Strategic Management-Zara - Case Study Example

Strategic Management-Zara Table of Contents Strategic Management-Zara 1 Table of Contents 1 Introduction 2 Porter’s Five Forces Analysis of the Industry 2 PESTLE Analysis of the Industry 4 Strengths of Zara 6 The strategies 7 Recommendations to the Business Unit and the Group 9 Conclusion 10 Reference 11 Bibliography 12 Introduction Inditex Group is one of the leading clothing and apparel groups in the world in terms of sales. Although the group is also involved in design and manufacturing of its own products, the main activity of the company is in the field of retail. The group is the owner of different brands such as Zara, Pull and Bear, Masimo Dutti, Bershka, Stradivarious, Oysho, Zara Home and Unterque. In the year ending 2009, the group has more than 4600 stores around the globe across regions like Asia, North and South America, Europe and Oceania. Zara is the flagship chain store of Inditex, established by Spanish tycoon Amancio Ortega. Zara makes a third of all its sales in Spain. However, recently it has intensified its business in other European markets such as France, Italy, Portugal and the United Kingdom. Established in the year 1975, the business unit has now 1608 stores across the world, offering products for men, women and kids. This report analyses the Inditex group and its business unit ‘Zara’ in order to gain a comprehensive understanding of its strategies in the market. The report starts with the analysis of the industry followed by the company and its business unit. In the end, a conclusion has been inferred from the entire analysis. Porter’s Five Forces Analysis of the Industry ‘Porter’s five forces’ model is a useful framework to analyse the industry’s attractive towards any business (Hill & Jones, “Porter’s Five Forces Model”). The following is the analysis of the specific business unit ‘Zara’. Porter has identified four factors which are capable of influencing the level of competition and profitability in the industry. Bargaining Power of the Buyers The buyers’ power in this fashion industry is moderate. Zara offers its customers the look-alike premium products at a lower price. So, the switching cost for the buyer is a bit higher. On the other hand, Zara keeps all trendy and fashionable merchandises according to the customer requirements at a reasonable price. Although, Zara has differentiated business model, still the customers have the choice to shift to other brands. Overall, the buyers in this industry seem to enjoy a moderate bargaining power. Bargaining Power of the Suppliers Zara is a flagship business unit of a leading fashion group. So the bargaining power of the suppliers is a bit low in this industry. The company requires its suppliers to be aligned with certain requirements of working practice, ethical activities, safety, quality and environmental standards. The low bargaining power of the suppliers reflects from the fact that the company has ceased 175 suppliers in the year 2008 and 145 suppliers in the next year because of their non compliance with the required standards. Entry Barriers Zara has been one of the significant business units of the leading business group. Definitely the business unit enjoys huge economies of scale in production, distribution and marketing of the merchandises. A new company in this industry will not be able to fetch the advantage of the production at a large scale. Moreover, the business unit has an intensive distribution network with strong logistics, which would be tough to achieve for the new entrants. Overall, the entry barrier is high for this industry. Threat of Substitutes There are a number of clothing stores across the globe. Although there cannot be any substitute of clothing; however, substitution can come from other apparel retailers, tailor houses and designer clothes. So the threat of substitution is high in this industry (Drummond, Ensor & Ashford, “Industry Analysis”). Competitive Rivalry Competitive rivalry is high in this industry. Zara has to compete with Hennes and Mauritz and Levi Strauss. Apart from them, there are many apparel business units in this industry. Moreover, the organisations get competition from tailor houses and designer clothing houses. As a consequence, the competitive rivalry is high in this industry. PESTLE Analysis of the Industry This analysis would look at the political, legal, economic, social, technological and environmental factors which have been influential for the industry. Political & Legal Factors The consumer market for European apparel industry has undergone significant changes in recent years. It will not be wrong to say that the maximum threat has come from market forces under the patronage of the World Trade Organisation (WTO) as a ten-year transitional Agreement on Textiles and Clothing (ATC) came to an end with the closure of textile and clothing import quotas on 31 December 2004. As the quotas have been removed, cheaper imports of clothing and footwear into the European Union increased, mainly from China. A bilateral agreement among the European Union and China had also influenced the apparel industry. Moreover, trade developments, customers and other associated bodies are very much concerned with the required standards and ensure that the manufacturers and suppliers are aligning the operation according to the social and internal labour