ZARA

Word count: 3799
Table of Contents Executive summary 2 Zara background 3 External factors and competitive forces 3 PESTEL 3 Porter’s 5 4 Internal factors 6 Resources and capabilities 6 Manufacturing 8 Logistics 8 Public relations crisis and their effect on peformance 8 Evaluation of strategic options and recommendation 10 References 12 Appendixes 13

Executive summary
This project aims to provide an in-depth analysis of external and internal factors affecting performance of world leading retailer Zara. First of all, the brief background on Zara is provided in order to familiarise reader with the business model they implement. Secondly, the PESTEL framework is utilised as the base for analysis of external environment and its potential effects on company’s performance. Further, the Porter’s 5 forces are identified in order to assess where the competitive advantage stems from. After assessment of external environment, this paper provides the overview of internal factors which might be crucial for success, as well as drawbacks of Zara’s internal organisation. Assessment of internal environment starts from the evaluation of Zara’s resources and capabilities, followed by the critical analysis of manufacturing and logistics processes. Further discussion of the PR issues and its effects on company performance is provided. In addition, the benefits of corporate socially responsible policies are discussed. Overall conclusions on Zara strategic steps that are to be taken are suggested based on the conducted analysis of the internal and external characteristics of the environment Zara is doing business in.

Zara background
Zara is the flagship chain store of Spanish company Inditex Group which incorporates other brands such as Zara Home, Massimo Dutti, Pull and Bear, Oysho, Uterqüe, Stradivarius and Bershka. Zara is present in 86 countries with a network of 1.751 stores on the premium locations in the world's largest cities (Inditex website).
There are three key pillars Zara is running its business on. First of all, time between new collections deliveries is very small. Stores are supplied every two weeks with new fashionable garments and in small batches in order to achieve an effect of scarcity, which is a second key element of the Zara business model. The third one is delivering many different styles in all forms and shapes so that there are more chances customers will like the clothes (Inditex website). Analysis of the Zara business model along with external and internal factors affecting its operations is given further.

