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Zara is one of the most well known brands in the world and is also one of the largest international fashion companies. They are the third largest brand in the garment industry and are a unit of Inditex. It their flagship range of chain stores and are headquartered in Spain. Zara opened its first outlet in Spain in 1975. The headquarters of the company is based in Galicia. There are more than 2600 stores across 73 countries in the world. The Zara clothing line accounts for a huge bulk of its parent group's revenues. There are other clothing brands owned by Inditex such as KiddyÂ´s Class (children's fashion), Pull and Bear (youth casual clothes), Massimo Dutti (quality and conventional fashion), Bershka (avant-garde clothing), Stradivarius (trendy garments for young woman), Oysho (undergarment chain) and Zara Home (household textiles). Inditex owns all Zara outlets except for places where they are not allowed ownership of stores (that's where Franchises step in).
Zara is renowned for coming up with products on a short timescale instead of taking forever. They are known for taking around 2 weeks to develop products and have been known to come up with around 10,000 new designs every year (which is an industry record). They have bucked the trend by making productions in Europe instead of shifting their entire production to Third World or Developing countries. However some of their clothes are manufactured in parts of Asia due to the fact that they have a longer shelf life. They make most of their own products inside Spain or other European Countries as they own a large number of factories in both Spain and Portugal. They also don't have to depend on anyone else as they can get everything done by themselves.
Zara is unique in the way that it does not spend money on marketing and instead concentrates on opening new stores instead. Their brave experiments have led them to be labeled as one of the most innovative retailers in the world.
Zara started out with low priced products which were pale imitations of high end fashion products. This move led to Zara being a smashing success and allowed them to expand by opening more stores in Spain. The company management also managed to reduce the time it took to create new designs and came up with the term "instant fashions" which allowed them to capitalize on new trends really fast. Zara is known to use teams of designers instead of individuals.
Zara has to face a lot of competition from H&M, Gap and Bentton internationally. Fortunately Zara is considered to be more fashionable than the rest of the brands despite the fact that its price is less than Benetton and Gap. H&M is still cheaper than Zara but is equally fashionable as Zara. Gap and Benetton are less fashionable and more pricy.
Zara's biggest strength is the fact that it provides cost leadership strategy by aiming at efficiency and cost reduction on products. There is a lot of efficiency merely due to the fact that products are put on fast track and costs are kept really low. They don't take a long time to come up with new collections. Zara is able to come up with collections really fast (around 2 weeks to get a collection ready).
Zara focuses on what its customers want and that's why they have managed to do so well. They are able to get the opinions of its customers on a daily basis. The data is sent over to the headquarters where it is analyzed. This is a great way of saving time and helps them understand what sort of trends to follow. Since it does not take them a long time to come up with products they are able to cash in on the trends. They are also able to design, manufacture and send out the new products in less than 2 weeks. They are also very efficient when it comes to delivery of the products.
Zara employs a huge team of designers who are able to design the clothes they require. Most of these designers are fresh out of Fashion schools and are able to do more for less. Most of the clothes manufactured are made in Spain and there is no need for outsourcing. Zara manufactures and distributes its clothes so it manages to cut out the middle man. This is one reason why they are able to get clothes out there so fast. They also have a great Information technology solution in place which allows for decentralized decision making.
Zara does not spend any money on marketing or advertising. This is a huge weakness for them as its competitors spend a lot of money on advertising. Zara relies on goodwill and word of mouth so that people can shop at their stores. This is a weakness which can be exploited in the future by its competitors.
Another weakness is the fact that Zara only has one manufacturing and distribution centre in the world. This is a double edged sword as it is both a weakness and strength. The fact that they have a huge distribution centre makes it an asset but then if it is hit by some sort of natural disaster or some logistical problem then it can have an adverse effect on its revenues.
There are a lot of opportunities for Zara lying ahead. They need to expand their presence in the USA where they face competition from the likes of GAP. They only have around 49 stores in the US which is not bad but then based on the size of the US that is equivalent to around one store per state. In comparison there are more than 300 stores in Spain which is a fraction of the size of the US. They may have conquered Europe but they still need to expand into the US market so they can give Gap a run for its money. They can grow properly if they expand their presence in the US.
Zara is only going for markets where it is doing well such as Italy. However there is a huge opportunity for them to tap into the Indian market. The Indian Economy is doing really well and people over there love to buy good quality brand names at a reasonable price. Zara already has 2 outlets in India but then it wouldn't hurt to expand a bit more and form alliances with local manufacturers. This will make it easier for them to slowly grow within the Indian market.
