STRATEGIC ANALYSIS REPORT FOR ZARA SA

Applied Corporate Strategy Assessment: Strategic Analysis Report for Zara SA

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Table of Contents

1. Introduction..................................................................................................................................2

2. Analysis of External Business Environment and Industry..........................................................3

2.1 Threat of New Entrants..........................................................................................................4

2.2 Threat of substitute products or services................................................................................5

2.3 Bargaining power of customers.............................................................................................5

2.4 Bargaining Power of Suppliers..............................................................................................6

2.5 Intensity of competitive rivalry..............................................................................................6

3. Analysis of resources and key competencies...............................................................................7

Strengths.......................................................................................................................................7

Weaknesses..................................................................................................................................9

Zara's VRIO Framework............................................................................................................10

Analysis of the automation strategy implemented at Zara............................................................12

Conclusion.....................................................................................................................................14

Reference List................................................................................................................................15
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1. Introduction

Among business executives and employees alike, taking advantage of external

opportunities while reducing internal weaknesses is broadly understood as a fundamental path to

competitive superiority (Tilles 2015). A most recent illustration is the strategic alignment of tech

companies during these times of uncertainty due to the COVID-19 pandemic; as businesses are

struggling to stay afloat, some companies such as Google and Twitter motivate their fatigued

employees to work from home to boost company revenues as billions of people globally are

under lockdown (BBC 2020). In line with these considerations, the key to success for any

organization is to identify and understand the issues affecting the business in order to deter

threats and capitalize on opportunities in the external environment while offsetting internal

weaknesses using strengths (Tilles 2015). This report ultimately offers decision-makers at Zara

an accessible overview of their biggest opportunities in the external environment, discussing

perspectives and trends in the fashion industry. It also provides decision-makers with an analysis

of the factors within the internal environment that is likely to boost performance and accelerate

growth.

2. Analysis of External Business Environment and Industry

Porter's Five Forces was used to examine the competitiveness of the fashion industry to establish

the performance of the industry in terms of productivity, opportunities to be seized, and the

threats to be avoided.
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2.1 Threat of New Entrants

The fashion industry is one of the profitable in the world, according to the Mckinsey

Global Fashion Index, which estimates the sector to be worth nearly $2.4 trillion as of 2017

(Amed, et al. 2017). The attractiveness of the industry makes it appealing for new entrants, yet it

is difficult for new businesses to enter the fashion market. The difficulty is due to the existence

of significant barriers to entry such as high marketing costs, the existence of stringent patents and

intellectual property rights, significant capital requirements, economies of scale possessed by

incumbents such as Zara, high switching costs to a different industry, difficulties in accessing

distribution lines, and the uphill task of establishing and maintaining customer loyalty (Amed, et

al., 2017). The low threat of new entrants is an opportunity for Zara to increase its product

offerings to its loyal customer base without fear of competition from small businesses.
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2.2 Threat of substitute products or services

Product differentiation is a widely used strategy among fashion companies as they seek to

satisfy the needs of varying customers across the world (Choi and Cheng 2015). At Zara, the

differentiation strategy is hinged on increasing the number of available styles and reducing the

quantities of the same products in the inventory (Danziger 2018). In doing so, the company is

able to obtain a differentiated product line at low costs. The existence of different products in the

same market means there is a significant threat of the existence of products outside the boundary

of common product realms. For example, Zara's Woven Cowboy Heeled mules could be

substituted with Etsy's western cowboy sandals. The high threat of substitute products is a threat

to Zara since it is forced to invest heavily in efforts to win over customers. For instance, the

company uses parts of its revenue to fund interactive customer experiences to reduce their

propensity to substitute (Danziger 2018). In this case, the company has invested significantly in

customer experience, as evidenced by the presence of augmented reality experience in stores that

allows shoppers to engage their mobile phones to see models wearing their preferred styles

(Danziger 2018).

