Value Chain Analysis of Zara's Industry - Case Study Example

Running Head: ZARA’S REPORT Zara’s Report [The of the will appear here] [The of the id will appear here] [The of the course will appear here] [The name of the course number will appear here] ` Executive Summary This report presents a company analysis of Zara- the fashion clothing retailer that is owned by Indetix Group and operates primarily in Spain. The company has been able to greatly change the fashion landscape with its innovative strategy of fast fashion. The company, further, has been able to align its operations such as the supply chain to the fast fashion strategy. Even though, the strategy is working well for now and generating profits for the company; it has its limitation. The current strategy does not allow for expansion in new markets globally primarily because of its vertical integration. Analysis of the company reveals CSR issues and expansion limitation. The report ends with the recommendations that the company should focus more on its core operations, develop alternate production facilities and work on its CSR policy. Key Words: Zara, Company Analysis, Fast Fashion, PESTLE Analysis, Porter’s 5 Force Analysis, Value Chain Analysis, CSR, Ethics Contents Contents 2 Porter, M. E., 1985, Competitive Advantage: Creating and Sustaining Superior Performance, New York: New Press 19 Introduction Zara is a Spanish brand that is created by Indetix Group as their flagship fashion clothing store. This store is known as the most innovative retailer in terms of fashion. It changed the way people buy fashion clothing and molded the consumers according to its own style. This report will present an analysis of Zara with regard to the external and internal environment by applying different marketing theories.. The purpose of this report is to critically analyze the situation of this apparel brand and to present recommendations to the CEO of the company, in light of the analysis conducted. External Environment Analysis PESTEL Analysis Political Factors Right now, Zara’s primarily operates in Spain and derives 40 percent of its sales from the region. However, in light of the increasing competition, Zara’s has expanded its operations in other parts of the world (Anon., n.d.). As the company considers expansion into other parts of the world, it needs to realize that political alliance with the governments of the country is important. The country needs to understand the political scenario. It is the government that ensures that foreign companies are able to get fair advantage in the market and for this the government should be willing to consider foreign direct investment favorably (Peng, 2008). Economic Factors The biggest economic issue impacting almost all industries throughout the globe is the recent financial crisis. While the economy is slowly reviving, customer buying power is still impacted to a great extent. They look for products that are inexpensive and medium fashion items such as Zara are losing ground. Since Zara’s customers belong to the medium income group, this income group is most affected by the financial crisis. These customers have shifted their buying preferences to low cost retail stores such as Wal-Mart (Ghemawat and Nueno, 2003). Another issue facing Zara is the matter of currency. Since Zara predominately operates in Spain, it deals in Euros. This currency has recently gained more strength as compared to the dollars. While this makes the company more strong, it impacts the sales of the company. While dollar weakens in regard to Euros, the conversion of price makes the products more expensive in countries outside the European Union such as America, Middle East and even Asia (Ghemawat and Nueno, 2003). Social Factors In terms of social factors, the company needs to understand the attitude of the consumers towards fashion. The world today is becoming more fashion conscious on account of the penetration of media and the role models developed in the form of celebrities and models. This is a favorable point for Zara as the company deals with fashion apparel. Also consumers, on account of this trend, prefer to look at celebrities as their role models (Ravasio, 2012). Another rising social trend is the hype against extremely thin fashion models. Fashion models, since time immemorial have been thin figures that inspire people around the world to consider them as the epitome of beauty. However, consumers today have raised voices against these thin models objecting that they do not leave a favorable impression on the young mind and they push consumers, specifically girls, towards adopting poor diet plans. Another consideration with respect to social factors is the constantly changing nature of the fashion industry. As new seasons and collections roll in, the old clothing line becomes obsolete and is marked down by most retailers. Technological Factors Technology has greatly changed the way in which companies as well as people interact. Technology makes it both complex and easy for organizations to operate in this modern world. In terms of Zara, it provides the company with improved communication systems. Since the company believes in constantly updating its merchandise, it needs to have a good communication system whereby all people within the organization are able to communicate effectively for efficient and smooth running of the organization (Anon. n.d). Technology has also allowed the company to improve its production facilities that