Effects of Hybrid Strategy on Zara UK

Effects of Hybrid Strategy on Zara UK CHAPTER ONE 1. INTRODUCTION 1. 1. Rationale for Chosen Topic To achieve competitive advantage in a highly competitive market such as a fashion market is not an easy process, what is more difficult than that is to achieve sustainable competitive advantage in like this market which also describe as fast changeable and unpredictable market. This opens the field to know about the competitive strategies, and to choose the best strategy among them to achieve the objective of sustainable competitive advantage. This research focuses on the Generic strategies which suggested by Michael Porter in 1980 who set three different strategies which are the low-cost leadership strategy, differentiation strategy, and focus strategy. Porter (1980) argued that these strategies are the road map for the companies to achieve a sustainable competitive advantage, however he warned that the combining two of these strategies will put the company in a position defined by him as ‘Stuck in the Middle and therefore will not lead a high performance. However, other researchers in the strategic management field such as Miller and Dess (1993), Kekre and Srinivasan (1990), Faulkner and Bowman (1992) and Hill (1988) suggest that combination of two strategies would let the companies achieve a high performance, and achieve sustainable competitive advantage. Recognising the debate in the academic world suggests exploring whether application of â€Å"hybrid strategy† will help companies in achieving sustainable competitive advantage or not. To do this, Zara UK is chosen since it has the highest contribution to the overall revenues of Inditex, the mother company, which was accounted 65.6% of the whole sales (Inditex Annual Report, 2008). 1. 2. Research Background Inditex group is a Spanish company and is one of the largest fashion distributor groups in the world. The group was established in 1975 and opened its first branch in Coruà ±a city in Spain (Inditex, 2009). The international expansion of Inditex started in 1988 by openings its store in the UK which is now the fifth largest market of the group after France, Italy, Portugal, and Germany in terms of number of stores (Inditex Annual Report, 2008). In 2009, Inditex operates in 73 countries through 4430 stores and among those 1340 are under the name of Zara. In 2008, the number of Zara stores in the UK was 63 (Inditex, 2009). â€Å"Inditex† consists of six subsidiary companies working in the retail industry and one of them is Zara which generates the highest income in overall revenues of Inditex. Zara is the most internationalised business unit of the group and therefore has the largest of chain (Inditex, 2009). 1. 3. Research Aim Ultimately, this research aims at exploring whether hybrid strategy helped Zara UK in creating sustainable competitive advantage or not. Reaching this aim requires conducting external and internal analyses. Applied tools and their justification are given below: The external environments which surround Zara are analysed by using: PESTLE tool to analyse the impact of Political, Economical, Social, Technological, Legislations, and Environmental factors on Zara to explore weather it would formulates opportunities or threats. Porters Five Forces model to analyse the competitive environment which surrounds Zara in order to explore the market conditions in fashion industry. Key Competitors analysis in order to examine the key competitors of Zara in the market to identify their similarities and differences as well as the business process in Zara. The internal environment of Zara is analysed by using: Values Chain analysis in order to explore how efficiently Zara uses the value chain system to create value for its customers. Financial analysis in order to analyse its financial performance from 2006 until the first half of 2009. Resource-based View analysis to determine core competences, and capabilities of Zara. Grand Strategy analysis to identify the grand strategy used by Inditex and to examine the effectiveness of this strategy. Competitive Strategy analysis in order to determine the competitive strategy used by Zara in achieving sustainable competitive advantage and analyse the effectiveness of this strategy. SWOT analysis in order to determine the internal strengths and weaknesses of Zara as well as the opportunities and threats that Zara faces due to forces exist in external environment. It is believed that after conducting these analyses, it would be possible to reach a conclusion about whether hybrid strategy is effective or not in achieving sustainable competitive advantage in the UK fashion industry. CHAPTER TWO 2. LITERATURE REVIEW 2. 