2.3 Bargaining power of customers

There is moderate power of the bargaining power of customers in the fashion industry.

While fashion companies invest significant sums in boosting customer experience and brand

equity, customers can put the firm under pressure (Jeffrey and Evans 2011). The buyer power is

somehow high as customers have access to many alternatives due to the low switching costs,

which means that customers could buy from other companies without incurring any high costs.

For fashion companies that embrace premium pricing strategy, the bargaining power is high

among customers that are price sensitive. What's more, the ease of availability of information on
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different products and services in the fashion industry has increased the power of buyers as they

are able to compare and contrast offerings in the sector. Nonetheless, companies offset the high

bargaining power of customers in the fashion industry by implementing loyalty programs and

lowering fixed costs. Companies also reduce buyer power by offering high-quality products as

compared to competitors (Jeffrey and Evans 2011).

2.4 Bargaining Power of Suppliers

There is a significant high bargaining power of suppliers in the fashion industry. This is

because the sale of clothing and apparel products by fashion companies is dependent on the

seamless supply of raw materials, labor, and components (Australian Government 2018). The

suppliers also derive their power from the high degree of differentiation on inputs needed to

make clothing, as well as the limited supply of substitute inputs, especially labor (Weller 2007).

The high costs of labor have resulted in negative externalities whereby suppliers rely on forced

labor and employment of children in developing countries (Moulds 2020). Besides, the supply of

water in the fashion industry is a lucrative business since businesses in the sector, such as Zara,

are massive consumers of freshwater in order to make clothing products out of cotton (Ravasio

2012). The suppliers in the fashion industry have also invested significantly in their sophisticated

global distribution channel that ensures raw materials and inputs from other countries are

transformed into clothing products that are sold by fashion companies in Australia (Choi and

Cheng 2015).

2.5 Intensity of competitive rivalry

The is a high intensity of competition among existing firms in the fashion industry. This

intensive competition is a reflection of the competitiveness of the industry (Choi and Cheng

2015). Innovation is one of the factors that drive competition, as existing firms utilize the latest
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information technology advances such as machine learning, algorithms, big data, and social

media to make evidence-based decisions and influence purchasing behavior. Further, companies

in the industry have huge advertising expenses in order to win new customers and cement their

powerful competitive strategies (Choi and Cheng 2015). The superior buying power of

consumers further fuels the competition as they have access to differentiated products from other

firms. The goal for consumers in the fashion industry is to get a positive experience, and those

companies that invest in customer services are poised to win over rivals (Choi and Cheng 2015).

3. Analysis of resources and key competencies

The analysis of Zara's strengths and weaknesses will form the foundation of the internal

examination of the firm, which will culminate into a VRIO framework.

Strengths

I. Adoption of latest technologies

Technology shaped and continues to shape the fashion industry. In this case, technology

help create an interactive shopping experience; for example, augmented reality allows shops to

see how the garments would look on their body while social media is a useful source of

information on product reviews and prices of offerings (Amed et al., 2017). Zara is an adopter of

the latest technology, as evidenced by its use of disruptive technologies such as Artificial

Intelligence and social media. Zara has 38.9 million and 28.1 million fans Instagram and

Facebook, respectively, as well as an interactive website that allows for e-commerce. Lately,

Zara has partnered with local intelligence apps that switch to 'instore' when a customer enters a

store, allowing the buyer to locate products and receive offers(Dowsett, 2020). The company
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anticipates combining online sales with its large network of physical stores for purposes of

managing retail and determining which products to be sold on discounts (Dowsett, 2020).

II. Strong financial assets

Zara SA's principal owner, Inditex (the world's largest retailer), is financed by several

wealthy investors that ensure the financial stability business operations (Dowsett, 2019). The

main investor in the company, Amancio Ortega, is among the wealthiest people in Europe with a

net value of nearly $6 billion(Dowsett, 2020). The financial stability of the company is the

reason why it reported a net profit of $1.3billion out of revenues of€7 billion for the third

quarter ending December 2019 (Reuters 2020). The superior financial infrastructure is a strength

because the company is able to invest in expansion activities, motivate its workforce

extrinsically, and cushion the firm from financial shocks brought by uncertainties in the markets.

