Competitive Strategy Zara - Case Study Example

? In-depth analysis of competitive forces and strategic issues shaping Zara industry For any company to sustain long term profitability and growth, it wise for such a company to have the ability of responding strategically to competition hence the need of such a company to identify its competitive forces and shape them strategically. As a competitive strategy Zara Industry business model mainly focus on in-house production as its model to withstand competition in the clothing industry. Today’s business environment is highly competitive and many firms choose to send out non-core functions to suppliers or manufacturers a situation which gives them room to focus only on core operations. Other firms also choose to outsource with the objective of enabling the firm reduce its costs through specialization and creating efficiency in the labor and resources of the firm (Porter 1996). Other firms also in the efforts to achieve the same try to gain control over the whole firms through as many departments as possible. This they are likely to achieve by the analysis of its value chain. Such firms are said to have gained such controls over the total production process by initiating in-house production hence and achievement of shorter lead times in production and supplies. Zara is one of the fastest growing cloth retailers and it holds a number of shares in the giant Spanish Inditex Group (Folpe 2000). This part of the group in the clothing industry in Spain has developed a unique business model which has enabled it to qualify as one of the vertically integrated retailers. This it has achieved through the identification of its lines of competition over the rest of the retailers. It shapes such competitive edges into strategic issues an act which has enabled the industry to obtain control of every step of the value chain while only outsourcing only cloths with a longer shelf/fashion lifetime (Birger and Stires 2006). The competitiveness and an organization’s focus on strategic issues in the modern business environment has become of age in strategic management of such organizations. A renowned author in this field is Porter through his five forces of competition where he introduced the ideas of competitive strategy, competitive forces and competitive advantage. This model is based on the fact that an organization’s internal environment that is the resources, capabilities, value addition to the value chain are the components of the organization that are most of the time used to account for its core competencies (Birger and Stires 2006). According to Porter’s model; cost and differentiation are the initial two competitive forces that result into competitive advantage to any given organization. Low cost strategy is derived from the vast cost leadership strategy that is coupled with efficiency and stringent controls to costs (Folpe 2000). For example the high profitability and growth that is witnessed in the Zara industry over time is as a result of lower costs of advertising while adopting a flat organizational structure with superior organization systems and well laid down logistics coupled with efficient use of capital. All these are directed towards provision of efficiency (Porter 1996). The company also adopts differentiation as a competitive forces and strategy to make a difference in its operations. As a source of advantage differentiation ensures that unique brands of the products are offered as well as technology, customer service and products all these aimed at making the firm gain a bigger share of the market. Zara industry as one of the famous and fast growing firms in Spain is based on its strengths and speed in designing and merchandising the products in stores. As compared to other firms in the turbulent fashion industry, Zara products are able to reach the stores in a record time of only 5 weeks as opposed to nine months of other firms in the industry (Folpe 2000). This fast response to the market is achievable due to the differentiation strategy in the designing, information systems and logistics management which is quite efficient (Hall 2008). The company has its own factories, designers and stores and the designers are in close contacts with the stores and hence the ability to respond quite quickly to any changes in trends. The company also does the purchase of its textiles from global suppliers and conducts the final production activities in its own facilities and equipment (Porter 1996). In the production process they use a computer controlled machinery to cut the fabric for production. Zara is able to capture a lot of consumers through reacting faster to any changes and this is its competitive edge over the other firms in the industry (Birger and Stires 2006). This is the way in which Zara has been able to build a competitive advantage over the other players in the textile industry through the use of differentiation, competencies in design, integrated information systems, and effective and efficient logistics management (Folpe 2000). For any business to realize success in the current operation environment they have to maintain successful competitive advantages and in addition ensure consistent improvement and innovation in the products they offer to their clients. This is done and achievable through the right business strategy which would in this case be the means through which such competitive advantages can be met. Zara has adhered to these rules and has hence been pronounced as the more fashionable as compared to GAP, Benetton and H&M and still their prices are much less hence affordable to many. It is upon the activities that the strategist has developed based on the theories that Zara is in the position of continued success in the year 2013 onwards. The foundations derived from the developed macro frameworks, porter’s 5 forces and Industry ILC theories will need strengthening to steer the company forward (Porter 1996). 