Competitive Growth Strategy ZARA and H&M - Essay Example

Competitive Growth Strategy – ZARA and H&M Problem Statement To what extent can it be said that the growth of sales account for the overall growth of the business? Swot Analysis “A SWOT analysis is a useful instrument for helping managers to identify internal strengths and weaknesses of a business and external opportunities and threats facing it,” Strydom J. (2000 p 31). Basically, SWOT stands for strengths (S), weaknesses (W) while on the other hand the external environmental factors are regarded as either opportunities (O) or threats (T). This analysis is very important to marketing managers as it allows them to focus on key strategic issues based on the notion that an effective strategy fully utilises the strengths and opportunities of a business and strives to minimise the weaknesses and threats. A close analysis of the two companies namely Hennes and Mauritz (H&M) and Zara reveals that they both have strengths peculiar to their business operations. One major strength characteristic to both companies is that they have vertically integrated business models which allow them to set pace of information flow thereby determine their own business operations. Their stores have diversified products as well ranging from clothing for all age groups to cosmetics which give variety to shoppers. Another notable strength characteristic to both organisations is the ability to have global patent, which is exclusive rights to their brand names and products which make them different from other rival competitors’ products. It shows that they are operating legally which creates mutual trust among customers. This can also be done by making their brands absolutely unique from other products already on the market as a way of showing that they are not mere copycats. By also establishing well defined distribution channels, the company would stand better chances of positive growth. Whilst the two companies have different approaches to their distribution methods, it can be noted that they have efficient distribution systems which offer a credit in the success of business. However, there are bound to be weaknesses faced by H &M as well as Zara in their attempt to achieve this feat of establishing themselves as forces to reckon with in the market. One major weakness that is evident for H & M in its endeavour to establish itself as a formidable organisation is its apparent lack of competitor and customer analysis. This often is dangerous as it risks failing to keep pace with customer needs as a result of lack of information. On the other hand, Zara’s major weakness is that its design and product development are human intensive which leads to less retail returns than the cost of production. On the other hand, opportunities for both companies lie in their ability to penetrate international markets which may have a different appeal than the local markets. H & M as well as Zara have both embarked on establishing retail stores in America as well as other countries. Venturing into global markets is advantageous in that different people have different tastes hence this can go a long way in attracting potential customers from across the globe. H & M as well as Zara use sophisticated, continuous IT development systems that allow the companies to customise their business processes and logistics in a very efficient and effective manner. Basically, the use of improved IT systems improves the opportunities of a company to succeed. Another opportunity for ZARA is the ability to own capital intensive manufacturing facilities that include equipment for fabric dying and processing which gives it an advantage over other competitors since it can respond quickly to the needs of the people should they need certain colours. Threats include price wars with rival competitors who are well established. The issue of pricing of the product such that it can be profitable is a bit contentious issue given that very high price would deter the customers from buying the product while at the same time very low prices would result in losses. For instance, H & M’s operating costs in USA were very high while its margins were small as a result of high labour turnover. Another threat to both companies is the weakening US economy and the fact that customers in that country are not homogeneous like in Europe. Pestel analysis The macro environment in which business organisations operate is affected by many factors that influence the managers in the decisions they make. Pestel stand for political, economic, social, technological, environmental as well as legal. These factors affect the decisions made by the managers in one way or the other. In this case, the political factors can be said to be favourable to both H & M and Zara they promote international trade. It can be seen that there are no such stringent measures put by international governments that deter investment in certain countries. On the other hand economic factors include aspects that deal with the economy as a whole. In these regard, the investment initiative by these two organisations was partly affected by the weakening US economy plus the September 11 attacks. The social factors are mainly determined by age or sex. The youths in this particular case have their own preferences when it comes to clothing which is a very strategic factor ought to be taken into consideration. For instance in 2004, HM invited the famous fashion designer which was very successful. Things like class and status are often given due prominence by customers. Technological factors often involve the equipment used in the daily operations of a business. In this particular case, both companies effectively use sophisticated IT systems that allow them to customize their processes and exploit innovations. Environmental factors refer to issues such as weather or climate. These often affect the operations of a business directly or indirectly. As far as clothing is concerned, the manufactures ought to take into consideration the climatic factors in areas they would venture into business. For instance winter seasons in US are characterised by snow, a factor which should be considered in designing clothes. The legal factors often relate to the legal environment in which an organisation is operating. Many countries in the contemporary world advocate laws that promote a competitive environment as well as laws that discourage discrimination in work places. Basically, the outlined factors affect the operations of any business in one way or the other. Financial analysis Financial analysis of both companies show that they were mostly preoccupied with high sales in the shortest period which meant charging lower prices. Whilst they could still earn gross margins of 53%, close analyses of their financial status show that in some cases, the profit for one fast fashion could have been lower than the actual amount invested. Zara recorded a sales growth of 21% in 2005 bringing to $8.115 billion putting it ahead of H & M which had $7.87 billion. A close analysis of H & M shows that in 2003 its financial status was not quite gainful since its operating costs in USA were very high while its margins were small as a result of high labour turnover. It embarked on reducing operating cost which saw it reducing its losses by about $6million. However, financially Zara had the competitive advantage of having many stores. In some cases, higher prices mean higher profit margins as what happened to H & M which recorded strong returns from its premium initiative. The financial statement for H & M for the period 2004 and 2005 indicate that there has been a notable increase in almost all facets of the financial position in 2005 compared to 2004. This can be attributed to the expansion drive which saw it increase its turnover compared to the previous year. Its operating margin rose from 19.9% to 21.5 % in 2005, a plausible growth. This in turn increased the net turnover. On the other hand Zara recorded a growth rate of 21% in 2005 which also resulted in net sales and income also increasing. It can also be seen that it increased the number of stores from about 2300 to about 2700 and its financial structure on shareholder funds also increased from 2376 in 2004 to 2889 in 2005. This can be attributed to its philosophy of lower prices and higher returns. Solutions and Recommendations Whilst both companies have registered a rapid growth in their sales as well as expansion across Europe, there is need for revision of their approach in business as the market gradually becomes saturated. There have been a rapid increase in sales but it can be noted that the returns were not commensurate with the actual investment committed in the first place. Indeed sales may be very high but the profit margin would be small which means that in the long run the business would be operating at a loss though there would be very high sales. It is recommended that that each of these companies should at least give a little longer chance to a designer fashion on the market than simply rushing into introducing new things whilst old ones are still capable of selling profitably. This in turn would minimise operating costs in some cases as more would be spent on producing new things whilst the actual profit gained would be very little or nothing at all. A major recommendation is that higher, deflated sales do not necessarily translate into higher profit margins. The essence of every business is to gain profit hence the issue of returns on profits should be given due cogniscence. When penetrating global markets, it is very important to undertake market research so as to fully know the customer preferences. It is folly and suicidal to assume that customers are homogeneous everywhere. As is the case, American customers were comfortable being specialised unlike in Europe. All these aspects about customer behaviour need to be taken into consideration and can be achieved through the use of different marketing strategies. It is also recommended that advertising can greatly enhance the chances of prosperity in a new setting than the use of unconventional methods such as locating the stores in busy streets and avenues. Reference Strydom J. (2004), Marketing, 3rd Edition, Juta & Co Ltd, SA. H & M vs ZARA: Competitive growth strategies, Case Study. Read More