Zara - The Fast Fashion Leader - Essay Example

? A strategic analysis of Zara: The fast fashion leader BY YOU YOUR SCHOOL INFO HERE HERE EXECUTIVE SUMMARY Research has shown that Zara maintains many competitive advantages over major competition such as H&M and the Gap. These advantages are apparent in the ability to maintain a low cost leadership strategy that provides customers with lower-priced merchandise. This is supported with a lean production and procurement system that recognises significant cost controls in the operational model. Further advantages include the ability to ensure a two week lead time on fashion merchandise from the design phase to final in-store delivery as well as a team-oriented and compliance-based organisational structure that ensures efficiency and productivity. Zara is also successful in ensuring barriers are established for new market entrants through self-operated manufacturing capacity and logistics strategies that cannot be rivalled without substantial capital investment. Weaknesses in the model were identified by conducting a comprehensive European/global environmental analysis of the competitive industry as well as through examination of Zara’s current business model. Weaknesses lie is in isolating the company from negative publicity, which has been a large problem recently with accusations of the company being supportive of sweatshop labour conditions with foreign suppliers. Additionally, research has identified weaknesses involving a lack of focus on more relevant, behavioural marketing strategy development as well as the company not maintaining proper focus on building more independent supply and logistics networks that would be owned by Zara to improve its scope of control. Because of these weaknesses, it is recommended that Zara consider repositioning the business to a premiumisation strategy as a new business level strategy, diversifying self-managed manufacturing and logistics capabilities, and focusing on promotion that is more consumer-centric. It is further recommended that Zara differentiate its products with an emphasis on fashion-forward design in order to capture the attention of target markets that value exclusivity. These strategies will sustain Zara’s future brand position and build more positive brand equity. TABLE OF CONTENTS EXECUTIVE SUMMARY 1.0 Introduction..................................................................................................... 2.0 Strategic issues and competitive forces........................................................... 2.1 Industry Life Cycle analysis................................................................ 2.2 Porter’s Five Forces analysis............................................................... 2.3 PEST framework................................................................................. 3.0 Internal strategic audit..................................................................................... 4.0 PR crises at Zara.............................................................................................. 5.0 Recommendations for future business sustainability....................................... 5.1 Improving supply capabilities.............................................................. 5.2 Better utilisation of marketing theory and practice.............................. 5.3 Premiumisation..................................................................................... 5.4 Differentiation as business level strategy............................................. 6.0 Conclusion........................................................................................................ References 1.0 Introduction The fast fashion leader, Zara, provides fashion and accessory products to a variety of profitable consumer markets in multiple international markets. Zara stands out from competition most distinctly for the retailer’s ability to restock in-store inventories with a lead time of only two weeks or less. This is unparalleled in the retail industry as most retail competitors require months in order to launch a new clothing line. Zara maintains a dedicated design team that assesses appropriate fashion opportunities and develops new products, sending it through the entire manufacturing and distribution process with a lead time untouchable by current competitors. Whilst Zara maintains many competitive advantages, especially with the firm’s capabilities in providing fast fashion, the business is also superior to rivals such as Gap, H&M and Benetton (the firm’s main competition) in areas of organisational structure as well as the establishment of a lean manufacturing and logistics strategy associated with its fashion products, identified through a comprehensive European/global environmental industry analysis. This report highlights all of the competitive strengths of Zara’s business model, as well as weaknesses that require development and attention by Zara’s executive management team in order to sustain a long-term, constructive brand identity in the many markets the business operates. 2.0 Strategic issues and competitive forces This section highlights the main strategic concerns for Zara and the industry/competitive forces that impact the ability of the firm to maintain success as a low cost leader. 