Question 1
Among the various internationalization theories, Uppsala internationalization model can be considered as the best representative of the Zara's strategy of internalization. According to Tykesson and Alserud (2011, p.6). The Uppsala Model of Internationalization implies that firms try to enter the new market incrementally based on their market knowledge. When a firm acquires adequate information and experience regarding their local market, they tend to expand into the neighboring market and then later in the foreign markets. Usually, such firms enter into the markets that have similar characteristics in the markets where they have acquired experience. Zara has followed various Steps of the Uppsala model to enter into the international market. The stage of internationalization includes two fundamental aspects that include state (market knowledge and market commitment) and change (current activities and commitment decisions) (Tykesson and Alserud, 2011, p.6).
In the 1980s, Zara attempted to acquire market information and experience through expanding within the domestic market, where it opened various stores in the Spanish cities. In the local markets, the company was operating in cities that exceeded the population of 100,000 inhabitants. Zara operated in the Spanish market until it reached maturity, and hence acquired experience and substantial market knowledge. Subsequently, the company used the gathered market information to expand to the neighboring markets such as Portugal. Portugal market had an attractive and similar trait like Spain due to its cultural and geographical proximity. Through the exploration of the Portugal market, Zara acquired experience and knowledge of the international market that helps the firm to enter into the international market (Lopez & Fan, 2009, p.148). In other words, Zara tended to enter into the new market after it had acquired market knowledge in Portugal.
Similar to the elements of the Uppsala model of internalization, Zara tried to expand into the internationalization markets that had an almost similar level of cultural distance with the local market, Spain. In 1990, the firm entered into the Paris market that helped it to acquire more international market knowledge due to its elements such as fashion hub and geographically contiguous trait. In addition, the company entered the South American market through Mexico, country that is culturally similar to Spain. This move helped the company to obtain the required market knowledge of the markets in South America and subsequently became more interested in venturing into the global market despite the geographical and cultural difference. Later, the firm gradually acquired the required experience of the international market and started to operate in countries such as Israel, Lebanon, Kuwait, United Arabs Emirates, and the European market.
The Zara's gradual penetration into the international market illustrates how the Uppsala model view internationalization process of a company as a time consuming and engaging organizational learning process. The firms using this model considers the experiential knowledge as a significant factor that helps the firm to reduce the market risks and develop the foreign business opportunities (Tykesson and Alserud, 2011, p.7). During the initial stages of internalization, Zara used the ethnocentric orientation to replicate the foreign stores to the local stores. This indicates that the firm as utilizing the local market experience to expand into the international markets. However, the strategy was challenged by the fact that international markets have a different culture. As a result, the company moved to the geocentric culture to integrate the behaviors of the consumers in the foreign markets (p.148). Rather that concentrating on the other marketing strategies such advertising, Zara focused on learning the local markets and customers' choice, preference, and trend. The company also developed similar stores to enhance accessibility and reputation in the global market.
Question 2
According to the case study, the fashion industry is characterized by stiff competition from three main companies. The three main competitors include Zara, Gap, and H&M. these competitors have to develop effective competitive strategies such cost effectively and differentiation to remain competitive in the market. The discussed below are the competitive strategies of these three world market leaders.
The competitive strategy of the Zara Company is the differentiation strategy. According to Bordes (2009, p.9), "Differentiation strategies are based on providing buyers with something that is different or unique, that makes the company's product or service distinct from that of their rivals." Zara struggles to satisfy the needs and preferences of their diverse customers by producing standardized products. Their core competence is based on the ability to identify and assimilate the continuous changes in fashion and developing new models that answer the customers' needs and preferences. As a result, their global competitiveness is based on their ability to adapt the offer accurately and quickly to the customers' needs (Lopez & Fan, 2009, p.145).
On the other hand, both GAP and H&M seems to take the low-cost strategy. The low-cost strategy requires the firm to locate and leverage every possible source of cost advantage in its value chain. The firm comes up with effective ways to reduce their activity costs. As a result, H&M and GAP have been able to produce their fashion products and offer them at affordable prices. For instance, H&M has moved the majority of its clothing manufacturer to Bangladesh and Turkey to take advantage of the availability of the raw material and cheap labor force. As the result, the company has been able to achieve low priced product as reflected by its mission "fashion and quality at the best price."
