How Zara used corporate business and functional strategies
Zara is a strong player in the fashion industry because of its value chain, internationalisation, and operational strategies. When a company is selecting a supply chain strategy, Porter’s value chain theory indicates that one can be a cost-strategy leader, a focus-strategy leader or a differentiation-strategy leader.
In the fashion industry, choosing a sweeping cost leadership strategy would hamper a firm’s ability to meet client needs. Zara realised this and chose a focus differentiation strategy.
It hires a team of designers who analyse market trends from the internet, campuses, discotheques as well as cat walks and then translate them into wearable garments. This clear emphasis on providing value rather than low prices is what makes the company stand out.
The organisation’s approach to internationalisation is highly strategic. According to the Uppsala model, a company internationalises by opening up a small branch in the target nation and then studies market trends in that market through the small branch.
Thereafter, the firm can continue to expand its business portfolio using the first branch as a prototype. Zara uses this approach when getting into new markets. A case in point was the firm’s entry into Paris, which anchored growth into other parts of the region.
Zara’s operational strategies are customer-driven and stem from the just-in-time model. The organisation works to ensure that it has short cycle times by selecting suppliers who are close to their consumers.
The company produces highly specialised products in-house then outsources the standardised ones. Therefore, its vertically integrated supply chain, in certain respects, has helped in meeting customer needs more efficiently.
Two competitors
One of Zara’s chief competitors is The Gap. The main advantage of choosing casual wear as its core product, at the beginning, was its identification with the masses. Most of the general American public would quickly identify with this choice of products rather than high fashion.
To some consumers, Zara might not be as unpretentiousness as The Gap. Outsourcing a large part of the supply chain caused The Gap to dwell on retail, which is the part that directly deals with consumers. It could analyse new trends, know about consumer preferences and study buying patterns more easily than Zara.
On the other hand, the internationalisation strategy adopted by The Gap was not as smart as Zara’s. The company downplayed the importance of price pressures in select markets and thus ended up struggling. Furthermore, although the company had outsourced its supply chains, it did not consider the location and coordination needs of target firms.
Therefore, cycle times became too long, and the firm lost a large portion of its market share in those international markets. Lastly, if a company started out in the low-end of the market, changing its strategy to become more fashion-driven may confound the company’s image and thus cause buyers to look elsewhere; this is what happened to the Gap within the US market.
The second competitor in this market is H&M. The company differed from Zara because of its choice of supply-chain partners. Although the company outsourced most production to European partners, it had longer lead times than Zara’s.
H&M entered new international markets in a more focused way than Zara. The company appears to have perfected its merchandising and marketing strategies because it uses pricing discounts, extensive advertising and single-format stores.
Zara has a disjointed marketing plan that may be hurting its bottom line. The company’s cost-cutting measures are also worth noting since it has fewer designers than Zara even though their sizes dictate otherwise.
McKinsey’s 7 model
McKinsey’s model encompasses a firm’s strategy structure, systems, shared values, style, staff and skills. The company’s business strategy is to meet consumers’ fashion needs at local and international levels, through excellent product-types and prices.
Members make decisions in a manner that allows the company to know what buyers want and thus meet their needs as soon as they arise. With regard to structure, the organisation has a matrix structure in which its separate business units operate independently.
Corporate managers only dwell on strategic aspects of business with no emphasis on operations. Furthermore, branch managers run each store as though it is their personal business.
This has assisted the company in coping with seasonal changes in market trends as the fashion world is quite dynamic. A top-down structure would cause the company to respond too slowly to these occurrences.
The corporation bases its business systems on the just-in-time model. It has vertically integrated its operations in order to accommodate fluctuations in demand efficiently. Furthermore, the company has adjusted its distribution methods so as to inculcate changes in market trends.
Now the firm delivers products from the distribution centre by time zone in order to adjust for new changes in routes. All business units across the firm believe in the same value of meeting consumer needs in an operationally efficient manner.
The leadership style is highly participatory; its store managers often give their own insights about the market. Furthermore, the firm’s CEO often has lunch in the company’s diner and listens to his employees. This company values its staff since it always promotes in-house and has a relatively low staff turnover.
Furthermore, because it uses an incentive-based system to compensate its store managers, then most of them try to work hard in order to make more money. Lastly, the company develops the skills of new recruits through a thorough in-house training program. Managers also go for training retreats where they bond and learn from one another.
Zara’s approach to market selection
Market selection occurs through a rigorous analytical approach. The company selects a country or area that is as a similar to the home market (Spain) as possible. Furthermore, those ones that are easy to enter, in terms of trade barriers get greater precedence.
Additionally, the company focuses on the profitability of the market before selecting it. For instance, it will use market prices, shipment costs and other operational expenses to forecast potential profit margins in the country and then decide whether the market is feasible.
However, in certain circumstances, Zara may simply enter a country because of some long-term strategic benefits, such as the case of Greece and its real-estate advantages.
As hinted earlier, Zara uses the Uppsala approach to internationalisation. The company opts to open a flagship store in a target country then uses it as a basis to study the market before opening up other branches.
In other words, the level of commitment in a country increases with time. This method has worked well for the organisation because it now has branches in over 32 countries.
As firms grow, they often choose to get into markets that are not as strategically aligned to their objectives as initial markets were. Currently, Zara has penetrated into several European markets.
It may choose to enter other countries merely to meet its international expansion strategy of penetrating the entire European continent. However, this will depend on the nation’s profitability as well as the market characteristics of the chosen location.