Indeed, Zara's owners wrote off nearly €300m in inventory as a response measure to the COVID-

19 pandemic that has forced the retailer to close half of its stores (Dombey 2020).

III. Fast Fashion Approach

Zara's other source of competitive advantage is shortened production lead time. The

company embraces a fast fashion business model whereby it sells it serves market segments that

are interested in trendy clothing. This explains why the company sets shops in high-street retail

areas in major metropolis whereby customers are highly likely to gain access to rapid and

accurate information on the latest trends in the fashion industry. Through its efficient distribution

system, the company is able to achieve quick product delivery that is still fashionable (Jeffrey

and Evans 2011). The use of a fast-fashion model is a strength as the company is able to gain
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competitive advantage and increase sales by reducing inventory and increasing the variety of

turnover products (Choi and Cheng 2015).

Weaknesses

I. Less aggressive on marketing

Excellent marketing efforts is key to the survivability of fashion companies (Tilles 2015).

However, Zara has embraced less aggressive marketing such that promotional messages

are occasionally showcased to the target audience. Instead of using advertising to push sales, the

company focuses on pulling customers through a strong recognition and excellent customer

experience (Danziger 2018). In other words, the company utilizes a pull marketing strategy that

advances the idea that customer experience matters more than the product in the mind of the

shopper. Nonetheless, lack of aggressive marketing efforts is a weakness since the company will

fail to build brand awareness in underserved markets such as those of Africa and Latin America

and also fail to improve the reputation of the business among potential customers.

II. Unmotivated workforce

A motivated workforce is a prerequisite for efficiency and productivity in a company.

However, Zara's employees' actions in recent years paint a picture of an unmotivated workforce

working in poor conditions. For instance, the company's workers in Istanbul inserted notes in

clothes complaining over sexism and poor pay (Buchanan 2017). Further, Brazilian authorities

discovered that one of Zara's suppliers is working in 'slave-like' conditions, whereby they work

16 to 19 hours per day with little time off (Clean Clothes 2020). More appallingly, the company

was accused of racial human resource management practices according to a survey by the Centre

for Popular Democracy, an economic, racial, and labor justice group. As found out in the
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survey, darker-skinned employees were less likely to be promoted to managing roles and were

given less prestigious roles (Popular Democracy 2020).

III. Reliance on vertical integration

Zara is a vertically integrated organization whereby the headquarters has control over

nearly all aspects of production and distribution (Polese, Tartaglione and Sarno 2009). As an

example, while most companies outsource labor or production of clothing products, Zara owns

several textile dye houses that facilitate the production of the final products (Polese, Tartaglione

and Sarno 2009). While vertical integration accords the company with much-needed stability

when managing the supply chain, it reduces flexibility. The company has few choices in the

supply chain hence could not be flexible. Additionally, vertical integrations demand high

economies of scale, making it an expensive venture for Zara. The company invests in building

new production facilities, understanding new processes, and hiring of staff.

Zara's VRIO Framework

Based on the resource-based view (RBV), resources that are valuable, rare, and

inimitable are sources of competitive advantage (Cardeal and António 2012). The VRIO

framework for Zara is summarized in the table below:

RESOURCE VALUABLE RARE INIMITABLE ORGANIZED

Financial Yes- It enables No- Zara's competitors Yes- Companies Yes- The company

Resources Zara to exploit in the global fashion face a costly has a finance

opportunities industry have access to disadvantage department tasked

in the external various sources of when seeking to with exploiting the

environment, financing, including increase their full potential of

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such as loans, and private and financial financial resources.

expansion into public investments. superiority

new markets

and to hire

talented

employees.