have become automated to suit the increasing needs of the company. Technology allows organization to increase production and lower costs to a great extent. Internet is another important aspect of technology. It allows organizations to develop their presence in the online world without a great deal of investment. It allows organization to cheaply market their products as well as communicate directly with the consumers through online social networking websites such as Facebook, Twitter etc. A rising trend among customers is not just to buy online but also use their cell phones to browse and buy new collections. For this, companies have developed their own mobile applications to better improve the experience of the customers (Bautista, 2013). Zara has also done the same with its own mobile application that allows consumers to interact with the brand more personally. Legal Factors Legal Factors that the company needs to take into account are the laws developed in the country in which they operate. Since Zara’s mainly operated within and through Spain, it needs to comply with the laws of the European Union which allows the company the advantage of a local market even when the company does business in European nations outside Spain (Anon., n.d) Another issue with respect to apparel industry is the outsourcing issue whereby companies have been caught indirectly hiring illegal immigrants and imposing harsh rules on them. These immigrants, in order to earn money, do not complain. Often the principal company hires suppliers who conduct such activities without the knowledge of the company. While the company may not be legally implicated in such cases, it leaves a bad reputation for the company (Moore, 2011). Environmental Factors The company, with respect to the environment, needs to understand the implications of the business on the environment. With the increase in globalization, one issue that has been raised by concerned environmentalists is the rising costs of transportation and its impact on the environment. While the company may benefit from lowered cost of production but the entire environment is negatively impacted as a result of wide area of transportation. Another issue with respect to environment is the utilization of bio-degradable materials in the products. This along with the cost of operations on the environment raises the concerns of the environmentalists that eventually become the concern of the consumers. With consumers gaining awareness regarding environmental values, companies need to be more environmentally conscious in order to develop a loyal, caring and strong brand image (Anon., n.d). Porter’s 5 Forces analysis This tool is a micro environment analysis tool that helps to gauge the rivalry within the firm. The more intense the power of the new entrants, suppliers, buyers and substitute products, the more challenging is the industry (Porter, 1985). Threat of New Entrants The threat of new entrants in the industry is quite low. This is because consumers perceive fashion in terms of the brand image. Zara’s is a credible name in the fashion industry and has a strong brand identity. Consumers associate it with fashion products. New entrants in the market would take a lot of time to develop a strong brand image as that of Zara’s (Ghemawat and Nueno, 2003). Threat of Substitutes The threat of substitutes is medium. This is because there already is a wide range of fashion brands that have a strong brand identity. These brands are constantly at war with each other as they continue to upgrade their products and come up with more fashionable products (Ghemawat and Nueno, 2003). However, one advantage that Zara’s provides is that it provides high fashion products at affordable rates. Consumers, when buying at Zara’s, are aware that they are getting the latest fashion that competitors may not have and that they are buying it at a good price. Threat of substitutes is low in the sense that Zara’s has positioned itself quite well in the minds of the customers. When customers come to the store to shop, they are aware that the product that they see on the shelf may not be there when they come back and as a result they are tempted to buy the product (Ghemawat and Nueno, 2003). Bargaining Power of Buyers The Bargaining power of the buyers is medium to high. This is mainly because of the multitude of products available in the market. With globalization on the increase, the bargaining power of the buyers has increased further. They have more options which make the market highly competitive (Ghemawat and Nueno, 2003). Zara’s has however increased its bargaining power among the buyers by introducing the concept of fast fashion. Products at Zara’s are replenished every two weeks which propels the customers to buy the products when they see them otherwise they may not be able to buy the product when they next visit the store (Ghemawat and Nueno, 2003). Bargaining Power of Suppliers The bargaining power of the suppliers in the case of Zara’s is low. This is because Zara’s mostly produces its own products. It does not outsource its manufacturing in the way that gap does. The only products that Zara’s gets from its suppliers are undyed fabric and other standard products such as zips, buttons etc. (Ghemawat and Nueno, 2003). Such products do not require extensive skills or rare suppliers and thus this reduces the bargaining power of the suppliers. Competitive Rivalry within the Industry Reviewing the above factors, it can