I selected Zara to be the topic of my strategic management individual assignment. I’ve chosen this topic because Zara is one of the leading companies in the fashion industry and they follow strategies that give them competitive advantage over other competitors like: MANGO, NEXT, GAP, H&M. In this paper I’m going to discuss the company’s background and history, the SWOT analysis, the strategies that adopted in the company, challenges, opportunities, and the mission vision and objective.
Brief background of the company
Zara is a clothing retailer who has taken a new approach in the industry. It was founded by Amancio Ortega in 1963 in Spain. Its parent company is owned 60% INDITEX by the Ortega family and Inditex has carried out in 2005 to 6.741 billion turnovers. Zara has about 2000 thousands branches around the world. Zara is a distributor of apparels. It offers a wide range of choices: the collections for women, men and children. However, the brand launched a line of cosmetics, perfumes and household products.
Since the beginning of its establishment, the main idea of Zara is to make luxury products accessible to everyone. Thus, they managed somehow to democratize luxury manufacturer of products inspired by the evolution of fashion. With this policy, Zara is now an industry capable of offering trendy products at affordable prices. On the other hand, it is a company that wants to be close to young people. Also, this desire is felt in its recruitment policy. Zara young employees with styles very marked fashion. However, Zara understands what exactly the customers need and respond to their needs very quickly. That’s the main secret of Zara, which gives them a competitive advantage.
Vision, mission, and objectives
– To be number one fashion retailer.
– The world is getting smaller; we want the whole world to dress in style, class, and experience unique designs weekly.
– The main objective is to increase the customers’ demand and satisfaction, by giving them the chance to experience new unique designs weekly.
– Spread widely and open more branches in the main cities around the world and cover 80% of them by the end of 2011.
Zara’s strategy has both opportunities and strengths of threats and weaknesses. The following section will describe the four dimensions of Zara’s agile approach.
Zara’s value chain is vertically integrated, which offers many advantages. It can react quickly and it may have high control over the entire process from design to final product. Supply chain is efficient when they have a smooth use of distributions centers and warehouses. Its strategy also allows distributing the products within a wide geographic range within a very short time. The other thing also is that the products are close to market demand. Their products are made only in limited editions; consequently, they must sale their products in short period of time so they can be sold at full price without having them to be returned. This responsive approach involves both lower marketing costs, and higher profit margins for the company. IT integration is also an important aspect of Zara’s strategy which is significant as it enables information sharing between different joints within the company.
Zara’s business model is certainly well adapted to today’s needs. But it has a significant weakness, which is that it is difficult to exploit the scalability of a continued expansion. Zara accounts for 80% of consolidated sales Inditexs, which means that the entire group is very dependent on Zara’s sales figures. The vertical integration of supply chain has its limitations in scalability. Zara cannot produce clothing in larger quantities for a lower cost, and then the whole concept is based on insignificant quantities as quickly distribute to the stores. The rapid processes can thus compromising the quality in some cases. To always be close to market and capture the latest trends and translate them into clothes that are ready for sale within a short time requires outstanding effort from the employees and the management. Zara fails to implement online shopping which leads to lose orders to their competitors.
Online shopping became huge and significant market; customers can go online and order what they need. If Zara allows customers to purchase online, that would increase their sales. Pablo Isla is the first Deputy Chairman and Chief Executive says: “we view our entry into the Indian market to be of significant strategic importance.”
The first threat is that the rent is continuously increasing in malls, Zara need to afford the high cost of rent, which means that they have to increase prices or cut other costs.
The main competitors of Zara are H&M, GAP,
NeXT, and Uniqlo. These companies compete with Zara in several categories like: valuation. , sales, financial ratios, and profitability. Moreover, there is competition with the Asian clothing industry, which starts brands can earn price premium over the competitors in this industry.
Sourcing Materials Inbound logistics Flexible manufacturing / Outsourcing outbound logistics in-store sales.
Market research Product design
Procurement Outsourcing Distribution
Centralized planning Corporate vision and mission Brand Image
Challenges facing the company
A. The Textile
The textile industry is undergoing dramatic changes. This is an area that requires unskilled labor, which many relocation of production abroad (mostly in Asia) in order to lower costs. In addition, there is a certain paradox. Lower costs can certainly develop a competitive advantage, but if all companies do so, they may not have a competitive advantage. Thus, innovation plays a key role in building the advantage against competitors. The question now is how to gain time in order to be more responsive to customer requests. Zara has understood this need and its strategy, is essentially based on the time savings.
