Zara case study. Zaras Objectives, Strategies and Problems.

ZARA: FAST FASHION

1. Introduction

In my short study case I will start by illustrating Zara’s present situation (according to the case), then I will continue with a brief analysis of the internal and external environments; in the next step I will develop some alternative ways of action and I will end by presenting my recommendations regarding the adaptation of the Zara’s business model in order to successfully face the future economic context.

2. Zara’s Objectives, Strategies and Problems.

2.1 Objectives

The first objective for Zara is to continue their expansion in countries like Switzerland, Italy, and Czech Republic and also on other continents: Latin America and Asia. A second objective is to continue their stores’ growth in the countries where already exists in order to consolidate its position and increase its market share. By the accomplishment of the two objectives Zara is looking to create enduring profitable growth.

2.2 Strategies

I will start with the product market penetration used by Zara and more precisely with the product line stretching (one of the tactics allowed by the product market penetration) and we can see in the case of Zara that it started with clothes and then added accessories. Zara definitively use a price differentiation that permits a differentiation between countries: starting with the lowest prices from Spain, then the prices are increasing with 10% for Southern Europe and 70% higher in the Northern countries, fact that is explained by the alignment to the standards of life in that area. An interesting and successful strategy used by Zara is the market orientation, a strategy that involves an implication of the resources, information and employees in order to create superior customer value that will increase the awareness of the brand without using advertising, therefore lowering the costs. As for the branding architecture, Zara is a house brand having tree collections categories, each of them personalized: Women (Zara Women, Zara Basics, Trafaluc), Men (Men’s line, Zara Basics, 100 Zara, Zara Sport) and Children Wear.

2.3 Problems

The main problem for Zara is that once with the global expansion the company is getting more and more difficult to coordinate the activities between the headquarter from Spain and the stores from other continents. In U.S Zara didn’t succeed to develop a strong supply chain and this will affect their sales being not able to provide the same services that provide in Europe: distribution facility and strong production. Therefore the vertical integration which is a distinctive feature of their business model tends to affect the costs but in a negative way.

3. Zara’s internal and external environments

3.1 Internal Environment

Zara has several specific capabilities that allow the company to have a solid competitive advantage:

►The ability to quickly respond to the market needs has given a distinctive competitive advantage to the company but other companies tried to copy the model but failed. That lead us to another distinctive capability which is a mix between human resources and Zara IT’s, in my opinion this is something very hard to imitate: a strong company culture embraced by employees that are in a continuous learning process (trainings, workshops) matched with simple ...

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3. Zara’s internal and external environments

3.1 Internal Environment

Zara has several specific capabilities that allow the company to have a solid competitive advantage:

► Time leadership: the production of the collections is done in maximum 3 weeks; this measure makes Zara come much sooner on the market with new collections than the normal average retailer which needs around 9 months to present a new collection on the market.

►A Global Brand: Zara is beneficiating of a worldwide recognition that was achieved by an innovative design and a constant quality that must provide the stimuli needed in order to create a similar brand meaning for the customers all over the world.

►Differentiation: Zara has a creative design team who give differentiation.

►Cost leadership (which is also a strategy pursued by the company): Zara manufactures 60% of its own products. By owning its in-house production, Zara is able to be flexible in the variety, amount, and frequency of the new styles they produce. Also, 50% of the production is done on client demand, which allows the chain to constantly provide its costumer with updated products. The supply chain permits the rotation of the products that aren’t sold in other countries in order to reach one of the main principles adopted by the company: 0 Inventories. Also the new products are tested first in certain stores before they entered full-run production keeping failures rate at 1 %( in comparison with the industry’s typical 10%).

►But Zara is offering fashionable clothes at affordable prices and that isn’t a pure differentiation and neither a pure cost leadership because Zara doesn’t have the objective to become the lowest-cost producer but Zara did come up with a combination between these two and end up with a successful formula.

Besides its specific capabilities Zara is facing some issues also:

►Because of an incorrect study the entrance on Argentina market was a failure because when analyzing the market the managers didn’t consider all the political and the economical factors.

