The Business Strategy of Zara Company - Essay Example

? Zara Case Study Analysis Report Table of Contents Executive summary 4 Introduction 4 Question External Environment Analysis 4 PESTEL Analysis 4 Political Factors 5 Economic Factors 5 Social Factors 5 Technological Factors 6 Environmental Factors 6 Legal Factors 6 Porter’s Five Force Analysis 7 Threat of New Entrants 7 Bargaining Power of the Suppliers 7 Bargaining power of buyers 7 Threat of Substitutes 7 Rivalry among existing firms 8 Industry Life cycle Theory 8 Question 2: Internal Environment Analysis 9 Resource Capability analysis 9 Tangible Resources 9 Intangible Resources 9 Capabilities 10 Core Competencies 10 Competitive Advantage Strategy 11 Question 3: Analysis of PR Crises 13 Question 4: Strategic Analysis 15 Business Level Strategy 15 Corporate Level Strategy 17 Strategies Suggested for Future 19 Conclusion 22 Appendices 25 25 Executive summary At present the northern American and the EU nations are looking to comeback from the shock-waves of the economic down-turn. Downward economic trend may have transformed regular clothing purchases into luxury purchases. Major Apparel Companies are looking to establish businesses in the emerging economies. In this fast fashion industry the threat of new entry is quite low; bargaining power of the buyers is quite high and the Rivalry among competitors is intense. The fast fashion apparel industry (UK in particular) is believed to be in the maturity stage. Zara gets strong financial back up from the parent company. Zara contains 1,751 stores and over 200 designers. To provide a fast fashion image to the customers Zara has been able to create a time-squashed manufacturing process. The potent human resource, lean distribution network and the economies of scale are the core competencies of the company. Introduction The present study has been conducted in order to provide an in-depth analysis of the business environment the fast fashion and apparel industry along with the analysis of the business strategy of Zara. The study also look to provide recommended strategic actions that the company may need to adopt to achieve the desired objectives such as globalization. Question 1: External Environment Analysis PESTEL Analysis External or Macro Environmental factors include political, economic, social, technological, environmental and legal (PESTEL) (Cowan, 2005, p. 67). Political Factors While considering the political aspect, apparel companies should have various interactions with the governments to understand the government policies for the intercession in the legal and economic aspects to aid the decision making process. Government bodies, especially those belonging to the emerging economises like India and China have welcomed foreign invest with open arms. However, there are different restrictions in various nations that need to be considered before making market entry. Add to that the trade policies in different countries may need certain adjustments on the part of the companies. E.g. China has a currency policy that results in imports to be higher than the market price. Economic Factors At present the northern American and the EU nations are looking to comeback from the shock-waves of the economic down-turn. Downward economic trend may have transformed regular clothing purchases into luxury purchases or ‘splurge’ as due to the downturn there might have been a dip in the disposable incomes. Also the rise in the rates of personal saving may have had a negative impact on the consumer demand. However, the recent global growth went up to 3.6 percent in the 1st quarter of 2012. This likely to supplement the expansion strategy of the apparel companies as majority of the apparel companies are looking to enter emerging economies like India and China (Henry, 2008, p. 89). Social Factors As mentioned before due to the downward economic trend consumers are looking to spend more on education, leisure, travel, healthcare, electronics, etc and relatively less on clothing. Also the consumers have become a lot more environment conscious and look to do business with companies that provide green product. Hence it should be considered as a drive that should motivate the apparel companies to develop and provide products that meet the consumer expectations ecologically. While considering the social factors another issue that the companies need to keep in mind is the customer demographics as consumer demographics affect the consumer demands. Technological Factors It has been seen that there is a vast amount of use of human intelligence instead of computers at least in the manufacturing process. However, in case of marketing and communications companies are slowly but surely providing a lot more focus on digital medium (search engine, social media and mobile marketing) because consumers intend to stay home rather than going out is also a likely reason for inclination towards digital strategy (Zarrela, 2010, p. 45). Environmental Factors Due to the rising threat of global warming, governments as well as environmental activists have been quite vocal to ensure green practices by the companies to reduce carbon footprint. This has lead to the initiation of various CSR activities by the Apparel companies to put up a greener image in the minds of the consumers. Legal Factors In order to counter the threat of global warming different governments round the globe have set-up environmental policies. Apart from that consumer protection, of the workers and child labour laws need to be considered by the companies. Porter’s Five Force Analysis Threat of New Entrants In this fast fashion industry the threat of new entry is quite low. Production, marketing and distribution costs are distributed over large production units in the industry. This actually lowers the production costs. This is why smaller players in the fast fashion industry is quite hard to find as small players faces extreme difficulties to compete keeping in mind huge investments needed to enter the industry. Bargaining Power of