Strategic Analysis of ZARA - Essay Example

? Strategic Analysis of Zara BY YOU YOUR SCHOOL INFO HERE HERE EXECUTIVE SUMMARY Zara operates in a very forceful and saturated retail industry with many competitors that have similar products on the market to Zara and with competency in gaining market attention with target customer segments. Per se, Zara has many risks imposed by such factors as rival promotional competence, the ability of consumers to dictate pricing among retailers, and even responsiveness (or lack thereof) of suppliers that are critical to meeting the two week lead time from design to delivery. The report identified that Zara requires acknowledgement of market forces that can potentially impede brand sustainment and growth in sales. These forces include ongoing negative publicity for allegations of unethical business practices, the competence of competitive rivalry especially related to marketing philosophies of rivals, and even macro-economic issues related to foreign currency exchanges. All of these factors influence Zara’s strategic position and direction. Findings indicate recommendations that include more proactive efforts at promoting corporate social responsibility, changing trading currency from the Euro to the American dollar, conducting more market research studies on consumer target groups, and working to build an internal culture focused on ethical behaviour. These recommendations will assist Zara in sustaining a positive brand reputation and building equity that can translate into future revenue gains through diversification efforts. CONTENTS 1.0 Introduction......................................................................................... 2.0 Competitive forces and industry audit............................................. 2.1 PESTLE Analysis..................................................................... 3.0 An internal strategic audit.................................................................. 4.0 Public relations crises at Zara........................................................... 5.0 Recommendations for improving future business position........... 6.0 Conclusion........................................................................................... References 1.0 Introduction Zara is a leader in providing what is referred to as fast fashion products in the retail environment. Fast fashion is defined as the ability of the company to rapidly replenish inventories in the sales environment in a lead time of two weeks or less. Accomplishment of this strategy entails aligning all elements of the value chain that are necessary to achieve competitive advantage. This report highlights Zara’s industry environment, the competitive pressures and threats of the firm’s operating environment, and proposes recommendations for future business improvement. 2.0 Competitive forces and industry audit The retail industry in most developed countries is very saturated, meaning that international markets are inundated with a variety of retail competitors. Zara is currently most impacted by competitive forces from H&M, The Gap and Benetton, which are competitors that offer similar fashion products at reasonably similar pricing structures. Because of this saturation and presence of like rivals, Zara must be ever-aware of the changing market forces that have the ability to improve business position or severely hinder its performance and profitability. Porter (2011) describes five forces that impact whether or not a business can adapt or find positive market position in its operating markets. These include threat of substitutes, buyer power, supplier power, rivalry between competitors, and the risk of new market entrants by competing retail organisations. All of these forces influence business strategy development as well as responsiveness of Zara in attempting to outperform competitors. Zara faces very little in its sales markets in relation to substitutes. Substitutes are defined as replacement products that can serve as surrogate products for consumers. In the fashion industry, except for like products offered by consumers, there are no legitimate substitute products that pose a threat for the organisation. Zara does not need to be concerned with demand levels dropping from non-market product sales as clothing and accessories maintain no replacement category. Not only is this not a threat for Zara, but also its main competitors. Buyer power, however, is substantially important as a risk for Zara. Buyer power is defined as the capability of customer markets to force price reductions on products (TUD 2012; Porter 1985). With such a concentrated market environment with many capable and brand-respected competitors such as H&M and Benetton, the switching costs of consumers are quite low as available products give consumer markets considerable choice. However, Zara has one advantage in this area: Zara already maintains a lean production system and 60 percent of its manufacturing facilities are owned by the business. This means that Zara can pass on cost savings on most of its fashion merchandise that serves to insulate the firm from competitive pricing activities. Zara is able to build barriers to buyer power through its chronic low pricing models. Zara is also able to effectively remove supplier power as a competitive risk. Since the business controls the majority of its supply and manufacturing capabilities, the switching costs for suppliers that offer the additional 40 percent of materials and finished product for Zara are extremely high. Unlike competitors that have dispersed and diversified supplier networks where price negotiations are controlled by