Strategic Management and External Analysis of Zara - Essay Example

? Strategic Management Table of Contents Table of Contents 2 Zara 4 External Analysis 5 Internal Analysis 17 Strategic Analysis of Zara 19 Review of Strategy 29 Reference 31 Zara Zara is a renowned clothing and accessories retailer. The clothing giant is headquartered at Arteixo, Spain. This Spanish company was established by Rosalia Mera and Amancio Ortega during the year 1975. Although the company faced slow business growth in the initial years but after 1990’s they have expanded international business and curry Zara is operating in more than 30 countries. New York Times has identified that Zara has the capacity to replenish stocks twice a week (Lutz, 2012). What Zara Really Do Zara has crafted their value chain in a demand flexible manner with an intention of enhancing forward and backward integration in the operation (Lancaster and Massingham, 2010, p. 195). The company has implemented integration in various value chain activities such as managing lead time, stock replenishment, incorporating latest fashion in designing and raw material tracking with an intention of achieving sustainable business growth. The company has decreased steps of value chain in order to decrease total turnaround times. More than two hundreds fashion professionals supervise the product designing phase in order to offer customer superior quality cloths and decrease probability of getting outdated in contrast to latest fashion trend. Zara emphasizes on establishing stable relationship with value chain partners in order to decrease lead time in product offering. The company has decreased turnaround time to only 14 days with the help of superior synchronization between forward and back integration. Zara offers fashion apparels for three types of customers such as men, women and children. Currently the company is offering products in more than five hundred cities across the world. External Analysis PESTLE Zara is a Spanish company hence it will be viable to do macro environmental analysis of the company in their home ground. The report will conduct PESTLE analysis of Spain in order to understand strategic position of Zara. Political PP is running the government of the country and public has rejected for ruling party PSOE in last year election. The country is suffering from various problems like high unemployment rate, high public debt and low GDP growth. Spanish government has implemented austerity measures of €65bn in order to reduce the financial deficit to 3% within next two years. Zara is facing a financial tumultuous period in home ground hence it will be interesting to see effect of austerity measure in their business. Spanish government structure can be understood by the following diagram. (Source: Market Line, 2012a) Economic Research conducted by Marketline shows that annual GDP growth of Spain will be reduced by 1.07% within next one year and other factors like retail sales, domestic consumption and industry output will be decreased by more than 3.5% within next one year. Economic recession has triggered the unemployment rate of the country to 20 year high 24.4%. All these factors are indicating that Zara will face a demand crunch in the home country. Stagnant GDP growth rate of the country can be explained by the following diagram. (Source: Market Line, 2012a) UNCTAD or United Nations Conference on Trade and Development has pointed out that FDI in Spain has decreased from $40.8 to $29.5bn in last two years. Dwindling FDI condition of the country can be understood by the following diagram. (Source: Market Line, 2012a) The country is suffering from increasing inflation rate which is hampering overall growth rate. Fluctuating nature of inflation can be analysed in the following manner. (Source: Market Line, 2012a) Staggering unemployment rate of Spain can be explained by the following diagram. (Source: Market Line, 2012a) Social Government has reformed the existing pension scheme and which can increase savings 3.5% of GDP by 2050. Spanish labour market reform will provide flexibility and competitiveness to retailers like Zara. Purchasing power of the Spanish people has decreased sternly due to sovereign debt crisis hence it is obvious that Zara will face a sluggish domestic sales growth for next two years. Annual expenditure of Spanish people can be analyzed by the following diagram. (Source: Market Line, 2012a) Technology Spain is a weak performer for the field of technology and innovation (read only 468 patents/years are registered which is way below than other European countries) but Spanish government has taken various steps like taking part in European Research Area vision 2020 and implementing AVANZA 2 (2011–15) to fillip technology integration. Zara needs to take part in these initiatives to enhance scope for future growth. Poor patent registration number of Spain can be understood by comparing its performance with other countries. (Source: Market Line, 2012a) Environment Spain’s environment policies are complemented by EU guidelines and government of the country provides bonus and technical