Evaluation Of Business Strategies

Introduction

In recent years, the corporate faces the globalization expansion, and in under a great pressure to establish their market position for their long term growth as well as to maximize their profit portion. In this situation, each and every manager strives to utilize their internal and external resources available in the business environment to transform them to achieve their strategies through creating a competitive advantage in the global market. Strategies are commonly known as set of activities that implemented to achieve organizational goals. This competitive environment is differing from industry to industry and country to country. Therefore corporations differ from one another in their internal characteristics and way developing their own strategies as well as how they achieve those in the real business world.

What is strategic management?

Strategic management is concern with shaping up the organizations for their future establishment in the market and to reach their destiny. It is about

putting the organization into a competitive position

Sustaining and improving that position by the deployment and acquisition of appropriate resources and by monitoring and responding to environmental changes.

Monitoring and responding to demands of key stakeholders.

(Williamson.D./ Jenkins. W./ Cooke. P. / Moreton.K.M, 2008)

Every firm have strategies even they are at the extreme levels, the strategy is no more than to adopt a reactive response to market challenges, and do what seems best for survival at a particular time. For this purpose strategy literature contains numerous approaches, models, tools and techniques available to top management to understand and analyze these aspects of strategy.

For further analysis purposes two main companies have been taken in to consideration in this report. Those two companies are two major players in the fashion industry known as Zara and Gap.

Evaluation of business strategies of the case companies

When developing a strategy firm have two main options available them to design a competitive strategy. Resource based view of competitive strategy is one of them, which emphasizes that firm achieve and sustain their competitive advantages through their abilities and core competencies. The other method analyses the industry behavior by using the porter’s five forces when deciding the competitive strategy. This is known as industry based view of competitive strategy in the strategic management context.

As per the resource based view, SWOT analysis will useful in evaluating the internal business environment in the strategic development process. As per this method evaluate strengths, weaknesses, opportunities and threats that are favorable and unfavorable in achieving objectives. Strengths and weaknesses are concern about the internal environment of the organization, whereas opportunities and threats are concern about the external environment of the organization. Following are the two SWOT analysis conducted for the two companies.

Zara

Strengths

Strong supply chain management – bringing new fashion items to the market less than three weeks

Information system placed within the group allows effective communication with the group.

Vertical integration within the company.

Weaknesses

It only has one manufacturing and distribution center in the world.

Opportunities

Opportunities available in the USA market.

Highest spending market for apparel market in Italy.

Opportunities available in the Indian market.

Threat

Business is an euro centric model

Intense competition in the industry

Zara is one of the largest international fashion companies. Founded in 1975 by the Zara’s parent of Inditex, which is one of the world’s largest distribution group. Zara is headquartered in Coruna, Spain. As of 2008, the total number of stores was over 3100 in 64 countries. Zara stores occupy some of the priciest top locations such as Paris’ Champs- Elysees, Tokyo’s Ginza, New York’s Fifth Avenue, and Dallas’ Galleria. This establishment in around the world has generated significant profit for the company. SWOT analysis will helpful to identify the company’s internal strengths and weaknesses and external threat and the opportunities to the company. From the beginning of the company’s history, its success has been due mainly to speed and location/market which it’s operated. The company’s main strategy is to bring new fashion items to the market in less than three weeks. Supply chain management and the effective information system implemented within Zara have become strengths to achieve their main strategy. Point of sales system and the usage of PDA have enabled them to capture the correct customer behavior and communicate them immediately to the designing and manufacturing facility. This has become key factor to bring what customer want at the right time.

However, having one manufacturing and distribution center in the world, there are huge risks associated with the companies operation even though it helps them to follow the counter-intuitive approach to apparel market. In terms of contingency planning in situations like strike, power shortage or even a natural disaster in the area could negatively impact the Zara’s operation dramatically.

When concern with the Zara’s external environment there are major opportunities available for them from markets such as USA, Italy and India to expand their market beyond the Europe. This could help them to overcome the threat of having European centric business model.

GAP

Strengths

Brand names – GAP, Banana Republic, Old Navy

Public listed – NY stock exchange

Weaknesses

Over dependent on US market

Dependent on outsource parties

Opportunities

Expansion in the emerging markets

Restructuring the business to bring more design to the market in a short period

Threat

Intense competition in the fashion chain

GAP Inc is recognized as one of the world’s largest specialty retailers, started it’s journey in apparel sector in 1969 as a small retail store in San Francisco, California where it focused its sales on Levis jeans. Later on it acquires banana republic, old navy etc. Gap Inc currently employs over 160,000 employees and has more than 2979 stores worldwide including US, Canada, France, Japan, Germany etc. This customer base includes men and women of all ages. The one of main difference of GAP Inc compared to Zara is, the company hasn’t established a manufacturing facility but only does the designer and marketing. Manufacturing function is conducted by the outsourced parties. As shown in the appendix 1 SWOT analysis conducted for GAP, its main strength is its product mix. Well branded product boost the major revenue portion for the company. After going into public in 1976, company’s wealth was increased due to the fact that acquisition of new investors to the company through New York Stock Exchange. However, company contains some weaknesses as well. GAP is highly dependent on the US market. Because of this reason company’s revenue got affected drastically during the last recession time. Further since the manufacturing function has been outsourced to third parties, company tends to depend on a third party to bring their fashion items to the market. This could be act as a threat to the company as increases the competition in the market.