►The lack of advertising: There is made only twice a year advertises and that is at the end of seasons for the sales. If Zara wants to continue the expansion on other continents where they don’t beneficiate of brand awareness it will be really difficult to be successful without an advertising campaign

►The Vertical Integration which is a distinctive feature of Zara’s business model start to become more and more difficult to handle as long as the distance from the headquarters is getting bigger.

3.2 External Environment

To have a better understanding of the company’s business model it is necessary to take a look to the external factors.

Opportunities:

►Once with the expansion of U.E the customs will disappear and also the liberalization of markets (e.g. Germany) will facilitate the further expansion of Zara

►Zara entered new markets that normally were riskier to approach by partnerships: franchises in Cyprus, joint-ventures with Benetton in Italy and Otto-Versand in Germany.

►If Zara will expand in Asia it will need to replicate its business model because of distance and differences

Threats:

►A treat that become significant for several companies (e.g. Swatch) is the exchange currency rate, as Zara is having activities in other continents (other than Europe) the company could register losses because of the exchange rate. Swatch is a company that is really aware of this treat and it started to use several financial tools in order to stop the losses caused by the exchange rate but it is not an easy thing to do and even the measures putted in place can backfire.

►The biggest treat for Zara is represented by the competition: H&M and C&A. H&M for example has lower prices uses top models(Naomi Campbell, Linda Evangelista) in order to advertise the brand and also is doing annual events with top designers( Cavalli in 2008)

►Another treat for Zara is the cannibalization. Because of the stores that are located so close one of each other we could assist to the cannibalization of sales between Zara and the other brands managed by Inditex.

4. Possible alternative ways of action

I’ve identified two ways of changing Zara’s business model: the ways of entry on the markets and Assess and Eliminate some other Inditex chains.

4.1 The different ways of entry on markets

When there is a more stable market, Zara is able to expand with the help of company-owned stores. In the case of the markets where there are cultural differences and therefore a bigger risk Zara should use franchise this way their partners will have to do the market study and assure that the clothes will respond to the market needs. Last but not least joint-ventures in the markets where there are barriers of entry.

4.2 Assess and eliminate some other Inditex chains

Zara is still in the growing stage and needs effort to stay as successful as it is now. Diversifying the managerial capabilities in too many new chains can destroy both Inditex's and Zara's success. Inditex should assess well whether these chain networks can really become profitable and eliminate some of them if needed.

5. Recommendations

My first recommendation is to expand aggressively in Europe in the next five years and in Asia on long-term.

There are significant markets to exploit such as Italy and Scandinavian countries; Italians are the big spenders in the apparel industry in Europe. Zara should especially enter Sweden market as a counter attack to H&M to defend its position in Spain. Expand in Asia is a logical step; Asia is the most popular emerging market for almost all industries.

A second recommendation is a continuation of the first one; on a continent like Asia it will be difficult for Zara to enter and have success without brand recognition so in the first phase is better to start an advertising campaign which must be well prepared in order to touch the Asian customers because this kind of advertising implies huge costs but in the case of a success the reward will compensate the efforts. Continuing on the idea of advertising Zara must invest in internet retailing, a sector that had an important growth in the previous years.

My last recommendation is to change the global strategy into a transnational strategy that will allow Zara to manage better the activities from U.S and Asia. Zara should most likely develop a second distribution center in U.S and the third one in Asia in order to deliver fashionable clothes in a fast manner. The creation of these two distributions centers it will be a test for Zara, it will be like a duplication of its business model and also a big signal of alarm towards the competitors but it also be a failure if it isn’t well managed. I would like also to consolidate the transnational strategy by adding two more elements: a management team that will be in charge with the coordination of all activities regarding the development of the two distributions centers and a council will be added also in order to supervise and improve the communication between the product divisions and the distributions centers (Exhibit 1). The information from the local centers will be sent to the Spain headquarters, in this way; the “design-on-demand” model will be more adapted to the various country specificities. An optimal solution can be the combination between cost leadership and local responsiveness.

6. Conclusion

Zara is one of the biggest retailers in the fashion industry. Its business model is unique: Zara gathers the information from the customers and then respond in a fast manner to their demands. As long as Zara is keeping its philosophy and make some modifications regarding its strategy in order to face the futures challenges it will be impossible to assist to the disappearance of this retailer in the near future.

Exhibit 1