Zara is considered as one of the most creative fashion brands in the world. It was founded by Spanish businessman Amanico Ortega in 1975. Zara is known for its innovation in fashion industry. The company has a history of making good strategic decisions . Their strategies for handling market competition are replicated by its competitors since long.
Zara has most of its retail stores in Spain, France, Portugal, Mexico, and Greece, US. Zara is very cautious in doing business with countries like Japan which is culturally very different and poses high risk. Zara is the owner of most of its retail owner and also operates them independently. Usually a Zara store consists of women’s, men’s and children’s sections. Every section has a manager in charge. Almost 60% of sales are obtained from women’s section. Other two sections contribute almost equally to the sales. Zara accounts for the largest Inditex sales which are almost 75% of total Inditex sales.
Zara has been generating maximum profits for Inditex. It is the most popular and recognized by the customers in market.Zara has proven in the past to produce high revenues as well as satisfying its customers. Zara has emerged as the fashion icon which has been in the fashion industry since decades. Its customers are very satisfied and the brand promises to show good results in future. The main reason for its success are the appropriate decisions taken by the management since the brand’s inception. The decisions were focused on entrepreneurial line at the time when brands were risk averse. They were able to do this by doing good research on micro and macro level before indulging in any decision. This helped the management to take rational decisions.
Zara uses extensive technology for manufacturing process. It follows the strategy of affordable pricing to ensure that it does not lose customers in economic downturns. It follows Toyota’s Just in Time strategy as well as Agile management in its supply chain management and operations. All the decisions and strategies are made after careful analysis.
ZARA’S PORTER’S FIVE FORCES ANALYSIS
- Threat of new entrants: The force of new players is high since the apparel and retail industry is very attractive owing to its uniqueness and profitability. Retaliation by existing big players in the apparel industry such as initiation of price war also gives advantage to new comers. However high costs for setting up business, distribution, advertising etc makes it difficult for new entrants. A new player must have adequate resources to enhance development of new lines of fashion. Zara already has the advantage of economies of scale and established brand name which makes it rigid for new players to enter.
- Threat of substitute: Clothing now not only acts as basic need but also as a symbol of socioeconomic class to demonstrate personal identity. Buyer’s propensity to substitute is high with several competitors to choose from like H & M, GAP and Armani. Duplicate fashion can be considerable threat to the revenue in some market such as India, China and Indonesia because of lower buyer switching costs. However good alternatives are not available as they are made costly with cheap quality. Zara’s products are more affordable and made with exceptional high quality natural materials. Also, substitution to online shopping poses a threat to retail stores like Zara.
- Buyer Power: Customers of Zara in general range from middle class to upper class who considerably posses a high buying power as they seem to have more income at their disposal. There are also other garment retail suppliers who distribute considerably same line of products to Zara,so there is low customer loyalty to the company’s products which places more weight on innovation. Therefore a huge battle exists for the sellers given that the buyer has relatively more power to decide where to buy. However Zara’s strategy of introducing new fashion trends at faster rate and affordable price makes it stronger among its competitors.
- Supplier Power: As there is continued liberalization of the global trade, the power of the supplier is less through rivalry from the producers in low wage boundaries such as China. Suppliers power is considerably high as it consumes more time to establish quality partnerships. The supplier power of bargaining is more when the members in the industry experience higher costs by switching to a new supplier since the suppliers are well knowledgeable on standards of safety and quality. Hence, Zara organizes the various licenses offered to all suppliers and hence with the existing licensing contract, the power of the suppliers is further weakened as they are required to stick to particular provisions which minimize variation or manipulation of the designs.
- Rivalry: The apparel industry has allowance for smaller firms globally due to its segmentation. Even though Zara has very many direct rivals such Gap and H &M its brand has still considerable loyal consumers. Zara remains adrift from its competitors. The chances of buyers’ cost of switching to other brands are relatively high in case they do not like the price setting. They are more concerned about the reputation of the brand. The buyers purchase in small quantities which imply that they have less power to bargain based on the small quantities. Besides, an increased demand establishes a market for the seller and moves the power of bargaining to the sellers. Therefore, a company such as Zara offers quality which makes the buyers to lack other close options.
