Company Background
In 1963, Amancio Ortega started a small company in Spain that manufactured women’s pajamas and lingerie products for garment wholesalers. In 1975, after a German customer cancelled a sizable order, the firm opened its forts Zara retail shop. The original intent was simply to have an outlet for cancelled orders but the experience taught the firm the importance of a marriage between manufacturing and retailing – a lesson that guided the evolution of the company ever since. From a starting point of 6 stores in 1979, the company established retail operations in all the major Spanish cities during the 1980’s. In 1988 the first overseas Zara store opened in Porto, Portugal, followed shortly by New York City in 1989 and Paris in 1990. But the real ‘step-up’ in foreign expansion took place during the 1990s when Inditex entered 29 countries in Europe, the Americas and Asia (particularly during 1998 to 2001 when it entered 21 of these 29 countries). In parallel with its overseas expansion, Inditex diversified its retail offering by adding and acquiring new brands in order to target different customer segments. Each brand operates independently, with its own stores, ordering system, warehousing and distribution system, subcontractors, and organizational structure (Inditex 2006). Zara is the largest Inditex division – accounting for more than 75 percent of total Inditex sales. The first Zara clothing store opened in 1975 in Spain as a small retailer selling men’s and women’s clothing. Since then Zara chains have grown into retailing giants with almost 1000 stores worldwide and an impressive sales record. The success of Zara is partly to do with the appeal of its men’s and women’s and children’s fashions and accessories that display unique style but at real world prices.
Task1
Industry Analysis
Strategic management starts with strategic planning an important part of the strategic planning process is External Environment Analysis. It is important that the company conduct a futuristic view of its environment as the environmental conditions may change from the date of the conception of the strategic Plan. Forecasts are needed in strategic planning and all environmental factors must be forecasted. This section will present an in-depth analysis of the industry where Zara competes. The analysis will include customer analysis, competitor analysis, PEST analysis, Porter’s Five Forces Analysis and to have a complete view of the company’s business environment a SWOT analysis will be conducted.
External environmental analysis reveals the health of an organization, its values, political climate, its use of technology and resources, its competitive rank within the industry, its overall image, and the areas requiring improvement (Gilley and Maycunich 2000). An organization’s environment is composed of those institutions or forces that are outside the organization and potentially affect the organization’s performance. These typically include suppliers, customers, competitors, government regulatory agencies, public pressure groups, and the like (Sims 2002). Because of uncertainty, these environmental factors play an important role in determining the success of the organization. Organizations are now faced with very dynamic environments where government regulations rapidly changes, new competitors arise, raw material are difficult to acquire, and consumer preference continues to change and so on. Now let us look at these external factors that shape the organization’s strategies and objectives and affect the organization’s success.
The global textile and clothing industry also experienced changes. One of the biggest changes is the removal of import quotas that has opened opportunities for large exporters such as China and India. The textile and clothing industry, particularly in Europe is characterized by fragmented production with a large number of small and medium-sized companies mainly located in Italy, Greece, France, Germany and Spain (Nordas 2004). The textile and clothing industry in Europe is also becoming more international and international competitors are posing greater threats. Sub-contracting or delocalization of textile and clothing production to countries with lower labor and transportation costs is also becoming popular among European retailers as it reduce lead-time and costs (Berkeley and Steuer 2000). European retailers and manufacturers are also changing their business models to keep up with the changing customer demands and tastes (Lopez and Fan 2007).
The Fashion Industry
The fashion industry is composed of different products and markets where there is an element of style, which is short-lived. The fashion industry is characterized by the following characteristics:
1. Short Life-Cycles – the product is often short-lived, designed to capture the mood of the moment. Consequently, the period in which it will be saleable is likely to be very short and seasonal, measured in months or even weeks.
2. High Volatility – demand for these products is rarely stable or linear. It may be influenced by the inconsistencies in weather, media, celebrities and icons.
3. Low Predictability – because of the volatility of demand it is extremely difficult to forecast with any accuracy even total demand within a period, let alone week by week or item by item demand.
4. High Impulse Purchasing – many buying decisions by consumers for these products are made at the point of purchase. Meaning, the shopper when confronted with the product is stimulated to buy it, hence the critical need for ‘availability’.