construction code to those companies putting effort to reduce greenhouse gas emission. Spanish government is focusing on making renewable energy as primary source of energy for the country. Zara needs to link CSR policy with renewable energy agenda of government to rip-off the future benefits. The country is trying to reduce carbon emission and their effort can be understood by the following diagram. (Source: Market Line, 2012a) Legal Government of the country has permitted 100% FDI in retail and legal system of the country has also created scope for liberalized capital movement. Wall street journal index has suggested that economic freedom score for Spain is 69.1. Such open legal and economic condition has created scope for foreign retail players to invest in the country which would increase competitive rivalry for Zara in near future. Legal structure of Spain can be understood by the following diagram. (Source: Market Line, 2012a) Porter’s Five Force Analysis Porter Five force analysis can be used to understand dynamics of global fashion retailing business. Buyer Power Buyer power in fashion retailing has decreased due to their individuality while losing a single customer hardly matters for big players like Zara and H&M. Clothing is necessity for buyers while same cannot be said for fashion apparels. Buyers have the power to choose different retailers who are offering fashion apparel at lower price hence buyer power increases significantly. Fashion and label consciousness is essential characteristics of the industry hence big players like Zara can charge premium price to brand conscious customers. Overall buyer power is can be reckoned as moderate. (Source: Market Line, 2012b) Supplier Power Fashion retail industry is complemented with various suppliers such as clothing manufacturers, designer and wholesalers but important fact is that the supplier sector is fairly fragmented. Supplier power of developed economies has decreased after liberalization of economy because many of the fashion retailers are outsourcing supply from low wage manufacturers belong to the countries like India and China. Low switching cost for retailers also has decreased supplier power up to great extent while lack of diversity in the supply can be classified as important weakening factor for supplier power. Overall supplier power can be assessed as low medium. (Source: Market Line, 2012b) New Entrants Capital requirement to enter in fashion retailing is high while entering in retailing is lot more easily for new entrants. Many of the European countries are allowing foreign players to enter in retail business by opening up the economy. Flexible FDI policy of government has increased buyer power significantly. New entrants can enter in fashion retailing by doing strategic partnership with well established local retailer while switching cost is not very high to shift business pattern from retailing to fashion retailing. Study conducted by shows that more than 45% of fashion apparel buyers prefer to switch brand which increases chance for new entrants complemented with customized product portfolio. (Source: Market Line, 2012b) Threat of Substitute Fashion retailing is different from ordinary apparel retailing due to difference of purchasing behaviour of customers. Online retail channels are emerging as threat factor for brick and mortar fashion retailers but this cannot be termed as significant threat due to its budding nature. Renowned companies like H&M and Zara have very little threat from counterfeit products due to high degree of forward and backward integration. Overall threat of substitute is weak for the industry. (Source: Market Line, 2012b) Degree of Rivalry Global fashion retail market is fairly fragmented and there is scope for new players to consolidate existing market opportunities. Big players like Zara, M&S and H&M outplay small retailers by using their superior control over value chain and economies of scale in production. Retailers like Mothercare emphasizes on offering childrenswear while Zara caters all three categories. Variation in business objectives has decreased degree of rivalry significantly. Overall degree of rivalry can assessed as high medium. (Source: Market Line, 2012b) Internal Analysis Bob De Wit and Ron Meyer have argued that SWOT analysis helps marketer not only to get insight about internal business strength but business capabilities also (Wit and Meyer, 2010, pp. 68-70). Strength Weakness Wide dimension of target segment and Zara has the capability to offer latest fashion trend to customers The company maintains strong focus on decreasing carbon footprint in the value chain The company has achieved lowest turnaround time in comparison to other players in the industry while their lead time is only 10 days The company gives augmented benefits like home delivery to customers and this process has helped them to increase brand acceptance among customers The company has low control over their international product portfolio Premium pricing policy of Zara is a marketing barrier for the company for entering developed countries Opportunity