Zara Company Analysis - Essay Example

? ZARA COMPANY ANALYSIS [The of the School] [The of the Department] [The of the [The of the [The ID Number] [The name of the Seminar Tutors] Executive Summary Zara is a leading fashion retailer store in Spain and most parts of Europe. This company has gained a good standing in the industry by its strategy of fast fashion. The analysis of the external market reveals that the rivalry within the firm is medium to high. This is mainly on account of the fact that the industry is in its maturity stage. The analysis of the internal market reveals that the company is faring well because of its strong supply chain and its vertical integration. As the company is expanding operations, it needs to reviews its strategy. The analysis leads up to two feasible strategies for the company, namely global expansion and introducing a new plus size in the product range. This report presents these strategies in more detail. TABLE OF CONTENTS Introduction 4 Q1. Analysis of External Environment 4 PESTLE Analysis 4 Political Factors 4 Economic Factors 5 Social Factors 6 Technological Factors 7 Legal Factors 7 Environmental Factors 8 Porter’s Five Force Analysis 8 Threat of New Entrants 8 Threat of Substitutes 9 Bargaining Power of Buyers 9 Bargaining Power of Suppliers 9 Rivalry in the Firm 9 Q2 Analysis of Internal Environment 10 Resources and Capabilities 10 Value Chain Analysis 11 Q3 Analysis of PR Crisis 13 Q4 Strategic Analysis 14 Business Level Strategy 14 Corporate Level Strategy 14 Market Penetration 14 Market Development 15 Horizontal Integration 15 Evaluation of Strategy 16 Market Penetration 16 Market Development 18 Conclusion 19 References 21 Appendices 23 Introduction This marketing report presents a set for recommendations for the fashion retailer, Zara. These recommendations are based on the analysis of external and internal environment. The analysis of the external environment relies on theories such as the PESTLE Analysis and Porter’s Value Chain Analysis. The analysis of the internal environment relies on the analysis of the company using Resource/ Capabilities Analysis and Value Chain Analysis. Zara is a fashion retailer owned and operated by the Spanish company, Indetix Group. This fashion retailer has introduced a different strategy within the fashion market that goes against the existing strategies of the fashion industry (Anon, nd.). Despite this, or rather on account of this, the company has managed to record profitable growth since its inception. However, in order to pursue further growth, it is necessary to analyze the current strategy. Q1: ANALYSIS OF EXTERNAL ENVIRONMENT PESTEL Analysis PESTLE Analysis is a widely used analysis to understand the external environment of the company. It is an acronym for Political, Economic, Social, Technological, Environmental and Legal factors that have an impact on the overall operations of the organization (Henry, 2008). Political Factors Since companies operate within a certain geographic boundary or boundaries, the government has an impact on the company. It impacts through the laws and restrictions placed on the companies. Since Zara operates mainly in Spain and the UK, which falls within the EU countries therefore the political landscape of this area should be understood. The EU is beneficial for the company as it has made the entire region work as a local market. This allows the company to get fair advantage in the entire EU market. Zara is also operating outside Spain and EU markets and in markets such as USA, Dubai and Singapore. In this regard, the company needs to ensure that such countries have friendly relations with the national base of the company which is Spain. Also such countries should have a politically stable government so that the company continues to enjoy friendly terms. Economic Factors In terms of the economic factors, companies all around the world have been seriously hit with the financial crisis that struck the entire world in 2009. This has hampered the buying power on the consumers and most consumers are shifting their buying trends towards low cost goods. Since Zara is a fashion retailer, the economic crisis has impacted the company’s sales also and may continue to do so in the near future. As Zara operated mainly in Spain and the EU market, its currency is the Euros. This currency, despite the financial crisis, has been gaining ground. This means that the company’s profits from all over the world increase as they exchanged in the Euro currency. But this also makes the products more expensive in the foreign market. The products are already priced higher in external market due to transportation costs and other overhead costs (Anon. nd). Social Factors Social factors refer to the buying psyche and behavior trends of the consumers with regard to the particular industry. Zara belongs to the fashion industry and in order to understand the social factors, it is necessary to analyze the consumers’ buying trends within this industry. The fashion industry is an extremely volatile industry with respect to the fact that trends are continuously upgraded. The fashion trend of the previous season would not work in the new season. Zara, in this regard, has understood and adapted to this psyche. They roll in new collections every two weeks to maintain the interest of the consumers in the brand. Another social factor impacting the fashion industry is the perception of the consumers towards fashion. On account of media, the consumers of today are becoming more fashion