Critical Strategic Investigation Of Zara

Strategic investigation of businesses is highly important for identifying potential opportunities and threats for the business that can be considered for future growth of the company. The current report is aimed at carrying out strategic investigation of Zara in order to make recommendations about strategic expansion of company. Report has been divided into different sections and firstly the introduction of Zara has been provided including; mission, vision and core values of the company. Along with this, target audience and key stakeholders of Zara are also identified. Secondly, the macro environmental and industry analysis of Zara is being carried out. Thirdly, internal analysis of Zara is being carried out in terms of resources, capabilities, competencies and strengths of the company. Followed by this, the report has considered corporate and business level strategies of Zara and identified key challenges faced by Zara. The strategic evaluation and identification is then carried out and different recommendations are being made to Zara.

1.1 Context of Zara

Zara is a Spanish brand of clothing that has been established by Gaono and Galicia in 1975. Zara is one of the most renowned brand of the fashion retailer, Inditex. Zara is an international brand and it has stores in number of locations across the world. Zara is selling clothing for men, women and kids and it also sells different accessories with an aim of completing range of its products (Kim and Ko, 2010). The vision of Zara is to meet the requirements of customers by continuously innovating and providing new designs to customers in affordable prices. The mission of Zara is to use its unique business model for development and sustainability of environment in which they are operating (Lopez and Fan, 2009). The long terms objectives of Zara are; saving energy, eco-friendly operation, increased recycling and less waste production, extended commitment to all staff members and usage of ecological fabrics (Kim, Ko, Xu and Han, 2012). The values of company revolves around customer orientation, team work and open communication. The stakeholders of Zara are Government, customers, employees, general public and environment (Moore, Fernie and Burt, 2000). These stakeholders are from different nations in which Zara is operating.

1External Analysis of Zara

2.1 Macro Environmental analysis through PESTEL

Political

Economical

  • The changes in Government of different focal nations are likely to exert an influence on functioning of Zara (Lopez and Fan, 2009)
  • Huge awareness of trading system of different countries and regulations to export products are also important to be considered by Zara  (Tokatli, 2008)
  • For expansion in new country the political stability is needed to be taken into account
  • The economic stability is uncertain
  • Difference in currency of different countries in which Zara is operating is laying pressure in terms of exchange rate fluctuation (Teece, Pisano and Shuen, 1997)
  • As low end fashion brand, Zara needs to take aspect of pricing into account (Tokatli, 2008)
  • Spending habits of consumers of fashion brands are elastic to economic stability
  • Spending patterns of consumers are important to be considered by Zara

Social

Technological

  • Fashion trend changes rapidly (Ko and Megehee, 2012)
  • Zara is working in diverse cultures and importance should be given to different socio cultural factors in order to react towards fashion trends of different countries (Moore, Fernie and Burt, 2000)
  • Innovation is needed to be taken into account by Zara to compete with other fashion brands
  • Adoption of advanced technology is important for Zara with an aim of maintaining quality control and efficiency (Lopez and Fan, 2009)
  • Digital aspects are helping the Zara to maintain global presence through website of company

Environmental

Legal

  • Consumers expects clothing and other accessories that are environmentally friendly (Sull and Turconi, 2008)
  • Lack of compliance with environmental regulations can cause legal and public relation issues in international market (Sheffi, 2005)
  • Zara needs to use environmentally friendly material
  • Zara needs to ensure that their products are not harming environment in any way
  • Compliance with legal regulations of international country is important for smooth functioning of business (Simons, 2013)
  • Fulfilment of legal obligations presents positive image of business

 

2.2 Industry analysis through Porter’s Framework

The industry analysis is mainly carried out through five forces of Porter model (Porter, 2001). The Overall investigation of Porter’s model can be seen in the figure 1 mentioned below (Rothaermel, 2015). 

Figure 1. Industry analysis of Zara

Porter (2001)

Substitute Products – Moderate

  • Buyers are available with number of substitutes such as; H&M, Mango, Uniqlo and number of other fashion brands (Rageh Ismail and Spinelli, 2012).
  • Buyers’ switching cost is low
  • Zara has generated significant loyalty among customers who are engaged in making repeated purchases (Rohwedder and Johnson, 2008).

