Business Within The Chinese Business Environment Commerce Essay

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Amongst the motivations to strategise are to grow fast ahead of the competitors, grow in the line with the industry or to simply catch up and defend an existing status. Despite the challenges, threats and risks, the orientation of various firms are to expand, to reach and to penetrate new markets segments. The working title of the research is initially drafted as - Market Entry Strategy: Case Study of Zara - Internationalisation in China. The study aims to explore the effectiveness of the chosen market entry strategy and mode of entry by Zara in penetrating the Chinese retail market. Whether the strategy proved to be beneficial in its initiative to internationalise the operation of the business will be also explored. Thereby asking, what are the benefits of putting the business within the Chinese business environment?

As such, market entry decisions are a multi-approach that requires careful consideration of the firm seeking to widen economies of scope and reach. Zara should take note, however, that market entry decisions depend on the resources and the ability to sustain the competitive edge. In this study, different market entry strategies and its drivers, nature and dynamics will be explored with reference to Zara's business. Zara is one of the world's most successful fashion retailers operating in 59 countries.

However, there is little research about the firm in English as the majority of publications have been written in Spanish. This paper seeks to address this gap in the literature by examining the internationalisation process of Zara. Zara's international strategy framework of market entry, market selection and marketing approach is the driver behind the internationalisation strategy of Zara. When it comes to market entry, the question now is what are the economic and political barriers that take effect on the strategy?

2. Company Profile

Owned by Amancio Ortega, Zara, on the other hand, is a clothing company originated in Spain. Inditex Group, the parent company, claims that Zara needed just a couple of weeks to go through the development of a new product and get it to the stores, compared to that of six months which is the industry average. Zara also launches products amounting 10, 000 new designs annually. Though Zara is a vertically integrated company, Zara controls most of the processes in the supply chain whereby 50% of the products are manufactured in Spain, 26% in the rest of Europe and 24% in Asian countries.  and  (2006) contend that Zara outsourced the production of high labor intensive processes but maintained in-house other capital intensive processes, protecting knowledge and know how. The quick-response capability of Zara is made possible by the three main stages that define the competitive edge of the company: design, manufacturing and distribution.

Zara embraces the strategy to focus on operations which can enhance cost efficiency thereby conducting most of the processes in-house. While, the rest of the manufacturing activities including finishing stages are completed through a network of 300 small contractors which specializes in one particular part of the production process or garment type. These contractors work exclusively for Inditex, and are not given more than 4% control of the production services so that if there will be a problem with a single contractor, there will 299 to back them.  and  (2004) maintain that although its manufacturing costs are 15 to 20% higher than competition, Zara more than makes up for the cost differential through its supply chain to ensure that merchandise in the stores matches what customers want ().

Further, the competitive advantages of Zara are because of its cost leadership, fast production and product variation. Zara sells quality, fashionable products at reasonable prices and based on product positioning, Zara is cheaper than its leading rivals as Benetton and Gap. Zara also has the ability to design and finish products to be deli8everd in stores within 4 to 5 weeks hence very quick to get designer-influenced products into their stores. Likewise, the clothing brand has the ability to launch new trends and designs in a much shorter period. Zara thereby boasts for low level of inventory, efficient distribution system and high turnover of product.

International Marketing Strategies

At the early stages of internationalisation, the management at Zara was following an ethnocentric orientation whereby the "subsidiary companies had to be a replication of the Spanish stores" (Alexander and Myers, 2000; Bonache and Cerviño, 1996).However, this approach encountered unexpected difficulties in some countries due to the cultural differences. Therefore, Zara decided to move towards a geocentric orientation, allowing the company to adopt in some cases local solutions rather than merely replicate the home market. Zara sells a largely homogeneous product for a global market (Flavian and Polo, 2000). Nevertheless, there are some adjustments in its marketing mix because of the customer's size differences in Asian countries (Monllor, 2001), laws issued that require the availability of garments for youths in all sizes in Buenos Aires (La Opinion de La Coruña, 2006), cultural differences in Arab countries where some garments cannot be sold, and a different season in the southern hemisphere (Euromonitor, 2002a). The information gathered by the store guides the decisions of the design department that finally produces those garments that can be sold in all the markets where Zara operates (Bonache and Cerviño, 1996). Each store manager, based on the customer's remarks on the products, decides the specific garments that will be put on display in the store to meet the customer's taste in that area (Fabrega, 2004).15 Zara's promotion strategy is the same in domestic and foreign markets. Advertisement campaigns are carried out only at the start of sales or a new store opening. Zara relies on the store as its main promotional tool. The prices of Zara's garments differ between countries with the Spanish market being offered the lowest prices (D´Andrea and Arnold, 2003). Prices are set centrally following a marketoriented strategy. Prices in international markets are generally higher due to longer distribution channels (Ghemawat and Nueno, 2003). As in the domestic market, the store location is a critical factor in international markets. All Zara's shops are situated in prime locations. This decision is based on an analysis of the local market environment that identifies the niche opportunities for Zara's products in those markets, the price of competitors' products and the recommended price to achieve a maximum level of profitability (Bonache and Cerviño, 1996). The shop window display and interior design are prototyped centrally and then replicated in all international shops by professional store decorators. Hence, Zara standardises the key strategic elements, namely the location, window display, interior design, store layout, store display rotation, customer service, information systems and logistics. The rest of the elements are customised to the market to suit local preferences (Fabrega, 2004).