conscious. These consumers want to adapt the latest trends of their favorite celebrities and models. An example of this is when Madonna went on a tour in Spain, the teenagers at the end of the tour wore the same dress to the last concert that Madonna was wearing on her first concert. This was all due to the courtesy of Zara where the designers quickly reacted to the current event and provided the consumers the chance to mimic their favorite celebrity. Another rising social trend is the increase in the body weight of the average consumer. As the eating lifestyles are changing towards junk food, obesity and general weight increase is on the rise. This affects the fashion industry since fashion clothing retailers mostly cater to the thin people with their limited size options. Plus sized consumers are frustrated because most high fashion retailers do not cater to this market and this market remains mostly untargeted. Technological Factors Technology has completely revolutionized the way that organizations operate in the world. One main change that technology has brought forward is through the internet. The internet not only allows information to be quickly and efficiently transferred from one area to another; but it has also introduced a new marketing and sales medium, the internet. Fashion industry and almost all industries in the world have made use of this medium to generate more sales for the organization. All fashion retailers maintain an online presence, not just through their website but also on popular social networking sites such as Facebook and Twitter. Zara has done the same. It has also introduced a mobile application where consumers can view the latest styles and offering by the stores and also buy through it. Technology has also for Zara automated the entire production system. Zara has installed state of the art communication and technological systems that complement the current strategy of the organization. Legal Factors In terms of legal factors, Zara should ensure that it is following all the laws put forth by the country where they operate. These laws, while similar in Western countries, are sometimes not so in the Eastern countries. For this, companies need to hire local lawyers to ensure that the company is complying with all state laws. Regular audits need to be performed in such cases. Also since the company operates internationally, it needs to take into account certain international laws. These pertain to environmental and social issues. Companies are increasingly adopting voluntary policies. These include compliance with international standards such as the ISO with respect to environmental governance. Environmental Factors As the awareness of the consumers and the community is increasingly towards the environment, companies around the world are becoming environmentally conscious. They are adopting environmental policies. Manufacturing companies such as Zara needs to consider the impact of the industrial production on the environment. They need to decrease wastage and release of toxic material in the environment. They need to properly handle their waste so that it does not harm the environment. Also since the company operates internationally, it needs to consider the impact of transportation on the environment. PORTER’S 5 FORCES ANALYSIS Porter’s 5 Force Model is an analysis tool developed by Michael Porter to understand the competitive forces at play within a particular industries. According to Porter, the stronger the power of these forces, the more challenging the industry is (Porter, 1979) Threat of New Entrants The power of new entrant is low. This is on account of the already strong companies in the market such as Gap Inc. and H&M. The industries have developed strong brand recognition and have a strong supply chain which allows them to enjoy considerable economies of scale. Since the fashion industry is based on brand image, new entrants would have difficulty in developing a strong ground. Threat of Substitutes The power of substitutes is medium to high. This is because the brand image of the competitors is well established in the market. Fashion consumers are very particular about a certain fashion and they would easily opt for a store that provides a more up-to-date style. Zara, in this case, has developed an edge over the competition by refreshing its stores every two weeks and by offering them at very competitive prices. Bargaining Power of Buyers The Bargaining power of the buyers is high on account of the fact that the market is in its maturity stage. In this stage, the market is saturated with brands that have gained recognition. This allows the buyers to main more power as companies are at cut-throat competition. Bargaining Power of Suppliers The power of the suppliers is low on account of two reasons. Firstly, the suppliers cannot directly reach the final consumers because it is the brand name that sells rather than the suppliers. Secondly, Zara has gained the upper hand by vertically integrating its operations and insourcing the bulk of its operations Competitive Rivalry within the Industry It is the power of the above factors that determines the competitive rivalry in the industry. This rivalry is medium to high in the industry. This is because the industry is in its maturity stage. In this stage, competition increases to a great extent while the production is standardize; thus reducing the power of the suppliers and the threat of new entrants in the market. The intense rivalry within the industry requires firms to