Market Entry Strategy: Case Study of Zara – Internationalisation in China
1. Introduction and Background
Amongst the motivations to strategise are to grow fast ahead of the competitors, grow in the line with the industry or to simply catch up and defend an existing status. Despite the challenges, threats and risks, the orientation of various firms are to expand, to reach and to penetrate new markets segments. The working title of the research is initially drafted as – Market Entry Strategy: Case Study of Zara – Internationalisation in China. The study aims to explore the effectiveness of the chosen market entry strategy and mode of entry by Zara in penetrating the Chinese retail market. Whether the strategy proved to be beneficial in its initiative to internationalise the operation of the business will be also explored. Thereby asking, what are the benefits of putting the business within the Chinese business environment?
As such, market entry decisions are a multi-approach that requires careful consideration of the firm seeking to widen economies of scope and reach. Zara should take note, however, that market entry decisions depend on the resources and the ability to sustain the competitive edge. In this study, different market entry strategies and its drivers, nature and dynamics will be explored with reference to Zara’s business. Zara’s international strategy framework of market entry, market selection and marketing approach is the driver behind the internationalisation strategy of Zara. When it comes to market entry, the question now is what are the economic and political barriers that take effect on the strategy?
2. Company Profile
Owned by Amancio Ortega, Zara, on the other hand, is a clothing company originated in Spain. Inditex Group, the parent company, claims that Zara needed just a couple of weeks to go through the development of a new product and get it to the stores, compared to that of six months which is the industry average. Zara also launches products amounting 10, 000 new designs annually. Though Zara is a vertically integrated company, Zara controls most of the processes in the supply chain whereby 50% of the products are manufactured in Spain, 26% in the rest of Europe and 24% in Asian countries. and (2006) contend that Zara outsourced the production of high labor intensive processes but maintained in-house other capital intensive processes, protecting knowledge and know how. The quick-response capability of Zara is made possible by the three main stages that define the competitive edge of the company: design, manufacturing and distribution.
Zara embraces the strategy to focus on operations which can enhance cost efficiency thereby conducting most of the processes in-house. While, the rest of the manufacturing activities including finishing stages are completed through a network of 300 small contractors which specializes in one particular part of the production process or garment type. These contractors work exclusively for Inditex, and are not given more than 4% control of the production services so that if there will be a problem with a single contractor, there will 299 to back them. and (2004) maintain that although its manufacturing costs are 15 to 20% higher than competition, Zara more than makes up for the cost differential through its supply chain to ensure that merchandise in the stores matches what customers want ().
Further, the competitive advantages of Zara are because of its cost leadership, fast production and product variation. Zara sells quality, fashionable products at reasonable prices and based on product positioning, Zara is cheaper than its leading rivals as Benetton and Gap. Zara also has the ability to design and finish products to be deli8everd in stores within 4 to 5 weeks hence very quick to get designer-influenced products into their stores. Likewise, the clothing brand has the ability to launch new trends and designs in a much shorter period. Zara thereby boasts for low level of inventory, efficient distribution system and high turnover of product.
3. Key Issues
Market Entry and/or Operations Market Entry
International strategy at Zara is defined by the combined generic strategy of cost leadership and differentiation strategy. There are considerations, however, such as when selecting the Chinese market, labor cost and productivity, distribution cost and shipment cost of raw materials are considered. Other considerations are characteristics or behaviour of consumers and income per capita. In terms of marketing approach, the considerations include the 4Ps inherent to the Chinese consumers and business environment. Market entry considerations include economics, both macroeconomic factors which include tax, political condition and export tariff and microeconomic factors including local competitors, demand and location of store. Regulation from government and local producers protection issues are other considerations.
Operation/Expansion
There are three basic international expansion strategies as entry modes: own subsidiaries, joint ventures and franchising. Zara adopted the first strategy for most European and South American countries which are perceived to have high growth potential and low business risk. The second strategy is adopted for expanding the business in Germany, Italy and Japan. Franchising is adopted on high risk countries such as Saudi Arabia, Kuwait and Malaysia. Which among this expansion strategy is used in penetrating the Chinese market? Does Zara conform to standardisation or customisation in its effort to enter the Chinese market?
4. Key Success/Failure Factors
Success factors include cost leadership strategy, differentiation of strategy, efficient distribution, information technology and fast delivery of new products, designs and trends. However, one of the failure factors is Zara’s centralised distribution system which may not be inappropriate in entering a specific market of diverse nature like that of China.
5. Learning Points and Recommendations
When in the process of penetrating a specific market, Zara should be guarded on issues of local competitions and how it affects global competitions. Zara should be also watchful of product cannibalism and lack of vertical integration. Nonetheless, the clothing brand could consider an online market and establishing a distribution center in the US.
References
Credit:ivythesis.typepad.com
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