Zara Strategy Essay Example
Zara Strategy Essay Example

Zara Strategy Essay Example

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  • Pages: 12 (3278 words)
  • Published: June 13, 2017
  • Type: Case Study
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Student(s)’s signature(s) Table of contents Introduction2 Challenges2 Industry competition3 Positioning and competitive advantage5 Blue Ocean Strategy6 Resource capacity8 Performance measurements9 Reputation risk11 Recommendation and conclusion11 Reference13 Introduction Inditex is one of the world's largest fashion retailers, present in 78 countries. It welcomes customers at its eight-store formats - Zara, Pull ; Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterque (Inditex Group (a), n. d).

Among these brand names, Zara is the most successful one that contributes a large portion to the total revenues of the group. Zara offers clothes and accessories to women, young girls, men and children. The fir

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st Zara shop was opened in 1975 in La Coruna, Spain and now Zara has a network of 1. 557 stores in upscale locations in the world's largest cities (Inditex Group (b), n. d). What makes Inditex and its Zara brand so successful is its unique business model that will be discussed more detailed in this paper. The distinct business model helps Zara differentiate itself from competitors and gain world – wide competitive advantage.

However, in the past few years, the company has faced a number of challenges, which arise from both internal and external environments. How Zara deals with present and future obstacles will be suggested in this paper. Challenges Zara has been facing a number of challenges stemming from both inside and outside environments that put its sustainable development at risk. There are three major weaknesses existing inside the company. Firstly, Inditex has 8 different store formats amon

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which Zara is the most successful fashion chain and contributes 64,6% of the Group’s revenue in 2010 (Inditex Group, 2010).

High proportion of the total revenue means that if Zara loses its competitive advantage and customer royalty, Inditex may go into internal meltdown. Therefore, every strategic decision as to Zara must be taken into careful consideration. Another problem to Zara is the issue of cannibalism. Zara’s extensive expansion strategy multiples the number of Zara stores that carry the same clothes in the same cities. The third weakness resulted from Zara business model is lack of economies of scale. They cannot gain the advantage of producing large quantities of goods with discounted cost, which leads to higher production cost for Zara.

In order to achieve a high rate of product turnover, Zara has a higher cost of research and development. Traditional apparel retailers do not experience extra costs like Zara (Craig et al, 2004). Challenges that Zara has to deal with not only arise from internal operation but also from the market outside. It has to face the tense competition from both local and global competitors such as H&M, United Colors of Benetton, and Gap. H&M is its closest competitor but more price-oriented. Thus, in the markets where customers are more price-conscious, Zara easily loses its market share to H&M.

Zara has its main market in Europe. However, in recent years, the euro zone economy has troubled and Greek debt crisis is severe, which makes customers more careful in spending now and in the future. Moreover, Zara has not achieved great success in the U. S. market. The U. S. market is quite different from the European market. Customers

are, in general, less fashionable and more price-conscious. Besides, Zara does not have a good supply chain strategy in the U. S. It delivered clothes from European distribution center by air to distribute in the U. S market. Figure 1: Zara SWOT analysis Industry competition To better understand how Zara developed its business strategy, we should look into the fashion industry competition via Porter’s five forces model. Rivalry among existing competitors: The apparel industry is highly competitive with a great number of both local and global competitors. As the market is mature, its growth is small. Accelerated growth and expansion to new markets are not easy goals to achieve. The barrier to get out of the industry is quite low for distributors, but high for producers.

Most fashion manufacturers moved their production base to low-cost countries like China as wage and raw materials in developed markets like Western Europe are high. Besides, there is no great discrepancy in terms of quality of products, so customers make their purchase choices based on price and brand recognition. Threat of new entrants: The threat of new competitors is medium. The local market (Spain) is not saturated. There is no barrier for distribution entrance, as it needs low initial cost to start up a shop; however, the entry barrier for production is high.