Entry Barriers – High

  • There is huge fixed cost associated with fashion brands and economies of scale can help to generate sustainable level of profitability (Wigley, Moore and Birtwistle, 2005)
  • The expense of marketing and communication with customers is high that can make it difficult for new entrants to compete in fashion industry (Tokatli, 2008)
  • The fashion industry is characterized as long scale cycle and it takes almost six months from concept to store (Tungate, 2008)
  • Generation of brand equity is difficult for new entrants

Buyer’s Power – Moderate

  • Consumers are attracted towards trendy and high quality apparels and they are like to shop low quality products (Tungate, 2008)
  • In addition to quality, price is also an important factor when it comes to trendy clothes and accessories. Zara is positioned as low end clothing brand in European and Western nations.

Supplier’s Power – Moderate

  • Vertically integrated supply chain model of Zara is lowering reliance on suppliers (Wigley, Moore and Birtwistle, 2005)
  • Cost of fabric is low in almost all of nations
  • There is less pressure of labour unions on local cooperatives

Rivalry – High

  • High fixed cost and equipment requirements are offering high exit barriers and huge number of resources are grabbed in the inventory that gets out of fashion (Rohwedder and Johnson, 2008).
  • There are number of competitors in fashion industry that are exerting huge competitive threat on Zara

2.3 External factor matrix

 

Weights (0 to 1)

Ratings (1 to 5)

Opportunities

Middle class in Asia is increasing that can increase prospects of company’s sales

0.1

3

Distribution channels in less developed countries can help to low the cost of production and thus price can be reduced

0.2

4

Huge recognition of Zara at international level

0.3

5

Emergence through eco-friendly nature and environment oriented mission of Zara

0.05

5

Threats

Increasing competition

0.1

5

Production cost is rising

0.02

3

Sweatshops issues and legal charges

0.05

3

Fashion products are easily imitated

0.1

5

Taste and fashion changes rapidly leading to piling up of out dated products

0.08

3

 

Total = 1

 

 

2Internal Analysis of Zara

2.1Value Chain Analysis of Zara

Primary Activities

In bound logistics

Zara has an integrated supply chain model and logistics operations of the company are solely controlled by Zara (Tungate, 2008). There is minimum reliance on external suppliers.

Operations

Zara has well developed equipment and its time compressed model of production in enabling the company to process raw material and prepare a finished good in minimum time (Tokatli, 2008). Highly skilled and differentiated designer teams of Zara are adding positively in operations of company.

Out bound logistics

Zara operates through company-owned franchises in different locations across the world. In store inventory storage of Zara is smoothening the operations of company (Rohwedder and Johnson, 2008). Along with this, the company is also selling online through website, Zara.com

Marketing and Sales

Zara relies on in-house advertisement model and most of the marketing is carried out from stores (Hayes and Jones, 2006). However, the company has recently started investing in digital advertisement and it has maintained appearance on different social networking of platforms.

Services

The customer’s services are highly differentiated and they are treated with respect (Tokatli, 2008). Customers are considered as the core stakeholders of all operations of company.

Secondary Activities

Firm Infrastructure

Zara is managing all of activities in smooth manner including; financial activities, public relations, legal and strategic activities (Ghemawat, Nueno and Dailey, 2003).

Human resource management

Zara has highly qualified base of human resources who are recruited based on their KSAs, trained and retained by the company.

Procurement

No material is acquired from external sources

Technology

Zara has highly advanced and efficient technology

 

3.2 Competency analysis

Tangible Resources: In terms of financial resources, the parent company of Zara that is Inditex is earning significant revenue and it is supporting Zara. There are number of exclusive brands of Zara that are allowing the company to strengthen its position in comparison to competitors (Ghemawat, Nueno and Dailey, 2003). The integrated supply chain of Zara is also an important key resources of company that has helped to lower the pressure form different forces within industry (Fernie, Moore, Lawrie and Hallsworth, 1997). Zara has factories of production in almost all of operating regions and it has subcontracts that are reliably accomplishing sewing operations. The designer team and advanced machinery are also important tangible resource of Zara. The in store inventory model is also adding in strength of Zara in comparison to competitors.

Intangible resources: The brand image and recognition of Zara at international level is differentiating it from other retailing fashion brands. The luxury customers of Zara are loyal with the brand and this strong brand loyalty is adding in increasing market shares of Zara (Hayes and Jones, 2006). Zara has different trademarks across the world that are adding in intangible value of company.

Capabilities: Zara has created time compressed production processes that is the essence of fast fashion image of Zara and the company is able to able to produce product in just 2 weeks, in comparison to 6 month average of industry (Heine, 2010). Zara has its own designers, manufacturers and logistics that is making up the vertically integrated model of company and Zara is able to innovate rapidly based on its flexible structure.  The differentiated quality products of Zara are also adding in capabilities of the company and it is able to generate positive brand image by enhancing value for customers.