The use of the differentiation has evidently helped the Zara Company insulate themselves moderately from their competitors in the industry. In addition, the differentiation strategy has successfully made their consumers less sensitive to the prices and hence ability to make more profit than their competitors. As illustrated in the case study, Zara is the leading company regarding net profit. Regardless of lowers sales compared to H&M, Zara has produces a net profit of €1,946 million compared to 1,823 for H&M. In addition, the company shows the highest growth rate of +10 percent compared to -1 percent of GAP and +1.5 percent of H&M. within a shorter period of operation than the main competitors, Zero has maintained its competitive force. For instance, the company has adequately managed to open 5,500 global stores compared to 3,100 and 2,200 stores for GAP and H&M respectively. The company also leads in terms of the brand portfolio with eight brand stores compared to five and one brand store for GAP and H&M respectively.
Therefore, Zara indicates a constant and more sustainable growth in future compared to the two competitors. This is because of the factors such as growth rate, global stores, net profit, and growth rate, which are greater than those of the main competitors are. If the Zara Company remains consistent with its competitive strategy, it is anticipated to be the future winner in the fashion industry.
Question 3
Over the past three decades, Inditex built a brand portfolio. The multi-brand store strategy was used to help in the marketing of two or more similar and competing products in the firm under unrelated and different products names. According to the case study, the firm made the decision of adopting multi-brand store strategy due to the success of the initial brand. The strategy of multi-brand portfolio helped the Inditex to target different segments more effectively (Lopez & Fan, 2009, p146). Zara is a Spanish popular fusion retailer in the world under Inditex Group founded in 1975 owned by Ortega. Many of brands, for instance, Pull & Bear, Oysho, Bershka, and Uterque are brands that are operating under Zara Home main brand.
A firm can fill up the Quality Gaps as well as Price Gap of the target market by promoting parallel products under unrelated and different Brand Names. When applying the strategy of the multi-brand portfolio, the market can become saturated with similar brands of the same company. However, the risk of cannibalization and cost of upholding several brands are the major drawbacks of the multi-brand portfolio. Nevertheless, Inditex differentiates the brands mainly through the target markets, products, and retail image and store presentation to tackle cannibalization (Lopez & Fan, 2009, p146).
According to the case study, the Multi-Brand Strategy in Zara has increased the profitability of the firm. Different sales managers for the different brands increase internal competition, which on the other hand increases sales under different brands. Overall, the result may cause an increasing of profitability of Zara Company. To generate a high degree of internal competition, the sales managers of the Zara Company are bound to operate professionally. Therefore, Multi-Brand Strategy keeps the company's managers on their toes due to internal competition.
Additionally, multi-brand store strategy increases easy adoption of the new brand by the company's loyal customer base. Moreover, brand image of the initial brands may lower the extra spending on promotions and spending. The existing strong multi-brand portfolio is used to promote a new brand and makes it less critical to creating awareness (Lopez & Fan, 2009, p146). It also represents a promise of the quality brand to the consumers, which increase international opportunities. Therefore, these become the major source of Zara Inditex additional revenue.
On the other hand, Zara Company also experiences some disadvantages of multi-brand strategy. These include the high cost of maintaining its numerous brands. Additionally, the multi brand strategy put the company under high hazard of cannibalization. Inditex has also suffered from difficulties in management Tokatli, 2008, p30). This is because when multi brands are owned by a parent company that is the Zara Inditex, it becomes difficult to manage brands under many products.
Additionally, high expectations on new brands from the consumers become a challenge for the company. Loyal customers expect the same or even better standard of quality from new products. Therefore, the company gets greater challenges in maintaining such standards since the customers have experienced the quality of the existing brands. Moreover, as a result of maintaining several brands instantaneously, multi-brand store strategy may increase lack of brand focus and clarity. Another great challenge that multi-brand store strategy can expose to the Zara Company is a risk of brand equality dilution. This is because it can lower the effectiveness of the brand name because the customers may have seen the brand name severally which might reduce the initial faith they once have (Lopez & Fan, 2009, p146). Lastly, negative feedback effects may be another challenge that faces Zara Company that damage the goodwill of the other brands.
Question 4
According to Madhavi (2014, p.41), "Product Cannibalization refers to a reduction in sales volume, sales revenue, or market share of existing product as a result of the introduction of a new product by the same manufacturer or by competitors." Zara Inditex experiences this situation in the year 1991 after they entered into the multi-brand strategy (Lopez & Fan, 2009, p145). Zara has overcame this hazard through multi-brand portfolio that involves building brands within the domestic market and then launching into the international markets.
Zara has successfully met the risk of cannibalization through the use of the latest technologies. The modern technology brings in new algorithms that combine the rate of sale of many brands as compared to similar brands during same seasonal cycles. These helps Zara yield cautions and adjust manufacturing before peak demand is attained.
Additionally, Zara has used the strategy of differentiating its business model from that of its competitors by enhancing turnaround time and using the store as the source of the information. To overcome this risk of cannibalization, Zara has used the strategy of completing the design, manufacturing and delivery of a new piece of clothing in four weeks, which is much faster than the competition.
