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Strategic Analysis of Zara

Executive Summary

Zara is an international fashion retailer which has gained considerable acclaim, being one of the leaders of the high-street fashion industry, and regularly producing new products for the market, at a rate that is quicker than its competitors can achieve, due to the strong supply chain in place. Despite this, the organisation is facing continual challenges, both in terms of consumer demand and costs; therefore, a detailed strategic analysis needs to be undertaken, to look at broader forces that are upon the industry and identifying ways in which the company can then use its own strengths and opportunity to establish an even stronger position within the high street fashion industry. By focusing on what it does best, namely using an efficient supply chain, this will enable it to beat its competitors to the market and to produce new products, on a regular basis, thus allowing the company to gain a competitive advantage in the war which is emerging among these high-street brands.

Introduction

The purpose of this report is to undertake a strategic review of Zara, based on the current position within the company. Over the years, Zara has become one of the largest and best known retail brands, on a global scale. Originating in Spain, back in 1963, the company has since become internationally recognised, with more than 2000 stores worldwide.

In order to create a presence within the fashion industry, Zara has managed to create a high level of differentiation and is seen as being a unique organisation which is able to provide customers with products that competitors cannot readily imitate. This has been achieved with full recognition of the external environment and competitive pressures being faced by organisations of this nature, something that is particularly relevant during the difficult economic times, when consumers have less disposable income available in order to purchase fashion clothing items.

One of the key ways in which Zara has achieved a competitive advantage in the market is to bring the lead-time of new products down from approximately six months to just two months, which means customers are able to obtain the very best fashion designs at high street prices. This also works to the advantage of the company as it is able to continuously turn over new products and this places a sense of urgency on customers to purchase items, immediately, when they see them, for fear that they will not be available next week. This is reflected in the fact that the global average of visits per year per customer is 17 in Zara, as opposed to a general average of three, across other similar organisations (Bigelow, 1980).

This report will go on to analyse the external and internal environment within which the organisation operates, before going on to look at crises that have been faced by the company, and to produce a strategic analysis of the company, drawing on all of the above information. The report will also include suggestions for future strategy.

Analysis of the External Environment

Looking specifically at the way in which Zara has managed itself into such a strong position within the industry, it is helpful to identify the external environment within which the company operates. This information can then be used alongside the internal narratives to create the appropriate business strategy for the organisation, going forward. In order to do this, the PESTEL analysis will be used, which looks at the Political, Economic, Social, Technological, Environmental and Legal factors, as well as looking at Porter’s Five Forces (Carter, 1999).

PESTLE Analysis

Politically, there has been a general opening of the market, with textiles now being readily available and not subject to quotas. This has made the market, in general, much more competitive and has encouraged all organisations within the industry to look towards reducing costs and attracting a broader customer base. This deregulation of the textile industry, from a quota point of view, has encouraged greater price competition which has, to a large extent, permeated through the large organisations such as Zara, which are able to enjoy economies of scale, when it comes to large-scale production (Lopez and Fan, 2009).

Furthermore, there has been the legal removal of import quotas, which has enabled the Spanish retailer to gain greater access to international markets and can therefore generate more sales and enjoy even greater economies of scale (Acur and Bititci 2004).

Economically, there are huge impacts on the fashion industry, as the world is currently facing a global recession and, as such, consumers are facing difficult choices in terms of how they spend their disposable income. In this context, consumers are reducing the amount of expenditure on items such as clothing and, in particular, fashion items, thus putting pressure on retailers to provide cutting edge fashion at a budget price, something which Zara has become particularly good at and is using this to gain success during difficult economic times.

There is no denying that when it comes to fashion and choices regarding fashion purchases, social factors play a huge role. Typically, individuals will prefer specific clothes that have a distinct image, when choosing fashion items. Having a strong brand identity that is widely recognised has enabled Zara to retain social popularity; therefore, while looking at economic drivers, it is also important to ensure that social acceptance of the brand is high and that the brand is seen as a desirable option (De Toni and Tonchia 2003).

Improvements in technology have also had an impact on the fashion industry, particularly during the difficult economic times where consumers are looking for the latest technologies for design. Furthermore, and of particular relevance to Zara, is the use of new technologies, in order to produce a more efficient supply chain and to ensure that products can be in the high street, at a much quicker rate than where technology is not being fully embraced.

Given the higher level of competition that is now being experienced within the fashion industry and when combined with greater legal protection, particularly where the protection of intellectual property is concerned, the individual designers are becoming very protective of their own ideas from the threat that the competition will seek to copy. Zara has overcome this threat by reducing the time frame within its supply chain. This means that it will always have a first mover advantage, where there are two or more designers looking to create a similar product. Any additional legal requirements, in terms of intellectual property protection, will not only be beneficial to the original design protection but may have the opposite effect and may limit opportunities for new product developments, as imitation and development is often an inherent part of fashion design.

Finally, environmental factors are also relevant to anyone looking towards transporting textiles across the globe and the amount of energy that is likely to be consumed in doing so. This new approach to fast fashion also creates environmental concerns as cheap items are often viewed as disposable by the consumer and simply thrown away, rather than recycled or treated in an environmentally friendly manner. This places an additional burden on companies such as Zara which are looking towards making themselves more environmentally friendly, while still retaining the basic position within the market.

Porter’s Five Forces

Another approach to identifying the external factors which are relevant to the development of Zara is that of Porter’s Five Forces, which argues that there are five forces all acting together to create a particular environment within a particular industry or market. The fashion industry in its entirety is highly competitive, with extensive sales, on an international basis, thus making Porter’s Five Forces particularly relevant to the analysis, when identifying how companies such as Zara can set themselves apart and what types of forces the company can use to achieve a differentiation (Porter, 1979).

Firstly, when looking at the threat of entry, it can be seen that there are relatively no entry barriers for those looking to enter the industry. However, although it is not necessary, at a low level, to invest large amounts of capital, the issue of economies of scale is playing an increasingly important role, with consumers constantly demanding cheaper prices. This makes it hard for the smaller new entrant to compete, from a price point of view, but still allows them to offer unique designs, which may then give them access to a market that which would otherwise be closed. Substitution across the whole industry is extremely high, as individual consumers can choose alternative providers for their fashion needs. When looking at taking the mass-market competitive approach, substitution may simply be down to price issues, whereas designer boutiques may be able to offer a different type of product, which again will offer a competitive substitution for the consumer (Moran and Riesenberger 1994).

Linked to this point of substitution is the large power that buyers have within this industry. Customers now have wide access to a broad range of retailers, with internet purchases extending this even further. The recent price war has also increased availability of fashion items to the general public and this allows buyers to have a huge influence on the market, by selecting new products, on a regular basis. Buyers demand continuous change, particularly within the fashion industry; therefore, it is necessary to continuously provide new and innovative fashions, on an on-going basis. Failure to do so is likely to result in customers turning away from a particular brand, until they renew their product ranges.

At the other end of the scale is the fact that the power of the suppliers within the fashion industry is low, with many organisations outsourcing their production to developing countries, in order to keep costs at a critically low level. Organisations such as Zara have a substantial opportunity, when it comes to changing suppliers, and this enables the company to drive down costs. Although this offers opportunities for reducing costs, it can also potentially create difficulties where there are concerns over the ethical behaviours of these third party providers.

Drawing on the four forces above, it can be argued that, finally, there is a large amount of competitive rivalry within the industry (the fifth and final force). This suggests that the competitive rivalry is increasing rapidly within an organisation such as Zara need to look towards establishing themselves with a competitive advantage during these difficult times, with particular reference to the fact that the buyers have a large amount of power, yet costs are critical to the situation, as there are economic pressures on the industry, as a whole, in the wake of the global international crisis.

Internal Analysis of Zara

Having identified the key issues which are impacting on the external fashion industry, the next step is to consider how these issues are impacting on the internal operations of the company. In order to do this, a SWOT (strengths, weaknesses, opportunities and threats) analysis will be undertaken, before going on to look at the value chain and the resource based view which has emerged within the company (Porter, 1980).

SWOT Analysis

One of the key strengths that Zara has as an organisation is its highly developed supply chain, which enables it to get new products to the market, at a very rapid rate. It also has a large international presence, with more than 2000 stores across the globe, allowing it to build a very strongly recognised brand. Furthermore, it has been identified that the ability to bring new products to the market, on a regular basis, encourages greater consumer acceptance and willingness to purchase cutting-edge fashion design. Therefore, this reduced timeframe for bringing new designs onto the market is a real strength of the organisation and keeps the ideas fresh in its stores, to such an extent that consumers will be regularly revisiting and restocking their fashion items.

However, there are weaknesses associated with the internal operations of the company. Having established itself as a large international fashion company, Zara is now required to produce a large amount of products, on a regular basis, which has somewhat removed the opportunities for producing new and innovative design, at the top end of the market. Zara has become recognised as a high-street fashion brand; therefore, any items which are believed to be at the luxury end of the pricing range are unlikely to be accepted by the customer base. Moreover, with increasing competition emerging throughout the industry, buyers are looking for cheaper prices, continuously, and any attempt at raising the price is simply unlikely to retain the favour of the existing customer base. As a result, the organisation has to produce a relatively large number of products, in order to enjoy economies of scale and therefore it simply cannot produce bespoke or unique items which would allow for a higher price tag (Kumar and Linguri, 2005).

Opportunities are continuously presenting themselves within the fashion industry. Consumers require regular updates, particularly at the high street end of fashion, where items are perceived to be somewhat disposable, in order to keep up with the latest trends. This means that an organisation such as Zara can retain a large customer base, by continuously improving its range and developing new products, on an ongoing basis. As noted in the case study, customers will tend to visit Zara stores considerably more frequently than competitor stores, due to the fact that new products are continuously being launched. This is a strong strategy and needs to be developed, as it offers substantial opportunities to gather greater customer support, on a regular basis (Mittal, 1988).

There are two particular threats being faced by organisations within the fashion industry, most notably from other large competitors that are able to reduce prices, such as Primark and H&M, as well as from unique fashion houses that are able to charge a higher price for producing new and bespoke products, at the high end of fashion. The other threats are the larger organisations and those that are able to reduce their prices below those which Zara can achieve.

Resource Based View and Value Chain

Applying this in the context of the resource based view and the value chain, which Zara has established, it can be seen that the main reasons for this are its supply chain and ability to bring new products to market, on a regular basis, with the product then being made available, on an international basis, at a very rapid rate. Zara not only has access to product designers that enable it to produce desirable high-street fashion, at low prices, but it also has a strong supply chain in place which enables it to bring new products to the shop floor, within a time frame which is four months quicker than its competitors can achieve.

Analysis of PR Crises

Environmental Concerns

Although Zara has managed to retain itself is a well recognised, well-respected brand within the fashion industry, it has also suffered from PR difficulties, over the years. The most notable of these was the Expose undertaken by Greenpeace, which listed Zara as being one of the worst companies, in terms of the level of toxins which were found within their clothes. Concerns were also raised that the efficient supply chain which it had established was having a dramatically negative impact on the environment.

As a result of this report, the organisation has had to review its supply chain and look at methods of reducing the amount of toxins that are seen to be contained in its clothes. Manufacturing processes will also need to be reviewed, in order to gain the support of those who were lost, when this expose happened.

Human Rights’ Concerns

Another area of growing concern within the fashion industry, with Zara not escaping media attention in this respect, was that of human rights’ concerns, such as the new staff sweatshops in developing countries used to produce products at a cheaper rate than would be possible within the more developed regions. Back in August 2011 a television programme in Brazil accused the organisation of using sweatshops in order to produce its products through outsourced services. Following this statement, Zara acted quickly to mitigate the damage that had been done in the public face, by stating that it viewed the use of sweatshops by its outsourced suppliers as being entirely unacceptable and put in place a variety of different procedures, to ensure that production was monitored much more carefully. Zara also works with various different government agencies, in order to ensure that this is happening.

Further difficulties emerged, in early 2012, when a journalist published a report looking at the treatment of shop staff, across the company, and found several instances of abuse. Again, Zara acted quickly to put in place an internal investigation and stated that abuse of this nature would not be tolerated. Although the company seems to be working with unions, in order to improve the position, the report clearly had an impact on the way in which the company was viewed, with concerns now being shown over the treatment of staff, as well as the treatment of individuals in developing countries who are producing the products, in the first place (Balchin 1994).

It is, however, noted that other organisations operating in a similar way to Zara have also suffered similar problems, with Primark being the main example of concerns over conditions for suppliers and the workers in the developing countries.

Strategic Analysis

Pulling together both the external and internal factors impacting on Zara as an organisation, it is then possible to establish a strategic plan for the future, in order to ensure the ongoing success of this substantial fashion retailer.

Corporate Strategy

The overall strategy for the company, referred to as the corporate strategy, looks at the general approach which the company should take, before going on to consider, in more detail, the business level strategy that can be used to achieve ongoing success (Doherty, 2004).

The corporate level strategies which Zara needs to focus on are doing what it does best, and where it has achieved the greatest efficiency, in recent years. One of the key reasons that Zara has managed to achieve this success is down to its efficient supply chain, which is critical to the current demands of the fashion industry at to meet consumers demand regular updates of products and new and innovative fashion, on a regular basis. Zara has managed to ensure that it has a first mover advantage by being able to bring the product to the market, within two months, and this unique selling point needs to be exploited further, if consumers are going to be prepared to pay slightly more, in order to gain access to new products before others (Coyne and Sujit Balakrishnan 1996).

It is suggested that Zara needs to retain a cost base element, in terms of strategy, as it has gained a large amount of support from high street customers who are looking for fast fashion, at a disposable level. By maintaining this price position, the company can then encourage consumers to renew their fashion products, regularly, thus offering continuous revenue for the company.

Business Level

Looking more specifically at the business level strategy, it is suggested that certain product lines need to be focused on, in order to keep the look within the high street stores fresh, as well as looking towards new opportunities for improving the supply chain, particularly given the recent PR crisis associated with its supply chain choices. It has been identified that one of the major advantages and strengths of the company is the fact that it can achieve a very rapid link to the market. Whilst it is currently the case that Zara has an unrivalled supply chain, it should not be accepted as the forever position and continuous efforts need to be made to improve the supply chain and to form alliances with appropriate third parties. Technology plays a huge role in this, and therefore having a strategic business unit which is entirely focused on technology and the use of technologies to create internal efficiencies, needs to be one of the primary business level strategies (Murphy, 1990).

A greater focus also needs to be placed on the team that is responsible for producing the designs which will ultimately make it onto the high street. Zara has achieved a position within the market that encourages individuals to look towards the brand as a means of gaining cutting-edge fashion, at a low cost, and the design of these products is therefore critical, if this position is to be maintained. Continuous evolution within this area is a necessary part of retaining the position and also looking towards cutting costs, by altering product designs to take into account the cost of production (Finch 2004).

Future Strategies

Several future strategies are now suggested for Zara, moving forwards. Economic pressures are likely to remain substantial, across the whole industry. Therefore, cost reduction needs to be critical and continuous, without potentially putting the company in a position where it may face questioning in relation to the ethics of third party suppliers, particularly when it looks towards outsourcing into the developing regions. Several other competitors within the market have suffered negative press, due to the use of suppliers associated with unethical practices. This presents Zara with a real opportunity to set itself apart from other low-cost retailers, by developing a specific ethical strategy that will enable it to retain a relatively low cost, but also allow it to sell itself as an ethical producer (Okumus 2003).

