Zara External Environment Analysis - Essay Example

? Zara Strategy report Table of Contents Table of Contents 2 External Environment Analysis 3 PESTEL Analysis 3 Porter Analysis 5 Internal EnvironmentAnalysis 7 Resource Based View 7 Value Chain Analysis 8 Financial Analysis 10 10 Internal Issues 11 Strategic Options 12 External Environment Analysis PESTEL Analysis To analyse UK’s Macro environment PESTLE is used here. Political UK falls in the category of developed economies. UK takes an active participation in deciding trade policies in NATO or North Atlantic Treaty Organisation. In the wake of the current economic crisis, the UK government has taken some tough measures for the reduction in financial deficit which aroused due to sovereign debt crisis and current economic decision (Lynn, 2010, pp. 93-102). There has been a 22% budget cut in culture and sports department, 23% in media department (Westfield, 2012). Apart from this, the government is also planning to reduce corporate tax to 23% in the coming years, which will result in decreased cost of overall operations in this industry (Marketline, 2012a). Economic In spite of the eurozone crisis and economic recession, UK’s GDP has reduced to a mere 0.2 % compared to the overall industry growth, which has dropped by 0.6%.N According to eminent economists, the unemployment rate will increase to 9% in the coming two years. Around two million people will remain unemployed. The retail clothing market of UK is constantly increasing. According to Key Note report (2012), the UK market showed a 3.3% increase in 2011, and sales reached 43.1 billion pounds. Women’s garments were the largest sector in terms of sales revenue followed by men and children’s sector (Chakrabarti, Subramanian, Meka, & Sudershan, 2012). Social There has been a 7% rise in age group which represents the working population. Because of this, more people are now including formal clothing as their daily wear. This means that in future, Zara may also be required to change its portfolio, in order to match the growing needs of this ageing population. Due to the current economic crisis and budget deficit, the purchasing capacity of the consumers has reduced. Now, sustainable and normal living standard has become a challenge for the local people. To get rid of the difficult financial condition, the UK government has taken the policy of managed migration. Technology Latest technological advances such as RFID, electronic data exchange and ERP, are used by most of the retailers in UK to decrease operation costs and enhance the value chain process (Pettigrew, 2006). According to the Science and Innovation Investment Framework (2013), there has been only 2% increase in investment in technological advances. This has made the investment condition in UK very inflexible Environment In order to meet the environmental norms, set by Kyoto Protocol, the industries need to reduce the percentage of carbon emission to a minimum of 9% from the present rate. According to the government protocol, the foreign countries in UK need to decrease their Carbon footprint to a minimum of 20% in the coming two years (Unfccc, 2013). Thus, in order to sustain in the market, Zara will have to follow the protocol in its value chain. Legal According to the economic freedom journal’s index, UK has been ranked seventh in terms of free economy (Index of Economic Freedom, 2013). It has also been praised by Wall street Journal for its business and economic sustainability. To solve any labour related issues, the country strictly follows the rules and regulations of European Union Labour Law. This indicates a necessary change in the HR policies and regulations of Zara’s business process to comply the EU Guidelines. Porter Analysis The major categories of apparent industry in UK are men’s wear, children’s wear, and women’s wear. The industry value can be calculated by using Retail Selling Price (RSP). Total Revenue of the Industry CAGR Women’s wear Men’s wear Children swear $54,495 million (2011) 2.1% 59.2% 26.9% 13.9% (Source: Marketline, 2012b) Growth potential of UK apparel industry can be understood by using following diagram. (Source: Marketline, 2012b) UK retail industry can be analysed using Porter’s Five Forces Model. Buyer Power Due to the small size and individuality of customer group, the powers of buyers have considerably decreased in the apparel industry in UK. Financially established consumers are a priority for the retailers than window shoppers. While choosing a particular brand of apparel, brand loyalty plays a major role (Porter, 1980, pp. 6-11). Since the switching cost is very low, this is increased the buyer power considerably. Apart from this, consumer prefer deign and variety over retailers, in terms of choosing apparels. Price sensitivity differs in various geographical locations and around 69% of customers give preference to discounts and other promotions in order to buy short lifetime or low priced garments. The product differentiation is low for non- designer garments when compared to designer garments and consumers in the lower income strata prefer non-designer apparel stores. Due to the low product differentiation, the stores can manipulate the consumer’s demand. Apart from this, it is really difficult for retailers to meet the ever changing demands of consumers, and thus it becomes difficult to achieve forward integration of value chain. Supplier Power Independent retailers and clothing manufacturers are the prominent suppliers in the UK market. Due to the business model of the apparel retail industry, there is a fragmentation in the supplier market. This fragmentation has forced big players like Zara, M&S, and Sainsbury to import supply from foreign market. Liberalisation of