Strategic Perspectives

Executive summary

Since 2008, a number of human rights issues such as poor working conditions and mishandling/abuse of staff have become a great concern for Zara resulting in PR crises. This report identifies and critically analyses Zara’s stakeholder issues employing key concepts such as the stakeholder theory, organizational ethics, CSR concepts and reputation management concepts. It proposes better handling of ethical and governance issues and their institution in the organization’s corporate culture.

This report also evaluates Zara’s levels of strategy focusing at two levels; the business and corporate level. Corporate strategy entails the pursuit of three generic strategies towards competitive advantage including cost leadership, differentiation, or a focus on either of the two. Zara is identified to pursue a hybrid strategy simultaneously pursuing both cost leadership and differentiation in its numerous strategic choices. With regard to corporate level strategy which focuses on the organization’s overall scope, Zara has adopted a growth strategy pursuing vertical integration, market development, market penetration and product development strategies in its endeavour to sustain its growth and strategic positioning.

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This report concludes by evaluating the various strategies it suggests for their sustainability, acceptability and feasibility and therefore potential benefit to the company and capacity for implementation.

Issues affecting the image of the company

A number of issues have impacted Zara since 2008 resulting to what can be referred to as PR crises which have become a great concern for the company in its strategic positioning as it looks forward into the future (Inditex, 2013). This report employs a critical application of organizational ethics theory, CSR concepts, stakeholder applications and reputations management concepts in the identification and analysis of these stakeholder issues. These concepts are however limited by their lack of clear and decisive methods through they can be utilized effectively to develop standards (Dricscoll and Hoffman, 2002).

Notable among the crises was the human rights concerns with regard to Zara’s operations in 2011 and testimonies by Zara staff of abuse and terror meted against them later in 2012. In the former instance, the company was accused of employing suppliers in its outsourced production strategy who were running sweat shops, an accusation which subsequently led to the closure of one of its factories over poor labour conditions. The company agreed to these accusations taking the position that the misdeeds pointed out amounted to a serious breach to its code of conduct (Inditex, 2013; Economist, 2012). In the latter instance, testimonies and claims of abuse and terror meted on 25 of Zara’s employees, including store managers and staff, were aired in the media. The company undertook to regularize such situations through the enhancement of supervision of the production systems of its entire network of suppliers.

Stakeholder theory

The Stakeholder theory states that, without regard to the fact that some stakeholders would make more contributions to the organization, all stakeholders are entitled to equal treatment. Stakeholders include individuals, organizations or groups that have legitimate interest in the business and who therefore affect or are affected by its actions (Nordberg, 2011). With crises and concerns over abuses of human rights, Zara’s corporate reputation and brand equity was hard hit giving it the image of a business entity which neither places sufficient importance to the needs of its stakeholders nor regard to them. With the interdependence between the company and its stakeholders, it is essential for an organization, in the recognition of the needs of its stakeholders, to act and reason rationally as well as to make ethical responses. The organization’s leadership is required to have the desire, will and the skill that will ensure that all stakeholders are treated with respect and their voices heard.

Corporate social responsibility

Among the ways in which corporate entities may shore up their reputation and image as perceived by its stakeholders is through conformance and adherence to ethical principles (Dricscoll and Hoffman, 2002). A notable avenue is the pursuit of Corporate Social Responsibility (CSR) which is a mechanism integrated into business processes and an organization’s business model that ensures that ethical principles and provisions in law are complied with and monitored. It entails the deliberate attempts by an organization to do good as a corporate citizen in reciprocation of goodwill it enjoys from society. For success in ensuring adherence to ethical principles and in the endeavour to build up its corporate image and reputation, Zara needs to institute mechanisms towards CSR that would also serve to guide its mission towards a better relationship with its stakeholders, outline its stand on such issues and as well clearly indicate the promises it intends to uphold for society as an entity obtaining its sustenance within society.

Organizational ethics

Organizational ethics is a concept that expresses the values of an organization to its stakeholders (Dricscoll and Hoffman, 2002). It includes written codes of ethics or standards such as Zara’s “Code of Conduct for External Manufacturers and Workshops of Inditex” which it claims to have had (Inditex, 2013); systems of reporting which are guarded with confidentiality; as well as ethics training and advice (Buelens, et al., 2011). Despite its claims of written codes of conduct, it is evident that they were not complied with, respected and adhered to. For its success in entrenching organizational ethics, Zara should endeavour to institute elaborate systems traversing the entire organization and its partners that enable the maintenance of requisite ethical standards.