The biggest threat facing Zara is the fact that it is Europe Based. Zara is based in Spain and has a huge number of stores in Europe. Critics believe that there is an over saturation of stores in Europe and that having such a huge number of stores will dent the revenues over the longer term. The other reason is the fact that the Euro tends to be stronger than the Dollar. This is one reason why merchandise from Zara tends to be more expensive in other countries. This can be a big turn off and can have an adverse effect on their revenues in the longer term.
Porters Five Forces
Porters Five Forces allows us to look at the five forces which help us determine the competitive intensity and the attractiveness of a market. Some of these forces are related to competition from external sources while the rest are internal threats. These are basically all related to the macro environment. The various Forces are threat of substitute products, the threat of established rivals, the threat of new entrants, the bargaining power of suppliers and the bargaining power of customers.
Porters Five Forces Analysis
Threat of Competitors
Zara faces a lot of competition in the market. There are a large number of competitors in the market such as H&M, Benetton, Gap, etc. Fortunately The high level of competition makes it tough for everyone as they are all struggling to get a piece of the pie . The biggest problem is that due to the large number of competitors the growth rate is low due to the number of manufacturers around. The clothing industry has peaked and it is very difficult for people to stay in the industry as the competition is cut throat. Customers are spoiled for choice due to the number of brands within the market. They are also very fickle minded and base their buying habits on the basis of new trends. They will only buy based on price and brand recognition and this is why the manufacturers have to keep changing what they do and come up with new ways of gaining customers. The costs of manufacturing new goods are quite high plus it is not easy to procure raw material so that's why the ones who have the resources and the ability to do so are able to survive within the market.
Threat of New Entrants
There is always the threat of new entrants but then the risk is not so much as Zara already has a huge presence in most parts of the world. The barriers for entry for distribution are quite low in Spain ( where the bulk of their clothes come from.) New entrants will have it easy as the cost of distribution is quite low as they only need to rent a shop and need a bit of capital to start out. However when it comes to manufacturing then the barriers of entry are really high mainly due to the fact that it requires a huge investment to get started within the market.
There is no threat of substitutes as it is a basic necessity for everyone.
Customer's Bargaining Power
Customers have varying levels of bargaining power as they can decide what they want. Customers are quite fickle when it comes to buying clothes. However the good thing is that each customer has a love purchase volume and that means that even if some tend to change their brand there will still be some who will buy Zara. It is not an item like a burger or a snack which is available easily anywhere for a low price. The good thing about the clothing business is that there is no risk nonpayment because customers pay for clothes during purchase.
Supplier Negotiation Power
There are too many suppliers in the market which is one reason why the suppliers don't have much negotiating power. The fact that Zara procures or makes most of the stuff itself is also another factor which doesn't work in the suppliers favor. If the supplier decides to cut down the supplies the manufacturer can easily go to another manufacturer.
The PEST analysis is a study of the environment before a company begins its marketing process. It is a study of the external macro environment. It stands for "Political, Economic, Social, and Technological analysis" and is an environmental scanning component of strategic management
â€¢ Political - The political factors affecting Zara are when the government intervenes into the economy and comes up with laws which change the way things are done in the country. The government can easily change its policy and change the ways a business can operate in the country. They can change the laws and do drastic things like changing the interest rate. Zara needs to know the entire system and to be prepared for any potential problems it can face from the government due to a change in policies.
â€¢ Economical - Economic factors come into play as they are related to factors such as interest rates, taxation changes, economic growth, inflation and exchange rates. These have the potential to create many problems in the future. There are different duties and levels of tariffs in different countries and this can cause the prices of products to vary in different countries. The price of goods will also vary based on the country of origin and that's what Zara needs to keep in mind.
â€¢Social - If there are Changes in social trends it will have a huge impact on the demand for Zara's products and the availability and willingness of individuals to work. However that is not likely to happen as it's not as if Zara makes niche products. They focus on a huge market and make different types of products so it is quite unlikely that there will be a social shift in this part. However the company still needs to work on trends and to make sure its updated with the times so that it can satisfy its customers and meet the demands of its demographics.
â€¢Technology - Due to advances in technology companies have to make sure that they keep up. Zara has to make sure that they have the latest technology and that they are innovative in every way. The more advanced the technology the more it can bring about some quality. Zara has invested in technology and it has to keep improvising because if they don't then their competitors will get a head start on them.