7EC502 – IB Theory & Strategy Assignment Sample
Introduction
ZARA is a renowned Spanish fashion and accessories firm that was founded in 1975 by Amancio Ortega, a former CEO of the Spanish apparel giant Inditex. Inditex, the world’s biggest fashion retailer, has its headquarters in A Corua, Galicia, and is responsible for the management of ZARA from there. Inditex is the world’s biggest fashion retailer with a global presence. More than 1,700 ZARA stores are now operational in 78 countries across the globe, with the most recent of them, in Australia, having opened its doors in September of this year. According to Inditex, ZARA was responsible for around 64.6 percent of the company’s overall sales in 2010. After years of hard work, it has established itself as one of the most well-known fashion companies in the world today. According to Daniel Piette, fashion director of Louis Vuitton, who also works for the company, ZARA has been dubbed “a Spanish success story” and is “probably the most imaginative and devastating retailer in the world.”
A few of the factors that have contributed to ZARA’s success are the company’s speed (a new fashion concept can be introduced in four weeks, whereas an existing model can be updated in two weeks), the feedback it receives from store managers, which is then forwarded to corporate headquarters for further refinement, and the feedback it receives from customers, among others. The fact that Spain, as the world’s key logistical centre, has substantial influence over the current situation should not be overlooked.. Inditex outsources its production operations to India and other regions of the world, including Turkey, as a significant source of cost savings and flexibility. More than half of all retail sales in Spain are made up of high-end garment goods that are cut and stitched in the country (49 percent of total sales).
If we are talking about clothes specifically, ZARA’s business model is built on the premise of offering the general public with fairly priced, moderately-quality clothing at a reasonable price. Successful vertical integration and rapid response times are essential in this environment if you want to remain competitive (Godman,2018).
Situation analysis
The business model of ZARA, which is centred on vertical integration in the company’s operations, is instantly apparent to anybody who has worked in the retail sector. In this particular instance, the passage of time was more important than the cost of manufacturing. As a result of vertical integration, ZARA has reduced its exposure to market fluctuations while simultaneously enhancing operational efficiency. This has allowed the company to cut inventory to an absolute minimum. The lessening of the “bullwhip effect,” which happens when swings in demand are magnified as they travel up the supply chain back to the customer, was also shown to be a beneficial consequence of vertical integration (Godman,2018).
Managing everything from product development to manufacturing to distribution and sales is the responsibility of enterprise management systems (EMS). Whatever the sector, it is apparent that the company puts a high value on its consumers in all aspects of its business operations, including sales and marketing (KAPUSTINA,2020).
Some of ZARA’s most fashionable items were designed and manufactured in-house, marking a first for the fashion brand. According to the special interests of their customers, designers often make orders with both internal and external suppliers to guarantee that their clients’ demands are addressed as effectively as possible. Over 11,000 products are created annually, compared to the 2,000-4,000 items produced annually by the company’s primary rivals. Manufacturing of the most time-sensitive components, which were made in tiny numbers and vertically integrated, was accomplished via the use of a vertically integrated manufacturing method. Asia is well-known for being a wellspring of patterns that repeat themselves in predictable ways. It takes between four and five weeks for ZARA to manufacture new items, plus an additional two weeks for them to appear in shops, plus an additional two weeks for adjustments or restocking of current items.
Textiles for Comditel are purchased by fashion store ZARA. Comditel is a subsidiary of the Inditex group of businesses that will ultimately buy the fabric purchased by ZARA. In part because we purchased half of the fabric in “grey,” we were able to make quick in-season changes while still producing a diverse range of colours and patterns. In accordance with the instructions, the cloth was ready for the first time to be used in the kitchen after a week of washing and drying. When it comes to fashion, ZARA manufactures its most fashionable things solely in-house and in limited numbers to meet the demands of customers who work under strict time constraints.
It is possible to complete deliveries significantly more swiftly thanks to ZARA’s integrated distribution network. Because of this, items are delivered directly to retail outlets from the central distribution centre twice a week, allowing customers to benefit from the lowest possible stock levels on hand. It is no longer necessary to keep warehouses since a central distribution centre distributes directly to retail outlets all over the globe on a continuous and regular basis, hence removing the need for such facilities to be maintained.
Retail outlets serve as information gathering stations for the market, providing designers with feedback and statistics on client demand patterns, among other things. Designers are practically forced to begin the design process from the beginning as a result of this. It is up to ZARA Corporation to decide whether or not to increase the availability of new items once they have been introduced in a restricted number of ZARA stores located in the most fashionable areas of the world. Because of limited supplies and short lead times, the “scarcity” effect on buyers has shown to be beneficial in influencing their purchasing choices.