come up with a differentiation strategy in order to retain or attract new consumers (Boyer and Verma, 2009). Q2: ANALYSIS OF INTERNAL ENVIRONMENT Resources and Capabilities The resources of an organization are the tangible and intangible assets that add value to the capabilities of the organization. The resources of the organization integrate into capabilities that finally form the core competencies of the organization (Ireland, Hoskisson and Hitt, 2008). The resources for the company includes its production facility in Spain, the sales team that serve as trend spotters, the strong financial position of the company and the employees of the company. These resources allow the company to enjoy a number of capabilities. Firstly, the company is able to manufacture its own products. It does not outsource most of its production which allows the company to reduce prices to a great extent. It also allows the company to quickly update its store stock. Since the company is not dependent on suppliers, it can easily adapt its products to the changing demands of the consumers. The employees of the company are also a resource for the company. They work in different aspects to add capabilities of the organization. Firstly the logistics team in the company ensures that the product supply is replenished every two weeks in the store. For that, they have a state of the art warehouses that systematically place the products in the shelves to allow for easier movement to and from the store. The sales team of the company serves two purposes. They not just sell the products to the consumers but also keep an eye on the demands of the consumers. When the consumers keep on asking for a certain design or a color, these trend spotters direct their request to the design. The design team further takes in the feedback from the sales team. They then quickly introduce and redesign their product range to suit the demands of the consumers. These capabilities ensure that the company enjoys the core competency of fast fashion. The products are updated every two weeks and this is made possible because of the integration of the manufacturing, logistic and supply team, design team and other employees within the organization. VALUE CHAIN ANALYSIS It was Michael Porter who introduced the concept of value chain analysis; he defined the chain as a set of activities that were performed by a firm in order to produce a valuable service or product intended for the consumers (Porter, 1985). Thus, the final product which is clothing that is delivered by Zara is a result of such activities. These activities include inbound logistics, operations, outbound logistics, marketing and sales and service. In the first stage of inbound logistics, Zara buys the raw material, the fabric. This fabric is bought by another subsidiary of Indetix. The fabric is bought in grey color that is later dyed according to the latest trends in the production facility, La Coruna. This ensures a certain economies of scale. At the next stage of operations, the designers develop the designs. The designers are required to keep the error margin to a minimum thus reducing the overhead costs of the organization. The company hires fresh graduates. This for two reasons; firstly to decrease overhead costs and secondly to take benefit from the zeal and fresh ideas of the new designers. The designers further have to keep on developing new ideas so that the stock is replenished after every two weeks. The final pieces of product produced are released in limited numbers so that they are immediately sold and new ones can take their places. In the third stage of the value chain, which is the outbound logistics, the product is moved to the distribution centers. Here the products are systematically placed so that the transfer to the stores is efficient and fast. Also it allows the company to make best use of the warehouse facilities. From there the product moves on to the stores; thus moves on to the fourth part of the value chain which is marketing and sales. The company spends on 0.3 percent of its revenues on advertising as opposed to the competitor’s 3.5 percent. Thus, the advertising budget for the company is quite low. This further reduces the overhead costs, thus strengthening the company’s position as an affordable fashion brand. In terms of sales, the company replenishes its stock every two weeks. It also uses its sales team to serve as trend spotters and thus they contribute in the overall design of the company. The last part of the supply chain is the service. In this regard, the company keeps an eye for the changing consumer trends. When the consumers visit the store for a certain design, this is instantly informed to the design team at The Cube (the design workshop). The designers then integrate this within their new collection which was soon hit the stores. This value chain is further supported by certain support activities. These include procurement, technological development, human resource management and firm infrastructure. The company fresh graduates for its design team to get the benefit of fresh and new ideas. The firm has incorporated state-of- the art technology in both its production and communication systems. The organization is vertically integrated to allow the organization more control over its resources and to achieve a suitable economies of scale. Q3: ANALYSIS OF PR ISSUES The company, at this time, is enjoying a good financial position. However despite this, the company has been recently plagued with certain issues. The most