At the 26th IAF World Apparel Convention (2010) in Hong Kong, one of the main themes was about the phenomenal” growth of “fast fashion. Indisputable, the Spanish clothing retailer Zara, owned by Inditex Group, is one of the pioneers in the fast fashion concept . Launched in 1975, with 1608 stores in 77 countries, Zara, designing, manufacturing and selling apparel, footwear and accessories for women, men and children, booked revenues up 29% (2008-2009), even during the recession.
Zara’s unique strategy to use its distinctive capabilities, supported by information systems, abilities in design and supply chain management, ensures it the competitive advantage to be sustainable. The aim of this report is to analyze the strategic management of Zara, which led it to its success. “Strategy is the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations. We are going to examine the environment factors influencing strategic choices of Zara’s management; company’s strategic capabilities and more specified the unique resources and core competencies tend to the success of the company; and how these respond to stakeholder expectations and organizational purposes, examining the corporate governance structure, business ethics and social responsibility. I. Environmental AnalysisThe aim of Macro-environment analysis is to examine the factors which influence the changing in demand, the way of manufacturing and distribute the goods, the prices and availability of resources and the method of competition in the industry. The tool which we are going to use for this purpose is PEST analysis.
(Appendix 1) Porter’s five forces framework: The industry environment analysis provides a framework of factors which affect more directly the strategic competitiveness and growth of returns. In order to assess the attractiveness of apparel industry we are going to use Porter’s five forces framework. , , , , Industry and CompetitorsFashion industry is characterized with short product life cycle, high variety, high volatility, unpredictability and high level of impulsive buying, because of which this industry hide a risk of shortage or surplus. The fast fashion competitors in high streets are becoming fierce, trying to meet the constantly changing demand of customers. Zara, as the most renown representative of fast fashion strategy, is faced to compete on home and global industry level with fast fashion brands like: Mango, Topshop, New Look, Hennes & Mauritz and with non-fast fashion industry like Gap, United Colors of Benetton, Uniqlo, and Espri.In contrast to the traditional retailers, Zara do not target its customers by segmenting them on the bases of age, sex or race, as its target is for women, men, and youth, from infants to age 45. The success of its international strategy is led by Zara’s conviction that, despite the differences of cultures and generations, “national frontiers are no impediment to sharing a single fashion culture.
” Zara, offering mid-market chic at down market prices target customers that have a specific respect for fashion, sensitive of latest trends and searching for affordable prices. II.Resource and Capabilities The resource-based view of strategy examines the organization’s capabilities which provide the competitive advantage and superior performance of the company. Michael Porter’ proposed a generic strategy frame work, which suggests that Zara, as company which offers fashionable goods at relatively low prices, using integrated cost leadership/ differentiation strategy. According to Bowman’s Strategic Clock the integrated cost leadership/ differentiation strategy is called Hybrid Strategy. We are going to examine how Zara’s capabilities fit to it ?Internal ProductionApparel industry is characterized as labor-intensive one, as a consequence of which most of retailers outsource their production to low-cost developing countries, most often Asian ones. In contrast, the major capability of Zara is the in-house production.
2/3 of Zara’s manufacturing is sourced in Europe and North Africa and just 1/3 is sourced in Asia. Despite the significantly more expensive cost production, Zara gain a competitive advantage over its competitors, allowing the rapid product turnover. The new designs are in store shelves as little as two weeks and always up to date fashion trends.Zara also has adopted the Just-in-time system, which is impossible for its competitors, entirely dependent on outsiders. The implementation of this system provide an competitive advantage as Zara lower its carrying cost of inventory and improving productivity and quality by reducing labor and equipment time. Zara reduces its inventory by about 50% compare to competitors as Benetton and Gap. The scarcity of the products on display also encourages the customers to buy now.
“If you see something and don’t buy it, you can forget about coming back for it because it will be gone,” says Elisabeth Garcia Cueto, a 23-year-old student in Barcelona .The new piece of clothing will be in stores in just 15 days and in this way Zara sell to full retail price 85% of its products, putting on sales only 15% of items, achieving less than 1% inefficiency in its process. The average ratio of its competitors is closer to 60:40. ?Vertical integration Zara’s business model, characterized with high degree of vertical integration, owns entire supply chain from design, production, logistic to sales in the company’s own stores. The company is capital-intensive, as oppose to its competitors, as just 624 out of 4607 stores are franchised.These allow maintaining a strong merchandize strategy, through which, Zara sustaining competitive advantage as cutting the manufacturing and delivery terms, reducing the stock volume and at the same time capability to introduce 85% of the new products through the season is kept. ?Logistic The centralize distribution facilities are attached to Inditex’s headquarters distribution center in Arteixo and the factories in Coruna (Spain), contrasting to its rivals most often based in developing countries.
