Mohammed Shafiq Hanif - 100134260

Mohammed Shafiq Hanif 100134260

Paulina Barahova

International Business Economics and Strategy 6EC500

Zara Strategy for Success Word count - 3251

ContentsExecutive summery3Introduction4Strategic positioning5Capabilities, resources and competencies5Porters value chain6Primary activities6Support activities6Basic market evaluation7Pest analysis7Porters five forces analysis8Strategic response10Competitive advantage and sustainability12Recommendations14Conclusion14References15

Executive summery

The aims and objectives of this management report are too; firstly analyse the changes within micro and macro environments of the retail company Zara. Secondly to evaluate what or how the organisation responded to these changes and from here an analysis of their sustainability, and finally to make recommendations on how they could improve their business in future. Throughout the information within this report it is clear that Zara went from strength to strength and is still growing strongly today; from 2010 there havent been any major challenges to them or any serious threats. The biggest challenge to Zara was one of self control in a period of growth; they could have easily expanded their brand and lost their ability to meet the customers demands better than anyone else. This did not happen as Zaras business strategy trims the excess and waste to make sure the company is as lean as possible. The most important aspect for Zara is to remain competitive to stay at the top and not get complacent, their major competitive advantage lies with the smooth integration with their supply chain and their retail stores which ensure fast sales, fast production with high quality.

Introduction

The management report will address the strategic direction of Zara. The retail company Zara is the most successful subsidiary of Inditex, and throughout an economic depression have been vastly successful. The Boston Consulting Group (2013) points out that success stories from the recession made bold moves and decisive decisions to earn their good fortune. This report will analyse the strategies and changes that have been made and implemented since 2010 to 2014; to see if Zara is still making bold moves and decisive decisions.

