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MGMT415 Strategic Management

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Course Code: MGMT415
University: United Arab Emirates University

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Country: United Arab Emirates

Question:

This report examines Zara Company, a business unit of Inditex multinational apparel group. The strategies that Zara employs are carefully identified. The report then identifies the challenges facing the management.
It analyzes various financial details of the company such as profit margins, current ratio, Return on Assets, Asset turnover, and capital structure of the company to come up with effective investment decisions.
The report further examines the competencies of the firm and the competitive forces facing the company. Lastly, the report gives recommendations to help the Zara to remain competitive in the market.

Answer:

Introduction
Overview of the Inditex (Zara) company
Inditex is a Spanish company that owns Zara as a separate strategic business unit among other business interests. Zara deals exclusively with manufacture and sale of apparel. It is the most profitable unit of Inditex and contributes over 60% of annual revenue to the mother company (Hammoudeh, 2016).
Zara can trace its roots in La Coruna Spain where it was established as a store in 1971. Initially, the store was called Zorba but the name was already in use by a different store that operated nearby (Mertens, 2015). To avoid confusion, the name was changed to Zara. Additionally, Zara was established to deal with rejected apparel orders from Inditex but flourished and became a profitable business entity (Caro et al., 2010).
Established using the Greenfield strategy, Zara had very little competition in Spain (Mertens, 2015). It soon began designing and manufacturing customer orders on its own. Consequently, it established its headquarters parallel to Inditex in Spain. In 1980 the company, through expansion strategy entered the Portuguese market and later penetrated the US and French markets in 1989 and 1990 respectively (Tokatli, 2008). Since then Zara has expanded its operations in over 88 markets and operates 1,923 stores worldwide. The company commands annual sales in excess of 30.9 billion US dollars. It is a market leader competing with 11 multinationals (Hammoudeh, 2016).
The Company strategy
The company employs a number of strategies while entering a market, manufacturing, distributing its products and while competing with other multinationals. These are analyzed.
Rapid Response (Fast manufacturing)
The company has a lead time of two weeks at most from establishing what a customer needs, designing the fashion, manufacturing it and distributing it to the customers. Conversely, the competition takes anything between a month to two months for the same processes. This gives Zara an edge as it releases new designs before competition has a chance (Yu, Subramaniam & Connella, 2013).
Vertical integration strategy
The company has avoided the production trap that has engulfed the competition. Zara controls the design, manufacturing process, and eventually does the distribution of its apparel, unlike the competition that outsources these processes to East Asia where the cost of labor is inherently lower. While other companies have to deal with third party delays, Zara ensures that its products are ready for display straight from their factories in Spain and Portugal (Williamson, Jenkins, Cooke & Moreton, 2013).
Mergers and Acquisition
When Zara wants to get into a new market, it first merges with an eating company to be able to decipher the prevailing conditions. Next, it initiates a buyout by purchasing the shares of their partners after understanding the market (Porter, 2008).
Mass production
The company produces different fashion designs en masse. In 2014, the company introduced 18,000 new products to the market. Zara does this by concentrating their production in Spain. This enables the company to enjoy economies of scale on their products (Stengel, 2011).
Franchising
A little less than 10% of Zara stores are franchises. These are established in the Middle East, Some regions in South America like Venezuela and also in parts of Central America. This is done to abide by each country’s regulations. In Middle East countries like Qatar and Kuwait, it is incumbent upon a foreign entity to issue non-controlling shares to a local entity. Zara forms these franchises to abide by the law (Tokatli, 2008).
Just in time inventory control
Zara produces just what has been ordered by the customers. This ensures that there is no shortage of raw materials, overproduction or underproduction. If a certain design stays on a particular display for more than 2 weeks, it is circulated to other stores. Overall, this inventory management technique prevents wastage hence affording Zara low cost of production (Thomas, 2015).
Product diversification strategy
Inditex the parent company of Zara owns over 9 brands including Stradivarius, Pull & Bear, Massimo Dutti, Oysho among others. While Zara is the most productive brand commanding 64% of total sales, the company caters for different clients. For this reason, Inditex has spread their operating risks (Caro et al., 2010).
Low cost and High-quality strategy
According to Hammoudeh (2016), Zara remains a favorite brand among the consumers because of their wide range of apparel is affordable compared to what other companies such as H&M, or NEXT offer their customers. In the same breath, their product quality is not compromised for price. This endears the company to customers since they acquire quality fashion at affordable prices.
Significant problems confronting management
Span of control
Zara is growing at a fast pace of a new store every single day. In 2014 it had 1,923 stores with an average annual growth rate of 5%. They are projected to be 2576 by 2020. For this reason, the management has difficulties in controlling the activities of each individual store. It is very difficult to inculcate company core values or control customer interactions (Meyer, Estrin, Bhaumik & Peng, 2009).
Over-Reliance in European Market
Zara has 1178 stores in Europe accounting for 61% of investment in a region where economic growth rate is the lowest in the world at 2.4%. This means that if economic crises were to affect this region again as was the case in 2008, their business would not thrive as projected by management (Dickson & Chang, 2015).
Foreign Exchange Challenges
Due to the strength of the Euro and the Dollar, the cost of operations is rising in Spain and Portugal where Zara has its headquarters and base of operations. The Yuan value is also increasing which is affecting the market dynamics in Asia-Pacific where the company has long-term interests (Murray, Ju & Gao, 2012).
Legal bottlenecks in the Middle East 
Many countries in the Middle East require partial ownership of foreign companies with local entities. This is also the case with Central America and Venezuela. This forces Zara to operate Franchises which it cannot enforce full control (Hammoudeh, 2016).
Increasing Competition
The market rivalry is becoming intense. There are 10 other competing multinationals in the apparel market. These include Hennes & Mauritz, Fast Retail, GAP among others. This may lead to decreasing market share growth in the future (Porter, 2008).
Parallel operations and internal rivalry
Inditex has its own headquarters in Spain as is the case with Zara. This leads to duplication of Dutti. On the other hand, the many brands operated by Inditex invite internal competition. This, in the long run, may lead to inefficiencies (Hitt, Ireland & Hoskisson, 2008).
Analysis and Evaluation
Market share analysis
The market is dominated by 11 competing entities. Zara is the current market leader with an apparel market share of 23%. It is closely followed by H&M with a market share of 18%. Following the analysis, it is expected that Zara’s lead will continue to widen as the global apparel market is projected to grow to 1.65 Trillion US dollars by 2020 (Statista, 2017).
Analysis of sales
Zara is expected to enjoy strong sales growth as customer demands for their products keep growing at 8.8%. This is only rivaled by PVH, the American company renowned for their Calvin Klein brand. All other competitors showed lesser growth in sales from the previous year (Statista, 2017).
Table 1. Competing companies’ sales performance

