Zara: Fast Fashions Savvy System, Case Study Example

  1. Introduction

The paper serves to develop an Integrative Strategic Plan for Zara, which is a Spanish based international fashion manufacturer and retailer operating in 74 countries through 4607 stores by 2010, so that it can maintain its competitive edge among rivals like H &M and Gap Inc. going further into the 21st Century.

A typical strategic planning process according to Fogg (1994), examines an organization current environment and capabilities, considerations about how it can grow and evolve, and its leaders aspirations and intentions to move forward.

The parameters that must be incorporated for Zara; which is a major subsidiary of Inditex, to develop its business internationally will include its annual net sales, international sales, global reach, internationalization status, current business models, production format, involvement in electronic commerce, and advertising, according to Lopez & Fan, (2009).

Zara’s internationalization going forward has to be done on the basis of the impact of the provisions of the World Trading Organizations 2005 on trading in its operational environment, as well as in Canadian and American markets.

Serious challenges will emerge in the process of developing and implementing an effective integrative strategic plan for Zara, as it has well entrenched vertical integration concepts, unique internal design and production processes for its clothing and apparel products, just in time inventory management, flexible structures, quick response policies using automated technology, among other factors according to Lopez and Fan (2009).

Vision and Mission Statements

Central to Zara objectives are Inditex corporate vision and mission statement. The parent company vision statement indicated that it places high priority on customers and combined this with high degrees of vertical integration across all fashion production process starting with design, manufacturing, logistics and eventually in sales, while its mission according to Casanova et al. (2010), is to respond with agility to the demands of the market at all times.

The corporate objectives of Inditex, working through Zara from an internationalization perspective, are to achieve the same perception achieved in Spain in 2009, where its brand mission strategy enabled it to be seen as a low cost and fashionable brand that is capable of fast stock changes to meet current demands by its consumers, according to Casanova et al. (2010).

Additionally, according to Casanova (2010), the leadership of the organization hopes through its Zara concept, to deliver unique customer experience to all visitors to its stores globally, as well as for the company to be perceived by its social actions, regardless of the culture, operating environment or the nature of the competition.

  1. Situation Analysis

A look at Inditex Xara’s present strength, shows that it has the capability to design, manufacture and deliver medium quality products at reasonable prices to its customers, using Just in Time strategy, strong financial systems, national and international brand reputation, a segmented supply system which entail 8 separate concepts, as well as group homogeneity within its operations.

However, in the face of increasing competence, demanding customers and threats from its competitors in the area of online purchasing and comprehensive growth strategies, Zara has to look at its opportunities, which according to Casanova et al. (2010), include the ability to create outlets in attractive locations, increasing interest being generated in its personal image, technological developments and size unification law, to develop an integrative strategic plan that will be easily replicated by its competitors in the market place.

Presently Zara market entry strategies are via own subsidiaries, joint ventures and franchising according to Flavin & Polo (2000), and Camunas, (2003), but if its international retailing, which according to Brown & Burt (1992) is the transfer of a retail brand with its associated image across national borders- is going to play an important role in the organization’s new internationalization strategy, these strategies must be revisited along with examinations of the  current trends that are restructuring and characterizing the textile and clothing global market.

The emerging trends that Zara has to forge strategic success against are, fragmented production of textile and clothing by a large number of medium and small size companies in Germany, Italy, Great Britain and Spain in particular, according to Nordes (2004), reportedly high concentrated distribution channels in the European markets (Stengg, 2004), increasing internationalization and competition in the textile and apparel sector , as well as mergers and strategic alliances, sub-contracting or de-localization of textile clothing production to entities providing low wage, low transportation costs and reduced lead times among others, according to Berkely & Steur (2000).

Zara’s future success will also have to take in to consideration the present growth strategies of its major competitors, namely H & M and Gap, Inc. H&M targets men women, teenagers and children with fashion and quality at best prices by outsourcing to 700 suppliers, locating its stores in areas with low input raw materials, as well as employing and promoting the use of celebrity designer, according to Lopez & Fan (2009)

Marketing of clothing by H&M is also done through catalogues and electronic commerce wit cosmetics and accessories added to the product package and made available in 1193 retail stores in 22 countries. This formidable competitor strategies growth through its own subsidiaries and by franchising which it hope to replicate in Dubai, where Zara presently has no stores.

