and company’s background

Every business concern operating at local or international level is affected by different types of factors. The factors can be internal as well as external and can be controllable and uncontrollable, respectively. Companies can focus on effective strategic management techniques to operate in highly competitive contemporary business environment (Worthington and Britton, 2009). In this report, the strategic analysis of Zara will be done. Zara is considered to be one of the biggest and famous fast-fashion companies, operating at international level and having roots in Spain. Zara was opened by Amancio Ortega in 1975 in La Coruña, a famous city of Spain. The company started expanding its operations in other regions and its success was unstoppable. In 1990, Zara became successful in opening stores in different regions including Paris, UK, USA as well as Portugal and other European countries. The company increased its product line in 2003 by introducing house wares and it established first in 2007 for selling Home products. Currently, Zara has 1830 stores in more than 80 countries, around the globe (Zara, 2017).  Zara is famous brand of Inditex and produces more than 64 percent of Inditex’s revenue. The company has built positive image in local as well as international markets by focusing on high fashion and stylish clothing for men, women and children. One of the plus points of Zara is its unique production system. Zara has built a vertical integration model for production. In addition, the main components of model include marketing, sales as well as design and just-in-time (JIT) production (The Economist, 2012). Due to vertical integration, company has become capable to produce products and meet the demands of customers in a short period of time.  Zara is able to meet consumer demands within a relatively short timeframe. However, different external and internal factors have an impact on the working of Zara. These are discussed in detail in the next sections of report.

 

 

                                        

 

2. Assessing the external environment of Zara

The external business environment and factors can be assessed with the help of various strategic tools and techniques. PESTLE and Porter’s five forces model is selected for external environment analysis of Zara. As per London Business School (2008) the fast fashion trend in clothing sector is changed in past few years due to emergence of various famous companies including Topshop, H&M as well as Zara.  

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2.1. PESTLE analysis for Zara

PESTLE analysis comprise of 6 factors that can have an impact on every business concern, operating in different corners of world (Kotler, 2009). In addition, the political, legal, social as well as economic, environmental and technological factors can influence the working of companies. The PESTLE factors for Zara are discussed as under:

2.1.1. Political and legal factors

According to Suttle (2011), there are different political aspects that should be taken under consideration by the clothing and apparel producing companies. In addition, these aspects include the rights of labours and laws regarding child labour as well as laws related with safe working environment, workers’ safety and employment rights. Likewise, Zara is also affected by the laws and regulations prevailing in different countries and has to perform operations as per local legal framework. Another important political factor includes import and export taxes imposed by local and international governments. These factors highly influence the Zara’s operations but it effectively handles them through efficient management.

2.1.2. Economic Factors

Economic conditions and factors including purchasing power, inflation rate, GDP as well as currency fluctuations and product demand (Best, 2012). The apparel and clothing industry can be influenced by economic recession because people do not want to spend money on luxurious clothing in such time period. Zara is influenced by economic factors in local market and international markets and change pricing strategies as per condition of economy.

 

2.1.3. Social factors

The demand of stylish clothing and related items differ as per demographic and social attributes of customers. For example, the aging people may want the loose-fitting dresses but youngster can look for mini shots and tight jeans (Keane & te Velde, 2008).  Furthermore, the customers are becoming highly informed and they make rational purchasing decisions. According to Jasuja (2012) the customers in UK have started spending on healthcare, education as well as travelling and other facilities rather than branded clothing. Zara is attracting the customers towards its stylish clothing which compel customers to buy them. But, it is quite challenging task for Zara to understand the needs of customers having different cultural backgrounds and societal beliefs.

2.1.4. Technological factors

It was mentioned by Ziv (2010) that in clothing and apparel sector, human intelligence is widely used rather than computers and relevant technologies for production of products.  However, different information and communication technologies are used by companies to communicate with customers and to understand their needs. Zara has online existence and it focuses on different technologies including internet, website as well as social media to communicate with customers and sell products online. As per Sorescu et al., (2011), the main success element in retailing is embedded in the new technologies as they do not let the product become obsolete. Zara is focusing on advanced technology and becoming successful in international markets.

 

2.1.5. Environmental factors

According to Bliemel (2001) companies operating at international level is considering sustainability a highly important success factor. In addition, they have to work as per environmental laws and regulations prevailing in the country and are not allowed to harm the environment, planet or people. Likewise, Zara has to comply with different environment laws present in various countries to compete with the strong competitors. Zara’s main competitors including Nike, H&M as well as Marks & Spencer are having developed sustainability strategies to efficiently conduct its operations (Kaye, 2011). Zara consider the environment important and use non-harmful production processes and raw material.