Zara’s levels of strategy

Business level strategy of Zara

The primary aim of a business in the competitive business environment, underpinning its goals and objectives of sustenance and growth, is to develop an edge over rival firms building on its resources and competencies.

Porter fronts three generic strategies which a company can employ in its pursuit of competitive advantage over its rivals. They include cost leadership, in which a company seeks to offer similar value with a lower price; differentiation, achieved by a company when it offers benefits different from and of more value than those of its competitors; and, focus on either of the two. A company can pursue a hybrid of both strategies simultaneously, achieving differentiation and a price lower than its rivals.

Zara pursues a hybrid strategy seeking to exploit both cost leadership and differentiation strategies. Its closest and most comparable rivals challenging its market presence and competitive advantage include Gap, H&M and Benetton though Zara sits closest with H&M in the more fashionable and less priced segment. Zara is however considered to be more fashionable among the three, a position the company intends to sustain and exploit.

Its strategic venture into the low-cost segment through its Lefties brand of stores illustrates its pursuit of a clear cost leadership strategy enabling Zara to tap into lower market segments meeting the need of customers in the current harsh economic times (Inditex, 2013). This ensures that the company is still better placed to sustain its growth and profits even with unfavourable shifts in the economy and consumer spending. However, Zara primarily pursues a differentiation strategy through significant focus on competitive strategies that enhance overall efficiency in its entire value chain.

Zara’s value chain, which is often tweaked to enhance efficiency and performance, is a major platform upon which the company derives its differentiation from rivals. Enhanced efficiency is enabled by vertical integration and therefore control of crucial processes; employment of technology to coordinate suppliers, production and distribution processes; outsourcing of intensive tasks; as well as its finely-tuned logistics and just-in-time manufacturing strategy which shorten response time and enable the achievement of greater flexibility in variety, frequency and amount of new styles produced.

The constant refinement of operations in pursuit of continuous efficiency gains including leveraging on technology to enhance crucial production processes has enabled the company to reverse the trend of costs rising faster than revenues. Enhanced efficiency and attendant effectiveness lead to the minimization of costly errors, reduction in costs which consequently enables the enhancement of bottom line and price. Zara also derives its differentiation from its effective market intelligence and focus on continuous awareness and understanding of the customer. Customer feedback through personalized ‘word-of-mouth’ interactions with staff at store level used to assess their preferences and wants is used to guide design and development, as well as other essential improvements. Unlike its competitor’s reliance on electronic consumer data, this has enabled quick turnaround of merchandise through quicker replenishment of popular items and removal of slow-selling lines enabling Zara to generate more cash, reduce inventory and eliminate the need for significant debt on held inventories which has a direct impact on costs.

These strategies and the resultant efficiency have enabled the company to achieve enhanced return visits by customers far greater than the industry average on several indices, a significant competitive advantage. They have also enabled Zara to incur significantly less expenditure on advertising with the saved revenue being redeployed to enhance competitive advantage.

Corporate level strategy

Corporate level strategy as the highest level of strategy in an organization is concerned with the overall scope, seeking to add value to constituent businesses/ elements within the entire organization.

In its pursuit of competitive advantage in the hostile business environment characterized by intense competition and economic challenges, Zara has adopted a growth focus in its corporate strategy. This is evidenced by its pursuit of vertical integration, market penetration, market development and product development strategies in an attempt to sustain its growth and strategic positioning in the fashion industry. Guiding these strategic decisions and particular choices, the Ansoff matrix highlights scenarios in consideration of the existence or newness of products or markets.

Market penetration and market development

Zara is hindered by constraints resultant from its Spain-centred model, a major weakness in its endeavour to sustain growth and to maintain its strategic positioning (BloombergBusinessweek, 2009; Economist, 2012). An outward focus towards market development is essential. This has necessitated international expansion and the exploitation of untapped markets including North and South America, Asia, Middle East, Africa and the rest of Europe, particularly Italy. Enabled by the construction of additional distribution facilities in Zaragoza, Spain and in South America, as well as the upward scaling of its logistics processes to enable the realization of economies of scale in the strategic expansion, the company has spread out into Asia, America, Australia, India and Africa.

The company has also sought to achieve market penetration in its development of virtual stores, tapping into the opportunities in internet retailing and marketing through online stores and boutiques. Available in ten countries and seeking entry into the USA and Korea, the company has since 2010 sought to exploit this model venturing into this field.

