Business strategies of Zara - Essay Example

Table of Contents Table of Contents PESTEL analysis 2 Porter’s Five Forces Model 4 Resource Capability Theory 5 Resource Appraisal 7 Value Chain Analysis 12 Corporate Responsibility, Ethics, Public Relations and Stakeholder Issues 16 Business level Strategy 17 Corporate Level Strategy 18 Suggested Strategy 19 Suitability Acceptability Feasibility 20 Conclusion 22 References 23 PESTEL analysis PESTEL is a tool which helps in analyzing the external environment for the company (Bowhill, 2008). This tool divides the macro environment into six factors which are Political, Economic, Social, Technological, Environmental, and Legal. The PESTEL tool will be utilized to assess the impact of these external factors on the apparel industry of Spain. Political Among several measures the Spanish government has increased the corporate tax rate from 24 percent to 24.75 per cent including royalty payments. The increase in tax rates would be effective from 01 January 2012. The increase in tax rates have also been imposed on multinational corporations investing in Spain (Ernst & Young, 2012). The increase in corporate tax rate has led to an increase in the prices of garments and affected the apparel industry of Spain. Economic The current economic situation of the economy is very weak and the average GDP growth of the economy has been very slow since 2007. The GDP growth of Spain was 3.7 percent in the year 2009 and 0.2 percent in the year 2010 Yarns & Fibers Exchange, 2012). There has been a major decrease in consumer spending and employment. However, the apparel industry of Spain has been recovering steadily amidst the recession. The export value of garment increased from $68,120 in the year 2009 to $88,821 in the year 2010 (Yarns & Fibers Exchange, 2012). As estimated by the analyst the rise in consumer spending on textiles and food would increase by the end of the year 2013. Social As per a survey conducted by Fashion United, a resident of European Union spent 5.3 percent of their salary on clothing and footwear (Fashion United, 2013). This reflects that fashion plays an integral part in the lives of Europeans. Europeans like wearing fashionable clothes and footwear as it enhances their personality. The apparel industry manages to yield profits even amidst a slow economy. Technological Technology plays a pivotal role in the fashion industry. Information Technology has helped the fashion companies of Europe in improving the supply chain management. Majority of the fashion companies use their official website as a medium to communicate and provide information to their customers. European fashion companies use their website extensively as an important communication tool. Technology like Location Based Mobile Technology permits the retailers to track and communicate with their customers (Wang et. al., n.d.). Environmental Most of the European companies have introduced their own environment policies which believe in the conservation of environment and preventing environment degradation. Fashion companies in Europe have introduced their own environmental policies which include usage of ecological fabrics and biodegradable materials in the manufacturing of clothes and footwear. Legal Plagiarism is a huge offence in the fashion industry (Jones, 2005). As per the intellectual property act the company can obtain ownership rights for its work to prevent plagiarism (Canberra Institute of Technology, 2011). In the year 2007, John Galliano was found guilty by the court of France for plagiarism for copying the design of Willam Klein (Daily Mail, 2007). The retail companies found guilty of plagiarism will be tried in the court of their respective countries. Porter’s Five Forces Model Before developing a business strategy, a company needs to identify the forces which affect the profitability of an industry (Henry, 2008). The five forces are as follows 1) Threat of new entrants: If a particular industry is witnessing high profit then it would naturally attract new entrants. A lot of time and cost is invested by the fashion companies in designing clothes. Recession had affected the established fashion companies like Prada, Gucci, Channel, and Versace to a great extent. Miuccia Prada had taken a considerate amount in designing clothes for the rich class and celebrities (Emerald Group, 2009). This strategy was adopted to yield profits during recession and remain as one of the market leaders. At the present situation the threat of new entrants is low in the apparel industry. 2) Bargaining power of buyers: Since, the consumer spending on clothes and footwear has decreased drastically due to recession the companies which charged high prices for their clothes and footwear have been offering sale and discount coupons. The bargaining power of buyers is high at the present situation. 3) Bargaining power of suppliers: Most of the fashion companies manufacture their clothes in their subsidiary company which are situated in developing countries like China, India etc where the availability of labour and raw materials is cheap (Wang et. al., n.d.).The bargaining power of the suppliers is very low. 4) Threat of substitutes: The existence of the substitutes in this industry depends on the price offered by the competitors. The threat of substitute in this industry is very low. 5) Intensity of rivalry among competitors: The fashion industry is one of the most competitive industries in the world. The established companies have already earned goodwill and the profits earned by them are immense. Most of the established companies have their stock listed so it will be not easy for them to make a sudden exit. The intensity of rivalry among the competitors is very high. We can observe from the above PESTEL and Porter’s five forces model that the political and economic situation is not favourable for the fashion companies of Europe at the present situation. Technological and socio cultural factors play an important role for the success of the apparel industry. Due to the poor economic situation in Spain and other European countries the consumer spending has decreased rapidly and this has affected the fashion companies to a large extent. From the Porter’s five forces model we can observe that the threat of entrants, suppliers and substitutes