1. Competitive Strategy Literature in competitive advantage strategy is a well developed topic and many scholars such as Milles and Snows (1978) Mintzberg and Quinn (1992) Faulkner and Bowman (1995) introduced several models to explain how companies can achieve sustained competitive advantage. However, one of the most famous and effective model in this field was Michael Porters framework which was introduced in 1980. in this framework which is called ‘Generic Strategy, he mention that the firm can achieve competitive advantage from three different bases. According to Porter (2004): â€Å"The two basic types of competitive advantage competitive advantage combined with the scope of activities for which the firm seeks to achieve them lead to three generic strategies for achieving above- average performance in an industry: cost leadership, differentiation, and focus. The focus strategy has two variant, cost focus and differentiation focus† Having briefly described the Generic Strategies, it is necessary to look at them in details. 2. 1. 1. Cost Leadership Strategy To achieve competitive advantage according to Porter (1980, 2004), the company has to decrease their cost, and to achieve cost advantage below its competitors in the market. By doing this, a company is able to lower prices and performs above the average performer in its industry thanks to the fact that the cost for the company will be less than its rivals. The company can succeed in its cost leadership strategy if it focuses in decreasing the overhead cost, uses a low-cost product design and automated assembly and pursuits economies of scale and so on. However, David (2005) highlighted some risks associated with applying this strategy. According to him, competitors may imitate this strategy and increase the competition and make a head on collusion, which will drive the overall profit of the industry down (David, 2005). 2. 1. 2. Differentiation Strategy According to Porter (1980, 2004), to achieve competitive advantage, the company has to seek to be unique in its industry. In another words, gaining a competitive advantage can be achieved by increasing the willingness of customers to pay for the company products or services that the company sell (Barney, 2007). According to Gaik (1993), in differentiation strategy, the customers look at the attributes of the products other than looking at the price. To apply this strategy, the firm has to differentiate itself in terms of its products for instance by focusing on the quality of the products or in terms of provided service by focusing on the delivery system by means of decreasing the lead or delivery time. Moreover, the company has to focus on the promotion and the packaging of products. The firm can also differentiate its products by competing on both cost and differentiation, by decreasing the cost and by adding value at the same time. One of the tools for achieving both strategies is managing the supply and value chain systems and designing, structuring, modifying and operating efficiently to add value to the products at the lowest cost possible. However, David (2005) mentioned that the risks of this strategy might be that the product or the service may not be valued enough for the customers to buy it at the price of which the company desires and/or that competitors will be able to imitate the products or services. Therefore, if a company seeks to be successful and sustain its advantage in the market, it should pursue a creative strategy which makes difficult for competitors to imitate and replicate the products or services. 2. 1. 3. Focus Strategy According to Porter (1980; 2004), focus strategy is different than other strategies this is because this strategy aims to narrow the competitive scope in the market, requires selecting a specific segment or group and focusing on it by tailoring the strategy to an exclusive and particular market. This strategy has two variants which are differentiation focus and cost focus. Differentiation focus aims at differentiating a segment or a group by satisfy their unusual needs and the in Cost focus, the firm seeks to achieve low-cost advantage in order to provide the products at cheap prices and the concentration is made only for a small number of the market segments. However, the risk of these strategies is that competitors can easily recognise the success and may copy them (David, 2005). Porter (1980; 2004) mentioned that each strategy is fundamentally different from the other strategies in terms of creating sustainable competitive advantage. Therefore, a company has to make a choice among these strategies and does not combine them. Otherwise, it will lead the firm to get â€Å"stuck in the middle†. He also stressed that being ‘all things to all people is the recipe for strategic mediocrity and if the performance is below the average, it often means that a firm has no competitive advantage at all (Porter, 1980; 2004). However, according to Porter (1980), there are three circumstances where a firm can combine two strategies given in the Generic Strategies framework: First, when all of the other competitors are stuck in the middle; second, when the cost is strongly affected by share or interrelations and finally, when a firm pioneers are a major innovation. Also Porter (1980) mentioned that even under these circumstances, a firm would not be able to compete with a firm which pursues either differentiation, cost leadership or focus strategies. Therefore, according to Porter (1980), a hybrid strategy is unlikely to achieve sustainable competitive advantage. 2. 