Application of Ansoff Matrix to Zara - Case Study Example

INTRODUCTION: Strategic planning is one of the most critical aspects of the management process as it allows the management to plan things and to identify what needs to be achieved (Armstrong, 1985). Managers use different models, matrixes and tools while formulating strategies and plans (Cravens, and Piercy, 2008). These tools are helpful as they help the management to know about their products standing in the market and what actions they can take to increase their market share and gain competitive advantage (De Wit, & Meyer, 2004). Ansoff Matrix is one of the tools which have been used by management for the purpose of strategic planning (Allison, and Kaye, 2005). This part of the report will apply Ansoff Matrix on one of the leading international fashion brands, Zara which is operating in 59 countries successfully. This part of the report will then discuss Ansoff Matrix and how the matrix can be applied on Zara as it has expanded in different parts of the world. Then the report will highlight the problems faced by Zara as it expands and then the report concludes the topic along with giving recommendation to Zara. ANSOFF MATRIX Ansoff model was introduced in 1957 by H Igor Ansoff. Ansoff model helps managers to understand the barriers and opportunities in existing and new markets with existing and new products. According to Ansoff model, an organization has four strategies with two based on markets and products or services (Hill, and Jones, 2005). According to this matrix, when an organization moves to next quadrant vertically or horizontally, risk increases. The image attached in the appendices section shows the Ansoff model. Ansoff matrix is commonly known as product and market expansion grid and this matrix helps managers to take decisions whether they should expand their business or penetrate in the existing market (Grant, 2009). Ansoff Matrix shows that management has four strategies and these are; 1. Market penetration 2. Market development 3. Product development 4. Diversification (Ansoff, 1965). All these four strategies have some risks associated with them. It is important for the management to identify and analyze risks associated with each strategy and then take the final decision (Watts, Cope, and Hulme, 1998). For many years different companies use this grid for strategic planning. Zara, one of the leading international fashion brands, uses this model to grow their business in different markets as well as within the existing market. For the entire process of business expansion, Ansoff model has been used. Now this part of the report will discuss and analyze each of the quadrants of Ansoff matrix and apply it on Zara’s expansion. Market Penetration: Market penetration is when a company stays in an existing market with their existing products or services then the risk is very low (Farris, Bendle, Pfeifer, and Reibstein, 2010). Company knows the product is already doing well in a market and market holds few surprises. Market penetration is to go further deep in the market as there are opportunities prevailing in the market but the company has not capitalized on these opportunities (Lusch, and Lusch, 1987). So to go deep in the market, the company penetrates and increases its market share in the market it is already operating. Company already is aware about the market and its characteristics like barriers of entry and exit or opportunities in the market etc (Meyer, and Tran, 2006). It is very important for Zara to maintain its market share in existing market with existing products. The company is operating in 59 countries and it is incurring cost by operating its stores. Therefore by penetrating into the markets where it is already operating, the company can further utilize the markets and increase its market shares in these regions. Thus it can help in improving profitability. Zara has achieved competitive advantage by changing the products quickly. However, industry average to deliver products is nine months whereas Zara’s in-house team is capable to deliver the same in 4 to 6 weeks. This is the reason why Zara introduces new designs every week which forces its customers to come and visit stores every other week. So, with quick turnover of inventory the company is penetrating and trying to increase its market shares in the countries where it is operating. Zara does not market through advertising routinely but Zara has opened stores in several major shopping streets in different parts of the world so that the company’s visibility is seen by the customers. It is a visual form of advertising on which Zara’s believe and it has been highly successful for years. Market Development: Market development refers to when a company enters into a new market. In market development the risk of the organization increases as the company is going into a new market and it is not sure how the market will perform (Gamble, and Thompson, 2010). There must be some barriers like competitors who have already captured the market and therefore, entering a new market is not easy (Kono, 1994). It may also be possible that company’s existing product does not work in the new market etc (Johnson, Scholes, and Whittington, 2008). To enter in a new market Zara has to analyze potential in the new market, available resources and competitors. Zara believes that the international market has potential for Spanish fashion and designs that are offered by Zara and this is the reason why the company has expanded their products to different parts of the world. In 1988, Zara searched for new markets and Oporto, Portugal was the best market to start with because of their geographical and cultural proximity. After opening store in Portugal, Zara realized to change its business model according to new market. After first store Zara was very cautious about expansion and they continuously opened new stores in new markets. In 1990, Zara opened its first store in France the fashion capital and then entered in Europe. After that Zara entered in Mexico, Greece, Malta, Cyprus and then New York. After 1997, Zara became aggressive in expansion as the company gained experience in international market. Zara opened its first store in Israel in 1997. Then Zara entered in a completely different and new market of Middle East by opening stores in Kuwait, Lebanon and the United Arab Emirates. In 1998, Zara entered in Argentina, Venezuela, Great Britain, Japan and Turkey. In 1999, Zara opened stores in Netherlands, Uruguay, Bahrain, Brazil, Canada, Poland, Germany, Chile, and Saudi Arabia. By 2006 Zara has 852 stores