Company

Country of origin

Percentage Change in sales (Year 2016-2017

Inditex(ZARA)

Spain

8.8

Hennes & Mauritz

Sweden

4

Fast Retail

Japan

4.1

GAP

USA

2.2

Limited Brands

USA

0.6

PVH (Calvin Klein)

USA

8.8

Ralph Lauren

USA

-10

NEXT

UK

-1

American Eagle Outfitters

USA

5.2

Abercombie & Fitch

USA

5

Espirit

HongKong

-10

Brand Analysis
From the 9 brands that are run by Inditex, Zara has the highest propensity for sales representing 64% of the company sales turnover. Other brands like Massimo Dutti which targets the high-income segment of the market also performed well at 7.8%. However, low performing brands like Uterque with 0.4% and Oysho 2.3% pull the company for every €1 investment done by the company and should be overhauled (Leonard & William, 2013).
Financial Ratios
Current Ratio
Table 2: Current Ratio

Current ratio =    = 7,105,953/3,748828 = 1.9

The analysis of current ratio helps in understanding the company’s ability to fulfill its financial obligations with regard to honoring their liabilities as and when they fall due. From the analysis of the year 2014, Zara had a current ratio of 1.90 which indicates that the company’s current assets can easily handle the current liabilities (Stengel, 2011).
Return on Assets (ROA)
Table 3: Calculation of ROA