Due to Zara’s expansion into other nations, there have been several exciting developments.
During the 1980s, ZARA’s home market grew rapidly as a result of the opening of the company’s first shop in La Corua, Spain, in 1975. Opening its doors in 1988 in the Portuguese city of Oporto, the firm laid the foundation for its worldwide development and success in the following years. More than 1,700 ZARA stores are now open in more than 50 countries on five continents, representing a significant increase from the previous year. During 2011, sales made outside of the United States accounted for more than half of the company’s overall sales revenue.
Several positive remarks have been received regarding ZARA, a global retailer. Given that they seem to operate according to a predefined operational formula, which limits their ability to change their operations in response to changing market conditions, it’s a strange moniker to assign them. However, a more in-depth assessment of ZARA’s globalisation strategy reveals an entirely different image of the company. It is only through the timely integration of global fashion trends into product development and marketing strategy that an organisation can maintain its competitive position in the global marketplace. The strategy used by the corporation when it comes to trading on the London Stock Exchange is a great illustration of this notion. In the United Kingdom, ZARA is a fashion-forward store that is cognizant of its Spanish heritage, which is reflected in the appeal of the ZARA brand and merchandise, which are developed from the company’s Spanish heritage. As a result of this choice, the company decided to concentrate its efforts in its British shops on things that were more sexier. In order to take advantage of the advantages of the British market in the United Kingdom, pricing in the United Kingdom has been higher than it was in the country of origin in order to capture the benefits of the British market.
It has been the “oil stain” strategy that has been employed to manage ZARA’s foreign growth efforts from the company’s beginnings. The establishment of a flagship store in a large metropolitan area in the United States is the first stage in the company’s growth. According to the corporation, they have proceeded to extend their operations into neighbouring countries in the years that have followed.. Since the opening of the company’s flagship store in Paris in 2002, 67 locations have opened in France, making it the country’s biggest retail market.
The Location of Your Sales Event is an Important Decision.
Selecting the most appropriate foreign market for a company’s internationalisation strategy is a vital component of any internationalisation strategy. As a result, it is probable that the firm’s management will have an influence on the direction in which the company expands in the years to come. The term “psychic distance” is used to describe how far away someone thinks themselves to be from another nation, and it has been agreed upon by the scientific world after extensive argument and discussion within the scientific community. The elements that interact and have an influence on one another according to this point of view are: “languages, business practises, political and legal systems, education, economic advancement, marketing infrastructure, industrial structure, and culture,” to name a few. They claim that these factors are to blame for the management’s inconsistency while dealing with overseas markets, according to the findings of the study.
Analysis of strategic choices
Factors such as international marketplaces and the psychological distance that exists between a company and its consumers may have an impact on a corporation’s global expansion. In the early phases of globalisation, it may be difficult to maintain a strong impression that one is separated from the rest of the globe. In order to reduce the influence of psychological distance on the market selection choices made by organisations with a global reach, these organisations must expand their worldwide presence. The worldwide growth of ZARA is an excellent example of this (Moorkens,2020).
Therefore, a team from ZARA headquarters performs macro and micro research on the new market in order to evaluate whether or not the new market is possible and what proportion of the overall market it will represent. Real estate prices, labour rates, and legal expenses, among other aspects of the macroeconomic environment, are being studied to see how they could alter in the future and how this would effect the operations of their firms’ operations. For data that is relevant to a given sector, such as local demand and competition, as well as the availability of retail locations, this format is more suited. To gather information on ZARA’s competitors’ concentration levels, the types of competition that would most directly compete with ZARA, and their potential political or legal ability to obstruct its adoption, it was decided to survey ZARA’s competitors. The results of the survey were used to inform the development of ZARA.
The psychological barrier that separates a corporation from its present clients, as previously noted, limits a company’s capacity to expand into other sectors of business. Following the idea of psychological distance, the spreading pattern might be seen as representing the phases of globalisation, as shown in Figure 1. There are three steps to the process of increasing a company’s geographic reach. Consumption goods merchants have gone through stages of caution, prudence, and ambition when it comes to responding to possible international market prospects. Managers’ views of risk change drastically once they have gone through the experience curve. When it comes to the expansion of ZARA over the world, there are three major phases that may be seen (Pontes,2021).
From 1988 until the present, the corporation has concentrated its efforts mostly on domestic growth. The maturity of the Spanish market prompted ZARA to explore for expansion options outside of the country’s borders.