in 59 countries (Lopez, and Fan, 2009). Zara has been expanding its markets and evaluating different markets and capitalize the opportunities that are available in the market. The company is right now operating in 59 countries and even today it is evaluating more markets to further expand its offerings. Product Development: When a company decides to launch new a product or service in an existing market, then it is referred as product development (Khurana, and Rosenthal, 1998). When an organization uses the strategy of product development then the risk increases (Ulrich, and Eppinger, 2004). Risk may increase because it may be possible that company’s old customers do not like the new product or service (Johnson, Scholes, and Whittington, 2008). Zara has not halted its progress in developing more and more products. Zara has been efficient and proactive in introducing products every now and then in different markets and this has been one of the distinctive features of the company that has helped in creating competitive advantage over the years. From time to time, Zara has introduced new products in existing markets. Zara introduced the concept of “Instant Fashion” which means Zara responds to changing consumer taste more quickly and launches new products in smaller quantities in shelves within record time. If demand increases, Zara increases production of that particular product and therefore they are able to meet the changing demands of different products as well (Lopez, and Fan, 2009). Diversification: When a company enters in a new market with new product, then it is referred to as diversification and the risk of the company increases to a new level when it diversifies (Ansoff, 1957). To capture a whole new market with a new product is very risky and the company needs intensive research of the market and its needs and then it’s the product should be able to meet these needs in order to be successful (Bishop, 1995). Moreover, when the company is diversifying then the company is not sure about how the product will perform as well as how the market will respond to the newly introduced product therefore the risk of diversification is the highest (Patrick, and Reuss, 1993). To enter in new markets with the new products, Zara needs to know the cultural and social values of each market and then create and customize products accordingly. With the passage of time Zara has diversified their product range and now they are offering products not only for men and women but for kids as well. The company has introduced different variety of products in different parts of the world considering the needs of the markets and people in that particular region. Previously Zara was focusing only on men and women however now they have diversified by coming up with new products that are targeted at a new market segment i.e. kids. Moreover, Zara has been introducing kids wear to different countries where it is operating as well as in the newly countries where it has expanded. Conclusion and Problems and Issues Being Faced Problems in expansion: While adopting growth and expansion strategies, Zara had to face some issues and these issues have been discussed below. Competitors: Zara has two main competitors H&M and Gap. H&M offers the best quality clothing products at affordable prices. H&M offers as an online store in countries where it does not have its physical stores. H&M has diversified in cosmetics and accessories along with apparel line. Gap is the world’s largest retail clothing store having 3053 stores in 5 countries. The company offers clothing, accessories and other personal items personal care products for men, women and children (Lopez, and Fan, 2009). If Zara is compared with its competitors, Zara controls its entire production chain. On the other hand, both of its competitors outsource their production. Zara has more global presence than both of its competitors. Zara has more stores in international markets and Gap is only present in 5 countries. H&M relies on advertisement more and Zara does not advertise their products. Zara focuses on the location of their stores (Lopez, and Fan, 2009). Market Entry Strategy: Entering in a new market is not an easy decision as the company has to analyze the decision from different perspectives (Moncrieff). It has to formulate its strategy on how to enter the market (Mintzberg, and Quinn, 1988). Zara had to decide how to enter in a new market successfully. Zara has adopted three entry modes; own subsidiaries, Franchising, joint ventures and exports. Own subsidiary mode has been the most expensive entry mode because it is the riskiest. Zara has adopted this mode for the countries where it sees high growth and minimum risk. Franchising has been chosen as the option for countries where high risk is involved and low sales are expected like Saudi Arabia, Kuwait, Malaysia and Andorra. In some countries there have been obstacles that require cooperation or partnership from local firm, and therefore in such countries Zara has started a joint venture with local companies. Like in Germany, Zara has opened its store with the German firm Otto Versand (Lopez, and Fan, 2009). Zara exports its products in countries where it is not possible to open the store. When Zara enters in a new market, it starts by opening one store and then analyze the potential of the market and gain the expertise which helps Zara in taking the decision whether to expand further in the same country or not (Lopez, and Fan, 2009). Conclusion and Recommendation While implementing Ansoff model marketing strategy, Zara has to face many obstacles and problems. An effective strategic plan makes it possible for Zara to expand its business worldwide even though the market has strong competitors. Zara’s target market is not limited to certain age; Zara offers products to different age groups and therefore it offers products to people of all ages. Zara keeps itself updated to the latest fashion and offers its products at reasonable prices. Due to their efficient and fast information system, Zara manufactures its products according to customers’ needs in quick time. Due to its effective planning and implementation Zara is one of the successful brands in the world and has ranked at 88th in the list of world’s 100 top brands of 2011 (Tumblr, 2012). 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(1998). ‘Ansoff’s Matrix, pain and gain: Growth strategies and adaptive learning among small food producers’. International Journal of Entrepreneurial Behaviour & Research, vol. 4 no. 2, pp.101 – 111. Appendices (Watts, Cope, and Hulme, 1998) Read More