Return on Assets =    
Net profit from Income Statement (2,510,000)
Net assets= total assets – total liabilities (15,377,000- 4,908,299) = 10,468,701
ROA= (2,510,000/10,468,701) x 100 = 23.97%

The return on Assets is a measure of the efficiency of a company to turn a profit from its pool of resources holding other factors constant. The higher the percentage of ROA, the more efficient the company is at generating profit from its assets. From the analysis, Zara had an ROA of 23.97% from the year 2014. This shows the company is moderately low at turning its assets to profit (Leonard & William, 2013).
Asset Turnover
Table 4: Asset Turnover

Asset Turnover =
Net Sales= 18,117,000
Total assets = 15,377,000
Asset Turnover = (18,117,000/15,377,000)= 1.178

This is the ability of the company to efficiently generate sales from its assets. As a ratio of sales to total assets, the higher the proportion, the more efficient a company is at generating sales. From the analysis, Zara had an asset turnover of 1.178 in 2014. It means that for every €1 of an asset that Zara used, it generated €1.178 in sales. This implies that Zara had moderate to low efficiency to generate sales (Leonard & William, 2013).
Profit Margins
From the balance sheet, the profit margins of Zara ranged between 59.25% in 2010 and 58.34% in 2014. This is average profit margin as it implies that for every €1 sale that Zara made, it generated a profit of €0.5925 and €0.5834 in 2010 and 2014 respectively.
Rate of returns (ROR)
The rate of return is a measure of growth in investments relative to a specific period. This calculation assumed the initial outlay was made in 2010 relative to the year 2014. The analysis shows that Zara had an impressive Rate of return of 56.49% hence the investment is a going concern (Thomas, 2015).
Capital Structure
Table 5: Capital Structure

Capital Structure =  x 100
In 2014 total liabilities = Current Liabilities + Long-term liabilities)
Total Liabilities= (3,748,828+1,159,471) = 4,908,299
Equity= 10,468,701
Company Gearing = (4,908,299/10,468,701) x 100= 46.89%
Therefore the company structure is
Debt= 46.89%
Equity = 53.11%

