Introduction
Global Strategy and sustainability are actions that a company takes to increase their influence on the environment and community (Olawumi and Chan, 2018). Sustainable strategies aim to critically understand the behaviours, theories, processes and forces that affect all organisations’ environment and social sustainability. The present report is about Zara, the largest international fashion brand; it specialises in fast fashion, selling accessories, clothes, shoes, perfumes and beauty products and started in 1075 in Spain. Zara has more than 3000 stores in 96 countries. This report covers the external and internal analysis of the Company along with the critical evaluation of the Global Strategy and the corporate of the Company.
TASK-1
External Analysis- Macro environment
Porter’s Five Forces-
Porter’s Five Forces Analysis comprises of Company’s economical background and tells the factors affecting it. It also helps to analyze its present position in the market (Gheorghe and Matefi, 2021). Zara’s Porter’s Five Forces are as follows-
The threat of New Entrants– Zara faces an external threat of new entrants because of company customers’ eccentric strategies, product differentiation, brand establishment and economics of scale. It is difficult for the new entrants as Zara’s economics of scale is a significant barrier for others. That helps the Company to reduce the overall cost of production. It provides its customer with quick access to the fashion brand at an affordable price, which earns them loyalty. There is a low switching cost, which makes the brand different and new entrants mark themselves as unique and different (Konstantinidis et. al. 2021). And because of the global presence with massive investment in branding, distribution, marketing and supply chain, new entrants need help to survive.
The threat of Substitutes– In different companies, there is a vast difference in the pricing, product, and quality, for which the product substitution is high. Still, as far as clothing is concerned, there is hardly any substitute. Zara has a low threat of substitutes, whereas different collections can also be treated as substitutes where people use the same clothes in different seasons.
Bargaining Power of Customers– The bargaining power of the customers is moderate in Zara, as the customers indirectly bargain by forcing Zara and its competitors to retain and attract its buyers. As the buyers are not concentrated in a specific market, there are varying levels of bargaining (Yin, 2022). Switching off the customers is low, so it pressures the Company to stay relevant and simultaneously satisfy its customers. It has also introduced a vertical integration tactic in its supply chain model to give new fashion to its customers for their satisfaction.
Bargaining Power of Suppliers– Zara is known for outsourcing its production to Morocco, Portugal, Bangladesh and some others, so the bargaining power of the suppliers is low in Zara. Like Zara, many other apparel companies control the prices. Hence, the suppliers make a small profit. Suppliers’ threat of forward integration could be much higher as it requires considerable investment. The brand can substitute and swap other suppliers as it has purchasing power at a reasonable cost (Saraswat, 2018). It also has in-house production, which has reduced the dependency on suppliers.
Competitive Rivalry– the Company faces intense competition from other big fashion retailers like H&M, Mango, GAP and others, making the industry price sensitive and highly competitive. Zara’s loyal customers and its latest product offerings have helped it compete with others in the market. With the fashion industry growing by leap and bond, the average value will be $1 trillion in 2025. But the competition is cutthroat, and the competitors have their brand value proportion (Lanzolla and Markides, 2021). The things favouring Zara are innovation, exclusive products, a customer-centric approach, an efficient supply chain and sustainability strategies.
Figure 1: Porter’s Five Forces
(Sources: Porter’s Five Forces Analysis: Definition, Model & Examples Explained, 2023).
Pestle Analysis
Zara is one of the fast-growing fashion brands in the world, it started in Spain, and now it has more than 10,000 stores worldwide. Many external and internal issues are directly and indirectly making an impact on the business. In Pestle Analysis of Zara, the reports take an understanding of the market through the Economic, Technological, Political, Sociocultural and Environmental lenses; they are discussed below:
Political– As a Spanish brand, Zara takes all the benefits of a business operating out of the European Union (Cao et. al. 2018). One of the most noteworthy positive aspects of running a company in the EU is its wide-ranging trade agreement. And it makes it easier to import, and export products and raw materials with the European Union, and Zara can also send its products to the whole world at a low cost and with minimum effort. As Zara is escalating its business in other nations, it has to consider the administrative guidelines of those countries. Like in China and India, it has become problematic due to red tapism. Again, any radical disruption in its neighbouring countries disrupts the supply chain and affects the business.
