Zara Company Analysis Essay Example

Zara International

This report prepared by the manager of Zara Company critically discusses the circumstances that influence changes in the modern day business environment and mitigating measures that the company can adopt in order to remain operational and successful. The report was authorized by the Director. As a manger, of one of the most successful companies in clothing industry, the need to remain alert to the changes in the business environment underlines the central duty of the manager. It is in this perspective that a manager is required to have strong leadership skills and experience to be able to detect the changes in the business environment and creatively come up with measures that will mitigate such changes. The purpose of this report is, therefore, to provide a comprehensive analysis of the modern day drivers of change in the business and then provide the mitigating factors that can be used to respond against such drivers of change.

Brief Background of the Company

Zara is one of the world’s largest fashion companies, and the most profitable brand of Inditex. It is also one of the largest distribution groups in the world. Zara’s business model includes design, production, distribution, and sales through the extensive network of retailers, consisting of over one thousand and seven hundred stores in 86 countries, mainly in Europe and Asia (“Stores Around The World”, 2013). Business model of Zara is based on smaller quantities, well thought about choice of style and clothes, and tight deadlines. The company provides a large choice of new clothes, frequently updated stock, and attractive prices for its customers. Today, Zara is recognized as one of the largest International fashion Companies in the world thriving on a unique business model of designing, production, distribution and sales. The background of Zara as a fashion house cannot be stated in isolation as it forms part of a larger chain of fashion houses in the world.

When The Company Was Set-Up

As stated above, the company is part of a larger chain of many stores which deal with fashion and are run by one group which is identified as Inditex Group. It is, therefore, impossible to talk about Zara Company without recognizing who actually owns the company. The Inditex Group is one of the world’s largest fashion retailers owning over 8 store formats that include, Zara, Massimo Dutti, Pull and Bear, Bershka, Oysho, Stradivarius, Zara Home and Uteque (Kotler, Armstrong, Wong & Saunders, 2008). This group is comprised of over 100 companies which operate in textile manufacturing, design and distribution
Zara was founded by Ortega Gaona, who was the CEO of the company, in 1975 when it opened its first store in A. Carina in Spain. The store had lower priced items of high end, popular products which were being sold to women, men and children. Since then, the company has grown to become an international brand opening stores in Portugal in 1989, the United States in 1989, in France in 1990, Mexico in 1992, Greece in 1993, Belgium and Sweden in 1994. This expansion has continued through years establishing the company in over seventy countries in the world (Hotchkiss, 2010).

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Product Line and Target Market

Zara as a fashion company which specializes in production of both men and women clothing ranging from the lower garment, upper garment, to shoes, cosmetics and accessories The company also makes children’s clothing under the brand of Zara kids. The most unique feature about the products manufactured by Zara is that they take considerably less time in making their products without actually compromising on the quality of those products. This is reflected in the fact that it can only take Zara a maximum of two weeks to develop a new product and get it ready for sale as opposed to 6 months notice as required by other companies. The Company, therefore, produces over 11,000 new products every year and manages to sale them in all of its stores. Zara has a rather unique strategy in regards to marketing its products as it strictly employs a no-advertising policy while most of the company rivals rely on advertising in order to market themselves. (Jain, Trehan & Trehan, 2006).

Product line in Zara stores consists of clothes and accessories sections for men, women and children. Presently, there are no indications of strategic changes in a product line. Apparently, Zara will strive to maintain growth in sales, together with focusing on brand identity, and a very short response time to market demands. Product line is continually affected by the latest trends and information in the apparel industry, mixed with Zara’s continuous fashion innovations. One factor that is very likely to influence the variety within a product line is the democratization of fashion, according to public’s demand.

