Strategic Business Analysis of ‘Zara’ Report

Executive Summary

The main aim of this report is to carry out strategic analysis of Zara which is business unit of Inditex, such that recommendations can be extended to assure long run survival and growth of business. The external analysis through PESTEL analysis has shown that political disruption, economic downturn and social changes are highly evident for Zara, which are caused by novel virus pandemic. Likewise, legal changes are also highly considerable for brand. Additionally, industry analysis has shown that competition is intense for Zara, yet the integrated supply chain of its unique fast fashion business model differentiates it from other brands. The core competencies of Zara are associated with flexible and highly efficient designer team of Zara and in store inventory model. These competencies enable the brand to launch new designs within weeks, which make it highly desirable and trendy among fast changing fashion industry. Based on this analysis, Zara is recommended to expand its e-commerce business along with entering into partnership with philanthropic organizations.

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1. Background

The chosen brand is Zara, which is the strategic business unit of Inditex, one of the renowned organization of fashion retailing. It has been introduced in 1975 in Spain, which has opened its stores across multiple locations in international market and is now recognized as one of the most famous fast fashion retailer around the globe. The first store of Zara has featured the lookalike collections of high-end popular brands, which has made it possible for many widespread consumers to buy latest fashion. Recently, Zara has around 10,000 stores worldwide. The key products of Zara are clothing for men, women and kids, along with multiple fashion accessories, which is considered as a low end and economical brand for continually updating the fashion statement of individuals.  The core values which form the basis of Zara’s business practices are to become energy efficient, eco-friendly, to lower waste production and increase recycling, to use eco-friendly fabrics and to enhance commitment of its staff. The key geographical regions, which are being served by Zara are; Africa, America, Asia, Europe and European Union. Zara is highly recognized brands across all markets and most of its revenue comes from American region. In recent annual year, the total revenue of Zara was $18.9 billion. The underlying report has provided detailed strategic business analysis of Zara, by carrying out analysis of macro and micro environment of the organization, such that suggestions can be made to enhance strategic value of the organization.

2. PESTEL Analysis

Political Analysis: Being operating in international market, changes in Government regulations of different nations, changing trade agreements and any political disruptions can affect the operations of business (Barney & Hesterly, 2010). For instance, based on European Union trade agreements, Zara is free to move raw material and finished goods across borders and restriction on any trade agreements can make it difficult for organization to operate freely. Additionally, political turmoil is also said to have an influence on supply chain operations of Zara, yet this threat has been addressed by Zara by limiting its supply chain to home and neighboring countries. Another more recent challenge which has been witnessed by brands is the restricted trading policies of countries based on major COVID-19 outbreak (McKibbin & Fernando, 2020). The Governments of multiple nations are limiting imports and exports, based on lockdown to control the effects of pandemic, which is having adverse effects on business capacity of Zara.

Economic Analysis: The changes in national and international economies are likely to have significant influence on businesses (Barney & Hesterly, 2010). For instance, recently, banks have cut their interest rates to lowest in the history, when Bank of England has announced to low interest rate to 0.1%, such that businesses can be supported in the times of great pandemic crisis (McKibbin & Fernando, 2020; Peachey, 2020). Any such changes are likely to affect the business operations of Zara, as it is operating in multiple economies. The changes in currency rates and rate of inflation can also have an effect on production and distribution capacity of Zara.

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Social Analysis: Social changes are mainly related with changes in taste and interest of consumers, which pose pressure on brands like Zara to continually update the designs, with an aim of remaining popular among consumers. Additionally, consumers are beginning to prefer brands which make reliance on ethical supply chain and are eco-friendly during production as well as consumption. These aspects are effectively addressed by Zara in its supply chain (Kapustina, Agababaev & Drevalev, 2018). However, the latest COVID-19 pandemic has also caused many social changes and consumers are isolating themselves as a result of confinement measures to protect themselves (McKibbin & Fernando, 2020). In such situation, Zara is likely to lose plenty of its revenue, based on closure of malls and brand outlets in many countries. The social changes rises from such natural disasters can pose substantial threat on business and recently Zara is exposed to one of biggest challenges to achieve its sales targets.

Technological Analysis: As result of technological advancements, it is becoming easier to maintain efficiency in supply chain, based on latest production equipment and artificially intelligent tools to support different operations. Although Zara has well embraced technological advancements in the form of inclusion of big data in business practices, yet any changes are needed to be incorporated through regular and timely up gradation in technology of business.

Environmental Analysis: The environmental performance of brands and businesses is highly important for enhancing corporate reputation of organization (Kreutzer, 2019). Many environmental protection agencies and pressure groups are laying pressure on Zara to opt for policies and practices which have limited consequences for environment. Thus, Zara is in continual need of lowering its environmental footprints and working proactively for protection of environment.