is low. The bargaining power of buyers and rivalry among competitors is very high. Since, most of the factors are low we can say that the threat to this industry is very low. Resource Capability Theory The main objective of this section is to analyze the resource and capabilities of the company that would help in formulation of an effective strategy for the company. A resource and capability appraisal is necessary for the company to gain sustained competitive advantage over its competitors. This theory will help us in determining the internal resources of the company responsible for the company’s sustained competitive advantage (Smith, Vasudevan and Tanniru, 1996). Resource Appraisal Resources Characteristics Indicator Tangible Financial Revenue Generation As per the latest annual report of Inditex, the company’s profit increased from 12.52 million in the year 2010 to 13.79 million in the year 2011. Zara accounted for 64.8 percent of the revenue for Inditex which was the highest among all its brands. This indicates that the net sales of Zara in the year 2011 were 8.938 million. (Inditex, 2011). Physical Size and Location Raw materials Zara has 26 stores in Asia, 39 stores in Europe, 17 stores in America. (Inditex, 2011). The raw materials of Zara are procured and then converted into finished products in Barcelona and Hong Kong. Intangible Technology Patents and Copyrights Like every other fashion company, Zara has obtained its intellectual property ownership rights to prevent plagiarism of their style. Reputation Brand and Customer Loyalty As mentioned before Zara has become an exclusive brand because of its availability of comfortable, safe to wear and organic clothes at affordable prices. This has increased the loyalty of the customers towards this brand. Human Resources Training Loyalty of Employees Programmes Inditex provides classroom training for its employees working in the different brands of the company to improve the technical skills of the employees. It also encourages internal promotion which can improve the morale of the employees (Inditex, 2011). Zara hires and trains fresh graduates and believes that new designs created by these youngsters will be well liked by their customers. Logistics and supply chain are an integral part of the company as their efficient delivery system ensures that the retail stores of Zara always stocked with the latest trend of clothes. The time of delivering the clothes to the retail stores have reduced from 5 months to 2 ½ months and this mainly due to the fact that the company believes in refreshing their stocks every two and a half weeks to offer customers with the latest style clothes. Zara has always maintained a pleasant relationship with its suppliers and developed a software tool that calculates the carbon particles emitted by the transport vehicles of Zara. Most of the logistical centers in Spain to which all the shipment products are delivered are located near the headquarters of the company. This saves time and reduces transportation cost. The company has always maintained a smooth and extensive distribution network and has also received a LEED Gold Preliminary Certificate in the year 2011 (Inditex, 2011). Zara conducts transportation audits for its suppliers at regular intervals. The number of suppliers has increased from 1337 in the year 2010 to 1398 in the year 2011. One of the contributing factors towards the success of the company is its successful relationship with its suppliers (Inditex, 2011). Value Chain Analysis To understand the strategic resources and capabilities of the company a value chain analysis will be conducted. Value chain analysis will help us in understanding the parts of operation that help in creating value and those who do not (Hoskisson, Ireland and Hitt, 2010, p.86). The value chain analysis of the company can be segregated into primary and secondary activities (Guan, Mowen and Hansen, 2009). We will analyze the various resources and parts of operation of Zara. Figure 1: Value Chain Analysis ( Source: Hoskisson, Ireland and Hitt, 2010) Primary Activity The primary activities of the company are to manufacture and sell clothes. The target customers of Zara are men, women and kids of all ages. The value chain analysis helps in developing business level strategies. The core activities of Zara are to sell fashionable clothes at affordable prices. Inbound and Outbound logistics Zara works closely with its suppliers, customers and investors. As mentioned earlier, the apparels are manufactured in some of the Asian countries and Turkey where the availability of labour and raw material is cheap. This has helped in saving inventory costs and reducing time. The time taken in delivering the clothes from the manufacturing units to the retail stores have reduced from 5 months to 2½ months. This keeps the inventory and also increases the frequency of customer visits to the stores. The supply chain of the company is very smooth and efficient. Operations The operational activates of the company include the manufacturing and selling of apparels that are worn by women, men and kids of all ages and ensure the proper delivery of the clothes to all the retail stores of Zara. Marketing and Sales Most of the retail companies spend 3 to 4 percent of its revenue in advertising compared to Zara who spends only 0.3 percent of its revenue on advertising. The apparels of Zara are popular for its affordable pricing range. Recession has compelled the consumers to reduce their spending but the low price range of the clothes offered by Zara has garnered attention from the potential customers. Zara has managed to generate considerate amount of sales even during recession. Services Zara offers online shopping facility to its customers where the product will be shipped to the house of the customers. Supporting activities These activities involve support and assistance required for the primary activities. Procurement The company has considered franchising as an important strategy for expansion into other countries like the United Arab Emirates. In 1999 Zara entered into a joint venture with a German company named Otto Versand. However, the company has not mentioned any future plans of procurement of other companies etc. Technology Development Technology is an integral part of the