations. Zara use a Strong IT System to allow efficient communication of inventory and sales data across the global enterprise. Similarly products move within hours from source to destination due to effective logistics and distribution scheduling. This is one of the decisions made to improve on efficiency. The opportunities and challenges are based on the current activities conducted by the firm and to the market commitment. The probability of a firm getting opportunities from the market highly depends on its performances and commitment to it. Uncertainty-reducing commitment Uncertainty-reducing commitment is a decision taken due to increase in the existing market risk for instance entrance of new competitors. Here the firm has to commit resources to reduce market uncertainty. On competitor’s analysis, Zara is facing stiff competition from Mango, Gap and Hennes & Mauritz (H&M). This is occasioned by Zara’s wide range of merchandise. The Gap is currently selling similar merchandise as Zara with less trendy styles and at affordable prices. The introduction of global online retail platforms will give Zara a competitive advantage over the others hence giving it an ability to revitalize the local clothing industry. Scale-increasing commitments when the market situation or company position changes due to factors such as political, competitive stabilization or even increase in returns, the firms needs to commit more resources to increase its market knowledge hence decreasing the uncertainty and increasing commitment to the market. From 2009 to 2013, Australia fared well in global recession with the clothing and foot ware industry market set to grow at 2.95% this is supported by high level of consumer awareness of the brands. Incremental market commitments have three exemptions according to Johanson and Vahlne (1977) . One of the exceptions is big companies degree of commitment: The firm size influences its partiality to the commitment. Therefore firms with more sources may feel secure making bigger commitments compared to smaller sourced firms. The other conditions where this approach will not apply are those markets with high degree of stability; market-specific knowledge emerging from experience may not be useful in homogeneous markets. Lastly, the conditions where this approach may not be applicable are markets with common features, firms in these markets may generalize their knowledge to the specific market References Aharoni, 1966. The foreign investment decision process. Harvard Graduate School of Business Administration, Boston Johanson, J & Vahlne, J, 1977. Internationalization Process of the Firm, Journal of management studies: Stockholm. Almquist and wiksell International. Johanson, J & Vahlne, J, 1990. The Mechanics of Internationalisation, International marketing review: Stockholm, Almquist and wiksell International. Johanson, J & Wiedersheim-Paul, F, 1975. The Internationalization of the Firm-four Swedish cases: Stockholm, Almquist and wiksell International. Johanson, J & Associates, 1994. Internationalization, Relationships and Networks: Stockholm, Almquist and wiksell International. Mintzberg, H, 1989. Mintzberg on management: Inside our strange world of organizations. Free press, New York. Penrose, 1956. Foreign investment and the growth of the firm. The Economic Journal, June, pp. 220-235 Rugman, 1982. New theories of the multinational enterprise. Croom Helm, London Williamson, 1985. The Economic Institutions of Capitalism, Free Press. New York. Read More