It is worth noting that between 1988 and 1997, they only entered one new market every year, for an overall total of 10 new markets throughout that time period. As a start-up firm, ZARA is concentrating its efforts on nations that are geographically and culturally equivalent to the Spanish market. ZARA originally opened its doors in France in 1990, owing to the fact that Paris is the world’s fashion centre and that France is a neighbouring nation to the United States of America. The country of Mexico was ranked top on the list because of its geographic distance from Spain, despite the fact that it is a significant distance away geographically.
This first-hand expertise has enabled the company to significantly reinforce its aspirations for worldwide expansion in recent years as a result of this experience. After successfully overcoming the psychological hurdle, the firm embarked on an aggressive and rapid worldwide expansion campaign in 1998, which continues today. You may be in any city in the globe, or even on a different continent, and yet be linked to the rest of the world. A total of 16 new shops opened in 16 different nations throughout the years 1998 and 1999, with the vast majority of them being situated in the United States, according to the firm. Traditions and customs vary greatly from one country to another, as can be seen in the case of Canada, the United Kingdom, the Middle East, Japan, and a slew of other locations (Yide,2021).
In the marketplace, the ability to acquire goods and services is known as purchasing power.
When building a strategic plan for a business, it is critical for the organisation to consider the approach it will utilise when entering a new market. The ability of an organisation to properly manage its resources determines whether or not a corporation will invest, take risks, and enjoy the rewards of those efforts, among other things. A joint venture provides a more equal division of ownership and control of a company’s assets and operations as compared to alternative entry options such as greenfield development and acquisition. In addition to increasing their exposure to environmental risks, investors in full-equity entry options are subject to increased economic and political risk as a result of their investments. Full-control entry methods, with the exception of management service contracts, need a greater financial and human resource commitment than other options, excepting the latter. In order to achieve the company’s goals, it is required to make use of assets that cannot be simply redeployed without incurring additional expenditures.
Using shared-control entry methods, your local partners and affiliates may be able to provide you with valuable information about your rivals, the markets in which they do business, and regulatory limitations that they face. Because the quantity of equity participation required will be smaller than the amount of capital input required, a joint venture that requires less capital input will have lower levels of risk, reward, and control than a joint venture that requires more capital input. The separation of ownership and management of the organisation also contributes to the reduction of national security risks as a consequence of the division. Occasionally, couples may find themselves in a situation where their interests alter over time, resulting in management challenges. If you’re interested in learning more about non-equity choices, have a look at this piece. Non-equity options such as franchising are examples of non-equity options in which a foreign company delivers services to the host market by entering into contracts with the host market that are not subject to the conditions of the foreign corporation’s equity investment in the host market.
In order to manage and react to ZARA’s business model’s requirement for control and flexibility, fully owned subsidiaries have always been the preferred manner of doing so, and this has always been the company’s preferred method of doing so. It is conceivable that legislative constraints, national politics, or some other element of the market will prevent them from pursuing other strategies. The organization’s major means of growth are international expansion, customer acquisition, and internal growth and development. They used a variety of ways to gain entry into the target nation, with different strategies being used based on the conditions at the time.
Getting into ZARA through greenfields is the most common and favoured method of entering the compound. If ZARA adopts this mode of business, the company’s success will be heavily reliant on the company’s ability to respond rapidly to changes in market circumstances, which is not guaranteed. The most significant advantage of this form of business is that the corporation has complete control over its operations. Retirement is more difficult than entering the stock market because of the high level of risk involved and the enormous amount of money required to do it. The strategy was used in nations such as China and India during periods of low growth and risk.
It is common for enterprises wishing to grow into areas where FDI (foreign direct investment) is not permitted, such as emerging markets, to use franchising as a strategy of entrance. When it comes to market participation, smaller markets that are less hazardous or culturally distant from the consumer are more likely to nurture it than larger, more established markets, according to the World Bank. Because of restrictions on foreign ownership in nations such as Andorra, Iceland, Poland, and countries in the Middle East, direct entry into these jurisdictions has been prohibited in these jurisdictions for some time. Franchisees in a solid financial status comprised a significant proportion of the total number of franchisees. ZARA is a part of a statewide franchise system that includes other Inditex brands, although the firm has always had the option of opening shops on its own property.