Strategic positioning Capabilities, resources and competencies Zara is a very popular and successful fashion retailer, they claim they just need one week to develop a product and get it to stores when compared to the industry average of six months. This can be done as Zara is a vertically integrated retailer, unlike other popular retailers Zara controls the majority of the steps of its supply chain, designing, manufacturing and the distributing of its products to retail stores. This can also be seen within their stores as they only stock products for the short term and in little quantities; and where they are demanded the most, and as they have their own distribution network they can change and deliver new product faster than any other retailer. (Lutz, 2013)They target a mass market of young price conscious and fashion savvy consumers but do not define them by age therefore broadening their consumer base. As their consumers are fashion sensitive Zara responds quickly to new trends and discontinues product lines often encouraging consumers to buy now and visit often. Their response time is faster than other retailers due to their de centralised decision making model which cuts out business politics and leaves the important decisions to those who understand the best. (Haque, 2012)Another aspect of Zara business strategy is to reduce costs as much as possible; this is done by performing all intensive capital operation in house, by outsourcing labour intensive operations to local subcontractors to reduce cost by using their economies of scale. Also and more importantly they use a low cost but highly efficient IT infrastructure, this is one forth the cost of the average within the industry. Unlike other retailers Zara doesnt rely on data to find trends in consumer spending but rather used their own human resources to make the decisions on what to produce and sell. Also with using IT, they only apply it to points in their value chain where it will bring about the most benefit and their ethos with regards to technology is every penny spent has to add value. (Inditex, 2015)As Zaras competitive advantage lies with their fast introduction of new products, the manufacturing needs to be tightly controlled. 50% of the products are produced in Spain and Portugal, 26% in the rest of Europe and 24% given to Asian and African countries mostly, unlike their competitors who outsource all their production to Asia. Zara produces the most fashionable stuff in house and clothing that is not part of their main business model like basic T-shirts are outsourced to Asia. (Christopher, 2000)Amancio Ortega Gaona utilise culture as a tool to increase the performance of his company; he set it up to be an aggressive culture to implement high speed fashion. He put in playfulness to increase innovation and finally a strong emphasis on collaboration to increase tea working. (Sull, 2008)Porters value chainBelow is Porters value chain, this model is being used as Zaras value chain hasnt changes much since 2010 and to give a better understanding of how the company is organised.Primary activities Inbound logistics; Raw materials brought from Italy, Spain and Greece to increase production time Suppliers are contracted to supply within 5 daysOperations; Little outsourcing Alterations done in house use their designer intuition to design for production, uses popular catwalk fashion In house prototyping, concept design and seam stressing. Designs, produces and distributes itself Computer guided fabric cutting using just in time approach Outbound logistics; New product line is delivered in equal amount at the beginning of each season When products are running out it is the managers duty to individually order how many of each item, so they only stock what they can sell Deliveries vary from 24, 48 and 1 week depending on location Own centralised distribution network Marketing; Use little marketing but the buildings themselves are the marketing In high end buildings They spend 0.3% of profits on advertising (average industry 3.5%) they rely on shop windows and word of mouth. Products are not on shelfs for long encouraging people to visit frequently Service; Standard returns service on clothing items Can return stuff purchased online in store to speed up transaction Support activities Firm infrastructure; Based in Spain, factory based in La Courana Cheapest labour in Spain but expensive when compared to Asia 2000 stores with 88 countries Human resource management; Mostly recruits school leavers and undergraduates Dose this for their flexibility Technology; Flexible manufacturing systems to decrease production time, just in time manufacturing Highly efficient low cost it infrastructureProcurement; Sends agent to popular fashion events to copy latest designs these agents send variation of the design in slightly different sketches to headquarters within 6 hours (IPR Plaza, 2012)Basic market evaluation Zara is the dominant fashion retail company and operates within the garment, textiles and fashion industry; it is estimated to have growth 5% from 2013 to 1,162.8 billion in 2014, this figure is expected to reach 2 trillion US dollars in 2018. This is a very large and saturated market with low barriers to entry but Zaras direct competition only consists of a few businesses, but there is high competition and increasing costs. (Europa, 2015)Pest analysis Political; Imports to China are taxed leaving products more expensive than domestics counterparts India requires domestic production Liberalisation of import quotas Political power issues within the Middle East Import tariffs are four times higher for developing nationsEconomical; Global growth at 3.3% Expected to be 3.8% in 2015 Financial crisis still affects the western world Increased fuel pricesSocial; Increased awareness for fashionable clothes in younger generations Aging population within Europe Increased use of social media Traditional eastern clothes only being used for special occasions Western / European culture spreading globallyTechnological; Only use technology where they think will give the most increased efficiency Growing trend in online shoppingPorters five forces analysis Threat of new entrants; Medium Very easy to open an clothing retail shop but very difficult to compete directly with Zara Market heavily saturated and segmented Economies of scale very difficult to achieve Rivalry amongst competition; High Zara business strategy gives them an advantage High competition from numerous other stores Low growth within industry creates stiffer competition Threat of substitute; High Zara is only as good as the fashion it churns out Once others modify their business strategies to compete Zara will suffer Consumers are always looking for the next best or most fashionable thing, whoever supplies it will get their businessSupplier power; Low Vertical integration means they own their supply chain Supplier market heavily saturated, many other options availableBuyer power; High Consumers decide where they spend their money If Zara doesnt met their needs they will go else whereIn summery Zara has been dealing with changes from the external and internal environment by making sure they protect their competitive advantage by; producing and distributing their most profitable stock themselves, reducing their costs by outsourcing products that are non essential to their competitive advantage, only implementing costly IT technology where it will have the most benefit and expanding into new eastern markets. It is evident from their annual reports that they had gone from strength to strength and are continuing with their global, multi concept, multi channel growth which was initiated in 2011.