Substitutes: There are no substitutes, as clothes are basic commodity. Customer’s bargaining power: The bargaining power of customers is medium. There a huge number of customers, not well organized to defend their interests. Additionally, the purchase volume per customer is small. However, their taste and demand can vary rapidly due to changes in lifestyle, in demography, in culture,

and in technology. Supplier’s bargaining power: There is no negotiation power for suppliers as the number of suppliers is large (Garcia, 2010, pp. 47, 48) Figure 2: Zara five forces analysis

Positioning and competitive advantage As analyzed above, the fashion industry is highly competitive. The threat of new entrants and the bargaining power of customers are medium, and there is no threat of substitute products; however, the market growth rate is small and global competitors are strong. How Zara was successful and thrived in the global fashion industry relied on its distinct strategy. Vertical integration is a distinct feature of Zara’s business model. Zara works differently from traditional retailers who outsource all of its production.

Traditional retailers take advantage of lower cost production in developing countries and try to focus on marketing and distributing goods. In the meanwhile, Zara owns its in-house production to manufacture products that are more fashion-dependent. It does all production, distribution and marketing activities for these fashionable clothes. By owning in-house production, Zara gain a lot of flexibility as it can easily change designs, materials, amounts and frequency of new clothes. This allows Zara to provide its customers with updated products every two weeks.

Traditional retailers never achieve this flexibility, as they have to place production orders to oversea manufacturers at least 6 months in advance of the season (Gracia et al, 2004). Zara not only quickly updates customers with new designs but also respond rapidly to the demand of its consumer better than competitors. Zara’s quick response system is composed of human resources and information technology. Zara’s product development teams often attend local and global fashion fairs and exhibitions in order to translate

the latest trends of the season into their designs.

At the same time, Zara’s shop managers and market specialists are in charge of transmitting the sales record of products, the product life cycles, and the store trends to the designers in the headquarters. IT software that was specially designed for Zara’s business model facilitates this communication transfer. According to Gracia (2004), “Zara’s quick response communication strategy is effective due to its management and corporate culture: freedom, perfectionism, responsibility, rapidness, flexibility and respect to others”. The high product turnover creates a climate of scarcity and opportunity in Zara’s retail stores.

This makes customers come to Zara stores more frequently and quickly buy clothes that they like. Luis Blance and Inditex director commented that “We want our customers to understand that if they like something, they must buy it now, because it won’t be in the shops the following week” (Linguri, 2005). Zara’s scarcity and opportunity climate allows the company to sell more items at full price. This strategy enables Zara to reduce 15-20% of discount merchandise in a comparison with a traditional retailer. The fast-fashion strategy also helps Zara to mitigate “fashion faux pas” risk.

The company produces clothing in such small quantities that even if no customer is willing to buy, Zara can cut its losses quickly and shifts on to new designs (Tiplady, 2006). Its failure rate is only 1% compared to 10% among the industry. The centralized distribution facility gives Zara a competitive advantage by reducing the lead-time of their goods. Zara also has an advantage over its competitors due to its low advertising costs. Zara spent 0. 3% of sales on advertising compared to 3-4%

as other fashion retailers. Zara pays a great attention to shop windows where it displays the latest designs that decided by the headquarters.

In different markets around the world, customers experience with the same environment when they enter Zara stores that are predominantly white, modern and spacious, well – lit and walled with mirrors. Zara stores are located in busy, prestigious, city center shopping streets or upscale shopping malls. All strategies implemented by Zara have a fundamental pillar that is CUSTOMER. For Zara, “the customer is the origin and driving force behind all its activity”. As mentioned above, customers’ demands are heard in stores and transmitted to 200 designers.

Their wishes will be transferred into the latest trends in fashion twice a week. Zara not only focuses on fast – fashion but also on customers’ shopping experience. Nice stores near city centers or in big shopping malls brings customers the most comfortable shopping environment. Besides, Inditex bears in mind in all phases of its activity another key aspect of its business as the environment or corporate social responsibility (CSR) (Inditex Group, 2010). Blue Ocean Strategy Let compare Zara strategy with traditional apparel retailer’s strategy to better understand why Zara has been successful.

Eliminate: Zara eliminates bottom-end market that offers extremely low prices. Reduce: Zara reduces advertising cost that helps lower product price. It also reduces outsourcing and lead-time of products. Raise: Zara increases the shopping convenience by store locations in busy streets and big shopping malls, and by selection convenience (in one store, there are different segments for women, men, young girls and children). Besides, Zara made effort to increase social network where customers can exchange information strategy.