External factors and competitive forces
Analysis of the competitive forces and external factors affecting Zara performance is conducted through the PESTEL analysis, which encompasses political, economic social, technological, environmental and law-related factors.
Political factors may affect company’s performance in case regions where Zara performs its operations become politically instable thus endangering Zara’s sales and elevating costs of operations. However, the global presence of Zara helps diminish the adverse effects due to the diversification of its business units.
PESTEL
Economic factors can have a significant effect on company’s operations since apparel industry is very price sensitive and in times of crisis customers will be choosing to spend less on expensive clothes. Since Zara operates world-widely effects of regional economic crisis could be avoided at some level. However, currency risk is the risk that will always be present and depending on the dollar/euro rate operational costs for Zara will be increasing or decreasing. Due to the current euro crisis the American dollar is becoming stronger compared to euro and as a result costs of raw materials that Inditex is buying mostly in American dollars will go up. Socio-demographic factors are important for analysis due to the specific aging structure of customers of Zara clothes since it is mostly worn by young people looking for fashionable garment. Cultural differences between regions Zara clothes are sold also matter as well as the purchasing power of customers. For instance US market has a high purchasing power. On the other hand “slim” designs of Zara do not match with the demand on that market. Furthermore, Inditex is now supporting eight brands and Zara is regarded to be a growth engine as it makes up one-third of group’s sales (Murphy, 2008). The strategy of Inditex in based on the openness to the society: “Inditex makes a solid commitment to transparency and develops different initiatives to guarantee fluid access to its different groups of stakeholders to information on the performance of its activity.” (Inditex annual Report, 2012)
Technological factors are not usually crucial when it comes to the apparel industry; however Zara due to its specific business model is an exception. High technology is essential for the communication platform used in order to achieve fast delivery of required clothes based on the responses received from customers. According to Carugati et al (2008), Zara is using the advancements in technology to the great extent, since all information flow go through the central server at La Coruna in Spain on daily basis, so managers are able to get information on the new designs by using handheld computers or so called PDAs. In this manner, all store managers are notified 24 hours before order deadline for the new designs. However, there is no device in store which can be used for tracking inventories.
Environmental factors play a significant role nowadays. Apparel industry uses water, energy and other resources thus making it important to wisely utilise them and in line with the environmentally friendly policies that Zara has been implementing.
Legal factors may have an impact on the company’s performance in a number of cases. Since Zara is present globally, changes in regulations of countries it performs its operations in may influence or cause additional costs. This is related especially to health, safety and employment laws, which will be discussed further.
After PESTEL analysis Porter’s 5 forces framework is used in order to analyse competitive advantage of the company.
Porter’s 5
Entry Barriers
Since the apparel industry is quite mature, the average growth rate is quite low due to relatively high saturation of market participant. Entry and exit barriers are relatively law for distributors, however manufacturers are experiencing quite high cost of entry and exit, since huge capital investments have to be made. Since apparel does not require any special conditions for storage due to its physical attributes, storage costs are low in comparison to other industries e.g. food production. When it comes to quality of products, one could argue that it does not vary too much, but it is rather brand which makes it worth, therefore high promotion costs might deny potential participants. In addition, the fashion is changing fast, therefore lower quantities should be produced which in turn leads to diseconomies of scale.
New Entrants
Since the local market is still not saturated and there are almost no barriers for distribution, since only storage and store should be rented, no administrative restrictions, in addition low initial capital is required to start operations, one could argue that there is high probability of new entrants. However, in production, there are barriers for the existence of economies of scale, since the initial capital required is considerably high.
Substitutes
The main Zara competitors are H&M and Gap, though there are some differences between their products. Zara is dedicated on development of trendy and at the same time low-cost fashion, which meets the requirements of their customer. However, the low-cost does not necessarily means low quality and it is shown by their sales. Zara has the highest sales per square meter of any of its competitors, as well as online, having only 10% of stock is unsold. H&M has very competitive pricing strategy, but in terms of quality their low-priced products suffer and way below Zara’s quality. On the other hand, Gap is competitive in terms of quality, but not in terms of prices.
Customer’s Bargaining Power
In terms of bargaining power of customers, one could argue that it is very low, since customers are individuals and there are many of them. Therefore, as non-unified body they are not able to defend their interests, since the discounts are given only after certain period of time, customer are rarely able to find exactly what they want on sales. Because of changes in the lifestyle, demographic changes, cultural changes or technological changes, the demand can easily vary and therefore be unpredictable, which leads to an inability to form correct expectations regarding the discount sales, which ultimately forces customers to buy in advance.
Supplier’s Negotiation Power
Comditel, a wholly-owned subsidiary of Inditex is in charge of suppliers relations and it has portfolio of more than 200 external suppliers of raw materials, such as fabrics. Furthermore, Comditel deals with the dyeing, patterning, and finishing of gray fabrics for all of Inditex’s chains, including Zara, and supplies finished fabrics to external as well as internal manufacturers. There are too many suppliers, thus they have no negotiation power.
Internal factors
Zara is a vertically integrated fashion retailer and manages and produces in-house almost all the steps of the supply-chain. In contrast to other retailers, Zara designs, manufactures and distributes their products. Zara’s business model assumes the production of trendy staff only, thus their collections do not include any “classics”, but rather following current high fashion and imitating it at lower cost. All the high fashion-sensitive products are manufactured in-house, which allows them to control the R&D process.
Resources and capabilities
The strong human resources team is of extreme value for Zara because it cannot be imitated by other competitors, and it is in a core of Zara’s success, since they are coping with fast changing trends in fashion industry. However, Zara is not the only company in loc-cost apparel industry, which has strong human resources, H&M for example, also has a good designer team creating a diverse range of fashion for men, women, and youth (H&M, 2013). But anyway, Zara’s fast responsive designer team is considered to be very rare in the fast fashion clothing industry. Therefore, the fast responsive and powerful designer team is a core competency for Zara
Zara’s human resources allow them to follow a pull model in their inventory and supply chain management. They create up to 1000 designs every month based on store sales and current trends. They analyse the consumption in stores in order to understand and identify the types of designs which are being purchased mostly and then in accordance with their conclusions they supply new styles in very short term.
Since Zara has very fast turnover, their production is limited to small amount of quantities of each product. In this manner, they are collecting information on the most demanded designs even more efficiently. It is also a great way to explore new designs and understand its success rate in the market. This way the risk of producing high quantities of low demanded products is also hedged to the minimum.
Furthermore, Zara pays high attention to the forecasting of the type and amount of fabric to be purchased. It allows them to avoid two problems: 1) fabric mistakes are cheaper than unsuccessful finished goods 2) the same fabric can be utilised in different garments

Another hedging strategy in procurement process is the purchase of semi-processed or un-coloured fabric that it colours up close to the selling season based on the identified necessity, which allows them great flexibility. All the factors mentioned above allow Zara to deliver the most demanded products to their customers. Being able to satisfy customers and at the same time utlise and optimise the manufacturing and distribution processes, Zara has been showing superior financial performance over the years. Below you can find the table showing that even in the years when economy is experiencing difficulties, Zara has managed to keep high rates of profitability. Fiscal Year | 2012 | 2011 | 12/11 | Net sales(1) | 15,946 | 13,793 | 16% | Net profit(1) | 2,361 | 1,932 | 22% | Nº of stores | 6,009 | 5,527 | 482 | Nº of markets | 86 | 82 | 4 | Employees | 120,314 | 109,512 | 10,802 |
The Inditex financial year is from 1st February to 31st January of the following year (1) in millions of euros/ Source: Inditex website