vendors, Zara has much more bargaining power that keeps cost controls positive. There is also little competitive risk for Zara in relation to new market entrants. The cost of capital and labour required to enter this particular fashion market are exorbitantly high, which requires significant financial capabilities for new competitive entrants. Zara’s competency in establishing closed supplier networks and maintenance of its supply systems prevents (sets barriers) to new market entry as no other competitor is able to duplicate the logistical successes of Zara. Competitive rivalry, however, is a substantial threat to Zara. H&M, as one example, is highly adept at creating promotional strategies that gain favour with its most viable target consumer groups. In H&M China, the business gained celebrity endorsement with the Australian singer Kylie Minogue who had launched an H&M exclusive fashion line. The promotional tagline “H&M loves Kylie” assisting in creating a linkage between two distinctive fashion brands (H&M 2007, p.2). H&M has also recruited such celebrity figures as David Beckham and Beyonce Knowles, two individuals with respected and adored brand identities domestically and internationally to gain more loyalty to the H&M brand. When a business is able to recruit respected celebrities to endorse through promotions and linked product lines, there is more likelihood that brand attachments will be achieved with important target consumers (Ohanian 1990). Zara must be always concerned with the competitive marketing efforts of major competitors as their capital resources that allow for powerful celebrity presence in advertisement and product line launches can serve to erode the potency and power of Zara’s brand. 2.1 PESTLE Analysis Political forces are not largely relevant as risks to the Zara business model. This is due to the fact that the majority of its manufacturing and supplier networks are in regions with political stability and are close to its Spanish headquarters. The countries in which Zara operates pose little to no political risk. The only significant limitation for Zara, the economic environment, will be explored. Economic forces, however, are highly relevant as risks to Zara. Even though Zara offers very competitive pricing on its innovative fashion merchandise, many buyers that favour Zara are price-sensitive which is why they are drawn to this particular business when seeking fashion attire. Zara further sells products in Argentina and Brazil, countries with significantly lower currency values than Spain and other European countries. Zara operates 39 stores in Brazil (Inditex 2013). In order to stabilise currency due to the international recession, Brazil has changed monetary policy in an effort to promote depreciation (Blanchard 2005). This is due to the fact that inflation rates have been exorbitant in the country, impacting the disposable income of important buyer markets. Currency fluctuations lessen the exchange value of sales in this market, impacting internationally-driven profitability capacity. This phenomenon of currency and monetary tightening is a major revenue risk for Zara in Brazil and many other countries where austerity is driving down disposable incomes of consumers and changing valuation of foreign currency against Spanish, British or U.S. currencies. 3.0 An internal strategic audit Zara maintains what is referred to as a lean culture, one that is focused on cost controls and ensuring productivity throughout all aspects of the value chain. Martin (1995) describes the inter-linkages between different divisions of the business that support the capacity to deliver an important and valuable product to a company’s markets. Such activities include marketing, logistics, technology, procurement and human resources. All of these systems are dependent on one another in order to achieve the final goal of delivering a product successfully to profit-building markets (Kleijnen and Smits 2003). Zara’s centralised business hierarchy was established to be certain that productivity, rapid response to market conditions, team working, and efficiency become part of the cultural model. Compliance is the main competitive advantage that Zara maintains from an internal perspective as it relates to human capital advantages. Hayton (2005) describes the characteristics of a successful business organisation that include a team-based design that enables knowledge exchange between disparate divisions of the business along the value chain. Zara has a competent management team that is able to facilitate, even if through autocratic processes, the ability to create team-focused inter-dependency between different divisions that must support the brand and its products. The case study supports this notion, suggesting that the management team delivers incentive results for cross-pollination of experience and knowledge by rotating job roles to improve innovation development. Through this, individuals with explicit knowledge are able to work dependently with such divisions as human resources or manufacturing to provide the business with more competitive advantages. As it relates to value chain efficiency, this is the bird-in-hand principle, making maximum and effective usage of existing capital resources that include networking and human-related skills (Sarasvathy 2005). In this centralised structure with team-centric values, each division is equipped with the knowledge and motivation to support one another, providing customers with a rapid product that is consistently innovative compared to the firm’s largest rivals. Furthermore, Kalyanaram and Gurumurthy (2008) indicate the advantages that a