ZARA’S PESTEL ANALYSIS
- Political – The most common political factor to adversely affect any business is the financial regulations imposed by the nation in which the business is done. Zara faces challenges in countries where Foreign Direct Investment is limited by the government. The only option left to enter in such markets is by partnering with the existing local brands in the country. Also, even after setting up business, other political factors like political stability, political turmoil, disruptions etc affect the particular economy which in turn affects the business. Hence, Zara tries to overcome this by doing business only in its home country and neighbouring countries. Thus the threat from political instability is reduced.
- Economic – The condition of economy in any nation directly affects the businesses there. To reduce the adverse effects, Zara uses the strategy of ‘Affordable Pricing’. This means that even if economy faces downturn, and people are saving instead of spending on high end products, they would still be able to afford Zara products. Thus Zara does not suffer any losses due to economic turmoil. The effects of recession or low economic activity thus does not affect Zara very badly as it does for other brands.
- Social – Social factors are very critical for any business to run. Social trends, youth mentality and attitude etc have to be taken care of for any business. To stay in touch with the customers and their likes is required for any business to sustain in the long run. As a result, Zara always does prior market research before entering into new territory. Because new business entry is always risky with many stakes. Cultural and social research is always considered before venturing into new business territory. Trends are adjusted according to local culture
- Technology – Technology is one factor which is constantly changing. Technology development occurs at a very high speed now a days. Data analytics has been the backbone of all businesses. Zara extensively uses technology especially in its supply chain management. It contributes largely to its profit. Zara uses Just In Time and Lean technology in their manufacturing process. It helps to improve their responsiveness to customer demands. It assists in connecting supply chain and logistics with manufacturing in an efficient way. Latest technology is also used in supply chain wherein tracking of inventory, customer order is made easier. Thus inventory management becomes efficient. As a result, Zara stands as a winner in supply chain management.
- Environmental – Sustainable development has become a necessity for any business to survive in global environment. Zara invests largely in sustainability. The parent company Inditex is working towards making the stores hundred percent efficient. They will help in saving energy and recycling. It also works towards removing hazardous waste produced from its manufacturing. They have also developed a line of fashion wear which focuses on sustainable wear.
- Legal – Every business has to abide by certain laws in every business environment. Zara follows ethics and sustainability in all its environments. They follow compliance policy in all their internal systems. It takes care of all the local laws in the areas it operates in. A main focus for Zara is to create an ethical brand image.
The above PESTEL analysis shows how theses six factors impact Zara’s business.
Zara invests a lot in advertising and marketing. However, it does not invest majorly in online marketing. The major competitors for Zara are H&M, John Lewis, M&S have a major online presence. They come as top searches on search engines for clothing. However, Zara has very minimal online presence. In this global environment, online presence is a basic necessity for sustainability. Hence, Zara needs to improve its online presence. It should have more social networking presence along with its website.
E-commerce through mobile is growing rapidly and Zara has not indulged in this market substantially. It has to catch with its competitors. Mobile commerce happens on par with desktop/laptop commerce. Almost 15-20% website traffic is usually through mobile. However this is not the case with Zara. So Zara needs to improve its mobile shopping experience.
Though Zara follows the strategy of affordable pricing, it should not be the only strategy they stick to. Zara’s competitors are also indulging in cutting prices which is reducing the competitive advantage that Zara already possessed. Hence Zara needs to shift its strategic focus from price to quality.
Zara should not stay away from its competitors. It should work towards forming strategic alliances with them. This will help them in defining a better logistics model. It will face less supply chain issues by horizontally collaborating with the competitors.
The major factors responsible for Zara’s success are quick deliveries, customer services, use of modern technology, logistics, vertical integration, economies of scale etc. Zara has main focus on generating customer value to gain competitive advantage.
Zara’s business model cannot be easily replicated by its competitors until their supply chain model is implemented. Supply chain model is built on multiple factors such as members, technology, methods. This needs accurate training and proper use of technology. Their success is directly related to the way they understand customer needs and how they fulfill them by using best approaches and strategies. They are constantly involved in innovation which helps them satisfy customer demands effectively. Thus Zara is a good example of strategic business model and integration of supply chain management in improving customer value. Also, it shows how investing in good technology helps the brand in long run.
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