However, despite all the advantages of Zara’s strategy, it creates some weaknesses as well. Their vertical integration has more advantages than drawbacks but it is important to recognise its limitations. Vertical integration quite often leads to the inability to reach economies of scale, which in turn eliminates the possibility of gaining the advantages of producing large quantities of goods for lower price. Inditex also has to support their own high capital investments for their chains and be able to financially support their technology and skills beyond those currently available within the organisation. Additionally, their costs have also gone up because of continuous changes in production techniques for generation of their apparel lines. New manufacturing techniques require the provision of additional training to employees, which in turns lead to further increase in costs. Furthermore, the rising labour costs have put Zara in difficult position, since their profit margin has been endangered, which has ultimately led to implementation of cost-leadership strategy, which is difficult to pursue in a rapidly-evolving industry (Sorescu et al, 2011). In addition, highly centralised supply-chain system incurs high transportation costs, especially for company with such international operations as Zara.
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Manufacturing
As mentioned above Zara dedicates high attention to high fashion-sensitive apparel, since it comprises significant share of their production, it means that biggest part of their production actually takes place in their own factories. The Group directly manages fabric supply, marking and cutting and the final finishing of garments, whereas garment-making stage is subcontracted to specialist firms located mostly in the northwest region of the Iberian Peninsula. All the garments of Zara are produced from the fabric and other raw materials supplies by Inditex group, regardless of whether manufacturing is internal or external. This can be seen as the guarantee and stability of quality without any significant deviations.
Logistics
All the merchandise are firstly delivered to the central distribution hub, regardless of where they are produced, and only then they are distributed further to all Zara stores in the world. The merchandise is delivered to stores two times a week and in order to keep the store collections fresh and up-to-date, delivery always includes at least small part of new styles. Previously mentioned software which was developed by in-house is highly utilies by the logistics system, guarantees that the time between the receipt of orders by distribution centres and delivery of merchandise to stores is approximmately 24 hours for European stores and does not exceed 48 hours for American and Asian stores.