2. Empirical Studies Porters framework both supported and criticised by the scholars. For instance, Dess and Davis (1984) and Kim and Lim (1988) supported Porters claims and found that companies have to employ only one of the Porters generic strategies if their aim is to achieve higher performance. On the other hand, several authors such as Miller and Dess (1993), Kekre and Sriniva-San (1990), Faulkner and Bowman (1992) and Hill (1988) criticised Porters claims and provided evidence that â€Å"the combination between the cost leadership and the differentiation strategy† would help the company to achieve high performance in the market. For example, Miller and Dess (1993), Kekre and Sriniva-san (1990), Faulkner and Bowman (1992) and Hill (1988) demonstrated that it is not necessary to choose between one of the competitive advantage strategy in order to achieve a high performance. They argued that a company may achieve high performance against its competitors by combining differentiation strategy and cost leadership strategy. This is because integration of these strategies allows being flexible against the changes in the environment. Barney (2007) mentioned that a company can use low-cost and product differentiation strategies simultaneously and this is often expected to create sustained competitive advantage. Moreover, Miller and Dess (1993) mentioned that conceptualisation of Porters model enables the researcher in a strategic management field to explore the viability of the Hybrid strategy. Miller and Dess (1993) gave an evident of Toyota and Lincoln Electric companies as highly successful companies which are applying the Hybrid strategy. Moreover, Wright et al. (1990) also proved that use of Hybrid strategy in apparel industry brought higher financial performance. In addition, Hall (1980) explored that use of Hybrid strategy is the main reason of high successful of firms in low-profit industries. Murray (1988) proposed that firms can use hybrid strategy successfully by focusing in two areas: areas of production and functional areas. In terms of production areas, Murray (1988) threw an argument based on the research conducted by Hayes and Weelwright (1984) and Schonberger (1982) and asserted that achieving greater market responsiveness depends on higher product quality. Using techniques such as Total Quality Control (TQC) and its integration with Just In Time (JIT) for inventory control and purchasing procedures are key to the success. Benefits would be reduction of cost as use of these techniques will be resulted in higher customer satisfaction. As a result, the conflict between the production and the marketing functions can be eliminated and therefore cost minimisation and price maximisation strategies can be implemented together. In terms of functional areas, conflict resolution techniques can be applied which will minimise the conflict to a point that permits the firm to pursue cost leadership and product differentiation strategies simultaneously. More recently, Grant (2005) pointed out the changes occurred in the management techniques and the industries and stated that the market leaders in most industries are the firms whom are able to maximise the customer appeal by reconciling effective mixture between differentiation and low cost. The examples of these firms include Toyota, Dell and Canon. More importantly, he underlined the fact that the success of these firms relies on the implementation of new management techniques such as Total Quality Management (TQM) of which exploded the myth that there is a trade off between high quality and low cost. Grant (2005) also mentioned about the role of the innovation in the manufacturing technology and the manufacturing management in producing simultaneous increase in productivity and quality. Thompson et al. (2005) called hybrid strategy as the ‘best-cost provider and stressed that in order for a firm to gain a competitive advantage among the competitors; it should have a lower cost than its competitors and should position its products with good-to-excellent attributes. They also stated that this strategy can be effective in markets where the buyers are sensitive to the price and the value and then the firm can position itself near the middle of the market by providing customers with either a medium quality products at below average price or by providing with high quality products at an average price. However, they warned that the firm which does not have the capabilities to integrate the upscale product attributes at lower prices compare to its competitors, the hybrid strategy would be ill-advised for them. CHAPTER THREE 3. RESEARCH METHODOLOGY 3. 1. Chosen Topic The â€Å"Hybrid Strategy† has been challenged by many strategic management scholars who argued that this strategy can be harmful to the companies. However, substantial amount of research showed that several companies like Toyota, Dell Inc, etc. have achieved a superior success. In order to assess whether this is true or not, this study examines the strategy of Zara in the hybrid strategy framework to determine whether it is successful or it â€Å"stuck in the middle†. 3. 2. Research Question In the light of the ultimate aim, the research question of this study is to what extent Hybrid Strategy can achieve a sustainable competitive advantage for firms in fashion retail industry in the UK. The research focuses on Zara UK which is one of the important business units of Inditex Group. 