Every organization or any other part of an organization has to make many important decisions occasionally (the decisions that actually affect the organization’s entire destiny for many years into the future). Such decisions are designed in such a way that they address the major and most important organizational issues. These decisions do not just dwell on small adjustments at some activity levels. However, these are the decisions that have the potential to lead to substantially new organizational structures or key changes in the relations of key stakeholders, industrial competition or strategic partners. At times, such decisions are forced on organizations by the forces in the external environment, such as radical moves by competitors and government policy changes.
Sometimes, internal factors of the organization demand a reappraisal; for instance, technological changes dictating a change in the ways of doing things and a change in management among others. Organizations have always experienced such pressures towards making serious decisions. Notably, in recent times, the pressure has come to the point where managers are forced to create a systematic process of making decisions when there is a need.
In Zara’s case, the micro and macro-environments must be considered in a pursuit of maintaining a competitive edge that the company has over its major competitors. Thus, they are always forced to go back to their drawing boards and update their strategies. In this case, the discussion will dwell more on a macro-environment. This can be carried out through environmental scans and other business strategy techniques such as theories as explained below.
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An In-Depth Analysis of the Competitive Forces and Strategic Issues Shaping Zara’s Industry
Porter’s 5 Forces Analysis
This framework will lay an industrial analysis for Zara, which is the clothing industry and assess the development of business strategies. The five forces are used to determine the intensity of competition within the industry, therefore, for the market attractiveness. Attractiveness here represents profitability while unattractiveness represents reducing profitability. The five forces include:
The new entrant threats: the clothing industry has proven to be a highly profitable venture, thus it is in a pole position to attract new entrants. This means a low profitability development. Zara must, therefore, develop strategies that consolidate its position in the market share through; creating the entry barriers, product difference economies, brand equity, convenient distribution, customer loyalty establishment, sunk costs and capital requirements (Roy 2011).
A substitute product threat: these are the alternative products that Zara’s customers can easily switch to since they offer more or less the same qualities; e.g., Gucci’s products. To minimize this problem, Zara should always update its products such that they are in line with the current trends and market expectations.
The customer’s/buyer’s bargaining power: this refers to the customer’s ability to pressurize Zara; i.e., its sensitivity levels to such touchy issues as price and product changes and any other changes that directly affect it. Zara can deal with this through a regular feedback collection and evaluation as well as ensure that its clothing product will be worth the price that customers pay for. This will satisfy them and minimize the unnecessary pressures.
Suppliers bargaining power: suppliers provide the firm with raw materials, labor, expertise services and other components. Some of them may turn down working with Zara on the grounds of prices in most cases. Suppliers of unique resources are known to charge high prices as compared to others.
Competition levels: the competition level in the clothing industry is quite high. Zara can attain a higher competitive edge over other competitors. It currently stands due to its high innovation levels, advertising mode, a strong competitive strategy, concentration ratio and competing on both online and offline quotas (Roy 2011).
The Industry Life-Cycle Theory
This concept relates to different stages that the industry goes through, beginning with an initial product entry towards an eventual decline. This concept is very practical for the case of Zara; since to remain at the helm of the clothing market innovation is a necessity. This is something that the ILC strongly encourages. The stages according to Cole (2003) include: i. Early stages – this involves the creation of alternative designs of a product, as well as the positioning and establishment of industrial boundaries. This was the case when Amancio Ortea Gaona initially founded Zara back in 1963.
ii. Innovation phase – at this stage, there are the declines in a product innovation, and a rise in a process innovation, finally arriving at one dominant design. The process innovation involves the implementation of significant improvements in production and delivery methods as well as other changes such as a capital replacement/extension, customization, process elimination, and etc. For Zara, this happened when, for instance, they had decided to open directly their own stores in different countries. iii. Cost /shakeout phase – at this phase, the company settles on the identified dominant design (the way of doing things). The economies of scale are also achieved; and smaller players are either acquired or exit from the industry (underperforming endeavours). Some barriers to the industrial entry become high and large-scale efforts of consolidation being undertaken. iv. Maturity – the current level that Zara lies under and the principal focus is no longer on growth. A cash flow and a market share have become the major goals of the organization. Currently, Zara is a popular brand across the world; and the focus now is to increase its profits and acquire a large market share over its competitors. v. Decline –declined revenues mark this phase. A new one may replace the whole industry if at all it does not create a room for the improvement of its products in accordance with the current affairs. This phase looks unlikely for Zara, considering its high innovation nature.