Zara is the most internationalized of Inditex’s chains, and it continues to expand rapidly. Zara operated its stores in 32 countries in 2001, 73 countries in 2009, and 86 countries in 2012 (“Stores Around The World”, 2013; Chemawat & Nueno, 2006). Zara looks for new markets that are relatively easy to enter. Commercial team from headquarters conducts macro and microanalysis, evaluating opportunities for entering the particular market (Chemawat & Nueno, 2006). When expanding internationally, Zara “employs three different models of market entry: company owned stores in low business risk situations, joint ventures in countries where there are barriers to entry, and franchises, in situations with higher risks involved”(Chemawat & Nueno, 2006, p.16). Usually, only one model of market participation is practiced in particular countries, though some exceptions and cases of moving from one model to the other are present. According to how Zara has positioned itself on the market, its target audience ranges from infants to 45 year olds. Devangshu Dutta (2002), retail and fashion industry professional and CEO of Third Eyesight, commented, “the middle-aged mother buys clothes at the Zara chain because they are cheap, while her daughter aged in mid-20-th buys Zara clothing because it is fashionable” (p.1). Until 2010, Zara was not engaged in e-commerce, and customers could only purchase Zara’s products in stores and shopping malls. Only within three years, Zara has launched e-stores in 21 countries.

Market/Customer Served

The size of the market occupied by Zara International highlights how national border plays no role when it comes to a fashion culture. The company enjoys a wide market in over 84 countries in the world, having stores in the upscale locations of the world’s largest cities. As a fashion retailer, Zara combines two of the winning retail trends in the fashion industry which are being cheap and being in fashion. It, therefore, serves two markets balancing between the middle class and the rich with considerable ease. Zara treats clothes like highly perishable goods and therefore strives to have newly designed clothes in its stores. This ability allows the company to meet the demands of the fashion industry and control the market.

Market Share

Zara’s mission reveals that its main business is in the clothing industry while its market is to serve all members of the society. The company controls about 38% of the world market which translates to over 4.3 billion customers in the world. In terms of the classes of the target market, the company enjoys over 60% of the women market, 25% of the men and 15% of the children market.

The Company as an Open System

Zara Company is a vertically integrated retailer and, thus, has an ability to control all the steps on the supply chain whereby it designs, produces and distributes its own products. The company employs a strategy of non-advertisement of its products and, hence, entirely relies on the communication structures that are existent internally to market its products. It has an open system of communication which goes all the way to the target customer in order to market its products (Ferriss, 2009).

Today’s Drivers of Change

The business environment has undergone and continues to experience various changes which greatly influence the business environment. The modern day business environment remains unpredictable, highly competitive and extremely demanding. The pressure to survive and remain relevant in the industry continues to grow and this has led to many companies collapsing or becoming minor players in the industry. There are major drivers of change that can be considered responsible for these changes. These drivers have brought with them so much more than just benefits, hence, making it difficult for many businesses to cope with the changes that come along.

Technology

The advent of technology has always been regarded as a concept that changed life as we knew it. Technology and information technology today play a critical role in establishment, marketing, running and continued survival of the business. Indeed, technology has made it easy to identify business opportunities, start a business, manage that business and be able to facilitate the growth of the same business. The ease with which information has become available has made doing business an easy task for many people. While all these can be viewed as advantages, they have present in themselves serious challenges that most business managers must identify in order for them to survive. Firstly, the ease with which one can create a new business has only meant that competition has become intense due to the increase in firms (Porter, 1998). Secondly, technology has facilitated a shorter period of product life, thus, meaning that the competitive advantages of introducing a new product in the market have become shorter.

Globalisation

This stipulates emergence of a global village. While globalization can be attributed to be a product of technology, the concept represents a challenge of its own in the fashion industry. Globalization has been facilitated by faster means of transportation and the increased ease of communication resulting in a giant global market place. This has led to increased pressure on companies to make products that meet certain global standards with failure of which, they risk being shut down or overcome by new competitors. Consequently, fashion companies no longer have to worry just about the competition in their own countries, but competition from firms all over the world; all these thanks to the concept of globalization which has become a major driver for change in the modern day business environment (Imparato & Harari, 1994).