The clothing industry has been changed by globalization. Now national brands such as Zara and Mango from Spain, Topshop from the United Kingdom, Hennes & Mauritz from Sweden, Gap from the United States, United Colors of Benetton from Italy, Uniqlo from Japan and Esprit from Hong Kong are crossing borders to become national brands. These clothes retailers are following the internationalization process of US retailers predominantly targeting the youth market (Stone and McCall 2004). Today’s fashion industry is highly competitive and the constant need to refresh product arranges means that there is an inevitable move by many retailers to extend the number of ‘seasons’ (Christopher et al 2004).
Consumer Analysis
Zara positions itself as the designer-boutique alternative for the price-conscious but trendy consumer (Cohen and Roussel 2004). Today’s consumers are spending less on clothing – choosing to spend their disposable income on healthcare, electronics, education, and travel and leisure. Moreover they can now choose from a wide assortment of inexpensive products.
Competitor Analysis
Three main competitors of Zara pose the biggest threats. These are Mango, the Gap and H&M. Almost any retailer can be a threat to Zara due to its wide range of merchandise categories. The Gap is one of Zara’s main competitors as it also sell the same merchandise as Zara does at a more affordable prices and less trendy styles. The company also has a world-wide presence. H&M (Hennes and Mauritz) is one of Zara’s most threatening competitors. H&M also has been quick to internationalize which allows it to gain sales in countries outside its native Sweden. H&M also is more attentive when entering new markets and tends to enter one country at a time, as opposed to Zara who multitasks globally. H&M builds distribution centers in their international locations in order to cut down lead times and potential logistics costs. Another threat to Zara is that H&M carries trendy clothing choices that they have designed based on the melding of international apparel tastes (Craig et al 2004). Mango, also a Spanish fashion retailer is also known for its excellent business model and supply chain management. Mango has a history comparable to Zara’s being a Spanish company with approximately the same number of stores in the same number of countries worldwide, and a recent history of great success. Like Zara, all the Mango stores are located in prime positions, whether in the main shopping centers or premises located in city centers. Stores are of sufficient size to display its collections. The products of Mango are also similar to Zara’s in style, pricing and quality. However, Mango is very different from Zara in organizational strategy as Mango is based on a franchising system, and in marketing strategy, relying heavily on advertising campaigns.
Porter’s Five Forces Analysis
1. Competition among existing firms (High) – the competition among existing firms in the clothing industry is very fierce. Zara does not only compete with local Spanish brands such as Mango or Springfield, it also competes with other European brands such as H&M, Topshop and United Colors of Benetton. Zara also competes with international brands like Gap.
2. Threat of new entrants (High) – the clothing industry is very fluid and open. Small and medium-sized companies enter the fashion arena frequently.
3. Threat of substitute products or services (High) – consumers are always on the look out for more quality trendy products at more affordable prices. The threat that other companies can offer the same quality or better quality products at lower prices is high.
4. Bargaining power of suppliers (Low) – fashion retailers/merchandisers outsource their production in places where transportation and labor costs are cheap. Zara strictly controls its production and has a very stringent contracts with suppliers.
5. Bargaining power of consumers (Medium) – the consumers is the focal point of Zara’s business model. In spite of this, Zara has conditioned the minds of the consumers by offering limited stocks and by quickly replenishing its products.
Task 2
Strategic Capabilities
Innovative Business Model
Inditex, the company that owns Zara has an innovative business model that serves as the foundation of its strategic capability. The business model of Zara gives utmost importance to customer and continuous innovation. The organization considers the customer as the beginning and end of its business. However, Zara has pushed forward by giving the customer an active role from the start of the chain and turned it into the principal drive for its entire business model. The requests, comments and suggestions of the customers are considered by the design team which, based on this, create some proposals that are sent to stores immediately. The start of the company’s business model is the store. The store is important to the company’s business model because this is where informatio0n from the customers are received and collected. These information are sent to design centers and commercial departments in real-time. The response from the customer with new requests sets the process going. Zara stores receive new products twice a week , thereby giving a quick response to the customer.
Excellent Supply Chain Management
For Zara stores to be able to offer cutting edge fashion at affordable prices requires the firm to exert a strong influence over almost the entire garment supply chain: design, purchasing, production, distribution, and retailing. Zara produces clothes that resemble the latest couture creations, but they beat the designers to market. Because they use less expensive fabrics, they can also provide the product at a lower price. To achieve this type of competitive advantage, Zara controls most of its supply chain, by managing all design, warehousing, distribution, and logistics functions. Zara design the organization, operational procedures, performance measures and even office configurations to make information and product transfer easy. Because Zara’s merchandise is produced in small quantities, provided on predictable schedules, and displayed in the stores for only a short amount of time, customers visit Zara stores more frequently. This has an added advantage of helping Zara avoid the cost of advertising.