This provides a huge advantage, reducing the time of receiving an order at the distribution centre and the delivery of goods in the stores.The average time for European stores is 24 hours and maximum 48 hours for American or Asioan stores. ?IT system Beside the production and distribution, the highly customer-valued Zara’s capability “Quick Response” will be impossible without the IT software, specifically designed for Zara’s diverse business. While its competitors spend average 2% of total revenue on IT expenditures, Zara spends less than 0. 5% of total revenue on IT. This cost advantage is because of the hybrid information and communication system, which incorporates human intelligence and IT, applications.Zara’s store managers monitor daily selling, fashion and sales trends, customers’ desires, on the base of which send their orders to 200 Zara’s designers.
This perfectly synchronized process improve the view of entire operation, faster time to roll out new stores , develop the control of inventory management and sales data analysis, ensure the unique flexibility of answering to unpredictable fashion changes. ?Low advertising budget Zara’s parent company Inditex spend 0. 3% of revenue on advertising, while its competitors, like H%M, Gap, spend on average 3. 5%.The First Deputy Chairman and CEO Mr. Pablo Isla said: Our advertising is our stores, the money we save is spent on top locations. ” Zara is on some of the world’s priciest streets: Fifth Avenue, Tokyo’s Ginza, Rome’s Via Condotti, and the Champs-Elysees in Paris, distinguished by special design of windows and interior.
This strategy is more” Gucci than Target”, positioning Zara among the prestigious brands, competing with affordable prices. III. Purpose/culture/ stakeholder analysis Since May 23rd 2001, Inditex has been quoted on Spanish Stock Markets after undertaking a public sale of shares.The company has generated a strong cash growth at the end of 2009 with sales of €11. 1 Bn, This reflects in shareholders’ payouts, increasing them with up to 14% more than the previous year. The Board of Directors is the highest decision making body, responsible for the control of direction, administration, management and representation of the company and acting as a link with shareholders. (Appendix 2) the model of governance applied in Inditex is shareholder one, due to the strategic purpose of Zara, determined in response to all its principle stakeholders: shareholders, employees, customers, suppliers and civilsociety in general.
According to the Managing Director, Pablo Isla: “Inditex’s leadership can only be understood in terms of the concept of the human team as the principal asset of the company. ” . The provision of “internal promotions” favors the competences of employees and their effort to improve the efficiency of the company. Corporate culture is characterized by horizontal structure, allowing the constant and flexible communication between all teams, both in the central headquarters of the Group and in the different offi ces of the Company’s international subsidiaries.This management style gives it a competitive advantage for flexible, effective and quick communication, keeping permanently in touch nearly 90000 people. Zara shows that its all innovation efforts are moved to customers’ needs, putting them as the most important stakeholders. Zara is trying to meet all customers’ needs, concerning the whole shopping experience, including the location and design of the stores, the frequency of new collections, and the up-to- date fashion trends at affordable prices.
Inditex is highly ethical committed company. But two years ago Zara was blamed for the “appalling conditions in a Dhaka factory”, where were made Zara’s goods. Although Manager of Corporate Social Responsibility at Inditex renounced to know that clothes for Zara were made in this factory, he entered into changing the working conditions in this factory, as the staff now is enjoying to safety and clean environment in new premises. In order to manage with such challenges Inditex is build up an Internal Code of Conduct, (Appendix 3)IV. Recommendations for future In order to make recommendations and options about Zara’s future management, we are going to analyze the competitive situation of the company, matching the external threats and opportunities for Zara, with its internal weakness and strengths. For this purpose we are going to use the TOWS matrix. (Appendix 4) Opportunities In order to continue its sustainable growth, Zara should take advantage of the opportunities for expansion in new markets in a profitable way.