Economic– Spain has recorded the highest unemployment in Europe, which means that the cost of labor is low, in comparison to other western European countries like UK, France and Germany (Jha and Veeramani, 2021). The Company manufactures some of its products in Spain because of low labour costs, which helps the Company keep its rates low and improve its profitability. Therefore, the standard price in Spain is good for the Company. As Zara operates its brand worldwide, the global economy plays an essential role in its growth. The slowdown in the worldwide economy can harm the business of Zara. As the world is facing financial problems with a high inflation rate and less money in the hands of the customers, it negatively impacts the Company’s revenue. These economic conditions limit the growth of the brand as a whole.
Sociocultural– Certain sociocultural factors impact the business of Zara like the brand has to be aware of the communities or regions they serve, so it has to be affordable in the price of the products in high demand (López, 2022). Online shopping has become the latest trend, so it has done an excellent logistic process to satisfy its customers. The Company should also target the communities and different groups searching for new fashionable clothes and accessories.
Technological– Zara is one of the few brands that has used technology to expand its global reach. As a famous brand, it has the audience and the money to operate the consumer data to the maximum. So, looking at the big data and analysing the vast data available, Zara finds better methods to reach its customers. Using both online and in-person touch-points, a challenging task, Zara has successfully had to pull off the data analysis.
Legal– Though Zara operates within the law of the land, copyright is the scariest legal problem that all fashion brands have to face (Viardot and Nylund, 2017). As Zara loves to bring new, affordable trends, it is evident that it runs into copyright issues. The Company is often accused of copying designs and concepts from Adidas and Balenciaga, but it has always taken itself out of these legal cases.
Environmental– The Company is always in the news for its wastefulness, and many of its products are not designed to last as they are more concerned with bringing out affordable clothes which look fashionable. Customers who want fast fashion jump on trends, throw away old clothes and like to wear what is in style. But with the customers becoming more eco-friendly hurts the brand. It has begun to think about sustainability more seriously and has opened a pledge on its website (Dominguez, 2021). It has shared its commitment to climate change, animal welfare, water and energy change, biodiversity, and sustainable materials.
As a big brand, it creates fashionable products at affordable prices. The availability of low-cost labour has ensured good revenue for its shareholders and the Company. Zara is maturely handling the legal environment.
SWOT Analysis
Through SWOT Analysis, the report will give an understanding of the Company’s Strengths, Weaknesses, Threats and Opportunities. They are discussed below:
Strengths– Zara has the most advanced strategic practices in the supply chain, which makes it possible to design, produce and sell as quickly as 3 weeks. It has got 96 outlets in 202 countries worldwide (Duoyan, 2021). And it has stores in 2249 locations, which makes it the second-largest fashion retail store after Nike. The Company has invested $ 3 billion to boost its online business, and in 2022, it generated a quarter of its income from online sales.
Weaknesses– Every three weeks, Zara revises its collection; this dedication has earned it a top position in the fashion industry. Sustainability in instant fashion is an issue with the brand, which is becoming popular with policymakers and buyers.
Opportunities– Zara can focus on fashion trends; customers visit Zara stores 17 times a year, so the brand is quick to deliver the latest trend in the store, and it has to keep up this cycle in future (Ly, 2021). Zara should use technologies, and by collecting data and segmenting its clients, it should provide customised recommendations.
Threats– The competition in the apparel industry is the main threat for Zara, with the price war in the fast-fashion sector, which offers new trends at low cost, as the main issue. After the pandemic, there was a 44% decrease in revenue, and only 3 out of 13 factories were operational during the lockdown, which affected the income and sales of the brand.
VRIO Model
The VRIO Analysis of Zara analyses the internal resources individually to know whether it provides a sustainable competitive advantage over other companies (Lee, 2019). It also explains how internal resources can be improved for a competitive edge. And most importantly, it also summarised it has a new competitive advantage, temporary advantage, and competitive disadvantage. The VRIO Analysis is discussed below:
Valuable– This analysis shows the economic assets of Zara, which are extremely valuable, and it helps in financing when occasions arise externally. It also helps to face external threats. As per the analysis, local food products are a valuable resource as they are highly differentiated (Anwar, 2017). Zara employees are also a valuable resource to its Company and are highly trained, which leads to high production; its patents are also conceived as helpful as it allows the organisation to sell the products without the interference of the competitors.