3.3 VRIO of Zara

The Summary of VRIO analysis of Zara can be viewed in the table 1. Zara is fast fashion brand and its resources are highly valuable, inimitable, and rare as well as organized enough that cannot be easily exploited by company for its long terms success (Hill, Jones and Schilling, 2014). The fast fashion responsiveness, highly skilled designer teams of the company, differentiated in-house inventory storage, lowest lead time and time compressed and efficient production process are adding in competitive strength of company (Jin and Cedrola, 2016).

Table 1. VRIO of Zara

Internal matrix of Zara

 

Weights (0 to 1)

Ratings (1 to 5)

Strengths

Strong brand recognition

0.05

3

Vertically integrated model

0.1

4

Time compressed production model, fast fashion brand

0.05

5

Minimum time from design to store

0.2

5

Brand equity

0.1

 

International recognition

0.1

 

Weaknesses

Limited reliance on advertising

0.2

 

Lack of outsourcing and increased pressure of labour wages

0.2

 

 

Total = 1

 

 

3Strategic Analysis of Zara

4.1 Corporate strategies

Zara is relying of single business strategy and it relies heavily on producing clothes which constitutes major proportion of company’s revenue (Jin and Cedrola, 2016). Zara has relied on vertical integration and it has become self-supplier which is not only saving cost but it is also offering greater flexibility and efficiency to company (Hines and McGowan, 2005). The international strategy of Zara is based on the glocal nature which is allowing the company to generate global efficiency through local adaptability of products.

4.2 Business level strategies

By analysing the business level strategy of Zara on strategy clock model, it has been highlighted that company is generating value based on high differentiation and low price (Ghemawat, Nueno and Dailey, 2003). It can be seen in the figure mentioned below that differentiation is lying on the higher end of perceived value to the consumers. The lead time of Zara is comparatively low and the company takes only 2 weeks from idea to store which is significantly low to the industry lead time that is six months. Thus, the reduced lead time of Zara, allows the company to provide innovative designs faster than the competitors (Hayes and Jones, 2006). Zara responds to any changes in fashion and preferences of consumers with greater speed and thus it stays ahead of competitors in satisfying the needs of consumers. In similar way, Zara is considered as low end fashion brand in most of countries and its prices are affordable for most of the consumers (Heine, 2010). Thus, the Zara is low in terms of price and high in terms of differentiation on the given strategy clock model and it has the ability to generate high value for its consumers.

Figure 2. Strategy clock model

Source; Freeman (2010)

4Identification of issues and challenges faced by Zara

5.1 Increasing cost of production

The cost of raw material is rising for the fashion retailing brands and producing countries are exerting pressure for increasing the amount of wages. For instance, the cost of cotton has increased significantly in China (Fernie, Moore, Lawrie and Hallsworth, 1997). It has been highlighted in the report on Inditex and H&M that cost of wool and nylon has also witnessed 20% increase over the past years and it is an important issue that should be considered by Zara (Fuchs, Prandelli, Schreier and Dahl, 2013).  In similar way, Zara has witnessed tighter labour market conditions, which is indicating that company needs to pay higher wages and thus, profit margins are squeezing (Ghemawat, Nueno and Dailey, 2003). These pressure might create a problem for Zara to continue with its current cost leadership strategy.

5.2 Cultural diversity and legal challenges in terms of transnational strategy

Zara has to deal with diversity of culture being operating in international market. In China, it has been accused for providing low quality clothing products and it has to bear huge fine (Christopher, Lowson and Peck, 2004). It was later claimed by Zara that company is maintaining similar quality across the world which is meeting the international quality standard, yet it was penalized. Along with this, an important challenge that is constantly haunting Zara is of illegal imitation in Asian countries (Covin and Slevin, 1989). The trend of selling products with tags of brand name retailing are common in these countries and it is affecting market share of company. It has been highlighted by the company that illegal imitation has lowered their brand value and closer replicas of Zara are highly demanded by consumers (Doherty, 2000). Based on this imitation, it is difficult for Zara to track the brand loyalty of consumers, specifically in Asian countries.

5.3 PR Issues in terms of transnational strategy

Zara has faced plenty of PR issues during its operations in the international country. The company has been accused for running sweatshops in the production facilities. As a result of this accusation, the factory of Zara in Brazil was closed (Alexander and de Lira e Silva, 2002).  In addition to it, another important PR issue faced by Zara is of discrimination among the Blacks and Whites. The Center for Popular Democracy in New York has carried out a survey on Zara and employees of company were interviews by the Center.  Most of the Black employees have reported that they are being discriminated and are considered as special order (core word used by Zara for suspicious individuals) by the company (Auty and Elliott, 1998). The report has also concluded that level of dissatisfaction was highly in darker skin employees and they have reported that they are not treated with respect and politeness. Likewise, the promotion opportunities were offered more to white employees in comparison to white employees. Zara was recognize as the company that is following approach of favouritism based on the race of employees and it has negatively affected image of company at international level (Burt and Sparks, 2002).