3. 3. Research Technique The dissertation is qualitative in nature. The exploration is based on data obtained from secondary sources of which include information that is already collected for other studies and documents. The main secondary sources used in this study include reports and documents such as annual reports, press releases and other documents published by the company as well as official statistics and other publicly available data collected by research institutions. The research did not attempt to collect a primary data due to barriers in communicating with the company as well as time limitations. 3. 4. Advantages and Disadvantages of Use of Secondary Resources The main advantage of using secondary data is embodied in saving time and resources. There are some disadvantages associated with the use of the secondary data in this particular study. First of all, collected information does not answer the research question fully. However, they are good enough to be relied upon to reach a conclusion. Secondly, secondary data has reliability issue as there are many resources but in some cases it is not possible to determine whether it is valid or not and this limits the accuracy of the analysis based on secondary data. To overcome these limitations, the coverage of the information was enlarged and multiple sources were used to improve the reliability of the data. 3. 5. Quality of Resources Zara is a leading company in the industry and have competitors. Therefore, before using the data obtained from secondary sources, it was assessed in terms of quality in order to verify whether the data is consistent with the purpose of the research and whether it is reliable and up-to-date. Quality standards were determined by identifying directions of bias in the resources by means of attempting both biased and unbiased sources, by checking the background and reputation of the provider and their level of education, and experience in their professional career. The assessment also considered the target audience in terms of their knowledge as a bias direction. The resources were also assessed in terms of their relevance to the research, their readiness and usefulness in achieving targeted quality and in the analysis of anticipated results. 3. 6. Case Study To enrich the quality of the research particularly in terms of its practicality and its rationality, it used empirical inquiry methods for analysis to investigate the contemporary phenomenon within Zaras real-life context. Therefore it has boundaries between phenomenon and context aimed at providing clear evidence by using multiple sources to assure quality and objectivity. In developing and conducting this study, the researcher was influenced by the case study produced by Ghemawat and Nueno and published in 2003. In their study, the authors explained the rapid changes occurred in the fashion industry, by focusing on the global apparel chain Zara and its structure from the producers to the ultimate customers. Although this study influenced by the Ghemawat and Nuenos (2003) work, it did not depend on the case because of two reasons. First of all, the case study focuses on the corporate level and the mother company and therefore did not include the strategic planning techniques and analysis to explore the advantages of using hybrid competitive strategy. Having said that, this study made use of information about Zara provided by the case study in developing the strategic analysis. Secondly, the case study was prepared in 2003 and the facts given in that study was outdated to some extent. As this paper needs to be based on most recent data particularly for external analysis, financial analysis, current trends in fashion market, it is different than the case study provided by Ghemawat and Nueno (2003). CHAPTER FOUR 4. ANALYSIS 4. 1. External Analysis 4. 1. 1. Characteristics of Fashion Retail Market 4. 1. 1. 1. Overview of Fashion Retail Market in the UK The apparel retail market contains three main sectors: the womenswear sector, menswear sector and infantswear sector. According to Data Monitor (2008), womenswear sector consists of retail sale of clothing for girls and women and generated 66.90% of the whole market in 2007 in the UK. The menswear sector consists of retail sale of clothing for men and boys and generated 30.90% of the whole market. And the infantswear sector includes retail sale of clothing for children between ages of 0 to 2 years of age and it accounts 2.20% of the sales generated by the whole market in the UK in 2007. According to Data Monitors (2008) report, the UK apparel retail market has the highest percentage of revenue in the Europe market value with 24.1% in 2007. The clothing market in the UK grew significantly between 2001 and 2005 when the total spending on clothes in the UK in 2005 reached at  £38.4 billion. Womens clothing sector showed the highest growth with 21% and the total value reached at  £24 billion in the same year. More interestingly the clothing market has been growing even though the recession which hit the UK in October 2007 and affected most of the UK sectors. According to the National Statistics (2009), the sales volume in retail sector in June 2009 was 2.9% higher than in June 2008. In the non-food sector, the sales increased by 2.4% and the largest increase occurred in textile, clothing and footwear by 11.3%. Fashion is a part of the clothing and textile industry and the fashion industry is characterised by the rapid change and the high competition particularly after the year 2005 because of permission of unrestricted access of all members of the World Trade Organisation (WTO) to the European (Lopez and Fan, 2009). This created a big opportunity for the multinational companies to invest in the UK market. Moreover, the rapid change in technology has given the chance for companies to reduce their cost and to increase the quality of their products. In addition, companies which are searching to decrease their costs started to outsource their production with the companies from the countries with low-labour cost such as China, Singapore. This led the competition in the clothing industry to increase and as the competition increased, the prices went down; as a result a market for ‘Discount Apparel Retail emerged and started to grow (Datamonitor, 2008). However, in the fashion industry, customers do not consider prices but look at the quality, variety, design and the availability of the products. Due to characteristics of the market, no particular group or company dominate the market since the market is driven by â€Å"customers†. In addition, due to increased competition, switching cost for the customers also diminished. This resulted in changes in the direction of competition. Today, the rules of the game in the clothing market have changed and meeting with customer expectations turned into achieving fast fashion production (Walters, 2006). Bruce and Daly (2006) describe todays fashion industry in the following way: â€Å"In fast fashion, buying activities play a crucial role through supplier selection and product decision-making, and indeed, buying is arguably changing from purely operational to much more strategic† And according to Walters (2008), the retailers in â€Å"fast fashion† can satisfy consumer expectations by the speed, variety and style of the products and by selling the products in low prices. 4. 1. 1. 2. The Nature of Fashion Market According to Christopher et al. (2004), there are four elements which determine the characteristics of the fashion market. These are: Short life-cycles products have short life, it is often for a moment when designs catch the style. As a result, the period of selling products is very short and seasonal: it could months or even weeks. High volatility the demand in the fashion market is rarely stable; the demand may be influenced by several factors, such as the weather, movies or even footballers or pop stars. Low predictability it is not easy to predict the desire of the market in the fashion industry, because of the volatility of the demand. Therefore, it is very difficult to predict total demand within a period accurately even week-by-week or item-by item. High impulse purchasing the availability of the products increases the need for the customer to buy it. Consumers decision making for buying fashion clothes occur at the point of purchase. 4. 1. 2. 3. Key Success Factors for Fashion Industry To conclude, as the fashion products have a short life cycle and as it is difficult to predict the market demand due to unstable demand as well as characteristics of fashion market, several key success factors were identified. These are outlined below: Price: Prices should be affordable for the customers. Quality: Fashion products should have a good quality. Quick Response: Companies should respond to market demand quickly by launching rapidly. Design: Should match with the current fashion. Availability: Products should be available on the shelves of the store as long as there is demand. Variety: Companies should provide variety of products for the customers. 4. 1. 2. PESTLE Analysis PESTLE framework provides a comprehensive list of environmental influences on the possible success or failure of particular strategies (Johnson et al., 2008). PESTLE framework contains six factors, which are the external factors that have effect on companies. It is argued that if companies major these factors they can formulate strategies from the opportunities or be prepared for the threats. 4. 1. 2. 1. P Political Factors Since 2005, no restrictions left on all import in the textile and clothing industry. This gives unrestricted access to all members of the WTO to the European. This would formulate an opportunity for Zara as it imports products from outside the UK with low cost without any restrictions. However it could pose as a threat for Zara, as the competition in the market can be increased especially by the companies which have products with lower prices. 4. 1. 2. 