Zara Strategy Essay Sample

Zara Strategy Pages
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In the 1970’s, the apparel industry spent more on capital investments than it had during the 1950’s and 1960’s combined.

Export oriented industrialization in South Asian economies like Malaysia, China.

In US, the apparel industry has trimmed one-third of its jobs since its peak in 1973.

Examples of technologies that were developed in the 1970’s and 1980’s are programmable sewing machines that allow operators to work more than one machine at a time, Computer Aided Design (CAD) that reduces lead time, and computer controlled cutting of material. Labor productivity increased by 26 percent between 1969 and 1979; this was slightly less than the 33-percent rate for all manufacturing.

Industry structure

Firms in the apparel industry are typically smaller and more disconnected than firms in the textiles industry.

The size of many apparel firms was often an obstacle to large capital investments. Small firms typically operate on a low profit margin, and the cost of new, technologically advanced equipment would be prohibitive to many of them

1980’s

Use of computers in textile and apparel industry started

1990’s

Design choices and visual possibilities can be infinite if the designer is given the time and freedom to be creative and to experiment using the computer.

According to National Knitwear Association of US, of 228 Apparel manufacturers: 65% use CAD to create colorways
60% use CAD to create printed fabric design
48% use CAD to create merchandising presentation
41% use CAD to create Knitwear designs
In US, both production and employment have continued to decline in the 1990’s after the peak production in July 1987.

2000’s

4 seasons in west – Spring Summer Fall/Autumn Winter

Industry structure = Five forces

Driving force of global apparel industry

• Mix of product
• Buying
• Distribution

The apparel commodity chain is organized around 5 main segments: raw material supplies: including natural and synthetic fibers; the provision of components, such as yarn and fabric manufactured by textile companies; production networks made up of garment factories, including their domestic and overseas subcontractors; the trade channels established by export intermediaries; and the marketing networks at the retail levels. Each of these segments encompasses a variety of differences in terms of geographical locations, labour skills and conditions, technology and scale.

Question 2

How has Zara created its competitive advantage? Comment on its strategic group and its strategic positioning, its value chain, its resources and its core competence.

Answer:

Competitive Advantage

Normally the retail industry takes about three to five months to come up with a new seasonal collection. Experts need to guess on the fashion trends people want, and failure means markdowns, write offs, and most importantly, low revenues. Zara takes a counter-intuitive approach made possible by their speed. Instead of guessing on the fashion they ask and monitor what the customer wants and is able to distribute the product within 2 weeks to the consumers. It follows trends that are successful with other retailers and delivers an imitation. So how does Zara know what the customers want?

Every Zara employee has a PDA which is used to gather customer opinions about its products and what they want to see in the store. This kind of data is extensively gathered on a daily basis and sent directly to headquarters. Then recent graduates from fashion schools are employed to design the clothes that the consumers suggest. These designs are manufactured and shipped out to the retail stores in as little as ten days. All of this takes place in Spain, with no outsourced manufacturing. By avoiding outsourcing, the manufacturing time is reduced by a significant amount.

A Point of Sales system is also used by every Zara store. The point of sales system allows the cash register to monitor what is selling and what is not, allowing for more popular items to appear in the store during the season in which its sales are high. This system means that only those products which are in the highest demand will be available in stores, therefore there is more revenue. These two methods cause most of the apparel to sell out within a week by keeping inventory low.

Another advantage that Zara exhibits is the vertical integration within the company. Instead of having suppliers around the world, they do almost everything in Spain, allowing for delivery to go out to stores twice a week. They design, manufacture, produce and ship right from Spain, saving time. In fact, Gap the leading clothing retailer in the world is twelve times slower when it comes to making a new item of clothing compared to Zara. Even though it costs Zara about 15% more to be quick, the write offs are in single digits which is much less than competitors. Zara uses its own fabric and its own dyes allowing them to respond to color demands as well. They even save money on advertising since they spend less than a third of a percent of their revenue on advertising and focus on placing their stores in high traffic and premier locations. Clothes are tagged at the production site, which allows the employees in stores to be 5% more efficient in other areas of the store.

Zara also takes advantage of the rarity in their clothing, which means more revenue because differentiability means more bargaining power for Zara. They have very low inventory for each item which means it lasts for a very limited amount of time at the store. It is said, that one never sees the same product twice at Zara. This means more revenue because write offs and mark downs are non-existent. Since inventory means death in the world of retail, the extra inventory in Gap has lowered it to junk status while Zara is still at the apex allowing them to generate ridiculous amounts of revenue on a quarterly basis. Another advantage of low inventory is that Zara does not risk substantial loses if one product line fails since they have hundreds more in the pipeline ready to be shipped out on command.