be assumed that competitive rivalry within the industry is high but Zara’s has been able to position itself quite well which allows the company to gain suitable edge over the competition. The increasing fashion awareness of the consumers along with increase in substitute products due to globalization, has led to an increase in competitive rivalry. This is aided by the fact that suppliers in the fashion industry do not hold great power as it is not the fabric that holds the most value but rather the finished designed product that adds value to the product and eventually the brand. Internal Environment Analysis Resources and Capabilities In terms of resources and capabilities, Zara’s is able to benefit from a variety of tangible and intangible assets that it is able to successfully deploy. Perhaps the most important resource of the company is its organizational structure. The company has a vertically integrated organizational structure where it empowers it employees including the sales team to a great extent. The sales team of the company is the trend spotters of the company. These trend spotters make notes about the changing customers’ demands and make notes about what item to the customers ask for more often. They then inform the designers about these customers’ preferences which allow the designers to incorporate these preferences in their new designs (Ghemawat and Nueno, 2003). The supply chain of the company is yet another resource for the company. The supply chain of the company is perfectly aligned with the strategy of fast fashion that the company has adopted. The coordinated supply chain of the company ensures that products in the stores are replenished twice weekly. This makes the company go away with the option of outsourcing and therefore the company has developed its own in-house production facility in Spain (Peng, 2008). Zara’s designers are yet another resource for the company. The company hires fresh graduates who want to make a mark on the industry and thus strive harder. They put in more effort and are substantially rewarded with rewards on individual as well as team basis. These designers take in the feedback of their customers and are able to produce design after design in the shortest period of time when compared to the industry (Anon, n.d). The investment in technology is yet another resource of the company. The company has developed the latest infrastructure within its production facility in Spain where automated machines dye the fabric, organize inventories and perform other such tasks; thus ultimately increasing the efficiency of the facility. The communication system installed in the organization also allows for improved communication between different internal stakeholders of the organization including sales teams, designer, suppliers etc. (Peng, 2008). Value Chain Analysis The concept of value chain was introduced by Porter whereby he insisted that in order for an organization to improve and maintain its operations, it needs to add value at each stage of its supply chain (Porter, 1980). Similarly, Zara’s should also apply this strategy to improve upon its supply chain. Typically, a product developed at Zara’s moves through the following stages: material ordering, material fulfillment, designing of products, manufacturing of products, distribution centers and finally to the stores where they are sold to the customers (Ghemawat and Nueno, 2003). At the material ordering and fulfillment stage, the company buys fabric in bulk quantities that is undyed. This allows the organization to take benefit from bulk buying and also allows liberty to the designers to choose their own colors. Designers in this regard are not restricted towards certain colors; also the fabric is available to them all the time. They do not have to wait for material consignments to reach them. They have the undyed fabric and can utilize it whenever they want (Peng, 2008). At the designing of products, Zara’s hires fresh graduates at lower prices than the industry average. This allows the organization to reduce operational cost while at the same time hiring graduates with energy and fresh ideas. These designers, with their fresh minds, are able to turn in products quickly; that is, products are refreshed at the stores every two weeks. The designers are also asked to limit their error margin when designing. This considerably reduces operational costs which translate as lower prices of the final products (Ghemawat and Nueno, 2003). At the manufacturing stage, the products are developed through automated systems. These systems improve efficiency as they reduce error margins while producing the final material in a short time span. Zara’s also does not outsource its manufacturing to other regions which allows the company to manufacture its products in a timely and fast manner (Anon., n.d). The products are then transferred to the distribution centers where the products are kept in an organized manner which further improved efficiency. The clothes are pressed and hanged beforehand so that the employees would not have to waste time in locating and finalizing the product before sending it to the store (Anon, n.d.) Finally the stores at the company serve as retail outlets as well as trend spotters. Sales team at the company is empowered to provide feedback to the designer to improve their designs. They give suggestions on which products to invest on. The stores also have their own individual appearance as though they conform