Threat Zara needs to establish strategic partnership with designers to incorporate variation in offering Online retail companies can create threat for the company in future Competitors such as M&S, H&M have increased competitive threat for the company while local brands are also creating threat for the company Zara is already facing problems like increased textile manufacturing and shipping cost Strategic Analysis of Zara Market Identification and Internationalization Market identification and internationalization strategy of Zara is complemented with generic models like product differentiation and cost leadership. Zara tries to enter in markets having resemblance with Spanish fashion retail industry. Zara appoints a specialized commercial team to conduct micro and macro environment analysis of a particular country in order to get a brief silhouette of business opportunity present in that country. Industry analysts have pointed out that Zara focuses more market price index of particular country while their competitors focus on cost benefit analysis. Zara identifies market opportunity for particular on the basis of following criteria. Factor Measuring Criterion Overall Cost of the Project Distance of the country from headquarter, tariff and tax rate of the country Country Level Analysis Zara measures profitability of a country in terms of city wise contribution Industry Level Analysis The company measures industry competition in terms of existing retail format and portfolio of rival companies Duncker Diagram Zara uses duncker diagram to take decision regarding entering a particular market after identifying business opportunity present there (Mandl and Levin, 1989, p. 228). International expansion of the company can be dissected into two parts. 1988-1997- Expanding business at a rate of one country per year with a median distance of 2900-3000km from Spain 1998-2009- ? Expanding business at a rate of more than one country per year with a median distance of (2000 – 5000) km from Spain Jose Maria Castellano (CEO) of the company has pointed out that Zara has expanded business in order to decrease overall value chain cost, increase brand visibility decrease fixed cost associated with opening up SBUs (Palladino, 2010). Entry Strategy Zara uses three types of market entry models such as Joint Venture (JV), company owned stores and franchises to expand business internationally. Sometime Zara uses a mixed entry strategy to enter a particular country. For example, Zara entered Turkey via franchisee model during 1998 while the same company has converted all franchisees into company owned store within two years. Zara relies more on company owned stores to expand business in developed European and North American countries while the same company relies more on franchisee model in countries (read Iceland, Poland and Middle Eastern Europe) complemented with cultural diversification, rigid FDI policy and risky business environment. Zara uses JV model for countries (read Germany and Japan, in Germany Zara entered market by doing 50:50 joint venture with Otto Versand) lack of availability of retail space and trade barriers for direct entry. Penetration of market identification strategy of Zara can be explained by the following diagram. (Source: Palladino, 2010) A comparison between Zara’s international strategy for the year 2003 and 2009 is given below. (Source: Palladino, 2010) Business Model of Zara Business model of the company is complemented with high degree of vertical integration. In the vertical integration strategically designed store plays crucial role on giving customers the opportunity to discover underlying fashion concept of offered apparels. Focusing on vertical integration helps Zara to offer desired apparel within shortest frame of time. Business model of Zara is dependent on four factors such as Design, Sourcing & manufacturing, Distribution and retailing. Business model of the company can be explained in the following manner. Design Zara has the ability identify and adopt latest fashion trend in the apparel collection. Flexible business model of the company helps them to replenish stock within 14 days which decreases the risk of stocking outdated fashion material. The company has appointed more than 200 designers to incorporate latest fashion trend in apparel. Creative team for Zara is complemented with sourcing specialists, fashion designers and NPD personnel. Creative team changes fabric style and supply mix constantly in order match step with seasonal fashion trend. Zara designs collections for two phases like spring/summer and fall/winter seasons. Designers of the company frequently communicate with store managers in order to understand customer demand. The company forecast future fashion trend by using in store sales data and published fashion data. NPD personnel create a link between designer and sourcing team. Zara permits only selected items to go into production in order to decrease product failure rate (only 1% in comparison to industry average of 10%). Sourcing and Manufacturing The company sources fabrics, raw materials for production with the help of purchasing offices located in Hong Kong and Barcelona. The company is focusing on sourcing from eastern region of the world in order to bring variation in product mix. Inditex has established Comditel (100% owned subsidiary) to control more than two hundred suppliers of fabrics. Combitel works on various activities like patterning, dyeing and finishing WIP and they contribute 45% of in house manufacturing for the company. Suppliers for Zara are located at various regions like Europe (95%), East and South East Asia (4%) and Central America (1%). 