Porter's Five Forces example - Zara

At the end of the 1970s, Michael Porter, professor emeritus in business strategy at Harvard University, developed an analytical model describing the 5 forces influencing the success of an existing or new business. This model, widely used to understand the positioning and functioning of a company within a market, is presented below. This model is then applied to the company Zara for illustrative purposes.

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1. Theory

1.1. The bargaining power of clients

The objective of the “customer bargaining power” theme is to draw up an inventory of the customers of a company. It consists in defining their number and their capacity to influence the decisions of the company. Thus, the more numerous, diversified, and isolated the clients, the less their negotiating power.

1.2. The bargaining power of suppliers

The same goes for the “bargaining power of suppliers”. The objective is to determine the number of suppliers and the list of products supplied as inputs to production. The balance of power between the company and the supplier is determined by the number of suppliers as well as by the scarcity or exclusivity of the good or service produced.

1.3. The threat of substitute products

“The threat of substitute products” consists in studying the range of possibilities regarding the use of an alternative product or service to that offered by the company. In addition to identifying these existing or potential threats, it is necessary to objectify the degree of threat by identifying the constraints for customers to consider this substitute product: cost, transferability, time, etc.

1.4. The risk of new market entrants

It is also necessary to be interested in the theme of the risk of seeing the appearance of new entrants. To assess this threat, it is necessary to establish a list of existing barriers to entering the market. These may be barriers related to costs, the need to have a patent, etc.

1.5. The intensity of the rivalry between competitors

To know the place of the company in an identified market, the competitors must be known, identifiable and analyzed. The more competitors there are, the tighter the market. We must then find areas of differentiation in terms of price or products offered, for example, or even create new, less competitive sub-segments.

1.6. Conclusion

Once these five forces have been analyzed, they must then be ranked in order of importance. For the most important forces in the studied market, corrective measures can then be applied to ensure a more favorable situation for the company.

2. Application to Zara

2.1. The bargaining power of clients

For Zara, the clients' bargaining power is weak: there are many of them with an average basket value under 100 euros. Over the past ten years, with the emergence of sites providing an opinion on each brand, the clients' bargaining power has increased somewhat. However, it remains very limited.

2.2. The bargaining power of suppliers

The bargaining power of suppliers is weak. Indeed, in the textile industry, there are many suppliers. Despite the commitments signed by Zara to guarantee respect for human rights, it is Zara that imposes its working conditions on suppliers. Thus, in 2021, Zara is one of the companies denounced for the working conditions imposed in China, in the province of Xinjiang. Zara maintained the same working conditions despite the controversy.

2.3. The threat of substitute products

Regarding the textile market and particularly Zara, substitute products concern clothing brands at a lower cost and the emergence of a parallel market for the sale of second-hand clothes on various internet platforms (The RealReal, Asos Martketplace, Style alert, eBay, etc.)

2.4. The risk of new market entrants

Entry barriers are rather high in the mid-range/mainstream clothing market. The direct threat from new entrants in the same market segment is moderate. The threat is rather linked to large multinationals which penetrate the entire European market, such as the Irish brand Primark which, however, offers lower-end products.

2.5. The intensity of the rivalry between competitors

For Zara, the competition is high. In the case of ready-to-wear, however, a distinction must be made between physical sales and online sales. Indeed, if at first glance, the sales in physical stores can turn out to be extremely competitive it should, however, be emphasized that it is a strength: the textile stores tend to group together, to attract a larger clientele. Competition is thus more of a force. For internet sales, competition is penalizing. Some sites, such as Zalando, offer a grouping of brands. Zara does not appear in the list of brands sold by the site.

Sources: Zara France, Business insider, France soir