Shifting Boundaries of the Fashion Industry

The traditional view that has been placed on the fashion industry is that of an industry which belongs to the elite in the society. It has for long been an industry that makes high end products which are very expensive and made only for the few in the society, hence, locking out the common person or even the middle class citizen. This view is drastically changing and new boundaries of the fashion industry are rapidly emerging. Fashion is no longer a preserve of the few and the changing financial capabilities that the society has ensured the change in the status quo. Today, the fashion industry is part and parcel of the classic cultural industry. Powered by the new phase of capitalism, the fashion industry is now for all, the old and the young alike and this created increased market pressure and the need to make items that are affordable and fashionable at the same time. Many fashion companies have found this balance difficult to sustain and have, thus, been run out of business.

Mitigating Against Negative Changes in Business

The need for a business to be alert to the changes in the business environment directly correlates with the ability of that business to develop mitigating factors that will ensure survival of the business. While some or even most of the changes come camouflaged as advantages or positive changes, their negative aspects are most dire to a business that has not been alert. Some of the ways in which business can protect themselves against the negative changes in the business industry may include some or all of the following;

Seizing the Opportunity

Development of technology came as an indicator of progress and growth in the world and as such was largely embraced by all and sundry. It, therefore, brought many other advantages and opportunities that made doing business a rather simple task. The unfortunate truth is that most companies took too long to adapt and fully utilize the changes that technology brought preferring to remain under the old method of doing business. This resulted in dire consequences with most of them collapsing or becoming less influential in the industry. In this light, Zara fully incorporated the benefits of technology, particularly the aspect of information technology and developed a strong system of communication that facilitated its growth. The internal and external structures of communication that the company uses have remained the company’s primary method of advertisement (McConnell & Brue, 2006). Therefore, Zara seized the opportunity and completely allowed technology to work to its advantage.

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Adopting New Ways of Doing Business

Whenever there are significant changes occur in the industry, the prudent thing for a company to do will be to comprehensively examine its business strategy in order to determine its effectiveness. Globalization preconditioned many companies to review their business strategies and align them with the new emerging global market. Zara established a new method of doing business by adopting a no advertisement policy which was relied on by most of its competitors. To many, this was a death wish, however, the company had realized the need to invest in creating new products rather than advertising the old ones (Appleby, 1994). This realization was in line with the impact of technology and globalization whereby there was a shorter life for a product in the market and, thus, the faster a company came up with a new product.

Developing Skills for a New World

Fashion industry has undergone considerable changes and among them has been the realignment of the boundaries of fashion to include each and every member of the society. Today, fashion is a cultural statement that has been accepted by everyone, hence, creating a new market place that has its own demands. In this context, fashion companies can longer approach the business utilizing old business models. Zara has led the way by adopting a business strategy that has incorporated each and every person through combination of fashion that is both cheap and fashionable. This has ensured that the company develops skills that perfectly address the new world.

Remaining Alert to Competition

Technology, globalization and shifting of fashion boundaries have led to emergence of newcomers in the market and, hence, increased competition. Companies that are already operating in the fashion industry need to be acknowledged about the emerging competitions and adopt methods that allow them to remain competitive. Zara has done this by adopting new ways of expanding its market share through opening of online stores, hence, ensuring that it remains in touch with the new trends in the market. By adopting online retail sales approach, the company has ensured that whichever company intends to make a business move through the internet, will find it firmly in control of the online market (Nickels, McHugh & Susan, 2006).