The company, therefore, needs to look towards other opportunities, for example, by changing the design of the product to reduce production costs, or looking at creating efficiencies in the supply chain, by transporting goods to a central warehouse that can then reduce the cots of transportation, overall.

A substantial focus needs to be placed on the design team and ensuring that it is continuously developing new products which are able to be produced at a relatively low cost. This will enable the company to retain its position for supplying fast fashion within the high street and continuing to attract customers into the store, on a regular basis.

Implementation and Evaluation

Throughout the implementation of the business strategies, it is necessary to continuously evaluate whether or not certain avenues of activities are successful and whether alterations are necessary, in order to establish greater efficiencies. For example, the supply chain needs to be monitored, on an ongoing basis, in order to identify any losses, either in time or money, so that these can then be reduced or even removed (Grundy, 1993).

The decision in relation to which products to design and produce is very much customer driven; therefore, it is suggested that customer reviews are obtained, on a regular basis, so that, where the customer is not being provided with a product that they choose, or are unmotivated to revisit the store, these instances are captured and dealt with, in the future.

Finally, evaluation needs to look at the ethical issues which Zara is now tackling, in order to set itself apart from other low-cost fashion producers, with regular reviews and reports being undertaken, not only to ensure that ethical practices are being followed, but also to allow the public to see that Zara is taking its ethical responsibilities seriously (Johnson & Scholes, 2002).

Conclusions

Zara is in a particularly strong position within the fashion market, having established itself as a brand name that produces cutting-edge fashion ahead of its rivals, and at a low-cost. Despite this, it is important that the organisation recognises the forces that are impacting on the external market and uses its own internal strengths to ensure that it retains a competitive advantage, thus enabling it to maintain its position within the market, as one of the brand leaders. A particular emphasis should be placed on the strengths within the supply chain, as this enables the organisation to bring products to the market, at a particularly rapid rate. Furthermore, cost pressures are also being placed on the organisation, which requires the design team to become more efficient when creating designs that can be turned into garments, at the lowest possible cost, without sacrificing ethical standings.

Simply put, it is argued that Zara needs to continue to do what it is doing, currently; however, it needs to do it better, with greater emphasis being placed on ethical behaviour, meeting customer demands for new and innovative fashion, while at the same time retaining low-costs, across every aspect of its operation.

References

Acur N. and Bititci U. (2004) A balanced approach to strategy process, International Journal of Operations & Production Management, Vol. 24 issue 4, pp.388-408;

Balchin A. (1994) Part-time workers in the multiple retail sector: small change from employment protection legislation?, Employee Relations, Vol. 16 Issue 7, pp.43-57;

Bigelow, J. (1980) Strategies of Evolutionary and Revolutionary Organizational Change, Academy of Management Proceedings,

Carter, D. E. (1999), Branding: The Power of Market Identity, Watson-Guptill,

New York.
Coyne, K.P. and Sujit Balakrishnan (1996),Bringing discipline to strategy, The McKinsey Quarterly, No.4

De Toni A. and Tonchia S. (2003) Strategic planning and firms’ competencies: Traditional approaches and new perspectives, International Journal of Operations & Production Management, Vol. 23 Issue 9, pp.947-97

Doherty, A. M. (Editor) (2004). Fashion Marketing: Building the Research Agenda. UK: Emerald Group Publishing Limited.

Finch P. (2004) Supply chain risk management, Supply Chain Management: An International Journal, Vol. 9 Issue 2, pp.183-196;

Grundy, T. (1993) Managing Strategic Change, Kogan Page, London UK.

Johnson, G. & Scholes, K. (2002) Exploring Corporate Strategy: Text and Cases 6th edition, FT Prentice Hall, UK

Kumar and Linguri, (2005), Zara: Responsive, High-Speed, Affordable Fashion, the European Case Clearing House.

Lopez, C and Fan, Y (2009) “Internationalisation of the Spanish fashion brand Zara”, Journal of Fashion Marketing and Management, Vol. 13 Iss: 2, pp.279 – 296

Mittal, B. (1988), The role of affective choice mode in the consumer purchase of expressive products, Journal of Economic Psychology, 9, pp. 65 499-524.

Moran, R. T. and Riesenberger, J. R. (1994), The Global Challenge: Building the New World-wide Enterprise, McGraw-Hill, London.

Murphy, J. M. (1990), Brand Strategy, Director Books, Cambridge.
Okumus F. (2003) A framework to implement strategies in organizations, Journal of Management Decision, Vol. 41 Issue 9, pp.871-882;

Porter, M.E. (1979) How Competitive Forces Shape Strategy, Harvard Business Review, March/April 1979.

Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980.

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The extent to which supply chain activities within Zara supports its competitive advantage

Introduction

Zara, a flagship brand of the holding group Inditex, has emerged as the world’s fastest manufacturers of affordable fashion clothing. It owns and manages an expanding specialty chain with 1721 Zara stores and 187 Kiddy’s class stores as of October 2012. Some of its stores operate under the Lefties brand, known for low-cost fashion. It has become a well-known brand globally and one of the biggest success stories in Spanish history (Inditex, 2013; Economist, 2012).

The fashion industry in which Zara operates is characterized by intense competition among rivals in the industry with ever changing customer preferences driven by continuous design and output of new fashion items that change every season. This continuous shift challenges the dominance of a company or product in the market over the long term, which can be significant as a competitive advantage in other sectors. The acquisition of competitive advantage in the fashion industry through pricing and production of new lines can hardly be sustained with the intense competition and ever-increasing costs in the competitive business environment (Economist, 2012; Inditex, 2013). Also a major challenge to business in the current business environment is the global economic recession and attendant economic challenges, which has hit the fashion industry’s profitability and growth hard threatening the survival of players in the market, especially the companies serving the wider international market (Economist, 2012).

Given these challenges threatening sustainability and viability of companies in the long term, it is incumbent upon firms in the fashion industry including Zara to enhance focus on developing and implementing strategies to improve bottom line, enhance profitability and assure revenue growth into the future. Pricing, quality, and new designs/items as potential sources of competitive advantage are challenged by characteristic frequent shifts of the fashion and apparel industry and, therefore, the sustenance of such strategies over the longer term as sources of competitive advantage is hindered. In such a case therefore, a focus on efficiency and effectiveness of the supply chain is a possible strategy that can enable competitiveness especially in this industry, enabling companies to enhance bottom-lines and to realise growth in revenue and profitability essential for any economic venture (Cousins, 2005; Ha?kansson and Persson, 2004).

Zara, in light of these challenges in its industry, has managed to create and to sustain its breakthrough strategy enabled by its performance of key activities differently, especially enhancing efficiency and effectiveness of its supply chain. This it has achieved through a myriad of strategies at specific points in its manufacturing and distribution including employment of technology, vertical integration, market intelligence and customer service, among several other tweaks of its production and distribution processes (Inditex, 2013; Economist, 2012). Its success, competitive differentiation and positioning which have contributed to its notable customer preference over its close rivals can be attributed to clear focus and vision in its tapping of the power of fashion, finding key activities that matter to customers and enhancing key operational activities, especially its supply chain (Economist, 2012). It has set the challenge for its competitors in the fashion industry who find it difficult to imitate or equal its achievement, its significant competitive advantage in the challenging industry and business environment (Inditex, 2013).

The supply chain encompasses a network of relationships between organizations and integrated business processes across the boundaries of individual organizations and/or business units that are involved in providing products and services to customers at the end of the chain (Croom and Romano, 2000). In today’s competitive business environment and challenges threatening profitability and growth as have earlier been outlined, there is need to manage this network and constituent processes so as to ensure a smooth flow of goods and information back and forth from the raw materials through several intermediate entities to the end-users (Hand?eld and Nichols, 2002). This synchronization of supply and demand is essential to enhance efficiency necessary for survival and competitiveness of firms in the market (Ketchen and Giunipero, 2004).

A number of theoretical concepts enable the evaluation of the various processes that constitute the supply chain enhancing our understanding of the processes, motives for the engagements in the chain and consequently results expected and obtained. Among the theoretical concepts applicable to Zara’s case are: the Principal-Agent theory, the Transaction cost analysis, the Network Perspective, and the Resource-based view (Svensson, 2002).

The Principal-Agent theory (PAT) is based on the separation between the principal and the agent (in this case Zara and the external suppliers and/or its internal production processes) with regard to the control of activities and ownership, and consequently, the resultant problems. Challenges of this separation include the asymmetry in information between the two players, bounded rationality, conflicts in objectives, variations in their risk aversion, their self-interest leading to inconsiderate behaviour, and the uncertainty of outcomes (Croom and Romano, 2000). This theory aims to facilitate the design of efficient contracts to mitigate such challenges and problems through the governance of the relationship between the two parties. An efficient contract would include a mix of incentives, based on behaviour and outcomes, that would motivate the agent to align their actions to the interests of the principal (Hand?eld and Nichols, 2002).

The Transaction Cost analysis (TCA) offers an economic approach in the endeavour to determine the boundaries of the firm. Through this, efficiency can be aptly presented as an essential motive for inter-organizational engagements such as those necessary in the supply chain (Frohlich and Westbrook, 2001; Svensson, 2002). Relationships in the supply chain are represented by a hybrid of hierarchies which influence costs of transaction and governance between markets. Through cooperation with entities and partners external to the organization, as well as cooperation of business units within, total transaction costs may be reduced. Commitments that are credible as well as safeguards such as long term contracts and penalties for deviations, sharing of equity, and joint investments that enhance the relationship, are some of the mechanism that can be used to mitigate opportunism (Ketchen and Giunipero, 2004).

Also among the theoretical frameworks is the Network Perspective which describes the supply chain as a series of interactions which are reciprocated between institutions, with a firm’s performance depending not only on its partner’s cooperation with it, but also on these partners’ cooperation with their own business partners (Frohlich and Westbrook, 2001). These interactions become important factors in the development of new resources with the value of such resources based on their synergy combined with other resources. Gradually, partners build trust mutually through their social exchanges and cooperative relations (Hand?eld and Nichols, 2002).

The resource-Based view is concerned with the competitive advantage obtained from the possession of resources and capabilities which are considered to be a firm’s core competence. Efficiency in this case would not just be related to productivity and mechanisms of operation, building competencies in-house, but could also be obtained through access to core competencies of partner firms in cooperation with it. Decisions for such associations are based on finding complementary competencies among partners through inter-organizational collaborations towards mutual benefit (Hand?eld and Nichols, 2002, Ketchen and Giunipero, 2004).

With regard to Zara, and its supply chain, the company has partnered with a number of organizations that enable its successful performance of its production operations (Inditex, 2013; Min and Mentzner, 2004). In the realization of the potential problems resulting from inefficiencies in dealing with numerous partners in the supply chain such as those envisaged in the Principal-Agent theory, and in an attempt to minimize transaction costs as outlined in the transaction cost analysis theory, Zara has, however, made an attempt to limit its exposure to external players and partners by conducting most of its manufacturing and distribution in-house thus ensuring greater efficiency (Womack and Jones 2003). Through its production facilities, it makes 40% of its fabrics and 60% of its merchandise, a strategy which has also enabled the company to significantly enhance efficiency and therefore competitiveness. This is unlike its closest rivals such as H&M which has no factories and therefore employs over 900 suppliers (Inditex, 2013).

Key to the fashion industry is the sourcing of inputs such as fabrics and dyes among other goods, as well as services such as labour to enable production. In acknowledgement of the need to tap into core competencies of partners, according to the resource-based view, and into synergies in association with aligned partners envisaged in the Network Perspective theory, Zara partners with contract manufacturers in Turkey and Asia that produce its staple, long shelf-life items such as jeans and t-shirts and a network of local cooperatives that stitch items together after the cutting and dyeing stage (Ketchen and Giunipero, 2004; Inditex, 2013). Also part of its supply chain are the entities that supply its fabrics and dyes which include Zara’s own subsidiary which purchases most of its dyes, and Comditel, a subsidiary of Inditex, through which Zara makes its fabric purchases. All these entities take charge of assigned tasks and the bulky and intensive production process so that Zara can focus on its specialty lines and core business which earns a significant portion of its revenues (Cox, 1999; Inditex, 2013).

Zara, in the endeavour to turn its supply chain into a significant source of competitive advantage, has sought to enhance its control over the entire supply chain so as to enhance efficiency overall and thereby enable its substantial differentiation from its rivals in the industry (Womack and Jones 2003; Cox, 1999; Inditex, 2013). To this end, Zara has been quite successful and has managed to sustain its leading position with regard to efficiency and speed in the delivery of new items to stores and the replenishment of stock. Its industry leading frequency of twice weekly deliveries drives customer preferences and ensures that its stores receives a high number of return visits to its stores by customers, beating industry averages (Economist, 2012).

Zara’s value chain linkage, often tweaked to enhance efficiency and performance is a major platform which Zara continues to employ to differentiate itself with its closest rivals (Economist, 2012; Min and Mentzner, 2004). This enhanced efficiency is enabled by vertical integration in which Zara runs its own manufacturing and production facilities; control of crucial production processes; efficient coordination of suppliers and processes through technology; outsourcing to countries close to its headquarters; as well as finely-tuned logistics and its just-in-time manufacturing strategy.

Other beneficial strategies include its centralized distribution which has enabled substantial reduction of lead-time and better inventory control; enhanced store management and control with its focus on the full ownership model; as well as a highly flattened hierarchical structure which enhances communication and enables effective conduct of market intelligence (Economist, 2012; Hand?eld and Nichols, 2002). Through these initiatives, Zara has managed to acquire a leadership position in the industry gaining substantial preference, and achieving high growth and profitability (Inditex, 2013).

Various theories in literature regarding the management of the supply chain can be useful tools which can be used to enhance understanding of the supply chain. They enable the evaluation of the chain so as to ensure that the company obtains maximum benefit from its management. Useful theories, especially with regard to Zara’s case include the transaction-cost analysis which is concerned with the employment of effective partnerships among players in the supply chain to reduce overall transaction costs; the principal-agent theory which is concerned with the development of efficient contracts to mitigate potential conflicts in supply chain associations and partnerships; the Network perspective which focuses on the wide network of inter-relationships between two partners in addition to their individual business partners resulting in synergy and the development of new resources through a series of reciprocated interactions; and the resource-based view which is concerned with competitive advantage gained through access to and employment of a partner’s core competencies and the mutual benefit enhancing the relationship.

The supply chain when well managed and controlled can be a significant source of competitive advantage as can be seen in Zara’s case in the fashion and apparel industry. Zara’s deliberate strategies to enhance efficiency in its supply chain, made in consideration of the theories outlined above, have been significant factors that have enabled the achievement of its level of competitiveness and given it a strong market presence in the fashion and apparel industry. Through its deliberate endeavour to enhance efficiency in its supply chain, Zara has managed to differentiate itself from its rivals in the industry, as well as to find differences that matter to consumers thereby driving their preference. Consequently, these differences have enabled it achieve its growth and profitability targets.