2.1 Industry Life Cycle Analysis Maintaining an understanding of the industry life cycle is critical for companies competing in the industry as this knowledge assists in guiding future and present business strategies (Ha-Brookshire and Lee 2010). The retail garment industry in which Zara and its competitors operate is still a growth industry along the Industry Life Cycle model. The industry has passed through the development stage in which the global supply chain has increased the volume of small and large production entities that supply domestic and international products to major clothing retailers. In the growth phase, major retail competition have established alliances and experienced trading gains through these alliances and international economic contributions that have facilitated more employment growth for those production entities that will be outsourced garment producers (Senevirathne 2010). As such, competition increases due to the well-developed sourcing infrastructure that is becoming consolidated with once geographically-dispersed production entities. With the efforts of Zara and many other competing apparel retailers, distribution networks are well-established and compliance regulations associated with quality standards and terms of trade are well-developed in this phase. Thus, the industry in which major competitors operate provide no significant competitive advantages that are common in the earlier stages of the industry life cycle as the establishment of effective supply strategies are advantageous for all major retail players that now have benefits of strategic alliance development, cost controls, and the ability to capture both local and international markets effectively. 2.2 Porter’s Five Forces analysis Rice (2010) provides an evaluation of the work of Michael Porter (The Five Forces Model) describing the externally-driven threats facing business in today’s retail environment. Of this model, the only relevant risks to apparel competitors is intensity of competitive rivalries and threat of buyer power in the industry. Major apparel retailers are successfully able to establish barriers to new market entrants due to the high expenditures necessary to achieve an effective distribution and manufacturing system, thus posing little to no threat to the business. Furthermore, there are no substitute products in the industry that can replace fashion merchandise, making competition in this area irrelevant in affecting major retailers’ ability to capture market share successfully. Most significant in this industry is the intensity of competitive rivalry occurring in international markets. H&M, as one example, utilises a promotional strategy that recruits very respected and renowned designers to collaborate in creating new fashion collections. In 2008, the famous Italian designer Roberto Cavalli assisted in launching a new, fashion-forward clothing line that was accompanied by very large-scale promotional activities (Fashion Week Daily 2008). Due to billboard ads and expensive television commercials in this design effort, H&M sold out the line almost instantly. Subsequently, in 2009, H&M recruited British designer Matthew Williamson to design a menswear collection that received the same attention associated with intensive integrated promotional strategies (Tokyo Fashion News 2009). H&M is especially adept at understanding consumer behaviour as it relates to celebrity endorsement opportunities to differentiate the brand and improve brand loyalty in current market segments. Hameide (2011) defines the aspirational brand, one that has social implications based on consumer behaviour. When a brand is able to instil a perception of social self-expansion, the ability to improve one’s social standing through fashion merchandise consumption, brand attachments occur that ultimately lead to long-term loyalty (Muniz and O’Guinn 2001). There is a propensity of consumer markets to make social comparisons, thus if a brand is able to provide beliefs that it can provide better social positioning, it leads to personal and emotional well-being (Taylor and Brown 1988; Suls, Martin and Wheeler 2002). This is why the competitive rivalry tactics are significant in determining competitive risks as a company that is not as adept in this effort cannot properly gain market attention. Plainly put, consumers homogenously have an inherent desire to maintain the belief that they are superior to others (Taylor and Brown 1988). Through apparel purchases, consumers build identity which forces intensive competitive rivalry to meet these psychological and sociological needs of customer segments. This ties in with the high level of buyer power that is present in this industry as well. When consumers have many available options for like apparel product purchases in this growth industry with well-established supply alliances and distribution channel proficiency, they are able to influence pricing since their switching costs for brand defection are extremely low. Buyer power is a moderate to high risk to the apparel industry. Not all competitors have been able to develop a low cost supplier strategy, thus operational costs can be significantly high which are often passed back to consumers in the form of higher pricing. Price-sensitive markets seek opportunities for apparel purchases that are aligned with their tangible resources, thus seeking a lower-cost competitor that can fulfil their consumption needs effectively. For some players in this industry, consumer markets are able to create a legitimate backward integration threat as they are able to threaten to consume from rival apparel companies. Businesses that are able to maintain a low cost leadership strategy, such as through the establishment of lean procurement and manufacturing philosophy, are the only major players that can establish barriers to buyer power. 