When it comes to the external environment of a company, PEST analysis plays major role in providing input for strategy development process. As per this method, external environment of a particular company will be evaluated through Political, Economic, Social and Technological factors. Nowadays, this has been further developed through adding further two factors of Environmental and Legal factors. Now it’s being called as PESTEL. Importance of the PEST analysis has now increased due to the complexity of the current business environment is increasing day by day. From the two companies perspective its noticeable that when developing strategies they concern about their external environment. From Zara’s view point, the company’s stores are geographically located in countries where sound political economical and social environment is exists. An especially European region country of Italy is positively contributed towards the apparel sector. Further future opportunities available in the US, Italy and the Indian market provide a same contribution towards the apparel sector with huge number of market capacity. These favorable economical factors are important for Zara in developing future strategies. When it comes to the technological environment of the company, only focus is given on high value adding activities of the business process such as designing and production process. (Online, www.oppapers.com) external environment of GAP, company located in politically stable countries and company has more establishments in Asian countries compared to Zara. Brand names of GAP are well known socially compared to Zara, since Zara is still well known mostly among the European countries. However, when considering economic factors, last recession badly affected to the GAP’s US market. Further in socially, company’s name negatively criticized in the society due to use of child labour in a GAP’s outsourced manufacturer facility in few years ago. (Online, www.oppapers.com)

As per the industrial based view of the strategy developing process is evaluated through the Porter’s five forces model. This model will help for companies to identify the industry environment and suggest competitive generic strategies (Differentiation, cost leadership and focus strategy). Porter mentioned that to identify the industry behavior company need to study five forces. Those are Threat of new entrant, bargaining power of suppliers, bargaining power of buyers, threat of substitutes and threat of new entrant. Each of these forces has an impact on the profit of the organization, strong forces could reduce the profit margin of the organization and on the other hand weaker forces could provide more opportunity to increase the profit margin.

Fashion industry can be considered as one of highly volatile industries in the world. Compared with the above two company’s internal and external factors we can notice that Zara enjoys more competitive advantage over GAP in the market. The rarity of their clothing (VIRO model of resource based view) which means their differentiability brings more bargaining power for Zara. It is commonly known facts that anyone never sees the same product twice at Zara where it designed products delivers a new garments to its stores in a mere 15 days. However rivals such as GAP can achieve is two months. Further Zara records more revenue because write offs and mark downs are nonexistent. Inventory kills the profit in the world of retail, as an example extra inventory in Gap has lowered it to junk status previously. This speed of the process has been achieved by Zara through highly vertical business structure within the company. When other companies like Gap outsource their functions such as manufacturing to most of the Asian companies to obtain the advantage from the cheap labour, Zara does almost everything in Spain, allowing them to minimize their lead time to market. This business model of Zara has lead reduce bargaining power of suppliers, customers, threat of substitute, new entrants and rivalry among existing firms. However, GAP follows mostly the same business model which follows by the other players in the industry where mostly manufacturing function has been outsourced to Asian countries to take the benefits of cheap labour which effectively lead to decrease in bargaining power of the company since suppliers, rivals can influence to their supply chain. Therefore GAP has to manage more strong forces in the industry compared to Zara. Due to the uniqueness of Zara’s business strategy has brought them to a much stronger position.

Scenario planning

However in strategic management literature concept of scenario planning concept could be used to overcome the limitations of the five forces when applied to a single point in time and estimation. This is a self contained envelop of consistent possibilities which describes the future scenario contains events that cannot control; if they can be controlled they represent strategic choice (Segal-Horn. S. and Faulkner.D, 1999). This contains following benefits such as challenges the conventional wisdom, demonstrate the impact of what if? Questions, enable company develop a contingency planes etc. There are two main types of scenarios, quantitative and qualitative. Quantitative scenarios are developed using mathematical forecasts, computer models etc. Qualitative approach believes best way forward is to make intuitive guesses structured around known trends and past experience. However this tool is more suitable for industries where that have a high level of capital intensity and a relatively long lead time for product development. Especially Zara’s point of view, they take only 15 days to bring new item in to their shop. Therefore, this method will be harder to implement in the fashion industry due to its nature as well as the business nature of the above two companies. However, they predict seasonal demand variances for their fashion items demand such as during the winter and summer demand conditions and incorporate them to the production process. As an example when ordering raw material required for the production these type of demand evaluation is necessary to avoid any short supplies in the future.