Moreover, Zara uses the differentiating strategy of the new brand by enhancing that the new product is not so closer to the existing brand. Inditex has built a portfolio of brands through brand acquisitions as well as owning eight major brand stores which involve Pull & Bear, Oysho, Bershka and many others. Zara has undertaken the hazard of cannibalization of these brand products by differentiating the brand products (Lopez & Fan, 2009, p146). For instance, the eight different brands portfolio under Inditex group deals with eight different brands though it is categorized under similar apparel products.
Another way that Zara Company is using as a strategy to deal with cannibalization is marketing different values. The company ensures that new products of different brands are aiming an utterly different market that is based on gender, age, and event. This helps the company to enter into a new market as well as increasing the loyal customer base (Lopez & Fan, 2009, p146). For instance, Zara offers products for women, men, and children under the age of newborn to the age of 45 years. Pull & Bears offers a product of women and men from the ages of 13-23 years.
Finally, Zara uses the strategy of differentiating the retail image and store presentation to tackle the risk of cannibalization (Madhavi, 2014, p42). The company ensures that the stores are located further away from newly built stores to lower the risk of cannibalization as well as the retail image which ensures that the trust of the customers on the existing brand name is not devastated(Lopez & Fan, 2009, p146).
Question 5
Joint venturing occurs when two firms decide to pool their resource to achieve a common purpose effectively. In 2009, Inditex and Tata's group signed an agreement to establish a joint venture with a common goal of developing Zara stores in India. The control ratio of this venture was 51 to 49 on Zara and Trent Limited, a Tata Group Company. However, this joint venture is expected to have some advantages and some disadvantages.
Advantages
Through the joint venture, Zara will able to access the foreign market much faster and less costly than entering on its own. Tata Company is a reputable company in that will allow Zara to have quick access to the channels of distribution in India as well as acquiring know-how and knowledge of the local marketplace. For instance, the case study reveals that Tata is among the largest conglomerates in India. The company has operated for more than 140 years in industries such as engineering, material services, information systems and communications, consumer products, energy, and chemicals. Tata Group also has a vast experience in the global market.
Another advantage of Zara entering the joint venture with the Tata Group is that Tata will help Zara to establish a quick relationship with the key customers and suppliers and proficiency in the local culture. India has the second largest population in the world with more than 1.1 billion residents. Developing a relationship with the main suppliers and customers and assimilating to the local culture would be a hard nut to crack when entering in such market solely as one foreign company. Therefore, entering into such big market requires developing a joint venture with a local company that has market knowledge and experience.
Disadvantages
Although a joint venture has intriguing advantages, various disadvantages make this business venture a risky business. For instance, the joint venture might develop a frustrating experience due to their dissimilar cultural backgrounds. As a result, this can deteriorate their planning strategy and fail to anticipate factors such as technological issues, marketplace developments, economic downturns, and regulatory uncertainties.
Another disadvantage of the joint venture is the reduced profit because the profit earned is shared between the two companies. The partners might develop management issues because they share different management philosophies.
Because of the well-established Tata Reputation in the India market, Tata might dominate the business, and the secrets of the industry become vulnerable. In this case, Zara might expose its competitive strategy and the secret of the fashion industry to the Tata Group, which in turn might use the information to dominate the business.
The culture of the Indian population might limit the business profitability and growth. India is broadly known for embracing the indigenous culture, especially on their attires. For instance, men are commonly identified to wear Kurutha, panache, lungi, or dhoti while women were salwar or sari. While Zari invests in developing latest and fashionable clothes that match with the current trends, the consumers in India prefers their traditional attires. Therefore, moving into such culture would require the company to develop a new strategy and business model, which might be costly or take the time to make the desirable profit.
The rules and regulation in the Indian market might also constrain Zara Company from making their desired goals. The government might impose strict regulation on the foreign investment, which might consequently harm the relationship between the two parties.
References
Bordes, J. 2009. Strategic Management Assignment: Building and Sustaining Competitive (Unpublished master's thesis). Atlantic International University, Honolulu.
Lopez, C. and Fan, Y. 2009. Case study: Internationalization of the Spanish Fashion brand Zara, Journal of Fashion of Fashion Marketing and Management, 13(2), pp. 144-149
Madhavi, K. 2014. The Impact of Product Cannibalization on Consumer Purchasing Decision-An Attitudinal Conflict Paradigm. International Journal of Research in Business Management, 2(8), 41-48.
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), pp.21-38.
Tykesson, D. and Alserud, M., 2011. The Uppsala Model’s Applicability on Internationalization processes of European SMEs, Today-A Case Study of Three Small and Medium Sized Enterprises. Lunds Universitet
