Introduction
Zara is a multinational company specializing in the production and distribution of clothes and other fast fashion goods. The company was established in 1975 in Spain with its primary objective being to retail clothes (Chatvijit 2012). In its initial stages, the company operated exclusively in Spain where it is headquartered. It had no subsidiaries in other parts of the globe. However, in the recent past, the company has penetrated many countries across the world in an attempt to maximize its profitability. Additionally, it has expanded its line of products to fit the needs of all people in society. Today, the company has a wide range of products that target women, men, children, and teenagers. A great percentage of the company’s income comes from its subsidiaries, which are located in different parts of the globe. Its UK subsidiary is central to the income of the firm as illustrated by the annual dividends it pays to the parent business. For example, in 2016, the subsidiary paid £47m to the parent branch up from £43m in 2015 (Christopher 2016). The high dividends were attributed to the rapid growth in turnover for the UK branch, which grew by 8% to £535.2m in 2016 (Christopher 2016). Given the importance of the UK subsidiary to the company’s profitability, this paper explores the factors behind the success of the subsidiary.
Five-Force Analysis of the Retail Fashion Market in the UK
Introduction
Porter’s five forces is a tool used to analyze the factors present in an industry, which are likely to affect a company’s competitive advantage. The tool bases its analysis on the following key industry forces: rivalry, buyers’ bargaining power, the threat of substitutes, suppliers’ bargaining power, and the threat of new entry. By assessing the listed factors, a company can make informed decisions regarding market penetration. This section explores the UK’s retail fashion industry to gain insight into the forces that have placed Zara ahead of the rivals.
Porter’s Five-Force Analysis
The rivalry is stiff in the fashion industry, with several large companies specializing in the production and sale of clothes. Zara’s major rivals in the UK market include Gap and Hennes & Mauritz among others. The listed companies are big enough to enjoy the economies of scale, hence giving them the power to influence the prices of raw materials (Christopher 2016). Price is one of the key sources of sustainable competitive advantage for a company. Businesses need to embrace the cost leadership strategy to successfully compete in the market (Chatvijit 2012). Therefore, the existence of large businesses in the industry poses a great threat to the future of Zara. It is expected to experience heightened competition. The rivalry is stiffened by the fact that the company’s opponents are multinational giants, implying that they have the capability of obtaining cheap labor from the less developed nations. This situation makes labor costs low, hence leading to low prices for their goods and services.
A high bargaining power implies that customers can influence the major decisions of a firm, including the pricing strategy (Joung 2014). On the other hand, low buyers’ bargaining power implies that consumers have little or no power to influence the company’s decisions. For Zara, customers’ bargaining power is moderate, implying that it is neither high nor low. One of the reasons for the described phenomenon is that the company produces high-quality goods, which are highly attractive to customers. The company’s products have won the hearts of the target customers all over the UK as illustrated by the tremendous growth in the subsidiary’s profits.
However, although buyers’ bargaining power is considerably low due to the strong brand equity, customers have some control over the decisions of the business. As indicated previously in this paper, the rivalry is stiff in the fashion industry, implying that customers have a wider choice. Customers’ dissatisfaction with Zara’s products may lead to the procurement of the rival merchandise. Therefore, the firm must produce high-quality goods and sell them at reasonable prices to win the loyalty of its customers.
The threat of substitutes is relatively high, owing to the existence of similar products from other companies. Given that Zara’s pricing strategy is based on quality, the prices are sometimes relatively high relative to those of the rival products, a situation, which may scare away low-income earners. Consequently, such customers may tend to purchase products from a rival business that produce similar items but sell at a lower cost. The low switching cost is another factor that explains why the threat of substitutes is high. The switching cost refers to the extra expenses incurred by a customer because of dropping a product or service for an alternative (Christopher 2016). Although Zara produces relatively higher quality products relative to its competitors, the quality difference is not huge enough to stop a customer from purchasing a rival’s product. However, the company counters the threat by producing high-quality products to make the switching cost high. Besides investing heavily in research and development, the company is highly innovative to the extent that it constantly introduces improved models.
Suppliers’ bargaining power is low, meaning that Zara can force the prices of the raw materials downwards. Zara is a global firm with subsidiaries in many countries across the world (Christopher 2016). The company’s big size implies that it can purchase raw materials in large volumes to acquire discounts from suppliers. Additionally, the voluminous purchases give it the ability to influence the suppliers’ operation strategies, thus leading to favorable terms.