2.3 PEST framework The industry is not generally threatened by potential political instability in the markets where the firms operates as its markets enjoy political solidity. Spain, Italy and other European countries where the business’ units operate are further supportive of business growth and development. Furthermore, the technological environment is favourable for supporting operations due to globalisation impact that provides ample opportunities for software and hardware procurement that sustains business improvement. The social environment differs in each operating territory across the world, forcing customised responses by the major industry competitors that are generally achievable through marketing strategy and promotional strategy development. This again reinforces the depth of competitive rivalry that is a moderate to high risk for major apparel retailers. Recent impact of the global recession has increased inflation rates in many European countries which reduces the income availability for consumers. In Spain, as one example, the inflation rate as of March 2013 was 2.43 percent (inflation.eu 2013). In the United Kingdom, inflation rates are currently 2.8 percent (rateinflation.com 2013). In Russia, the inflation rate is a whopping 7.3 percent. These are markets where major apparel competitors in the industry operate and attempt to gain revenue growth. The identified inflation rates in three of the industry’s most profitable markets are much higher than the global average, making it necessary for primary apparel competitors to be concerned about the potential impact of price-sensitive buyers reducing their consumption behaviours. Despite the risks in the industry, it is absolutely a profitable market, which is closely associated with the growth (nearing maturity) industry characteristics that provide ample distribution capacity, employment in outsourced apparel and associated alliances leading to certain competitive advantages, and the ability to control buyer power through marketing strategy development and, when applicable, establishing a lean procurement and manufacturing system. 3.0 Internal strategic audit One of the most compelling internal competencies of Zara is the maintenance of a centralised business structure that provides broader internal scope of control, thereby ensuring a culture of efficiency and productivity that is focused on achieving the vision of the business as a fast fashion leader. In no area of the business is proper governance of decision-making apparent than in the inter-linked support and operational components of Zara’s value chain. Gereffi, Korzeniewicz and Korzeniewicz (1994) define effective governance in this sense as the power and authority structures vested in senior-level managers to make determinations about proper resource allocation, either financial, material-related or human, throughout the entire value chain. It is the governance and policies/practices that establish effective divisions of labour throughout the entire chain that allow a firm to maintain internal advantages to create value-added gains in very distinct ways (Ponte and Gibbon 2005). Value chain activities within Zara that are important support roles include sales and marketing, human resources, procurement and logistics. Many retail competitors promote their capability in providing more effective service delivery and sustaining customer satisfaction through service in order to differentiate the firm. Generally, the philosophy of many competitors are to decentralise business hierarchies in order to promote more shared decision-making and provide workers with service-related autonomy to better serve customers. Zara, however, has constraints associated with its necessity to maintain a two week (or less) lead time to maintain its differentiated business position. Therefore, decentralisation of business would be ineffective as worker compliance is absolutely necessary to achieve a systems perspective which demands inter-dependency in many business divisions to achieve fast fashion outcomes. By maintaining strict and rigid governance systems where decision-making occurs at the top of the hierarchy, Zara is extremely adept in ensuring that resources and labour activities are properly aligned to achieve strategic competitive advantage. Why value chain linkages are important to Zara has to do with the ability of customers to impose changes along the value chain in order to satisfy their very complicated and diverse needs for fashion consumption. Each country in which Zara operates maintains very distinct cultural characteristics that dictate the type of merchandise that will be accepted and demanded. Therefore, Zara must maintain a diversified production schedule and design ideology to successfully serve these markets with unique fashion products. Lower-level in-store managers throughout its international sales environments order stock from Inditex’s Spanish headquarters where designers constantly review reports illustrating sales histories and customer feedback to determine what fashions would be relevant for these markets (Palladino 2010). Logistics managers then review reports on stock ordering, ranking each store according to their forecasts and sales histories to determine which international retail outlets should be given priority (Palladino 2010). The rationale behind this is to ensure that there are no over-supply issues and, if it is determined that a product is not selling, manufacture is rapidly ceased (Palladino). The aforesaid illustrates how all aspects of the value chain are inter-linked in order to ensure a viable stock replenishment system and ensure that only relevant