Magoosh GRE

Critique Zara’s strategy based upon an evaluation of the external and internal environments facing Zara.

| January 16, 2017

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Introduction

Using your evaluation of the external and internal environments facing Zara, you are asked to critique Zara’s stated strategy of expansion into (Eastern) Europe and Asia. Consider whether the strategy is feasible, suitable and acceptable. In your answer, consider both the likely benefits as well as challenges that Zara is going to face. How does the emphasis on online expansion fit into the company’s international strategy?
Zara opened its first store in 1975 in La Coruña, located in northwest Spain. International expansion of the Zara brand began with the opening of a store in Oporto in 1988. By the end of January 2006, Zara was operating in 59 countries with 852 stores: 664 stores in Europe (including 259 in Spain), 100 in America, 45 in the Middle East and Africa and 31 in Asia.
Foreign sales accounted for 69% of the company’s turnover in the year 2005, with Europe being the biggest market so far. This paper critiques Zara’s strategy of expansion into (Eastern) Europe and Asia, based upon an evaluation of the external and internal environments facing Zara.
The decision for global expansion is due to both push and pull factors. The push factors are those which encouraged the organization to search for international opportunities. The pull factors include attractive situations in the host market . Limited market growth opportunities at home were major influences in the decision to expand internationally. With the opening of their first store, Zara discovered that for some, the Spanish fashion and design market was on verge of saturation.
Key pull factors included the entry of Spain into the European Union. The globalization of the world’s economies, the economy of scale to be made and the similarities of consumer spending patterns was an additional pull factor.
Strategy is feasible, suitable and acceptable
The internationalization of Zara seemed to follow the classic stage model by first entering the culturally or geographically closest market prior to taking chances in a more distant market. This method aided the company’s learning curve.
These stages include:
• Reluctance as well as trial: Zara focused their expansion on the domestic market. The maturity of the Spanish market led Zara to search for international opportunities. Expansion into Portugal was seen as an attractive as well as familiar market because of their geographical and cultural proximity to Europe.
• Cautious expansions: During this stage Zara expanded into markets with geographical and psychological proximate as well as with minimum levels of socio-economic developments by adding one or two countries each year to their market portfolio. Zara then began operating in France’s fashion capital, with sights on the geographical contiguous EU and points for later expansions in Northern Europe, including Belgium and Sweden.
Benefits as well as challenges that Zara is going to face
Zara owns many stores in Europe and Asia; international expansion has been adopted by way of three separate entry modes:
• Subsidiaries: This direct investing strategy is a very expensive method of entering and it involves a high level of quality management control as well as business risk. Zara adopted such strategy for European as well as Asian countries, which had been perceived for having high growth potential along with low business risks.
• Joint venturing: This is a cooperative strategy where manufacturing facilities and a know-how of local companies have been combined with expertise in foreign companies in the same market, particularly in large, competitive markets where it is difficult to acquire property for setting up retail outlets and where there have been the other types of barriers which need cooperation with a local firm.
• Franchisee: This strategy has been chosen for high-risk countries that are culturally different and have little market opportunities along with a low sale forecast. Franchisees of Zara follow a similar business pattern to their subsidiaries regarding product, store location, interior design, and logistics, as well as human resources.
When an entry mode has been decided for a specific country, Zara has followed patterns of the expansion called in company as oil stain. Experience guides Zara in these stages of expansions in each country.
Emphasis on online expansion fit into the company’s international strategy
Experience gained in international environments made Zara intent on rapid global expansion, with regard to the cultural and geographic proximate. Zara consolidated its position in the European market as a method of gaining a foothold in the new countries.
Due to the expansion of the European Union, at the start of the year 2006, Zara was operating in 59 countries with 800 stores, with plans to add many more in countries such as Italy, France, Germany and Great Britain, with Asia as the headquarters of international operations.

References

Alexander, N. (1995b). Internationalisation: interpreting the motives, in McGoldrick P. and
Davies, P., International retailing: trends and strategies. London: Pitman Publishing.
Johanson, J. a.-P. (1975). The internationalisation of the firm four Swedish case studies. Journal
of Management Studies, 12 , 305-322.
Martinez, J. (1997). Jose Maria Castellano. Economistas, 73 , 118-126.

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