Environmental Scan
Environmental scans represent a vital phase towards attaining the industrial competition as well as the business strategy formulation. Scans can be carries out through the SWOT and PESTLE forms of analysis. Under a SWOT analysis, Zara will be in the position to define its strengths (the strongest brand, popularity, good reputation and endorsements among others); its weaknesses (the unsatisfied workforce and low quality products); its opportunities (an emerging market and innovation); and the threats (competition and poor mechanisms). This analysis helps in consolidating an organizational stronghold, improving its weaknesses, exploiting available business opportunities, and eliminating any possible threats (Aswathappa 2010).
PESTLE analysis represents political, economic, socio-cultural, technological, legal, and ecological analysis. All these factors determine a business position and whether it can really work, for instance, it is not advisable for Zara to invest in Somalia. There is a question – why? Because the country has been politically unstable for two or so decades, thus, the business cannot work. Zara products have targeted customer segments in uptown markets due to their economic ability to match the needed purchasing power.
Zara cannot display the miniskirt products in Saudi Arabia, because the culture does not allow women to use such products. Zara has to acquire operating licenses from the relevant authorities in order to do business normally. This is a legal factor. Lastly, there are some ecological factors. They affect the company’s ability to do business as intended as well as the customers’ ability to purchase products as intended; e.g., earthquakes and other natural calamities. Investing in such natural calamity prone areas will expose the company to heavy losses in the event of occurrences of such natural calamities.
Zara’s Internal Strategic Audit
The factor of the internal conditions of the organization is very important as far as the strategy formulation is concerned. The internal analysis of Zara will give us a real company’s profile, bearing in mind that this is a determiner of Zara’s strategic competencies as well as its weaknesses (Cascarino 2007). The analysis entails the relevant internal factors of the organization with the aim of determining its particular strengths and weaknesses. They include:
Financial position – a businesses’ financial position plays a vital role in the determination of what can or should be done in the future. Of course, being a business as profit making is a principal objective. Zara’s financial position is amongst the best ones in the industry. For instance, the company generated 7.07 billion Euros’ revenue in the year 2009 alone. Figures have definitely risen due to a good performance of late. The company has a wide customer base across the world with its 1,751 stores in 68 countries of operation. The company’s financial position future seems to be brighter than it currently is. One should consider the fact that the company is slowly but surely edging its close rivals like Gap in the market share. Zara’s efficient and low priced approaches further enhance this; e.g., it does not undertake advertising (Cascarino 2007).
Product position – for any business to attain success, then, it must be fully aware of its own products and their behaviour in the market. For a business to be successful, it must be acutely aware of its product position in the marketplace. In a Zara’s store, one will find women’s, men’s and children’s clothing (known as Zara Kids). Zara products are believed to be more fashionable as compared to those of its closest competitors, i.e. Gap, Benneton and H&M. Benneton and Gap are less fashionable but more expensive as compared to the more fashionable and lowly priced H&M and Zara. We can conclude that H&M is a major competitor to Zara; and that Zara products are doing well in the global market.
Marketing capability – marketing capability refers to the organization’s ability to convince its potential customers to purchase the products. This is done through promotion to increase the product awareness and distribution to ensure they are delivered at the customer’s convenience. Zara has persistently resisted the clothing industry’s traditional trend of delegating the production of a fast fashion to the countries with low costs.
The most unusual strategy that Zara has adopted is the policy towards zero advertising. Instead, they opt to invest the percentage of its revenues towards flagging new stores. The anti-advertisement policy may be quite odd for Zara to adopt because all its competitors rely on it, though it has worked. This is because with many stores customers are able to visit them and have practical looks with the guidance of the friendly staff there. The products are also there when customers need them.