to a standard interior design but the displayed products vary according to the tastes and seasons of the region (Ghemawat and Nueno, 2003). This value chain is further aided with support activities in the organization which includes vertical integration of the organization, IT infrastructure and cost cutting strategies. CSR, Ethics and PR In terms of its CSR policy, Zara’s covers a lot of ground. It ensures eco-friendly stores; uses biodegradable materials in its shoppers; it recycles certain products such as hangers and tags to prevent undue wastage. Furthermore, the company employs the use of PEFC paper for most purposes including the publishing of catalogues. The company also uses bio-diesel fuel for the transportation of its products (Anon., n.d). On the supplier side, Zara’s is again aware of the environmental implications and therefore strives to buy organic cotton. It uses PVC-free material for the manufacturing of its footwear products. In terms of animal products, Zara’s uses fur and leather products derived from farm animals and not from animals sacrificed for the sole purpose of providing fur and leather (Anon., n.d). Despite this, Zara’s has been implicated for certain ethical issues; predominant among which is the issue of slave labor practices. Quite like Gap, the company has been caught outsourcing some of its production to illegal Bolivian and Peruvian immigrants in Brazil. The company claims that it was unaware of this issue as it had hired AHA for this activities and it was their ethical duty to prevent such activities. While this may be true, Zara’s is still guilty of irresponsible sourcing as this was not the first of its kind slave labor issue for the company (Moore, 2011). Recently the firm put mandatory rules on its biggest suppliers from Morocco in order to curtail this issue but that it still to bring positive results and the company is seriously considering moving its outsourcing to China (Reuters, 2007). Stakeholders’ Analysis Low Interest High Interest Low Power Society/Community Employees; Suppliers High Power Consumers; Media Shareholders, Management Mendelow proposed his power interest grid to define the roles and power of the various stakeholders (Mendelow, 1991).The above Mendelows Power-interest grid represents a summary of the stakeholders’ analysis that has been discussed in more detail below: The Community: The community is identified as the stakeholder since the actions of the company directly impacts the society. It is the society that is ultimately impacted with the positive and negative actions of the company. For instance, if Zara shows high profits, it means it is boosting the economy while providing new employment avenues for the citizens. However, the community does not take a high interest in the company unless a major event takes place. Consumers: The consumers are perhaps the most powerful stakeholder as it is for them that the company is operating. Without the necessary number of consumers, the company would have become extinct. However, the interest of the consumers is limited to the products that the company offers. They are usually not concerned with the strategy or operations of the company. Media: The media allows has a high control over the company since the publicity offered by the media can make or break an organization. If the media portrays the company in a negative light, consumers would not be willing to make purchases. However, the media has low interest in the company as it has a wide range of issues to cover. The interest is only generated when the company does something worth noticing. Employees: The employees have high interest in the company as their future and career is dependent on the organization. If the organization performs well, it means added benefits, bonuses and more perks for the employee. However, the employee has little power over the company. The employees at Zara do have considerably higher power since they are the trend-spotters for the company. Suppliers: The suppliers also have high interest in the company since their business in dependent on the company. However, suppliers of Zara do not have a high power ratio because they do not perform core functions for the company and the company does not overly rely on its suppliers. Shareholders: Shareholders have high power and high interest in the company because they have invested their money in the company. They wish to see better returns from the company and therefore follow the company closely. They also yield high power because the company ultimately has to report to them. Management: The management also has high power and interest in the company. This is because they are responsible for the overall profit of the company and also have invested in the company in terms of time, and often money. They make the important decisions in the company and therefore have high power. Recommendations In light of the above analysis, the company has the following issues that can be resolved with the given solutions: Over reliance on one Production Facility One pressing for the company is the over reliance on one production facility in Spain. While the facility is owned by the company itself and has a huge capacity, this facility has its limitations. The company is unable to maintain its economies of scale while spreading into other regions. Also in case of any natural or man-made disaster, the entire supply chain of the company would be affected. Therefore the most viable option for the