Strategic Management for Zara Essay Example

and EU markets with cheap products due to the end of a world trade agreement. If further restraining action is not imposed Zara may face further price competition as other retailers outsource more of their production to china.

The removal of protectionist trade barriers in China has allowed Zara to carry out its expansion strategy into Asia easily. Zara has reached an agreement with Spain’s government, to standardise women’s clothing. A number of major fashion designers have agreed in order to promote healthy body images, promising not to use clothes smaller than a size 38 which is a UK 10 in window displays. Furthermore, the government legislation law on corporation tax which is 28% at national level. Also involves the planning regulations for building and buying new outlets which requires retail spaces and public spending decisions. www. inditex. com- Annual Report/ W. P Kroll. P 22). Economic forces also have a significant impact on business operations. It focuses on the impact of growth or decline in gross national product and increases or decreases in interest rates, inflation, and the value of the pound. The UK retail market is set to increase in size by 15% over the next five years, taking its value to just over 312bn. However this represents a slowing down of annual growth and with operating costs and the cost of credit set to rise, The retail sector faces challenging times.

Almost 8% of the Gross Domestic Product (GDP) of the UK is generated by the retail sector. But the global economic downturn, tight credit saw the country slide into recession in the back half of 2008, which resulted in

one of the lowest quarter-on-quarter growth rates since the last recession in the early 90s. This resulted with people with less spending power which effected on the sales in retail. But since the middle of 2008, people started to save/pay off debts more and spend less even. Those circumstances might benefit the cheap fashion sector.

Less money will be spend on designer clothes as well as accessorises. These changed present both opportunities and threats or constraints to strategic managers. The gross national product (GNP) of economic growth for the retail industry has a moderate and consistent growth GNP generally produces a healthy economy in which business find increasing, demand for their outputs because of raising consumer expenditure. Currency exchange rates, however, can also be affected by international economic conditions. The increase in interest rates and unemployment has ade a steady retail sales growth. Unemployment has climbed consistently since mid-2008, reaching 7. 8% by 2009 and it could rise to over 10% in 2010. Youth unemployment (18-24-year-olds) exceeded 17% by the second quarter of 2009 and in the short term will continue trending upwards . There has been an increase in mortgage payments as the Bank of England has recently increased the base rate to 5. 25%. Most importantly this has an effect on cash outflow, meaning consumers have less to spend on clothes this may leave to a decrease in sales for retailer.

The value for the retailing industry has increased, leading to falling prices; die to the immense competition from low prices producers and retailers. Furthermore, taxes will rise in 2010 and, although the Bank of England has indicated that it seems

most unlikely that the interest rate will remain at the current level of 0. 5% for the whole of next year. When the rise does come it could be quite sharp and sudden. (http://www. prospects. ac. uk/cms/ShowPage/Home_page/Explore_job_sectors/Retail/overview/p! egiLLL) Social forces include traditional, values, societal trends, consumer psychology, and a society’s expectation of business.

Societal trends include demographics, shifts in values ad culture, change in lifestyle and distribution of income. There are new and more modern designs being produced as our society is becoming more fashion conscious and will walk away instantly if products are not up to their expectations. Retailers today are very quick in adapting the latest high street fashion. Although shops such as Zara incorporate the high degree of vertical integration. Its house design team, tightly controlled factories and distribution network in Spain produce 20,000 styles; it transfers the production to low cost countries.

Most retailers tries to cater its clothes to an older market as well trying to make them look younger than their age which impacts their design and cut of clothing. There has been a shift in gender and it’s seen that men tend to take more care of themselves and are more trendy and have a high disposable income. This is due to the increasing tolerance of a gay lifestyle which retailers today try to market particularly well and sales of males clothing have increase. The retail sector of clothing has to compete with the fast changing volatile market and be able to satisfy the needs and wants of the customers in the future as well. www. emeraldinsight. com-The Role of Market Orientation on Company Performances through

the Development of Sustainable competitive advantage) Technological forces include scientific improvements and innovation that provide opportunities or threats for businesses. The rate of technological change varies considerably from one industry to another. Retailers today use advances in computer technology to perform their traditional tasks at lower costs and higher levels of customer satisfaction. Improved IT systems that help store managers to support them in their decision making process.