pressing of these issues the criticism of the company regarding its outsourcing practices. The company, though outsources, limited production to foreign countries, does not keep a check on its suppliers. These suppliers contact illegal immigrants for the manufacturing; keeping them in poor working conditions and paying them low hourly wages. These issues have been recently brought to the surface where the company was implicated for hiring illegal immigrants in Brazil and Morocco (Moore, 2011). Another issue that the company has been facing is the criticism against its designs. Some designers claim that Zara is copying their designs and putting them up for lower prices. This is a serious claim as it raises piracy issues. However, Zara claims that it has its own design pool and that its design may be inspired from certain designers but are not replicas (Anon., 2003). Q4: STRATEGIC ANALYSIS Recommendations for the company will be based on the analysis of external and internal environment presented above. These include both business level strategy and corporate level strategy. Business Level Strategy A business level strategy model was developed and presented by Michael Porter in 1980. This model was known as the Generic Strategy Model and is presented in Figure 1. With the above analysis in mind, the strategy that would be most suitable for Zara would be a hybrid strategy of differentiation and cost leadership. Zara already has a strategy where it differentiates its products by reviving them every two weeks. Cost leadership would be achieved by developing more manufacturing plants such as La Coruna in strategic locations around the world. The business is able to attain cost leadership through its vertically integrated structure. This structure allows the company to gain power over the suppliers by reducing their bargaining power. It further allows the company to gain power of the buyers through reduced prices as compared to the competitors. Corporate Level Strategies Corporate Level Strategy model has been developed by Ansoff. This model present four avenues of growth for the company. These include market development, market penetration, product development and diversification. This model is shown in Figure 2. From this model, the company has the following options: Market Penetration The company at this time needs to explore new markets throughout the globe. Right now, the company predominately operates within the European Union. While this has been profitable for the company till now, it needs to penetrate new markets. This would allow the company to increase sales by reaching more consumers. Possible new markets include Asian markets. Market Development Market Development involves developing new consumers with the same product. This can be done by targeting a different kind of consumers. This could include plus size people. Right now, fashion brands cater to only the thin people as it does not have sizes that could be worn by healthy or plus sized figures. The company can expand its market to these consumers by introducing a new size in the stores: the plus size. Since the company produces clothes in limited sizes, the strategy is quite feasible for the company. Horizontal Integration The company right now is vertically integrated. This means that the company keeps operations in-house. It does not outsource any part of its production process. In the case of Zara, the company ensures all operations are performed by the company; from material buying, designing to marketing and sales. While this has been working for the company till now, the company needs to revise its strategy. This prevents the company from focusing on its core competency which is producing fast fashion. The company needs to outsource part of its production process so as to allow room for focus on the design and sales of the products. Therefore the strategies suggested to the company are: Differentiation and Cost Focus Market Penetration Market Development Horizontal Integration Evaluation of Strategies Out of the above presented strategies, two strategies namely market penetration and market development have been selected to be evaluated under the SAF (suitability, accessibility and feasibility) model. This model was developed by Johnson and Scholes. Suitability analyzes whether the strategy would be appropriate given the external and internal analysis of the company. Accessibility analyzes whether the strategy fits into the objectives of the major stakeholders of the company. The feasibility aspect of the model analyzed whether the strategy would be appropriate given the financial position of the company. Market Penetration Suitability Expansion in the global market is a suitable option for the company. This is because fashion retailers around the world including competitors such as H&M and Gap Inc. are expanding into other market. The industry at this point is at its maturity stage. In this stage, organizations expand their geographic reach to serve more markets and more consumers. Also the company has a good communication network. The company has a well-developed online presence. This would allow the company to easily develop a good brand reputation in the global market. However, since the company relies on one production facility in Spain, this could lead to a number of issues. The company would have difficulty in transporting raw materials and finished goods to foreign markets. Also it would increase the burden on the one facility that the company has. Accessibility The adoption of