Cost Leadership through Economies of Scale

The company uses cost minimization, market focus, and product differentiation strategies to provide a competitive advantage. It has a highly structured supply chain with over 6,500 stores across 88 countries. The company faces various issues and challenges such as political, economic, and social factors that impact its business growth. To overcome these challenges, the company is recommended to develop products considering culture and ethnic background of the country, improve its supply chain, and conduct market research to attract a large number of consumers.

ZARA COMPANY
Case Report

Table of Contents
Introduction......................................................................................................................................3
Company background......................................................................................................................3
Part: 1 External analysis..................................................................................................................3
Pestel analysis..............................................................................................................................3
Porter’s five forces model............................................................................................................4
Opportunities and threats.............................................................................................................5
PART: 2 internal analysis................................................................................................................5
Value chain model.......................................................................................................................5
VRIO framework.........................................................................................................................7
Strength and weakness.................................................................................................................7
Part: 3 Corporate and business strategy...........................................................................................8
Generic strategic model...............................................................................................................8
Part: 4 Issues and challenges...........................................................................................................8
Part: 5 Strategic options.................................................................................................................10
Generic strategic options............................................................................................................10
TOWS matrix.............................................................................................................................10
SFA framework..........................................................................................................................11
Implementation of strategic options...........................................................................................12

Part: 6 Recommendations and conclusion.....................................................................................12
References......................................................................................................................................13

Introduction
In this present paper, we will discuss the strategic appraisal of Zara Company. The paper also
describe company background, external analysis through using pestle analysis and porters five
forces model in order to determine the opportunities and threats of the company, internal analysis
is conducted through using value chain model and VRIO framework in order to determine the
strength and weakness of the company, business strategy is analyzed through using generic
strategic model, identification of threats and weakness of the company, and strategic options for
growth through applying TOWS matrix and SFA matrix with the implementation of strategic
options.
Company background
Zara is a Spanish clothing as well as accessories retailer which are mainly based in Arteixo,
Galicia. The company lies in retail industry, and it is present in approximately 2169 locations. It
was founded in the year 1975 by Amancio Ortega. The company operates worldwide, and it is
the largest index division, and it provides clothing for men’s as well as for women’s and children
fashions with accessories segment. The company is using differentiation strategy in order to
provide the unique style of products and services to the target audience. The success of the
company is mainly based on providing the high quality of innovative products and services to the
target audience through using differentiation strategy. The company had started its foreign
expansion in the 1990s when index entered in twenty-nine countries.
The vision statement of Zara states that the company wants to develop niche market of their own
in the competitive market and to attain market leadership through unmatched quality,

empowered employees, unique products, highly ethical, world-class system, and professional
standards. The mission statement of Zara states that the company is consistently improving its
quality and value in order to satisfy its customers.
Part: 1 External analysis
The external analysis is conducted to determine the health of an organization, political
environment, technological, social, economical, and environmental factors which impacts on the
sales volume of the company.
Pestel analysis
The pestle analysis of Zara is explained below:
1. Political factors
There is a highly competitive textile industry which forces to price in order to attract a
large number of the target audience which is a deregulation of textile industry.
Furthermore, import quotes are removed for Spanish retailer which provides access to the
international market that helps to generate high revenue through economies of scale.
2. Economic factors
The company has faced the economic crisis during a recession which impacts on the sales
volume of the company, and the company has the large share in the fashion industry which
directly contributes towards the gross domestic product of the country. The company also
contributes towards the employment generation of the company (Rachet et al., 2014).
3. Social factors

The company has also considered about social factors in developing products and
services for the target audience as social factors play an important role in selecting
fashionable clothes. Zara has a strong brand identity which helps to retain social
popularity, and high sales of the company ensure that the brand has high social
acceptance due to which it is seen as a desirable option.
4. Technical factors
The company uses innovative technology in order to develop unique and highly
fashionable products for the target audience. It helps to fulfill needs and demands of the
consumers through providing innovative products and services.
5. Legal factors
The fashion industry is much concerned about intellectual property, and Zara has
overcome this threat through providing less time framework within its supply chain. It
provides first mover advantage to the company as their design is looked by other
designers then the similar design is copied by them. In addition, legal requirements in
terms of intellectual property protection may limit opportunities as imitation is inherent in
fashion design.
6. Environmental factors
It is concerned with the textile companies which are transporting textile across the world,
and a new approach to the textile industry concerns about the environment at the time of
developing products and services. It creates a burden on the companies to develop eco-
friendly products with the retention of basic position within the same industry.