2. Internal strategic audit of issues that face Zara This form of audit will be geared towards looking at Zara in terms of the internal aspects that it is composed of as an organization. It is worth noting that the customer is always at the top of the stakeholders recognized by the firm in its model. These include the whole process right from design, production, distribution and sales through its extensive retail network. According to the mission statement by Zara we are able to know some of the key factors which make it successful among which is its unique business system hence one of the leading fashion brands in the whole world (Birger and Stires 2006). The internal analysis of the firm according to the internal issues presented in the article takes the form of value chain analysis of the organization. The organization gains a lot of competitive advantage through its offer of fast fashion in the form of quick marketing, fast an accurate reaction to customer needs hence providing the customers with exactly what they need. This is in line with the mission statement which outlines clearly that, “The customer is at the heart of our unique business model.” Therefore, acting swiftly to the customer’s needs and demand is at the center of Zara’s most important service. As an internal issue all the activities of the chain have to support the idea of fast fashion and the need that they perfectly match each other (Hall 2008). Right at the center of the value chain exist the vertical integration strategy as exploited by Zara. Most of the activities of the company take place in-house right from design, production and distribution in a facility that is located near La Coruna, the headquarters of the company. The centralization of its activities enables the firm have control of all its activities and operations of the value chain. In addition, there is high flexibility and proximity of all the divisions a situation which allows for swift changes and reactions on any current changes. In order to facilitate the speed and flexibility of the internal operations of the company and its value chain- the management of the company tries as much as possible to minimize their dependency on their suppliers while encouraging their responsiveness. They do not as a result purchase more that 4% of its supplies from a single supplier but do distribute the same in reasonable quantities among their 260 suppliers. In addition, the company has a policy that enables it to take 405 of its used fabric from the other companies owned by Inditex an action which further limits their dependency on external suppliers. All these makes the operations of the company to quantified as 50% in-house (Hall 1994). The firm adopts the local production techniques of its clothing and textile products and this takes place right at the headquarters in La Coruna with a bit of the production being outsourced to subcontractors of which over 70% of them are found within Europe and around the headquarters of the firm. To derive the benefits of cost minimization the company is at times forced to outsource some of its productions to Chinese companies in china most so the production of basic commodities. The advantage that the closeness to the customers have as well as to the production sites is that planning and forecasting is fastened as there is a narrow distance between supplies, production and demand (Gentry 2007). Furthermore, such action allow for the production to at times if not most of the time to take place in small batches due to the reduced risk involved in the production in smaller volumes; this can as well enable production to take place six times a year as opposed to most firms in the industry that takes place only 4 times a year. This enables Zara be in the position of offering more fashionable and up to date products hence a competitive edge (Hall 2008). Zara also has a very strong internal response system that is composed of human resources integrated with information technology. The importance of fast and frequent communication between the branches of Zara is the force behind the use of customized handheld computers. This enables the workers to commence work on any information gathered from the stores as soon as they are gathered hence a cross-functional function of the teams (Birger and Stires 2006). Within the system it is the designers who make a draft of over 40,000 items annually from which a production of around 11,000 commodities are realized. All the company personnel are fund close to one another as the designer sits right in the middle of the production process closer to the market specialists and procurement and production planners. The physical vicinity of the workers and personnel again is responsible for the speed, flexibility and the quality of production realized as feedback, alteration or assumptions on prices are quickly possible. The fastness upon which the process takes place and the flexibility as a result go a long way in out bounding the logistics of Zara (Hall 1994). Finally, in the internal operations and processes, all the finished products are able to pass through the centralized distribution centre just near the headquarter. A shipment of around 2.5 million items pass through the distribution centre and no item stays longer than 72 hours at the centre. The company imposes quick and accurate decision making procedures which ensure that their deliveries are within the strict schedules whereby the finished garments are distributed to the stores 2 times a week while the deliveries arrive in the stores in Europe within a record time of 24 hours. This enables us see a two very crucial factors for the internal operations of Zara which if time and speed apart from efficiency and effectiveness (Gentry 2007). The company measures its distance not in Kilometers but in terms of time, they are the ones who adopt the argument that time is money and nothing can be substituted to it if profitability is to