Expansion of ZARA in Asian region
Discuss about the process of Internationalisation that Zara has used for itself.
In the age of globalisation where many firms have crossed borders, it has become difficult for them to ensure effective management of their operations. Globalisation has empowered the organisations to enhance their profit margins but it is not easy to manage a worldwide business (Carugati, Liao and Smith, 2008). For managing it, they have adopted various kinds of strategies which provide them competitive advantage over its competitors. The selection of markets and the strategies is always done by understanding the market dynamics as its future growth objectives. Issue in the market have widened and hence operations management across borders are also facing difficulties.
Zara which is a global fashion brand have also adopted a series of strategies so as to manage all the operations of the firm in a better manner (Tungate, 2008). With the support of its parent firm Inditex they have adopted various approaches to expand their business in many parts of the world. Their major focus was Asian market which has a lot of opportunities because of its highly dense nations (Crofton and Dopico, 2012). With the use of its resources and brand name they have successfully entered into the Asian market with their major focus on the markets of India and China. Their fast fashion concept has helped them in their expansion plan. There were many challenges faced by Zara over the years in the Asian market and in recent years this has widened because of the fact that heavy competition exist in the market.
Over the years, fashion industry has made a huge development especially in the Asian region. Zara is a leader in the fashion industry all around the world and so is in Asian market. In the highly populated regions of Asia this fashion giant has utilised different strategies to enter into the region. Their parent firm has its manufacturing plant at China while they are availing their raw materials from the regions like Indian sub-continent. It is because all the resources are available at lower prices (Bhardwaj, Eickman and Runyan, 2011). The easy availability of resources and the increasing demands of the company’s products in this region have made its business successful over the years.
This report covers the several aspects related with the expansion of Zara in the Asian region. It also showcases the internationalisation approach which they have selected for expansion and growth in and across the Asian region. It also depicts the problems and issues they are facing in the Asian region along with the strategies that they have used for their development of business across borders.
Approach to Internationalisation
With the growth of fashion industry in the Asian region, global fashion leaders like Zara have started to look for their market in these nations. As there are many countries in these regions which are treated as an emerging economy (Bhardwaj and Fairhurst, 2010). This emergence of economies has written the script of expansion of European market leaders like Zara to enter into this region. The selection of countries by Zara has been done after checking all the factors present in the market.
By taking major action before and after expanding its legs into Asian region they have been able to make strong hold in the market. With high quality technological advancements, China attracted the producers of Zara clothes to establish their firm in this country. Recently, the manufacturing unit in china has become capable of satisfying the needs of their global market. Starting from China they now have their stores in various parts of Asia. In every region of Asia, they have used different entry mode strategies (Cortez, et. al., 2014). Because of the problems existing in the Asian region, their growth has been not as fast as they expected in the start of their expansion. The business environment all across the globe has changed especially after 2009. The poor performance of European market was somehow managed by the firm with good performance in Asian market.
For checking the expansion story of any company, the first and foremost thing that they need to be checked is their approach to Internationalisation. Zara’s approach to internationalisation has been different. Internationalisation is generally understood to be process of business expansion into new regions for ensuring stability, considerable growth in their business. Zara have taken use of few internationalisation approaches to enter into the Asian market.
The basic approach that Zara adopted for Internationalisation is the strategic approach. It can be seen by the fact that there are series of strategies they have used for expansion. All the strategies were adopted by checking all the factors that are confronting their business (Byun, 2013). They have also taken use of the strategies according to the demand of their various units. From expanding into new areas to marketing their products they have used a series of strategies. This has not only helped in gaining the competitive advantage but has also helped them in reducing the impact of the problems they have been facing. This approach has not only helped them in reducing the cost of operations but has also helped them in increasing their market share in a very small time. Zara’s internationalisation process has changes the equation in the Asian fashion Industry as other players in it have also got affected.
Process of expansion
Another approach that Zara adopted is a holistic approach in which they not only targeted the Asian market by taking the help of imports and exports rather Zara opened its production unit at this place. With the help of strategic alliance with the suppliers in this region they have become successful in reach deep in the market (Jang, et. al., 2012). Their manufacturing unit at China was a part of this approach. When they established their business in the market, they needed to eliminate the factors that are pulling down their growth. For this they have adopted contingency approach. In the changing global business dynamics this strategy is highly beneficial (Kotler, 2015).
These approaches are used with each other at the same time so as to smoothen the work process. The competition is increasing at alarming level and hence reaching deep into the market is not easier. With the use of these approaches they can easily reach to their targeted consumers.
Zara’s process of expansion in Asian market has been unique as they came into the market with the goal to capture the larger part of the market. In their process of expansion they generally used the pragmatic approach. The benefit of this approach was that it suggests adopting different strategies to enter into different markets. Among the choices that are available with the Zara, they select their mode of entry after understanding their personal capabilities and the restrictions in the market. Taking use of the pragmatic approach has simplified things for them while entering into any nation. Joint ventures, franchising and own subsidiaries are the three major modes of entry they adopt for entering into any market (Cuc and Tripa, 2007). The selection of mode depends on the business legislations that are present in the market.
The very first example is of China where they have used own subsidiary as the mode of entry. Their Equity mode of entry in the Chinese market has helped them in reaching deep into the markets. Applying this entry mode, they opened their flagship store in different parts of the nation. In order to meet up their consumer’s demands they have opened their factory in China (Fisher and Raman, 2010). They have used cost leadership and product differentiation as a strategy to expand into Chinese market.