Research & development capability – a good organization should be concerned and able to develop products as well as improve the existing ones. Zara’s performance here is excellent; for instance, it only takes Zara two weeks towards a new product’s development that can be immediately found in stores, compared to the industrial average of six months. Zara launches about ten thousand designs annually compared to two thousand to four thousand by its closest competitors. This can be attributed to the organizational culture, where the failure is not condemned and efforts are encouraged. This goes in addition to professional and well coordinated groups that are very creative (Cascarino 2007).
Organizational structure – the structure of the organization can either encourage or act as an obstacle towards the achievement of organizational objectives. Zara’s organizational structure is flexible and always ready to penetrate any changes that may affect the organizational objectives. This is the reason behind the high innovation levels; e.g., a new product is developed in Spain. In two weeks, it is found in Venezuela. This can be largely attributed to the fact that Zara owns more than 90% of its retail outlets across the world, thus, they operate as a unit rallying together for a common purpose. Zara’s success in the global market has raised Inditex to where it is now, to the helm of the industry.
Human resources – the activities of any organization are largely influenced by its human resources’ quality and numbers. Zara has a good workforce across many stores in the world. The workforce works tirelessly towards achieving the company’s objectives; e.g., they are very innovative. They deliver their products in time; they use s personal selling to convince customers to do purchases among others. However, some of the company’s subsidiaries in Europe and South America have been accused of the child labour, forced labour, and generally poor working conditions. These are very serious allegations against such a reputable company. Therefore, the necessary steps must be taken to eliminate such inhumane conditions from the company’s circles.
Condition of facilities and equipment – the conditions of facilities of the organization can encourage or hinder its levels of competitiveness. Zara has 1751 in addition to 174 Kids stores across the world. Some of them operate as Lefties – a brand of the low-priced fashion. The stores are well equipped and modernized such that if one visits a Zara store in New York and another visits a store in Paris, then, the experience will be identical. The stores are quite smart and covered with mirrors in the interior. Inditex also has launched an online store for Zara, through which everything can be done online as far as FAQs and the purchase decision are being concerned. We can generally conclude that Zara has the magnificent stores that offer the best shopping experience for buyers and visitors. However, some still need to be improved in some ways.
Past objectives & strategies – During an internal environment assessment, a business should try and explicitly look at past objectives. This is always important because it helps to analyze the strategies that either brought about success or upset some expectations. Improvements are then adjusted to ensure that the strategies and objectives are updated in accordance with the current business trends.
Zara and Public Relations
With all successes and praises that Zara has been credited to, human rights’ controversy have at times threatened to tear down the company’s remarkable reputation as a global example of how the big money business should be done in cost-effective terms. In August 2011, Zara was accused of having the connections with some companies (suppliers) that were having sweatshops for Zara’s outsourced production in Brazil. The following day, a Zara clothing production was closed down on poor working conditions’ grounds such. This means – 12-14 working hours per day, the confinement and poor food as well as water supply; thus, they earned $1 per day (Bernays 2004).
In March 2012, an investigative journalist reported that 25 of Zara employees (shop managers and staff) testified about the terror and other forms of abuses on their own employees in Europe. It is quite sad that the firm of Zara’s calibre can actually act in that manner because competitors can easily doctor this into a very lethal propaganda tool against it as the organization as well as its clothing.
Zara’s reputation can be badly ruined. It is obvious that some damages have already been done. Though this has not affected the company on a full scale, it is good that necessary measures are undertaken to improve the image from where it had been dumped by these allegations. Necessary steps must also be taken to minimize any possible occurrences of such events in the near and far future. Below are some of the techniques that Zara should apply from now; henceforth, to ensure that there are good and mutual relations with everyone and that their reputation does not exclusively lie in the production of some renowned products but also on the social responsibility.