The scheduling techniques of Zara is also very efficient.
- Centrally Managed Inventory – controlled and timely delivery of clothing to all stores across the world
- Reduced Design Cycle Time – timely response to items that sell well and ability to quickly alter or enter new designs
- Strong IT System – allows almost immediate communication of sales and inventory information across enterprise
- Logistics and Distribution – clothes move within hours to their destination, efficient scheduling of shipments
Fashionable Items at Real World Prices
The particular operation strategy used by Zara helps it respond quickly to shifts in customer demand and build a powerful brand. Zara estimate that it takes only two weeks to convert design ideas into products on the shelf to satisfy its young, hip, clientele with fashion for the masses. Store employees regularly tour urban hot spots looking for new trends and reporting back to designers. Knowing what’s in today may be out next month is the secret of the success of the Spanish retailer as is the ability to apply operations strategy that puts new fashion concepts on the shelf twelve to fifteen days.
Zara’s appeal is in its clothes themselves. Zara has earned a reputation of being able to come up with more affordable interpretations of catwalk styles into its stores with breathtaking speed. A design presented in a fashion show by a luxury design house will not be available to the masses for months, but Zara is able to create something that looks like it in just two weeks. This enables Zara to attract a large number of customers who cannot afford designer clothes or who are looking for a more affordable alternative (Tungate 2008).
Although Zara is known for its ability to provide more affordable interpretations of catwalk clothes, it is also known as a company that can create innovative fashion pieces. This is attributed to its highly effective design strategy that starts in the stores. The customer feedbacks, requests and suggestions that are gathered from the customers in every store is passed to the design team. The design team also consult magazines, trade fairs, and fashion shows to know the latest in the fashion industry. The company ensures product quality by designing its own products. Zara employs around 300 people in its headquarters in Spain. The headquarters staff is composed of designers, specialists and buyers. Together they produce designs for approximately 40,000 items per year from which 10,000 are selected for production. Unlike their industry peers, these teams work both on next season’s designs and, simultaneously and continuously, also update the current season’s designs. Extensive feedback from the store network also forms an integral part of the design process. Women’s, men’s and children’s designers sit in different halls in a modern building attached to the Inditex headquarters.
The store managers play an important role in making sure that each store only offers what customers want and need. Store managers monitor the tastes and demands of the customers, and tailor stock accordingly. That is the reason why even if there are two Zara stores in the same city the products that are being offered are not exactly the same. Zara’s product managers keep in touch with stores, seeking feedback from customers and monitoring the popularity or otherwise of items (Tungate 2008).
Task 3
Strategic Choices
Porter’s Generic Strategies
Michael Porter believed that a firm can choose between two options. These are cost advantage and differentiation. There are according to Porter three generic strategies that a company can employ. These are cost leadership, differentiation and focus.
Cost Leadership
Overall, cost leadership requires a firm to develop vigorously an optimally efficient scale of operation and to control tightly the firm’s cost in all activities (Reid et al 1993).
Focus Strategy
A focus strategy requires a firm to concentrate on a particular market segment which may be dictated by factors such as the buyer, the product, or the location rather than the overall market. The strategy is predicted on the notion that a firm that devotes its entire energies to a niche or target can better achieve competitive advantage than those rivals which broadly compete across the market (Reid et al 1993).
Differentiation
Firms that follow the generic differentiation strategy seek to exploit firm-specific assets by producing goods or services, which are almost unique compared to those offered by rivals. Differentiation is not limited to the physical nature of the product. Other significant dimensions of differentiation include distribution channels, marketing efforts, after sales service and so on. Essentially a firm seeks to establish itself as unique within its industry. Effective differentiation is generally resistant to the forces of competition. Potential and existing rivals must overcome the uniqueness of the product and try to erode customer loyalty. Customers are less likely to switch because of a perceived lack of similar alternatives (Reid et al 1993).