2.2. Porter’s five forces model

Porter proposed five forces model for assessing the external environment for a particular type of industry. This can be used to assess the factors impacting Zara. According to London Business School (2008) the fast fashion industry is built on innovation as well as creativity and the companies adapt to existing and future trends as per shifts in demands of customers. The Porter’s analysis for Zara is as under:

2.2.1. Threat of New Entrants

The fast fashion industry is very vast and it is not easy for the new players to enter the market. According to Porter (2008) companies in the fashion industries have to bear different types of costs including marketing, manufacturing as well as distribution costs. These costs cannot be bear by small players and they find it quite challenging to meet the production and related expenses. Thus, threat of new entrant for Zara is low.

2.2.2. Bargaining Power of Suppliers

The bargaining power of suppliers in case of fashion clothing sector is low for the reason that there are a lot of suppliers that can provide raw material to the clothing companies. For example, inexpensive raw material can be purchased by western companies from countries like India, China and Pakistan. In addition, it is not easy for the suppliers to get competitive edge over others for raw material like cloth and cotton. Thus, they have low bargaining power and this is a plus point for Zara because it can purchase raw material at cheap prices.

 

 

2.2.3. Bargaining Power of Buyers

In case of clothing industry, the bargaining power of buyers is between moderate and high. The customers can switch the clothing brand because of low switching costs (Porter, 2008).  Zara attracts the customers towards its innovative and stylish products to make them loyal. However, Zara’s competitors can attract the customers by producing stylish clothing. . 

2.2.4. Threat of Substitutes  

The threat of substitution in clothing sector is high because there are large numbers of clothing and fashion items providers. These providers include luxurious retailers as well as departmental stores along with discount fashion products retailers. The customers can easily switch from expensive clothing of Zara to the brand providing high quality products at lower prices.

2.2.5. Rivalry among Competitors

According to Mihm (2010) the competition among rival brands in fast fashion apparel industry is high because there are large numbers of retailers that have selected the fast-fashion model. In addition, various clothing brands are listed companies in the international markets and they cannot easily exit the international markets. Likewise, Zara is operating at global level and it has to face competition from local, international and global fashion clothing companies. Zara is facing intense competition and attained strong position in the market due to differentiation strategy.

 

 

 

 

 

 

 

3. Assessing internal environment of Zara

The internal business environment of company can be assessed by identifying and examining the significance of resources, competencies, skills as well as capabilities of employees and management (Lynch, 2006). The internal environment of Zara is assessed as under:

3.1. Competency framework

The competencies of Zara can be assessed through:

• Tangible resources

Zara has a strong financial position in international market, is being supported by Inditex (parent company of Zara) and earn huge revenues (Zara, 2017).  Zara has many different trademarks worldwide.  As per Jimenez (2014) Zara has overwhelmed Louboutin in French court in recent years for the trademark on red soles. This enabled the company to improve its sales from shoe manufacturing. In addition, the logos as well as highly fashionable brands are tangible resources that are useful for Zara in building and retaining strong brand personality.

• Intangible resources

The intangible resources of Zara include its designer’s team of more than 200 designers that regularly revise information related with fashion trends and styles.  Moreover, the highly proficient ITC systems are used by Zara to communicate and build relationships with customers, suppliers as well as designers and other stakeholders (Mihm, 2010). In addition, the exclusive in-store inventory model adopted by Zara is its competitive edge on rivals and the quick inventory turnover also brings a sense of sophistication to consumers (Caro and Gallien, 2010).

• Capabilities

The time-compressed manufacturing procedure adopted by Zara is its core capability. New designs are produced and offered to customers in only 4 weeks (Mihm, 2010). According to Keane and te Velde (2008), the vertical integration model used by Zara is its key strength in which it design and produce products with the help of its own designers, producers as well as logistics. In addition, the cost-effective marketing strategies are used by Zara as it keeps advertisement to a minimum level as compared with competitors. But, it has maintained strong brand image in the market.

3.2. VIRO model for Zara

VIRO model is useful method to assess the core competencies of business concern on the basis of their value, rarity as well as inimitability and organization (Best, 2012). The VIRO model for Zara is given in the figure below:

VIRO model for Zara (Source: Best, 2012)

The above figure shows that the strong team of human resources is highly valuable as well as organized competency of Zara and new entrant cannot imitate it without a specific amount of capital and funds. However, one of the main Zara’s rival brands named H&M has also an efficient designer team that is able to produce highly stylish and quality fashion products for males, females and children (H&M, 2012). The highly responsive designer team of Zara is rare. Therefore, the quick, efficient and highly responsive and strong designer team of Zara is its core competency. Furthermore, the VIRO analysis shows that the unique model of in-store inventory of Zara is highly valuable, organized as well as rare and difficult to imitate by rivals.  In addition, the time-compressed manufacturing procedure of Zara is it’s another main core competency.