firm has when it is able to constantly innovate. First-to-market players in a market or industry often have very important advantages with targeted consumers. If the product is able to provide adequate perceptions of value, many consumers are risk-averse and will not seek the products of late movers. When assessed comparatively to competition, the pioneering company is usually assessed far more favourably. The first mover usually is the one with the advantage of defining the product category (Agarwal and Gort 2001; Liberman and Montgomery 1998). Zara’s ability to use appropriate leadership theory, such as incentives for innovation production, provides the business with the opportunity to provide innovative products at rapid speed which is not achievable by the firm’s main rivals. This gives the business, due to its internal competency and culture of team development, a major brand-related competitive advantage. The importance of inspiring innovation against a corporate mission and vision cannot be understated as it pertains to Zara’s ability to compete and stay relevant in its markets. Fairholm (2009) offers that in order to develop such a culture, the mission and vision must be constantly reiterated in order to gain commitment and dedication to achieving productive goals. Innovation, as supported by the case study, involves the dedicated talent of recruited design specialists as well as the manufacturing competencies of internal staff members who must work quickly in order to meet the average two week lead time for in-store inventory deliveries (replenishment). The internal management competency of using inspirational strategies and incentives provides psychological motivation to meet mission goals on the promise of reward for employee efforts. This is referred to as transactional leadership, where specific goals and targets are set and reward structures are provided for meeting these expectations (Hargis et al. 2011; Antonakis, Avolio and Sivasubramiam 2003). Transactional leadership is often effective in sparking loyalty toward meeting innovation and mission goals as it provides the psychologically-driven incentive to perform according to strategic expectations. Zara is a quality example of where transactional leadership design, coupled with a more rigid compliance-required culture and hierarchy provide significant innovative advantages over competition especially as it relates to fashion design and delivery. Zara is also able to establish important advantages over competition by developing strategic alliances throughout the supply chain. Inter-organisational learning and knowledge exchanges allow a firm to leverage its supply chain advantages when alliances are developed (Steensma et al. 2005; Lane, Salk and Lyles, 2001). Verma (2007) describes the alliances that have occurred with many Inditex suppliers, providing a variety of supportive business activities with reciprocity that build the foundations of a productive customer relationship management system. Alliances in the supply network make it easier for Zara to ensure compliance to its lean production needs (which is critical for cost control and ensuring a lower price structure for consumers). Since 40 percent of Zara’s total global supply chain is not owned by Zara, these alliances ensure that suppliers are more flexible and adaptive to the many different delivery timeline and quality needs of the firm. Ragatz and Handgeld (1997) indicate that when a firm involves suppliers in new product development during its earliest stages, competitive advantages can be achieved especially in relation to responsiveness of the supplying vendor in understanding what needs are driving the customer’s supply schedule. The importance of building alliances for a fast turnaround supply and manufacturing network cannot be understated and it should be identified that Zara’s management team are competent in exploring and exploiting these opportunities. The diversity of its 40 percent supply not wholly-owned by Zara requires that suppliers be responsive and dedicated to delivery of quality products. The ability to turnaround fast fashion merchandise is at the heart of Zara’s profit capabilities, therefore alliances should be recognised as being a significant internal strength of this business. Innovations and alliance development along the supplier network indicate not only the linkages between value chain activities, but how Zara must operate in a rapid environment where fast fashion merchandise will make or break short- and long-run business success. Without the adaptability of supplying alliance partners, reaction time to critical product development needs might not be achievable. Zara must therefore be sensitive to supplier agreements and relationship management to sustain its efficiencies in supply strategy. 