Porters Analysis of Zara

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MGT136- Management Themes and Perspectives
Strategy
MGT136-1

Provide an analysis of an organisation explaining the relative importance of each of Porter’s Five Forces for the organisation’s strategic position. You should support your arguments with evidence from the company and/or the relevant literature.

Zara has been the major pioneer of ‘disposable’ fashion; which makes up over 12% of the UK clothing industry. Zara outperforms its rivals in profitability, brand identity, and its successful business model. I have used Porter’s five forces model (Porter, 1995) to analyse the industry and Zara’s strategic position. I have applied the theory of this model and its determinants to my research of Zara; providing evidence to form strong conclusions. Zara faces competition from other market leaders such as Topshop and H&M which all provide customers similar products of ‘disposable’ fashion. The concentration of the market also influences rivalry amongst competitors. I believe the ‘fast-fashion’ industry is an oligopolistic market; concentrated by a few main competitors. Through its ‘unique business model’ Zara has revolutionised the modern clothing industry and bought about industrial growth. Zara shows higher levels of profits than its competitors during 2009. The Arcadia Group (Topshop) experienced a 2.1% increase in their operating profit. (Arcadia Group, 2010). H&M increased operating profit by 7.4% (comparing figures from 2008 and 2009). (H&M Corporate, 2010). Inditex (Zara) showed increased annual operating profit of 8.6% (Inditex Group, 2010).

Zara’s consumers, on average, will visit the store seventeen times per annum, whereas the average for a London high street store is four times. (Ferdows, K., Lewis, M. A., Machuca, J. A. D., 2005). Consequently, Zara has to spend less on advertisement. The industry average is around 3-4% of sales, whereas Zara spends just 0.3% of sales on advertising. Porter (2004) states, “The intensity of rivalry influences prices as well as the costs of competing in areas such as plant, product development, advertising and sales force”. Zara fulfils many of Porter’s determinants of rivalry and shows competitive advantage over its rivals. In the oligopolistic ‘fast-fashion’ industry, creating and sustaining a brand identity is challenging when faced with market dominating competitors. Firms have experienced years of industry growth and new entrants need to have the knowledge of the extent of their economies of scale. Zara does not implement economies of scale; the company has evolved a unique alternative; all of the designing, manufacturing and distributing take place at a single plant. They hired automotive experts Toyota, who gave them technology to ensure maximised efficiency. With everything located on one plant, Zara claims a huge superiority over the market, and also low transport and communication costs. The’ unique business model’ increases the intensity of many barriers to entry from Porter’s model; economies of scale, brand identity, capital requirements, proprietary learning curve and most significantly absolute cost advantages, and successfully reduces the threat of new entrants. Substitutes are influential in the competitiveness of each firm. Buyer propensity to substitutes is defined by factors such as attractiveness of competing firms’ products, lower prices and customer service. The switching costs for this industry are fairly low and combined with the oligopolistic market structure, firms need to differentiate their products to aim to reduce buyer propensity to substitutes. H&M and Topshop both utilise online shopping as a service to their customers. Zara launched its online shopping service on 2nd September 2010. The initiative proved a success and Inditex Deputy Chairman and CEO Pablo Isla commented, "the strategic significance of this new commercial initiative, which is in keeping with our ongoing effort: to offer our customers the best service...
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