In India, Zara had to work out a little different way. This is because India’s Foreign Direct Policy does not allow any multinational firm to have 100% investment or say to be the major player in the market. For this they utilised the strategy of strategic alliance in which they did partnership with TATA group for entering into Indian market. In Zara India, Tata’s Trent is having the share of 49%. Trent limited is one of the biggest distributors in this region. With the years of experience both had in the industry, they complimented each other to raise their profit margins. Use of collaborative strategy helped them to open new shops in the market that too with their own brand name without breaching any law. In starting phase their tie up did not had smoothness because of the cultural difference between them. The cultural hurdles were slightly in different ways in China as they had to deal with problems like language barriers etc.
Outsourcing and offshoring has been part of their business processes (García-Álvarez, 2015). This can be seen with the fact that they offshored or relocated their manufacturing plant in China while they conducted their other operations from the nations of Indian sub-continent. Both of these were adopted by Zara so as to reduce the operational cost.
Zara was able to manage their expansion because of the strategies they have made for stabilising their business in Asian market. Despite of the fact that they are poor in terms of investing into promotional campaigns they have achieved their objectives. The credit for it goes to strategies that they have used in their business. Over the years they have used various strategies first of them is Internationalisation strategy. This helped them in crossing borders as there were four strategies under the internationalisation strategy (Hurley, 2017). These are growth strategy, international strategy, transactional strategy and multi-domestic strategy. The selection of the strategy was always checking the facts that what sort of challenges they will face in the market. Predominantly they have been using growth strategy which has brought standardisation in their work process. This was highly necessary for bringing standardised products. It has also helped them in lowering down their product prices which was essential for attracting their target audience. Zara relies on the products in which they have gained experience and has low cost structure. This is the reason why they focuses on keeping things simple while being highly standard. Low cost structure was essential because of the fact that there is high price war present in the Asian market. Even the per capita income is on the lower side which results in low responsiveness.
Figure 1: Internationalisation strategy Zara
For their staffing requirements mostly they utilised the strategy known as Polycentric. In some regions they also adopted geocentric approach. Polycentric approach helped them in reducing the problems that are occur due to cross cultural differences. In China this helped them as they opened wholly owned subsidiaries at this place. Along with this, to solve the problem of distribution channels in the countries like India where 100% investment was restricted, they adopted cooperation strategy. This strategic alliance has helped them in their strengthening their supply chain management (Matic and Vabale, 2015).
Their Fast fashion strategy has helped them in attracting larger numbers of consumers towards their stores. This has also helped them in enhancing their market base. Sprinkler strategy is another strategy which Zara has used over the years and has a direct relation with the bringing diversification in the work process (Lopez and Fan, 2009). Sprinkler strategy has helped them in entering into the market in the shortest possible time. Their range of strategies also includes new product development and Joint ventures whichever gave them competitive advantage.
For fashion brands it was never easier to enter into the Asian market because of various factors present in the Asian region. The same is the case with the Zara as several challenges and problem exist in Asian business environment. Some of them are as follows:
- Intense competition: Since huge number of firms came up in Asian market hence the competition has made the ocean red (Mihm, 2010). Zara is facing problems from both smaller and multinational firms operational in this region. In the huge competition that is present in the market lowering the price is not easy because of the price war present.
- Design copy: In the Asian market, branded companies face challenges related to piracy of their products (Mazaira Gonzalez and Avendaño, 2003). Since the pirated clothes are available at lower prices hence people due to low per capita income usually buys a pirated version. This is a serious loss to Zara.
- Lower purchasing power: Data illustrates that because of lower per capita income, the purchasing power of the people is on the lower side which is a great loss to the branded fashion retailers like Zara (Preuss, 2017). For tackling this, they have adopted low cost structure which is again a challenge in the market where such a high price war is present.
- Regulation: The policies made by the government have not been positive towards the fashion industry. The greatest example of it is regulation that has been put in the Asian market by the India government regarding 100% investment in retail.
- Developing economies: Most of the economies in this region are still developing hence it has become difficult for the organisations to stabilise their business (Swoboda and Elsner, 2011). Fluctuations in the economic condition of the nation is a set back to the business of fashion brands.
- Lesser technological use: When compared to the technology use in its parent nation, the Asian region has lower technological advancements available in the market (Tokatli, 2008). This is not good for Zara as they are highly dependent on the technology for its operations. This makes the business operations a bit costly.
- Bureaucracy: Asian region is having slower bureaucratic process which further slows the pace of decision making. Corruption has been the major problem in the market as companies like Zara had to invest a lot in lobbying (Viardot, 2014). This has created negative business environment for the multinational companies to come into this region.
- Cultural and communicational gap: Since the culture in Spain and Asia differs especially in terms of language hence they faced challenges in Asian market (Gamboa and Goncalves, 2014). Since the nations like India and China have huge cultural diversity hence understanding the local demands was a bigger problem.
- Huge market competition: There are many smaller and bigger players in this industry and Zara is facing tough fight from them (Rodrigues and Reis, 2013). The problem intensifies as Zara do not use promotional campaign which is necessary in modern day marketing.
- Local demand: There is a huge variation in the demands of the European market as well as in the Asian region (Steenkamp, 2017). This increased the need of having a market research that will help them to understand the requirements of the market.
Conclusion
The above report can be summarised in a way that fashion brands like Zara have crossed borders so as to increase its growth rate and profit margins. In the process of expanding, they have used several approaches to internationalisation. Along with these approaches they have also taken use of the series of strategies depending on the factors that is influencing the market place. In selecting strategies they have used pragmatic approach and hence their strategies differed from country to country. Offshoring and Outsourcing has helped them in reducing their operational cost. Because of easy availability of the resources in the Asian market, it has been easier for Zara to achieve higher growth rate. There are many kinds of challenges that were present in the market and hence they had to ensure that their strategies are effective in confronting these challenges.
References
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