Rare– In the VRIO analysis, Zara’s financial resources are rare, but its local food products are not rare, according to the findings. The employees are also rare as they are highly trained, unlike competing companies. So a better work environment and compensation ensure they don’t switch jobs (Zara et. al. 2022). Zara’s patents are rare as they are not easily accessible and its competitors don’t have it.
Imitable– As per the VRIO analysis, the economical assets of Zara are expensive to imitate, and the Company has gathered its wealth after a lengthy profit over many years. Competitors and new competitors need the same earnings for a long time to gather such financial assets. Their local food products are also very expensive to imitate. It can be learned if its competitors invest considerable amounts in its R&D. So, this competitive advantage is temporary, and Zara’s opponents can have in future (Wang, 2018). Its workers are relatively inexpensive to imitate because other companies can give training to their staff also, to improve their abilities, by offering them reasonable compensation good environment to work, and growth opportunities.
Organization– The economic assets of Zara are much organized to seize the value as acknowledged by VRIO Analysis. The finances are invested strategically using the prospects and fighting the threats. This analysis has proved competitive advantage has sustained for Zara. The patents are also well organized, as shown by the VRIO Analysis, which shows the organization is the patents need to be utilized more (Allam et. al. 2020). So, a competitive advantage is present, which can be changed to a sustainable advantage if Zara sells its patented products before it expires.
The critical factors emerging from the analysis
The three main factors which have emerged from all the analysis are that the essential values of Zara are beauty, sustainability, functionality and clarity.
- Customer’s co-creation– the core of the success of Zara is the relentless focus on its customers.
- Super-efficient supply chain– It has a highly responsive vertically integrated supply chain that exports its products throughout the year and ships new products every two weeks (Aftab al.2018).
- Sustainability at the core of operation– To win over the customers, the Company has maintained its sustainability, keeping hygienic factors in mind and taking measures to protect biodiversity and reduce water and energy consumption.
A current source of competitive advantage
The present source of competitive advantage of Zara are:
- Pricing strategy– Zara offers quality high-end fashion products at an affordable price.
- Quality products– The products are made from a good and sustainable fabric.
- International expansion– Global presence of Zara is a significant advantage well as its online stores.
- Fast Fashion model– This is a substantial advantage for Zara, the fashion changes after Zara, and hence the brand keeps its customers engaged (Periwal al.2018).
TASK-2
Critical Evaluation of Global Strategy in Zara (UPPSALA MODEL)
To maintain a competitive advantage in the business, Zara has adopted Uppsala Internationalization Model. It enters the foreign market step by step, as the model is based on four concepts commitment decisions, market commitment, market knowledge and current activities. These four concepts are divided into change and state aspects. The two change aspects are everyday obligation decisions and recent actions, and the state aspects are related to market commitments like the assets dedicated to the market knowledge and foreign markets (Carr, 2020). Uppsala Model of Zara has four diverse steps to enter an international call:
- No regular export activities (sporadic export)
- Export via an independent representative (export mode)
- Establishment of a foreign sales subsidiary
- Foreign production/manufacturing
With the knowledge of the market and having control over the resources, they expand to more distant markets (by the distance, it means cultural as well as political, language and geographical). Following the Uppsala model, Zara first entered those markets which are geographically close before going to distant markets. It also expanded its stores internationally but controlled a large part of its supply chain. Zara focuses on speed through management to achieve success. It also uses joint ventures and franchising in countries with legal and administrative barriers. But it has its limitations (Xuejie et. al. 2019). Like the Uppsala, the model needs to include some aspects of organisational learning, affecting the behaviour’s accuracy. Further, it keeps the incremental and experimental behaviour in the same platform. The model also emphasises the practical knowledge for which the internationalisation process becomes very slow.