Gap Inc. on the other hand operate out of only five countries, but is the largest specialist clothing suppliers in the world due to its 3053 retail stores, 1,100 suppliers and its market strategy of targeting men, women, and children with clothing, accessories, and personal care products  promoted through three well establish brands.

Growth strategies for Gap Inc. has been through international expansion, diversification into accessories and personal care products, creation of new brands, and the development of other channels of sales through electronic commerce .

  1. Environmental Analysis

The Political Environment

Zara operates 1359 stores in Spain and has 87 % claims in the remaining 3248 entities spread across 74 countries by 2009, employs 92, 301 workers, and is led by a president who is the world’s 9th wealthiest man in Amancio Ortega who has a net worth of $25b.

These political clouts strategically placed Zara in a position influence its suppliers to its owned production facilities to offer low cost prices which will impact the company ability to continuously deliver medium to low price and medium to high quality apparel to the industry according to its brand image.

In order to replicate its technical knowledge and corporate values, Zara created a policy according to Fabrega (1994), to dispatch Spanish managers to all new store locations to ensure conformance to its standards, and uses its central office as a control center for subsidiaries across the global market, according to Bonache & Cervino (1996).

Zara political control from it’s headquarter in Spain, not only ensure concepts are perpetuated but to reduce the threat from substitutes entering the market, as well as new entrants to erode its dominant position.

The Economic Environment

The promotional strategy of the company both domestically and globally were found to be the same , in that advertisement were done at the start of seasons or at the opening of new stores, according to Lopez & Fan (2009). Zara’s budget for its promotions were fixed at 0.3 % of its annual turnover and this enable the company to maintain the low cost leadership strategy in Spain as well as on the global markets where it raise it to accommodate distribution cost  while maintaining high profitability levels, according to Ghemawat & Nueno (2003).

The Structural Environment

Structurally, Zara has developed an ownership, joint venture, and high levels of franchising market entry strategies globally to ensure its economic gains are constantly realized and used to invest in future sustainably growth and development markets.

In terms of cost reduction and control, Zara centrally prototypes its shop windows and internal designs so that all key strategic elements, inclusive of store locations, window displays, store layouts, store display rotation, , information systems, customer service, and logistics are aligned in both local and overseas markets, according to Lopez & Fan (2009).

The Technological Environment

The company uses its store as sources of information extracted from its customers  in terms of feedback on judgments concerning designs, changing tastes and values, and collaborate them with reports for staff members who travel to fashion cities, observe people in the streets, browsing publications and from visiting venues frequented  by potential customers, according to Fabrega (2004).

Strategically this information is then used to design, re-design and create new articles which are delivered to stores globally with minimal expenditure on any forms of promotions.

In franchising arrangements, Zara is able to sell this technology at prevailing prices and allow franchises to replicate its model which entails product quality specifications, store locations, interior designs, logistics, and human resources, which involve recruiting and training employees.

Despite Zara embracing vertical integration to generate faster turnaround than its competitors, the company was technologically disadvantaged by not engaging in the use of electronic commerce to further maximize sales, and runs the risk of losing millions of dollars on the global market, as well as the erosion of its market shares by the convenience provided by its competitors from this strategy.

The Social Environment

The socialization process of Zara requires Spanish managers travelling to all new store locations to implement the management procedures as obtains in the home office as much as possible, with cultural modifications where necessary, due to the necessity of achieving greater understanding of each unique business environment

Unexpected difficulties in some countries during Zara internationalization program has helped to prove the social consciousness of the company, in that it in order to be perceived according to its global brand, it changed from its ethnocentric orientation to a geocentric predisposition. This was evident in the Argentina and in Arab and Asian countries, where the existing cultures required changes in how the apparel could to be sold on the market (Lopez & Fan, 2009).