Up to date technology use is very important within Zara due to its vertically integrated production and distribution process. The software used by Zara means that the time that an order at the distribution centre to deliver its good in the store will take an average of 24 hours for its EU stores and 48 hours for American stores. Using technology such as optical devices means 60,000 items are stored and distributed in an hour. Many retailers have established an Internet platform where recent trends can be purchased online.

This technology will become even more important in the future when costumers through out the world get more accustomed to this technology. Zara’s website which contains a catalogue; the products that are advertised are very limited. Zara has a high turnaround of products and cannot possible make online shopping visible. For future growth retailers can improve on online websites and make more of their product available online. Zara can also try to be cost effective as Zara’s fast fashion of new products increases the costs of constant change of production techniques to have different clothing manufacturing techniques.

Environmental conditions, due to inferior quality and fashion trends, most retail clothes are worn only one season and

then disposed, which in very general terms causes problems for the environment. The textile industries (suppliers) have been the subject of continuous ethnical and environmental discussions. Zara is respected as one of the most responsible Fashion manufacturers and gives a lot of attention to sustainable management of all its operations. Retailers should consider recycling of materials and shopping bags to be environmental friendly. (W. P. Kroll P. 29)

Legal aspect is plagiarism in the fashion industry, has become a huge issue. Trends are often copied and cheaply as well as illegally sold in the street. Global expansion bears problems in terms of legal securities and political stability. Whereas the European market has a well working trade and legal system facilitating business operations in member countries, other countries globally will not offer the same securities. Especially in communistic countries the thread of losing a private run company to the local government is very real. (W. P. Kroll P. 22) Zara’s Current Position within the Competitive Marketplace

Hennes & Mauritz (H&M) is the closest competitor of Zara. Although H&M differs from Zara because they outsource all their production, spend more money on advertising, and is price oriented. Similarities that Zara and H&M is that they are both European based companies, are fashion forward at lower price retailer and have a strong international expansion strategy. There financial status is comparable to their net operating revenues are closer to each. Porters five forces model identifies five basic forces that can act on the organisation, for instance Zara.

The objective of such an analysis is to investigate how the organisation needs to form its strategy in order

to develop opportunities in its environment and protect itself against competition and other threats, explained the in the diagram below. The bargaining power of suppliers, any increase in price would hit value added unless the organisation was able to raise its own prices to compensation. The threat of potential new entrants for instance Gap and H &M which are the main competitors of Zara, new entrants come into a market when the profit margins are attractive and the barriers to entry are low.

This would be affected by economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages, independent of scale and government policy. The extent of competitive rivalry, some markets are more competitive than others. Higher competitive rivalry may occur when competitors are roughly of equal size and one competitor decides to gain share over the others for instance H&M which is the strongest competitor. (Lynch. R P. 97)

The current position within the competitive market place both in the EU and abroad in the 29 countries, the European switchover into Euros has created the potential threat. If the Euro becomes stronger against the American dollar, than production costs will increase for European producers. The Euro switch over will increase Zara’s cost of production. The cost increase will be carried over to the consumer with higher prices. This threat of the Euro may also create a threat of less sales because clothing prices will be too high for Zara customer.

Zara will suffer from a high euro and the threat of competition offering more inexpensive products. (www. philau. edu/SBA/News/ZaraReport. pdf) The BCG matrix method is based

on the product lifestyle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. The diagram below illustrates that placing products in the 4 categories in a portfolio of a company for instance star, cash cow, dogs and question marks. Zara would fit into the star which indicates that it is able to sustain high growth and market share.