Imperative Strategic Choices
Zara employs different strategies to gain competitive advantage over its competitors. In order to become the leading fashion retailer in the world, Zara employs a combination of both differentiation and cost leadership strategies. This imperative strategic choice is achieved through:
1. Distribution Channels
One of the possible threats to the company and a potential source of failure is its Spain-centric production and distribution. Majority of the company’s processes are being done in Spain and the company’s two distribution channels are in Spain. If the external environment is subjected to drastic changes such as political unrest, economic flux, weather changes, calamities, and terror attacks the company will be vulnerable. In order to avoid this and to strengthen the company’s presence in other locations, the company can develop distributions channels in strategic locations in Asia and in America.
2. Complimentary Sales Channels
In order to reach the consumers and to fully utilize technology, Zara can make use of the internet as an alternative sales channel where customers can shop online. Catalogues can also be used as an alternative sales channel. Zara can choose to grow in three sales channels – stores, internet and catalogue. Although the stores are Zara’s primary sales channel, internet and catalogue sales can strengthen Zara’s profile and increase the level of service to customers, thereby making Zara even more accessible.
3. Expansion in Europe, South America and Asia
One strategic choice that is pertinent to the strategic positioning of Zara is expansion.
Zara continues to expand to new markets. In 2006, Zara entered markets such as Croatia, Slovakia, Colombia, Guatemala and Oman (Annual Report 2007). The chain continued its expansion process with openings in the main commercial areas of large cities. In line with the company’s strategy of growth, in 2007 Zara opened up in Peking with the first store of the Chain in the Chinese capital, and continued growth in the Russian market with openings in Moscow, Kazan, Rostov and Novosibirsk. In Europe, stores opened in such places as Bologna and Naples (Italy), Frankfurt (Germany), Gotenborg (Sweden) and Oslo (Norway). What is more, the chain began to operate in five new markets: Croatia, Slovakia, Guatemala, Colombia and Oman (Annual Report 2007).
Task 4
Recommendation and Justification
The recommended growth strategies for Zara is Market Expansion through Market Development. The focus of market development is entrance to new markets where Zara is not yet present.
Market Expansion through Market Development
Finding new markets may not guarantee success for the firm. A firm can also achieve growth in developing markets. Market development strategy involves developing new markets by duplicating the business operation, with minor adaptive changes. The firm can undertake a market expansion strategy. In market expansion, the same expertise and technology and sometimes even the same plant and operations facility can be used. There is therefore potential synergy and resulting reductions in investments and operating costs. Geographic expansion may involve changing from regional operation to a national operation, moving into another region, or expanding to another country (Proctor 2000).
The expansion of Zara in Europe, South America and Asia requires a more developed and well-managed supply chain. In order to make the expansion strategy effective the company must further develop its supply chain management process. In order to strengthen the company’s supply chain management, Zara can make use of different strategies where necessary. These strategies include Total Quality Management and Quick Response. These strategies do not aim to replace Zara’s supply chain processes but to enhance and support the company’s already effective supply chain.
1. Total Quality Management
The idea of total quality management (TQM) emphasizes planning for quality, including designing the product in such a way that consistent quality is more easily obtained and more easily measured. The impetus for a company to devote significantly more resources to quality through a TQM program comes from a trend that most companies are now experiencing – an increased competitive pressure that leads to higher costs associated with poor quality. The product must be designed in such a way that it can be produced consistently without losing sight of the design aspects demanded by the customer. The production process must be designed with quality in mind (Summers 1998).
2. Quick Response
Quick Response (QR), a program developed by textile and apparel manufacturers and retailers around 1985 as a way to cope with problems challenging the apparel industry, uses a combination of strategies to reduce inventory levels, improve merchandise quality, increase worker productivity, increase stock turnover, and reduce merchandise markdowns and inventory costs. Fundamentally, QR is a way to gather information about consumer preferences and to reflect them in production decisions in a timely manner. To comply with consumers’ needs, QR relies on sales data. Through computerized information systems, sales data are transmitted and transformed as useful information that reveals consumers’ preferences and reactions, and decisions are then made promptly to respond to what consumers want (Kang and Sullivan, 1999).
The QR strategy links all activity to real time demand. It is customized by the individual retailer or manufacturer and is particularly suited to small and medium-sized firms. It is designed to be context specific and to be contingent upon the setting. Quick Response as an operations strategy is designed to overcome the impact of seasonality in operations.
References
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