company as the company generates a major part of its revenue from online shopping store. Advanced and sophisticated machineries not only helps in accelerating the work process but also helps in saving resources for the company. Human Resource Management Human resource form an integral part of the company as the skill and capability of the employees determines the effectiveness of the company. Failure rate of product innovation has been 1 percent compared to the 10 percent industry average. This shows that the company has always believed that the key to the success of the company lies with the human resource of the company. Infrastructure The retail stores of Zara are well built and have a spacious environment. The offices are well equipped with the latest software which enables the customers in the store to browse through the garment available in the store. Infrastructure plays a pivotal role as customers prefer retail stores with spacious and colourful environment. Competitive advantage The low price of the apparels has helped the company in gaining competitive advantage over its competitors. The company has catered to the needs and requirements of the customers by offering them comfortable, fashionable apparels at affordable prices. The designs for a new collection take only two and half weeks compared to six months of other retail companies. This is one of the prime reasons for the success of Zara. The sales of the company increased when the company reduced their prices during recession. Corporate Responsibility, Ethics, Public Relations and Stakeholder Issues There is a significant amount of effect of the business activities on employees, customers, communities, competitors, shareholders, government and the environment (University of Oregon, 2013). The corporate behaviour of the companies reflects the link between good business and responsible business. Corporate social responsibility undertaken by the company has a positive impact on the customers, competitors and the government. Inditex is known for implementing various environmental awareness programmes and conducting activities which help in environment protection and prevent environmental degradation. Zara manufactures organic clothes and these clothes have a separate label attached to them. In the year 2011 Zara had sold 1.9 million cotton organic garments and 800 eco efficient stores have been built since 2007 (Inditex, 2011). As mentioned before, the company has committed in lowering down the emission of carbon particles which helps in the elimination of hazardous chemicals. The initiative taken by the brand is known as “Toxic Free” As mentioned before, Zara has developed a software calculator tool which helps in the measuring the carbon particles emitted by the transportation vehicles. Zara believes in healthy lifestyle and this is evident through their implementation on two internal standards of health and safety which are known as ‘Clear to Wear’ and ‘Safe to Wear’ in collaboration with University of Santiago de Compostela. These two standards ensure healthiness and safety of the products. Ethics and values form an integral part of the company as it is believed that a good value and ethics system is one of the key drivers for the success of the company (Inditex, 2011). The workforce of the company is diversified and the Zara ensures that all the employees of the company are given equal opportunity and discrimination based on race, gender, caste and colour is discouraged. As per the latest annual report of Inditex, the workforce consists of employees coming from 140 different nationalities and 79.5 percent of the employees are women. Zara has signed an agreement with UNI Global Union which believes in the protection of the rights of the workers. The communication between the media and the management of the company is not very clear and transparent. The former chairman of the company Mr. Amancio Ortega Gaona had never given an interview to a journalist in his entire work period in spite of him being the world’s third richest man in the year 2012 (Hansen, 2012). The current chairman Mr. Pablo Isla is also not fond of interviews and press conferences. This indicates the there is only one way flow of information in Zara which can sometimes hamper the bond between the customers and the company. Reputation management is a crucial aspect from the point of the view of the shareholders as goodwill of the company affects the profitability of the company. Although, the shareholders and stakeholders are very happy with the CSR activities of the company certain incidents has tarnished the image of the company to a certain extent. In the year 2011, the company was accused of practicing slave labour in one of its retail shops in Brazil. One of the local authorities had also labelled the brand as a “sweating workshop” (Green Peace, 2011). There were reports that the labour working in the Zara retail stores of Brazil were not registered and the workers lived in terrible conditions. The allegations of the workers were that they were not allowed to leave the office premises without taking the permissions of the senior officials. Shareholders assume that unavailability or being silent on an issue can worsen the situation and this problem needs to be rectified immediately. Business level Strategy A company often chooses from five different business level strategies: Cost Leadership, differentiation, focused cost leadership, focused differentiating and integrated cost leadership. The business level strategy the company chooses forms the basis of the competitive advantage of the company. (Source: Author’s creation) Cost Leadership Strategy means to offer products at a low price to a broader market segment. Differentiation strategy means to sell products that customers perceive to be unique in their own way. Companies opting for this marketing strategy have a broad market segment. The uniqueness provided by the company can be ‘physical’ or ‘psychological’ to the customers (Hoskisson, Ireland and Hitt, 2011). Focus cost leadership strategy focuses on providing customers low priced products to a narrow market segment. Focused Differentiation is to offer unique products to a narrow market segment. At the present moment the Zara follows the Cost leadership strategy Corporate Level Strategy