2. E Economic Factors Most recent recession hit almost all countries in the world, including the UK. As a result of global recession, the unemployment rate in UK started to increased. According to the National Statistics (2009), the unemployment rate was 7.6% for the first quarter of 2009 and it was the highest rate since 1981. The impact of recession in the UK is a threat for Zara, as the number of unemployed people increase, their expenditures decrease. Moreover, for employed people, current economic conditions bring uncertainty and therefore they tend to decrease their expenditures and increase their saving. This could affect Zaras sales in an adverse way since unemployment rate has been on the rise. Moreover, as a result of economic recession, the Gross Domestic Product (GDP) has been declining in a dramatic way in the UK. According to the National Institute of Economic and Social Research (2009), the GDP in the UK fell by 0.3% ending in July 2009; in addition, according to Financial Times (2009), it was the worst quarterly performance since 1958. However it is predicted that it rose by 0.2% starting from August. Decline in the GDP posed a threat for Zara as it indicates decline in consumers income. In terms of exchange rates, the situation is also not that bright. According to Economy Watch Website (2009), since December 2008, the Great Britain Pound (GBP) lost value at a rapid rate and reached a 24-year low of $1.35 per  £1 in January 2009. The impact of weakening of the pound against euro and dollar is pushing up the prices of imports and therefore forces retailers to increase their prices. According to Financial Times (2009), this would formulate a threat for Zara as the retailer will need to increase its prices. However, depreciation of GBP would be an opportunity for the mother company Inditex because of the strong Euro against the GBP. More interestingly, despite the recession, the clothing industry in the UK is still growing. In general, the retail industry in UK has grown during 2009 and the growth was predominantly in non-food goods particularly in textile, clothing and footwear stores by 11.3% (National Statistics, 2009b). 4. 1. 2. 3. S Social Factors The social factors are one of the most important factors which affect the fashion industry. Culture of the society is viewed as the most significant factor in terms of its effects in fashion since it is different from one country to another, even it might be different in the same country. Moreover, culture changes as time passes and these changes affect preferences in fashion. As a result, predicting changes become difficult since taste of consumes can be influenced by several factors, such as weather, movies, or even footballers or pop stars (Christopher et al., 2004). The impact of this would be a threat for all companies in fashion industry if they company cannot be able to adapt themselves with ever-changing nature of tastes. Other thing which might affect fashion preferences is education which triggers continuous searching for knowledge. In the UK, education level is high and it causes fashion preferences change rapidly. This is because, as a result of high education level, the awareness of customers to new areas of experience expands and it increases the interest in and desire for a more fashionable appearance. Moreover, increases in the number of working women let them more confident in their judgments when making decisions about clothing (Kiran et al., 2002). The increase in population in the UK is also an opportunity for Zara. According to National Statistics (2009), the UKs population increase with an annual growth rate of 0.5% which is about 1000 people per day due to increase in number of births. This means the market for fashion clothing will continue to grow thanks to the increase in the number of customers, particularly in children clothing sector. UK clothing market is well-developed market and it is growing. According to the research conducted by Allwood et al. (2006), consumers in the UK spent  £38.4 billion in 2005 in clothing and of which  £24 billion was on womens, girls and infants clothing and  £12 billion on mens and boys clothing. Growing fashion clothing market is an opportunity for Zara, especially in women and girls sectors. To conclude, it can be said that the impact of the social factors on Zara would be positive as they create opportunity for the company if it quickly responds to the market and the changing in customer preferences. 4. 1. 2. 4. T Technological Factors The technology is the corner stone for any company since it helps in decreasing the cost in manufacturing process. Therefore, technological developments stand as an opportunity for Zara as advance technology helps in developing better business process. In addition to this, technology led to development of new marketing channels. The internet is a good example for such development. Recent figure showed that online retailing has been increasing particularly in the UK. According to IMRG Cap Gemini (2009), e-retail sales index showed an increase around 12% in the second half of 2009 and in the first half o 2009, UK consumers spent  £22.9 billion in their online purchases. This suggests that increase in online retailing transactions stands as an opportunity if Zara starts online retailing. 4. 1. 2. 5. E Environmental Factors Watson (2001) argued that as much as organic food products have become popular, it is inevitable that consumers will extend their scope of purchase to the organic textiles and this trend is already started as some retailers such as Marks and Sp