international trade has decreased the supplier power in the market. Developing countries like India and China are giving a tough competition to the UK retailers in terms of low cost supplies. Developing countries account for around 90% of the total imported supplies (Index of Economic Freedom, 2013). Due to a lack of range among suppliers, the switching cost is medium for retailers in the UK market. Threat of New Entrant Fluctuating market and ever increasing demand from consumers have made the apparel retail industry attractive for new entrants. Compared to menswear market, the women wear market is growing at a faster rate. Because of the low capital requirement in setting up shops and stores, the entry barrier is less for new entrants. There are few big players such as Zara and M&S which account for majority of market share in the apparel sector. Due to the economics of scale, the big players have been able to decrease the pricing capability and retailing power of smaller players. There has been a decrease in consumer loyalty due to decreased switching costs and thus it can be concluded that threat of new entrant is high for Retail industry. Threat of Substitute Online shops are giving a tough competition to the traditional retail outlets. Though online retailing is at a nascent stage, it is becoming increasingly famous and acceptable among consumers. Overall the threat of substitute is concluded as weak. Degree of Rivalry Due to the presence of complementary retailers offering almost similar kind of products, there is a moderate fragmentation in the UK apparel market. Due to the lack of advanced technology and resources, smaller players do not stand with big players in terms of market share. It can be said that rivalry in the industry is average. Internal Environment Analysis Resource Based View Tangible Resources- Zara gets ample support from its parent company, in terms of financial stability. Inditex made revenues worth $1.9 billion Euros in the year 2100 (Inditex, 2011). The trademarks of Zara are known worldwide. According to Waterlow (2012), Zara fought for the trademark on red soles against Louboutin in the French court, and defeated them. This helped Zara to raise their sales from shoe production. Zara changes the store infrastructure every three years in order to increase brand attachment with customers. Zara changes 75% of store layout and product display every three weeks. Exclusive brands and logos are tangible resources that can assist Zara in maintaining its superior brand identity. With increasing growth in sales in recent years, Zara has achieved recognition in fast fashion brands of the world (Helm, 2008). Intangible Resources Zara has a strong team of 200 professional designers, who are constantly updated with new fashion trends and help Zara in constantly pursuing the fashion market (Inditex, 2011). In addition, communication system and efficient informational technology help Zara to remain trendy (Mihm, 2010). The relationship between Zara’ suppliers, designers and manufacturing facilities reinforced with the help of vertically integrated information technology system (Deschamps, 2012). The in-store inventory model of Zara is unique which helps it to create a competitive advantage in terms of brand image. This has helped Zara to keep up with the constantly evolving fashion trends. Quick inventory turnover also brings exclusiveness and freshness to the consumers (Caro & Gallien, 2010). Freshness of apparel attracts customers while new ideas in product designing can be considered as intangible asset of Zara. Human Resources The human resources team of Zara is very organized and valuable. It is composed of a powerful design team, responsive manufacturing team and workers who are engaged in sewing and stitching. The overall manufacturing operation of Zara is tough to copy. Zara’s quick responsive and powerful team of designers is considered rare in the designer apparel industry. Thus, overall, a powerful and fast responsive designer team and an efficient manufacturing team is core competency of the company. Value Chain Analysis Primary Activity Description Inbound logistics Zara procures its raw materials from countries like France, Italy, and Greece etc. Recently it has started importing supplies from emerging countries like China and India also. Inventories are manually checked and the store manager decides on which inventories to order and which ones to discard. The employers actively participate in research and observation regarding changing consumer preferences and these are fed into the hand-held computers present in the store itself (Caro and Gallien, 2010). Operations The data from the stores reaches the designers and manufacturers after approval from the management. Zara produces 60 % of the merchandise in-house while the rest 40% are outsourced from external suppliers. The manufacturing operations of Zara is vertically integrated which enables continuous introduction of fresh items with lesser lead time (Bhagwat, 2011). Large computer controlled machines helps in faster and accurate cloth cutting into various patterns. Outbound logistics The distribution centres of Zara are automated and computerized. The logistics are equipped with tracker system. IT systems keep a track on each SKU of Zara (Zhelyazkov, n.d.). Just in time manufacturing, coordination with suppliers and fine tuned logistics along with use of advanced IT system helps Zara complete its cycle from design to availability in store within four weeks as compared to the traditional cycle of 6 months (Mihm, 2010). Marketing and sales Zara spends a meagre amount in advertising as compared to its competitors. Zara’s advertisements are strictly minimum, which allows for more cost-effective techniques