The age of globalization, in which more and more people have access to fashion, standardizing the international trends, give up an opportunities for specialty retailers like Zara. A strong Zara’s potential is to increase the European presence, especially in Italy, France, emerging economies of Eastern Europe and Russia. This market is mainly favorable because it’s the domestic market, where all of the competitive advantages can be used most effectively: the quick response of fashion trends distribution time up to 24 hours; recognition of cultural preferences and most important- lower unit cost.The strong European currency is reason for increasing prices in countries not in European Union. The Italian market is extremely attractive as the Italians generally follow the latest fashion trends, color and styles, enjoying the whole shopping experience. After the beginning of economic crisis in 2008, consumers all over the world restrict their spending. The ones fashion-oriented like Italians, removed their preferences from more expensive brands, to retailers like Zara, offering “cheap and chic” clothes.
The BRIC countries are currently going through attractive changes and Zara should put its capabilities into deepen its presence among the middle-class of these countries. The Global Retail Development Index, rank their attractiveness as follow: China- 64, India- 61. 7, Brazil- 58. 7, Russia- 53. 7, accordingly to 1st, 3rd, 5th and 10th position. These markets give up to Zara attractive opportunities for growth, putting the priority to the Asian market, based on the positive reaction of the public- the sales in this region represents 12% of Inditex sales.The “untapped consumer buying power” is a great prospect for Zara, applying its business model, based on maintains customers through its flexibility, recognition of cultural fashion trends and acceptable prices, as opposed to the short term and expensive promotional tactics.
The success of Zara store in Palladium mall (Indian, Mumbai) shows great long-term growth potential in Indian market, which Zara should develop. Arjun Sharma, Delhi’s Select Citywalk mall, said: “Any mall owner will want Zara now for free because it has an ability to bring more people of a certain kind into the mall. ” RecommendationsThe growth opportunities in apparel market are definitely the best for Zara’s future. Going through the TOWS matrix, the scale up of its distribution system is the main recommendation in order to minimize the external threats. Integrating a multiple vertical production chains in new regions will reduces a lot of the risks, the operational cost and helping to the fast response in the potential new markets. The best option for locating the new center is USA. With distribution center in USA, Zara will decrease logistic order time and costs, and will be helpful for better recognition of Americans peculiarities in fashion trends.
In this way the saved fund will be used for commercial activities, which is an indispensable feature for penetration the American market. (Craig, Jones ; Nieto, 2004). This will resolve also the problem with the climbing of Zara’s prices due to the strong European currency. To maximize the capacity of the new distribution center, Zara should emphasize also the internet retailing in USA. Americans are get used to do their shopping from their home, even the apparel ones, so using the effective customer reception will ensure Zara a definitely growth and brand loyalty .Also Zara should keep abreast of growing popularity of applications for I phone and social networks, and to invest it these kinds of commercial activities. V.
Conclusion Zara is company which exploiting the uniqueness of its business model to develop competitive advantage in the fast fashion industry, corresponding to the fast changing of customer preferences, the short life cycle of the goods and last fashion trends. It faces the challenges of the apparel industry using a vertical integrated strategy with internal production, as oppose to all its competitors.Inditex has a lot of opportunities for sustainable growth, but they should continue to innovate themselves in order to keep the advantages over the competitors. “Best of all for Zara, the model is complex enough that only a few others have been able to imitate it successfully, thereby putting in place Zara’s foundation for sustainable competitive advantage for more than 2 decades. ” Appendix 1 Political Trade Regulations; trade barriers Obtain retail space in the city center Political governance Employee Rights- Employee retirement and Social Security Health and Safety Regulations EconomicDisposable income of consumers Business conditions Interest rates Credit opportunities Tax rates Global crises and inflation Social Demographics: age, sex, income, ethnicity, religion Cultural differences Differences in consumer behavior and patterns of work Technological Investment in communication and information infrastructure Innovations in terms of production process, bar coding, online selling and security check Appendix 2 Board of Directors A. R. Inditex, (2009) p.
Appendix 3 The Inditex Internal Code of Conduct Suppliers•Code of Conduct for Manufacturers and External Workshops. Methodology to monitor the process of implementing the Code of •Conduct for External Manufacturers and Workshops: Tested to Wear •Compliance Programmes •Clusters Institutions•Dialogue Platforms •FTSE4Good and Dow Jones Sustainability Indexes •Social Council •Ethics committee Institutions•Product health protocol:Clear to Wear •Product safety protocol:Safe to Wear Society•Community Development •Programmes •Escort Programmes •Emergency Programmes •Project for;from •Sponsorship and Patronage •Programmes A. R. Inditex ,(2009) Internal Factors External FactorsInternal Strengths (S) 1. Worldwide distribution expertise . Broad Segmentation 3. Vertical integration; maintaining a strong merchandize strategy, introducing 85% of the new products through the season is kept 4.