References
Cousins, P.D. (2005), “The alignment of appropriate firm and supply Strategies for competitive advantage.” In: International Journal of Operations & Production Management, Vol. 25 No. 5, pp. 403-28.
Cox, A., 1999. “Power, value and supply chain management.” In: Supply Chain Management: An International Journal, Vol. 4 No. 4, pp. 1
Croom, S., and P., Romano, 2000. “Supply chain management: an analytical framework for critical literature review.” In: European Journal of Purchasing & Supply Management, Vol. 6, pp. 67-83.
Economist, 2012. Inditex Fashion forward Zara: Spain’s most successful brand, is trying to go global. Mar 24th. LA CORUNA
Frohlich, M., and R., Westbrook, 2001. “Arcs of integration: an international study of supply chain strategies.” In: Journal of Operations Management, Vol. 19 No. 2, pp. 185-200.
Hand?eld, R., and E., Nichols, 2002. Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems. Financial Times. Prentice-Hall, Englewood Cliffs, NJ.
Ha?kansson, H. and G., Persson, 2004. “Supply chain management: the logic of supply chains and networks.” In: The International Journal of Logistics Management, Vol. 15 No. 1, pp. 11-23.
Inditex, 2013. Zara. Viewed from: http://www.inditex.com/en/who_we_are/concepts/zara
Ketchen, D., and L., Giunipero, 2004. “The intersection of strategic management and supply chain management.” In: Industrial Marketing Management, Vol. 33 No. 1, pp. 51-7.
Min, S., and J., Mentzner, 2004. “Developing and measuring supply chain management concepts.” In: Journal of Business Logistics, Vol. 25 No. 1, pp. 63-99.
Svensson, G., 2002. “The theoretical foundation of supply chain management: a functionalist theory of marketing.” In: International Journal of Physical Distribution & Logistics Management, Vol. 32 No. 9, pp. 734-54.
Womack, J., and D., Jones, 2003. Lean Thinking, 2nd ed., Free Press Business, London.

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

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 Coruna, 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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Fashion and Zara Store

Colour case This case contains colour exhibits which will be affected by the user’s screen and printer resolution. Therefore, to ensure optimum colour quality multiple copies must be ordered directly from ecch. This colour case cannot be supplied as a permission master in either paper format or as a sealed pdf file. However, please contact ecch to check availability of a black and white version which can be supplied for reproduction. ecch the case for learning ecch UK Registered Office: Cranfield University, Wharley End Beds MK43 0JR, UK t+44 (0)1234 750903 f+44 (0)1234 751125 e [email protected] om w www. ecch. com ecch USA Registered Office: Babson College, Babson Park Wellesley MA 02457, USA t+1 781 239 5884 f+1 781 239 5885 e [email protected] com w www. ecch. com Responsive, High Speed, Affordable Fashion This case was prepared by Sophie Linguri under the supervision of Professor Nirmalya Kumar as a basis for classroom discussion rather than to illustrate either effective or ineffective handling of a management situation. Copyright © 2005 London Business School. All rights reserved.

No part of this case study may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without written permission of London Business School. London Business School reference CS-05-037 ecch the case for learning Distributed by ecch, UK and USA www. ecch. com All rights reserved Printed in UK and USA North America t +1 781 239 5884 f +1 781 239 5885 e [email protected] com 305-308-1 LBS-CS-05-037 Rest of the world t +44 (0)1234 750903 f +44 (0)1234 751125 e [email protected] om – 2 -305-308-1 LBS-CS-05-037 Zara: Responsive, High-Speed, Affordable Fashion In 1975, the first Zara store was opened in La Coruna, in Northwest Spain. By 2005, Zara? ’s 723 stores had a selling area of 811,100 m2 and occupied ? “privileged locations of major cities? ” in 56 countries. With sales of ?€3. 8 billion in financial year 2004, Zara had become Spain? ’s best-known fashion brand and the flagship brand of ? €5. 7 billion holding group Inditex. Inditex? ’s stock market listing in 2001 had turned Amancio Ortega, its founder and a self-made man, into the world? s 23 richest man, with a personal fortune that Forbes magazine estimated at $12. 6 billion. Zara strived to deliver fashion apparel, often knock-offs of famous designers, at reasonable costs to young, fashion-conscious city-dwellers. Zara used in- house designers to present new items of clothing to customers twice a week, in response to sales and fashion trends. Thus the merchandise of any particular store was fresh and limited. To produce at such short notice required that Zara maintain a vertically integrated supply chain that distributed the clothes through a single state-of-the-art distribution centre.

Unlike its competitors, 70- 80% of Zara garments were manufactured in Europe. In 2005, Pablo Isla was appointed the new Inditex chief executive. With plans to double the number of its stores by 2009, the rapid pace of growth was necessitating changes. First, Zara had opened a second distribution centre to increase capacity. Second, expanding into more distant markets meant that the number of items carried had increased to 12,000. Would Zara? ’s business model be able to scale up? Or would the resulting complexity compromise its speed advantage?

Would Pablo Isla be able to maintain the focus that Zara had established? – 3 -305-308-1 LBS-CS-05-037 THE RETAIL APPAREL INDUSTRY AND COMPETITORS The apparel industry was one of the most globalised industries, with 23. 6 million workers in over 20 countries. As labour costs in Western European countries had risen, labour-intensive manufacturing operations had become increasingly outsourced to less developed countries. Hourly wages in the textile industry could be as low as 60 cents in India and China, compared with $2 in North Africa, $3 in Eastern Europe, $8. 50 in Spain, and around $15. 0 in Italy. The 1974 Multi-Fibre Arrangement, which placed import quotas on garments and textiles from developing countries to the industrialised world, had expired on 1 January 2005 for all members of the World Trade Organization. This was amplifying the relocation of textile and garment manufacture to countries with lower labour costs, especially China. For example, in 2004, 400 Spanish textile groups went out of business, due to competition from Asia, resulting in the loss of 15,000 jobs. The Spanish textile guild predicted a loss of another 72,000 jobs by 2009. The apparel retail channels had consolidated during the 1990s, with a few large players dominating most major markets. Competitors included department stores, mass merchandisers (e. g. discounters and supermarkets) and specialty stores. Department stores were usually national players, like Marks & Spencer in the United Kingdom or Federated in the USA. Typically, they had lost market share in recent years. Mass merchandisers such as Target, Tesco and Wal-Mart had increasingly added private label clothes to their mix over the years to become major players.

There were many successful specialty chains like Benetton, C&A, Hennes & Mauritz (referred to as H&M), The Limited, Mango and Next. The traditional apparel industry model worked on long lead times (see Exhibit 1). The industry average was around nine months, around six months for design and three months for manufacturing. As a result, 45-60% of production was committed in the six-month pre-season period, with 80-100% committed by the start of the season. Only the remaining 0-20% was generally manufactured in-season in response to sales patterns.

Excess inventory was marked down at the end of the season, and typically accounted for 30-40% of sales. Despite their best efforts, Zara? ’s closest competitors, H&M and Gap, still took around five months to produce new clothing lines. H&M Swedish clothing chain H&M was founded in 1947. By 2005, it had close to 32,000 employees, just under 1,100 stores in 20 countries. In 2005, it planned to open 155 new stores in Europe and the US. Its 2004 sales were ? €6 billion, which yielded a profit of 1. 24 billion. With close to 30% of its sales, Germany was H&M? s largest market, while the US generated only Iman for H&M Germany – 4 -305-308-1 LBS-CS-05-037 6. 4% of its 2004 sales. It manufactured 60% of its clothes in Asia. H&M? ’s business concept was to offer fashion and quality at the best price. In order to offer the latest fashion, H&M had its own buying and design department. It claimed to achieve the best price by: ?? Few middlemen ?? Buying in large volumes ?? Having a broad, in-depth knowledge of design, fashion, and textiles ?? Buying the right products from the right market ??

Being cost conscious at every stage ?? Having efficient distribution H&M? ’s clothing lines in men? ’s wear, women? ’s wear and children? ’s wear, as well as its cosmetics range, targeted cost-conscious shoppers. Within H&M women? ’s wear were different sub-brands: Hennes (women aged 25-35), L. O. G. G. (casual sportswear), Impuls (young women? ’s trends), BiB (plus-size line), Woman (classic), Clothes (current trends), MAMA (maternity) and Rocky (youth fashion). There were also different sub-brands within the men? ’s and children? ’s lines.

H&M stores generally had a somewhat chaotic, marketplace feel, with clothes packed tightly onto racks, frequent markdowns, and queues at the cash register. H&M devoted 5% of its revenues to advertising. Its high-profile ad campaigns featured celebrities, such as Claudia Schiffer, Johnny Depp, Naomi Campbell and Jerry Hall, wearing its low-cost clothes. Dedicated collections by star designers Karl Lagerfeld and Stella McCartney in 2004-5 continued to create buzz among its customers. The Gap Gap opened its first store in San Francisco in 1969, where it sold mainly Levis jeans.

In 1991, Gap announced its decision to sell only private label brands. With around 3,000 stores and 152,000 employees worldwide, Gap positioned itself as a provider of high quality, basic items, such as jeans, khakis and t-shirts. In addition to Old Navy and Banana Republic, Gap? ’s chains included GapBody, GapKids, and babyGap. Its 2004 sales were around ? €12. 5 billion, with a profit of $1. 4 billion. Nearly all of Gap? ’s products were manufactured outside the US, with 18% of its collection made in China. Gap? ’s stores were spacious, with stock well spaced Madonna for Gap and neatly presented.

There was an emphasis on service, with a call button in fitting rooms for customers requiring assistance with clothing sizes. Television advertisements featured hip music and dance sequences, with appearances by celebrities such as Madonna, Lenny Kravitz, Sarah Jessica Parker and Joss Stone. – 5 -305-308-1 LBS-CS-05-037 INDITEX HISTORY Spanish entrepreneur Amancio Ortega Gaona started a firm manufacturing lingerie and nightwear in 1963, after quitting his job as a runner for a shirtmaker in La Coruna. He founded Confecciones GOA in 1972, and opened the first Zara store in 1975, to sell stock after a customer cancelled a large order.

Ortega founded the Inditex group in 1985. After floating 26% of its shares on the Madrid stock exchange in 2001, he remained its majority shareholder, with 61% of the company? ’s shares. Ortega retained a low profile, rarely making public appearances (apart from during the run-up to the IPO in 2000), and had never given an interview. Jose Maria Castellano Rios joined Inditex in 1985 and became its Chief Executive in 1997. Castellano had previously been IT manager of Aegon Espana SA, and had a doctorate in economics and business studies. In 2005, Inditex developed a five-year plan, which included a board restructure.

As part of the restructure, Pablo Isla Alvarez de Tejera was appointed as Chief Executive in May 2005. Isla came from the Franco-Spanish tobacco group Altadis, where he had been co-chairman. Isla was chosen for his experience in international distribution. Ortega stayed on as the group? ’s Chairman, and Castellano remained the Deputy Chairman. Portfolio of Stores Besides Zara, which was targeted at trendy city youngsters, Inditex grew its portfolio of apparel chains throughout the 1990s. Each chain was targeted at a specific segment (see Exhibit 2): ?? Massimo Dutti ? – Young businessmen ?? Pull & Bear – Elegant male clothing ??

Berksha ? – Elegant fashion for young women ?? Brettos ? – Trendy young suburban women ?? Oysho ? – Lingerie ?? Stradivarius ? – Youthful fashion ?? Kiddy? ’s Class ? – Trendy children In 2003, Inditex opened a home furnishings chain called Zara Home. By 2005, Zara made up close to 70% of Inditex sales and led the group? ’s international expansion (see Exhibit 3). While, as a group, Inditex had about twice the number of stores as H&M, Zara? ’s 700 stores were fewer in number than H&M? ’s. Inditex was aggressively expanding, and planned to increase its 2,000 stores to 4,000 by 2009, in Europe, Asia, and the U.

S. (see Exhibit 4). In terms of profits, Inditex was performing well compared with its main competitor, H&M (see Exhibit 5 and Exhibit 6). Aamancio Ortega Gaona Inditex Chairman – 6 – 305-308-1 LBS-CS-05-037 THE ZARA STORE 91% of Zara stores were company-owned; the rest were franchises or joint ventures. Customers entering a Zara store on Regent Street in London, Rue Rivoli in Paris, Fifth Avenue in New York or Avenidas das Americas in Rio de Janeiro generally found themselves in the same environment: a predominantly white, modern and spacious store, well-lit and walled with mirror.

The latest fashions hung from the store racks around them. A long line of people typically waited at the cash registers to pay for their purchases: a few select items. Shop Window of Zara, New York In comparison with other clothing retailers, who spent 3-4% of sales on advertising, Zara spent just 0. 3%. The little it did spend went to reinforce its identity as a clothing retailer that was low-cost but high fashion (see Exhibit 7). Instead Zara concentrated on creating compelling store windows and to the design of its shops, which had won awards.

It relied on its shop windows, which were dramatically lit and used neutral backgrounds, to communicate its brand image. The shop windows of Zara stores were changed regularly, according to display designs sent by headquarters, and were critical for Zara to remain visible and entice customers. Store locations were carefully researched to determine that there was a sufficiently large customer base for Zara2, and as such were generally busy, prestigious, city centre shopping streets. Zara was a fashion imitator.

It focussed its attention on understanding what fashion items its customers wanted and then delivering them, rather than on promoting predicted season? ’s trends via fashion shows and similar channels of influence, that the fashion industry traditionally used. Its 200 in-house designers were trend-spotters who kept their finger on the fashion pulse, and translated trends into styles that were universally accessible. At Zara headquarters in La Coruna, store specialists (who were responsible for a number of stores in a region) worked closely with designers to develop styles that would work for different arkets. Collections were renewed every year, with an average of 11,000 styles produced annually, compared with the more typical collections of 2,000-4,000 produced annually by rivals H&M and Gap. Production and distribution of new clothing pieces was favoured over replenishing existing items, contributing to the perception of scarcity cultivated in Zara stores. Customers returned frequently to stores, to browse new items. The global average of 17 visits per customer per year for Zara was considerably higher than the three visits to its competitors. Visitors were also more likely to purchase, as one senior executive explained: Zara? ’s objective is not that consumers buy a lot but that they buy often and will find something new every time they enter the store. 4 – 7 -305-308-1 LBS-CS-05-037 Comments by Luis Blanc, and Inditex director, illustrated how Zara stores fostered an environment of immediacy: We want our customers to understand that if they like something, they must buy it now, because it won? ’t be in the shops the following week. It is all about creating a climate of scarcity and opportunity. Affordable prices helped to encourage purchases, and Zara? ’s offering was often referred to as clothing to be worn six to ten times. Zara? ’s pricing differed across country markets. It set prices according to individual market conditions, rather than using cost plus margin as its basis (which was the formula used by most of its competitors). In Spain, Zara products were low-cost, while in the US, Japan and Mexico, they were priced as a luxury fashion item. Prices in France were somewhat higher than in Spain, since the average French consumer was willing to pay more for fashion than most other European consumers.

For example, in 2003, the price of jeans in Zara stores in France was $34. 58 compared with $24. 87 in Spain and $54 in Japan. 6 Until 2002, Zara had used one price tag listing the price in different currencies, to simplify tagging of items. In 2002, however, it implemented a system of local pricing, using a bar code reader that printed the correct local price for items. Compared with its competitors, Zara generally priced its products somewhat higher than C&A and H&M, but below Gap, Next and Kookai. For example, a similar shirt cost $26 at Zara, compared with a price of $29 at Gap and $9 at H&M. Store Management Store managers were encouraged to run their store like a small business. Salespeople were well trained, and Zara promoted its people from within as much as possible. Store managers? ’ remuneration was partially dependent on the accuracy of their sales forecasts and sales growth. 8 Each evening a handheld PDA displayed the newest designs sent by headquarters, which were available for order. Order deadlines were twice weekly, and were issued via the handhelds. Store managers who failed to order by the deadline received replenishment items only.