and strategies. Zara focuses on creating and maintaining brand awareness with the help of word of mouth and establishing a reputation of fashion forward brand. Zara uses print media like billboards and fashion magazines to increase brand awareness. Service Most of Zara’s stores are company owned and very few are given to franchisee. Zara uses the franchisee model only in outside markets. Almost all stores of Zara are located in prime areas such as premium shopping centres and malls which are easy to search and give a premium value to the store’s image. Financial Analysis Annual Financials for Zara Investment (holding) Co. Ltd (Source- Market watch) The five year income statement of Zara indicates that the sales and revenue have not been constant in the last five years. From 2008 to 2009, the sales have remained constant. Sales increased from 76.7 million to 89.6 million in the year 2010. There was a slight decrease in sales in 2011 but sales decreased drastically during the financial year 2012. This can be explained due to reasons concerning the recent PR issues faced by the company and the shortcomings in the application of ethical practices and CSR strategies in the company. Internal Issues Rapidly increasing costs of raw material and higher demands in wages in producing countries are putting pressure on the fast fashion retail brands (Wang et al., n.d.). Cotton prices reached to new heights in supplier countries like Pakistan and China in 2011. Apart from this, the prices of other major raw materials like spandex, wool and nylon have also increased to 20% in the past two years. There has been a further decrease in the profit margin because of the increased wages in developing countries. Because of these issues; Zara’s profit margin has been put under pressure (Sorescu et al., 2011). Due to the expansion in global markets, Zara is facing problems in its centralised logistics model. Apart from this, when expanding in other countries, compliance with the local authorities becomes a tough task because of the changed regulations and ambiguous rules. On the other hand, illegal activities regarding imitation of products with famous brand labels are other concerns in international expansion. Logistics and business set up implications are another concern area for Zara. The production base of Zara is located in Europe (Mintzberg, 2009). This can be a challenge while working in emerging markets, due to increased shipping costs. Retailers will have to develop logistics and production support in newer regions. Another concern which the company is facing is which geographical areas to target as a part of international expansion. The company has realised that it needs to expand globally but which territories should be targeted is unclear to the company. Detox campaign, a global initiative of Greenpeace, put Zara under pressure by exposing the link between the toxic chemicals used in textile manufacturing facilities and water pollution. Greenpeace accused Zara for using the rivers and waterways as private sewers and disposing off hazardous chemicals and others waste into the water sources (Greenpeace, 2011). The initiative also expected them to be clean and transparent in their work flow and disclose what each unit facility of suppliers of Zara was disposing off in the environment. This campaign went viral both online and offline and created a PR nightmare for the company. Lakhs of people emailed and tweeted to the company directly and expected it to commit to the Detox campaign (Wordpress, 2012). This diminished the brand reputation to a certain extent which was also evident in the financial statement of Zara for the year 2012, where Zara‘s net sales reduced drastically In the year 2011, Brazilian authorities claimed that Zara was using unethical and unlawful activities in its factories in Brazil. The authorities claimed that the company had purchased items made by Peruvian and Bolivian immigrants in illegal and unethical working conditions. People from labour ministry rescued 15 workers, who were working in degradable and dangerous conditions in two of the outsourced facilities of Zara. This incident highlighted the issue of irresponsible monitoring of the factories owned by Zara. The labour law authorities claimed that Zara failed to audit most of its facilities. The lack of ethical practices inside the manufacturing facilities in Zara leads to a diminishing brand image (Businessrespect, 2011). Activists from the clean cloth campaign of human rights law started a campaign against Europe top-notch fast fashion brands. These activists mimic fainting inside the stores of these brands. These fainting highlighted the increased mass fainting, occurring in Cambodian factories due to malnutrition and poverty pay in workers who sew in the facilities of fashion brands like Zara. The purpose of these activities was to demand companies to increase the wages of the sweat shop workers to a minimum level which will help in lifting them out of poverty (Ethicalconsumer, 2012). Strategic Options Due to the current economic crisis it is becoming increasingly difficult to maintain consumer loyalty, customers are increasingly shifting to lower priced apparel brands. To address this issue, Zara needs to encourage its customers to buy more from its stores. By integrating a faster value chain, Zara can work against the weak strategy of its customers and increase its market share. Zara can also use advertisement strategies such as outdoor advertising, television commercials and organising sponsorships in order to increase awareness among its customers. This strategy will be more useful when Zara is planning to enter a new market. The centralised logistics business model of Zara is a concern in international