This is basically how a company finances its operations using different proportions of funds. A good capital structure should have more proportion of funding under equity as opposed to debts. Therefore the simplest definition of capital structure is the ratio of a company’s debt to equity. For the year 2014, Zara had a capital structure of 46.89% debt and 53.11% Equity.
Marketing and production
Zara uses its own stores for display and sale of their apparel. They have also taken o online sales by offering e-commerce services. One big omission by the company is lack of advertising which hitherto, would lead to more sales (Valle, 1955).
In production, the company uses one base of operations in Spain. This undoubtedly leads to a higher cost of transportation to far-flung areas such as the Americas, Australia, Africa, and the Middle East.
Valuable resources and competencies
According to the resource-based view of the firm, valuable firm resources and competencies should be scarce, difficult to imitate and expensive to acquire. With this regard, Zara has very skilled management who offer strategic direction to the employees and manage the apparel design and manufacturing process.
Zara also has a very strong financial background to of over 30.97 US dollars. The company had an asset base of 15 billion Euros in 2014 including 1,923 stores worldwide. It has a very efficient team of designers who are creative and entrepreneurial in nature. Lastly, the company has reliable suppliers and logistic networks (Williamson et al., 2013)
Competitive forces facing the company
Zara faces various competitive forces. The threat of new entrants is high. Currently, the company competes with 11 multinationals and more are likely to join the lucrative apparel business since barriers to entry are minimal. The threat of substitutes is low since there are no products that can be used instead of clothes. Industry rivalry is high. Moreover, there are over five American companies, three European companies and three Asian companies competing with Zara. The bargaining power of suppliers is low since Zara is the biggest consumer of raw materials that the suppliers provide. The bargaining power of consumers is very high as they have alternatives from other companies (Porter, 2008).
Conclusion
This report examines Zara, an apparel manufacturing and distributing company. It delves into the strategies the company employs to remain competitive and weaknesses that the management faces. The report goes further and analyzes the Apparel market and looks at the competitive operating environment. It finally draws conclusions to help the company remain competitive.
Recommendations
Inditex runs a headquarter parallel to Zara. This definitely leads to duplication of activities in both headquarters since both are apparel businesses. It is therefore recommended that the headquarters should be merged. The CEO of Inditex and his directors should commence the merging of the headquarters within a year to pool resources and prevent internal competition.
It is recommended that Zara opens more stores in Asia and Africa where the economy is growing fastest at an average of between 5% and 8% in the two regions. This is corresponding with a middle class of 525 million people or 28% of the world middle class in Asia and 350 million people in Africa. This should be implemented by the marketing directors and top management in within one year.
As the cost of production rises in Spain and Portugal due to exchange rates of the Euro, it is recommended that Zara should diversify her manufacturing centers to other regions where the cost of labor is relatively lower such as China, India, and Africa. This will keep the cost of manufacturing and transportation low hence continued low pricing strategy. This can be done by the CEO and directors within two years.
Since Inditex runs 9 brands. Of those brands, seven have high sales margins while Oysho and Uterque have sales margins of 2.3% and 0.4% respectively. The brand manager should replace the two brands with market effective Brands.
References
Caro, F., Gallien, J., Diaz, M., García, J., Corredoira, J. M., Montes, M., … Correa, J. (2010). Zara Uses Operations Research to Reengineer Its Global Distribution Process. Interfaces, 40(1), 71–84.
Dickson, M. A., & Chang, R. K. (2015). Apparel Manufacturers and the Business Case for Social Sustainability: ‘World Class’ CSR and Business Model Innovation. The Journal of Corporate Citizenship, (57), 55–72.
Hammoudeh, R. (2016). Zara, from Spain to the big wide world. Company analysis, markets and competition. Munich: GRIN Publishing.
Hitt, M., Ireland, R. D., & Hoskisson, R. (2008). Strategic Management: Competitiveness and Globalization, Cases (8th ed.). Boston: Cengage Learning.
Leonard, M., & William, Z. (2013). Handbook Of The Fundamentals Of Financial Decision Making. London: World Scientific.
Mertens, M. (2015). Strategic Analysis of Zara. Munich: GRIN Publishing.
Meyer, K. E., Estrin, S., Bhaumik, S. K., & Peng, M. W. (2009). Institutions, Resources, and Entry Strategies in Emerging Economies. Strategic Management Journal, 30(1), 61–80.
Murray, J. Y., Ju, M., & Gao, G. Y. (2012). Foreign Market Entry Timing Revisited: Trade-Off Between Market Share Performance and Firm Survival. Journal of International Marketing, 20(3), 50–64.
Porter, M. E. (2008). Competitive Advantage: Creating and Sustaining Superior Performance (10th ed.). New York: Simon and Schuster.
Statista. (2017). Size of the global apparel market 2011-2020. Retrieved October 16, 2018, from https://www.statista.com/statistics/551775/size-of-the-global-apparel-and-footwear-market/
Stengel, D. N. (2011). Managerial Economics: Concepts and Principles (1st ed.). New York: Business Expert Press.
Thomas, G. (2015). How to Do Your Case Study. London: Sage Publications.
Tokatli, N. (2008). Global sourcing: insights from the global clothing industry—the case of Zara, a fast fashion retailer. Journal of Economic Geography, 8(1), 21–38.
Vaile, R. S. (1955). [Review of Review of The Case Method at the Harvard Business School, by M. P. McNair & A. C. Hersum]. Journal of Marketing, 19(3), 303–304.
Williamson, D., Jenkins, W., Cooke, P., & Moreton, K. M. (2013). Strategic Management and Business Analysis. London: Routledge.
Yu, T., Subramaniam, M., & Cannella, A. (2013). Competing globally, allying locally: Alliances between global rivals and host-country factors. Journal of International Business Studies, 44(2), 117–137.

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