the Suppliers Bargaining power of the suppliers is low. There exist a lot of suppliers in the apparel industry. Also there is very little scarcity of raw materials. As a matter of cat there is abundance of raw materials in developing countries like India, china and Vietnam. Bargaining power of buyers Bargaining power of the buyers is quite high. The switching costs incurred by the customers are quite low. Also due to presence of various brands such as H&M, TopShop, etc that provide quality products. However, relatively lower possibility of integration of the customers declines the buyers’ bargaining power to some extent. Threat of Substitutes The threat of other substitute products to this is quite high. The substitute products sellers and the fast fashion retailers are department stores, discount retailers and also luxury retailers. The degree of threat goes even further as consumer can find the substitute products at almost same price level. Rivalry among existing firms Rivalry among competitors is very high; intense to be more precise. There are vast numbers of apparel retailers that have adopted the fast fashion or high street business model that includes Zara, H&M, and Topshop. Such companies are also listed firms and hence the management may to be able to decide upon probable exit strategy (Wenderoth, 209, p. 359). Industry Life cycle Theory The Industry Life Cycle consists of four stages such as the Start up stage, consolidation stage, maturity stage and relative decline stage. The fast fashion apparel industry (UK in particular) is believed to be in the maturity stage. The products produced by the attained considerable amount of aptitude. Products produced by the players are relatively standardized in nature and prices of the products are also similar in nature. Hence, the profit margin of the companies belonging to the industry grows at a relatively slower pace. Most of the times firms belonging to matured industry are tagged as cash cows as the flow of cash is quite consistent but growth opportunity are low due to the intense competition. However, the scenario of fast fashion industry in emerging economies is seemingly different. The fast fashion industry in emerging economies like china and India are probably in the consolidation stage. This is the reason top notch fast fashion players are looking to invest in the emerging economies to capitalize the growth prospect. This includes Zara as well as other competitors like Topshop, H&M, etc (Burgemeister, 2003, p. 192). Question 2: Internal Environment Analysis Resource Capability analysis Tangible Resources Zara gets strong financial back up from the parent company, Inditex. Inditex has touched revenue of €13.79 billion. Zara has various trademarks around the globe. As a matter of fact, Zara very recently had beaten Louboutin in French Court in a tussle of trademark on red soles. This allowed Zara to increase the sales from the production of shoes. Exclusive brads and logos are resources that have helped Zara too tangibilize the offerings. This has helped Zara to maintain a strong brand identity and thus becoming one of the most famous brands in the world. Intangible Resources Zara contains 1,751 stores and over 200 designers. The designers constantly update the management about new information on the fashion trends to get edge over the competitors in the fast fashion market. Add to that the efficient information technology and communication system helps the brand to continue the trendy outlook. An integrated IT system ensures strong relationship between the suppliers, designers and the personnel engaged in manufacturing of apparels. The unique store inventory model of Zara provides a competitive edge in the domain of brand image. Another competitive edge is the ability of the company to identify the latest fashion trends and adjust with the changing trends. Also rapid inventory turnover injects a sense of exclusiveness and freshness. As far leadership and decision making is concerned Zara has a self driven decentralized decision making structure. Castellano and Ortega thought that in order to succeed Zara has to respond quickly to the changing fashion trends. Therefore the employees should have the power to make decisions on their own rather than relying on the head office. The main idea behind this was to save time to support the robust and lean business model of Zara. This is the reason the store managers have the power to choose inventories rather than waiting for the headquarters to make the decisions. Capabilities To provide a fast fashion image to the customers Zara has been able to create a time-squashed manufacturing process. It takes only four weeks for a complete cycle which includes design of clothes to the delivery and availability in stores. As a result the distribution time span of Zara is very low as compared to the industry average six months cycle. Also Zara has been operating through a vertical integration model with the designers, channel partners and manufactures. Also as opposed to the competitors like that Gap has several magazine and television advertisements, Zara operates through cost effective marketing and communication strategy. Zara mainly concentrates on delivering quality products to the customers and developing brand awareness through viral or word of mouth communication, developing and maintaining the unique reputation by providing rapidly changing fashion trends (Kotler, 2001, p. 25). Core Competencies The potent human resource team of the company is something that the new entrants to the markets or even the competitors would find difficult to imitate. The fast responsive designer team of Zara is considered as a rare spectacle in the apparel industry. Also the in store inventory and fast moving production has also been very useful for the company and this would also be hard and costly imitate. The core competency of Zara can be shown using the VIRO (Valuable, Intimate, Rare and organized to be exploited) (Appendix –I). A part from the competencies mentioned above