Corporate growth strategy is the way a company creates value through configuration and coordination of its multimarket activities (Furrer, 2010). (Source: Author’s creation) The diversification strategy can be divided further into related and unrelated. A related diversification occurs when the company expands its business activities into product lines that are similar to that the company offers at the present moment. Unrelated strategy occurs when the company diversifies into a different product line that the company does not offer at the present moment. Vertical integration is divided into two types; forward and backward integration. Backward integration occurs when the company acquires its input supplier and when the company acquires companies in its distribution chain it is called Forward integration. The merger between two companies belonging to the same industry is termed as Horizontal integration. Concentration occurs when the company focuses on manufacturing a single product or service. International strategy is developed by the company to establish its presence on a global level for sales of its products. Currently, Zara is following the concentration strategy. Suggested Strategy Zara should opt for differentiation strategy. Differentiation strategy for Zara would mean that the company would offer clothes that are fashionable, comfortable, and affordable to broader market. The main objective of the company would be to a design a collection of clothes that are unique and have not been designed by its competitors. Differentiation strategy means that the management of the company needs to focus on the features, design and performance of the product. Zara should manufacture specialized products in different geographic locations. The company already provides customized dresses only in the European region, it should develop this strategy further to increase consumer demand. Zara can also follow unrelated diversification strategy like those of its competitors Versace, Gucci, Prada etc. Apart from clothing line and shoes the competitors of Zara manufacture perfumes, bags and other clothing accessories. This strategy would help Zara to increase its sales and establish its presence worldwide. There is a high demand of luxury good products especially in the European and American region. The immediate strategy of Zara should be to manufacture luxury good products in China because most of the manufacturing units of Zara are present in China itself. Currently, Zara has 289 stores in China and most of the manufacturing of the clothes are carried out in Hong Kong and Barcelona. In the year 2012, the consumption of luxury goods items was the highest in China and Taiwan. The sales of the luxury good items in China had crossed €520 billion (Mulligan, 2013). This strategy would act as a good litmus test for the sales of luxury goods items in China. Suitability Acceptability Feasibility Suitability is concerned whether the company addresses the key issues that have been identified in understanding the strategic position of the company (Johnson, Scholes and Whittington, 2002). Strategic Option Environment Capability Influences Differentiation The low priced apparels of Zara are of high demand and have become popular among the customers. The management needs to consult with the designing team of the company. To increase customer satisfaction, reputation and increase customer’s loyalty towards this brand. Related Diversification The demand and sales of the apparel and footwear is high. The company needs to exploit its core competencies and utilize resources to its optimum level in its related fields. To increase its sales, establish its presence globally and meet the needs and requirements of shareholders. Acceptability This is concerned with the expected performance outcome of the strategy which can be evaluated by measuring the risk, shareholder’s return and reaction. The assessment of certain financial and non financial strategic options is necessary. After the strategies are implemented the success rate of the strategies can be evaluated by assessing the returns and benefits that the shareholder’s would receive from this strategy. This could be achieved by measuring the Return on Capital Employed and Payback ratio of the company. Feasibility This is concerned with the fact that whether the company has sufficient resources and competencies to implement a strategy and expect benefits out of it. Financial Feasibility One of the easiest and simple ways to assess the financial feasibility is by analyzing the financial resources through cash flow analysis and forecasting. The finance required for this strategy and the likely sources to obtain it would be analyzed by the finance department of the company. This would help in estimating whether the suggested strategies would be feasible or not in terms of revenue generation and availability of funding requirements. This can be asses through Break even analysis and Return on Capital Employed techniques (Johnson, Scholes and Whittington, 2002). Resource Development Apart from financial feasibility, the assessment of the resources and competencies required for the implementation of the suggested strategy would be required (Johnson, Scholes and Whittington, 2002). Conclusion Zara is one of the leading fashion companies of Europe and has always been regarded as one of the most employee and environment friendly companies of Europe. The current financial and strategic position of the company is good and the revenue generation of the company has been excellent amidst the current economic slowdown. However, as observed from the macro environment analysis that the present strategic position of the industry is satisfactory and that is why Zara needs to focus on strengthening its brand further. If Zara follows the above mentioned strategies then it would definitely yield higher amount of profits and the efficiency of the company would improve. References Bowhill, B., 2008. Business planning and control: integrating accounting, strategy, and People. New Jersey: John Wiley & Sons. Canberra Institute of Technology, 2011. Intellectual property. [online] Available at: http://libguides.cit.edu.au/content.php?pid=206744&sid=1766704> [Accessed 18 April 2013]. 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