4.0 Public relations crises at Zara The recent public exposure giving Zara a somewhat negative brand reputation for ethical business practices are a real concern for the business. In 2011, Zara was charged by the Brazilian government for its role in supporting supposed sweatshop conditions with its primary South American supplier. Government investigators raided these alleged sweatshops and discovered multiple violations associated with use of child labourers and what was referred to as appalling working environments (Hartley-Parkinson 2011; BBC News 2011). Zara received much recent negative publicity for their supposed role in these sweatshops being sustained in order to meet supply needs despite the over-50 charges that were placed against the business. Involvement in sweatshop activities have plagued many multi-national companies in recent decades as consumer sentiment about positive corporate social responsibility becomes a common and recurring theme in many international consumer markets. The company was also investigated for a sweatshop situation in Argentina, a situation in which Bolivian contractors working to supply products for Zara were forced to work over 13 hours a day and achieve permission simply to leave their job roles for the day (Alexander 2013). Though Zara has adamantly denied these allegations, claiming no knowledge of sweatshop conditions and lack of proper documentation by the Bolivian workers, the media coverage continues to exert that Zara may not be an ethical and moral business organisation as it pertains to supply strategy. This is critical in sustaining the brand equity and reputation of the business when media sources continue to express that Zara requires an examination of its ethical policies related to corporate social responsibility. In 2007, Zara partnered with The Ethical Trading Initiative, an agency with a mission of ending sweatshop and other negative labour situations worldwide. A global framework agreement was signed by Zara that included the International Textile, Garment and Leather Workers’ Federation in which the business agreed to be integral in examining and correcting problems in the company’s well-diversified international supply chain (Ethical Trading Initiative 2013). However, this proactive effort to improve its standing as an ethical business in 2007 was insufficient, it would appear, in driving out sweatshop scenarios from its supply chain and the business continues to receive negative backlash from many consumer markets about its supply strategies and intentions. Some of the problems with Zara are that the business has not developed an ethical culture, instead centralising business functions so that all executive controls remain at the top of the hierarchy. Research indicates that companies with ethical cultures have very few instances of ethical scenarios and are better equipped to cope with these issues when they arise without external support (Denison 1996). Ethical problems and negative publicity has serious ramifications for supporting a positive brand reputation internationally. This is due largely to a growing prevalence of consumers to value organisations that have established socially responsible business policies. This impacts consumer behaviour and intention to make future purchases, in some markets, substantially. Ethical deontology is a philosophy that indicates it is the moral responsibility of businesses to ensure the well-being and lifestyle improvements of workers operating under the business structure. It demands that moral principles such as honesty and integrity must be adhered to and obeyed regardless of the potential consequences to the business (Cody and Lynn 1992). Many consumer markets are so concerned about the integrity of businesses as it is related to corporate social responsibility that they will boycott a perceived unethical business and seek the products of rival firms with a better reputation in this area. Consumers sharing the deontological view of sacrificing even profitability in favour of human welfare have serious consequences and implications for Zara. If consumers begin defecting to other organisations for their fashion consumption needs, in the face of ongoing negative publicity, Zara could have significant problems sustaining its current brand equity earned through years of dedicated experience, supply competency and marketing. Trust, in relationship to ethical business practices, is defined as the rules and relationships by which individuals or businesses seek to gain social acceptance (Farrell and Knight 2003). Research evidence did not provide instances where Zara had established a rigorous CSR methodology and release of CSR-related activities that could, theoretically, improve its reputation in relation to ethical programming and business strategy. 5.0 Recommendations for improving future business position Based on the findings of the report, a series of recommended business improvements can be developed to assist Zara in the future as it relates to profit, consumer revenue expansions and brand reputational sustainment. Zara should, primarily, consider the role of corporate social responsibility as a cultural dimension that needs to be incorporated into its internal cultural model. The sentiment provided by Denison (1996) about the imperative of establishing an ethical culture to be more responsive to ethical concerns as they arise is critical for Zara. Developing an organisational culture with a specific vision is the responsibility of managers that must be more interactive in reinforcing the company’s mission for ethical behaviours and then consistently promoting these values throughout the organisation. Zara cannot rely only on press releases to express its alleged dedication to corporate social responsibility, instead it must engrain these beliefs into the organisational culture. This is accomplished by opening effective lines of communication between executives and all lower-level subordinate employees and managers. Culture is also considered a negotiable change practice and where desired behaviours are consistently role modelled by important organisational leaders. It would be beneficial for Zara to attempt a benchmark of the CSR models utilised by major petroleum companies such as BP and Shell that regularly promote their internal cultures related to corporate social responsibility and devote financial investment into integrated marketing communications in this fashion. By providing more transparency of these activities