another core advantage of the company is the economies of scale. One of the advantages of the economies of scale has been the ability of the company to develop an efficient centralized distribution network. However, as the company is looking to enter the international marketing, Zara may have to think about making certain modifications in the centralized system (Frank, 1964, p. 401). Competitive Advantage Strategy Zara utilizes the cost leadership and also the product differentiation strategy to gain competitive edge. The overall business model of Zara is cost effective in nature. As compared to the competitors Zara provides less focus and money to advertisements and look to adopt price quality approach i.e. the company look to provide quality product at a reasonable price. Differentiation is a must in the fast fashion industry keeping in mind that the product lines of the brands are almost the same. Zara looks to achieve product differentiation by changing the store merchandising, design and ambience after a cycle of six months. Also through the lean JIT system Zara delivers trendy fashion outfits. The life cycle of the products produced by Zara is very short and the brand focuses on providing latest trendy fashions to the customers (Kolb, 2008, p. 92). Value Chain Analysis The primary activities of Zara will differ from the traditional primary activities of the Value chain model. But the supporting activities will remain the same. (Appendix-2). The figure below shows that Zara performs an array of activities. Among these the primary activities include fulfilment, ordering, manufacturing and design. Ordering is most certainly the most important activity. Zara has been able to differentiate itself from that of the competitors through adding value in the overall supply chain management system. Zara has a decentralized and flat decision making system. The store managers at Zara hold the power to select the inventories independently rather that the headquarters having to make the decisions. The distribution centres of the company look after the inbound logistics including warehousing, receiving as well as the inventory control. The distribution centres get bulk quantities and then each segment is shipped to the stores. Zara does not stock the items into inventory to minimize inventory risks. Very few inventories could be found in the supply chain of Zara. The clothes are designed in the factories. From there the clothes are shipped to the factories and then followed on to the stores. Such distribution system helps Zara to introduce new products in a very short lead time. The DC and SKU of Zara manage the outbound logistics where the demand and supply are matched. Also the company feels that the stores and the overall store experience, ambience, merchandising is form of marketing. Therefore the company spends 0.3% revenue on advertising which is very low as compared to that of the competitors who spend 3-4% of the total revenue. The core activities of Zara are complemented by several activities such as technology development, procurement, human resource and the infrastructure. Most of the supporting activities are quite common to other industries. However, in case of human resource the fast responsive and potent designer team of a key factor for Zara (Brown, 2009, p. 209). Through the robust inbound and outbound logistics system, time compressed production process, unique store inventory and the fast responsive designer team Zara has been able to achieve a unique brand image in the market that is hard to imitate by the competitors. Question 3: Analysis of PR Crises Although Zara has done several corporate and social sustainable activities and published commitment towards the sustainable development of environment and society, but are affecting by several PR issues like Labour issues. It is evidenced that, the employees in different countries are unhappy due to the work-load. Lac of appropriate performance appraisal is affecting the motivation level of the employees (Berger, 2006, p.36). The organizational communication process is facing several challenges. On the other hand, the organization treats their customer as their god. At the same point of time, they are overlooking the employee dissatisfaction factor (Jobber, 2012, p.583). In adequate employee retention is one of the biggest issues that are affecting the organization’s business process. Labour Issues The inadequate work culture have forced various unions to criticize this leading fast-fashion organization criticize heavily. Different international news and media articles are affecting the brand image of Zara. Lack of effective employee retention strategy and poor performance appraisal system may affect the organization work-culture of Zara. For an example, a Brazilian TV network has claimed that Zara has bought the items that are made by the Peruvian and Bolivian immigrants within illegal and unethical working condition. The report in the Brazilian television also showed that a similar condition was created in Sau Paulo. Near about 52 workers were rescued through the Raid. All the employees in Brazil were recruited for their home country with the commitment and promises of improve life, but it is evidenced that the employees had to work for more than 16 hours in a day for below wages. These were the unethical and unlawful wages. Therefore, the brand reputation of Zara has reduced in Brazil and the government of Brazil has restricted the employee recruitment policy of Zara in Brazil. Zara has continuously denied this allegation and any responsibility regarding this issue. Moreover, the fast-fashion organization has put the blame on the shoulder of AHA. Zara has claimed that, the supplier has violated the code of conduct. The Brazilian TV programme has continuously pointed out the ethical code violation of Zara in the manufacturing factories by implementing workshops that unethically exploited the labours. In response to these allegations, Zara has confronted with several points, but they have failed