Create: Zara creates fast-fashion, new designs every two weeks, a climate of scarcity and opportunity.

By the ways of eliminate, reduce, raise and create, Zara has differentiated itself from traditional retailers and gained a lot of success so far. Figure 3: Zara: Eliminate, Reduce, Raise, Create Figure 4: Zara Blue Ocean Strategy Resource Capacity In order to support its strategy, Zara has made a lot of efforts to make full use of its resources. All resources have to be used in an efficient way that aligns with the company’s strategy. Figure 5: Porter’s Value Chain Primary activities Inbound logistics: Zara has its own in-house production in Spain. Outbound logistics: It has two distribution centers in Spain.

Operations: Zara chooses materials very carefully to make them totally fit with the designs and implements quality control of all products before moving them to distribution centers. Marketing and Sales: Zara spent on advertising less than its competitors, but it does not mean that it is Zara’s weakness. It pays more attention to shop windows of stores and relies on “word of mouth” marketing tool. Services: Sales team training plays an important role in service strategy of Zara as it always has a desire to offer customers satisfying shopping experience.

Also, customers can change merchandise purchased within 3 days. Moreover, they can order goods online and receive them at home. Supporting activities The support activities assist the primary activities in helping Zara achieve its competitive advantage. Technology development: The use of technology helps Zara obtain a competitive advantage within the organization. Information technology is used in communicating store managers and market specialists with designers, in research and development to develop new products,

and via the use of the Internet so customers have access to online facilities.

Human resource management: Zara has a flat hierarchy that makes managers and employees get on well with each other. Employees are encouraged to develop their own competence. Zara’s quick response communication strategy is effective thanks for its management and corporate culture: freedom, perfectionism, responsibility, rapidness, flexibility and respect to others. Overall, it is clear that Zara built a strong primary and supporting activities to help gain the organization a superior competitive advantage. Performance measurements

The integration of management system plays an important role in the performance of every organization, especially when the entity operates in turbulent and complex conditions. Performance management allows companies to identify, interpret and solve the problems related to specific performance measurements. To be able to sustain its competitive position, Zara measures its performance in terms of 4 major perspectives: customers, employees, shareholders and internal business processes. Figure 6: Zara performance measurements

According to Inditex Annual Report 2010, “the customer is the leading figure in the Group’s business model and for this reason is the one who opens the commitment block in the Inditex Annual Report”. Therefore, Zara has made a lot of efforts to discover, understand, stress on customers’ needs. In order to evaluate what Zara has done to its customers so far, we assess three common measures in this perspective including customer satisfaction, customer loyalty and customer retention. As mentioned above, customers’ wishes heard in stores will be transferred into their favorite designs. They are always updated with the latest trends.

Moreover, Zara creates a completely comfortable environment for customers to do shopping. Stores are nice and well lit. Also,

they can receive great support from helpful staff. Maintaining customer satisfaction helps Zara build customer loyalty and customer retention. In terms of employees, Inditex pays a great of attention to improve their employees’ sales skills and create for them a friendly working environment. According to Inditex Annual Report 2010, “more than 80% of the Inditex training budget targets store personnel and customer services and is one of the areas that is most emphasized on training days”.

At Zara, employees can share their creative ideas on how to improve sales and they can enjoy freedom, fun, respects thanks for Zara’s flat hierarchy. As for shareholders, Zara stress the two main aspects including “transparency and maintenance of communication channels guaranteeing that all of its current and potential shareholders have clear, complete, homogeneous and simultaneous information, which is sufficient to value the management of the company and its economic and financial results” (Inditex, 2010).

Zara set up Shareholder’s Office where individual shareholders can visit to request detailed information about all information about the company’s financial records and future strategies. Besides, the corporate web page includes all the relevant information about the company’s business activities that investors and shareholders can easily access. They can check daily and historical share pricing, annual public reports since 1998, financial information registered in the Spanish National Securities Market Commission (CNMV) via Periodic Public Information and the financial calendar, among others.