Store managers regularly spoke with store specialists, who also received real time sales data from stores, to discuss which items were selling well or if customers had requested Zara Store, Barcelona specific items. This information was then fed back to the design process. 9 Deliveries arrived at stores twice per week from Zara headquarters, a few days after the order was made, and contained both replenishment items as well as – 8 -305-308-1 LBS-CS-05-037 new products. Headquarters also sometimes included products that had not been ordered, which stores expected to receive.

If demand of an item exceeded supply, some stores did not receive the product they had ordered. Zara also tested some of its products in limited numbers in its test stores, before introducing them on a wider scale. Failure rates of Zara? ’s new products were reported to be just 1%, considerably lower than the industry average of 10%. 10 Technology was a key part of enabling communications and information flow. While information technology was fundamental to its business, its IT infrastructure was relatively simple (even dated by some standards), which meant that Zara? s IT expenditure was significantly lower than its rivals (as much as five to ten times lower). 11 Deputy Chairman Jose Maria Castellano explained the key role played by technology: Technology in this company is important and will be more important in the future. The technology we use is mainly information technology and [enables] the communication between the shop managers and the design team here in headquarters. 12 THE ZARA SUPPLY CHAIN Around 50% of Zara? ’s garments were sourced from third parties. Unlike its competitors, Zara? s outsourced production came for the most part from Europe (60%), with just 27% coming from Asia, and another 10% from the rest of the world. The products sourced from Asia were basic collection items or wardrobe ? “staples,? ” with minimum fashion content, such as T-shirts, lingerie and woollens, and where there was a clear cost advantage. Formal contracts were kept to a minimum, and Zara was generally a preferred customer due to its order volume and stability. 13 Externally manufactured items were shipped to Zara? ’s distribution centre. Zara intended to source more of the collection from Asia in the future, as commented by Castellano: ? In the next few years, we will source more basic items from China and Vietnam, but the high value added fashion items will continue to be made closer to home.? ”14 The other 50% of Zara? ’s garments, those that were more fashion-dependent, were manufactured in-house, in more than 20 Zara factories located in nearby Arteixo. 15 For its in-house manufacturing, it purchased fabric from Comditel, a subsidiary of Inditex. Half of this fabric was purchased grey (undyed) to enable Zara to respond to changes in colour trends during the season. Dye was purchased from Fibracolor, in which Inditex held a stake.

A team of 200 young, talented yet unknown designers were hired (often recent graduates of top design schools) to create designs, based on the latest fashions from the catwalk and other fashion hotspots, which were easily translatable to the mass market. 16 Working alongside the market specialists and production planners, designers for each of Zara? ’s collections (Woman, Man, Child) kept in-touch with market developments, to create around 40,000 new designs per year, of which around one-quarter were manufactured. 17 The design and – 9 -305-308-1 LBS-CS-05-037 production working environment was consistent with Zara? s flat hierarchical structure, in which prima donnas were not tolerated. 18 Illustration: Fast Fashion Computers were used to guide the cutting tools, using patterns made from selected designs. Zara tried to keep its offering of any style simple, usually in three sizes and three colours only. The labour intensive sewing of the garments was outsourced to around 500 local subcontractors, who used seamstresses in cooperatives. Zara was usually their sole client, and they worked without any written contracts. Zara paid these subcontrators a flat fee per type of garment, (e. g. , ? 5 for a pair of trousers and ? €15 per jacket) and they were expected to operate on short lead times and fast turnaround. Subcontractors picked up the prepared fabric pieces from Zara, and returned them to the 500,000 m2 distribution centre. 19 At the Zara distribution centre, optical reading devices were used to sort and distribute over 60,000 items per hour. The garments were then picked up and transported by truck to different destinations all over Europe (which made up about 75% of deliveries). Products for more distant destinations were transported by air (about 25%).

Throughout the process, garments were tracked using bar codes. Shipments tended to have almost zero flaws, with 98. 9% accuracy and under 0. 5% shrinkage. 20 Since Zara? ’s garments were produced in-house, it was able to make a new line from start to finish in just three weeks (see Exhibit 8). This varied somewhat depending on the type of garment: new garments took about five weeks from design to store delivery, while revamped existing items could take as little as two weeks. As a result Zara could be responsive to fashion items that were selling well during the season, and to discontinue those that were not.

By constantly refreshing the collection, and manufacturing items in high-intensity, Zara was a master of picking up up-to-the- minute trends and churning them out to stores around the world in a matter of weeks. ?•After Madonna? ’s first concert date in Spain during a recent tour, her outfit was copied by Zara designers. By the time she performed her last concert in Spain, some members of the audience were wearing the same outfit. ?•In 2003, when the Crown Prince of Spain announced his engagement to Letizia Ortiz Rocasolano, she wore a white trouser-suit for the occasion (pictured left).

In just a few weeks, the same white trouser-suit was hanging from Zara? ’s clothes racks all over Europe, where it was snatched up by the ranks Crown Prince Felipe of Spain and Letizia Ortiz Rocasolano of the fashion-conscious. – 10 -305-308-1 LBS-CS-05-037 short-runs, Zara was able to prevent the accumulation of non-saleable inventories. It was estimated that Zara committed just 15-25% of production before the season began, 50 to 60% at the start of the season, and the remainder manufactured in-season. Percentage of Zara sales consisting of markdowns was 15-20%. In some cases, stores ran out of stock.

However, this was not viewed as a negative since it contributed to customers? ’ perception of the uniqueness of their purchase: ? “Customers are actually satisfied to see items out of stock as they are then confident that there is little chance that many other customers will wear the same dress.? ”21 Castellano explained the rationale for this departure from industry norms: We don? ’t want to compete in the bottom end of the market. We offer fashion with a high design content. If I tried to source my collections in Asia, I would not be able to get them quickly enough to our stores.

By manufacturing close to home, I can scrap collections when they are not selling. And without this rapid response, I would not be able to extract a good relation between quality, price and fashion which is what our customers have come to expect. 22 A study in 2000 estimated that Zara managed to generate 14. 7% operating margins as a percentage of sales, compared with 10. 6% for Gap and 12. 3% for H&M. Additionally, the same study put Zara? ’s inventory turnover at 10. 67 outpacing Gap at 7. 18 and H&M at 6. 84. 23 THE FUTURE Following Zara? ’s success, competitors sought to reduce their own lead times.

The competitive advantage achieved by Zara? ’s vertical integration appeared to be eroding. With its highly centralised structure and its rapid growth, Zara was producing around 12,000 different items per year by 2005. As it opened stores in increasingly distant markets, would Zara be able to retain its flexibility in adjusting production to accommodate differences in local trends? Would the increase in complexity result in a need to create regional production facilities? How would this affect the advantage Zara gained from its centralization?

Might Chinese clothing manufacturers prove to be a competitive threat to Zara, with their high capacity and continuous improvements in quality? Castellano discounted this threat: ? “Being a Zara or Gap is not just about designing fashionable clothes and manufacturing them cheaply. You must also make the transition to being a retailer. It is a big step from manufacturing to distribution. There is also the question of managing the location and presentation of stores, training staff and so on.? ”24 The Zara model seemed to work better in markets where customers had an appetite for fashion (such as France, Italy, Japan and the UK).

However, in countries such as France and Italy, Zara had received bad press for copying – 11 -305-308-1 LBS-CS-05-037 designs from couture labels, and the French Fashion Federation had called for limited access by reporters to fashion shows to minimize imitation by copycatters. In other markets, where consumers were less fashion-focussed (e. g. Germany and the U. S. A. ) Zara seemed somewhat less successful. Would Zara be better served in the long run by increasing penetration in these fashion- sensitive markets, or by extending its global reach through increased presence in more markets? – 12 -305-308-1 LBS-CS-05-037

Exhibit 1: Traditional Season for a High Street Store Adapted from Dutta, 200425 – 13 – 305-308-1 LBS-CS-05-037 Exhibit 2: Inditex Stores and Sales Sales, by Division (2004-5) Zara Home Kiddy? ’s Class Pull & Bear 6. 7% Massimo Dutti 8. 5% Bershka 9. 1% Zara 67. 4% Stradivarius 4. 3% 1. 3% Oysho Source: Handelsbank, 2005 Source: Financial Times, 2005 Percentage of Stores (2005) 0. 7% 2. 1% Zara Home Kiddy? ’s Class 3% Oysho 5% Stradivarius 10% Pull & Bear 16% 6% Zara 31% Dutti 15% Bershka 14% – 14 – 305-308-1 LBS-CS-05-037 Exhibit 3: Number of Zara Stores by Country (31 March 2005) Russia Slovenia2 2Hungary Czech Rep.

Lithuania1 Asia Pacific = 21 Japan14 Malaysia3 Europe = 576 3 Sweden Denmark Finland Iceland 2 2 1 1 4Romania 3Estonia 1Latvia1 Singapore Hong Kong Mexico Venezuela Brazil Argentina Chile Uruguay El Salvador Panama Dominican Rep. 1 Spain244 Portugal41 France83 Greece30 UK34 Belgium17 Germany34 Italy23 Eire4 Turkey11 Cyprus3 Holland6 Switzerland 6 Poland7 Austria6 Malta1 Andorra1 Luxembourg 2 3USA16 1Canada12 Americas = 98 Middle East & Africa = 40 Saudi Arabia Israel UAE Kuwait Lebanon Jordan Qatar Bahrain Morocco 13 13 4 4 2 1 1 1 1 34 8 13 5 5 2 1 1Adapted from Inditex, 2005 Exhibit 4: Inditex Store Formats ZaraKiddy? sPull & Bear Class – 15 -305-308-1 LBS-CS-05-037 MassimoBershkaStradivariusOyshoZara Home Dutti 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 No of stores723626 Turnover* 3,820 3,220 129103371350 121 90 379 288 22 18. 0 56 19 12. 8 13. 4 30. 5 31 2. 11. 96. 76. 3 61% 80% 44% 16% 327297302 481 389 516 75 60 83 41. 9 40. 9 35. 7 8. 58. 59. 1 50% 56% 52% 253227191104 395 242 162 72 57 394 16 33. 8 15. 4 16. 6 31. 5 8. 64. 33. 51. 3 46% 43%5% 52% 766226 45 40 11 2 0. 3 (0. 5) 35. 1 12. 7 8. 5 10. 70. 2 7%2%– Operating Income* % international sales 648 476 65. 8 63. 5 67. 470 % of Inditex ROCE 38% 33% in millions of Euros, rounded off. Source: Inditex press dossier, 2005 – 16 -305-308-1 LBS-CS-05-037 Exhibit 5: Key Indicators of Gap, H&M and Inditex (Financial Years 2003 & 2004) GapiH&MInditex 29 29 30 30 31 31 Reporting Date Sales (millions ? €) Gross Profit (millions ? €) Operating Profit (millions ? €) Profit (millions ? €) Profit after tax (millions ? €) Total Assets (millions ? €) Inventories (millions ? €) January 2005ii January 2004iii November 2004iv November 2003v JanuaryJanuary 20052004 12,47012,6966,0295,3305,6704,599 4,8924,7803,4492,9943,0342,306 1,5981,5221,1981,019925627 1,4351,3491,2361,062886613 882826817706628446 ,7038,5793,1592,8474,2093,510 1,3901,365577558514486 Stores Employees 152,000150,00031,70128,40947,04639,760 Countries 56 20185648 2,9943,0221,0689452,2441,922 Total square3,3993,3931,364vin/a metres (thousands) 1,175988 Source: Inditex, H&M and Gap, 2005 i Gap Inc? ’s stores include Gap, Old Navy and Banana Republic. Gap? ’s sales were ? €5. 6 million, with 1643 stores, and 1. 43 million square metres. ii Exchange Rate of 29 January 2005 is used for all currency calculations: 0. 76660 USD = 1? € iii Exchange Rate of 29 January 2004 is used for all currency calculations 0. 80080 USD = ? 1 iv Exchange Rate of 30 November 2004 is used for all currency calculations 0. 11230 SEK = 1? € v Exchange Rate of 30 November 2003 is used for all currency calculations 0. 11050 SEK = 1? € vi Estimated (Adapted from Datamonitor, 2005). Exhibit 6: Iniditex vs. H&M (1998-2004) Sales, Inditex vs H&M (Millions, ? €) – 17 – Inditex H&M 305-308-1 LBS-CS-05-037 Number of Stores, Inditex vs H&M (1999-2004) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2500 2000 1500 1000 500 0 22244 66029 5670 1922 55,058 5330 1558 11284 682771 99451068 IInditex H&M 44599 1080 613 44,196 3,980 3,250 922 8844 33,255 1,614 2,035 3,508 2,615 ,631 1999 2000 2001 2002 2003 2004 NNumber of Countries, Inditex vs H&M (1999-2004) 60 50 40 30 20 10 556 11998 1999 2000 2001 2002 2003 2004 44 14 448 330 12 339 33 1414 118 220 IInditex H&M 0 0 11999 2000 2001 2002 2003 2004 AAdapted from Inditex and H&M, 2005 – 18 -305-308-1 LBS-CS-05-037 Exhibit 7: A Zara advertisement The Cheap Frock coat (119) White shirt (25) ZARA Black necktie (65) HACKETT Woollen Trousers (45) and Black boots (55), both ZARA The Expensive Black cashmere frock coat (950) White tuxedo shirt (190) Black necktie (86) and Woollen Trousers (380) both RALPH LAUREN Black boots (500) are by UNGARO 19 -305-308-1 LBS-CS-05-037 Exhibit 8: Zara Season Adapted from Dutta, 2004 Endnotes – 20 -305-308-1 LBS-CS-05-037 1 Crawford, L. (2005) ? “Inditex sizes up Europe in expansion drive,? ” Financial Times, 1 February 2005, p. 30. 2 Ferdows, K. J. , A. D. Machuca and M. Lewis (2003) ? “Zara,? ” CIBER Case Collection, Indiana University. 3 D? ’Andrea, G. and D. Arnold (2003) ? “Zara,? ” Harvard Business School Case 9-503-050, p. 7. 4 ? “Zara, la deferlante de la mode espagnole,? ” Interview with Stephane Labelle, MD of Zara France, Enjeux-Les Echos, February 1996. 5 Crawford, L. (2000) ? Inside Track: Putting on the style with rapid response,? ” Financial Times, 26 February 2000. 6 D? ’Andrea, G. and D. Arnold (2003) ? “Zara,? ” Harvard Business School Case 9-503-050, p. 19. 7 D? ’Andrea, G. and D. Arnold (2003) ? “Zara,? ” Harvard Business School Case 9-503-050, p. 18 8 Ferdows, K. J. , K. M. Lewis and J. A. D. Machuca (2003) ? “Zara,? ” Supply Chain Forum 4(2): 62. 9 Ferdows, K. J. , A. D. Machuca and M. Lewis (2003) ? “Zara,? ” CIBER Case Collection, Indiana University, p. 6. 10 Ghemawat, P. and J. L. Nueno (2003) ? “Zara: Fast Fashion,? ” Harvard Business School Case 9-703-497, p. 10. 11 ? The Future of Fast Fashion,? ” The Economist, 18 June 2005, p. 63. 12 ? “Zara: A Retailer? ’s Dream,? ” from http://www. fashionunited. co. uk/news/archive/inditex1. htm 13 Ferdows, K. J. , A. D. Machuca and M. Lewis (2003) ? “Zara,? ” CIBER Case Collection, Indiana University, p. 7. 14 Crawford, L. (2005) ? “Inditex sizes up Europe in expansion drive,? ” Financial Times, 1 February 2005, p. 30. 15 Fraiman, N. , M. Singh, L. Arrington and C. Paris (2002) ? “Zara,? ” Columbia Business School Case, p. 5. 16 Ghemawat, P. and J. L. Nueno (2003) ? “Zara: Fast Fashion,? ” Harvard Business School Case 9-703-497, p. 0. 17 Fraiman, N. , M. Singh, L. Arrington and C. Paris (2002) ? “Zara,? ” Columbia Business School Case, p. 5. 18 Ferdows, K. J. , A. D. Machuca and M. Lewis (2003) ? “Zara,? ” CIBER Case Collection, Indiana University, p. 6. 19 Fraiman, N. , M. Singh, L. Arrington and C. Paris (2002) ? “Zara,? ” Columbia Business School Case, p. 6. 20 Ferdows, K. J. , A. D. Machuca and M. Lewis (2003) ? “Zara,? ” CIBER Case Collection, Indiana University, p. 8. 21 Interview with Anthony Pralle, Senior Vice President of Boston Consulting Group, Madrid, 13 July 1999, as quoted in Harle, N. , M. Pich and L.