through advertising, it will allow many consumer markets that are highly concerned about business integrity and ethics to become part of the ethical culture and feel confidence and trust in the genuineness of these efforts. Zara might also, in relation to negative publicity, consider revamping its current supply methodologies and manufacturing capabilities to create more Zara-owned facilities for this purpose. There are genuine financial concerns (either financed or related to depleted cash flow availability) when constructing or acquiring the amenities needed to produce wholly-owned products, however it would greatly improve Zara’s ability to avoid negative press related to allegations of unethical behaviour. It would also further lessen any supplier power that international outsourced manufacturers and other suppliers have, further improving their competitive cost positions over the long-term. After conducting a strategic audit of the distribution infrastructure in such regions as Europe and South America, Zara can establish cost-conscious centres of manufacture. This strategy would improve the liquidity position of the business (by improving asset availability) and also give Zara an opportunity to recognise even more cost reduction efforts through innovative strategy development along the supply network. Control over the supply chain has been integral and vital for Zara’s current ability to satisfy customers and ensure lower pricing models on its fashion merchandise. Further enhancements and self-owned and self-managed new facilities would give Zara even more competitive advantages that would be quite difficult to emulate by competition. Zara should also consider utilising American currency as its most desirable trading tender due to the still-lingering impacts of the global recession. As illustrated by the report findings, using Brazil as a relevant example, sudden government-imposed depreciation of the currency valuation in order to combat internal inflation problems is an internalised risk by which Zara has little to no control. The exchange rates for less-developed countries as compared to the Euro are significant and in order to sustain its lower-price, high quality business reputation, Zara cannot simply raise prices in regions such as Brazil without endangering relationships with customers who are price-sensitive. The American currency is one of the most stable currencies around the globe by which many developing countries valuate their own currency. Recent changes that are being felt in Europe, South America and many other continents related to austerity as a means of improving decreased economic stability are radically changing currency values that impact profitability. An inability to stabilise the Euro, which is recently evident with situations in Greece and Cyprus, poses serious financial considerations for Zara. By selecting a more stable trading currency, profitability can be improved (as the exchange rate between U.S. currency and the Euro is favourable for the Euro). When exchanging currencies related to international sales, the American dollar is a more stable strategic alternative for improving revenue growth. More emphasis on the human resources function would also assist Zara in improving its brand positioning against competition. It was identified that Zara is not involved in staffing many of its outsourced supplier network facilities, which has led to deplorable sweatshop conditions and even criminal charges being filed against the business. If Zara devotes its own internal HR competencies in the form of expatriates, Zara can provide guidance in areas of recruitment and development of more humane working conditions that could be promoted effectively to improve its global ethical image. Since this is a value chain function that is inter-linked with many other operational aspects necessary to achieve fast fashion success, this strategy has a duplicitous series of outcomes in sustaining the brand. Alliances with the suppliers to allow Zara representatives of human resources for improving the suppliers’ organisational environment have many long-run benefits for this business. Finally, it is recommended that Zara be more proactive in identifying what factors are driving consumer needs, outside of simply design. Consumers in many markets have very complicated and intense emotional needs related to fashion consumption that drives their decision-making about which business to purchase products from. Zara does not seem to devote much into market research efforts, instead relying on the talents of designers to monitor these trends and behaviours. If Zara executives procured the software necessary to assist in analysing and storing results of primary market research, Zara could identify better service philosophies and also build better interpersonal relationships with consumers that would lead to better competitive advantages and revenue growth. 6.0 Conclusion As shown by the research, Zara maintains many competitive advantages that are difficult to replicate. This is true in the current environment where Zara’s fast fashion model provides valuable products for its target consumer markets. Despite the lack of availability to copy Zara’s ability for rapid replenishment turnaround, Zara should consider all aforesaid recommendations in areas of market research, human resources development, changing trading currency, developing an ethical organisational culture, and creating more Zara-owned manufacturing and logistics centres in order to remain relevant well into the future. References Agarwal, R. and Gort, M. (2001). 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