and profitable fashions are produced along this two week delivery timeframe. The design team works collaboratively with logistical support management, the in-store sales teams, procurement and manufacturing in order to create efficiencies along the entire value network. Without having a centralised business structure that guarantees responsiveness and compliance to delivery needs and production forecasting, Zara would not have the competitive advantages it currently experiences in many international markets. Therefore, Zara must maintain a rather autocratic leadership structure, one that is defined as a command and control style along a very bureaucratic business structure (Goodnight 2004). The autocratic structure is relevant for Zara due to the very complicated inter-linkages in value chain activities allowing the senior management to establish the policies, practices and procedures necessary to achieve efficiency along the value network. Self-directed decision-making would not be effective or profitable for Zara as non-compliance to any area along the value chain would significantly disrupt achievement of new and diverse fashion deliveries in-store. Zara is extremely proficient in not allowing autonomous decision-making to occur, even though the business is very team-oriented, which gives the business the ability to better satisfy customers whilst also reducing merchandise waste or price clearancing that is very common with many retail organisations maintaining more decentralised business activities and labour. Zara also operates in an environment where change is a constant, since the business must be very flexible and adaptable in order to achieve new product developments in a very short time period. Most of these changes are market-driven, meaning that consumer segments dictate how the business reorganises or changes production and design efforts. Deming (2002) indicates that the main reason for success or failure of a company is directly attributable to the competency of managers. “All business processes in the organisation are subject to problems through statistical variations and management is responsible for 85 percent of that variation” (Deming 2002, p.68). Under this acknowledgement, it becomes absolutely necessary and critical for managers to establish distinct political and authority systems that ensure obedience in many support divisions whilst also establishing statistical methodologies that observe trends externally and internally in order to achieve fulfilment of fast fashion production and delivery. Zara is an expert leader in developing the power structures that guarantee the business meets its primary mission of satisfying diverse, culturally-driven consumers in a very rapid systemic network along the value chain. Research literature on leadership philosophy also indicates that when a business attempts to create an ethical culture, managers must role model these behaviours, an important factor for getting all subordinates to follow the firm’s vision (Resick et al. 2006). In autocratic business structures, it is oftentimes difficult to motivate employees as the focus shifts away from fulfilling the emotional and psychological needs of employees to more compliance-based labour strategies. The case study of Zara provided ample evidence that the business attempts to instil a market-centric sense of ethical corporate responsibility related to environmentalism, thus support for these activities (such as recycling) requires the interactivity of multiple business divisions. It should be recognised, then, that Zara maintains a positive blend of command and control ideology along with role modelled ethical behaviours that gain followership in responsible business behaviour. Human capital advantages are considered to be some of the most fundamental competitive edges that a business can maintain and Zara should be acknowledged for its successful compliance-oriented strategies alongside the maintenance of an ethical culture. 4.0 PR crises at Zara Zara has been the target of negative publicity in recent years, which has an impact on the brand identity that is absolutely critical for the company to maintain its differentiated position and gain important market loyalty. Consumers in many markets are growing more and more concerned about the ethical responsibility of businesses which can, oftentimes, translate into their intention to make future purchases of product. Dobson (2011) informs the public about Zara’s alleged role in supporting negative working conditions in Brazil. The allegations implicate Zara for procuring product from a variety of Brazilian manufacturing facilities in which workers are said to be forced to work 16 to 18 hours daily and where the pay for mostly Bolivian workers is significantly below the poverty line (Dobson). Though Zara denied any knowledge of these sweatshop conditions, Zara did discover that much of the allegations were correct and that employees working to service Inditex’s needs were hired illegally. Zara was also implicated for its involvement in procuring products from workers in Cambodia, a country that has reported 2,400 different incidents of workers fainting due to excess labour expectations and improper diet (Ethical Consumer 2012). What makes this situation so damaging for Zara’s brand is that Zara has been adamant about not paying workers what is referred to as a living wage, a pay structure that satisfies basic lifestyle and health needs. The workers in Cambodia were being paid only $61 USD per month, where these payments were coming directly from Zara for the services provided. Campaigners