Strategic response As mentioned previously Zara had gone from success to success and the challenges that they faced where a part of their growth strategy, this section will evaluate how successful they were in this and how they responded to the external and internal changes.Ferdows 2004 points out that the CEO of Inditex has mentioned that they were so successful to having five fingers touching the factories and five fingers touching the customer; this can also be seen with their business model and their response times and capacity. Zara uses their knowledge of what the consumer might want and uses it competitive advantage of the internal design, manufacturing and distribution to meet the consumers needs faster than any other company. This is all the more important as they operate within the fashion industry and products go out of style quickly. The chart below shows the number of stores Zara opened from 2010 in varying retail formats.

The chart above shows the number of markets Zara has entered globally since 2010, these new stores have mostly been in China and other countries that are culturally different to the UK.The chart below shows the gross profits made by Zara since 2011, from 2010 their profits rose sharply from 442 million to 8.2billion.

The biggest challenge faced by Zara was the time taken to get new fashion products to retail stores, although Zara boasts this can be done within one week; it generally averages about two and a half months. This is when compared to the competitions 5 to seven month averages. This is possible for Zara as they use a bottom up method of strategy, this has previously been mentioned with their de centralised decision model. Zara also operate on a market requirements basis, the fashion market is characterized by its rapidly changing customer demands and Zara is the best retailer to meet their demands. They have developed a manufacturing system that is vastly profitable all whilst requiring a short lead time, decreasing production quantities and adding variety. (Wharton University, 2012)Zara has a mix of prescriptive and emergent strategies, it prescriptive strategy revolves around the manufacturing and distribution of their products or in other words the finely tuned manufacturing and distribution model that cannot be easily replicated. This helps them adjust to the demands of the consumer better and faster than any other company, more efficiently than any other company. Within its prescriptive strategy there are also ways to deal with unexpected demand, their strategy is to avoid building stock of inventories and raw supplies and outsources labour intensive tasks such as sewing; all in effort to keep them flexible to produce whatever product is the most demands and to stop undesirable product from being on sale for too long. (Hines, 2004)Its emergent strategies revolve around meeting the customers demand; it has spare manufacturing and storage capacity and the ability to employ four hundred extra members when demand is at its most demanding. Zara collected information on a daily basis from their retail shops in efforts to assemble consumer data internationally. The manager operates with a personal handheld computer to gather consumer input, feedback and recommendations. This is done to negate the bullwhip effect, and along with this they use a POS system which capture purchases and creates data to which product is selling the best etc in efforts to guess customer behaviours in order ascertain patterns of purchase. (Christopher, 2000)Competitive advantage and sustainability Competitive advantage is defined as an advantage an organisation has over it competitors which allows them to gain greater sales or retain more customers. Competitive advantage can come in many forms such as cost structure, product offering, customer support and distribution method etc. (Business Dictionary, 2014)Zara competitive advantages are many, the first being their speed and responsiveness to the market. Strategists are now saying Zara has revolutionised the way retail should be done with their design and distribution processes which exceeds their competitors. This also adds value to stakeholders and customers as Zara maintain high quality clothing and their pricing model is affordable. Some other reasons for their speed is that the fabric dying, cutting and processing is done in house to add to their control and flexibility which in turn helps them a shorter lead times and old fewer products in storage. The biggest threat to this is that this could be lost all together as the competition copy the business model, and they can do it better. The stop this they could put business process copy rights in place to stop other from reproducing them. (Byoungho, 1996)As Zaras own their own supply chain, use the just in time manufacture and distribute the products themselves they have full control over how much products to make and where to send them. This system allows them to send stock to retail stores up to twice in one week and only stock popular products. Even though their business model allows shelfs to be empty, their strategy is to give the impression those products will not be restocked to force the consumer to buy now rather than later. This could have a negative effect on the customers as they could miss out and be emotionally affected by it and change where they shop. This could be avoided by sticking and referring people to the online shop where they keep products offered long term. (Christopher, 2000)The second aspect of their strategy is having the fastest response to customer demands, instead of having designer they have teams of people who produce design ready for manufacture including material specifications. This is a major part of their competitive advantage as most of their products are copied from popular fashion personalities and places. This is also a disadvantage as they are copying other organisations intellectual property and not creating their own. Also it would take a change in one law for the copying of popular fashion to become illegal. (Mazaira, 2006) Another of its advantages is their ingrained flexible design strategy, they employ 200 designer of the average age of 26 who create and discuss their work with numerous other staff members such as; market specialists, planning and procurement. This ensures that they can meet all the fashion design and production necessities and that the product will attract the whole of Zaras customer base. Also Zara stores are controlled by headquarters with little self-rule as headquarters provides all this information. This is an adaptive model rather than a traditional merchandising one which is widely used within the competition which use a small choice expensive design team. They could lose this competitive advantage by reducing the numbers of their designers due to costs; this could be kept by keeping a fresh inflow of trainee designers and not letting their brand name and corporate culture keep the real talent away. (Lopez, 2011)Also the majority of Zaras products are labelled made in Europe which adds to the quality as it holds a higher value than something made in China. When compared to their competitors who out source all their products from Asia. Zara do this even though Asia has 17 to 20% cheaper manufacturing costs, this doesnt seem sustainable until you realise that they are saving money using operational efficiencies. To maintain this they would have to keep the company lean to keep manufacturing and distribution costs and times down. (Tokatli, 2010)Zara are also worried about sustainability so they have put certain issues onto their long term business plan. The first being to save energy and to be more environmentally friendly; they plan to do this by reducing energy consumption by 20%. This will be done by introducing re designs of the retail shops heating, cooling, decorating and recycling systems. The second is to produce less waste and to increase recycling; this would be put into effect by reusing hangers and alarms by collecting them from their retail shops along with other plastic items. Currently they re use millions of hangers every year and to further push the point home they hold in company awareness and multimedia based training programs to re educate their staff to be more aware of issues such as limiting energy use, sustainable transport subsystems in order to change set behaviours and patterns within their staff. Complimentary to this they have integrated bio fuels into their distribution systems, their lorries which deliver 200 million tons of products every year use 5% bio fuel to reduce their emissions by 500 tons. (Inditex, 2014)