Analysing Inditex’s financial situation as its part of Zara it shows that it had progressed over the years the sales in 2004 were 5569 euros whereas in 2008 it has gone up to 10407 Euros. The net profit in 2004 was 639 Euros and in 2008 it raised up to 1253 Euros. Inditex’s 1,284 stores and a higher number of employees per store. Inditex’s operating profits per store is 54. 8% , Inditex is building more stores based on projections and anticipates future value. As long as Inditex’s profit margin is high, they will be able to have sustainable growth because they will have the money to invest and pay expenses. http://www. valuebasedmanagement. net/methods_bcgmatrix. html The product life cycle, analysis the sales over the period of time, as sales are often quite low to begin with and increase quite slowly. Zara are still at their growth stage where the are still progress and expanding as a company their sales have grown significantly in the pass few years. Strategic options and Recommendations for Zara There are three main areas of focus, (1) product and markets, (2) generic strategy and scope and (3) growth and development option.

The three generic competitive strategies are cost leadership, differentiation

and focus. According to the theory every business needs to choose one of these in order to compete in the market place and gain sustainable competitive advantage. Zara has adopted a focus strategy when it focuses on a specific niche in the market place and develops it competitive advantage by offering products especially for that niche, Focused strategy selects a segment or group of segments such as Zara looks into young professional women, men and children’s in the industry. It tailors its strategy to serve them to the exclusion of others.

By optimising its strategy for the targets, the focuser seeks to achieve a competitive advantage in its target segments. Zara can undertake this process either by using a cost leadership approach or by differentiation. In a cost focus approach a firm seeks a cost advantage in its target segment. In a differentiation focus approach a firm seeks differentiation in its target segment. By targeting a small, specialised group of buys for instance young professional working women it should be possible to earn higher than average profit, by charging a premium price for exceptional quality. (Lynch. R, P 306)

The Ansoff Growth matrix is a tool that helps businesses decides their product and market growth strategy. The diagram below suggest the strategies that Zara has adopted which is market penetration which is the name given to a growth strategy where the business focuses on selling existing products into existing markets. Their main objective is to maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies and promoting by frequent refurbishing of store

layout, as well as the creation of a common window display for Zara’s global stores.

It will secure dominance of growth market. Restructure a mature market by driving out competitors, supported by a pricing strategy designed to make the market unattractive for competitors. Increase usage by existing customers – for example by introducing loyalty schemes. A market penetration marketing strategy is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research. Zara could adopt the product development is the name given to a growth strategy where a business aims to introduce new products into existing markets.

This strategy may require the development of new competencies and requires the business to develop modified and new fashion lines which can appeal to existing markets. [pic] (http://tutor2u. net/business/strategy/ansoff_matrix. htm) Recommendations for Zara as a company, there have been reports suggesting that Gap may put itself up for sale. Inditex, which already has 24 Zara stores across the US would benefit from gaining easy and immediate entry into the US. Inditex owns another store called Zara Home within its group. There is opportunity for this to be extended internationally, incorporating it within Zara stores.

Zara has one main production base in Spain which means that it offset’s costs through charging more for example Zara products in US are 65% compared to products made in Spain, could possibly consider to invest opening another production line. Zara also has slow servicing for its customers which leads into long queues within the stores, gets frustrating for those purchasing the clothes, looking into satisfying

the customers by opening more payment counters. Their strategy of producing a huge variety in small quantities may also burden them with a lot of costs.

Vertical integration often leads to diseconomies of scale, which means that they cannot gain the advantage of producing large quantities of good for a discounted rate. The should consider about bulk buying so they could benefit from economies of scale and save on costs and to be cost effective. Zara’s fast fashion of new products increase costs as well as high research and development costs; create costs due to constant change over of production techniques to have different clothing manufacturing techniques, which again leads to increased costs.

Bibliography

1. Books Lynch. R (2009) 5th edition, FT Prentice Hall- Strategic Management J. L. Thompson (1997) University of Huddersfield- Strategic Management - Awareness and Change W. P. Kroll (1994) Text and Cases second edition- Strategic Management Bowman. C (1990) The Essence of Strategic Management Websites
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