The biggest strength is probably how hard it is to replicate their business model. To remain competitive in a business, one must always have an advantage over the competitors and having a model that is impossible to replicate makes this advantage possible. Even though Gap is in a junk status right now, they cannot form a new business model that is similar to Zara because it would cost too much money. Gap already has too many distribution centers and manufacturing sites which cannot be withdrawn. Zara is the only clothing retailer with one manufacturing site, and the only one that follows consumer trends instead of creating them.

Core competencies:

Zara’s success comes from a number of competencies that spanned design, production, logistics, distribution and retailing.

Design:

Zara rejects the conventional idea of spring and autumn clothing collections in favour of “live collections” that can be designed, manufactured, distributed and sold almost as quickly as its customers’ fleeting taste. Zara’s 300 or so designers continuously track market events, fashion trends, and customer preferences in designing about 11000 items per year ‘ several hundred thousand fashion SKUs, given variations in color, fabric and sizes. Designers get ideas from frequent chats with store managers, industry publications, TV, internet, film content and trend spotters who focus on venues such as university campuses and nightclubs. Zara’s fashion staff is quick to snap digital pictures at couture shows and immediately reproduce the looks for mass market. Zara did not develop products to respond to a particular country’s requirements and 85 to 90 percent of basic designs sold in Zara stores tend to be same from country to country.

Sourcing:

Zara sources from external suppliers with the help of purchasing offices in Beijing, Barcelona, and Hong Kong as well as headquarters stuff. Zara also acquires fabric, other inputs and finished products from numerous suppliers in Spain, India, Morocco and the far east. About half of the fabric purchased is “gray” so designs can be quickly updated during a season.

Production:

Zara makes its most time ‘ and fashion ‘ sensitive products internally. Zara’s factories are heavily automated, specialized by garment type and focused on the capital-intensive parts of the production process ‘ pattern designing and cutting-as well as final finishing and inspection. The company spent 15% more to produce garments in Spain and Portugal than rivals spent in China, mainly due to labour costs. It more than compensates for this cost penalty with a lean advertising program, efficient inventory management and quick adjustments to fashion trends. Zara built a network of about 450 workshops, located primarily in Galicia and across the border in northern Portugal, which performs the labor-intensive, scale-insensitive activity of sewing the garment pieces cut at the factories.

Logistics:

All garments, both internally made and externally contracted, flow into Zara’s massive distribution center. Fully equipped with mobile tracking systems that dock hanging garments in the appropriate bar-coded area and carousels capable of handling 45000 folded garments per hour. Driving the process are the twice weekly deliveries to every Zara store triggered by real time inventory data collected through a network of computer handsets feeding through the internet.

Marketing:

Zara’s product policy emphasizes reasonable quality goods, rapidly changing product lines and a relatively high fashion image. The company spends only 0.3% of its revenue on media advertising. Its advertising is limited to the start of the sales period at the end of each “season”. It relies extensively on word of mouth to market its products. Interestingly management adjusts pricing for the international market, thereby making customers in foreign markets bear the cost of shipping products.

Question 3

Comment on Zara’s current strategy with respect to Porter’s generic strategy, dual competitive advantage and added value

Answer

In contrast to operational effectiveness, strategic positioning refers to performing different activities than rivals, or the same activities in a different way. While the model itself is often very easy to replicate, technology is essential to creating and enabling novel approaches to business that are defensibly different than rivals and which can be quite difficult for others to copy.

The fashion market has changed considerably over the past few decades. Fashion products, which used to be an elite consumption product and now, are mass consumption market, are embodying what has been called “the democratization process of fashion”.

In the last years the fashion market has polarized. On the one hand there are producers and retailers of premium products on a high price level offering luxury products. On the other hand the low price young fashion producers, often foreign international operating chains like the Swedish chain H&M (Hennes & Mauritz), the Dutch chain C&A (Clemens and August ), the Spanish chains Mango and Zara or the American chain Gap.

Zara is considered as an example of the relationship between technology and strategic positioning. Inditex describes Zara in this way: “Zara is a high fashion concept offering apparel, footwear and accessories for women men and children, from newborns to adults aged 45. Zara stores offer a compelling blend of fashion, quality and price offered in attractive stores in prime locations on premier commercial streets and in upscale shopping centres. The in-house design and production capabilities enable us to offer fresh designs at out Zara stores twice a week throughout the year.”

Zara’s target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Its target market is a young, educated one that likes fashion and is sensitive to fashion. Today, people around the world through various communication devices have more access to information about fashion. Therefore, fashion has become more globally standardized and Zara uses this to their advantage by offering the latest in apparel. For that reason, 80- 85% of the products that the company offers globally are relative standardized fashionable products. The international strategy of this fashion chain is excellent because it adopted a balanced mixture of standardization and customization.

