Case Study: Zara's Market Entry Strategy in France (BUSN101)

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Business Organisations and Environments in a Global
Context
“A Case Study on: Zara”
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Executive Summary
The case study analyses the various aspects in the context of Zara and its expansion policies into
France. Several theories have been scrutinised to provide an extensive overview and get accurate
analyses regarding the same. The study also effectively looks into the various key factors which
would facilitate the operational procedure of expansion and assesses the risk degrees as well as
how they can be prevented and mitigated.
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Table of Contents
Introduction......................................................................................................................................3
Background of Zara.........................................................................................................................4
Background Information on the Business Environment in France..................................................7
Political Factors...............................................................................................................................7
Economic Factors............................................................................................................................7
Financial factors...............................................................................................................................7
Analysis of the business Scenario....................................................................................................9
Porter’s Five Forces.........................................................................................................................9
Ansoff’s Matrix.............................................................................................................................11
Demand-supply scheme.................................................................................................................12
Major factors that would likely impact the operations..................................................................14
Conclusion.....................................................................................................................................14
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Introduction
Business expansion essentially refers to the process of growth that successful organisations go
through in order to generate larger profit margins and grow their operational functionalities by an
exponentially large scale. Policies of growth and expansion include uncertainty, and large
organisations often do not want to expand globally due to an inherent fear of diminishing
revenues. The primary disadvantage to not growing and keeping operations localised is the
distinct absence of economies of scale among these smaller organisations. Expansion usually
occurs in three distinct forms of movement and targeted policies – internal, external and
franchising. The expansion into new territorial boundaries allows the organisation several
operational benefits, some of which are as economies of scale, enhanced consumer bases,
massive brand awareness along with heightened revenue generation and profit maximisation
Foreign Direct Investments or FDI’s are essentially overseas investment tools that utilize
merging of companies or acquiring them wholly in order to expand operations and penetrate a
new market sector. FDI includes a variety of asset classes like equity capital, long run capital
investments and short-term direct investments as well. A host of operational functionalities are
also undertaken, which include sharing of skills, supply of niche products, channelizing
technological specifics and so on. The benefits offered range from economic support to the
expanding territories, increase in overseas trade as well as foreign revenue generation. In the
context of this study, the brand Zara of the Inditex group has been selected for a further
expansion policy into France. This could be implemented using principles of diversification,
speedy deliveries, researching the consumer profiles and so on.
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Background of Zara
Zara SA is a Spanish apparel brand catering to the organised retail sector based out of Galicia in
Spain. The holding company, Inditex group began operations in 1975, after being founded by
Amancio Ortega and Rosalia Mera (Moreno et. al., 2016). The company has several other brands
like Massimo Dutti, Bershka, and Oysho and so on, but Zara predominantly leads the revenue
generation figures and has been doing so consistently for the last few decades. As of 2018, Zara
has over 25 different collections of clothing under their brand and is seeking further expansion.
The Inditex group with operations in over 90+ countries, functions in the format of a public
limited liability company. Dedicated to the fashion retail industry, the Inditex Group is heavily
involved in the distribution products like clothes, shoes, bags and backpacks, accessories and so
on. The focus is largely on the retail format, and most concepts are carried out through brick and
mortar stores along with online shopping systems. Over the past 12 months, the Inditex group
has created more that 10,000 plus jobs, a fourth of which are in Spain itself. The revenue
amounted to a whopping 11.7 billion Euros, with an overall sales growth of 6% globally. The
Inditex group’s multi faceted development process was also accredited recently by the Dow
Jones Sustainability Index, where the organisation received a score twice as much as compared
to other major players in the organised retail industry.
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Figure 1: Global presence and revenue shares
(Source: Annual Report, 2018)
The Inditex group carried on a serial investing process in areas that were of interest to them
(Joung, 2014), including the opening of refurbishing and renovation outlets and functional
modernisation of its existing outlets. The group has also been pushing paperless purchase
methods through their internal application and e-wallets in order to get rid of paper tickets. The
company was awarded the most sustainable organisation in the retail sector.
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The group donated goods worth 1.6 million Euros to the Red Cross in Spain to include
economically backward people and diminish the severe effects of poverty, along with a number
of charitable initiatives promotion fitness and donation of old unused clothes as a means for
social upliftment.
Figure 2: Consolidated Income Statement of the Inditex Group for 2017 and 2018
(Source: Annual Report, 2018)
The Inditex group began its international expansion through the opening of its first international
store of Zara at Porto, Portugal. Soon after, stores were also opened in United States, France,
Mexico, Greece, Belgium, Sweden and even Asian countries like Singapore and Malaysia (Babin
et. al., 2016). Zara came up with its online accommodation policies that in 2010, and even
brought about the use of security chips (Howson, 2016), which allowed the organisation an easy
management system of purchase and inventory along with sales and territorial distribution.
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Irrespective of all the accolades, Zara occasionally has gotten into trouble, mostly due to the use
of toxics in their local manufacturing facilities. Following the tiff with Greenpeace, Zara made
changes to become a chemical free production facility, and was one of the largest propagators of
the detoxification campaign in the context of the organized fashion retail sector.
Background Information on the Business Environment in France
Political Factors
France, in relation to other developed economies, has a certain sense of rigidity in the context of
political and legal factors. However, the transparency in the government and the policies
regarding tax subsidies (Allain et. al., 2014), no requirement for audit and ease of operational
functions provide a massive market for any organisation involved in any sector. France is also a
major player within the European Union and functions as a diplomatic ally to all the great
powers of the world (Choi et. al., 2014).