Game Theory

However, these days emphasizes the importance of considering competitors reaction on the company’s decision as well. This is known as the Game theory in the business context. This theory develops a business arena as one in which typically two players try to outwit each other when the same information and motivations are available to them. However in practical fashion industry different players see the environment differently and try to develop different styles to the market. In here both players try to introduce new items to the market within a short time and it is easy to replicate by another player. Therefore to be successful in the long run with the competition, continues innovation is required. In this race Zara always ahead of the GAP. When GAP takes nearly two months to bring new fashion to the market, Zara takes only 15 days. Within that 15 days shop outlets capture the market demand, communicate them to the design team, design team develop a design and passed it the manufacturing team and finally its distributors deliver it to the shops. This is clearly shown in deciding and structuring Zara’s business model in a way that has become impossible to replicate to another player in the industry.

Diamond theory

Porter’s diamond model introduces four forces that largely responsible for the competitive advantage of a nation. These four forces are factor conditions, demand conditions, firm strategy, structure and rivalry, related and supporting industries. Factors condition explains knowledge, technological, natural resources, country currency strengths etc. As per the demand condition it says local demand is important for global development of a company. Further organization located in very competitive industries with high levels of national rivalry are the ones most successful in international market. Finally existence related and supportive industry plays a role in their global development. We can relate this theory to business environment as well in identify the success of a business.

When we compare the two companies of Zara and GAP, we can state that Zara is more successful in the fashion industry compared to Gap. This business model of Zara has been the biggest strength of them to stabilize in this type of highly volatile industry. It is impossible to imagine that any competitor or new entrant would be able replicate this business model and makes these advantages possible. From the Gap’s perspective, they are in a practically difficult situation to establish a new business model which is similar to Zara since gap already has too many distribution centers and manufacturing unites worldwide and that would be costly decision from the company’s view point. The location that Zara has established their business is well famous and well demanded market for the fashion industry and therefore supportiveness is higher for their success. Gap’s perspective, its decentralized structure and highly dependent on US market strategy is not compatible enough to beat Zara’s business performance.

Visions, missions and goals of the companies

A strategy to become a positive, it requires a sense of purpose (Segal-Horn. S. and Faulkner. D., 1999). The company’s mission statement provides the long term expectation and sense of purpose for the strategic development process. Most of the mission statements express that particular company is aiming to deliver the customer excellent value, treat it’s employees as well as well as most of the firm currently incorporate environmental concerns with their mission statements. This is mainly act as an umbrella statement for the company to develop attached goals and objectives as well as in strategy development stages.

Zara’s mission is to contribute to the sustainable development of society and that of the environment with which they interact. The company’s main objectives are mainly to bring new fashion products to the market lesser lead time, concentrate on environment and reduce impact on environment, find new markets, increase commitment towards employees, opening of more online stores etc. Their backward integrated business model has created a major contribution in achieving above objectives through reducing the competitive pressure and to differentiate themselves from the industry players. Continues supply of the company ensure customers are satisfy with the new products continuously. Zara always try to price lesser than the competitors but enjoy more profit margin due to the internal efficiency. Further Zara’s energy saving program, eco friendly stores, recycling processes act as positive contribution for their environmental concern.

Gap’s vision is ‘every day; we look for new ways to connect with customers around the world, provide value to our shareholders and make a positive contribution in the communities where we do business’. Mission of the company is ‘to make it easy for you to express your personal style throughout your life’. The objectives of the company are meet corporate governance guidelines for shareholders, fair treatment for employees, reduction of cost, increase no of products and reduce the lead time to market, increase brand loyalty of main brands of Gap, Banana Republic and Old Navy, invest in marketing campaign to boost sales, conducting sustainability programs etc.

Gap is highly dependent on the US market and it has been negatively affected during the last recession. Searching for new customer base could help them to stabilize their revenue. Always introduction of new products to the market before competitor act on it is essential in surviving in this industry. Gap is not performing well in introducing products to the market in short time due to their business model. However, creating brand loyalty is crucial from Gap’s view point and advertising function plays a major contribution in this regard. Since Gap is operating in Asian market they tend to do social responsibility activities in those developing countries and which will help those countries to increase their social level as well as company shows good sustainability record.

In the process of searching for new markets emerging markets would be an option to increase their revenue in the future which consist stable political, social and economical conditions and favorable for new investments.

Conclusion

After looking at the above strategic behavior of the above two players in the industry, we can identify that interactions with customers, suppliers, other business partners, and competitors, as well as interactions across people are different to each other which ultimately play an integral role in any decision and its consequences in strategic management. Advances in information technology (IT) and e-commerce further enrich and broaden these interactions by increasing the degree of connectivity between different parties involved in commerce. In Zara’s view point they maintain high level of interaction with the suppliers, customers as well as the within the organization in between the departments to maintain their strategic position. Due to the globalization these interactions have complicated within the industries further. Emergent of new economies, dominating of multinational companies all around the world etc are the few reasons behind this complexity. Therefore developing an effective strategy at the right time to obtain the opportunities available in the market is essential. Further as we can see from most of the mission statements of the organizations, considering environmental impact and act as a social responsible manner is also has become a critical factor to consider in this context rather than developing goals and strategies solely for economic benefits.