Porter’s five forces model
It is used to analyze various forces which help to shape their company, and it enables to develop
the competitive strategy which allows standing out among the competitors within the same
industry. The porters five forces model of Zara is analyzed below:
1. The threat of new entrants:
The fashion industry is highly fluid as there are free entry and exit due to which threat of
competitors is high. New entrants can enter the market with innovative products and
services that help to attract a large number of consumers.
2. Bargaining power of buyers:
The consumers are mainly focused on the business model of Zara due to which company
has settled the minds of consumers through offering limited products and services to the
target audience with quick replenishing its products. It shows the bargaining power of
buyers is medium.
3. Bargaining power of suppliers
The company is mainly focusing on producing innovative products with low costs due to
which company has used the combination of differentiation and cost leadership strategy.
The company has very stringent contacted with suppliers due to which bargaining power
of suppliers is low (E. Dobbs et al., 2013).
4. Threats of substitutes
The consumers are always looked for high quality of products and services at reasonable
prices due to which competitors who are providing substitute goods at reasonable prices
has a major threat for the company.
5. Threat of existing competitors

The company operates globally due to which it has international competitors such as
H&M, Mango, United Colors of Benetton, and others that are also providing a high
quality of products to the target audience, so the company has the high threat from
existing competitors.
Opportunities and threats
The company has not explored various global markets such as Hong Kong market which has
high growth and it leads to increase the market share of the company. The company can enter
into various market segments and those areas which have not explored by the company. Online
marketing and e-commerce are gaining importance in the market which can be tapped by the
company in order to generate high revenue within the specific period of time. There are various
threats to the company such as high-end fashion merchandisers which provide a high quality of
products and services at a reasonable price which impacts on the market share of the company.
The Economic downturn is another threat to the target segment. Change in customer taste and
preference which impacts on the profit margin of the company. (Jackson et al., 2003) Fake
limitations can also decline the sales volume of the company.
PART: 2 internal analysis
Value chain model
It is used to analyze the internal environment of the company in order to determine the strength
and weakness which helps to develop an effective strategy for the company. The value chain
model is explained below:

Primary activity:
1. Inbound logistics
The company has sourced its raw material from Hong Kong and china in order to
produce high quality of products at low cost. The company has reserved almost one-half
of fabric un-dyed in order to provide in season updating with high flexibility. The
company has finished fabrics within one week through vertical integration from a
subsidiary of Inditex.
2. Operations
The company has employed advanced telecommunication system in order to connect
headquarter, sales location, production, and supply. The company has outsourced [price
sensitive items and manufacture fashion sensitive items internally. The company has
manufactured approximately 85% items internally, and factories are highly automated
with the garment type specialization. The company has developed long term relationship
with 450 sewing workshops which are specialized through product type, and it has long
term relation with many suppliers.
3. Outbound logistics
Shipped goods are stored in other countries in the morning whereas it was shipped in the
afternoon in Europe. Approximately twenty-five percent are shipped by air, and seventy-
five percent are shipped by trucks.
4. Marketing and sales
The company mainly focused on the marketing activities at the end of the season, and the
target age group is between 18-34 women. The target class is middle to middle, high
income and company spent a small amount of money on marketing with the

maximization of window displays (Mohajeri et al., 2015). The company provides joint
venture and franchise in order to expand its business overseas which helps to acquire high
market share and sourcing ability. The company has different positioning strategy in
order to develop brand image such as high price charging outside Spain.
5. Customer service
The company has a rapid turnover which helps to attract a large number of customers and
sales assistance is required in order to wear Zara clothes that reflect the socioeconomic
background of the store location.
Secondary activities
6. Research and development
The company has developed just-in-time manufacturing system in order to maintain
inventory system. The second distribution center is constructed for economies of scale,
and automated tracking system is used for ordering adequate amount.
7. Human resource management
Training and development are given to the employees in order to use a machine with the
just-in-time system. Sales assistants are trained by the store manager in order to generate
high revenue. Fixed salary and incentive is given to the managers in order to boost sales
volume (Shabani et. al., 2013).
8. Infrastructure of firm
The bullwhip effect is reduced through using vertical integration, and it is the largest as
well as internationalized of index chain. The company has formalized and effective