3.3. Value chain analysis of Zara

According to Haberberg and Rieple (2008) value chain analysis is a strategic process used to define the company’s internal strength in the form of primary and secondary activities. The value chain for Zara is as under:

Activities	Details
1. Primary activities
Inbound logistics	Self-sufficient inbound logistics Company receives dyed cloth from parent company No third party included
Operations	No outsourcing is involved and products are produced by company itself
Marketing and sales	In-store advertising model is used by company for selling and marketing the products to customers

 

Services	Zara is not focusing on the service on items sold to customers
Outbound logistics	The products are marketed to the customers directly by the company
2. Supporting activities
Infrastructure	Zara has highly developed infrastructure for carrying out business activities
HR	Human resource is competent, skilled and qualified
Purchasing	The amount of purchasing required by company is reduced due to vertical integration
Technology	Zara is using advanced and latest technology

 

4. Corporate and business strategy of Zara

4.1. Business Level Strategy – Cost Leadership

Zara emulates modern haute couture designs as well as similar clothes by using inexpensive fabric for achieving low costs and maintaining high fashion (Ferdows et al., 2005). Moreover, Zara only manufactures small amounts to sell for every latest design.  In this way, Zara can reduce losses more rapidly when a particular design becomes unpopular. Moreover, this can also reduce inventory costs in effective manner.

4.2. Corporate Level Strategy – Single Business

Above 95% sales revenue of Zara is generated from clothing business. Though Zara is also engaged in home furnishing named as ‘Zara Home’ but this business just adds 2.3% revenue to the total income (Zara, 2017).

4.3. International Strategies – Transnational Strategy

Zara desires to attain both social responsiveness and worldwide efficiency. Zara has better flexibility with respect to its products’ mobility in comparison to its competitors as a result of vertical integration (The Economist, 2012). Zara directly conveys customer feedback to its huge design team in Spain with the intention of responding to the local consumer preference changes. This transmission is facilitated by the information technology (Hume, 2011). Format, governance and activities are the 3 key elements of Retail Business Model. These factors assist retailers to strategically think about the maximum focus of business model novelty (Sorescu et al., 2011, p. 13). All these elements are vital for the success of Zara in the multinational market. For instance, activities’ format may fluctuate on the basis of technological advancement within industry as well as cultural connotations of activities within a certain country. Quality structures and governance are enormously different globally; therefore Zara should do a comprehensive strategic examination before entering into new market.

5. Issues and challenges faced by Zara

5.1. Rising Production Costs

Presently, fashion retailers are experiencing the stress of higher pay demands and rapidly-increasing raw material expenses in producing nations. In Pakistan and China, the prices of cotton have risen to the highest level in 2011. According to Bernstein Global Wealth Management (2011) the costs of other key raw materials such as spandex, wool, and nylon have raised above 20% per annum for past two years. Due to the rise in labour costs, the turnover margins have further decreased in key producing nations. Moreover, pays have also increased due to tough conditions of labour market. According to Bernstein Global Wealth Management (2011), the Chinese apparel producers were pressurized to raise wages just to retain their personnel. Bangladesh is regarded as the cheapest country with respect to its labour costs. But recently, the government of Bangladesh has decided to increase the minimum wage of industry from $25 to $44 for each month (Bernstein Global Wealth Management, 2011). Profit margin of Zara is currently under pressure because of the increasing cost of raw material and labour. Therefore, Zara has to adopt cost-leadership strategy for surviving in rapidly-growing industry (Sorescu et al., 2011).

