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Zara Company’s Competitive Edge and Entry into Japan Case Study

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Updated: Aug 30th, 2021

How Zara used corporate, business and functional strategies to improve its competitive position within the industry

Zara gained competitive advantage in a highly competitive and evolving fashion retail industry through a quick time production cycle. This allows Zara to differentiate its products from the other competitors and cater to a wider preference of the customers. On applying Porter’s generic strategy model, it is observed that Zara adopted differentiation as a generic strategy to gain competitive advantage. The first level of differentiation adopted by Zara was in its production process.

Quick production time helped Zara to address the demand of the supply chain within a very short period (two to four weeks) of time while competitors took at least six months. The reason for such prompt response to the supply chain demands were its internal production system and close suppliers mostly in Europe. All the suppliers supplied the finished items to the central distribution from where the products were directly shipped to the stores eliminating the need for warehouses.

The most important strategic advantage of Zara in order to be cost effective is its differentiated model of production wherein not all the production is outsourced to external vendors. For instance, highly fashionable items are risky and therefore, are made in-house while the regular standard items are price sensitive and therefore, are produced in Asia where production cost is 20 to 30 percent less than that in Europe.

The other differentiation strategy adopted by Zara was creating a sense of scarcity with its products and its non-presence in fashion shows where fashion retails usually display their products. On the other hand, Zara’s products are first available in their stores. Therefore, Zara has gained competitive advantage over its competitors by adopting differentiation strategy in production process, distribution, retailing, and product design.

Zara’s competitors and their key strategies different to Zara’s

Two major competitors of Zara are Benetton and Hennes and Mauritz (H&M). Unlike Zara, H&M outsources all its productions to mostly European suppliers. Though close to home suppliers help in reducing production cycle time, it is not comparable to that of Zara. Benetton too outsources its production process to subcontractors. H&M expanded its geographical market expansion 10 years before Zara. H&M has a distribution center in each country where it operates.

Unlike Zara, H&M follows a single format and their product prices are slightly less than those of Zara. H&M and Benetton follows intensive advertising strategy and have fewer designers (almost 60 percent fewer). Benetton sells its products not through company owned retail stores as did Zara but through franchising and subletting to small entrepreneurs. Both H&M and Benetton have fewer designers than Zara and also had less designs offered annually. Zara offered close to 11000 designs and catered to a wide variety of trend and market preference but H&M, Benetton created very few designs per annum, and their operations were much smaller than that of Zara.

Benetton invests heavily in some of its production process such as dyeing as its core marketing strategy is based on colors but has almost no investment in the downstream supply chain. However, their investments are not at par with Zara that invested widely to engage a large number of operations. Benetton heavily depended on forward booking of their products in order to produce while Zara takes a more aggressive approach wherein its designers follow trend and its changes and based on their research they create design fit for the season. Advertising is important for both H&M and Benetton and both retailers heavily invest on advertising and fashion shows while Zara’s promotion is mostly store based.

Some advantages of the strategies employed by H&M are its decentralized distribution system that allows it to be more efficient and provides economies of scale. Further, outsourcing of production process allows it to concentrate more on its core area i.e. designing and retailing. Further heavy advertising done by Benetton allows it to be positioned as a high-end fashion brand and availability through franchisees ensure wider reach.

PESTLE analysis of the Japanese market where Zara entered

Market entry decision by Zara is based on initial macro market analysis of a country. Therefore, to enter in an Asia market, Zara would study the country as a whole. For instance, in order to enter the Japanese market, Zara would study the macro environment in the country that would affect its operations and expansion in the country. A PESTLE similar to that of Zara is done in order to demonstrate how country analysis is done.

Japan has a democratic form of government. The political system is a parliamentary form of government with constitutional monarchy. The legal system is based on the German model and has influences from Anglo-American and Japanese traditions. The economic environment is Japan is very attractive. Japan is world’s third largest economy and had showed remarkable growth in the twentieth century. The economy enjoys a good level of economic freedom and there is relatively low level of corruption in the country. GDP of Japan experienced an increase in 2009 by 4.5 percent.

The retail trade in the country experienced an increase in value added and is one of the top sectors of economy. The social environment in Japan is in transition with an amalgamation of traditionalist and the modern new generation. The youth of Japan are highly influenced by the western traditions and culture, and therefore, offers a hot spot for attracting customers for a high-end fashion brand.

Technology advancement has been the basis of Japanese economy and the country is highly developed in technology and information systems. Communication and transportation is the country is highly developed. Legal environment in the country is well formed and there is low level of corruption. Overall environment of the country is good with low unemployment rate of 5.1 percent and inflation of -0.7 percent. Japan, through a Pestle analysis, shows a definitively good market to enter from the point of view of market expansion for a fashion brand like Zara.

The Key Success Factors Zara used to enhance its competitive positioning

The key success factors of Zara are its production process, market expansion strategy, and large number of designs. The first success factor of Zara that helps it to adopt a differentiation generic strategy is its unique production facility. Zara, unlike its competitors, believes in in-house production system. This provides the company with two advantages – first, it reduces production cycles and second, reduces cost of production. Zara has large number in-house designers, (almost 60 percent more than its closest competitor H&M), that allows it to design products quicker and create products at faster interval. A new product takes at least six months to be launched by competitors who rely on outsources model of production while Zara can do it within 2 months.

This huge gap in the production cycle helps Zara to refurbish its retail outlets at shorter period. Moreover, the competitors create their season line and no production for that season is created during the commencement of the season. However, Zara continues production of the line based on the demand of the design. This enables the company to cater to a larger market demand at a shorter period.

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IvyPanda. (2021) 'Zara Company's Competitive Edge and Entry into Japan'. 30 August.

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