Van der Heyden (2002) ? “Marks & Spencer and Zara: Process Competition in the Textile Apparel Industry,? ” INSEAD Case 602- 010-1. 22 Crawford, L. ?“Inditex sizes up Europe in expansion drive: Rapid design, manufacture and distribution keep pressure on rivals,? ” Financial Times, 1 February 2005. 23 D? ’Andrea, G. and D. Arnold (2003) ? “Zara,? ” Harvard Business School Case 9-503-050. 24 Crawford, L. (2005) ? “Inditex sizes up Europe in expansion drive,? ” Financial Times, 1 February 2005, p. 30. 25 Dutta, D. (2004) ? “Brand Watch: Zara,? ” Images Fashion Forum Presentation, New Delhi, 12 February 2004.

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U01A1 Zara Rapid Fire Fullfilment

U01a1 Zara Rapid-Fire Fulfillment Steven A. Shapiro Capella University European clothing retailer Zara has been highlighted in several publications as a model for its supply chain management. This retail chain exists as a subsidiary of “Spain’s largest apparel manufacturer and retailer” (Chopra & Meindl, 2012, p. 14). The most telling account of Zara’s success is detailed in an article for Harvard Business Review entitled, ‘Rapid-Fire Fulfillment’. Here, authors Ferdows, Lewis and Machuca (2004) describe three key principles that Zara relies on to maintain its success… * Close the communication loop Stick to a rhythm across the entire chain * Leverage your capital assets to increase supply chain flexibility (Ferdows, et al. , 2004) The first of these principles, ‘Close the communication loop’, outlines the processes by which information is transferred quickly between its valuable customer base and the designers. This open and nimble communication allows Zara to have a better understanding of the pulse of its customers; which in turn, allows the company to stock its stores with clothing the customer wants when they want it.

The next principle, ‘Stick to a rhythm across the entire chain’ is outlined by Ferdows, et al. (2007) when they wrote, “at Zara, rapid timing and synchronicity are paramount” (p. 107). The authors go on to highlight the rigidness by which Zara holds its retail stores to time-bound deadlines for things like product ordering. Missing a deadline is highly frowned upon and can result in a retail store losing that opportunity to obtain additional products.

The third principle, ‘Leverage your capital assets to increase supply chain flexibility’ is fairly self-explanatory. The concept is that Zara funds the supply chain not only to run at an efficient manner with their in-house processes, but it outsources the easier parts of the processes as well. The authors of the article write, “[Zara] produces complicated products in-house and outsources simple ones” (Ferdows, et al. , 2004, p. 107). These guiding principles allow Zara’s supply chain to drive the company’s growth and success versus its less agile competitors.

One example of this is given in the text, Supply Chain Management, by Chopra and Meindl (2012), these authors demonstrate this, saying, “Whereas design-to-sales cycle times in the apparel industry have traditionally averaged more than six months, Zara has achieved cycle times of four to six weeks” (p. 14). That difference is significant and is what allows Zara to take action based on the communication they receive above and rapidly react to customer demand in a way their competitors cannot.

The most unique aspect of Zara’s supply chain model is its level of control over all aspects of its business; far more than its competitors. The authors of the HBR piece build on this point, stating, “Instead of relying on outside partners, the company manages all design, warehousing, distribution, and logistics functions itself. Even many of its day-to-day operational procedures differ from the norm” (Ferdows, et al. , 2004, p. 106). Another component of Zara’s success, beyond just its maniacal control, is its belief in ensuring its processes and departments are funded for success.

This is especially true for the information technology department. A fact which Chopra and Meindl (2012) conveyed when they wrote, “Zara has also invested heavily in information technology to ensure that the latest sales data are available to drive replenishment and production decisions” (p. 14) In conclusion, though Zara has been highly praised for its innovative supply chain management techniques, this praise is well deserved. It is clear from reading these two disparate accounts of Zara’s practices that they have truly developed a successful and unique supply chain to enhance their business.

The three principles that are at the core of the Zara philosophy serve to enhance their customer’s experience and continue to deliver value for their customer where competitors cannot. References Chopra, S. , & Meindl, P. (2012). Supply chain management (5th ed. ) [Electronic]. Indianapolis, IN: Prentice Hall. Ferdows, K. , Lewis, M. A. , & Machuca, J. D. (2004). Rapid-Fire Fulfillment. Harvard Business Review, 82(11), 104-110.

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Zara International Case Study

Zara International was a retail shop originated in La Coruna, Spain in 1975. It was clothing and accessories shop and imitated the latest fashion trends and sold them at a lower cost. It became Zara International after entering Portugal in 1988 and then the United States and France in the 1990s. The distributor for this brand is Inditex and is considered the most successful retail chain in the world. Zara has a business strategy that is very different from the retailers nowadays.

If a customer orders a product Zara’s distribution centers can have the items in the store within 24 to 48 hours of receiving the order, depending upon the country. The business plan that Zara’s executives made was very innovative and played a great part in the success of this retail chain. Not only has it been successful and profitable in the past, they are successful in the present and have been expanding their brand all over the world Zara International’s business strategy has elements of classical management approach.

Classical Management approach has the assumption that people at work act in a rational manner that is primarily driven by economic concerns. This approach has three major branches: Scientific management, administrative principles and bureaucratic organization. Scientific Management Frederick W. Taylor used the concept of time study which is to analyze the motions and tasks required in any job and to develop the most efficient ways to perform them. His first principle was motion study which is the science of reducing a job or task to its basic physical motions.

This concept was clearly evident in Zara International’s case. Time is the main factor that is considered by Zara International as opposed to production costs and advertisements. According to Schermerhorn (2010), “Parent company Inditex Group shortens the time from order to arrival by a complex system of just-in-time production and inventory reporting that keeps Zara ahead (p. 54)” It is only possible if Zara has skilled workers and the required training to train these workers with the ability to send the product within 24 hours of receiving an order in the European store and 48 hours in American and Asian stores.

This is evidence of using the principles two and three of Scientific Management. All this requires careful planning which is the fourth principle of scientific management. Administrative Principles: Henri Fayol’s administrative principles are also clearly seen in Zara International’s case. Zara had a foresight of what it was doing will create profit. It did not spend any money on advertising but instead on being efficient and on time on its production. With no advertising the company made a profit of $10 billion in sales which were overwhelming.

The CEO of Inditex Pablo Isla seems to have great organization and leadership in gaining profit for the business. Zara international also applies a Behavioral Management approach in doing business. According to Schermerhorn (2010), “The behavioral approaches maintain that people are social and self actualizing. ” (p. 38) Instead of advertising their brand Zara makes sure that the interiors and exteriors of the stores are up to date and designed based on the location. They focus on what people are demanding and keeping in mind their social and cultural needs.

It also keeps a close watch on the latest trends and the buying behavior of customers. Zara’s strategy of being successful consists of various factors. Zara has succeeded by doing business according to customer’s needs and buying behavior. Their different approach in production approach is another factor. They have created a very efficient link in between their management principles and social environment. Their use of complex systems of just in time production has played a major role in its success. Zara also has believed in cutting expenses wherever and whenever possible and has done that in an intelligent way.

Their strategy of inventory control is also worth applauding. By using this distinctive thinking Zara has been successful amongst the fashion world. The latest trends in the competitive apparel industry are companies going digital. Reinvention of fashion runways and then use of social media in publicizing the latest fashion is a hot trend. Use of mobile devices such as smartphones and iPads for shopping for the convenience of customers is also a very hot trend. There are also virtual dressing rooms and interactive store windows that make shopping for apparel easier (Agathou, 2012. Zara has also started to come up with innovations to stay in the competition. Zara International has launched its online store in Mainland, China (Inditex to launch, 2012). Zara has also expanded its stores internationally by entering South Africa this year (Kew, 2012). Zara International will definitely continue to do well with the business strategy. However it will still have to adapt to the changes in the global economy and plan their business strategies according to the customers and clientele. It will do well since it is expanding internationally and also adapting the latest technologies.

Zara International has gained huge success by following the classical management approach and the behavioral management approach. Inditex has used a distinctive business strategy in their production and inventory control. Even in the competitive trends in apparel industry, Zara will survive in the competition if it continues to do business according to the clients’ needs and wants. BIBLIOGRAPHY (2012, September 4). Inditex to launch Zara’s online store in Mainland, China. www. fibre2fashion. com. Retrieved from http://www. fibre2fashion. com/news/apparel-news/newsdetails. spx? news_id=115305 Agathou, Amalia. (2012, June 30). 6 Hot Digital Trends transforming the fashion industry. Insider. Retrieved from http://thenextweb. com/insider/2012/06/30/6-hot-digital-trends-transforming-the-fashion-industry/ Kew, Janice. (2012, August 27). Zara Enters South Africa as Foreign Brands Seek Growth. Bloomsberg Businessweek. Retrieved from http://www. businessweek. com/news/2012-08-27/zara-enters-south-africa-as-foreign-brands-seek-growth Schermerhorn Jr. , John R. (2010). Management. Management Learning Past to Present. (pp. 31-56)

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Zara: Fast Fashion

The Spanish retail chain Zara has unique supply chain management practices that enable it to gain a competitive advantage over other fashion retailers in the industry. Zara’s rapid response time enables the firm to quickly respond to changing fashions while deliberately under producing products. This strategy, which is supported by competencies in logistic management, design and information systems, allows the company to maintain less inventory and higher profit margins and is a key factor to Zara’s success. The firm should continue to add value by seeking new opportunities to expand in the retail market and maintain their sustainable growth.

Financial Analysis Being aware of a company’s financial health and profitability of its competitors is highly essential for everyone interested in engaging in business with Inditex. In this part of the paper, through analysis of 4 key ratios and return on invested capital, we are going to discover some of the company’s drivers of sustained competitive advantage. The 4 key ratios will focus mainly on company’s liquidity, activity, solvency and profitability, while ROIC will show how well the company manages the capital invested in operations of the business.

In order to measure ability of Inditex to meet its short term obligations and to assess liquidity, it is important to calculate current ratio. As shown in exhibits section below, in 2001, Inditedx had 1. 02 million in current assets, while Gap and H&M had 1. 48 and 3. 4 million Euros in current assets for every Euro in short-term debt. This indicates that Inditex’s main competitors demonstrate greater ability to meet current payments of debt; therefore liquidity is not one of the company’s success drivers. When it comes to comparing company’s sales to various assets categories it is significant to take a look at the total assets turnover.

This ratio indicates how efficiently assets are being used to support sale. From 1999-2001, this ratio increased by 1. 2%; however it was still below industry performance. Currently Inditex is industry leader with total assets turnover of 1. 8. This shows that company’s recourses are being well managed and that company is able to realize high level of sales from its investments in property, plant and equipment such as manufacturing facilities. Debt to equity ratio is used for solvency evaluation. The main purpose of this ratio is to show company’s ability to repay long-term creditors.

As shown in exhibits section, this ratio decreased from 1999-2001, however, when compared to its rivals, Inditex confirmed to have the best leverage among them. When it comes to company’s financial flexibility and profitability it is highly essential to calculate Net Profit Margin ratio. This ratio measures how successful a company has been at the business of making profit for each euro earned.

As presented in the exhibits section, Inditex was and still is an industry leader with Net Profit Margin ratio of 10. 6% in 2001 and 13. 10% in 2010 which means that company has currently €. 3 of net income for every dollar sale. In addition, according to Inditex’s income statement, we could see that company is delivering higher net income due to its ability to keep operating expenses and COGS much lower than competitors. Furthermore, the company is able to gain sustained competitive advantage by making its own products, efficiently covering lower advertising expenses and maintaining cost-effective number of employees per store. In order for Inditex to maintain continuous growth it is important to keep its profit margins at the high level.

Last but not least ROIC (Return on Invested Capital) gives a good judgment on how well a company is using its money to generate returns. Inditex ROIC varied through past couple of years but is currently able to earn around 7% on each euro invested. From the exhibit table below, we could conclude that the company is making wiser investment decisions than its competitors. SCP Analysis Zara competes in a monopolistically competitive industry due to the number of players. No business in this type of industry has total control over the market price and there are no barriers to entry and exit.

Because of its monopolistically competitive playing grounds, Zara’s conduct is to increase its market power by producing demand for its heterogeneous products. Through differentiation and cost leadership, Zara attempts to increase market demand by offering new items weekly while keeping a low inventory, thus making its products unique and attractive to consumers. Because of its backward vertical integration model, Zara creates a strong synergy throughout its production process.

Zara has sustained a competitive advantage globally by expanding into new markets and becoming more efficient. In a onopolistically competitive industry, Zara is expected to make profits in the short run but will break even in the long run because demand will decrease as average total costs increase. This means in the long run, a monopolistically competitive firm, such as Zara, will make zero economic profit (AmosWEB, 2001). Porters Five Forces Barriers to Entry: Due to the recent recession and weak economic market, many new players have avoided entering the retail industry. Zara has taken advantage of this opportunity to be the first to enter into many markets across the world before its competitors.

With the economic future improving, Zara will be facing more and more competition especially in the United States. Rather than implementing new strategies on how to differentiate itself even more, Zara will need to focus more on creating brand awareness and staying on top in the game. Zara has been the odd ball in the industry with its creative business model but with more and more retailers quickly catching on and critiquing their business model to match the economy changes, Zara faces intense competition. Unlike other retailers, for example Gap and H&M, Zara needs to fight threats around the globe.

In the states, Zara competition is intensified with American retailers because many customers still do not know who Zara is or what it offers. In Europe, Zara is like a Macys for us in the states so the brand awareness is there but competition is still also high. Many retailers in Europe offer the same products as Zara, at the same or similar prices; therefore Zara needs to find ways to keep ahead of competition. Bargaining Power of Buyers: Zara is famous for its business model of just in time inventory. No other retailer can produce a garment from scratch and have it hanging in the stores within weeks than Zara.

Zara also distributes large number of shipments to its stores around the world twice a week. All merchandise is shipped from Spain and all stores receive shipment on the same days, Monday and Thursday. Zara produces nearly 16,000 new designs a year which is much more than leading competitors. With the constant changing apparel Zara keeps its inventory levels extremely low. Zara customers know that if they see something in the store to buy it right then and there because tomorrow that garment will not be there. US customers are still adapting to this quick turnaround time.