Public Relations
This is a practice and also a profession whose main aim is the creation and maintenance of the organizational goodwill at its various publics. This should be the internal publics or external ones. Publics here may refer to suppliers, customers, investors, stakeholders, employees, and etc.). Usually, public relations are done through publicity as well as many other forms of communication. PR efforts may include sporting events, newsletters, press releases, sponsorships, charitable causes and many other engagements. Through such efforts, Zara can improve its organizational image to the public, especially those that have painted a human rights’ violator image on the firm (Johnston 2009).
Corporate Social Responsibility (CSR)
This is a form of self-regulation by the corporation that is integrated into a corporate business model. These policies function as a built-in mechanism that is self-regulating and allows a business to monitor and oversee that it operates in the full compliance within the expected norms, ethical standards and as per the law requirements. CSR is, therefore, a process whose aim is to trigger a positive impact on the organization’s actions as well as encourage positive impacts by its activities on stakeholders, consumers, communities, the environment, employees and the general public, at large (Kotler 2011). It is important that Zara adopts CSR policies that will ensure that its organizational action has gone in line with the interests and expectations of the public. Therefore, unlawful labour activities must come to a halt.
Reputation Management
This refers to an understanding/influencing of the businesses’ or individual’s reputation. There are many techniques of reputation management such as listening to customer complaints, taking down and recording the incorrect information, a feedback collection, and online question answering, among others. Zara as a firm should adopt reputation management to ensure that such scandals like poor working conditions. The likes do not bring down the company’s reputation of Zara as a leading clothing retail store (Helm 2011).
Stakeholder Management
This vital discipline that organizational managers can apply to win the support of other stakeholders is successful from the internal and external environments of the business (employees, customers, investors, owners, government and competitors, etc.). In the case of Zara, employees’ mistreatments seem to be the topic that haunts the company. Managers should understand that employees are the vital stakeholders for the business. They should be treated with dignity and rewarded/compensated for the work they do. It is, therefore, crucial for Zara managers to consider the interests of employees and other stakeholders. They should not exclusively concentrate on the private maximization at the expense of stakeholders (Huber 2004).
Summary of Strategic Options that Are Appropriate for Zara
According to the industrial lifecycle theory, it is clear that Zara is at the maturity stage where the principal focus is no longer on its organizational growth. Instead, the cash flow and market share have become the major goals of the organization. This brings about the necessity for the acquisition of a competitive advantage over competitors, which can be achieved through setting up a framework towards the competitors’ analysis. This analysis consists of:
- Future goals of the competition; for instance, H&M and Gap in Zara’s case, this will allow the company to come up with counter-attack strategies that sets the bar higher as compared to that of the competitors.
- Assumptions; Zara should analyze the assumptions that the competitors may have made during their strategy drawing process. In turn, one should exploit the assumptions towards their favor, therefore, catch them off guard.
- The current strategy; Zara should consider the current strategies that the competition sides have to offer and as well analyze their probable effects on the market share. Therefore, this creates the necessary counter strategies.
- Capabilities; Zara should analyze its own capabilities as well as those of the competitors in order to come up with a final resolution about an effective capability exploitation. This will help to achieve organizational objectives and set targets.
Porter’s five forces of new entrant threats, a substitute product threat, a consumer bargaining threat, and suppliers bargaining power, in addition, to competition levels are also an effective way that Zara can use to analyze the global clothing industry. This is because they analyze all the market stakeholders that are considered in the analysis. Thus, it lays an effective platform through which Zara or any other organization within any industry can use to undertake the industrial analysis.
The environmental scanning is another important technique that can be used to identify organizational and industrial strengths and weaknesses as well as other factors that are likely to affect the way business is done. The two major environmental analysis techniques that Zara should use is the SWOT analysis. It will identify strengths and weaknesses in addition to opportunities and threats. This is more of an internal scan as compared to the solely external PESTLE analysis which considers such factors like ecological, political, economic, social, legal and political factors.
An internal strategic audit is also important as far as a clear organizational profile is to be drawn. It helps identifying the organizational internal ability to undertake the expected endeavors with the aim of achieving objectives effectively. Audits include a financial and product position, marketing capability, the research and development capability, an organizational structure, human resources, conditions of facilities, and, finally, the past goals and objectives. Internal audits are, therefore, crucial since they define the organization, at large.