Flexibility 5. Capital-intensive 6. Quick Response Time and effective Supply Chain 7. New collection in two weeks 8. Affordable prices 9. Up-to- date fashion trends 10. Internal Production rapid product turnover; saving money and time from shipping; 11.
Highly integrated IT system-ERP system 12. Minimized inventory Stock/ Just-in-Time System 13. European based distribution centers- reduce the distribution time from 24 to 48 hours 4. Low Advertising Budget 15. Prime locations all over the world 16. Special design of stores: exterior and interior 17. High Corporate Social Responsibility 18.
synergy between strategic and operation managementInternal Weaknesses (W) 1. Vertical Integration Limitation: inability to reach economies of scale 2. European based distribution centers- 3. Weaknesses about the supply chain in America 4. Exceptive dependence of Inditex to Zara- 63. 8% of whole sales 5. Cost weaknesses: High costs for IT/ERP system, acquiring higher training cost for employees High rents for prime locationsHigh cost invested in Research and Development 6.
Disadvantages of high Capital-intensive model: High risk, high volatility, less monthly earning for shareholders, less attractive for investors. 7. The advertisement policy, in-store- model, might not be successful in the future. External Opportunities (O) 1. Potential new markets: developing economies 2. Big opportunities of fascination the USA and Australian apparel market 3. Expansion of the E commerce retailing 4.
Developing the IT system, as the technology is constantly change 5. New distributioncenters . Outsourcing from lower cost countries (if the economic conditions force it) 7. More actively advertising SO use strengths to maximize opportunities 1. Enter new market: America, Australia; developing countries: emerging economies forwarded by Inditex’s international experience. 2. Establishing new distribution center, outside Spain 3.
Maintaining the Quick Response due to IT system. 4. With the quick response of up-to date-trends, Zara might become the leading retail chain in USA, as it main competitor- GAP-is not so fashion oriented. 5.The ability to respond to customers’ needs flexibly and fast, the E-commerce is a great opportunity for future growth, due to the constant technology development. WO minimizes weaknesses by taking advantage of opportunities 1. The opportunities for growth in new market, will lead to greater production and the economies of scale will be reached.
2. The excellent position of Zara to growth, gave it an opportunity to minimize the risks related to the European based distribution centers, as opening new center in USA. 3. this will be also a solution about the weak supply chain in USA 4.The more active advertising will reduce the need for key locations, and reduce the costs related to it. 5. The growth of market share and the most effective economies of scales will turn the disadvantages of capital investments to advantages.
This will help to decrease unit cost, increase the prices, increase the shareholder’s returns and monthly earnings and lower the risk. 6. In the advertising age, Zara’s in-store model may not be enough to attract and maintain new customers groups, so it should take advantage of the opportunities for future marketing and advertisement strategies.External Threats (T) 1. Economic conditions and especially the Spanish one, which is suffering badly now (about 40% of sales are in Spain) 2. the expected increases in cotton prices will raise the prices of retail clothes. 3.
Currency fluctuation -Euro has strengthened relative to the dollar 4. Cultural differences in the potential markets 5. A natural calamity or terrorist attacks in Spain (due the whole distribution process is based in Spain) 6. Direct competition 7. Consumer lifestyle changes 8. Need for outlets, due to the recession consequences: preference for sales 9.Kyoto Protocol’s regulations 10.
The threat of cannibalism . ST use strengths to minimize threats 1. Competitors will meet serious challenge in order to compete with the unique business model, enough complex to imitate it. 2. With the highly developed IT system, human resource team and the fast communication between the company, company could easily meet the different preferences in culture. 3. The sustainable growth of company, allow the opening of new distribution center, outside Spain and minimize the risk of failure in case of natural calamity or terrorist attacks in Spain.
4.With its broad segmentation of customers, Zara will fill up the gap of American market, represented by customers highly oriented to fashion trends. 5. Its direct competitor Gap-less trendy oriented. WT minimize weaknesses and avoid threats 1. With the movement of part of the production outside the Europe, the risk related to Currency fluctuation will be minimized. 2.
The avoidance of this Zara’s weakness will also result in lowering the affect of Spanish economic in company’s returns. 3. Using franchisers will avoid some of the fixed cost, and at the same time reduce the risk of inability to meet cultural differences in some countries.
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