Once the location for the store is identified, the next stage is the recruitment and selection of the company personnel. Initially Zara sent Spanish managers to replicate the management procedure used in Spain (Fabrega, 2004). Difficulties arose in countries like Mexico and France (Bonache and Cerviño, 1996) which made Zara change to a practice of recruiting employees locally to get a better understanding of the local market preferences (Martinez, 1997). Zara makes a great effort to transfer know-how in order to share the same corporate values. The Head Office in Spain controls the subsidiaries to maintain Zara's concept across its international markets.

Market Entry Strategies

While Zara owns a majority of its stores in Spain, the international expansion has adopted three different entry modes:

• Own subsidiaries: This direct investment strategy is the most expensive mode of entry and involves high levels of control and risk in case the firm exits the market. Zara has adopted this strategy for most European and South American countries that were perceived to have high growth potential and low business risk (Flavian and Polo, 2000).

• Joint ventures: This is a co-operative strategy in which the manufacturing facilities and know-how of the local company are combined with the expertise of the foreign firm in the market, especially in large, competitive markets where it is difficult to acquire property to set up retail outlets or where there are other kinds of obstacles that require co-operation with a local company (Camuñas, 2003). In 1999 Zara entered into a joint venture with the German firm Otto Versand and benefited from the latter's experience in the distribution sector and knowledge of one of the largest markets in Europe. The administrative barriers in Italy, wherein local traders decide whether an international brand could operate in a specific city and the amounts of Money required for the transfer of the stores (Expansion, 2001) led Zara to link with Gruppo Percassi, a successful firm in the property sector, in 2001. The 12 experience of Biti in the clothing sector together with its knowledge of theproperty market encouraged Zara to sign an agreement with this company to enter Japan in 1998 (Castro, 2003). In Germany and Japan the deal was on a 50-50 joint venture. In Italy Inditex held a 51 percent investment in Zara.

However, Zara has recently increased its ownership to 78 percent in Germany, 80 percent in Italy and 100 percent in Japan.

• Franchising: This strategy is chosen for high-risk countries which areculturally distant or have small markets with low sales forecast like Saudi Arabia, Kuwait, Andorra or Malaysia (Flavian and Polo, 2000). Zara's franchisees follow the same business model as their own subsidiaries regarding the product, store location, interior design, logistic and human resources. However, they are responsible for investing in fixed assets and recruiting the staff. Zara gives franchisees the chance of returning merchandise and exclusivity in their geographic area, although Zara has the right to open its own stores in the same location (Castellano, 2002).

Once the entry decision is made for a particular country, Zara follows a pattern of expansion known in the company as "oil stain" (Castellano, 2002): Zara opens its first store, the so-called flagship store, in a strategic area with the purpose of getting information about the market and acquiring expertise. The experience guides Zara in the following phases of expansion in that country (Blanco and Salgado, 2004).

3. Key Issues

Market Entry and/or Operations Market Entry

International strategy at Zara is defined by the combined generic strategy of cost leadership and differentiation strategy. There are considerations, however, such as when selecting the Chinese market, labor cost and productivity, distribution cost and shipment cost of raw materials are considered. Other considerations are characteristics or behaviour of consumers and income per capita. In terms of marketing approach, the considerations include the 4Ps inherent to the Chinese consumers and business environment. Market entry considerations include economics, both macroeconomic factors which include tax, political condition and export tariff and microeconomic factors including local competitors, demand and location of store. Regulation from government and local producers protection issues are other considerations.

Operation/Expansion

There are three basic international expansion strategies as entry modes: own subsidiaries, joint ventures and franchising. Zara adopted the first strategy for most European and South American countries which are perceived to have high growth potential and low business risk. The second strategy is adopted for expanding the business in Germany, Italy and Japan. Franchising is adopted on high risk countries such as Saudi Arabia, Kuwait and Malaysia.  Which among this expansion strategy is used in penetrating the Chinese market? Does Zara conform to standardisation or customisation in its effort to enter the Chinese market?

4. Key Success/Failure Factors

Success factors include cost leadership strategy, differentiation of strategy, efficient distribution, information technology and fast delivery of new products, designs and trends. However, one of the failure factors is Zara's centralised distribution system which may not be inappropriate in entering a specific market of diverse nature like that of China.

5. Learning Points and Recommendations

When in the process of penetrating a specific market, Zara should be guarded on issues of local competitions and how it affects global competitions. Zara should be also watchful of product cannibalism and lack of vertical integration. Nonetheless, the clothing brand could consider an online market and establishing a distribution center in the US.

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