communication system, and eighteen out of twenty are located around headquarter for
effective control.
9. Procurement
The products are shipped directly to the attractive stores from central distribution center
twice a week and outsourcing its inputs at Far East markets.
VRIO framework
The company has utilized VRIO framework in order to determine core competencies as
compared to other competitors within the same industry. The company has the ability to meet its
activities through using vertical integration and synergy from a strategic move. The company has
developed its new products in the shorter time through using vertical integration which helps to
develop innovative products within the short period of time as compared to other competitors.
The company has major three competitors, namely, H&M, GAP, and Benetton which has the
narrow scope then ZARA as the company outsourced its raw material from china and Hong
Kong. It shows that the company has the unique feature of vertical integration which is
implemented in production and sales of the company. The implementation of vertical integration
required huge capital as it includes all process from purchases to sales due to which other
competitors don’t copy the same process (Pesic et al., 2013). Capital, training and time are
required in order to create value to the brand. Such process allows increasing inventory turnover
and faster adoption of trends than other competitors which provide a competitive advantage to
the company. It shows that the vertical integration is the core competencies of Zara which helps
to provide a competitive advantage to the company that directly contributes towards the sales
volume of the company.

Strength and weakness
The strength of the company includes more than 2000 stores worldwide, and it has the biggest
contribution in the Spanish retailer market that contributes towards the gross domestic product of
the country. The company has a positive brand image and high perceived value globally. The
company has effective supply chain and the manufacturing in vertical integration which provides
the competitive advantage to the company (Pelkmans et al., 2015). The company provides online
purchase from many online platforms other than company website which provides a wide range
of purchasing platform to its target audience. The company provides highly unique products and
extremely trendy to its target audience. The company provides a wide range of products to its
target audience. The company does not consider social values and customer taste as per the
operating countries which impact on the sales volume of the company. The company has
conducted limited marketing and advertisement as compared to other brands. The company has
the limited market share, and it has high brand switching which is another weakens of the
company.
Part: 3 Corporate and business strategy
Generic strategic model
There are three main corporate strategies, namely, stability, growth, and renewal. Three
strategies are explained below:
1. Stability strategy
Zara has a team of dedicated designers which are providing similar kind of products to
the target audience in order to maintain its market share and stability strategy ensures that
the operations of the company are maintained. The designers ensure that high quality of

products is provided to the target audience which helps to develop a competitive strategy
in order to stand among international competitors.
2. Growth strategy
The growth strategy is applied by the company in order to expand its products and
services for the target audience. This strategy can be applied to the existing business or
new business. The well-planned growth strategy leads to increase the sales volume of the
company, and it also enables to increase the market share within the specific period of
time. Zara had applied growth strategy in order to increase its global presence, and it is
highly demanded in European countries (Rothaermel et al., 2016). The company also
provides the variety of products in various segments such as men's, women, and
Childers's.
3. Renewal strategy
It is the strategy which is used in the worse condition of the company in order to improve
its business performance. It includes turnaround and retrenchment strategies. Zara has
applied turnaround strategies by employing high-skilled designers in order to highly
fashion designs and well-structured supply chain which ensures that new market is
developed within four months which helps to provide a competitive advantage to the
company.
Zara’s generic strategy
According to the generic framework, there are three strategies in the framework, namely,
cost minimization, market focus, and product differentiation. The company provides a
wide range of products with the highly structured supply chain in order to provide a
competitive advantage to the company. The company used cost leadership strategy