Profit and Growth of Zara
Zara owner Inditex has announced that it has made a 24% revenue growth in the first nine months of the financial year. The world’s biggest clothing store retailer and online sales increased 19% last year, more than analysts expected (Berbiche et. al. 2020). The Company’s net profit is 14.8 billion euros, up by 24.55% in the same period in 2021. Zara is already offering more options in high fashion pieces designed for special occasions and is always known for quickly delivering the latest trends to its customers.
The analysts expect that the Company will be dealing with the increase in cost in the coming months and will also be under pressure from the workers to increase their salaries. Online sales are expected to increase to 30% of the total sale by 2024; because of unique fashion trends and focus on sustainability, it can keep its loyal customers engaged and attract new ones (Camargo et. al. 2020). The Company’s internationalisation has helped the brand grow by leaps and bounds, benefitting the organisation.
Recommendation for Different Entry Strategies
To enter a new market, a company can use many strategies to enter international markets. Since many models are available to enter a new market, it depends on the Company to choose which suits its organisation. Market entry strategies can plan, distribute and deliver its products to international markets. The critical factors which affect a company like Zara should choose for global entry to the market are as follows:
- Marketing– Zara should first consider its target market and in which country, and then it can market its products to this section (Aabed, 2017).
- Sourcing– Zara should decide if it wants its own Company to produce its products, work with a manufacturer in the target country or buy from someone else.
- Control– while presenting its products in the market, Zara has to decide if it wants to enter the market independently or with a partnership with other businesses.
Entering a new market requires a lot of planning and maintenance for which Market entry Strategies are needed as they enable the Company to stay organised throughout the entry process. These strategies give the option to choose which fits its needs as every Company has their own goals and aims for entering the international markets.
TASK-3 (Corporate Strategy)
Evaluation and analysis of the supply chain
Vertical Integration– Zara has a vertically integrated business as it controls all of its warehousing, production, distribution, logistics, and design; it helps the Company to process in time and enables it to deliver the products in the stores with appropriately priced and labelled (Zhang et. al 2017). With a vertical structure, Zara can maintain a conservative approach that is optimised, and its designers can provide the latest market trends in a few weeks.
Horizontal Integration– In horizontal integration, one Company’s operations grow at an equal level in the industry. It helps the company in increasing its income and size by entering into new markets and diversifying its products. Zara does not use horizontal integration as it has its disadvantages as they go through regulatory scrutiny, consumers have fewer choices, and it destroys the value rather than creating it and is also less flexible. In horizontal integration, it merges with other companies to expand its operations, which is different from Zara’s business model.
Outsourcing– Outsourcing happens when the work is done at a low cost from outside the Company and is all about saving the production money with cheap labor (Carro-Rodríguez, 2018). Zara tries to control the whole supply chain rather than outsourcing it to China and other countries where the cost of delivery is reasonable, like most of its competitors. However, with the increase in labour wages, it is becoming more expensive to manufacture in China.
Strategic Alliance– Though Zara cuts fabric in-house, it has a strategic alliance with local cooperatives for sewing to save time for the distribution of raw materials. It also has a partnership with logistic service to deliver the products to the stores through trucks, ships or cargo jets (Hänninen and Paavola, 2021). It also uses product and service alliances where Zara used its products and services alliances where one firm license another to produce its products and jointly market them.
Recommendation to increase the profitability
Due to its policy of Zara to provide its customers with new trends within weeks in the market, the pressure is too much on the supply chain. And the clients also are concerned whether they should opt for this kind of fast-fashion clothes as there is no guarantee of sustainability. To address this concern, the brand has started a sustainable line in the name of the #joinlife label (Chunling, 2020). However, it has mastered retail sales but needs to improve in an online store or digital market. But it has taken steps to improve its technology. Using artificial intelligence, Zara has improved its technology to spot and predict its products.
Conclusion
Zara has a superior business system which helps the Company to its advantage. With the continuous growth and expansion in the international market, Zara can scale high with its unique supply chain and distribution system. Still, there are some issues with its centralised logistic system for which they might suffer a loss in future. But the Zara model works well in markets where the customers are fashion-conscious, like Italy, France, Japan and the UK.
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