expansion. To address this concern and increase capacity, Zara has started constructing a second distribution centre in Zaragoza. Geographical operations vulnerability is another concern in Zara’s plan of global expansion. To overcome this, the company can first target those territories whose major customer profile is matching with the range of apparels manufactured by the company. This will reduce the cost of operation in manufacturing and designing of new line of apparels. Secondly, the company can target those countries where the local authorities and economic regulations comply with the parent company. This will reduce the obstacles and delays occurring due to stringent and ambiguous regulations. Lastly, to evaluate the acceptance of the company’s clothing line, Zara can test market their products by tie-up with leading retailers of the target country. Rising production costs are one of the major issues which have resulted in decreased profit margins for the company. Zara should implement use of advanced technologies to increase its capacities. Technologically advanced equipments allow engineers and designers to work as one team. This will help saving a lot of time and this collaboration will help in bringing out the best products. The company can also implement software technology to increase the production process while specialised PDA (Personal Digital Assistants) can help the designers in more precise design efficiency (Kasyuk and Reedman, 2008). The company can also involve itself into regular researching processes. This will help to evaluate the efficiency of the production processes. Through this the company can eliminate the processes which are not working properly and further work to increase the efficiency of the available processes. The other issue which Zara is facing is which model of business to use when expanding in a new market. Zara has experimented with joint ventures, franchising and company owned stores. To address this issue, Zara can survey the successful business models applied by Zara’s immediate competitors in the same target market. Zara can also focus on the most acceptable business model used in that particular target market. Zara should make the best use of the available suppliers by utilising them to the full potential. When experimenting with new market, the company can start with few stores and evaluate the success and the applied business model over a period of time, and then go for further expansion. Illegal activities regarding imitation of products with famous brand labels are other concerns which can hamper the overall revenue of Zara. To address this issue Zara can trademark their leading brands and appeal its customers to look for company trademarks while purchasing clothes from retailers. PR recommendations Zara has been facing PR challenges due to the use of toxic chemical and disposal of harmful wastes into the environment. In order to rectify this issue and strengthen its brand equity, Zara has promised that by the end of 2020, a minimum of 100 suppliers of its global southern region, will release public data regarding their disposal of hazardous and dangerous chemical substances into the environment. This report will cover extensive data about every chemical used in each of the facilities and the report will be published every year. Zara has been recently facing challenges from the ethical and human rights authorities due to the increased illegal activities and pathetic conditions of the employees working in the manufacturing facilities owned by the companies. This has resulted in diminished brand reputation of Zara. To resolve this issue, Zara should take necessary steps towards revising the wage of the workers to lift them from poverty. Apart from this Zara should also take into consideration the health issues of the employees working in the organisation. The company can organise health benefits programmes to highlight the issues such as harmful effects of malnutrition and unhealthy food. They should also engage in activities such as providing good and healthy meals for the workers and regularly monitoring the process. The manufacturing facilities of Zara are under constant attack due to its poor auditing procedures. Zara should follow stringent policies to monitor its manufacturing facilities all over the globe. There should be regular and ethical review of the conditions in these facilities. Any unethical or dangerous practice should be immediately abolished. Zara can also take help from various manufacturing accreditations like Fair Trade and SA8000, which have been extensively developed to help the big brands, in case they do not have the proper skills or manpower to audit their entire manufacturing facilities. The manufacturing facilities of apparel companies have a great impact on the environment and the society surrounding it. The amount of chemicals resources and energy used in fashion industry is huge. Also, the supply chain process of apparel industry is complex. Because of the challenges that fashion apparel manufacturer Zara is facing, Zara has started active participation in an initiative, Sustainable Apparel Coalition (SAC) (Apparelcoalition, 2012). This initiative works in developing sustainable tools and strategies which will help in evaluating and measuring the sustainability performance. This initiative will help Zara to recover from its decreased brand reputation and put it in a strong position in terms of CSR and ethics. References Apparelcoalition, 2012, What is the Sustainable Apparel Coalition (SAC), [online], Available at [Accessed 12th April 2013]. Bhagwat, S., 2011, Zara: IT for Fast Fashion Case Analysis, [pdf], Available at [Accessed 12th April 2013]. 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