Globalization of the Company ZARA - Essay Example

MICROECONOMICS The Spanish company ZARA, is an example of globalization; how and why …………………. College/ ………….. …………. Introduction Globalization is no doubt one of the most significant and powerful influential force in today’s business environment. Global marketing has been attracting growing importance in recent years and this has in fact profoundly affected the people, companies, management and economies throughout the world. Many brands have got significant place in customers’ mind since they were able to find and utilize global marketing opportunities for the realization of their business potential. A customer, no matter he is Europe or Asia or Africa, would be familiar with a large numbers of famous brands like Nokia, Apple, HP, Nestle, McDonald etc. Zara is one of such names as it has long been impacting the life of customers and the economies of many countries that it has maintained its business-base. This piece of research paper examines microeconomic concepts regarding economies of scale, profit strategies, effective use of resources and market forms in relation to Zara’s business and marketing landscapes. This paper aims to illustrate the global business aspects of Zara and explain how Zara has maintained sustainable business as well as competitive advantages. Zara: Company Overview Zara International Inc. is the flagship brand for Europe’s fastest-growing apparel retailer, the Inditex (Industria de Diseno), one of the largest fashion and design retail groups in the world. It runs through more than 4,000 clothing stores in more than 70 countries and 400 cities worldwide (Plunkett, p. 237). Not only the retailing strategies, but also the marketing concepts and ideologies that Zara has been implementing for its business have become better business-model and academically significant strategies. Zara runs more than 200 kids shops in some 75 countries, and sells women’s, men’s and children’s apparel to its customers worldwide. (Yahoo Finance, 2011). As Tamer (p. 484) noted, Zara has emerged to be the leader in rapid-response retailing. Its in-house teams for designing and manufacturing its products produce fresh designs twice a week. The total turn-around time at Zara is just two weeks whereas its competitors have typically an 11-month lead time to move a garment from design to manufacturing. One of the main success factors that helped Zara achieve greater reputation and long term sustainable competitive advantage is that it has always been very fast and flexible in meeting market needs by integrating design, production, distribution and sales through out its own stores. The supply chain system of Zara International Inc is also lightning fast, because once the clothes are produced, they are shipped to stores within 24 to 36 hours. With the help of very latest technology available to it on different times, the company continuously scans the garments as they pass through the distribution channel. Most of its stores are uncluttered and very colorful in a way that create a high-end luxury shopping environment. Product innovation, use of latest technology and value-based pricing have been considered by its management as high priority strategies (Tamper, p. 485). As Ferdows, Lewis and Machuca (2005) highlighted, Zara’s production centre consists of three spacious halls, one for women’s clothes, one for men’s and the other one for children’s clothes. Many other companies depend on redundant labors to cut costs, but Zara makes a point of running these three segments quite parallel and operationally different product families. Same staff, design, sales and procurement and production planning can be used simultaneously for the three different segments. Demand and Supply Demand and Supply are the very basic two microeconomic elements that explain why consumers buy commodities from traders who make and market various products. According to the economic concept, demand shows a specific quantities of a product that customers are willing and able to buy within a specific time period (McConnel and Brue, p.40). The main problem of the consumer in the market is to get maximum happiness or well-being as possible by spending the limited income that he has. Consumer’s basic preferences, tastes, opinion about the product and his previous experience in buying the same are some of the determinants of how much a consumer can buy certain products. More specifically, these factors determine the demand as well (Pugel, p. 19). Income is considered to be one of the major determinant of the demand in the market. When consumer’s income increases, consumer will be able and tempted to buy more of many goods, probably more of the normal goods. In the case of inferior goods, economists argue that consumers will buy less number of such goods when their income decreases. The demand curve is therefore downward sloping as is shown in the diagram. Supply refers to the quantities of a certain commodity that producers are willing and able to make available for sale at each of a series of possible prices during a specific period (McConnel and Brue, p. 46). Producers manufacture and market a particular goods normally for a higher prices rather than lower pierces, because they will be able to earn more when they can sell them for higher pierces. Similarly, they will produce less goods at a low price. As a result, supply increases if price of the goods increases and supply decreases if their prices are less. When it comes to the case of Zara International Inc, it was a very different company as it creates demands for its various apparels and makes availability of its fashion goods accordingly. Though demand depends on consumers willing and ability to buy certain goods, a company or industry can stimulate consumers demand for specific goods. Zara’s retail concept largely depends on regularly creating, testing, evaluating and finalizing various designs so that customers are largely attracted to them. As Ferdows, Lewis and Machuca (2005) noted, Zara’s designers create approximately 40,000 new designs annually, from which only around 10,000 are selected for production. It is an illuminating example for how can a company create demand through its own marketing activities. A large number of companies worldwide manufacture goods according to the market demand whereas many other highly successful companies create demand through various strategies and dominate the market. In Zara store, it is most amazing that customers can always find new designs, but they are in very limited supply. Ferdows, Lewis and Machuca (2005) explains how demand and supply forces interact in the case of Zara. There is a sense of tantalizing exclusivity, as