to prove those points. However, recently Zara has initiated discussion with the supplier organization AHA in order to arrange some compensation for the affected employees. Finally the organization has committed to abide the law regarding the usage of workshop for manufacturing purpose. The Brazilian authorities did not convinced by the commitment of Zara. They have reported and noticed Zara clearly that Zara is responsible for the unethical and illegal activities taking place. Employing child labour is an unethical business strategy. This incident was also took place in Brazil as the organization has employed the child labour below 14 years in order to reduce the employee and manufacturing cost (Torun, 2007, p.39). They had drastically cut down the employee number in Brazil in order to minimize the cost. Due to this unethical labour law and illegal employee recruitment police, Brazil government has restricted the labour policy of Zara in Brazil. Though, it is feasible that the organization has faced the labour problems in different countries, but the environment sustainability through implementing CSR strategy and customer relation and satisfaction policy has made Zara a premium and trustworthy brand in terms of Business sustainability (Selim, 2013, p.217). Question 4: Strategic Analysis The strategic analysis of Zara will evaluate the business level and corporate level strategy of Zara. Business Level Strategy Zara targets educated and young people who like fashion and sensitive towards the current trend of fashion. The target market of Zara is very broad as it is not segmented by lifestyle and age of the target audiences. Therefore, it is feasible that the the scope of Zara’s business is quite vast. According to the business level strategy of Zara, the organization follows both the differentiation and cost leadership strategy. The integrated differentiation and cost leadership strategy followed by Zara has been listed below. Cost Leadership Strategy Zara has implemented the Haute Couture design and provides similar clothing with low cost fabric in order to maintain superior quality and achieve low cost (Howe, 2004, p.173). Moreover, they have always concentrated on the short lead times that in turn guides limited inventory. It has reduced the supply chain operational cost. These two strategies are the example of cost leadership strategy. Differentiation Strategy Zara has differentiated itself from its potential competitors within the industry by providing lower lead times. This is quite lower comparing to the industry standards. Every year the organization use to produce more than 11000 unique designs compared to the near about 4000 designs by the competitors. Zara used to replenish its stores twice in every week, where the competitors of Zara used to replenish only once in a week. The organization produces the products in small batches and takes the benefit of shortage in outlets by replacing those products with the new designs. The fashion designs of Zara remain in all the stores of Zara for a shorter period of life cycle, i.e. not more than 4 months. Only 10% designs used to take out from the outlets by the organization compared to 17% of its potential competitors. The in-store executives always used to take the feedbacks of customers in order to determine the preference and need of the customers. They used to take the advantages of Information technology in the supply chain’s vertical integration by controlling and maintaining a smooth flow of information from end to end of the chain (Fernie, 2004, p.79). Corporate Level Strategy The corporate level strategy of Zara can be categorized based on the Ansoff Matrix. Zara used to follow the following strategic direction based on the Ansoff Matrix (Appendix-3). Market penetration Strategy Zara has motivated its customers to purchase more products, when the organization has evaluated that there are lot of issues and weaknesses in the competitors’ marketing and product strategy. For an example, Zara has constructed an effective in-house design team in the Spanish stores and effectively controlled distribution and factory network after observing problems in the distribution network of its one of the potential competitor H&M (Granger, 2010, p.122). Zara has regularly introduced new designed clothes in every week in order to pull the customers continuously to check the new and latest collection of fashionable clothes. In terms of Zara, the clothes move quickly through the outlets and used to replace by the new designed clothes. They have centralized their distribution system and half of their factories are exist in Europe. The fast-fashion loom has benefited the organization to reduce its coverage to faux pas of fashion. From design to production, the organization has controlled the supply chain network. It is one of the key re4ason of success for Zara. The organization used to design almost 50% of its own fabric and used to produce more than 50% of its own clothes rather than depending upon the other slow moving suppliers. Effective Vertical integration strategy implementation in the supply chain network has makes the networking channel highly flexible, faster and huge efficient comparing to the other international competitors. Market Development Strategy Firstly, Zara has identified potential buyers group in the effective sales areas. Moreover, the organization looks to sell its products in the new location in the new emerging market. Inditex; the parent company of Zara is the leading fashion manufacturer in world. Zara is the fastest growing umbrella brand of Inditex. The organization turns its inventory twice in a week. The inventory-to-sales ratio is quite impressive of Zara. The profitability of Zara in the European operation is more than 50% comparing to its major competitors. Product development Strategy Zara quickly develops the new feature and designs as the organization has the fast development option from the concept to point of sales. On an average, it takes 6 weeks. The positioning of Zara