this strategy would ensure more revenues for the company. The stakeholders of the company including the shareholder are concerned merely with the revenues of the company. When the company would increase its market penetration, it would mean more revenues for the company. Feasibility The financial position of the company is quite strong given its consistent growth. The company, if it expands operations, would require considerable expansion. This expansion would require a heavy amount of investment. Since the company is operated and owned by Indetix, this is not a big issue. This parent company can raise the required capital through other subsidiaries. Since the strategy promises to be fruitful, these subsidiaries would be interested in the investment. Market Development Market Development as discussed above presents the strategy of exploring a new market segment, which are the plus sized people. Suitability With the intake of junk food increasing, the average size of the consumers in increasing. Furthermore, consumers are becoming increasingly frustrated with the limited size options available in fashion stores. Therefore, exploring this new market segment is quite appropriate for the company at this time period. The competitors right now have not come up with a good range of products for plus sized people. Zara could develop a leadership position and take advantage of the first mover. However, since the company does not spend a lot on advertising, it would become difficult to bring these customers within the stores. Plus sized people generally avoid going to fashion stores because they know that such stores do not cater to their size. In this case, the company can employ the use of store exterior and their online presence to market to their new market segment. The strategy is also appropriate for the company given its strategy of introducing limited number of new products. The designs at the company are produced in limited quantity to prevent overstocking. This ensures that the maximum number of products are sold full price. When the company would introduce a new size, they would do so by keeping the stock in low quantity to check whether the strategy would be feasible. Accessibility This strategy is accessible in the sense that it would increase revenues for the company without requiring a huge amount of investment from the company. The main objective of the shareholders is to get maximum returns and this strategy is bound to increase revenues for the company. This strategy would also give a chance to the designers to challenge their skills as designers. Since the current fashion norm is only to cater to the extremely thin, designers only have to create pieces where the thin people would look good. This is not as much as a challenge as making clothes that would look good on the plus sized people. Feasibility This strategy is feasible for the company as it requires minimum investment by the company. The company already has the resources to develop a product range for a new market segment. These are the fabric, its embellishments, the designers and the sales team. The only, however, would require investment in advertising and creating new design team. While initially this would require a good amount of investment but this strategy is more feasible financially as compared to the market penetration strategy. CONCLUSION The above analysis presents the findings that Zara is a profitable company in the fashion industry despite the maturity stage of the organization. This is primarily because of the superior supply chain management of the organization and the vertical integration of the business structure. The company has redefined the way that fashion retailers do business by replenishing its stock every two weeks. In order to remain profitable, the company needs to pursue a strategy of either global expansion or market development. It can cater to a new target segment which is the plus sized people. These people are gaining in number on account of the changing lifestyles and eating habits. Right now they are not catered properly in the fashion industry and Zara can get the first mover advantage here. The company, thus has a good potential for growth and given the right strategies, it can establish its position as a leader in the industry. References Anon 2003, Fashion Chain Zara Reclaims the Glory of Spain, Retrieved from http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=565&language=english [Accessed April 21, 2013] Anon, n.d., Zara Case Study Ansoff, I., 1957, Strategies for Diversification, Harvard Business Review, Vol. 35 Issue 5, pp. 113-124 Boyer, K. K and Verma, R., 2009, Operations & Supply Chain Management for the 21st Century, Ohio: Cengage Learning, Henry, A., 2008, Understanding strategic management, UK: Oxford University Press Ireland, R., Hoskinsson, R. and Hitt, M., 2008, Understanding Business Strategy: Concepts and Cases, Ohio: Cengage Learning Johnson, G. and Scholes, K., 2008, Exploring Corporate Strategy, USA: Financial Times/ Prentice Hall Moore, M. 2011, Zara Caught in Slave Labor Scandal, Green Go Post Retrieved from http://greengopost.com/zara-slave-labor-scandal/ [Accessed 12 April, 2013] Porter, M. E., 1985, Competitive Advantage: Creating and Sustaining Superior Performance, New York: New Press Porter, M. E 1980, Competitive Strategy: Techniques for Analysing Industries and Competitors, New York: Free Press. Porter, M.E., 1979, How Competitive Forces Shape Strategy, Harvard Business Review Appendices Figure 1 Figure 2 Read More