through producing the large quality of products due to which it enjoys economies of
scale. The company has its narrow market, and it has its stores in Italy, Europe, Greece,
and Spain. The company has more than 6500 stores across 88 countries. The company is
using differentiation strategy in order to develop unique products and services which
provide a competitive advantage to the company (Cortez et al., 2014).
Part: 4 Issues and challenges
Political issues
The political factors impacts on the business growth and the government interface impacts on the
business through taxes and direct product restriction. The company operates in various countries
due to which it is necessary to consider the political environment of the country. The company
must be aware of government regulations, import and export regulations, and trade system. The
tax imposition impacts on the profitability of the company. The company has already paid fine
for providing poor working conditions in Brazil (Makgala et al., 2017).
Economic issues
The company needs to consider various economic factors such as inflation rate, interest rate,
exchange rate, and others in order to determine the importing and exporting commodities. The
target audience of the company is middle class and high middle class, so the company needs to
determine the current economic condition in order to determine the customer’s affordability. The
previous statistics shows that Inditex sales in Spain were 25% in 2009 and the sales were 6.8%
higher.
Social issues

It is necessary for the company to determine the customer spending habits and trend changes in
the fashion industry which required huge market research and investment of funds. Zara is a
global company, so it is necessary for the company to consider socio-cultural factors. The
company needs to consider innovative technologies in order to provide a unique quality of
products and services to the global competitors. Customers in India prefer ethnic touch in foreign
clothes which are the lack in Zara stores due to which social issues are considered as a major
challenge for the company.
Centralized distribution system
The company has effective centralized distribution system but is a major challenge for the
company to control more than 6500 stores globally. So the company needs to increase its
distribution stores in UK market in order to improve its distribution channel. A Recent study
shows that Zara has less experience as the comparison to its competitors.
Change in customer behavior
The company needs to determine the change in consumer taste and preference in order to provide
goods and services as per the needs and demands of the customers. Zara is a retail fashion brand
which requires customer buying behavior inclusion in order to develop the successful business
plan.
Part: 5 Strategic options
Generic strategic options
The Ansoff’s matrix shows the adequate options for the company which helps to develop and
grow business in a long term (Darroch et al., 2014).

TOWS matrix
The tows matrix shows the combination of strength and opportunities, weakness and
opportunities, strength and threat, and weakness and through using such combinations, most
appropriate options can be taken by the company.

SFA framework
CRITERIA SO strategic
option
ST strategic
option
WO strategic
option
WT strategic
option
Suitability 5 4 4 3
Feasibility 4 4 3 3
Acceptability 4 3 2 4
Total 13 11 9 10
The SFA framework is mainly developed on the grading scale of 5 in which five is considered as
most deviating, and one is considered as least deviating from the SFA requirements. The SO is
considered as the most appropriate strategy for the company as it has the highest score in the
SFA on the basis of its requirements. The Ansoff matrix shows that the company needs to

develop the new market in order to improve its market size (Song et al., 2017). It is correct as the
diversification is already applied by the company and in the product development, innovative
technologies are applied in order to develop high quality of products.
Under market penetration category, new products are developed into the market, and the
emphasis is given on UK market in order to ensure growth in the specific region which falls in
line with SO strategic option.
Implementation of strategic options
Above strategic options can be implemented in the company in order to provide market growth
and development within the specific period of time.
Zara can enter into the new market segment through entering into the existing market with new
products, for example, complementary goods that require huge capital as well as capable
designers which help to attract new target audience through providing the high quality of
products which enable to provide business growth within the specific period of time.
Zara can also enter into new territories which have never been utilized in order to increase its
market share. Zara needs to conduct market research before entering into the new market in order
to determine the taste and preference of target audience which helps to provide customized
products and services for the target audience. The company needs to conduct huge marketing
activities such as the advertisement on international television, online stores availability, and
others which help to attract new target audience in order to generate high revenue within the
specific period of time.
Hong Kong market is not explored by the company so the company must enter into Hong Kong
through providing franchise which helps to increase the market share of the company. The SO

strategy must be in line in order to provide stylish clothing for the Chinese market. It requires
market research in the Chinese market in order to provide a high quality of products to the target
audience, and additional capital is required in order to enter the new market.
Part: 6 Recommendations and conclusion
From the above analysis, it can be concluded that the company has a strong brand image in the
internal market through providing highly unique products to the target audience. The internal and
external environment provides various opportunities to the company in order to generate high
revenue within the specific period of time. It is recommended to develop products by considering
culture and ethnic background of the country which enable to attract a large number of
consumers. The company must develop swift supply chain which enables to increase the
flexibility of providing products and services to the target audience.

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