throughout Europe were bringing even more negative press on this issue, occurring in 11 different countries, in an effort to drive compliance for Zara to ensure that the business is forced to pay a living wage. Adding even more fuel to the proverbial fire of unethical business behaviour, Zara was also investigated for its role in supporting slave labour in Argentina, another region where outsourced suppliers service Zara’s procurement needs. The government found evidence that workers were actually living in the manufacturing environment and not allowed to leave the facility (Roper 2013). Though regulatory authorities in Argentina indicated that Zara was cooperative during investigations and also involved with conducting regular supplier audits, the reputational damage for Zara is intensive on the heels of other allegations aforesaid in Brazil and Cambodia. This has many implications for ensuring the integrity of Zara’s established brand as the perceived brand personality often dictates whether consumers build long-term loyalty. When loyalty occurs, it becomes easier for the business to translate this into brand equity, the ability of the business to capitalise on diversified business developments or new products under the umbrella of the established brand. Two of the most fundamental parts of establishing brand personality are sincerity and competence that must be perceived by markets in order for a business to obtain brand loyalty (Aaker 1996). Further, consumers that are positively attached to a brand due to these factors of sincerity and competence are more apt to engage in defending the brand against derogatory remarks (Aron, Aron and Smollan 1992). Since there is a growing market segment trend in demanding ethical and responsible social behaviour of businesses, when negative publicity begins to erode the consumer perceptions of a business’ ethical and moral standing, attachments are less likely to occur which has long-term implications for exploiting brand equity. Brand equity can provide a business with significant profit increases when new revenues are achieved in diversified business practices or development and launch of new products that are supported by the parent brand reputation. Therefore, Zara must be actively concerned about their role in corporate social responsibility to avoid further brand damage. 5.0 Recommendations for future business sustainability As based on the evidence, a series of recommendations can be provided to improve Zara’s long-term viability as a leader in fast fashion and in the competitive environment. 5.1 Improving supply capabilities Zara, being the target of very critical negative media attention alleging unethical supplier activities have severe consequences for the positioning and consumer acceptance of this brand as an ethical and moral business leader. The case study has indicated that Zara currently owns 60 percent of its manufacturing and logistics bases, with 40 percent being outsourced to foreign manufacturers and other relevant suppliers. In 2011, the parent company of Zara, Inditex, reported a total profitability, after subtracting operating expenses from revenue, at €1.932 billion (Inditex 2011). This is coupled with significant profitability reports between 2008 and 2010. Such high cash availability gives Zara a unique opportunity to invest financial resources into improving the supply network, giving Zara more control over supplier issues. Zara is consistently expanding into a variety of new international markets, making it less feasible with each expansion to rely substantially on its Spanish logistics headquarters to fulfil all store replenishment needs and secure a cost effective supply network. If Zara invests more in establishing a diversified supply and manufacturing network outside of the Spanish region, it would prevent the need for international outsourcing of supplied products. This would help to isolate the company from achieving negative publicity that impacts the brand identity by removing opportunities for suppliers to maintain sweatshop or other negative working conditions and labour that are very monumental risks to the long-term brand equity sustained by the organisation. The case study indicated that Zara was currently considering diversifying logistic capabilities in Asia and Mexico and the evidence showing that Zara is actively involved in promoting poor outsourced labour conditions makes this more of a necessity. It would improve its asset valuation whilst also creating risk barriers in procurement that is vital for Zara’s ethical reputation into the future. 5.2 Better utilisation of marketing theory and practice Zara should also revamp its current advertising and promotional strategies to align them with the cultural characteristics of vital target consumers internationally, taking a lesson from H&M. Continuing research on Zara did not show that the business invests a great deal of capital resources or labour into the marketing function, instead relying (subjectively) on the product itself in order to gain market interest and long-term loyalty. There are some risks that competition will be able to begin copying the logistic and manufacturing models of Zara, especially with the increasing support of technologies and strategic alliances along the international supply chain. There are no guarantees that Zara will be able to maintain this advantage over the long-run without risks of competitive responses that are more aligned with fast fashion methodology. Because of these risks, Zara should consider the potential opportunities for recruiting celebrities