Zara has been acknowledged as a good example of how the modern business should be done in a unique way that is cost-effective, compared to its free spending competitors in the clothing market. However, this reputation has been threatened by the allegations of human rights’ violations in some parts of Europe and South America. Such as the smuggled immigrants into Brazil that were confined in the factory where they would work for 12-14 hours per day in addition to the inadequate shelter supply. The European case emerged when some store managers and staff confessed to their employees being subjected to brutalities within their lines of duty for Zara.
The human abuse allegations cannot be taken lightly because they are a threat to the organization’s reputation. A reason behind which is a matter of concern. That is why the radical organizational image improvement is necessary for Zara to be adopted. This will be achieved through such measures like public relations, reputation management, stakeholder management and corporate social responsibility. Public relations will improve the organizational image through such activities as: a newsletter, sponsorships, conferences, media briefings and many other events and activities that affect the organizational publics, both internal and external. For example, employees, stakeholders, customers, government, etc. as the reputation management involves the management of good reputations; for the organization like Zara that is known for good business strategies and models. Stakeholders’ management involves the consideration of interests of various stakeholders within the specific business environment, e.g., Zara has stakeholders such as customers, employees, franchisees and investors. Their interests should also be considered when the organizational image is at stake; for instance, the Brazilian and European cases are a case study of poor relations between the company and its employees, especially those working manually in the textile industries. This needs to be improved.
Corporate social responsibility is also important as far as the improvement of the organizational image is concerned. This is because it enshrines the principles of the rule of law, generally accepted things in the society and other accepted things within the businesses’ internal and external environmental quotas.
Recommendations
Zara is one of the leading clothing stores within the global market, as we have seen during the internal audit. We have seen that the organization’s financial position is healthy; therefore, the company is directing towards the highly prosperous economic moments. The management of its finances is, thus, good; and no weaknesses have been noted during the audit. Some measures should be put in place to consolidate this.
The product position; Zara’s products are well placed within the global clothing market and offer the better qualities as compared to some of its competitors such as Gap. The latter one offers the low quality products at higher prices. This places Zara clothing on a pole position towards the attainment of a bigger market’s share at the global level. This pace should, therefore, be maintained.
Marketing capability; Zara’s marketing techniques may look somewhat weird, especially due to the rejection of advertising as a main product promotion tool. Instead, Zara has opted to channel some of generated revenues towards the development and opening of new stores across the world. This has made it quite convenient for customers that wish to purchase their products. They are readily available whenever they need them. Stores should, therefore, be opened in as many locations as possible for the customer convenience purposes. The company has also gone a digital way with the recent opening of Zara online stores under which customers can make purchases online. This is much to the current world trend’s convenience. This is the right path, i.e. moving with the current waves.
The research and development capability is that it is clear that Zara is a leader in this sector. In fact, they release more than 10,000 models per one year, compared to their closest competitors releasing only between two thousand and four thousand models. It only takes two weeks for Zara to develop the product and make it available to its many shops across the world. This means that Zara is an undisputed champion as far as the innovation in the clothing industry is concerned. A very high note that the company must maintain in order to maintain the competitive edge they have over the competition sides like Gap.
An organizational structure is that Zara has an effective organization structure. This is something that is portrayed by the short durations that innovations and new products take to penetrate the whole organization and all its distribution channels across the world. A good organization has also given Zara an organizational culture of dealing with the things according to the current trends. This, however, needs some improvement because at times some stores are more updated than others are.
Human resources; Zara has a wide work force which we must commend for the good work they have been doing so far. However, the company needs to create clear policies of dealing with the casual labourers at the textile firms. That is where human rights’ issues are beginning to emerge. It is unfortunate that Zara has been involved in such outdated business techniques during the 21st century. Something has to be done to scrap this image off Zara.
Zara clothing facilities are simply the best clothing outlet across the world that can avail to its customers and stakeholders, at large. Thus, the remaining outlets that have not undergone modernization should be renovated.