With their advanced technology, Zara knows what its customers want and will deliver that to them within 2 weeks’ time. Bargaining Power of Suppliers: Zara manufactures all its clothing in house. This way it has control of the entire process and can make changes more quickly and efficiently when needed. After the garments are cut and ready for assembly, Zara sends out the fabric to different sewing companies to assemble the pieces. There are many competitors that Zara can choose from when deciding where they want its clothes put together which makes the bargaining power weak.

Zara also took control of this process by taking over Comditel. Comditel is in charge of nearly the entire garment process. Once the garments are ready and fully assembled they are then stored in Zara’s own distribution centers. From the distribution centers they are then shipped around the globe to the thousands of Zara stores. Like many other aspects of Zara’s business model, the distribution center moves even more quickly. Once the garments are in the distribution centers, they only stay there for a maximum of 3 days before be sent out to the appropriate destination.

Substitutes: Some may describe Zara as a higher end replica of fashion forward items. The items featured on Prada, Chanel, and St. John runways will be replicated in 2 weeks in Zara stores at a much more affordable price but poorer quality. Therefore, there are not many substitutes that customers can use because a majority of the products are out of the price range of many customers. This is a huge benefit for Zara because its customers are willing to pay a much less price for a lesser quality replica.

Competition: Zara’s direct competitors include H&M, Gap, and Benetton. H&M offers nearly the same products as Zara to its customers, but a much lower quality and price. For those customers who are price sensitive, H&M would be their choice of retailer. The Gap possesses more competition in the states because it has been around longer and has its loyal customer base which is hesitant to shop elsewhere. Even though these retailers give Zara a run for its money, none of them can keep up with Zara’s business model.

Other retailers do not have in house production like Zara and ship their production to other countries for the cheap labor costs. This does save money but it increases time. Time is money so while others are still in production stage, Zara is already selling out of the garment. VRIO Analysis We can use the VRIO framework to determine the competitive potential of Zara’s resources and capabilities. As we analyze Zara’s resources and capabilities, it is evident that Zara has built a highly effective, self-reinforcing business system.

Three elements in particular – (1) extensive vertical integration, (2) the company’s flat management structure, and (3) exceptional communication and coordination throughout the business system – allow Zara to successfully execute its “Very Quick Fashion Follower” business model. Each of the three make the grade of being Valuable, Rare, costly for competitors to Imitate, and for which the company has Organized to take advantage. Extensive Vertical Integration: Zara prides itself in its vertical integration, with near full control over its value chain through to the end-user.

The company owns or closely controls its manufacturing and distribution facilities, manages its own logistics and transportation, and wherever possible owns its own stores (except for in markets with high risk or barriers to entry). This integration brings value primarily through speed-to-market, as Zara has achieved significantly shorter cycle times than its peers. Full vertical integration is rare in the apparel industry, which typically sees companies foregoing direct involvement in elements of the value chain (e. g. , H&M outsourced all of its production, and Benetton sold the bulk of its production through licensees).

It would be extremely costly for a competitor to imitate Zara’s vertical integration, and even if they were able to do so it is unclear how much or how soon they would profit from it, as much of Zara’s advantage comes from the degree to which it has developed its integrated organization over many years. Flat Management Structure: While the drive, insight, and guidance provided by founder Amancio Ortega and other top executives have obviously been crucial to the success of Inditex, it is the structure and incentives they have put in place that truly drive Zara’s exceptionality.

Zara’s management structure is very flat, with autonomy and significant incentive-based compensation for store managers, thus closely aligning their interest with that of the company. This structure adds value to the company through diligent hands-on management at the local level, something so rare that Zara’s CEO noted that the availability of store managers capable of handling these responsibilities was “the single most important constraint on the rate of store additions. ” The structure would be highly difficult for ompetitors to imitate, as it has been built into the culture and processes of the company over several decades. Zara has certainly proven that it is able to organize around the flat structure model – in fact many of the company’s business processes depend on the communication and input of enabled employees at the edges of the business system. Exceptional Communication and Coordination: From early on, Zara developed a focus on communicating and coordinating activities up and down the value chain and across functions.

This capability focused on speeding important information on customer preferences and trends to the store network, and feedback on successful and unsuccessful products back up the line to headquarters. Exceptional communication and coordination are crucial to maximizing the value derived from Zara’s vertical integration and flat management structure. A look at the more disjointed businesses systems of peers such as The Gap and Benetton demonstrates how rare it is for all of a company’s capabilities to simultaneously reinforce each other, and how difficult it would be for them to imitate Zara.

Zara has successfully organized to coordinate its activities around the fast communication of accurate information – about designs, customers, competitors, and micro- and macroeconomic factors – both up the line to top management and to the edges of the network where store managers and employees interact with its customers. Each of these three capabilities passes the VRIO test, indicating that they are indeed key competencies for Zara. Four Actions Framework In order to understand how Zara created a new value for both the buyer and the company, we utilize the Blue Ocean 4 Forces Analysis.

Starting with what factors Zara raised above standard, we see what is also Zara’s key resource, the company’s application of vertical integration. While Zara is involved in both backward and forward integration, what sets it apart is precisely its backward integration into manufacturing. For instance, its competitors Gap and H&M are both practicing forward integration and unlike Zara, outsourcing their production. Zara is also constantly in communication with employees at the edges of its business system such as store managers in order to better identify and track customer preferences and trends.

The company encourages increased frequency of customer visits with its short cycle times; customers flock to the stores in order to catch the current fashion trends and product lines. In addition, the company also raised responsibility and accountability for store managers by hiring experienced employees promoted within which the CEO believed was a necessary judgment especially for store additions. Zara increased market saturation leading to better economies of scale thus significantly cutting costs and raising higher awareness and increasing sales.

On the other hand, Zara reduced several factors well below the industry standard in order to cut costs and increase customers’ willingness to pay. For instance, the company decreased the failure rate for new products with its intensified product testing program which included store-level personnel in the process. Zara also reduced its cycle time for design which enabled the company to offer the customer new designs in four to five weeks and existing products in two weeks; the industry standard for this process was six months for design and three months for manufacturing.

A pioneer in its industry, Zara proudly enjoyed engendering revenues at full price with only 10%-15% of its sales generated at discount prices compared to its European industry at 30%-40%. Lastly, Zara reduced its ad spending below industry standard at 0. 3% of its revenue while its competitors advertised 3%-4%. Although it is relatively unlikely for an apparel company to create factors that its industry has never offered, Zara formed a distinct vision among its competitors. The company was the first within its main rivals to saturate international markets as fast as it did.

Zara is a global apparel retailer with a truly international scope. While from 1980’s to 2011 H&M added eight countries to its international expansion, and Gap five, while Zara was at thirty two countries. In the competitive apparel industry, Zara managed to eliminate what its competitors continuously took for granted. The company focused on a flat management system which allowed capturing trend preferences directly from the customer and applying to mass markets. Eliminating the separation between merchandising and manufacturing was especially beneficial to a fast and productive design team.

Strategic Vision Based on our analysis, Inditex has proven to be financially stable and can successfully manage its capital invested in its operations. Therefore, to maintain their sustainable growth and continue to add value, Inditex should use their commercial team’s micro/macro evaluations to seek new country market opportunities. They should to continue to use one of the three modes of entry; company-owned stores, joint ventures, and franchises, to open additional stores in European countries that have high apparel markets.

Italy, Germany and United Kingdom are markets that show promise, especially Italy because of its high per capita spending on apparel. As discussed in our analysis, one of Zara’s core competencies is its extensive vertical integration, and because the case mentioned a second distribution hub already being built in Zaragoza, Spain, it can support additional European stores without being subject to diseconomies of scale. Increasing the density of Zara’s store locations in Europe will achieve logistic efficiencies.

Zara keeps transportation costs low on the supply side, since most of the production takes place in Spain. Efficient distribution and inventory systems help Zara minimize costs. Demand based production means there is very little inventory in Zara’s supply chain, which results in lower working capital requirements and lower supplier opportunity costs. Another market that has potential is the United States. With changing consumer behaviors as a result of globalization, there are growth options available for specialty retailers like Zara.

For example, Gap’s current ratio of 2. 18 is higher than Zara’s 1. 71; however Zara’s 13. 10% net profit margin is preferred over Gap’s 8. 21% (as illustrated in Exhibit A-1). Therefore, as long as Zara can maintain its low production and overhead costs, which are high for its competitors, they should be able to compete in the US market. Inditex should invest in prime locations in major cities such as New York, Chicago and Los Angeles to maintain its positioning strategy. Zara should most likely develop a second central distribution center in America.

Zara can strategically locate its central distribution center in or near countries where manufacturing can be done with cheap labor cost, such as Mexico. The close proximity of the distribution center to the American market will decrease logistics and help maintain Zara’s model of fast fashion and economies of scale. Internet retailing is another market opportunity that Inditex should consider. Zara can reach consumers faster and easier in the countries they are trying to expand into.

This method can also help gauge consumer preferences from country to country. The internet retailing market will increase sales revenues and has a very low business risk considering the products are already being produced for the retail stores. Zara’s online shop would complement its stores, adding an extra level of service for its customers. It would also expand its customer base to reach areas where stores are not located. Patrons can shop from anywhere in the world and at any time of day or night.

This essentially means more shoppers and more sales for the business. Based on our analysis, the monopolistically competitive industry structure is not the key factor driving Zara’s significant performance. Zara has leveraged its key resources to combine low price with product differentiation to create value and succeed in this industry structure. Zara has been able to increase the customer’s willingness to pay by constantly rotating its merchandise and creating a climate of scarcity and opportunity for customers.

In conclusion, Zara has the potential for sustainable growth due to its competitive advantage and its ability to increase customer’s willingness to pay while decreasing its opportunity cost. The company keeps its operating income high, has a solid business model with unrivaled synergy and has various opportunities for expansion in the retail industry. Zara must continue to re-invent their image in order to stay fresh in the apparel industry and as long as they maintain their core competencies, they will continue to succeed.

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Success Factor for Zara

What are the Key success factors of Zara? “The ability to respond to customer requirements on a timely basis has always been a fundamental element of the marketing concept. ” Martin Christopher et. al. Hence, it is important being proactive in a market such as the fast-fashion industry which Zara is operating in, time is always a crucial factor. The fast-fashion market, amongst other things, is characterized by short lifecycles, high volatility, low predictability, and high-impulse purchases. Therefore, it is very important for Zara to constantly have their products available for a potential customer in order to sell and earn more profit.

Since the fast-fashion market is also constantly shifting and trends can be replaced over a night, there is a low predictability. This makes it a lot more difficult to compose accurate forecasts. In order to stay competitive in the market, it is important to take be aware of these types of factors mentioned above, and make sure you are not left behind. One of Zara? s distinctive key success factors is their valuable and planned integrated logistics and supply chain management. This allows them to further develop and deliver a competitive marketing mix.

In a marketplace where customers expect to find the latest designs that are still in fashion, Zara is an outstanding example of how to make that possible. It usually takes at least six months in the textile industry for an idea to be transformed into a product and reach the store shelves. By reducing the lead-time through efficient channel management, Zara has developed a vertical integrated business model, which allows them to change some parts of their inventory in only a couple of weeks. This strategy is nowadays known as the “Quick Response” (QR).

The definition of QR can be described as; “A state of responsiveness and flexibility in which an organization seeks to provide a highly diverse range of products and services to a customer/consumer in the exact quantity, variety, quality, time, place and price, as dictated by real-time customer/consumer demand. ”Neil Towers et. al The QR strategy allows Zara to create products that are inspired by the latest fashion trends from around the world through diverse media sources displayed to a broad public, leading fashion scenes, movies, bloggers, etc.

By having products for a reasonable price with relatively high quality, Zara is one of the leading fast-fashion companies in the world. But, how does their company function to have this much success? One of the main reasons why Zara is so competitive is because they have suppliers that are strategically designed to fulfill their conceptual idea. Their conceptual idea is to supply trendy clothes, to a broad market, for a reasonable price. Almost 30 percent of the company`s suppliers are situated in either Spain or parts of Europe.

The local presence of the manufacturing facilities within a short distance to many of their stores and headquarters, has allowed the company to be very flexible in a changing market. With high integration to the company? s suppliers, the products that are highly sensitive to availability and proactive response are mainly produced in Europe. They minimize costs and lead-time because of the local presence, which makes it possible to introduce new and fresh merchandise multiple times a year.

Since, major parts of the production are situated locally, the products can reach the stores at the right time, meet the actual demand, and reach a higher sell-through. The other part of their product line that is not susceptible for seasonal change is outsourced to low-cost-labor countries in Asia. The combination of suppliers works as a competitive advantage. It promotes high-impulse purchasing from their new lines while still profiting for their basic product lines. Another key success factor is their pricing strategy.

The company uses a market-based pricing strategy, which means that they design products at a fixed price according to what the costumers are willing to pay. All the costs to produce and deliver the product combined with the planned gross margin for profit are then calculated in accordance to the final retail price. Besides the pricing strategy, Zara also uses a market-oriented approach, which refers to being aware and predicting costumers hidden needs. As studies has revealed, the company only spends one percent of their annual turnover on advertising.

They put most of their resources into using modern technologies, such as point-of-sales data collected from their stores as an effective communication tool. By regularly collecting POS-data, and translating the information into real demand and different consumption patterns, the company can deliver the exact quantity of merchandise, at the right time, to their stores. This activity minimizes the costs and results in higher profit, which can be used for other business activities such as expansion, product development and so on.

Not to mention, it also makes it possible for the company to evaluate and predict which products that will have a shorter or longer product life cycle. Hence, will result in higher sell-through, quick elimination of products that are out of fashion, and replenishment of new merchandise. Another reason to why their internationalization has been so successful is the fact that their merchandize can be sold in many different parts of the world. Even regardless of cultural differences. One of the reasons is that their consumer’s love garments from the high-end market and Zara copies those garments at lower prices for their consumers.

In some cultures the company is using adaptation tools. For example, each store manager is allowed to make slight modifications to the assortment to achieve a better match between supply and demand in certain countries. In addition, the location of the stores is another successful factor. Zara has chosen to position their stores in attractive and high-trafficked locations. Also, Zara’s stores are designed by professional store decorators in accordance to Zara’s business image. The interior of the Zara in Central for instance is very similar to other high-end fashion stores, which gives customers the same feeling as shopping in a luxury store.