Economic Factors
France falls within the top ten economies of the world, both in terms of GDP and per capita
GDP. Any sector the country has tried to penetrate, it has done so with implementations par
excellence – be it defence technology, cosmetics and fashion, automotive industries as well as
space flight and commercial aviation sectors (Cortez et, al., 2014). Moreover, it has been
projected by analysts world over that France will see a steady pace of overall economic growth,
even with a relatively high company tax policy of around 33%.
Financial factors
Since the industrialization days, France along with most European nations has heavily favoured
capitalistic systems of operation (Arrondel et. al., 2014) and policies to open up markets and free
trade systems. The financial approach of the French government in often interventional, but only
in cases of urgency. Key sectors like agriculture, banking and finance have largely been under
the control of the state.
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Technological Factors
The French population has a massive dependence upon the internet and its related systems, being
a spearhead of modernism in today’s day and age. Good education systems, healthcare
availability and historical locations like the Eiffel Tower have made it the most populous tourist
destination in the world. The language too has been massively accommodated and is spoken
across the world (Orcao et. al., 2014). With a typically high living standard, general consumers
within France have a large disposable income as compared to similar economies and
demographics.
It is important to note that France has contributed heavily to the fields of science, information
technology, automobile engineering and aerospace designing. Having launched its first satellite
over five decades ago, France has traversed beyond all the limiting boundaries unlike other
developed economies (Suleiman, 2015). Internet penetration is exorbitantly high at about 90% of
the total population. This opens up a completely new phase of the market in addition to jobs,
sectors, avenues and various other metrics.
Cultural Factors
France also stands to be the most visited destination with approximately 90 million tourists
taking a flight every year. Brilliant locales, world heritage sites and places of historic
significance further add to the appeal of the country at large.
Legal Factors
The legal environment in France is almost wholly constitutional and absolute freedom of
judiciary is maintained. In the context of the retail industry, labor laws are well defined and
rather relaxed by essence. The legislation-enacted cap for working hours in one week is 35
hours, irrespective of companies. Codified provision are enforced regarding overtime
compensation, leave systems like maternity, paternity, religious and casual and so on. Consumer
protection laws are naturally rigid like almost any other developed country.
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Analysis of the business Scenario
The business scenario in context of Zara’s expansion into the organised retail sector can
effectively be understood by implementing certain models – Porter’s five forces, Demand-supply
scheme and Ansoff’s matrix.
Porter’s Five Forces
Porter’s five forces are an essential tool to understand the competitive standpoint of the
organization (Dalken, 2014), in this case, Zara.
Figure 3: Porter’s five forces chart
(Source: Created by the learner)
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Competitive forces (Moderate): Zara would face immense competition including a moderate
risk degree in the organized retail sector specifically in France. This is due to the large
availability of similar products and establishment histories much greater than that of Zara.
However, the capitalistic nature and the free economy system would accommodate the company
largely, co relating to hefty disposable income of the French consensus (Dobbs, 2014).
Power of suppliers (Low): Supplier index would not be a problem for Zara due to their internal
manufacturing facilities present all across Europe and a large presence of supplier base within
France. Naturally, the risk degree would be substantially low, with the ease of operations in
France would rather help set up a fresh manufacturing facility catering to the local and specific
needs of the French consumers.
Buyer index (Moderate): Buyers could drive the price point down due to a large presence of
similar alternative products. However, due to exorbitant rates of internet penetration, Zara could
look at online systems instead of physical stores as a means to further reduce costs and beat local
players by a margin and a half (Porter and Magretta, 2014). The risk degree would be moderate
in this scenario as instead of digital integration, Zara would have to focus on the digital model
individually.
Forces of substitution (Low): This could prove be a major challenge for the organization.
However, due to Zara being a global brand, the degree of risk gets substantially minimized and
France being a tourist heaven, the company could look to specifically target tourists by putting
up stores at prominent sites, airports, railway stations and so on.
New entrants (Low): The system of the French economy would easily allow the entry of new
players, especially due to tax benefits and no audit principles. However, the operational scale of
an organization like Zara would be hard to match, let alone beat and progress. With a global
presence in over 90 countries, it would not be feasible to take on Zara as a direct competitor,
especially in the case of new entrants hence causing the degree of risk to be very low.
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Ansoff’s Matrix
The Ansoff’s matrix provides typically four separate functions, which are market penetration,
market development, product development and diversification. In the context of Zara’s
expansion into France, the following analysis can be made:
The market penetration strategy, which seeks to utilize the pre existing resources of the
company, in this case Zara, would bear the least degree of risk due to the establishment of Zara
as a global brand and worldwide recognition along with a massive availability of resources
(Gregor and Hevnor, 2014).
The strategy of market development would be moderately risky due to the fact that France
would be a relatively unknown demographic and market development strategies in the context of
specific needs would have to be catered according to local tastes and desires.
The strategy of product development would be substantially less risky as the strength of Zara
lies in its well founded general public image and qualities of production and final design.
Existing customers could be targeted on the principle of brand retention increasing the feasibility
of this strategy further so (Jarzabkowski and Kaplan, 2015).
Diversification strategy would be associated with a high degree of risk, as Zara has no prior
experience apart from the organised retail sector within its home territory itself. Naturally, it
would make little sense to diversify product range at an overseas location (Wang, 2014).
The market penetration strategy is the one the company would opt for and function upon in order
to maintain operational efficiency.
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