Latest Yes- Latest No- Most of Zara's Yes- Companies Yes- The firm has a

technologies technologies competitors are capital in the fashion fully functional IT

do not come intensive and have industry without department tasked

cheap, and acquired the latest adequate financial with the management

Zara has technologies too. resources face a of IT infrastructure

invested disadvantage in

significantly to acquiring the

acquire and latest

exploit technologies such

emerging as artificial

technologies intelligence.

making IT

valuable

resource

Fast fashion No- While fast No- Many companies No- It is not Yes- Zara is located

approach fashion is a have embraced the fast expensive to enter strategically in cities

source of fashion trend in an the fast fashion where informed

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competitive attempt to capitalize on industry as it is customers interested

advantage, it is opportunities offered cost-friendly. in the latest fashions

not valuable as by the trend. are located.

they are

largely

focused on

imitating

original

products,

which

increases

reputational

risks.

Analysis of the automation strategy implemented at Zara

In 2018, Zara's top leadership announced the company has embarked on a full automation

strategy whereby it will use robots to replace human resources used in searching for orders and

dropping them to customers (Anderson 2018). The implementation of the strategy came in the

wake of the realization that Zara customers prefer ordering online before heading to the store to

pick their purchase. Therefore, in order to reduce wait times and boost customer shopping

experience, the company embarked on automation to make it easy for customers to retrieve their

goods (Anderson 2018). Furthermore, the desire for automation stems from the fact that
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competition in the fashion industry has become more intense as notable competitors such as Gap

and J. C Penney have implemented automation to develop faster supply chains (Anderson 2018).

The SAFe criteria will be used to determine the influence of the automation strategy in

the operations of Zara. SAFe is an acronym for suitability, acceptability, and feasibility (Tilles

2015). The dimension of suitability is concerned with whether a strategy addresses key issues

that are related to the strategic position of the company. Accordingly, the automation software is

suitable as it seeks to exploit the opportunities in the environment and mitigate the threats. The

five forces analysis revealed that buyer power is moderately high in the fashion industry, and

Zara could use the automation strategy to reduce buyer power, whereby it enhances customer

experience so that they become loyal and buy products from Zara and its affiliates only.

Additionally, the internal analysis confirmed that Zara has superior technological capabilities as

evidenced by its acquisition of some disruptive technologies; hence the automation strategy

places the company in a position to capitalize on this strength to remedy the weakness of low

employee morale and inadequate aggression in marketing efforts.

The acceptability criteria encompass the expected performance outcomes of a strategy

and how it meets the expectations of vital stakeholders. Three aspects of acceptability include

risk, return, and reactions of stakeholders (Tilles 2015). The automation strategy implemented at

Zara has resulted in an increase in profitability as the company recorded high financial returns on

investments in major projects as of 2019 (Reuters 2020). The increase in profitability translates

to an increase in shareholder value as the robustness of the automation strategy increased

liquidity and dividends paid to Zara's investors (Reuters 2020). Finally, the feasibility aspect is

concerned with the deployment of resources for the purposes of the business competing

successfully. Already, Zara has deployed several automation software that uses machine learning
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and augmented reality to not only boost customer experience but also improve the efficiency of

service delivery (Anderson 2018).

Conclusion

The report examined the macroeconomic environment of the fashion industry with a

focus on the micro-environment of Zara SA. The macro-environment analysis was studied based

on porter's five forces, which examined the attractiveness of the industry. The analysis of

strengths and weaknesses revealed the resources that the company could utilize to take advantage

of the opportunities available in the external environment. It was found out that buyers and

suppliers in the fashion industry have considerable power, resulting in intense competitive

rivalry among existing firms. Zara attempts to minimize the buyer power and increase its

competitive advantage by using an automation strategy aimed at leveraging the power of

disruptive technologies such as augmented reality and social media to boost the customer

experience as they shop.

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