Strategic Analysis of Zara Fashion Retailer.

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STRATEGIC ANALYSIS OF ZARA INDITEX FASHION RETAILER

by

Alla Romanova (Student ID: 114729)

and

Isabel Arroyo Moreno (Student ID: 114695)

Strategic Management Module

BSc Business Management with HR

Greenwich School of Management, University of Plymouth

London

Submission date: 6th January 2011

Word count: 3000

TABLE OF CONTENTS

  1. Executive Summary
  2. Introduction
  3. M. Porter’s Five Forces model for Competitive Industry Analysis applied to Zara (Michael Porter)
  4.  Generic Strategy of Zara (Michael Porter)
  5. Zara’s Value Chain Analysis (Michael Porter)
  6. Zara’s Telescopic Observation (Panagioutou)
  7. Organisational culture (Gerry Johnson) and Corporate Social Responsibility
  8. Recommendations and conclusion
  9. Reference List

  1. EXECUTIVE SUMMARY

This report provides a strategic analysis of the international fashion retailer Zara by explaining the factors that enabled the company overcome its main competitors and become an international market share leader thanks to a very successful combination of different corporate strategies.

Accordingly, the methodology used to analyse the company’s strategy includes several models such as Michael Porter’s Five Forces of Competitive Industry (1980), Generic Strategy and Value Chain (1985); Gerry Johnson’s Cultural Web (1992), and Panagiotou’s Telescopic Observation (2005).

As result, the report highlights the following findings:

  • The international clothing retail industry has a very intense rivalry among competitors, the threat of potential new entrants and substitutes is relatively low, and suppliers and buyers have little bargaining power.
  • Contrary to Michel Porter’s assertions, Zara has achieved competitive advantage and success following two different generic strategies – cost leadership and differentiation-.
  • Zara has a centralized, vertically integrated and capital intensive value chain that provides the company with a cost advantage over competitors.
  • Zara’s well developed and flexible corporate culture is appropriate for the fashion retail industry as it supports a communication strategy that enables to adapt rapidly to ongoing changes in fashion trends.

Concluding, further strategic recommendations consider the fact that due to international expansion, the company may need to partially decentralize its vertically integrated production and distribution model; while it should make efforts to reinforce and promote its e-commerce business model to remain competitive in the future.

  1. INTRODUCTION

Zara is the leader fashion brand of the Spanish Group Inditex – the biggest fashion retailer chain in the world- founded by CEO Amancio Ortega, which also operates other brands such as Massimo Dutti, Pull and Bear, Oysho, Uterqὒe, Stradivarius and Bershka. The brand offers reasonable quality designs copied from high fashion designers at average market price for the category. The first Zara store was open Spain by 1975, and since then it has experienced a strong national and international expansion. Currently, Zara has 1,603 stores in 77 different countries worldwide and it has achieved success and competitive advantage by employing a particular vertical business structure unlike competitors. In addition, Zara has revolutionised the fashion industry with a “fast fashion” strategy, adapting merchandise assortments to current trends as quickly as possible and bringing affordable, ultrafashionable items to the masses (Inditex Annual Report; Inditex.com)

  1. FIVE FORCES MODEL OF  INDUSTRY COMPETITIVE ANALYSIS APPLIED TO ZARA (Source: Michael Porter, 1980)

The Porter’s Five Forces Model (1980) will serve as framework for examining the current competitive environment of Zara within the international clothing retail industry which is determined by:

  • Intensity of rivalry among competitors:
  • Large industry size with a lot of competitors and very susceptible to trends (Investopedia.com; Turconi, 2008).
  • Mature industry with slow growth rate -European market is saturated, Eastern markets are emerging and US market still a challenge- (Ghemawat and Nueno, 2006).
  • Thus, very strong rivalry among competitors as firms must fight with each other for market share (Pirone, 2010).
  • Proliferation of foreign international fast fashion chains seizing the market share from traditional rivals.
  • Highly labor-intensive industry; chains tend to outsource production to developing countries in order to cut down costs (Ghemawat and Nueno, 2006).
  • The three closes competitors are H&M, The Gap, and Benetton, followed by C&A, Uniqlo and Topshop (Sunshilde, 2007).
  • In economic recession, low cost discounters such as Primark or Wal-Mart become a serious threat (Gallaugher, 2008).

  • Threat of potential new entrants:
  • The threat is medium to low; new entrants face high entry barriers due to the existence of economies of scale in such mature and saturated industry (Pirone, 2010).
  • The ability to become competitive is highly limited; a high initial capital is needed to start up.
  • A strong branding strategy is necessary in order to remain competitive (Investopedia.com).

  • Threat of substitutes:
  • The threat of substitutes is low because clothing products cannot be substituted -it is a basic need to be dressed - (Pirone, 2010).
  • However, second hand and hand-made clothes – E-bay, charities, etc.- might act as substitutes.
  • Special attention must be paid to the emergence of e-shopping methods, which have the ability to shape competitiveness of traditional retailers, although these frequently integrate online shopping into their operations (Investopedia.com).

  • Bargaining power of suppliers:
  • International apparel retailer chains exercise a strict control over their suppliers, which have very little bargaining power within this industry.
  • There is a tendency for chains to acquire supplier´s plants in order to have greater control over their production costs (Investopedia.com).
  • Zara has bargaining power over its suppliers as it is part of Inditex S.A. – the world´s largest clothing retailer-.
  • Zara is vertically integrated and it mostly designs, produces, distributes and sells by itself, although due to international expansion the company counts with some independent suppliers and production centers (Pirone, 2010).
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  • Bargaining power of buyers:
  • In the case of international clothing retailers, the individual buyer´s bargaining power is very little as they lack the ability to bargain for higher quality products at lower prices.
  • Nevertheless, the existence of a large population of buyers demanding high quality products at affordable prices may help to keep retailers´ honesty (Investopedia.com).

  1. GENERIC STRATEGY OF ZARA ( Source: Michael Porter, 1985)

According to Porter, a business must adopt one of the four different “generic strategies” stated above to gain competitive advantage. If not choice is made ...

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