Personnel and Organizational Design

A local personnel plays a significant role in making Zara’s fashion retail successful. Responsible for their departments, managers gather data for quick response to customers’ demands, coordinate response between retail and manufacturing, forecast trends and sails, analyze purchase patterns, create and imitate the latest trends, and deliver ready-made clothing to the stores (Dutta, 2002; Manna, et al., 2011). The above described process takes two weeks for Zara, and four to nine months for its competitors, to bring new products into the market (Barnes & Lea-Greenwood, 2006). It is the unique response to market demands that makes Zara so successful in fashion retail industry. Zara’s organizational design is a reflection of its business process, and sets it apart from its competitors. Instead of accurately predicting trends in fashion, Zara “has developed its business around reacting swiftly” (Dutta, 2002) to what is in style today, and will remain to be the fads of the nearest future. Organizational design in Zara retail chain differs from its competitors because primary task of Zara’s designers is to use existing fashion elements for creating new kinds of products. They do not innovate, but rather interpret fashion for their purposes. Firstly, samples are collected from various sources (Barnes & Greenwood, 2006). Uncolored fabrics are ordered in advance to be available in stock before the start of the season. Production that follows is based on three aspects: maximizing of used resources, minimizing of lead times, and inventory (Zhelyazkov, 2011). Manufactured apparel and accessories are distributed to stores, where sales and feedback take final steps in Zara’s fast fashion process.

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Competition and Industry Development

Zara’s key competitors are Benetton, Hennes and Maurits (H&M), and GAP (Chemawat & Nueno, 2006). Considering competitive advantage of Zara’s marketing strategy, based on “product variety, speed-to-market and store location” (Mehra et al., p.2), it seems unlikely that above named apparel retailers will pose a serious threat to Zara at this point. Benetton has lead times of several months and narrower age of the target audience. Benetton has higher prices, and is less inclined to change with fashion in comparison with Zara. GAP has difficulties entering new markets outside of the US, and experiences fashion and price difficulties, related to the expansion. In addition, what GAP offers in terms of clothing, looks more like regular wear rather than latest fads, displayed in the Zara stores. H&M is considered Zara’s closest competitor. Its prices are slightly lower, quality is higher, and expansion efforts are successful (Chemawat & Nueno, 2006).
Considering given analysis, Zara will be strengthening its position, as one of the leaders in the apparel market. Zara’s recipe for success, with its quick two-week response to customers’ demand, continues to be a strong point, and contributes to competitive advantage (Wickham & Wickham, 2006). Zara also stays in tune with industry development by practicing e-commerce on a large scale. Zara can further strengthen its positions in an apparel retail industry through expansion to new markets.

Management Approaches

Elements of the classical and behavioral management approaches are evident in how things are done at Zara International. Zara’s classical scientific approach is based on careful selection of personnel for the job, vertical control throughout the chain of design, manufacturing, distribution and retail, as well as on a clear division of work responsibilities among employees. Work of each department is carefully planned to adjust to fast fashion process and “supercharged product development” (Dutta, 2002). Supply Chain Management (SCM), Agile Supply Management (ASM) and Just-In-Time (JIT) techniques are employed at Zara, as scientifically based and proven by good business practice tools. Top corporate management is responsible for setting and approving business strategies of chains, and controlling their performance, which is not involved functionally in running the chains (Chemawat & Nueno, 2006). The behavioral management approach is employed as well. Managers in stores are involved in the evaluation of demand, forecasting trends, and placing orders. Reward system in local stores influences sails positively. Staff is encouraged to be creative, and trust and responsibility are encouraged on different managing levels.

Successful Practices

System concepts explain success of Zara’s practices. Zara built its system with its own structure and distinctive behavior of the manufacturer and customers in the retail industry. Its founder, Amancio Ortega, believed that customers would view clothes as perishable commodity like food, i.e. to be consumed rather than stored. It was a revolutionary approach to retail fashion industry. Ortega’s belief led to some distinctive practices. One is a rapid and frequent change in content of the high fashion product lines. Another one is that Zara’s advertisement costs are 10-15 times lower than those of competitors (Chemawat & Nueno, 2006; Dutta, 2002). Zara chain succeeded in the creation of a high scale demand for fashion, by influencing relationship between manufacturers and consumers. Zara’s customers visit stores 17 times a year on average, as opposite to seven to nine times a year for competitors (Chemawat & Nueno, 2006). Ortega’s way of making Zara successful was contingent on unique internal and external opportunities. It explains other retailers’ difficulties in adopting Zara’s business model, and competing with this successful brand.

