Zara's Growth, Financial Analysis, and SWOT Analysis - Case Study Example

Zara Case Study Name Institution Zara Case Study Company Situation Zara has become a renowned apparel brand in Spain with a brand known as Inditex worth £2.5 billion (Weidenbaum, 2007). The company has operations around the world. Its success presents instructive lessons on how to formulate and maintain a break through approach. Zara has identified substantial diversities on consumers and distinguished itself from rivals by carrying out major activities, especially in the supply chain uniquely. This strategy has set challenges to business rivals making them fail to equal or mimic Zara’s market positioning (Ton, Corsi, and Dessain, 2010). This accomplishment has bestowed Zara protracted positioning and competitive differentiation. Nevertheless, this has not saved the company from facing several challenges, opportunities, and strengths. Financial Analysis The table below shows Zara’s net sales, COG (Cost of Goods Sold), GP (Gross Profit), and Net Profit. These values are intended to increase every fiscal year (graph representation in the appendix). Table 1   year 2009 2010 2011 Ratio Net Sales (mn €) 11084 12527 13793 COGS (mn €) 4756 5105 5612 Gross Profit (mn €) 6328 7422 8180 Net profit (mn €) 1322 1741 1946 Zara’s Growth Growth ratio helps to comprehend the general development of an organization (Cheng and Tsan, 2010). Therefore, calculating growth at Zara involves taking figures of three consecutive fiscal years using the procedure given below. [Value of present year – value of previous year] Growth (%) = ---------------------------------------------------------- X 100 Value of previous year The table below indicates Zara’s growth in sales, profits, assets, and debt. The growth in assets, profits, and sales should always increase positively to show that the organization is flourishing. Alternatively, the debt growth should remain negative because decreased debt growth increases the profits as indicated in the table below (graph representation in the appendix). Table 2 SWOT Analysis Zara’s current situation can be accessed through its internal analysis or SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis (Nakhala, 2008). Zara’s SWOT analysis indicates that the company has inspired and gratified employees. The key strengths in the company include its vertically integrated system and realizable goal settings. The management has made employees feel comfortable in their workplace. Staff members receive adequate retirement benefits, leaves, and are allowed to present ideas on how to improve the company. The second strength includes high brand value. Zara is a very popular brand in Spain and other countries where it has opened retail stores (Khurana, n.d.). It has improved its brand through effective marketing strategies such as discounts, media (Facebook, the company’s website, and clothing wrappers). Modern youths keep up with technological advances thus allowing Zara to reach most of them through media platforms. The third strength is vertical integration. Zara clothing chain operates differently compared to conventional retailers who outsource their products unlike Zara that manages all designs, distribution, and warehousing. Alternatively logistics runs itself. Zara’s business paradigm is very capital concentrated and vertically integrated therefore creating more benefits such as (Cheng and Tsan, 2010); a) Fast, effective, and proficient label, production, and circulation. b) Avoiding inconsistencies surfacing from diverse channels. c) Reduce costs due to lack of outsourced channels. The fourth strength includes positive feedback and comments by customers. Zara stays very close to consumers by welcoming their feedbacks and comments. This strategy facilitates the establishment of prospective merchandising strategies and policies by stakeholders (Ton et al 2010). For instance, Tesco manager states that “Our Customer is based on listening to customers.” The fifth strength includes the company’s ability to spot budding trends and reacting quickly. Zara operates on a pull approach instead of forecasting. Its designers tour the world to single out latest trends. Store managers often report to the central headquarter regarding sales and inventory. This helps to categorize customers’ tendencies. The other sound characteristic of Zara is that managers’ decisions are based on consumers’ choices instead of mere creativity of designers. The fact that Zara produces fashionable products and sells them at affordable prices makes its well-known. This has enables it to undercut its competitors such as H&M. Competition in the apparel industry may be healthy but can also weaken some companies. Zara has several weaknesses throughout its operation despite its strengths. The first weakness includes a centralized system of distribution. A centralized distribution structure allows suppliers’ to distribute merchandises in a central warehouse instead of retail stores. This