Legal Analysis: Changes in business regulations, consumer protection regulations, child labor regulations, employee protection acts and copyrights laws, among others, are considerable for Zara (Kreutzer, 2019). For instance, Zara has mainly been accused of copying the designs of other brands to update its style statement, which has posed huge threat for business but brand has somehow managed to get its hands clean. However, it needs to maintain close compliance with business regulations for preservation of its corporate reputation.

2.1. Identified Opportunities and Threats from PESTEL analysis

Opportunities

  • Zara has the opportunity to act as ethically responsible business, by helping communities in the time of chaos, caused by virus outbreak, with an aim of enhancing its corporate reputation
  • Zara has the opportunity to extensively rely on its online business, such that consumers can be provided with safer shopping options
  • In long run, Zara has the opportunity to enter into markets which are showing emerging trends, such as Asian markets

Threats

  • Disruption in external environment, for instance, caused be recent outbreak of COVID-19.
  • Changes in taste, behavior, preferences and buying patterns of consumers, such as based on recent pandemic, consumers have begun to purchase items which are compulsory for living and fashion buying is not preferred
  • These threats are expected to lower the growth rate of industry, and can also have an influence on supply chain effectiveness of organizations

3. Porter’s Analysis

The porter’s framework is important to analyze the industry wide situation for business (Sullivan, K., Thomas, S., & Rosano, M. (2018) and the figure 1 provides snapshot of the forces for industry in which Zara operates.

Threat of Substitutes – Moderate

  • The propensity of buyers to substitute is considered high, as there are multiple options to choose from
  • The buyers possess low switching cost.
  • The substitute options are mainly costly in contrast to Zara, as they are high end clothing brands and thus moderate threat of substitutes is evident for the brand (Wang, 2018).

Barriers to enter – High

  • The capital expenditure is high to make entry in fashion market and economies of scale is the only way to control costs and to enhance revenue.
  • The cost associated with marketing and communication is high, which needs substantial commitment to financial resources for new entrants.
  • The long scale cycle is the main characteristic of fashion industry, which shows that lead time from concept of design to final product delivery in store is around six months, which shows that new entrants experience substantial difficulty to compete with existing brands with strong designer team (Włodzimierz, 2012)
  • The high entry barriers show that threat from new entrants is low for Zara.

Bargaining power of buyers – Moderate

  • Fashion consumers are willing to consume low price as well as trendy fashion apparels.
  • Zara is positioned as low end brand, which makes it attractive option among consumers and thus bargaining power of consumers is low (Włodzimierz, 2012)

Bargaining power of suppliers – Moderate

  • Zara makes use of vertically integrated supply chain, which makes it a self-supplier and thus bargaining power of suppliers is low (Xuejie, Chang & GuangHao, 2019)
  • The cost of raw material is also low.

Threat of Competition– High

  • The fashion industry is characterized by multiple players, who are engaged in rigorous marketing and promotion activities, which shows that consumers can easily switch from one brand to another (Xuejie, Chang & GuangHao, 2019).
  • It is difficult to win loyalty of fashion consumers.
  • The threat from competitive forces is high for Zara.

The industry analysis indicates that Zara is facing huge threat from competitors. However, it has been found that all other industry forces are showing moderate effect for the brand, which could be dealt by making reliance on economies of scale, core capabilities of brand and its backward integrated supply chain, which make it easy for Zara to continue its operations.

4. Internal Analysis

The internal analysis could be carried out by making reliance on competency framework, which helps in identification of tangible resources, intangible resources and capabilities of business, such that core competencies can be highlighted (Ansoff et al., 2018).

4.1. Tangible Resource Analysis of Zara

In terms of tangible resources, parent company of Zara, Inditex is in financially sound position to support Zara, such that brand can take steps to deal with any complex situation. In similar way, the integration aspect of supply chain of Zara is also an important tangible resource of the brand, which is making the business independent in terms of its supply chain operations (Sitaro, 2020). The integrated supply chain can help the company to deal with external environmental and industry forces, such as political disruption and bargaining power of suppliers. Another tangible resource of company is that it has facilities in all regions of operations, thus smoothening the production system, if any disruption is caused to restrict border movement (Saraswat, 2018). Finally, the team of designers and technologically advance machinery equipment are also considered the core tangible resources of Zara.