Recommendations Zara is a very successful retail company, their parent company Inditex has strived to gain competitive advantages by meeting the customers needs better and faster than any other company. But today a customer can walk in to buy a product only to find out that it has been discontinued, this should be stopped as it could turn the customer off the shop. Zara should have a system in place to provide old stock to customers who want it; this can be produced in Asia where it is cheaper and stored in a low cost facility and available only online so people can re buy their favourite products for years to come. Zara should also copy their entire business model over to China and America as soon as possible, as these two countries have a different fashion culture and extremely large markets. Zara should hire national designers to best meets the customers needs, open their own supply and distribution systems so they can be an exact replica of how they operate in Europe. This should be done to capitalise on the US and Chinese peoples own fashion retail markets fully and without compromise as they will require different products when compared to Europe.Also Zara should be very careful with their current business model of not advertising and opening physical shops as changing global consumer behaviour is leading to online shopping and there has been a noticeable decline in department store success and sustainability; to combat this they should expand into new opportunities within the garment and apparel market so they dont get left behind like last seasons shoes. Inditex should expand into India and China, but to supply mass amount of low quality and cost clothing. This should be done to target the impoverished people in those countries and can be done under a different brand. This would look good for them as a company and they would be making money as the foundation of India and Chinas economy is the impoverished people who need cheap clothes. With this they could also offer country specific fashionable brands that are maybe culturally embedded or very popular. Another recommendation that would be very beneficial for Zara would be to advertise in select places, for example they could take some model down to universities to show off their new products or specifically find ways to communicate with their target segment either by social media or TV. Conclusion The purpose of this report was to analyse Zara and their business strategy, this report highlights the key points that make the business strategy Zara have adopted successful and sustainable and ultimately Zara very successful. In future Zara would need to keep up their innovation as its only a matter of time before their competition copies their strategy and replaces them.

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