Pricing Strategy:

Zara’s pricing strategy is, in the words of one analyst “Armani at moderate prices”. Interestingly management adjusts pricing for the international market, thereby making customers in foreign markets bear the cost of shipping products.

Differentiation:

It moves fast. With an in-house design team based in in La Coruña, Spain, and a tightly controlled factory and distribution network, the company says it can take a design from drawing board to store shelf in just two weeks. That lets Zara introduce new items every week, which keeps customers coming back again and again to check out the latest styles.

Zara’s success is all the more surprising because at least half its factories are in Europe, where wages are many times higher than in Asia and Africa. But to maintain its quick inventory turnover, the company must reduce shipping time to a minimum. The fast-fashion approach also helps Zara reduce its exposure to fashion faux pas. The company produces batches of clothing in such small quantities that even if it brings out a design that no one will buy — which happened during an unseasonably warm autumn in 2003 — it can cut its losses quickly and move on to another trend.

BASIC BLACK.

Zara’s fast pace means that some popular items appear and disappear within a week, creating an image of scarcity that many shoppers find irresistible As well as keeping sales high throughout the year, it also keeps margin-stripping markdowns to a minimum. That helps explain why Inditex profits soared 26% last year, to $973 million.

H&M uses a slightly different strategy. Around one quarter of its stock is made up of fast-fashion items that are designed in-house and farmed out to independent factories. As at Zara, these items move quickly through the stores and are replaced often by fresh designs. But H&M also keeps a large inventory of basic, everyday items sourced from cheap Asian factories.

To add pizzazz to its lineup, the Swedish retailer has also struck deals with high-fashion designers Stella McCartney and Karl Lagerfeld to create limited, one-time collections, which generally sell out within days. H&M is a strong financial performer too. Sales during the first three months of this year were up 20%, after rising 14% in 2005.

Question 4

Strategic challenges Zara facing today and forthcoming 5 years. Which KSFs Zara needs now ?

Answer:

Following are the threats to Zara’s success:

1. Zara’s Vertically integrated model is a threat to Zara’s success in long run. The model will not work once Zara scales its operation. Currently, Zara’s designing, production, distribution and retails stores are tightly coupled together and operate very closely. Expanding operations in different regions (America, Asia, Europe etc.), requires addressing different fashion trends at a time. Also, given different sizes/ trends in different regions, it would not be easy to pull a new fashion cloth or apparel from one region and put it in other region.

2. Also, scaling its operation may require joint-ventures and acquiring some smaller chains also. In a 50:50 joint venture, it is very difficult for Zara to impose its business model to the other partner. In this case, we have already seen Zara’s joint ventures dissolving on a couple of occasions.

3. While zara may find it difficult to manage the vertically integrated model for its large scales of operation, local retailers may follow Zara’s formula to success and can emerge as big threat to its success.

4. It is not easy to beat the local retailers in their home market. For example, the Local appreal market in Italy is still owned 61% by the independent stores, 45% in Spain (Note that this is Zara’s local market too) and 15-30% in other three major European markets. Specially, in a country with very cheap labour (mostly in Asia), it will be very difficult for Zara to keep up its production in Spain.

5. Zara’s business model is based on ever changing fashion. For countries like US, where people are less fashion forward, it may be a challenge for Zara to sustain its presence.

6. With changing time, Advertisement is becoming an important part of the business and it reflects directly to the sales. Zara’s in-store advertisement model may not work going forward.

Question 5

Your strategic recommendations. Sustainability of Zara’s business model

Answer:

Firms strive for sustainable competitive advantage, financial performance that consistently outperforms their industry peers. The world is so dynamic, with new products and new competitors rising seemingly overnight, that truly sustainable advantage might seem like an impossibility. But there are winners and the Zara chain is one of them.

The Zara fashion chain, founded in 1975 in Arteixo, a small town in the north of Spain, is perhaps the world’s most successful clothing chain. Zara has helped its parent, the Spanish firm Inditex, grow from obscurity in the mid 90s to the world’s third largest pure-play fashion retailer after the Swedish H&M and US-based Gap Inc. with financial performance well ahead of these rivals.

The Inditex Group is present in 64 markets in Europe, the Americas, the Middle East, Asia and Africa, with upwards of 3,100 stores [8]. In addition to Zara Inditex has another seven commercial formats: Skhuaban, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho and Zara Home. The Group also includes more than a hundred companies associated with different activities in the business of textile and fashion design, manufacture and distribution.

Inditex has grown dramatically in recent years, achieving a consolidated turnover in 2005 of 8,196 million euro, with a net profit of 1,002 million euro. It has reported a 25% rise in profit for 2006 on strong growth in its Zara chain -that makes up about two-thirds of Inditex’s total sales. Profit for the year to 31 January 2007 was EUR1.0bn, on sales that rose 22% to EUR8.2bn .