5.2. Transnational Strategy - Cultural Implications

Market share and product awareness of Zara can be increased by expanding its business worldwide. Though, some challenges also exist. Different rules and unclear regulations have made the compliance with domestic rules more difficult. For instance, the Chinese government first examine the business of foreign companies before accepting them in their country. In the previous year, consumer watchdog of China assailed Zara for bad quality of fabric. Moreover, China also attacked foreign entities such as Carrefour and McDonalds for their minor trail offs (The Economist, 2012). Establishing crucial relations with the local stakeholders is extremely significant. Conversely, the illegitimate market for fake brand-name attire in Asia, the products with dubious labels of popular brands, is ordinary challenge that the brand-name retailers face. Additionally, unlawful markets have risen in past years. Both high and low quality imitations have significantly reduced value of brand because there is least preference in possessing real brands for extravagant customers if they are asked whether that product is a replica (Wilke and Zaichkowsky, 2005). Moreover, with respect to cultural context, they also recommended that Chinese people have the nature of copying and imitating form for learning and expressing artistic gratitude. It may recommend an expansion of businesses which aim to imitate brand-name or famous designs. Brand loyalty of consumer can be complex to locate in China for making the matters poorer. According to Mintzberg (2008), even the leading chain in Shanghai does not have more than 25% loyalty levels (p. 79). Establishing higher customer loyalty will be a great challenge for foreign chain. Loyalty incentives or benefits can assists an organization in increasing customers’ loyalty and repeat visits.

6. Strategic options available for Zara

According to Christodoulou and Patel (2012) it is highly useful for international companies to effectively manage the challenges as well as competition to get develop and grow.

6.1. Ansoff matrix for Zara

As per Ansoff matrix proposed by Porter, the strategic options available for Zara are:

6.1.1. Market penetration

Zara can penetrate in existing markets by focusing on exclusive and interesting marketing campaigns. Companies can focus on social media campaigns and various promotional activities (discounts, buy one get one free) to penetrate in the current markets. Likewise, Zara can also penetrate in the market through identified means to grow and develop.

6.1. 2. Market development

There is possibility for Zara to grow and develop by focusing on market development option. Zara can enter in new markets to increase its market share and to realize economies of scale through strategic expansion in new countries (Economist, 2012).

6.1.3. Product development

The companies operating in the fast fashion sector need to make continuous improvements in its products to beat the competitors and to effectively fulfill the customers’ needs. Zara is focusing on JIT for production of products and chances of imitation are low (Sanders and Gearard, 2007). However, in order to attain more growth company can focus on innovation and add new product line for attracting the customers.

6.1.4. Diversification

Zara can focus on growth and development through diversification. In case of diversification, the new related or unrelated product is produced by company and offered to the new segment of customers for growth purpose (Haberberg and Rieple, 2008). Zara can offer unstitched clothing (related product) or packed juices (unrelated product) and offer them to new customers for growth and development.

6.2. Evaluation of strategies            

Strategy can be evaluated by focusing on SAF model that provides a procedure to evaluate the significance, priority as well as possible success of each strategy identified for business (Hough et al., 2008). Diversification and market development strategies are evaluated for Zara with the help of SAF model, as under:

6.2.1. Suitability

Suitability is related with the basis of the strategy and its general fit in the mission of company (Hough et al., 2008). Diversification is extremely useful option for Zara because its strong competitive position in the fashion market can be broadened by providing new products.  However, by focusing on continuous market development, Zara can enter into new markets to increase growth as well as sustainability. Both of the strategies can be implemented because of strong financial position of company.

6.2.2. Acceptability

Acceptability is related with the expected consequences related with the strategy. If diversification is focused by company then the cross-business strategic fits including generation of new competitive strengths and competencies, sharing of services to decrease costs can be attained. Through market development, Zara can exploit markets that are untapped and use its surplus production to satisfy the customer needs in new markets. Both strategies will generate profits for company.

6.2.3. Feasibility

Feasibility is related with the ability of company to implement the strategy as per available resources and assets (Kotler, 2009). Zara has different financial resources that can be used to implement diversification or market development strategy. In addition, both strategies are possible to be implemented due to highly efficient distribution system of company.  

6.3. Implementation

The identified strategic options for Zara can be implemented by focusing on different resources, capabilities and competencies of company. The efficient skills of workforce, designer’s team as well as financial and non-financial resources in the form of machinery and equipment should be used to produce and market diversified product for customers (Freeman, 2010). Likewise, human resource and their possessed capabilities should be used for market development. The marketing manager and staff of Zara should use its marketing research skills to identify the new potential markets for growth.

7. Recommendation and conclusion

It is highly recommended for Zara to use its skills, resources, competencies as well as financial resources in the form of profitability to implement diversification strategy. Management should make effective decisions regarding production of related or unrelated product for diversification. It is concluded that there are certain external and internal factors that have an impact on the operations of Zara. Zara can handle the impact of such factors through proper strategic management. In addition, it is also found that company should focus on growth for sustaining strategic position in the market. It can do so by focusing on its key strengths including short production period, JIT as well as advanced technology, staff’s skills and resources.

 

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