be realized (Gentry 2007). In a nutshell, vertical integration and centralization of operations are the key internal operation strategies that support the success of the value chain by Zara. There is a close link between procurement, human resource management, inbound logistics as well as operations and outbound logistics. The coordination of these activities happen in a way that they are able to respond to each other as fast as possible hence the achievement of Zara strategy of fast fashion in the highly volatile fashion industry (Hall 2008). What has guided the internal operations of Zara as witnessed above has been its business model which says they sell medium quality clothing at affordable prices apart from vertical integration and quick response (Birger and Stires 2006). Throughout the whole process of Zara business system, designing, sourcing and manufacturing; distribution and retailing are modeled around four fundamental success factors; factors which are involved in all the aspects of the business and its operations for success in terms of profitability and growth (Hall 1994). 3. External stakeholder issues that Zara faces and their impact on the reputation of Zara There are a number of external stakeholder issues which if not well handled can always result into a damaged reputation of any global company. Zara has therefore strived to always help the sustainability of the development of the society in which it operates and the environment in which it interacts with. Zara runs the manufacturing of textile a process which uses toxic chemicals and can hence result into water pollution. These are critical environmental issues that affect the external stakeholders of the company negatively and if not handle well by the management of the company can result into a damage of the reputation of the company’s operations. Apart from the environmental factors there are also the ethical and legal issues. A company involved in legal battles has the proximity of damage to its reputation a great deal. The group Inditex group is highly committed to CSR activities and Zara happens to a member of the group hence part of this policy (Gale and Swire 2006). To avoid the depletion of the energy in the environment Zara saves a lot of energy and strives to make its stores eco-efficient through the development of eco efficient management models for their stores. In the recent past the company works around the clock to ensure that they are at the right side of the law to guard its reputation that has taken them quite some time to develop (Gentry 2007). The company operates in an environment with a lot of competition and it has to ensure that the products they produce to the consumers are of the required quality which would make them stay away from scandals. Scandals are not good for the reputation of a company such as Zara as this has the impact of greatly reducing the reputation of the company and hence a reduction in the sales as well. For instance the company was reported to be engaged in slave labor scandal through the purchase of items from Bolivian and Peruvian immigrants in illegal working conditions (Helft 2002). The workers who were allegedly involved in the scandalous act accompanied the labor ministry and reporters to be freed from the act by Zara. This is an unfair act by the company caused by lack of the company to audit all the branches they claim to own hence sourcing material from companies engaging in such unfair and acts likely to damage the reputation of the fashion giant (Johnson, Whittington, and Scholes 2011). The company being accused of exploiting workers is not something good for the ears and the company has to employ measure to ensure that they either deny the claims as was with Inditex who directed such claims to the supplier AHA. They claimed the supplier had violated the ethical code for the manufacturers (Gale and Swire 2006). In the event that such occurrences that are damaging to the firms operations take place; the management has to come out strongly and defend the image of the company. They can as well devise ways of making the affected individuals be compensated and ultimately ensuring that the company operates outlets that are in compliance with the law (Hall 2008). The operation branches of Inditex such as Zara must take lead in ensuring that the employees of the company are handled with the basic possible human rights available. Unlawful and unethical activities are much detrimental to the operations of a business most so the ones operating in the volatile environments like Zara in the fashion industry. Apart from simply bringing down the business in form of damaged reputation, the company also gets financial loss if legal suits are initiated against the company. All the costs lead to the general decline in the components of growth of the firm such as sales, profitability and growth ultimately (Helft 2002). With Zara’s case sustainability may be ensured for the short run since they offer their clients with the fashion products at affordable rates. Within this window period the organization must ensure that they correct the unethical practice of labor exploitation as reported and continue meeting the demands of the customers as there is no business that can ever survive without customers to buy their products. The consumers must as well be enlightened by the organization on the need that they have a right to complain of any form of exploitation and in this way firms are likely to be on track when it comes to unsupportive practice (Johnson, Whittington, and Scholes 2011). 