The Legislative Environment

Zara legally adjusted to the requirement of countries whose markets it chose to enter by using joint ventures, franchising and own subsidiaries where appropriate. By adopting this flexible approach Zara as ensuring it help to establish the appropriate legal environment to operate in, one in which its financial objectives as well as that of its employees and the respective governments are achieved.

  1. Industry Analysis

Competitor Profile

H & M seek to expand according to its 1997 Managing Director by listening to the local market and then adapt but not to the extent of losing its own unique brand image. The company like Zara, makes it’s a policy to replicate its concepts and values across countries it operates in, in that it selects international markets  on the basis of physical locations, cultural distance, economic purchasing power of consumers, employment rate,  demand accessibility and local information about competitors, according to Lopez & Fan (2009).

H& M differentiates itself from its competitors by offering fashion quality at the best prices to men, women, teenagers and children. It also extended its product line to include cosmetics, and accessories, so that 90 % of its turnover was realized from its overseas markets by 2005, with Germany contributing 27 % of this intake, according to Lopez & Fan (2009).

Culture plays a significant role in H& M marketing strategy as it expands, in that it had first focused in the Nordic region of the globe to maximize its revenues for several years, before moving to the Anglo-German environment and other cultures where it was able to rapidly expand after increasing its learning curve and experience levels, according to Lopez & Fan (2009).

Key Success Factors

In ensuring success H & M strategically located in stores in the best shopping areas, prototype its internal designs with some cultural modifications, hired celebrity designers like Karl Lagerfield and Stella Mc Cartney, and skillfully uses the economic and demographic indicators for each country and locations to reinforce its decisions.

Competitive Forces

Essential to H&M competitive advantage and its bargaining power to influence suppliers, is its outsourcing of production of clothing to700 manufacturers. The company was therefore positioned to extract the lowest prices for its purchases while it churns out 500 new designs annually and distribute them to its 1193 retail outlets in 22 countries at the highest quality and best prices (Lopez & Fan, 2009).

Gap Inc.

Company Profile

Gap Inc. the world’s largest supplier of specialist clothing, operates over 3000 stores in major markets of USA, Germany, UK, Canada and France using brand names like Banana Republic, and Forth and Towne to promote the range of products to women, men and children according to Lopez & Fan (2009).

The 43 year old company seeks to grow through internationalization, diversification, brand creation, and channel development through electronic commerce, of which Zara has shown no proclivity to participate in.

Gap  Inc. however, may have failed to achieve high growth rate globally, due to its insistence on only using own subsidiary market entry methodology, rather than the three prong approach embraced to great effects by Zara.

Key Success Factors

Gaps’ Inc. success, especially in its home markets, were due to its policy of developing and reinforcing business concepts in one area before launching into other areas, the strategic use of three clothing brands at the same time, using communication as one of its major advertising weapon, the outsourcing of production, and the use of electronic commerce to move inventory and generate high revenues to customers diversely located.

Competitive Forces

Gap Inc has been able to withstand the competitive rivalries within the market by outsourcing the production of its apparel from which it was able to sell at very low and prices. Superior expansion strategies from Zara and H & M, in terms of physical locations of stores as well as cultural proximities to international markets, have successfully resisted threats from Gap Inc. as well as from other new entrants and substitutes.

  1. Internal Analysis

Core Competences

Zara has maintained excellent core competences in its business models by being able to effect faster turnaround times for its newly designed products as well as using its stores more effectively than its competitors to generate vital information on the changing needs and behavior patterns of its consumers. In terms of customer behavior patterns Zara has been able to ascertain that its customers are making an average of 17 visits per year, compared to 4 for its competitors, according to Castro (2003).

This disparity positioned Zara to generate higher levels of revenues on an annual basis, and as such help it to maintain its competitive edge in terms of market control.

Value Chain and Value Systems

Zara has been able to build value into its products using feedback from customers to make much need changes in design and then bring these products to markets in approximately 4 weeks. Information is also collected and used similarly from staff members visiting fashion sites, browsing publications, visiting venues or from observations of people on the streets, according to Fabrega (2004).

A value system is then developed and transmitted across the thousands of stores globally, when the new designs are distributed from the main office in Spain.

Cultural differences, where necessary, are also incorporated to increase stakeholders’ confidence and improve customer satisfaction and revenue growth in the process.