The other reason for the low suppliers’ bargaining power is the reduced switching cost. Competition is high among the suppliers, a situation that compels them to offer attractive terms to buyers to win their loyalty (Choi 2013). Consequently, the company may abandon a supplier for the rivals on the grounds of unattractive terms. Competitor suppliers will have to accept the terms dictated by the company. They may even offer lower prices to attract the defecting corporations.
Currently, the fashion industry in the UK is saturated, with each of the existing firms controlling a considerable market share. The firms that dominate the industry are global. They enjoy the economies of scale, hence giving them the power to sell their products at low costs. New entrants may not bargain discounts from suppliers. Hence, their (new entrants) operations costs, and the retail price of their products may be high. Therefore, such new entrants may find it difficult to acquire a profitable market share, meaning that they may be suppressed before being well established. The threat of new entrants is minimal. Zara may not mind about increased competition emanating from new enterprises. Instead, it should concentrate on differentiation to counter the competition that it currently faces from the existing businesses.
Another reason for the low threat of entrants is that the start-up capital for the fashion industry is overly high to the extent that new enterprises cannot easily raise it further. A new entrant must be able to raise enough money to finance its capital assets, as well as the initial operations before it realizes its first profits. Due to the high competition in the industry, there is no guarantee that the investment will realize good returns. This situation makes investors shy from investing in the industry for fear of losing their finances. It is important to note that new companies usually raise funds from investors in the form of loans. Debt capital may raise the cost of operations due to the high payable interests. The existing companies already make good annual profits, which may finance the company’s operations with no payable interests, hence translating into low operations costs and reduced commodity prices.
Reflection
Based on Porter’s five-force analysis, it can be concluded that the company has a bright future in the UK. The view is informed by the fact that although rivalry is stiff in the fashion industry, the company can influence the prices of raw materials to make its goods cheaper in the market. The low pricing strategy coupled with quality products reduces the overall competition while lowering buyers’ bargaining power.
Assets and Competencies
Introduction
To understand a company’s strengths and ability to remain competitive against the backdrop of stiff rivalry in almost every industry, it is important to assess its assets. A firm with strong tangible and intangible assets will have the capability to use them to counter rivalry. This section analyses Zara’s assets using the Resource Audit Model and VRIO tools to determine if it is capable of remaining competitive in the UK’s fashion industry.
Resource Audit Model
In terms of tangible assets, Zara finances its property and operations mainly using the retained earnings coupled with equity capital. The high profits realized by the firm annually contribute to the increment of the retained earnings, hence leading to the reduced need for debt capital. This situation makes the company’s cost of capital low. It also increases its debt capacity. The company’s financial capability is a strong source of competitive advantage since it allows it to invest in R & D to improve quality and to mitigate market risks (Cortez et al. 2014). Also, its financial power facilitates the opening of new stores to advance its growth strategy and to open one-stop shops.
In terms of intangible resources, one of the major sources of competitive advantage for Zara is its strong workforce. The company has a highly skilled and diverse workforce that is experienced to handle various tasks. Based on the company’s website, the company not only recruits the best talents but also offers continuous skill-based training for all employees. Additionally, it strives to retain its talented workforce through competitive remuneration and development programs, hence making the personnel valuable, rare, inimitable, and non-substitutable. These four elements are vital when it comes to sustainable competitive advantage.
The company’s products are widely accepted by customers around the globe. They recognize the business for being the global leader in the provision of quality products at fair prices. The company’s reputation has been boosted by the environmental initiatives that it has launched in the UK and other countries all over the globe. In the recent past, customers are becoming more aware of the need to conserve the environment (Joung 2014). Hence, they are engaging firms that are corporate socially responsible, as opposed to those that do not care about the environment. Therefore, the decision to sponsor environmental conservation activities is a great boost to customers’ confidence in the company in the backdrop of the intensified campaigns against unethical firms.
VRIO Analysis
As indicated in the table below, Zara combines three major competencies, namely, quality, fashion, and a competitive pricing strategy, to achieve a sustainable competitive advantage over its competitors. Regarding product quality, the company, through its product differentiation strategy, ensures that only high-quality products penetrate the market. This goal is achieved through exclusively engaging only the quality-conscious suppliers. On the other hand, fashion is achieved by supplying fashionable garments based on gender and socio-cultural factors for the target customers. Using the cost leadership strategy, the company brings down the operations costs, thus facilitating the application of the low pricing strategy (Battaglia et al. 2014).
As illustrated by the table above, Zara’s products are imitable. However, the costs of such an undertaking are overly high. Therefore, the products may be imitated to make substitutes available to customers. Besides, the products are not rare since it is quite possible to have quality and fashionable clothing within the fashion industry. However, by integrating the core competencies of quality, fashion design, and the competitive pricing strategy, Zara can outsmart its rivals in the industry.