4. Strategic options available to Zara and recommendations These are responses that any given firm can employ towards its external environment and they are plans which require alternate and creative actions. Zara has to continue operations in its current environment and foster its survival into the future. To arrive at the best options available for Zara for continued operations into the future, our discussion will have to borrow a lot from the external and internal analysis as discussed already. The external and internal analyses are however difficult for companies given the economic environment upon which they are currently operating (Bowman and Faulkner 1997). The company in its operation is faced with many new and continued challenges such as the ever changing technology and the increased sped of globalization through the advent of social media and this has greatly changed the way business is done a great deal. In the case above the analysis of the external environment was done using PEST analysis with great weight given to the use of the Porter’s 5 forces and these enabled the organization that is a giant in the fashion industry to identify its opportunities and threats (Helft 2002). It is from the opportunities and the threats as identified by the company that the company will be able to identify the strategic options that could enable it to continue its operations into the unforeseeable future. The company in question, Zara has so far delivered to its consumers and the first and foremost strategic option is for the strategist to identify what can be done to enable the organization have a competitive advantage that can never allow the competitors shake its stand in the current market situation (Gale and Swire 2006). The company is also forced to fast track its globalization strategies o enable it survive in times of hard times irrespective of whether it is economic or any form. As it stand for Zara currently if their stores and production plants in Spain are hit they do not have any fallback since most of their operations are centralized (Helft 2002). Apart from just operation vulnerabilities that the firm may face in the current state they are also facing acute risk of financial vulnerability if the Euro strengthens against the dollar. Such a situation would make the costs of operations be unbearable as compared to those of its competitors another reason why it should diversify its operations throughout the world. This will ensure that in the event that the costs of operations increase in one part of their operations other areas are not affected as well hence able to make the business thrive well (Johnson, Whittington, and Scholes 2011). By incorporating firms abroad will be able to meet some of the loses which are likely to happen by increasing the prices abroad. As mentioned in the case study, the prices of Zara products like in the US can be priced to cost 40% more than they do in Spain. The strategy to ensure they invest more in regions where they appear to be doing well is another strategy and this must take place once they have established that they are in the position of making enough supplies of the same products they offer (Bowman and Faulkner 1997). Vast economic conditions have the probability of impacting in a worse way in the financial performance of the firm. This is because when there is an economic meltdown consumers simply buy less. The same consumers may as well change their taste and preferences to more affordable baskets of the products they purchase. As it is evident Zara is susceptible to the conditions in Spain as the market accounts for around 40% of the contributions of the firm to Inditex sales hence globalization of the firm’s operations is the surest way to go (Johnson, Whittington, and Scholes 2011). For Zara to build a sustainable competitive approach against the competitors the firm should adopt the strategies of positioning approach and the resource based approach. The former is associated with Porter where the author maintained that a company needed to understand the structure of the industry in which it operates so that it could change its strategy to improve the performance and outperform its competitors (Bowman and Faulkner 1997). For Zara to know the models and how such models will be of use the analysis choice implementation framework should be used. The company will therefore establish a position that best fits its competitive forces within its industry of operation and it as a result chooses a favorable position in which it is able to earn an above average returns even in the most unlikely events that the industry operations are not favorable. Resource based approach is dependent on the availability of resources by the firm (Porter 1996). The resources available should be amassed and used in building capabilities which will in turn lead to competences that are difficult for competitors to emulate. Rather than starting by starting by looking at the challenges brought about by the external environment as the former strategy, resource based strategy approach lies within the company. The success of the strategy used should be viewed against the satisfaction that they have with the customers. If the strategy continues to bring in more customers into the business then it is a good strategy and should be adopted for the success of the firm in its future operations (Bowman and Faulkner 1997). References Birger J., and Stires, D., 2006, “CEO on the Hot Seat: Paul Pressler, Gap”, Fortune, Feb. 6. Bowman, C. and Faulkner, D. 1997, Competitive and Corporate Strategy, London, Irwin Folpe, J., 2000, “Zara has a Made-to-Order Plan for Success”, Fortune, Sept. 4. Gale, B.T. and Swire, D.J. 2006, Value-Based Marketing and Pricing, Boston, Customer Value Inc. Gentry, C., 2007, “”European Fashion Stores Edge Past U.S. Counterparts”, Chain Store Age, Dec. Hall, J., 2008, “Zara is now bigger than Gap”, The Telegraph, Aug. 18. Hall. W. 1994 Review of research: Competency-based training and assessment, Adelaide, National Centre for Vocational Education Research Helft, M., 2002, “Fashion Fast Forward," Business 2.0, May Johnson, G., Whittington, R. and Scholes, K 2011, Exploring Strategy, 9th ed., Essex, Prentice Hall Porter, M.E. 1996 What is Strategy? Harvard Business Review, Boston pp 61-78 Vol.74, No.6 November-December Read More