company is to develop production facilities in strategic locations around the globe, if the company wants to explore possible lucrative markets globally. In order to pursue this, the company should explore new locations where it could set up a production facility. The most viable option in this case would be China. China presents a good opportunity because it produces cotton locally; boosts a good supply of cheap labor; has innovative technology that would be imperative to set up a facility in the same designs as the Spain factory; offers great advantages for foreign investment within the country and finally the production facility would allow the company to easily set up stores in the Asian market while keeping intact the current strategy of the company. Vertical Integration: Another issue for the company is within its vertical integration. The company ensures that all activities of the company are performed in-house. The company only outsources minimum products such as zippers, buttons etc. from other regions. While this allows the company to gain more control over its supply chain and suppliers, this system has its limitations. It takes away the focus of the company from the core business which is fashion products. The company puts more effort on the manufacturing when it should be focusing on fashion. Here the company can take the example of Apple Inc. that has maintained control over the designing of its products but outsources the manufacturing to China. In order to implement this, the company needs to evaluate areas that it can outsource. While the company still outsources the production of standard products like jeans and certain t-shirts, it is still not enough. In order to focus on the core business, the company should ideally outsource its fabric supply and stitching. However, this places implications on the strategy as it may restrain the company from keeping its image of fast fashion. For this, the company should focus on using suppliers that are easily available and within reach to avoid hassles of transportation which takes considerable time. Outsourcing and Ethics: One pressing issue for the company is outsourcing. The company outsources some of its production to countries such as Morocco and Brazil through suppliers such as AHA. These suppliers do not form to legal matters and thus this result in a bad image for the company. The company is such cases should ensure that suppliers conform to the law by performing proper audit of the suppliers. The company should periodically review the activities of its suppliers. It should demand that the supplier company undergo audit each year. This audit should be performed by reputable companies that Zara would recommend. The company should condemn such practices by going away with shady suppliers who have already been caught once. Global Expansion: Another possible recommendation for the company is to pursue new markets globally. While Zara continues to expand despite the financial crisis, the company has still not fully explored the Asian market which presents lucrative options for the company For this, the company needs to hire locals who would inform the company of the fashion trends within the area. Every country has its own traditional dresses and while jeans and t-shirt have gained international acclaim, certain dresses are area centric. For this, Zara should hire local designers who would incorporate such elements within the already existing fashion at Zara. Conclusion In conclusion, it can be said that the current strategy that Zara is employing is generating favorable cash flow for the company. However, the strategy of vertical integration has its limitation with respect to global expansion. Since globalization is on the increase and Zara cannot hope to only rely on one market, it needs to upgrade its strategy to aid globalization. For that, it needs to develop more production facilities and focus more on its core operations. Furthermore, Zara is underdoing certain PR issues on account of the shady CSR policies. It needs to focus on these before further expansion. References Anon, n.d., The Story of Zara, Unique Business Strategies, Retrieved from http://www.uniquebusinessstrategies.co.uk/pdfs/case%20studies/zarathespeedingbullet.pdf [Accessed 2 April, 2013] Bautista, C., 2013, How Social Media is Making over the Fashion Industry, Retrieved from http://mashable.com/2013/02/15/fashion-social-media/[Accessed 2 April, 2013] Ghemawat, P., and Nueno, J.L., 2003, Zara: Fast Fashion, Harvard Business School Case (9-703-497), pp 1-35 Mendelow, A., 1991, Stakeholder Mapping, Proceedings of the 2nd International Conference on Information Systems, Cambridge, MA Moore, M. 2011, Zara Caught in Slave Labor Scandal, Green Go Post Retrieved from http://greengopost.com/zara-slave-labor-scandal/ [Accessed 12 April, 2013] Peng, M., 2008, Global Strategy, Ohio: Cengage Learning Porter, M. E., 1985, Competitive Advantage: Creating and Sustaining Superior Performance, New York: New Press Porter, M. E 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: Free Press. Ravasio, P., 2012, Will rising costs spark a new social trend in the fashion industry?, The Guardian, Retrieved from http://www.guardian.co.uk/sustainable-business/blog/rising-costs-social-trend-fashion [Accessed 12 April, 2013] Reuters, 2007, Zara owner lays down ethics for Moroccan supplier, Retrieved from http://www.reuters.com/article/2007/06/27/idUSL2764574420070627 [Accessed 12 April, 2013] Read More