standards. This has also been quite influential on the apparel industries. A fair trade garment initiative has been adopted to ensure that the producers, who meet minimum social and environmental standards, are paid a minimum amount. Economic Factors European economy has been one of the economies which have been majorly affected by global recession. The purchasing power of the European population has been reduced due to the financial turmoil. This has an adverse effect on the apparel industry. During recession, the industry was adversely affected by the reduced demand in the industry. Social Factors The European people are known for their passion towards fashion. They like to wear trendy dresses according to their choices. So, definitely social factors have a major role in influencing this industry. Technological Factors With the advancements in technologies, a number of routine activities can now be done with standard machineries. Apart from that, technology has enhanced the productivity and has increased the economies of scale in the industry. Moreover, it has contributed to the establishment of efficient management information system for large organisations like Inditex. Environmental Factors In the wake of environmental awareness, it is required that the organisations maintain the required environmental standards in their operation. The environmental issues in this industry are mostly related to the use of chemicals such as dyes and bleaches in the apparel manufacturing industry. The way to discharge the waste water is another issue in this industry. In the year 2007, new legislations on the safe usage of chemicals came into force within the European Union. The respective authority aims to enhance the safety of human health and the environment through better monitoring and control. Strengths of Zara Zara offers look alike products of popular, higher end clothing merchandises at a comparatively low price. The business unit follows a design and production process which encourage ‘fast fashions’. Earlier, the business used to take long lead time, which allowed the manufacturers of the clothing products to display two or three collections per year. The business model of Zara allowed the unit to respond to the shifting taste of the consumers. The distribution model of the group is worth appreciation and has gradually emerged as the biggest strength of this company. Moreover, the business model of the group is based on vertical integration, which has been advantageous for the group. The group has made a number of acquisitions and now covers all phase of the fashion processes including design, manufacture, distribution and logistics. Both the group and the business unit have been able to continuously recognise and assimilate the continual changes in the clothing industry. This has given Zara an edge over its competitors. At the end of last year, Inditex was able to develop a network of 1237 suppliers with whom it has kept a stable relationship. The strength of its relationship with its suppliers has emerged as one of the significant strengths of this group. The logistics is well developed in this group. All the merchandises, regardless of the origin, are received at the logistical centres for each chain. From the centres, the products are distributed simultaneously to all the stores worldwide. The distribution is carried out twice a week and each of the delivery always includes some new models of clothing. As a consequence, the stores constantly replace the old models with the new ones. This has also enabled the group to display new fashions in its outlets. Financial Analysis After looking at the financial results of the group, it seems that despite low demand in the industry, Inditex has been able to increase its net sales amount. At the same time, in the year 2009, the cost of revenue as a percentage of the total sales was lesser than the previous year. As a result, the group enjoyed an enhanced gross profit margin. In the last year, the company has been able to enhance its net profit margin with higher earnings per share value. The balance sheet of the company is also quite good. The company’s current ratio is around 1.71. Generally a ratio of 2 is good for the liquidity of the company. However, as the group is mainly into retail business, a ratio bit lower than that also displays good liquidity of the company. A major portion of its capital structure consists of debt amount. However, that did not reach an alarming state. A considerable amount of debt on its account would help the group to gain tax shield on its profit amount. Compared to the year 2008, the group has reduced its inventory and receivables position which would be helpful in enhancing the liquidity position. The strategies Zara offers apparel for men, women and kids. The speciality of Zara is that it offers look-alike products of other expensive brands at cheaper price tags. Both the group and the business units have been prompt to pick up the new fashion trends and display the same in their stores. The distribution and logistics chain has been one of the significant components of their strategies. The distribution takes place twice a week and each of the time it is supposed to carry one new fashion collection. The strategy has being possible because of ‘fast fashion’. Zara men’s and women’s wear have targeted the market of fashion conscious city