References Used the two articles posted by Dawn on FB Lectures Tutorials And: Retrieved on 2012-03-11http://www. google. com. hk/books? hl=sv&lr=&id=-9Ja0ZQ6gSMC&oi=fnd&pg=PA62&dq=market+orientation+and+supply+chain+management+in+the+fashion+industry&ots=0FiX4Yvyf5&sig=BoBe-KOlSiOaY6igTvN7NvyPVYM&redir_esc=y#v=onepage&q=market%20orientation%20and%20supply%20chain%20management%20in%20the%20fashion%20industry&f=false Retrieved on 2012-03-11 http://martin-christopher. info/wp-content/uploads/2009/12/CREATING-AGILE-SUPPLY-CHAINS-IN-THE-FASHION-INDUSTRY. pdf

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Zara Supply Chain China

Case Study and Exercises Exercise #1 We were given the formula of distance , where D – Distance from location L (distribution center) to location I (consumption point); – X coordinate of the warehouse l (distribution); – X coordinate of the store i (consumption); – Y coordinate of the warehouse l (distribution); – Y coordinate of the store i (consumption). Consequently, applying these formula in the Excel we receive the following result: Then, multiplying the distance by the amount of demand and summing up for each relevant location, we get: Thus, the answer is LOCAY, because it has the minimal score. Exercise #2

Using provided formulas , where – X coordinate of the optimal location for warehouse; – Y coordinate of the optimal location; – X coordinate of store i; – Y coordinate of store i; – Load (or Demand) of the store i, we get And finally The answer is (8;11). Zara’s Case Study Company Profile Zara is one of the largest international fashion companies with 1671 stores around the globe. It is a part of Inditex holding. Inditex is one of the world’s largest fashion retailers, welcoming shoppers at its eight store formats -Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterque – boasting 5. 93 stores in 85 markets [www. inditex. com], [www. zara. com]. In 1975 the first Zara shop was founded in Spain. In 1976-1984 In-Spain expansion takes place. In 1988 it enters Portuguese market. Followed by US and France, it quickly becomes world-brand and until 2006 it had 52 countries which held retail operations of the company. Zara concentrates on the three principles to satisfy the customer [http://ru. scribd. com/doc/27372254/Supply-Chain-Practices-of-Zara#]: Short lead Time which results in “more” fashionable clothes Lower quantities – scarce supply More styles, which create a greater possibility of attracting needed customers. )

Zara’s designing process organized in a way such that the stores, which actually interact with the customers, communicate to the head office in Spain the needs of the customers and the trends in fashion clothes. Thus, making it possible for the company to react to market changes within 30 days [http://thirdeyesight. in/articles/ImagesFashion_Zara_Part_I. pdf], which makes Zara unreachable for the same-size competitors. 2) Reducing the number of clothes manufactured in each style creates the “scarcity” which is applicable to fashion clothes. The less it is available, the more desirable it becomes. As a result, Zara discounts only approx. 0% of its products. 3) The stores are supplied with new merchandise twice a week, thus making them seem “new” every 3-4 days. On average, Zara creates around 11,500 styles per year [http://thirdeyesight. in/articles/ImagesFashion_Zara_Part_I. pdf; http://www. slideshare. net/koffman/zara-case-study-2780928#btnNext]. Moreover, most of the production facilities are located in Spain, near the headquarters, so that the company has more control over the operations, producing and distributing. Zara’s characteristics of vertical supply chain Zara is a vertically integrated retailer. Unlike similar apparel retailers,

Zara controls most of the steps on the supply-chain: It designs, produces, and distributes itself. The business system that had resulted was particularly distinctive in that Zara manufactured its most fashion-sensitive products internally. Zara did not produce “classics”, clothes that would always be in-style. In fact, the company intended its clothes to have fairly short life spans, both within-stores and in customers’ closets. Retailers like the American chain ‘Gap’ and the Swedish retailer ‘Hennes ; Mauritz’  completely outsource their production to factories around the world and mostly to low cost Asian countries.

In contrast, it is estimated that 76 percent of Zara’s production is carried out in Europe which is within the small radius of its headquarters in Spain. In fact, almost half of its production is in owned or closely-controlled facilities. Another 24% are produced in Asian region [http://www. slideshare. net/anusaj/zara-ppt#btnNext] While this gives a tremendous amount of flexibility, it does contend with higher people costs – that of up to 19 times as much as Asian ones. The group also owns capital intensive facilities in Spain, which can do dyeing and processing of the fabric as well as cutting and garment finishing.

Provided that, Inditex has an ability to adjust to the new trend or demand in a very short time. Overall Supply Chain is can be described as follows: Collect the information from retailing points. At least two times per week the sailing points should somehow conduct the information to the headquarters in Spain, providing information for the groups in charge to develop and decide on the range of clothes which will be demanded by the customers in the observed future. This work is done by approx. 200 people, which develop up to 1,000 styles per month [http://ru. scribd. om/doc/27372254/Supply-Chain-Practices-of-Zara#] The information is also received via sales reports from retail points. Thus it can be claimed, that Zara has invested a lot into IT, to make the up-to-date information flow possible. Decide on the needed clothes, distinguish trends. After depicting and sketching appropriate merchandise for the stores, they send the order to facilities, which are located near the head office. Moreover, it should be said that Zara somehow lowers its risks by purchasing uncolored fabric or even raw materials, thus making enhancing flexibility.

The process organized in such way, that final product may be even painted on demand. However, only cutting of material is done within the company. Actual sewing is done by workshops, which are mostly located in Spain or Portugal. None of the workshops belongs to Zara. The company provides them with instructions how to do the work for its own needs. Zara being vertically integrated has its own distribution network, which allows the company to further control physical flow. Since the time has a great value for Zara, the newly produced merchandise arrives to the stores within 48 hours. [http://ru. cribd. com/doc/27372254/Supply-Chain-Practices-of-Zara#] An esteem of time, needed to pass from development of the product to actual shipping is around 7-10 days. [http://thirdeyesight. in/articles/ImagesFashion_Zara_Part_I. pdf] Zara’s development in China First Zara’s store was opened in Shanghai, in February 2006, and during the first day store has managed to generate 800,000 RMB of revenue. Within a year Zara opened 12 new stores across China, and accorfding to the latest data (31st of July) its chain had 114 stores within China (out of 355 operating in Asian region) [http://en. wikipedia. rg/wiki/Zara_%28retailer%29#Stores] in over 40 cities, including Beijing, Guangzhou, Shenyang and other. [http://www. chinadaily. com. cn/business/2012-09/06/content_15737684. htm] During 2011 Beijing Consumer Association was checking the quality of Zara’s product. The result was that they accused company of selling lower quality products on chineese market. [http://www. chinadaily. com. cn/business/2011-04/26/content_12396211. htm]. However, the company doesn’t seem to be damaged: no apologizes nor compensations followed. .On 5th of September, 2012 Zara opened its on-line shop in China.

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Pestle Zara

Pestle Analysis of Zara SOE11108 Sources of Competitive Advantage Assessment 1 Group Presentation PESTEL – Analysis [pic] Contents 1 Introduction 3 2 Overview 3 3 Business Environment 3 4 Political 4 5 Economic 4 6 Social 5 7 Technological 6 8 Environmental 6 9 Legislative 8 10 Conclusion 8 References 9 Introduction The global apparel market is a consumer-driven industry. Also, globalization and new technologies have allowed consumers to have more access to fashion. As a result, consumers are changing, competition is fierce, and companies are evolving to meet these demands.

Zara, a Spanish-based chain owned by Inditex, is a retailer who has taken a new approach in the industry. With their unique strategy, Zara has the competitive advantage to be sustainable. In order to maintain that advantage and growth they must confront certain challenges and face traditional retailers in the apparel industry. So, now our group will analysis the PESTLE of Zara Company. (Lopez & Fan, 2009) Overview Zara is one of the largest international fashion companies and belongs to Inditex, which is one of the largest fashion retailers worldwide.

Inditex operates in textile design, distribution and manufacturing. (Inditex, 2011 b) Zara operates in 78 countries worldwide with 1557 stores in the world’s largest cities. (Inditex, 2011 c) The company is founded in 1975 by Amancio Ortega, located in Spain and had in 2010 a net sale of 8. 088 million of euro. (Inditex, 2011 a) The have worldwide 1557 stores in 78 different countries. (Inditex, 2011 a) Aim: democratize fashion, offering latest fashion, medium quality and moderate price (Lopez & Fan, 2009)

Structure: customer oriented, satisfaction of consumer needs (Mazaira, Gonzalez, & Avendano, 2003) Business Environment Global textile and clothing industry (Lopez & Fan, 2009) with 900 billion Euro in 200 worldwide (Ghemawat & Nueno, 2006). Main competitors: H&M, Gap and Benetton (Ghemawat & Nueno, 2006) Dynamic and innovative sector (Nordas, 2005) High quality fashion market vs. lower quality products (Nordas, 2005) Production in Europe vs. Production in low cost (Nordas, 2005) Political

Internationalisation: The key pull factors that explain the internationalisation of Zara include Spain’s entry into the European Union in 1986, the globalisation of the economy and thus potential economies of scale, the homogenisation of consumption patterns across countries – Zara’s belief is that “national frontiers are no impediment to sharing a single fashion culture” – and the abolition of barriers to export as well as the development of information technology (Lopez & Fan, 2009). Indian Market:

India provided open market for Zara as Indian government is willingly to provide foreign investment in their country, but Indian Govt. Has their own policy which are to be adhered by organizations as Zara formed joint venture with TATA (Shah, 2011). Economic Production NOT transferred to low cost locations Zara resisted the industry-wide trend towards transferring fast fashion production to low cost countries like for example China. Zara states that this gives the greater control as it controls most of its steps on the Supply Chain, designing, manufacturing and distributing of products (CNN, 2001).

In the UK 50% of the product Zara sells are manufactured in Spain, 26% in the rest of Europe and 24% in Asian and African countries > clothes with longer shelf life like for example basic t-shirts are outsourced to low cost suppliers mainly in Asia and Turkey (Business Week, 2006). Zero Advertising Policy The most unusual company policy is its’ no advertising policy. It is worth noticing that Zara competitors rely heavily on costly advertising campaigns. However, Zara prefers to invest money in opening new stores instead (CNN, 2001). Producer of about 11 000 items annually

The product range of Zara company is significant. It produces nearly 11 000 items annually whilst its competitors produce only about 2000 – 4000. Moreover, Zara changes its designs every 2 weeks which encourages customers to repeated visits and builds the brand loyalty. An average high street store in Spain expects customers to visit three times a year. It is 17 times for Zara. (The Guardian, 2002). Shortening Product Life Cycle Additionally, Zara needs just 2 weeks to design a new product and get it to the stores whilst industry average is 6 months (Business Week, 2006).

To sum up, Zara breaks all the rules but this strategy proves to be successful as Zara is one of the biggest retailers in the industry. REFERENCES LIST entrys Social Rising of income With the rising of disposable personal income, people began to pursue a high quality and comfortable life. This tendency provides Zara quite wide market share. Personalized consumption become the mainstream of society. The strategy of ZARA, “a small amount, variety, cheap,” is a major guarantor of its success. Fast fashion

Regarding the design strategy, an article in Business world magazine describes it as follows: “Zara was a fashion imitator. It focused its attention on understanding the fashion items that its customers wanted and then delivering them, rather than on promoting predicted season’s trends via fashion shows and similar channels of influence, which the fashion industry traditionally used. ” There will be a 0. 7% depreciation of fashion products every day. A new product, from design to produce, logistics operation and the final sale, only need 2-3 weeks in Zara. Affordable fashion

An increasing number of people pay more attention to fashion. But fashion is a masterpiece of top designers, only a few people can afford it. The designers of ZARA will follow these fashion elements and design their own product, which most consumers can afford it (Baidu, 2010). Technological R&D and Production 1. Fast production: Deliver within 6 weeks instead of 6 months which is the delivery time from Zara’s competitors (Ghemawat & Nueno, 2006). 2. Zara has only 20 suppliers which accounted 70% of their products. The other companies have for example more than 200 different suppliers.

Therefore it’s easy for Zara to control their suppliers. Logistic 1. Own distribution centre with an order to delivery time of 24 hour for Europe and 48 hours to USA and Asia (Tokatli, 2007). 2. The shops receive two deliveries from distribution centre. That allows the shops to have low inventory and a high turnaround within the shop (Lopez & Fan, 2009) (Ghemawat & Nueno, 2006). Flexible Supply Chain 1. Vertical integrated and controls its entire production chain. One important effect of the control is to re reduce the bullwhip effect. (Ghemawat & Nueno, 2006) . Zara has very short lead times. The Agility of their supply chain enables Zara to deliver from product design to sale within 2 weaks for repeat or 5 weeks for new products (Mazaira, Gonzalez, & Avendano, 2003). Environmental Zara wants to help the sustainable developments of the society and the environments with which it interacts. This commitment to the environment is a part of the Inditex group corporate social responsibility policy. Objectives and Actions: At the sores: Zara saves energy and lot of care has been given to make the stores eco efficient.

Development of efficient management models for their stores that proposes measures to be applied to all processes, from the design of the store itself, the lighting heating or cooling system equipment, to the possible recycling of furniture and decoration. Use of paper or biodegradable plastic bags 90% of the bags Zara gives out to customers are made of paper. 1. Reduction of waste and encourages recycling Millions of hangers and security tags are processed each year additionally both the cardboard and plastic used are recycled. 2. Increasing awareness among the team members

Heighten employee’s awareness of the need for sustainable practices such as trimming energy consumption, using sustainable transport or modifying habits. With the product 1. Use of ecological fabrics, like organic cotton. Zara Supports ecological agriculture and uses organic cotton in the production of selected items of clothing (100% cotton, completely free of pesticide, chemical agents and bleaches). With a distinctive label these products can be identified very easily at the stores. 2. Producing PVC –free footwear No petroleum derivatives or non-biodegradable materials are used in producing the footwear.

In the transport Zara’s fleet of Lorries transport over 200 million items of clothing annually and uses 5% biodiesel fuel, reducing emission of CO2 into the atmosphere by more than 500 tones. Animal welfare policy All the animal products, including fur and leather sold at Zara come exclusively from animal reared in livestock form and never from animal sacrificed for skin sale. (Zara, 2010) Legislative Plagiarism plagiarism in the fashion industry has become a huge issue. Trends are often copied and cheaply as well as illegally sold in the street. Global expansion

As the European market has a well working trade and legal system facilitating business operations in member countries, other countries globally will not offer the same securities, especially in communistic countries the threat of losing a private run company to the local government is very real. REFERENCES ? Conclusion ZARA was just a small Spanish dress shop, but now, the little-known brand has grown into a leader of the apparel market. Now the footprints of ZARA have around more than 60 countries. The big design group, unique strategy, environmental management idea and other operational strategies make ZARA success.

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Fasion Brand-Zara

Title: Examine the underlying factors in the current success of a well-known fashion brand of your choice and assess the extent to which the brand’s success looks set to continue. Word counts: 1218 This essay will introduce a well-known fashion brand, ZARA, and illustrate the underlying factors in the current success of its company. Meanwhile, it will also evaluate ZARA’s prospective development and provide possible strategic suggestions.

Established in 1963, Inditex group is one of the largest fashion retailers, welcoming customers at its eight store formats -Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterque – boasting 5. 618 stores in 84 markets across the world, and operating in textile design, manufacturing and distribution. Figure shows that the subordinate brand of Inditex group, Zara, contributed two thirds of the Group turnover (Annual Report, 2011) and continued to develop in a flourishing tendency.

Meanwhile, it has been developed in a mushroomed tendency across the world within a short period of time since 1975. ZARA places the customer in the central position of its marketing management and its entire business model, which consists of attractive design follow the fashion trend, manufacturing in a relatively high quality, distribution in an effective way and sales with a worldwide distribution network. (http://www. zara. com/webapp/wcs/stores/servlet/category/cn/en/zara-I2011/11112/Company).

Zara is aiming to democratize its unique concept by offering the latest fashion in relatively high quality at affordable prices. What differentiates Zara’s business model from that of its competitors which lead to success is the turnaround time, and the store as a source of information. Zara’s vertical integration of design, just-in-time manufacturing, delivery and sales, flexible structure, low inventory rule, quick response policy and advanced information technology enable a quick response to customer’s changing demands (Castellano, 1993).