5Identification and evaluation of strategic options

5.1Ansoff Matrix

Market penetration: Zara is relying on fast fashion branding approach with an aim of capturing changing needs of consumers and delivering them a modified product to increase level of its sales. In comparison to competitors, such as H&M Zara has low reliance on advertisement which is considered as an important key for market penetration (Jin and Cedrola, 2016).

Market Development: Zara is internationalized brand and international expansion is constituting the main market development strategy of Zara. Zara has more than 200 teams of researchers that are continually moving across the wold and are recognizing the changing desires of consumers (Ko and Megehee, 2012).

Product Development: This strategy is developed well by Zara and the company is continually engaged in developing new products and selling to consumers who want to pursue high quality products at affordable prices (Moore, Fernie and Burt, 2000). The super business teams and in house skilled designers of company are highly beneficial for supporting product development strategy of Zara. Zara can consider to seek the possibilities of launching a separate range of products for luxurious customers.

Diversification: This strategy is highly risky and it is not considered by Zara as it involved developing new products for new markets (Tokatli, 2008). Yet, company can rely on its well develop technological capabilities in order to diversify its business.

6.2 Evaluation through SFA

From the above investigation, Zara can further its market penetration strategy through extensive marketing campaigns and it can develop markets in emerging international economies (Tokatli, 2008). In terms of product development it can introduce new range of products and finally, it can diversify its operations. Zara has significant tangible and intangible resources that are making these strategic options as suitable for Zara. Good relationship of Zara with different global players and its favourable reputation can support the strategic expansion (Wigley, Moore and Birtwistle, 2005). All of options are feasible for Zara in terms of financial, technological and research and development capabilities of company. The acceptability for diversification can be low given the involvement of high risk and fast fashion industry of company that demands instant return for any pursued strategic opportunity.

6.3 Implementation

There are number of prerequisites that are needed to be considered while implementing any strategic option, including; structure, culture, support from leadership, change management perspective, branding and marketing. The structure and culture of Zara are highly flexible and open for any new initiative. Members of organization are possessing welcoming attitude towards any changing situation and leadership of company has history of manging change with greater effectiveness (Tungate, 2008).  Zara needs to launch extensive branding and marketing campaign with an aim of increasing recognition of its new products or any diversified products. Along with this, in order to carry out internationalization in emerging economies, Zara needs to carry out extensive research of focal market with an aim of ensuring chances of success.

6Recommendations

It is recommended to Zara that it needs to carry out extensive internationalization in the market that are growing and income level of people is rising. The emerging economies are those who are capturing maximum population of the world such as India and China (BurgeSmani and Wheelwright, 2004). Thus, by targeting these economies as international expansion, the Zara can gain access to large market and thus market shares of company can rise. In similar way, the company can carry out a detailed research of its internal capabilities and competencies against external opportunities of producing an altogether different products that might help the company to enter into new market with different target audience (Christopher, 2000). For instance, by developing fitness products (running shoes, fitness suits etc.) it can attract health conscious consumers and can expand level of its operations further. Similarly, it can launch products for luxury customers who can be attracted with integrated differentiation focus strategy rather than integrated cost differentiation strategy.  Finally Zara needs to modify its in house advertising to the more comprehensive marketing that may help it to increase the level of sales further.

7Conclusion

Zara is recognized as the fast fashion retailing brand and it has significant appearance across the world. The Zara is facing huge competition from different competitors and environmental forces are mainly in favour of Zara, given that Zara has the potential to deal with environmental threats and competitive forces. Zara has unique set of resources that are differentiating it from competitors and they are inimitable and immobile across the industry. Vertically integrated model, time compressed production model, instore inventory model and unique designer teams are core resources of company that are offering it sustainable competitive advantage. Zara has single business corporate strategy and its vertical integration ad internationalization are constituting the main corporate strategic initiatives of the company. At business level, Zara is following low cost and differentiation strategies that are enabling the company to offer high value to consumers. Zara is recommended to expand its international operation further specifically across the emerging economies of the world, where people have rising income level and demand for fashion brands. Along with this, company is offered a suggestion to develop products other than clothing, with an aim of expanding its target market and scale of its operations.

 

 

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