In 2010, the company’s website received 502,430 visits. Zara also has department of relationships with shareholders and investors, which provides relevant information on the performance of the business for all the shareholders and the financial community and the media. This relevant information includes the Balance Sheet,

P&L Account and Management Report (Inditex, 2010). As regards the internal business process perspective, Zara focuses on its value chain operations and innovation processes. Common measures used for this perspective are expenditures on research and development, new product sales, lead-time, efficiency and productivity.

In case of Zara, the company spent a lot of time and money on research and development to continuously update customers with new designs. It also recorded rapid new product sales, especially in Europe. Moreover, Zara is also famous for its short lead-time. Undoubtedly, the internal business process of Zara, which runs efficiently, helps Zara maintain its distinct strategy. Reputation risk Zara has a strong reputation that is built on a large number of factors such as fast-fashion, customer satisfaction, trend and designs among others.

Realizing that it is not easy to maintain reputation, Zara has made great efforts as mentioned in value chain and performance measurement parts to protect and flourish its fame. However, Zara has encountered some severe problems, especially in emerging markets where labour is not well treated. For example, a subcontractor of Zara in Brazil let its employees work in unsafe conditions. Zara said that the subcontractor did it without their knowledge and requested them to compensate for workers. Zara is also committed to fostering the working condition in the Brazilian textile industry (BBC News, 2011).

In this case, if Zara did not control well their suppliers, its reputation would be harmed. The majority of customers do not want to buy products made by suppliers who abuse children or vulnerable people. Thus, to protect its reputation, Zara has to take a lot of elements into account. Some elements are obvious and

easy to detect; others are easily out of control like subcontractors’ actions. Recommendation and conclusion Undoubtedly, Zara has distinct business model and takes coherent actions to achieve its objectives. Nevertheless, Zara faces several challenges that keep its management board awake at night.

These challenges put Zara’s sustainable development at risk. One of the best ways for Zara to maintain its sustainable growth is to seek new opportunities in the apparel market. The fashion industry in emerging markets is still growing and people are more willing to pay for high quality products at reasonable price like Zara. Besides, although the U. S. market is highly competitive, there is still opportunity for Zara to boost its sales. Zara should build up a central distribution center in the Americans to minimize logistics in order to deliver goods in a faster manner and reduce prices.

This distribution centre can be allocated in Brazil or Mexico to serve logistics for the whole continent. Another market opportunity for Zara is to invest in online retailing. That form of direct marketing will reach more consumers faster and easier. Customers can easily update new designs on the website and purchase goods which can be picked up at stores or sent at home. Online retailing is the trend when many businessmen and women have little time to do shopping but want to be fashionable. This type of customers is one of the major targets of Zara.

Last but not least, Zara should offer specialized products for different locations within the same city. In some cities the company has the issue of cannibalization, as there are too many Zara stores that carry the same product within one city.

By differentiating its product from location to location, Zara can shopper visits. When shoppers would hear about new or different products by word of mouth or advertising that another Zara store is carrying, they would be willing to pay a visit. By that way, sales will not be cannibalized (Inditex, 2004).

All in all, Zara has the potential for growth in the future thanks for its competitive advantage that is created by vertical integration of product process. To customers, Zara is the place where they can buy trendy and well-priced new fashion every two weeks. Besides, for a long time, the company managed to keep its operating income elevated and strong reputation. Zara has faced several challenges; however, with its innovation, Zara can overcome obstacles and stay successful in the future.

Reference

  1. BBC News, 2011. Fashion chain Zara acts on Brazil sweatshop conditions. Available at http://www. bc. co. uk/news/world-latin-america-14570564, Accessed 16th Dec 2011
  2. Craig, A. , Jones, C. ,& Nieto, M, 2004. Zara: fashion follower, industry leader. Philadelphia University.
  3. Gracia, J, 2010. Benetton and Zara information systems: comparative analysis. Inditex Group, 2010. Annual report. Available at http://www. inditex. com/en/shareholders_and_investors/investor_relations/annual_reports, Accessed 12th Dec 2011
  4. Inditex Group (a), n. d. Our group. Available at http://www. inditex. com/en/who_we_are/our_group, Accessed 12th Dec 2011 Inditex Group (b), n. d. Zara. Available at
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