that are considered aspirational in foreign, diverse markets to gain more consumer interest. It was established by Taylor and Brown (1988) and Suls et al. (2002) that consumers make social comparisons and the aspirational aspects of a fashion brand are predictors of loyalty and future intention to make further purchases of retailers’ products. H&M is growing increasingly competent in understanding what drives buyer behaviour and then translating this knowledge into a campaign that uses important reference groups to appeal to these psychological tendencies of consumer market segments. Zara should be scanning the consumer market to determine which celebrities would provide more value to the brand and creating cooperative fashion lines and advertising concepts with this in mind. 5.3 Premiumisation Though Zara has been able to improve its reputation through low cost pricing structures, there is enough evidence that the company has established a great deal of loyalty with certain markets. When loyalty has been established, it allows a business to charge premium prices and also increases the potency of word-of-mouth advertising (Chaudhuri and Holbrook 2001). Zara should consider, based on its ability to remain relevant along the industry life cycle, in selecting key markets with higher resources to attempt a premiumisation strategy that will allow for higher pricing structures. By performing a new positioning strategy under premium quality, it will offset any rising prices along the supply network and also promote more interest in those markets that gravitate toward premium products for conspicuous consumption. This is representative of the corporate level strategy which involves aligning business strategy and structure with the mission of the business. Zara’s mission is that of premium quality and providing relevant fashions along an expedited development and delivery cycle. 5.4 Differentiation as business level strategy As Zara is facing considerable competitive competency in promotion and advertising, as illustrated by the effective positioning of H&M, Zara should be devoting more emphasis on differentiation as a new business level strategy. Zara has many competencies in the design team related to the ability to create modern and interesting fashions that are pertinent for satisfying consumer needs. The multinational fashion company, Abercrombie & Fitch, has gained considerable brand loyalty from youth markets for the firm’s ability to differentiate based on consumer characteristics demanding exclusivity. Abercrombie & Fitch is positioned on the market as a brand that exudes social prosperity and economic privilege, with many youth markets drawn to the brand for its ability to enhance consumer self-esteem by emphasising that the brand can transform the wearer into a prestigious member of society. Abercrombie & Fitch differentiates by creating integrated promotional campaigns that focus on youth needs for social belonging, “wanting to belong to the beautiful, exclusive world that the Abercrombie image projects” (Perman-Reynoldsburg 2000, p.1). This is accomplished utilising attractive young models in advertising and in-store promotional materials that make the brand inspirational and aspiring to younger consumers. If Zara follows the business level strategy of differentiation following a similar aspirational focus, Zara products can stand out more effectively from major competitors with strong brand identities in the industry. Zara should focus on the contemporary exclusivity of its products, using lifestyle-relevant actors that share similar characteristics to the younger markets (18-25) with visual promotional imagery of aspirational actors. This would open Zara to new markets that favour products that improve their social status and further promote the competency of designers that are capable and willing to facilitate exclusive fashion designs. 6.0 Conclusion Zara maintains many competitive strengths, including the ability to sustain a low cost leadership generic strategy, eliminate barriers to new market entry, and the internal cultural dynamics that lead to better compliance and efficiency along the value chain network. These strengths are largely impenetrable by competitive retailer efforts that do not sustain a majority of their own manufacturing and logistics systems. However, not all strengths insulate the company from problems. Recurrent negative publicity about the firm’s ethical position, coupled with very competent marketing strategy development by competition, represent very legitimate threats to the future brand sustainability of the business. The recommendations provided will assist in shoring up the weaknesses identified in Zara’s model, improving its long-term brand equity and profitability opportunities in the markets in which the business operates. References Aaker, D. (1996). ‘Measuring brand equity across products and markets’, California Management Review, 38(Spring), pp.102-119. Aron, A., Aron, E.N. and Smollan, D. (1992). ‘Inclusion of other in the self scale and the structure of interpersonal closeness’, Journal of Personality and Social Psychology, 63(4), pp.596-611. Chaudhuri, A. and Holbrook, M. (2001). ‘The chain of effects from brand trust and brand affect to brand performance: the role of brand loyalty’, Journal of Marketing, 65(2), pp.81-92. Deming, W.E. (2002). Chapter Six, in J. 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Porter’s Five Forces model, though not all relevant for Zara as threats, illustrates the cyclical relationship between all forces that impose risk on retail businesses. Read More