60% of Zara’s products are manufactured through in house production departments and this method helped them to catch latest fashion trend and incorporate the variation in manufactured apparels. This is a competitive advantage for Zara because it takes at least 6 months for traditional retail outlets to manufacture fashion garment while Zara can manufacture it in much smaller time frame. Reduction of production cycle time for Zara can be explained in the following manner. (Source: Palladino, 2010) Zara starts the procurement and designing activities at least four months prior to start of selling season with an intention of capturing more than 60% of customer demand. Industry report suggests that Zara completes only 15%-25% of production before the season starts while they complete 50%-60% of production during the start of the season. 85% of production is dependent on the ongoing sales trend and Zara supplies only 15-20% collection to stores in order to decrease probability of selling outdated fashion collection. Competitive advantage of Zara can be explained by the following diagram. (Source: Palladino, 2010) Distribution Zara has established a centralized distribution structure which gives them competitive edge over other competitors. Centralized distribution network of the company has decreased lead time for Zara. Centralized distribution system of the company is complemented with a large procurement centre in Spain and satellite centres located in Brazil, Mexico and Argentina. Value chain of Zara is comprised of four warehouses located in various cities like Zaragoza, Leon, Madrid and Galicia. These warehouses receive finished goods from domestic and international suppliers. Centralized distribution helps Zara to replenish stocks twice a week domestically and internationally. (Source: Palladino, 2010) Retailing Zara emphasizes on offering trendy fashion garments at competitive price to customers. Although Zara emphasizes on forward vertical integration in manufacturing but in case of retailing they use forward vertical integration to match apparel collection with customer demand. Merchandising and store operation of the company focuses on meeting customer demand within shortest possible time frame. Zara replenish inventory within two weeks in comparison to industry average of Six months. Zara took a policy of zero advertising (the company spends only 0.3% in advertising while their competitors are spending 4% on advertising) to cut down overall in order to make international expansion more cost effective (Tolga, 2010, pp. 47-49). Zara has created a specialized division to refurbish design of the store in order to increase brand visibility among customers. Review of Strategy Zara uses expected and variance ROI or Return model on Investment to success of implanted strategy. Mathematical formulation of the strategy is required in order to realize its efficiency. A simple formulation of Zara’s expected and variance ROI model can be explained by the following equation. P(i)= probability or expectancy in the (i)th stage of economy, X(i)= Return on Investment at (i)th stage of economy. Zara calculates ROI for all three phases of business cycles like boom, normal and recession. A model ROI framework for Zara is depicted below with an intention providing a guideline to understand quantitative aspect of their strategic decisions. Condition of Economy Probability (i) Return on Investment (i) Boom 0.20 14% Normal 0.60 11% Recession 0.20 3% (Source: A. Lee, J. Lee, & C. Lee, 2009, p. 244) Reference Lancaster, G. and Massingham, L., 2010. Essentials of Marketing Management. London: Taylor & Francis. Lee, A., Lee, J. and Lee, C., 2009. Financial analysis, planning & forecasting: Theory and application. Singapore: World Scientific. Lutz, A., 2012. Zara Has Fundamentally Changed Fashion and there's no going back. [online] Available at: [Accessed 7 December 2012]. Mandl, H. and Levin, J. R., 1989. Knowledge Acquisition from Text and Pictures. Amsterdam: Elsevier. Market Line., 2012a. Country Analysis Report: Spain, In-depth PESTLE Insights. [online] Available at: [Accessed 7 December 2012]. Market Line., 2012b. Europe – Childrenswear. [online] Available at: [Accessed 7 December 2012]. Palladino, A. P., 2010. Zara and Benetton: Comparison of two business models. [pdf] Available at: [Accessed 7 December 2012]. Tolga, O., 2010. The last Retail Evolution. Milan: Editrice le font. Wit, B. D. and Meyer, R., 2010. Strategy: Process, Content, Context. 4th ed. 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