Product development

For a company to survive and grow in the fast changing fashion industry, it is essential that a business keenly enhances product development, matching or beating its rivals in output and production of new items. Zara has endeavoured to maximize its throughput of new items keeping merchandise in stores always new and fresh. This frequency, enabled by just-in-time manufacturing and focus on limited runs, also ensures that products do not stay long enough risking replication or imitation. The active pursuit of market intelligence and awareness and appreciation of customer preference ensures that the company does not become complacent and unresponsive thereby losing its track in the fast changing and intensely competitive industry.

Vertical integration

To enhance control of the entire business and its processes, achieve stability of production and thereby strengthen its competitive position, Zara has pursued vertical integration strategies. These include forward integration through the investment in distribution facilities and specialty stores, as well as backward into production and manufacturing facilities. Zara has also developed subsidiaries that manage its purchases of fabric and dyes. The company has undertaken this strategy in an endeavour to minimize its exposure to expensive distributors and suppliers and the inefficiency attendant to the lack of complete control of especially crucial processes.

Recommendations

Zara in its performance and strategic positioning can be considered to be a success. However, the company cannot afford complacency and should endeavour to maintain its competitiveness and to sustain its position in the fashion industry into the future. At its strategic position and level of maturity and given the slow growth of the fashion industry and attendant economic challenges, a number of strategies are suggested for Zara to pursue for its sustenance into the future. Among these strategies is Diversification either into a business that also deals in fashion or to an unrelated field adding value and broadening present business.

Also recommended is the strengthening and sustenance of its successful strategies such as efficiency in its entire value chain which has been the primary factor that has enabled its differentiation; Market Development in its international expansion and exploitation of new markets; and Market Penetration in the exploitation of the boom in the information technology field, enhancing its virtual platforms and stores. Such ventures have the potential of being important avenues through which the company can acquire additional revenue, as well as, reducing its exposure to vulnerabilities of its centralized model and complete focus on a single line of business.

Evaluation of strategies

A simple and straightforward criteria used to evaluate strategy is the Suitability, Acceptability and Feasibility model (SAF). It offers a process of rationalization to assess importance, priority and likely success of each strategy identified. This report evaluates two strategies identified above including: diversification and continued market development.

Suitability

Suitability is concerned with the rationale of the strategy and its overall fit in the organization’s mission. At the company’s level of maturation, with regard to the Industry Life Cycle (ILC), and stature in the fashion industry, diversification is highly recommended as a priority strategy given that its strong competitive position in the fashion industry is constrained by slowed growth in the market. This strategy would enable the broadening of present business to include complementary products. Continued market development is also recommended for Zara enabling it to tap into new markets enhancing its growth and ensuring its sustainability. These strategies would generally also enable the company to lower its vulnerabilities to financial and political factors that could affect it given its centralized model, as well as risks attendant to the fashion industry.

Acceptability

Acceptability deals with the expected outcomes of the implementation of strategy and expectations of stakeholders. Diversification, if pursued, would enable the capturing of cross-business strategic fits such as the creation of new competitive strengths and capabilities, the sharing of facilities to reduce costs, and/or the spreading of risks across diverse businesses. Market Development and entry into new territories/geographical areas and distribution channels enable the company to exploit markets that are not saturated, utilising its surplus production capacity. These strategies would enable the generation of additional revenue and the securing of shareholder interests which contribute to the enhancement of shareholder value. They would also reduce risks due to Zara’s centralized mode of operations.

Feasibility

Feasibility is concerned with the capacity of the organization to implement the strategy, especially focusing on the availability of resources. With Zara’s success in the fashion industry and, consequently, availability of adequate financial and organizational resources, as well as the consideration of the diminishing prospects of growth in the fashion industry, diversification should be a priority strategy for Zara. Its surplus financial and organizational resources can be exploited to enable the company’s sustenance and growth. These surplus resources can also be utilized in pursuit of Market Development. Its highly efficient distribution system can be scaled up, such as in its present initiative to develop additional distribution facilities, to build the company’s capacity to exploit the opportunity offered.

Zara has successfully found activities that matter to customers and has significantly enhanced key activities enhancing its key activities. However, to sustain this strategic position and achieve necessary growth into the future, the company needs to pursue appropriate strategies as outlined above especially diversification, market development and the continuous pursuit of efficiency gains.

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