Zara’s Logistics System

Zara’s logistics system is presently based on software that was designed by Zara’s software developers. The system made possible delivery of new orders from stocks to the chain stores within 24-48 hours. Considering rapid development, Zara’s top managers have to evaluate whether current logistic system can maintain such tight time frames of deliveries in a situation when number of stores quickly increases. Presently, the management considers outsourcing development of such software to an outside company. Switch to the new software will meet increased future demands, and align with expansion strategy. Perhaps, Zara will employ evidence-based practice approach to introducing new change. Fist, pilot project might be run in one geographical area, and then data will be collected, evidence will be rated, decisions will be made, and strategy will be created. Last steps will be the knowledge transfer, and implementation of a new logistics practice in the everyday running of the chain.

Zara’s Supply Chain

In the past two decades, supply chain management is a dynamically developing concept and at the same time one of the most common relationship management system. Supply chain management can be of two types: “lean” and “agile”. Lean approach to supply chain management involves reducing costs by decreasing the amount of inventory; the active application of practice supplies “just in time”; reduction of production and other operating costs through joint planning; reallocation of resources, responsibilities, and risks in the supply chain, which is an effective solution, for example, for standardized products. Agile approach to supply chain management, by contrast, is effective for fashion products with high fluctuations in demand. Agile supply chain is focused on promptly responds to changes in demand, both in quantitative and qualitative parameters.

A great example of agile supply chain is an example of the Spanish company Zara operating in the segment of “fast fashion”. Zara receives a strong competitive advantage not due to the fact that it can predict fashion trends and, accordingly, the demand in each geographic region, but due to the fact that it has learned to form assortment without unnecessary inventory extremely operatively. The secret of Zara is a special link in the supply chain – its own factory that is configured to “rework” of semi-finished products: everything what fashion change very quickly (Stevenson n.p).

Zara bought fabrics, other input factors and finished products from external suppliers using procurement offices located in Barcelona and Hong Kong, as well as by procurers in their headquarters. Approximately half of the procured fabrics were “gray” (unpainted) to facilitate maximum flexible update within the framework of the season. Moving further along the chain, approximately 40% of finished products produced within the company, and the remaining volume of approximately two thirds of items came from Europe and North America and the one third came from Asia. The most fashionable items were the most risky, and therefore their producing were in small volumes within a company or contracts with suppliers that were located nearby, and repeated orders were made only if the goods were sold well. Basic items that differed to prices than to time, often came from Asia, as production in Europe was usually for 15-20% more expensive for the company. The share of approximately 20 suppliers accounted for approximately 70% of the external procurement. Although Zara had long-standing relationships with many of these suppliers, it has minimized formal contractual obligations to them (‘Fashion Forward – Zara’s Supply Chain Strategies’).

Domestic production was the primary responsibility of 20 completely owned factories, 18 of them were located in the headquarters of the Zara in Arteixo. Space for expansion of activities was achieved through undeveloped areas around the main industrial complex. Zara factories have a high degree of automation; they specialize on the type of clothing and are focused on capital-intensive parts of the production process: design of patterns and cutting, as well as the final processing and quality control. Even for those items of clothing that were issued within the company, the cut items dispatched approximately on 450 workshops, located primarily in Galicia, where it was carried out a laborious procedure of sewing. These workshops were mostly small enterprises, which employ an average of 20-30 employees, although in a several of them there were employed more than 100 people, and they have specialized by product types. The company also provided them with the technology, logistics and financial support and paid for their services on pre-established rates based on the finished item of clothing; also company conducted on-site inspections and insisted on the comply with local tax and labor laws. Stitched garments were sent to a production facility where they were inspected, ironed, folded, packaged and then sent to the adjacent distribution center (‘Fashion Forward – Zara’s Supply Chain Strategies’).

In conclusion, the major drivers of change are meant to ensure that consumers are able to get high quality products by expanding the thresholds that must be met for a firm to survive in the market. Consequently, development of technology, globalization and the shifting boundaries of the fashion industry ensured that the fashion industry remains competitive through adoption of the mitigating factors that allow the companies to remain competitive and relevant.

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