The two risks in the textile:
Three adjectives can describe the demand part. First, it is unpredictable, which means studying the market may give an indication of demand characteristics. Second, it is a variable; it follows the fashion trends. Demand is also volatile, remain loyal to a brand is not the objective of the consumer. The two important things to the customer are the aesthetics and the price: no matter who proposes, as long as it pleases the customers and the prices are reasonable, then they will buy.
The textile sector is hyper competitive. The competition is twofold: that of basic products from countries with low production costs, and global companies that offer products high-end.
Moreover, competition depends on costs but also on quality, image, responsiveness and, logistics company. Today, off shoring does not only to create a competitive advantage. Other factors should be taken into account.
B. New markets
The sales area is centered in Europe. The desire to penetrate a new market is ready for any enterprise. However, in the case of Zara, this conquest is hampered by the centralization of management and production. It appears as the first drawback of the strategy of the company. Therefore, they should revise the strategy to integrate the North American market, one of the largest markets in the world. Thus, they planned to open a distribution center in Mexico to serve the U.S. market.
C. Competition with China
This country is the largest producer and exporter of textiles. The lifting of EU quotas (in place since 1974 with the Multi-Fiber Agreement) the 1janvier 2005 has completely destabilized the textile sector (liberalization of world trade). The entry of China into the WTO in 2002 had already had a dramatic impact on the textile sector. According to the European Apparel and Textile Organization (EURATEX) in 2004, 165,000 jobs have been lost and it is anticipated the loss of a million jobs. A major advantage of China is its low production costs (for the violation of workers’ rights). More generally, Asia alone accounts for 75% of global textile production. China produced in 2003 17% of global textile and with the abolition of quotas, its share reached 50% within three years.
Strategy of Zara
All functions are centralized at Zara in La Coruña (design, marketing, and communication), enabling cost control and responsiveness. The competitive advantage of the company based on three factors: quality items, reasonable prices and very short response time.
1. Creating and marketing
The degree of development of Zara is quite low, they copy the haute couture models: 40 researchers to attend fashion shows around the world and retain the ideas of top designers to fit the model Zara.
About 11000 models are available per year, while other competitors have around 3,000 models. The Spanish firm has 12 collections a year, which is huge in this sector. Communication is minimal because Zara is about 0.35% of its turnover, in contrast to other textile companies who spend 3-4% on average. This reflects the lack of advertising campaigns and the consolidation of the communications department at Corunna. The group’s websites are in English or Spanish, you cannot buy over the internet which reduces the cost of site management. Their philosophy is: “No Marketing”, “no communication”.
“Time is more important than costs.” It is a primary fact in the world of fashion. Design, manufacture and delivery can be done within fortnight, while the market average is about two months.
It is interesting to quote the remark of one analyst: “Manufacturing activity is Inditex a cost center that has for vocation to better serve the sales activities. The cost is certainly higher than 20% of outsourcing but it is more than offset by increased reaction rate and a lower risk.” The time strategy is the dominant strategy, because as I mentioned above, time is a cost itself for the company, so when Zara manufacture and deliver the products in two weeks while the others take months to finish this process, this means that Zara will have the chance to reduce costs and increase revenues, also increase the intangible and tangible assets of the company.
Zara cannot afford to operate in an extremely competitive market. So it must offer products of superior range by responding quickly to customer requirements and desires. Therefore, the distribution is important because it represents up to half the cost of the product, which means that the competitive advantage is created by low distribution costs.
4. Marketing and sales
Signs are open in the inner cities in order to compete with more expensive brands, being present in the very neighborhoods merchants in large cities. Stores are proper name, there are no deductibles Zara. The level of inventory turnover is very high; the shops are stocked twice a week, which creates a certain image of scarcity that can attract customers who do not hesitate to come to Zara quite frequently in order to discover the new collections of articles.
After we saw this issue appears, the disadvantages and advantages of Zara’s strategy. First, it is important to note the unusual degree of it, since it is totally different from that established by the other competitors. The strategy worked to some extent but in the long run, it seems impossible to continue because as we saw in Part III, it is a barrier to entering new markets. In a context of globalization, it seems completely incongruous. If Zara wants a foothold in the U.S., it must decentralize its production, or need to relocate its production factors.
The time factor can nevertheless still be the key to the European market but to enter the U.S. market, another strategy is to be considered. But, will they be sufficient to counter the Chinese giant?