On 31 January 2007 the Group had 60.240 employees. With 1021 shops, at 3.04.2007, in 55 countries, Zara appears to have found the formula for success: Give the public what it wants, at the lowest possible price, in the shortest time possible

According to Porter, the reason so many firms suffer aggressive, margin eroding competition, is because they’ve defined themselves according to operational effectiveness rather than strategic positioning. Operational effectiveness refers to performing the same tasks better than rivals perform them. Everyone wants to be better, but the danger in operational effectiveness is in “sameness”.

At its heart Zara is building on a vertically integrated demand and supply chain, while most other textile chains rely on outsourcing and cheap labour in China. It enables company to short turnaround times and achieves greater flexibility, reducing stock to a minimum and diminishing fashion risk to the greatest possible extent.

Mainly vertically structured fashion companies offer an attractive and frequently varying range of goods, in order to increase households’ propensity to consume textiles. By using a dynamic strategy, the traditional bi-annual collection cycle (spring/summer and fall/winter) is accelerated more and more, so that new collections are launched in increasingly shorter cycles, e.g. on a monthly basis .

Another characteristic of a dynamic strategy is the acceleration of the value chain processes. While it takes 60 to 90 days in order to design and deliver a new fashion style in a traditional value chain, it only takes 12 to 15 days for Zara who is vertically integrated . Zara’s in-house production purposely creates a rapid product turnover since its “runs are limited and inventories are strictly controlled”

The business model for the company is based on offering the latest style in a high quality product at a good price. With a creative team of more than 200 professionals, Zara’s design process is closely to the public. Information travels from the stores to the designers, transmitting the demand and concerns of the customers. Zara’s shops use Information Technology to report directly to its production centers and designers in Spain. Shop managers use PDAs to check on the latest clothes designs and place their orders in accordance with the demand they observe in their stores. Thus, they directly contribute to a streamlined fashion collection of the entire company. The designers at headquarters collect and evaluate these suggestions and they arrive, produce designs on their computers, and, when finalized, send them over the company intranet to a factory. The result is that Zara designs and produces as many as 10.000 new items every year.

The company avoids mass production. Although some stock is replenished, its clothing, for both men and women, is deliberately made in small batches. This helps create a scarcity value: better buy now in case it is gone tomorrow. It also keeps shops looking fresh and reduces markdowns. In Zara shops, there are two new collections every week, and the company manages to design, produce, distribute and sell each of its collections in just four weeks. In contrast, its competitors take several months. Zara pays special attention to the design of it stores, its shop windows and interior décor, and locates them in the best sites of major shopping districts.

In addition, the group does not spend even one euro on advertising. They consider it for not necessary in a “pull” model and to slow anyway because their offer is good localized.

But, the operational effectiveness is critical. Firms must invest in techniques to improve quality, lower cost, and design efficient customer experiences and, unfortunately, for the most part, these efforts can be matched. Because of this, operational effectiveness is usually not sufficient enough to yield sustainable dominance over the competition.

In contrast to operational effectiveness, strategic positioning refers to performing different activities than rivals, or the same activities in a different way. While the model itself is often very easy to replicate, technology is essential to creating and enabling novel approaches to business that are defensibly different than rivals and which can be quite difficult for others to copy.

The fashion market has changed considerably over the past few decades. Fashion products, which used to be an elite consumption product and now, are mass consumption market, are embodying what has been called “the democratization process of fashion”.

In the last years the fashion market has polarized. On the one hand there are producers and retailers of premium products on a high price level offering luxury products. On the other hand the low price young fashion producers, often foreign international operating chains like the Swedish chain H&M (Hennes & Mauritz), the Dutch chain C&A (Clemens and August ), the Spanish chains Mango and Zara or the American chain Gap.

Zara is considered as an example of the relationship between technology and strategic positioning. Inditex describes Zara in this way: “Zara is a high fashion concept offering apparel, footwear and accessories for women men and children, from newborns to adults aged 45. Zara stores offer a compelling blend of fashion, quality and price offered in attractive stores in prime locations on premier commercial streets and in upscale shopping centres. The in-house design and production capabilities enable us to offer fresh designs at out Zara stores twice a week throughout the year.”

Zara’s target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Its target market is a young, educated one that likes fashion and is sensitive to fashion. Today, people around the world through various communication devices have more access to information about fashion. Therefore, fashion has become more globally standardized and Zara uses this to their advantage by offering the latest in apparel. For that reason, 80- 85% of the products that the company offers globally are relative standardized fashionable products. The international strategy of this fashion chain is excellent because it adopted a balanced mixture of standardization and customization.

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