4.2. Intangible Resources of Zara

It is notable that Zara has substantial brand image in international market and likeability of brand is considered as one of the key intangible resource of brand. The loyalty of customers is also considered as an important resource of the brand. The skills and competencies of designer team and in-store inventory modes allow Zara to continually update the style, with an aim of coping up with changing demands and preferences of consumers (Aftab et al., 2018).

4.3. Capabilities of Zara

The compressed production cycle of Zara helps the brand to lower the time from design inception to its production and delivery to stores. This time is only 4 weeks for Zara, which is less than other fast fashion brands (Aftab et al., 2018). This capability is supported by vertically integrated model of Zara, through which Zara utilizes the skills of its own designers, logistic team and manufacturers to assure that flexibility is maintained in delivery of fast fashion products.

1.1. Core Competencies of Zara

The core competency of Zara can be identified by making reliance on VRIO framework, which comprises; value, rarity, inimitability and organized for exploitation. The investigation of core capabilities of Zara through lens of VRIO model can be seen in table 1 below.

Differentiated, flexible and responsive designer team Lowest lead times In store inventory model to support fast fashion image
Valuable ü ü ü
Inimitable ü – ü
Rare ü ü ü
Organized to be exploited ü ü ü

The skills inventory of any organization is regarded as inimitable, as it cannot be attained by any other organization in immediate manner and rather requires huge time to develop the team of responsive designers (Saraswat, 2018). This resource is also valuable to support fast fashion image of Zara, rare to the bran and is exploited by the brand to compress its lead times to the market, indicating that it can be regarded as one of the key core competencies of Zara.

In addition to this, lowest lead time resource can be imitated by other organizations, through implication of more designers and resources. It is thus excluded from the list of core competencies of Zara.

Finally, in store inventory model of Zara is considered as inimitable, because it require huge commitment of financial resources (Xuejie, Chang & GuangHao, 2019). The other aspects of value, rarity and organizability are also witnessed for this resource, showing that it is core competency of the brand.

2. Summary of External and Internal Analysis

The external analysis shows that currently external environment of Zara is highly unstable as political disruption is being observed due to novel pandemic (Oxford Analytica, 2020). Additionally, economical instability, lowered interest rates, restricted buying of fashion goods and legal aspects are all negatively affecting the current business position of Zara. The brand has got opportunity to foster its online business and to support community. Additionally, the industry forces are mainly controllable by the brand, based on Zara’s capabilities, yet competition is intense for the brand and needs huge commitment with core competencies of the brand to differentiate.

The internal analysis of brand has shown that Zara is in position to differentiate itself from other competitors, as it uses its core competencies in effective manner to seek differentiation within market (Włodzimierz, 2012). The responsible and flexible designer team of Zara and its instore inventory model are both considered as core competencies which support long run success of brand (Xuejie, Chang & GuangHao, 2019). By using this competencies, Zara can avail opportunities within external environment, along with coping the external threats.

Based on this analysis, the following recommendations are being provided to Zara;

  • The key recommendation for Zara is to expand its e-commerce business operations. It will enable the brand to deal with recent disruptions caused by virus outbreak and will also help the company to cope with increasing trend of online shopping. The online platforms will enable Zara to achieve its sales target and performance gaols.
  • The brand needs to enter into partnership with philanthropic organizations, such that community can be supported to enhance reputation of Zara in international market. This strategy will pay the brand in long run, as Zara’s recognition will enhance as ethically responsible brand. The brand image will be strengthened and more consumers can be attracted. Additionally, the contemporary consumers pledge their loyalty to brands which are ethically responsible, thus Zara might become able to develop base of loyal consumers.

3. Conclusion

In conclusion, the underlying strategic analysis has suggested that external environment is highly unstable and it is likely to lay many challenges for continuation of normal business operations as well as for growth of business. Likewise, the industry forces insight has indicated that competition is intense for Zara. Zara has the support of tangible and intangible resources and its core competencies of exceptional designer team, compressed business model and in store inventory storage model are offering substantial benefits to Zara over competitors. Based on analysis, Zara is recommended to adopt philanthropic practices and to expand its e-commerce platforms for serving consumers.

References

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Sullivan, K., Thomas, S., & Rosano, M. (2018). Using industrial ecology and strategic management concepts to pursue the Sustainable Development Goals. Journal of Cleaner Production, 174, 237-246.

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Włodzimierz, R. (2012). Business model design and its importance in successful strategy–the case of Zara. Bulletin of Socio-Economic Research. (3 (1)), 129-134.

Xuejie, C., Chang, Q., & GuangHao, Z. (2019, August). Research on Innovation supply chain Management in Fast Fashion Industry – A comparative analysis of ZARA and H&M. In 2019 3rd International Conference on Education, Culture and Social Development (ICECSD 2019). Atlantis Press.