clearly address that it is not a luxurious fashion brand but the organization used to target the price sensitive people with the help of fashionable designs of clothes in reasonable price level. They have always differentiated their product line by the relentless introduction of latest and new designed clothes in less quantity at rapid speed and the affordable price level of the products is the evidence of the large scale customization necessity of the target audience. Diversification Strategy When the potential opportunities are being found outside with the current business scenario, diversification growth makes sense. Zara has specialized in the retail fast-fashion retail industry in UK. They have the opportunity to expand its footprint in the new developing market with new design of clothes. The major limitation of Zara fashion is that, the pace of Zara’s growth is gradually slowing down. Strategies Suggested for Future Several issues and some weaknesses can affect the future growth strategy of Zara. In order to overcome the issues Zara can implement some development in the existing strategies. These are recommended below. The UK fast-fashion industry has affected by the recent recession and has become more mature enough. Zara should decentralize their manufacturing system as it will be cost effective (Schiller, 2006, p.88). Moreover, they should focus on the production firm in the developing BRICK countries, such as Brazil, India, and China etc. Zara should undertake aggressive online marketing strategy. As it is known that, major of the people are becoming social media centric comparing to the other media sources, therefore, the social media and online promotional strategy will be effective for Zara (Porter, 2008, p.344). The organization should continue its vertical integration in the supply chain network in new countries. Moreover, they should observe the socio-cultural aspects of the country. They should employ the domestic employees in different operating countries. It will develop the economical stability of a country. After a long year of successful operation, Zara can build up new factory in different operating countries in order to cut import-export cost (Tiits, Kattel and Kalvet, 2006, p.83). Implementation of Models and Final Suggestion According to certain criteria the following strategies can be implemented in the case of Zara. Suitability, Acceptability and Feasibility This part will evaluate whether the strategies of Zara are suitable, acceptable and feasible enough or not. Suitability The strategy of Zara is suitable enough in the light of the organization’s objectives and goals. It is evidenced that Zara is engaged in achieving its objectives and goals. Acceptability In terms of organization’s share holder point of view, the strategy of Zara can be highly accepted. The strategy that is implemented by Zara is very much focused on the objective of its shareholders. Moreover, the adopted strategies by Zara can be determined as sustainable enough as these strategies are fair in terms of environment, economies and operating countries. Feasibility The strategy of Zara is feasible as since last two decades the organization has achieved its major performance indicators. The organization has required the effective financial and non-financial resources in order to execute the strategies. STAIR Model According to STAIR model, the major steps for changing the performance of Zara are underlined below. Strategy Zara has designed and clarify the strategies in order to communicate with the external and internal stakeholders with a transparent viewpoint (Appendix-4). Target Zara has translated its business strategies into clear concrete targets and specific objectives to fulfil the organization operational target and convert those specific targets into performance indicators. Assignment They need to implement bottom-up organizational process and develop effective action plan in order to achieve success for the assigned project. Implementation Then they should implement the discussed action plans through internal operational subsystem alignment to execute the agreed strategy as the bottom-up level does not exist in the organizational process of Zara. Results Finally it is recommended that, Zara should track the end performance against the established operational and strategic goals according to the relevant action plan description in order to review the strategies and take desire actions basis on the final result. Conclusion Zara is one of the leading global fast-fashion brands. The organization has implemented both cost leadership and differentiation strategy as their business level strategy. They have effectively implemented vertical integration strategy in their supply chain network. Though Zara is one of the renowned and popular global brands, the organization may face several difficulties through their centralized manufacturing strategy. Their business model is cost-effective and they have set up business goals and objectives effectively basis on the model. It is feasible that the execution of determined strategies have bought success for Zara. Finally, it can be said the Zara should look to expand their business and adopt decentralize manufacturing process in the developing BRICK countries. References Berger, S., 2006, How We Compete. California: Currency Doubleday. Brown, L. 2009. Marketing and Distribution Research. New York: Ronald Press Company. Burgemeister, S. 2003. Market analysis. Berlin: GRIN Verlag. Cowan, A. 2005. Risk Analysis And Evaluation. Global Professional Publishing: UK. Fernie, J, 2004, Logistics and Retail Management: Insights Into Current Practice and Trends from Leading Experts. London: Kogan. Frank, N. 1964. 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Particularities in the Marketing Mix for Service Operations, Berlin: GRIN Verlag. Zarrela, D. 2010. The Social Media Marketing Book. Toronto: O'Reilly Media, Inc. Appendices Appendix -1 Appendix-2 Appendix-3: Ansoff Matrix (Zara) Appendix-4: STAIR Model (Zara) Read More