there are only few items available on display even though store are much spacious. A customer visiting the store may think “this red-designed shirt fits me, and it is there in the rack. If I don’t buy it now, I will lose my chance”. Economies of Scale Firms can be said to be achieving economies of scale when they are able to reduce per unit costs and thus to increase the size of market it represents. Over time, markets have been increasing in size allowing firms to gain production advantages. When firms expanded their size and output, they were able to use larger and highly productive equipments and to implement effective manufacturing methods to increase productivity (McConnel and Brue, p. 315). According to Baumol and Blinder (p. 142), production is said to involve economies of scale or increasing returns to scale when all input quantities are increased by a certain percentage, the output quantity is increased more than that in proportion. As far as Zara International Inc. is concerned, the company has been focusing on increasing its total productivity through efficient and effective strategies. One of the better examples for Zara’s economies of scale is its production centre, that contains three spacious halls, each one different for women’s clothes, men’s clothes and children’s clothes. As these three different segments are from a single production centre, labors and most other materials can be shared and this helps the company increases the productivity and achieve economies of scale. Cost of Production and Business Strategies For any firm, assessing and evaluating the total costs for production is critical to find whether the company earns profit and how much it would be. Profit is the excess amounts to the total costs and therefore the company would be able to earn a reasonable amounts of profits only if the company is able get an amount that is in excess of the costs. Businesses use different strategies to achieve competitive advantages and all these strategies are aimed to gain a better amounts of profit. Profit maximization was a conventional approach and today’s business world presumes it to be less important, but still, no business can survive in the market unless it is able to earn a reasonable amounts of profits. Supply chain, customer relationship marketing, customer focus, total quality management, own-store retailing and integrated marketing communication are some of the very effective prevailing business strategies of today. All these strategies are implemented by companies worldwide in order to help them become highly competitive and gain better profits too. One of major marketing strategies of Zara is vertical integration, that has allowed Zara to successfully develop a strong merchandising strategy. With this strategy, Zara was able to create a climate of scarcity and opportunity aligned with fast-fashion system. As the company itself produces around 60% of the total items it sells through its own stores, it is able to control consumer demands and thus to be flexible in the market in relation to varieties, amounts and frequency of new styles (Russow, p. 4). Zara’s market form: Oligopoly: Economists are of the opinion that there are different market forms, namely monopoly, oligopoly, monopolistic competition etc. Monopoly is the market structure in which only one firm is the sole seller of a particular kind of product or service, and therefore entry of other firms is blocked. Pure competition is another market form in which a large number of firms produce a standardized product, or identical product and compete each other. Entry and exit barriers are no there in pure competition market. Third form of the market is monopolistic competition in which a relatively large number of sellers produce differentiated products, like clothes, furniture etc. there is widespread non-price competition in this form of market. Oligopoly is another form market in which there are few sellers of a standardized or differentiated products and each firm in it will be affected by the decision taken by its rivals and therefore these decisions are to be taken in to account in determining price and products. Out of these four forms, Zara is an example of Oligopoly (McConnel and Brue, p. 413- 414). Oligopoly is characterized by a few large producers, homogeneous or differentiated products, control over price with mutual interdependence etc. There are many fashion and apparel retailers, and since Zara produces around 60% of the items it sells in its stores, the company has relatively greater control over other firms. Conclusion Different companies use very different strategies to achieve sustainable competitive advantages. Many companies turn to be greatly successful with help of their strategies whereas many companies fail in the market either because they have no better strategies or they failed to manage such strategies. When it comes to the case of Zara International Inc. the company went global to operate its apparel retailing in more than 70 countries. Vertical integration has helped the company achieve greater success and attract more customers to its retail stores. It has given grater emphasis on finding thousands of designs every year and marketing some of them effectively. The company was always able to create its own demand rather than manufacturing goods according to the prevailing demands in the market. With limited supply of some of its unique designs, the company accelerated demand as consumers feel to make them their own before it may go to others. This paper has highlighted various economic concepts and theoretical underpinning in relation to Zara International Inc, such as demand and supply, economies of scale, market forms etc. References Baumol, WJ and Blinder, AS Microeconomics: Principles and Policy, Tenth illustrated edition, Cengage Learning, 2007 Ferdows, K, Lewis, MA and Machuca, JAD, Zara’s secret for fast fashion, Retrieved from hbswk.hbs.edu, http://hbswk.hbs.edu/archive/4652.html, 2005 Inditex, Inditex Annual Report, Retrieved from inditex, http://www.inditex.es/en/shareholders_and_investors/investor_relations/annual_reports McConnell, CR and Brue, SL, Economics- Principles, Problems and Policies, Sixteenth Edition, The McGraw Hill Companies, 2004 Plunkett, J.W, Plunketts Retail Industry Almanac 2009 , Retail Industry Market Research, Statistics, Trends and Leading Companies, Plunkett Research, Ltd, 2008 Pugel, TA, International Economics, Twelfth edition, McGraw Hill Irwin, 2003 Russow, LC, ZARA: Fashion Follower, Industry Leader, Philadelphia University, Retrieved from http://www.philau.edu/sba/news/zarareport.pdf 2004 Tamer, C, 2009, International Business, Pearson Education India, 2009 Read More