system causes many setbacks in meeting stores’ demands. The second weakness is advertising. Advertisements are influential communication tools that notify consumers about the products and services of an organization. The consciousness and fondness of buyers draw them to purchase a company’s products. Alternatively, Zara has not introduced a marketing policy to sell its product globally therefore limiting the number of customers worldwide. Weaknesses allow a company to improve its products and services for consumers. However, opportunities emerge while a company works on its weaknesses. The first opportunity for Zara includes online marketing. Internet marketing presents remarkable opportunities to an organization to enhance marketing efforts and accomplish competitive advantage (Khurana, n.d.). Zara can benefit from online marketing in three major ways; a) Business efficiency b) Product development c) Effective communication The second opportunity for Zara in the apparel industry includes brand image improvement. Zara is a very renowned apparel brand in the world. The company is also able to win many consumers through its consumer-based policy (Cheng and Tsan, 2010). This policy can also help Zara introduce its products and services to other markets in the world, thus increasing its sales and profits. The third opportunity for Zara entails development of a clothing market in Asia. The Asian apparel industry is growing at a high rate because of the increasing population, consumer awareness in global brands, and high disposable earnings. These factors can motivate Zara to penetrate the Asian market. The fourth opportunity for Zara includes its expansion plan. Zara has invested more money to create other stores globally. This plan could be robust for the company especially in its future revenue intensification. Additionally, Zara opens around 640 stores annually. Therefore, it should consider approaches that will benefit its growth around the globe, especially in countries with weak currency and low cost of labor. It will be able to join organizations that have benefited from outsourcing. Zara also faces both negative and positive aspects as discussed below. The first threat includes market entry barriers. Zara operates on an international market-Entry approach. Every nation possesses its own regulations such that some countries welcome global investments while others do not. The second threat faced by Zara includes fluctuations in exchange rate. Zara has successfully opened new stores in Europe, Africa, Asia, and the United States. Its national and worldwide network contributes to variation in exchange rate of money leading to huge gains and loss simultaneously. The third threat is economic recession. This threat reduces the shopping power of consumers (Ferdows et al, 2003). Zara has also lost to new entrants. The rate of entry for new companies in the apparel industry is low but the daring entrants have stolen few clients from Zara. The new entrants have increased competition resulting to increased bargaining influence of consumers thus cutting down the company’s profits. Euro-centric production has also become a threat to Inditex Corporation because it concentrates on manufacturing and designing its merchandise in Europe where labor costs is high. It is important to note that increased operating expenses reduce profits. Recommendations Zara operates on outdated systems throughout its operations. Therefore, it should upgrade those systems by implementing change (Ferdows, Lewis, and Machuca, 2003). This change should not be immediate but rather occur gradually to help the company to sustain competition from its rivals in the industry. Presently, Zara must avert from investing in the existing system and perform a pilot assessment of the new operating system to gather information of its property. Zara should also assign a budget for executing the entire upgrade. It should invest in sequential phases rather investing one at a time. It will have to devise a formal decision-making chain. Zara consumers use PDAs (Personal Digital Assistants) to make orders. This technique is inconvenient and the company should substitute them with suitable equipment such as tablets smart phones, and personal computers (PCs). Smartphones like iPhones, tablet devices, and Androids can operate absolute OS software (Wireless Intelligence, 2012). These devices offer a podium for “apps” (applications) intended to assist users to carryout multiple or single tasks. Other apps offer operations like messaging, tracking, and control that could help Zara with execution of supply chain management. The variety of budding mobile apps seems big – from fundamental traceability and visibility through order to repository management solutions and haulage management systems. An example includes SAP Transport Tendering application that allows users to obtain RFQ (Request for Quotation) for delivery of products everywhere. This facilitates the improvement of consumer response