Sustainable Competitive Advantage

Profits earned form the low cost and medium to high quality products on the Spain markets significantly leveraged Zara to open hundreds of stores as 100% owned, and the use of the stores to develop technical information to sell to franchisees contribute significantly to the achievement of sustainable competitive advantage, which will always increase proportionally with the number of retail stores increases.

Zara’s success is reflected by the fact that by the end of January2006, it was operating 859 stores in 59 countries and had international accounting sales that was 69 % of Inditex annual turnover, according to Lopez & Fan (2009). Casanova (2004) also reinforced the success when he reported that Zara has grown by 205 each year for the last 10 years.

Summary of the Current Analysis Situation

Zara’s strengths as its contemplate future expansions lies in its core concepts that has been developed using its store as the base information  generation, design and re-design, and manufacture of apparel  for distribution globally.

The company’s political influence for gaining access to new markets, its respect for the culture and laws of participating countries, excellent financial capability to ensure maximum owned stores, strategy to market low to medium price and medium quality apparel,  and market dominance in Spain, all augers well for future expansions on the global market.

Weaknesses however, exist in the company failure to enter the electronic marketing of its products in addition to its present format, the centralized distribution of finished goods manufactured in Spain, lack of market saturations in countries with low number of stores, and the possibility that it can be exposed to cannibalism of its concepts within its stores form saboteurs.

Zara it was realized, possessed the capacity to create outlets base on available empirical evidence, is experiencing significant interests and recognition of its brand image, is existing in a period where rapid technological developments are taking place, and can maximize these opportunities to offset the increasing competence of its competitors, the demands from customers and the creation of online shops to sell apparel (Casanova, 2011).

Strategic Options

In its present position where it is marketing fast fashion clothing of low to medium price and medium quality to over 74 countries through thousands of store using own subsidiary, joint ventures and franchising, Zara can continue along the same trend and generate adequate profits, but run the risk of losing its position due the flexibility of its competitors as well as the possibility that economic depression can significantly change the marketing landscape.

The company should re-examine its consumer behavior patterns in the 45 countries in which it has less than10 stores, as well as their cultural differences, seasonality, risk perceptions and economic indicators and where cost benefit analysis provides the support, adopt a market saturation approach that will ensure its competitors will find it difficult to enter.

Additionally the company should increase it advertising cost by at least 100%, hire celebrity to take its design to a higher level, and incorporate electronic commerce in Europe initially to make inroads in the more affluent markets.

The rationale for this approach rather than the status quo is that according to Casanova (2010), the last 10 years has seen Zara achieving 20% growth in its turnover, and its competitors are using tools that are generating success that will in the long run negatively impact the company’s profitability. However a hybrid approach will be more favorable towards achieving win/win situations, in that both strategies will work simultaneously and generate even more profit for the company.

Implementation Issues

Growth in Zara’s business empire will bring challenges to its main office control and the maintenance of its core concepts globally. The company should therefore adopt a decentralized approach where responsibility for distribution of apparel, accessories and personal care are delegated to regional and national managers, who will then be required to train staff and supervise the implementation of the company standards and concepts in their locale. This approach will further reduce the distribution cost of its products and enable consumers to benefits from the saving generated.

Implementing electronic purchasing will impose new operations standards on Zara, including advertising, delivery, and training of employees even in inventory management and customer services.

The change in modus operandi will require day to day management initially by Zara experts from Spain until the learning curves of its global managers rises to the acceptable performance standards.

Conclusions

The world’s second largest retailer is presently in a strong position, but can become even stronger should it embrace the integrative strategic plan developed. The market entries approach, product designs manufacturing and distributions, low advertising, just in time strategy, 1%  advertising budget, continued use of its store to generate consumer behavioral information, embracing electronic marketing, and the re-evaluation of markets with low number of stores, will auger well for Zara going forward.

 

Reference

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Casanova, M., Bernando, B., Manuel, D.J., Jordi, V., (2010). “Corporate Brand Management 11 The Inditex Group” www.branding-institute.ch/pdf/cbm11_inditex.pdf 01/08/12

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