Reflection
Based on the Resource Audit Model and the VRIO analysis tools, the author concludes that the company’s competitive advantage in the UK is directly attributable to its tangible and intangible assets. The company’s major tangible asset is its financial muscle, which prevents it from using debt capital to finance its assets. This situation leads to a lower cost of capital. On the other hand, intangible assets include a skilled workforce and a strong brand image, both of which are grounded on the provision of high-quality goods to customers.
Zara’s SWOT Analysis
Introduction
The SWOT model refers to a tool that is used to assess the strengths and weaknesses of a firm about its brand. The model is an acronym of strengths, weaknesses, opportunities, and threats. It helps marketers to determine the ability of a company to execute the opportunities available in the market to outsmart its rivals (Christopher 2016). This section explores the strengths and weaknesses that Zara (UK) has, including its ability to exploit the available opportunities.
SWOT Analysis for Zara
The company’s major strength is its strong brand image. Its products are widely accepted all over the globe as evidenced by the high number of customers it controls. The company has customers across the UK, including women, men, teenagers, and children, who are loyal to it following the strong brand equity. Clients tend to buy the company’s products just because they are Zara-branded. Next, the company has a strong financial base in terms of the profits earned annually, which it uses to sponsor its assets, as opposed to using debt capital. Besides, its large size facilitates its exploitation of economies of scale to lower the operation costs, hence maximizing profits.
One of the greatest weaknesses of the company is the low-quality perception of its products among customers. Such perception results from the low pricing strategy that the company utilizes. Generally, high-quality products are highly-priced while poor-value goods are cheap. In the light of the stated view, customers tend to perceive the company’s products as poor quality, owing to the low prices it charges. The other weakness revolves around the delays in the execution of an order from a customer. The delays are attributed to the high number of customers doing business with the company daily.
The company has the opportunity to increase its customer base in the UK through the exploitation of the internet. The UK has experienced a high embracement of the Internet and social media networks, a situation that presents an opportunity for market expansion for the company (Cortez et al. 2014). Therefore, the company may use the Internet to maximize its market share by opening online stores to supplement the physical ones. The company may also partner with supermarkets and other garment stores to bring the goods closer to customers.
One of the major threats facing the company is competition. It faces stiff rivalry from competitors who include H & M and Gap. The listed organizations are big enough to enjoy economies of scale. Hence, they can force the prices of garments downwards. The other potential challenge includes changes in legislation in the future. Zara’s UK-based subsidiary procures raw materials from numerous countries across the world. Changes in import/export laws or diplomacy rows between the UK and other countries from which the raw materials come from may negatively affect the company’s profitability.
Future Strategy for Zara
Based on the strengths and opportunities available for the company, the author recommends the firm to extensively use the Internet and social media to maximize its market share in the UK. Currently, the company has not fully exploited the UK market, implying that it has the opportunity to grow its sales in the country by focusing on market development and diversification. Regarding market development, the company may use the Internet to reach customers who are not reachable through personal promotion. Encouraging customers to make reviews online to attract the attention of other potential clients can achieve this goal. Positive reviews by customers through social media may influence more of them to test the products (Chatvijit 2012). Additionally, the company may advance its market development strategy by encouraging conversations between it and customers. It should invest more in online stores to facilitate the full exploitation of the existing market.
The savings achieved through Internet marketing may be used to push the prices of the clothing downwards. It is important to note that the Internet is much cheaper relative to the print and audio media and hence its alignment with the competitive pricing strategy. Lastly, the Internet coupled with social media may facilitate the advancement of the product diversification strategy (Epstein & Buhovac 2014).
Reflective Account
Based on the assessment of the company’s strengths and weaknesses, the author concludes that the business has enough assets to exploit the opportunities that are present in the UK market. The company may use its strong Internet base to exploit the market fully. Additionally, it may use its financial muscle to lower the operating costs by minimizing debt capital.
Conclusion
ZARA is a Spanish company, which operates in the fashion industry. It has multiple branches in many parts of the globe. Since its inception, the company has grown tremendously to the extent that it is currently one of the best performing multinational businesses in the fashion industry. Its success is highly attributed to the high income it earns from its subsidiaries. Its UK subsidiary is especially important to the mother branch since it contributes highly to its income. In 2016, the UK-based Zara branch paid £47m to the parent company, a situation that illustrates its importance in making the business successful. This paper has explored the factors that have pushed the UK subsidiary ahead of the rivals. The analysis concludes that the company’s assets combined with the industry’s favorable conditions have contributed heavily to its success.
Reference List
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