Strategy implementation
As premium retail space in city centres becomes more difficult to get, an increasing number of co-operative venture agreements are being used in more competitive and bigger markets where direct entrance would have been unthinkable due to the difficulties in obtaining premium retail space. As part of its strategy to assist both firms in growing their respective activities, ZARA has launched joint ventures with Otto Versand in Germany and Bigi in Japan. Apart from that, the founder of Otto Versand, a German catalogue juggernaut, is a well-known mall owner and successful entrepreneur. When Bigi, a Japanese textile wholesaler with extensive understanding of the Japanese real estate business, persuaded ZARA to establish a presence in the country in 1998, ZARA surpassed all other retailers in the globe in terms of sales volume and market share. Bigi’s knowledge and abilities were especially valuable in Japan, where space is at a premium and large areas are difficult to come by, notably in the building business, and where he had extensive expertise. As a result of ZARA’s acquisition of the remaining stakes in the joint ventures, they were dissolved. This was in part because of ZARA’s business model, which was difficult to execute, particularly when they had to match their needs with their partner’s in terms of strategy and control.
An organised attempt to boost the quantity of sales is being made.
When ZARA first established operations in the United States, the company’s foreign development was ethnocentric, with subsidiaries that were almost similar to the company’s locations in Spain acting as a starting point for the company’s international expansion. Taking into consideration ZARA’s global industry and product mix, the thought went, it would be logical to transfer the identical methods from Spain to other nations, which is precisely what happened.
A distinct approach, known as an ethnocentric technique, which takes into account cultural diversity across various nations, encounters unanticipated challenges during its application process. As a result of their localised concentration, ZARA is able to accept local conceptions rather than just copying those that are accessible in their home market, which is in contrast to other businesses. Despite this, ZARA maintains to supply a very homogeneous product to a worldwide market by making only minor adjustments to its entire marketing mix. It is important to consider cultural and geographic distinctions that exist across various countries and regions while designing clothing for young people. When creating clothes for children and teenagers, keep the following points in mind: As a result of cultural differences, some goods cannot be sold in Arab countries, and seasons in the southern hemisphere differ due to variations in the length of the growing season in the tropics, which causes seasonal variations throughout the year in the southern hemisphere. Some goods cannot be sold in Arab countries as a result of cultural differences, and the seasons in the southern hemisphere differ as a result of seasonal variations throughout year in the southern hemisphere. In response to the information received from ZARA’s stores all over the globe, the company’s design team is able to make items that can be sold in all of the company’s stores. According to the preferences of customers in the surrounding region, each shop owner has the authority to choose the clothing products that will be shown in his or her institution for exhibition in his or her establishment.
As a consequence of the diverse variety of civilizations represented on our planet, an ethical conundrum has arisen in relation to the ethnocentric point of view on this topic, creating an ethical dilemma. As a result, despite the modest variations in management practises between France and Spain, the company’s first shop in France had a substantial impact on the company’s operations in the years that followed, despite the tiny differences between France and Spain. It was as a result of this study that managers and workers’ interactions were examined, and these ties were then tailored to better satisfy the needs of French nationals living in the United States. Employees in France were expected to have a more formal and hierarchical relationship with their superiors than they had with their Spanish counterparts, in contrast to their prior experience. A geocentric approach might be implemented by the subsidiary while still maximising the potential of the subsidiary’s core strengths.
The pricing of the commodities was governed by the current state of the market at the time of writing this article. While the corporation was responsible for the cost of delivering the items from Spain, the cost of the products was passed on to the customer. Prices in northern European nations are 40 percent more than those in Spain, while prices in other European countries are 10 percent higher than those in Spain as compared to Spain. Prices in the Americas are 70 percent more than those in Spain, while prices in Japan are 100 percent higher than those in the country of origin. Prices for ZARA’s items are growing, and this will have an impact on the company’s worldwide image, especially in developing nations. In part due to the fact that the average income in Mexico is lower than the average income in the United States, the majority of clients in Mexico are members of the middle and higher classes. ZARA was obliged to establish itself as a high-end brand rather than a mid-market brand as a result of the misalignment in positioning.
Conclusion
In terms of product availability and advertising practises, there were only minor differences between the United States and the rest of the globe between the two countries studied. With the exception of the biennial sales seasons that were held in select regions, there were no marketing or promotional efforts carried out anyplace in the globe. According to industry estimates, the most basic designs seen at retail establishments all around the globe are the same 85 to 90 percent of the time, with some variations. Clothing has been adjusted to meet the needs of people in Japan, the southern hemisphere, and Arab countries, who need smaller sizes, a different growth season, and unique women’s wear, as a consequence of the shifting climate, temperature, and cultural environment. With growing convergence of tastes across national lines in recent years, the option to adopt a more global strategy has become more realistic. Objects that did not sell well at one location were available in another location as a consequence of the residual variation effect, which is a result of the residual variation effect.
References
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