dwellers. That is why they try to keep multiple trends according to the fashion statements. The group does not invest much on public advertisements; rather, they prefer to keep their stores usually at the primary position of a city. In the marketing mix, four P’s have been significant for the success of a business unit or a company: product, price, place and promotion (Baker & Hart, “Managing the marketing function”; Gitman & McDaniel, “Developing a Marking Mix”). In the product category, Zara has always tried to replace their products with new fashion trends. As they cater to the trendy people of middle to upper socio economic class, it has always tried to keep products which have less ‘in store’ and ‘at home’ life span. Zara has focused more on store position and decor rather than public advertisements. Its advertisements are meant to publicize its new stores and promote twice a year sales. As a result, its spending on promotional activities is quite low. While pricing its products, Zara has always taken into consideration the related cost and the market conditions. In the Spanish market, the prices are at Euro currency, while in other regions prices are set at a fixed percentage over the Spanish baseline. The company has been enjoying strong technological position. This has also helped the company to make its position with the help of respective business models. Inditex prefers to open stores where it is the only or major shareholder. At the end of 2009, 86 % of its stores are managed by the group itself. Another significant strategy of the group has been its extension plan through franchise agreements with the leading local retail companies. The main characteristics of this franchise model are to integrate the franchised stores with the group managed stores in terms of product, human resource, training, decor and logistical optimisation. This brings uniformity in the store management criteria and portrays a global image in the eyes of the customers across the globe. For any retail chain, distribution is very important. The company’s strength has been in its logistics and distribution which helped it to cater to its customers with changing requirements. According to marketing mix, the product is required to be produced keeping in mind the required benefits and service of the products. Zara’s products have less time span in the stores. These are produced according to the changing fashion requirements of the trendy people. The ‘Place’ aims to make the location more accessible and reachable (ArnoldIT, “Marketing Function and Activities”). Zara stores are located mostly on the primary roads of the leading cities and the distribution is done twice a week. Price is decided after proper accounting of cost, perceived benefits of consumers regarding these products and the affordability of the target customers. Zara has considered each of these elements while zeroing down on the price tags. Recommendations to the Business Unit and the Group Effective strategic management planning demands continual attention (Lamb, Hair & McDaniel, “Effective Strategic Planning”). The business environment is changing to become more competitive in near future. It is good to find Zara and Inditex both having most of their stores at the primary position of the cities. However, that may not suffice in the near future. Both the business unit and the group are offering its product to the youthful and vibrant customers. Undoubtedly, advertisement attracts them more than anything. They are required to develop a promotional activity plan to attract their target customers. Digital media is supposed to be the best in this. Undoubtedly a vibrant advertisement will bring in more customers to its stores. The company may also try to reduce their cost a little bit to match the affordability of the prospective customers in this changing environment. It has been reported that the share of clothing expenditures as the percentage of disposable income has reduced drastically from 11 % in the 1929, to around 3 % in 2009. The strategy must be developed with due consideration to this shrinking apparel market. Conclusion Undoubtedly, the business model of Inditex is quite impressive. However, it is required to be enhanced according to the market demand and the changing business environment or else it may become obsolete in due course of time. The dimming demand and shrinking consumer expenditure on the same can pose as a threat to the company. The group is required to transform it into an opportunity with the help of strategies that enhance its cost effectiveness. The group has a number of business units, catering to different segments of people. A proper integration of the business units with a master strategic framework is the call of the hour. Reference ArnoldIT. No Date. The Marketing Mix. December 04, 2010. < http://www.arnoldit.com/articles/PDF_Web/article1988/chap5_MarketMix.pdf>. Baker, M & Hurt, S. The marketing book, Volume 2003. USA: Elsevier Ltd, 2008. Drummond, G., Ensor, J. & Ashford, R. Strategic Marketing: Planning and Control. USA: Elsevier Ltd, 2008. Gitman, L. & McDaniel, C. The Future of Business: The Essentials. USA: Cengage Learning, 2008. Hill, C. & Jones, G. Strategic Management Theory: An Integrated Approach. USA: Cengage Learning, 2008. Lamb, C., Hair, J. & McDaniel, C. Marketing. 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