service and time by businesses while restructuring efficiency (Khurana, n.d.). Therefore, Zara should establish mobile enterprise apps through their SC and slowly replace the current PDAs with modern devices. PDAs and the Point of Sale (POS) lack a connection and therefore Zara must change its modem-oriented network to a broadband-oriented system in order to enhance its capabilities of networking in store levels. This will help Zara to remain connected to its headquarters and other stores. Zara uses Point-of-Sale workstations that run on an obsolete DOS (Disk Operating System) system. Contemporary POS run on modern operating systems such as UNIX, LINUX, and Windows, and can utilize various physical layer protocols (Nakhala, 2008). However, Ethernet remains the most ideal system. For instance, HP-intuit retail solutions run on Windows Operating System (OS). POS must also possess customer-oriented functionalities, which will record, layaways, exchanges, returns, and sales. Additionally, ‘back-office’ POS system computers must handle operations like purchasing, receiving and transportation of merchandise across locations, and acquisition (Cheng and Tsan, 2010). According to (Khurana (n.d.), Zara should also consider using CRM software like Sap because it will help in addressing short-term essentials, reduce expenses, and increase decision-making processes. CRM software will also help Zara to operate both old and new systems alongside each other, until the novice system start to operate efficiently. Additionally, the company should maintain its old system even when operating the new system. Simultaneously, Zara must concentrate on developing its Information Technology department by appointing a Chief Technology Officer (CTO) or a Chief Information Officer (CIO). The CIO will use his/her expertise to deal with IT allied issues and assume set roles (Ferdows et al, 2003). Additionally, Zara must apply the internet to capitalize on the available gratis social media platforms to increase online sales. The company has frequently utilized information technology as an addition instead of a replacement. This step will also increase the operations of the company around the world. New competitors will also face added entry barriers while current competitors will be required to improve their maneuvers to compete with Zara. Zara was able to transfer its business only but failed to expand to the global market since it only provided deliveries to nations bordering its distribution centers (Khurana, n.d.). As a fast-fashion principal, Zara fails to benefit from the profitable e-commerce market, which may place it behind competitors. Therefore, Zara must develop an online retailing system around the world and obtain considerable knowledge on marketplace penetration and demographics of the industry. Online buying allows Zara to obtain instant and comprehensive customer preferences when consumers purchase products and services (Nakhala, 2008). Zara cal also benefit from online transaction by capturing consumer information immediately and effortlessly with each online deal. This will present designers with direct view of the existing situation. Besides, lack of physical stores allows the company to operate whenever, therefore increasing sales. Establishment of online stores remains a difficult task as network infrastructure and culture of a nation facilitate popularity and approval of online buying. Therefore, it is important for Zara to review the e-commerce prospect of a nation prior to establishing online stores. This is because the number of online visitors and their comfort in buying online products determine the triumph of such online stores. Furthermore, the company may be required to create additional distribution centers in the nation or in bordering nations to improve their services to online demands. References Cheng, E., & Tsan, M. C. (2010). Innovative Quick Response Programs in Logistics and Supply Chain Management. New York: Springer-Verlag Berlin Heidelberg. Ferdows, K., Lewis, M., & Machuca, J. A.D., (2003). Zara Supply Chain Forum. International Journal, 4(2): 62 -66. Khurana, A. (n.d.). Advantages of Ecommerce - Top 11 Advantages of Ecommerce Over Traditional Retail. Retrieved on April 27, 2014 from http://ecommerce.about.com/od/eCommerce- Basics/tp/Advantages - Of- Ecommerce.htm Nakhala, C. (2008). Market- Driven Supply Chain Management: A Sustainable Competitive Strategy in the Fashion Apparel Industry. Executive Journal, 1(1): 39 - 44 Ton, Z., Corsi, E., & Dessain, V. (2010). Zara: Managing Stores for Fast Fashion. Harvard Business Review, 1- 19. Weidenbaum, J. (2007). Zara: IT for Fast Fashion. Retrieved on April 27, 2014 from http://faculty.pepperdine.edu/mwillia2/613/613- Zara - Memo.pdf Wireless Intelligence. (2012). Analysis: Operators see smartphones beginning to dominate handset sales. Retrieved on April 27, 2014 from http://www.businessweek.com/magazine/zara - plays- catch-up- with- online - shoppers -08252011.html Read More