Public relations crisis and their effect on peformance
Since fashion industry is highly dynamic, it is quite often required from manufacturers to deliver their products within unrealistic deadlines. The shorter production cycle benefits Zara in following ways: they can reduce inventory costs, rotate financial assets more frequently, and they can reduce uncertainties about customer preferences or better calculate customer reactions to marketing campaigns.
According to Harney (2008, p.120) it takes just three weeks for Zara to develop a new product, manufacture it and get it to their stores. The required dynamics and necessity to satisfy customers increase the time pressure, which is in turn transmitted onto the manufacturers. It leads to significant and at the same time quite often unpaid overtime work in the store, higher safety risks and the subcontracting by manufacturers to smaller and cheaper factories with even lower labour standards (Ferdows et al. 2004; Harney, 2008). Extreme overtime work is also result of processes related to marketing and sales of the product, such as product development, design and commercialisation (Locke, Qin and Brause, 2007). Considering this evidence, one could argue that higher requirements from customers for high quality products at low prices and profit maximisation by corporations leads to unsustainable working patterns, especially in countries with weak governance systems and low labour standards. However, manufacturing in countries with low labour standards or weak rule of law, though allowing multinational companies to abuse their working population, exposes them to the risk of being accused in harm doing or being irresponsible to society, which in turn can lead to negative publicity.
Since the last decade of twentieth century, human rights problems in global supply chains, especially those producing raw materials, have been in the middle of debate on responsibility of corporations. Also working conditions in plants have been in the middle of academics’ interest as well (Arnold and Bowie, 2003). Multinational corporations and especially retailers have been under pressure of public due to their participation in the worsening the situation in terms of human rights in lesser developed economies either as a result of their own activities or of their supply chain partners’ activities. Though Zara, as the part of Inditex group, has implemented the sustainability strategy which involves the commitment to the customers, suppliers, employees and society, it has been involved in slave labour scandals several times. The most recent case of slave labour scandal Zara was accused occurred in Argentina and currently it is being investigated (Ropper, 2013). However, Zara’s spokesman has denied any relation of Zara to this case, since the supplier in question is not on the list of approved suppliers.
Multinational corporations are becoming more and more attractive for activists' critiques with regard to socially irresponsible or even illegitimate behaviour. It should be the point of concern for Zara’s public relations strategy, as the activist campaigns are quite often aimed at the strongest brands, rather than the worst in terms of behaviour (Palazzo and Basu, 2007). According to Bhattacharya and Sen (2003) the matching between corporate values and consumer values is likely to enhance the connection and propensity of customers to the company, violation of those values is likely to lead to extremely negative reactions towards the company. In the situation where placed values are contradictory to the behaviour, the brand might be perceived as incoherent, (Palazzo and Basu, 2007) and brand incoherence, in turn leads to the decrease of brand attractiveness (Curras-Perez et al. 2009). Such cases can have very negative effects on Zara’s publicity, which in turn can lead to the consumption boycott in the extreme situation, though it is highly unlikely as individuals are self-interested beings in general, therefore they are glad to purchase good looking piece of fashion for reasonable price regardless of the manufacturing process and labour used in it.
Evaluation of strategic options and recommendation
Considering the evidence and analysis of Zara’s operations presented in previous sections, potential strategic options are discussed further. The main issue with Zara’s performance is cost minimisation, as it is considered to be the major threat to their cost-leadership strategy. Though, Zara has been doing quite well or even superiorly in recent period, the threat of rising labour and transportation costs can significantly affect their future performance.
Therefore, one of the main proposals in terms of strategic decisions could be the enforcement of decentralisation by geographic areas. The generation of new central hubs would allow Zara to lower transportation costs, as currently all the finished product have to be delivered to their central hub in Spain and then further distributed to their stores worldwide. Though, building of new hubs might be costly and quite demanding investment, in long-run it should be able to pay off, especially taking into account that their operations are spread from the Far East to the USA. Also this option might be attractive, the cost-benefit analysis should be conducted in order to understand whether the markets other than Europe are already at sufficient stage of development in terms of sales. Depending upon the volume of sales, as well as products sold this decision and the cost of hubs establishment in other regions, this decision can be made with more supporting evidence. Another strategy with regard to cost minimisation might include complete outsourcing of production to developing countries, since labour costs are lower in Argentina or Brazil than for example in Spain. This way, only designing teams would be located in Europe, in order to follow trends more tightly, however it could cause the problem in communication between designers and manufacturers. That would require designers to move to developing countries as well, but then they would not be able to attend the majority of European fashion show or it would cause high costs of transportation. Therefore, this strategic option might be considered but the detailed plan of communication and instruction has to be made and implemented in order to avoid misunderstandings. Even lowering the labour costs on manufacturing might be not sufficient to maintain the cost-leadership strategy, therefore it is important to manage and utilise the labour of in store personnel appropriately. As it has been mentioned previously, the inventory cannot be tracked automatically using any device, but rather manager of the store, in co-operation with other personnel, has to check it physically and assess the needs for following order. Such system causes a lot of unnecessary work, since such operations can be automotised and the time spent on it might be used on other, more productive work. Therefore, the implementation of new IT systems has to be the priority number one, since it will definitely allow personnel to dedicate more time to customers and provide them with more joy while shopping in Zara. Though Zara is not advertised anywhere besides their own stores, it is important to understand that it is 2013 and no business oriented towards wide range of clients can be done without social networks. According to Berthon et al (2012), nowadays customers are not just consuming the products, but also being “creative consumers” and can significantly contribute to online communications about retailer’s products through forums or other social networks. For example, Zara loyal customers could be using facebook or any other social network for commenting and discussing the new products or engaging in an interactive website or blog in another way. Therefore, one of main potential strategic options for Zara might be the implementation of “Web 2.0” into their marketing strategy. However, Berthon et al (2012) note that both the culture of the country in which social media is being implemented as a part of marketing strategy and government regulations for advertising and marketing need to be considered before implementing social media. The build-up of strong community online can be great source of popularity in new markets, especially developing countries which do not have access to low-cost brands and usually are looking forward to opening of their stores. Additional strengthening of brand can also significantly increase the prices which customers are read to pay for Zara products. In overall, considering potential strategic option outlined in this section, the main proposition would be to utilise the development of information technology and implement advanced systems for inventory tracking as well as implementation of “Web 2.0”, which can significantly increase the value of brand and awareness of it, which in turn leads to ability to charge higher prices. With the development of non-European markets, Zara should be planning on opening new hubs as serving the whole world from the hub located in Europe might be extremely costly and inefficient.

References
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Appendixes

Appendix 1

Indetix Sales by brand

Source: Adapted from http://www.inditex.com/en/who_we_are/our_group

Appendix 2

Zara’s Vertically Integrated Supply Chain

Source: Pradhan (2009)

Appendix 3

Inditex Sustainability Strategy

Source: Inditex Group Annual Report 2012

Appendix 4

Sales by region in 2011 and 2012

Source: Inditex Group Annual Report 2012

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[ 1 ]. See Appendix 1 for details on Inditex sales per brand
[ 2 ]. See Appendix 2
[ 3 ]. See Appendix 3
[ 4 ]. See Appendix 4 for distribution of sales by geographic regions