To sum up, there are three main factors to ensure the success of ZARA, which are offering the latest fashion items at fair prices, rapidly putting items into market and employing test orders to ensure risk reduction, and realizing a three dimensional development. Firstly, most designers of ZARA are such young people who have the unique creativity, discerning insight, sharp fashion mind with dye-in-the-wood of

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Clothing and Zara

Customer-Based Brand Equity (CBBE) (Keller, 2008) Salience Zara is a well-known and ranked number one clothing brand in Spain, and it is the brand chain store of the Inditex Group owned which ranked number three in the world (INDITEX Group, 2012). Zara used fast fashion model – limited and variety. Zara resist a trend within the worldwide industrial- product manufacturing in low-cost area. That prove its product has a certain quality. Related to fast fashion, Zara has asserted that it only needs 2 weeks time to design and develop a new product on store shelves.

Moreover, the main work like design, production and delivery are proceeding in Spain and via it business model system, Zara can directly know which type of the goods are popular and almost sold out in a short period of time, and the types of the undesirable goods. It can easily to know the buying behaviors of the customers and can control the amount of the product. E. g. colorful cloths are desirable and almost sold out, the designer/factory can use this information to design/produce more types of colorful cloths via the system.

Or the colorful cloths are undesirable then the designer/factory may stop to design/produce the similar cloths directly. It lead Zara’s product are low cost, low storage, low price, fast design, variety types and more flexible. Performance Refer to resist product manufacturing in low-cost area that the products of Zara must have a certain quality. Although there have many similar competitors such as H&M, Forever 21, etc in the market. Zara insist the mass production processes retain in Spain and Europe (Figure. ) rather than in Asia area, it proves the product is reliability, durability and serviceability. Zara is not easy replace by the competitors due to produce in Europe which is more durable than produce in Asia country (Figure. 3). In addition, related to fast fashion, the design is creative, especially and diversified. The price is valuable as a result of the change of the design is faster and variety as well as limited amount, the chance of the customers buys or wears same clothe are declined. Figure. 2- a tag of Zara’s cloths show Figure. – a tag of H&M’s cloths show “Make in Morocco” “make in China” Imagery Zara is a fashionable and particular brand of fashion family clothing, which composes with the design and the retail of fashionable clothes for kids, men, young girl and women (Zara, 2012). The target consumer is young people with higher income and high education level, mainly 20-35 year-old customer, they have higher awareness in fashion and have spending ability, but lack the ability on buying a product of high-class luxury brand.

Zara provide inexpensive products frequently to meet this population’s needs. It has four product lines, kids for children; Men for boy and men; Trf for lady and girls; women for middle class women and office lady. Also, customers would regular to search the new products in the store to ensure they can buy the favorable products themselves due to fast fashion model. Judgment Refer to the fast fashion, Zara rarely promote discount strategy. It only has 1-2 time of regular on sales.

Also, the products are limited and variety, if the consumers who haven’t buy the products at the first time, a risk of they can not buy afterward will exist. Therefore, the consumer will buy quickly when they unable to wait until the end of the season or the regular on sales. That is utilizing the mentality of consumers, it lead the goods of the company almost sold out within a short period of time, only a small quantity of unpopular products remain at the end of the season or the regular on sales.

Feelings Zara is a middle class level fashion brand, the target consumer is young people with higher income and high education level, and they have higher awareness in fashion and have spending ability, but lack the ability on buying a product of high-class luxury brand Zara provide cheap products frequently to meet the needs of this population. Also, Zara’s customers have owned self-respect and social approval, because of the street style are popular in the western, many well-known international odels and stars are becomes the customers of Zara, even Michelle Obama (the wife of the President of the United States) ((Figure. 4) and Kate Middleton ( the Princess of British) (Figure. 5)are buying Zara’s clothing. Figure. 4- Michelle Obama wears Figure. 5- Kate Middleton wears Zara’s cloths Zara’s cloths Resonance The impression of Zara is fast fashion. It supplies a limited amount of a variety of clothing, it lead a concept “When a thing is scarce, it is precious. ” Also, it makes fashionable be the sense of community.

Zara advocates the design of the products can satisfy the targeting customer’s needs and demands. It lead customers always buy luxury fashion style clothing via an affordable price. According to below (Figure. 6) and (Figure. 7) are related the profit of Zara in 2011 and 2010. It shows that the profit in 2011 is more the 2010. And (Figure. 8), it show the profit is continuously increase from 2006 to 2010. All figures mean the profit increase included new buy and re-buy. Zara has built a relationship with the customers and they would regular to search the new products in the store.

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Zara Supply Chain

Zara “Possibly the most innovative and devastating retailer in the world” – Daniel Piette, Fashion Director of Louis Vuitton – LIM College Center of Graduate Studies & Continuing Education Supply Chain Management (MNGM 605) Introduction Since globalization is an important asset to the world of fashion, significant developments have improved processes within the industry. It has been challenging for consumers to find clothing “Made in the USA” as transformations in the apparel business have caused changes in the supply chain distribution procedure.

Accordingly, globalization has created new opportunities to improve production and distribution practices, which gave room for the growth of the “fast-fashion” concept. Fast-fashion can be defined as the quick production of “apparel with a low cost, chic look now dominating the retail world. Fast fashion is mass-produced, reasonable in price for most consumers, and easy to obtain, making it simple for anyone to look stylish” (Mhm, 2010, p. 55). Zara: Spanish Retailer Zara, the Spanish firm owned by Inditex (Industria de Diseno Textil), is the first company to control the fast fashion market in the United States after its success in Europe.

In 2009 Zara went beyond Gap and became the world’s largest clothing retailer. In 1975, Zara established itself as a lingerie-clothing store in La Coruna, Spain, and in 1985 became part of Inditex. The company went public in 2001 and in 2012 was named Best Retail Brand in Spain by Interbrand, with 8% increase in brand value from 2011 to 2012 (Interbrand, 2012). Zara being the flagship brand of Inditex is accountable for Inditex’s global success as it reports for more than 60% of the company’s sales (Hoover’s Database, 2012).

Globalization increased the challenges to coordinate shipment by road, rail, sea, and air and now it broadened to include the Internet. An American consultant in the fashion industry, Thomas Freese, explains, “Supply-chain management is an evolution of logistics. Logistics tends to be tactical, supply-chain management is strategic. Supply chains are becoming not only longer but also more enveloping” (Mhm, 2010, p. 57). Zara owns the majority of its stores (90%), and to expand overseas has adopted three different methods.

Owning subsidiaries is the most expensive strategy and represents high risk if the firm decides to exit the market; however, it involves high levels of control. This strategy is used in European and South American countries. Joint ventures are a co-operative strategy where the manufacturing facilities and the know-how of the local company merge with the expertise of international firms in the market. This strategy is applied in large and competitive markets were purchasing property to arrange a retail outlet is a challenge and the assistance of local companies is needed.

Finally, franchising is the strategy chosen for high-risk countries that are culturally distant or have low sales forecast such as Saudi Arabia, Kuwait, Andorra, and Malaysia. Zara’s franchisees apply the same business model as its own subsidiaries concerning product, store location, interior design, logistic, and human resources. Also, they are responsible for investing in fixed assets and recruiting staff. Since Zara gained management control of the franchisees located in Japan, Germany, and Italy, such stores have been incorporated in the group of owned stores (Leong, et. l, 2009, p. 280). Zara utilizes a “store-centric business model”. Unlike other fashion companies, in which the design or sales functions tend to dominate others, Inditex places the retail function at the center of its corporate structure (Business Source Complete Database, 2008). Proof of this is that Zara’s store management function takes center stage, not only managing all the store staff, but also making orders (and discussing them with designers and market specialists), providing feedback and making requests to the design team.

Additionally, operations, wholesale, logistics and sourcing are all at their service. The Spanish retailer also relies its retail strategy on a dynamic assortment capability (Caro, 2009), which is a firm’s ability to revise its product assortment during the selling season. To do so, Zara keeps production volumes low at the beginning of the season and reacts quickly to orders and new trends during the period; after all, “we are in the fashion business – not clothing” says a Zara manager (Ferdows, 2003).

This way, the store is always supplied with the most up-to-date designs, receiving new merchandise twice a week. The policy of avoiding markdowns during the selling season also plays a center role in Zara’s strategy (Caro, 2009). The items that are not sold for more than two weeks are usually transferred to another store in the same country, shipped back to Spain or to Lefties (Zara outlet). This allows the company to charge nearly 85% of the product’s full price, while the industry’s average product makes only 60% to 70% of its full price (Ferdows, 2003).

Based on the information provided by Hoover’s Database (2012), Zara and Inditex’s (parent company) major competitors are H&M (Hennes & Mauritz), and The Gap Inc. This criterion is based on both their volume of sales and the industry that these companies belong to (clothing stores). Euromonitor Database (2012) also includes TJX Companies within Zara’s major competitors. Table 1 presents Zara’s basic data together with that of its competitors (Hoover’s Database, 2012).

Tinsley and Ormsby (2010) agree on the idea that Zara does not seek to create tendencies or looks through fashion shows and other distribution channels. Zara is perceived as a fashion imitator and therefore, the goal of the company is to understand the trends and styles that are used, develop products based on this knowledge and deliver them to the consumer as quickly as possible. H&M and Gap also operate with a comparable strategy. Zara is a chain of retail stores characterized by its low prices and quick response to fashion trends, which accounts for the company’s success (Hoover’s Database, 2012).

The Gap Inc. has produced basic apparel for women, men and children since 1969 and in search of expanding its target market and product categories has developed chic brands such as Banana Republic, Old Navy, amongst others. H&M designs chic apparel for women, men and children; yet, the prices of its merchandise are lower than those offered by Zara (Lexis Nexis Database, 2012). Both, Zara and H&M, have followed the same growing trend when introducing brand extensions such as Zara Home and H&M Home (Hoover’s Databse, 2012). The Gap Inc. is ranked as one f the top global clothing vendors; however, Inditex as parent company of Zara has managed to operate more stores worldwide (Hoover’s, Database 2012). Inditex’s production system truly differentiates Zara from its competition. While Gap and H outsource most of their manufacturing, Zara produces 60% of its merchandise in-house. Its own factories, which primarily produce the most fashion-forward garments, are mainly located in Spain and Portugal. The others contractors are typically located in Asia and in other European countries. From Asia, Zara imports basic products and those for which the region has a clear cost or quality advantage.

Zara obtains the majority of its fabric supply from another Inditex subsidiary (Ferdows, 2003). Over half of these fabrics are purchased undyed to allow faster response to mid-season color trends. While fabric supply, making and cutting, and the final finishing of garments are made in-house, Zara subcontracts the sewing stage to other specialized firms (Euromonitor, 2012). Finally the fabric is sent to local shops to be assembled. All products pass through Zara’s major distribution centers in La Coruna, Zaragoza and Barcelona before being shipped around the world.

These distribution centers employ some of the most sophisticated and automated systems. Orders for each store are typically ready for shipment 8 hours after they have been received. Stores in Europe normally receive their orders in 24 hours, United States in 48 hours and Japan in 48 to 72 hours (Ferdows, 2003). Clearly, speed is a major concern. This combination of real-time information sharing and internalized production means that Zara can work with almost no stock and still have new designs in the stores twice a week, as opposed to the six weeks that it traditionally takes most competitors.

Dan McCue states “changing retail and consumer behaviors are putting increased pressure on supply chains to deliver” (McCue, 2010). Zara certainly uses the Just in Time strategy when it comes to having fashion and trendy items available for the consumer. This business model indeed differentiates from that of Gap, H, and other major competitors (McCue, 2010). The three companies, Zara, H and Gap, target the same market and consumer base with the same product categories that differentiate amongst themselves by price, quality, availability, and style.

Similarly, TJX targets consumers with middle to upper incomes that want to wear fashion items, but due to the economy downfall, are more conscious about the money they spend (Hoover’s Database, 2012). It is important to note that discounting and off-price retail clothing stores like TJ Maxx offer multi-brands generally in single markets as it allows them to build economies of scale that will generate profit, instead of bigger margins (Global Briefing, 2011).

Both Zara and Gap sell private label products that are exclusively manufactured for both companies. Still, Inditex exerts a strong influence over almost the entire garment supply chain, which operates at a record-breaking speed. Zara is described as a vertically integrated retailer, directly controlling design, purchasing, production, distribution and retailing. Therefore, within Zara’s competitive advantages it is important to highlight the power to sell a high quality product that has a tight margin at a reasonable price.

This also gives the company the expertise about the production process of a piece from beginning to end, which results in lower costs and superior efficiency, that is later on transformed into a differentiator within the market (Quadrik, 2010). Zara produces only a limited quantity of each design, providing small inventory and a constant renewal of its collections with new models and designs. Based on sales, stores report costumer’s feedback to designers who elaborate future garments.

In this sense, Zara launches around 10,000 new designs per year, while the industry produces between 2,000 and 4,000. Constant change in designs makes the consumer perceive Zara as a store with the latest fashion (Tinsley, & Ormsby, 2010). Similarly, TJX’s strategy has been that of managing tight inventories with high inventory turnover so as to attract more consumers to their stores (Hoover’s Database, 2012). According to Bovet, Zara introduces two to three new lines each week, with around eleven inventory turns a year, compared with rival H, which has seven or eight.

He says he would be surprised if any retailer in the UK is higher than this, and believes many probably turn their inventory four to five times a year (Retail Week, 2001). Zara puts a lot of effort to locate its stores in the most up-market, high traffic and prestigious locations, even if prices are very expensive. These attributes are particularly important for Zara because it spends relatively little on advertising compared to its peers (Business Source Complete Database, 2008). Zara’s advertising strategy is that of zero advertising; alternatively, heir main communication channel is the store’s window. Again, this emphasizes their store-centric business model. On the other hand, H marketing strategy consists of attracting consumers through the endorsement of celebrities and joint ventures with big name designers (Hoover’s Database, 2012). TJX Companies operates TJ Maxx and Marshalls, which represent two of the largest cut-price clothing retails stores in the United States, therefore, the approach of the company is to target those consumers that are looking for discounted prices (Euromonitor Database, 2012).

The competitive advantage of this stores are the selling products 20% to 60% below the price of comparable items at other department stores (Hoover’s Database, 2012). Finally, what really differentiates Zara from its competitors is its emphasis on fashion, as opposed to value, which has successfully appealed to the growing middle class (Global Briefing, 2011). Zara derives its competitive advantage from an astute use of information and technology as all of its stores are electronically linked to the company’s headquarters in Spain (Retail Week, 2011).

Conclusion In order to improve its supply chain management, Zara should further develop its online sales presence. Research indicates that online apparel retailing sales are expected to grow (Euromonitor, 2012). Zara has a strongly underdeveloped presence in Internet retailing, which accounts for less than 1% of Inditex’s total revenue, while global apparel internet sales made up about 5% of the industry’s total sale (Euromonitor, 2012). Therefore, the Internet could be a huge advantage for the company, as many countries still don’t have a Zara’s online store.

As stated previously, overall, Zara has many advantages over its competitors, specially regarding logistics and supply chain. However, the need for new distribution centers may turn into an issue in the future, as Zara has to remain fast, efficient and effective while penetrating new markets and consolidating its presence in existing ones, such as the US and Asia. Table 1 [pic] References Caro, F. (2009, July 13). Felipe Caro. Retrieved from http://www. youtube. com/watch? v=CGrT_zqfj2U Duns, S. (2006, June 28). What is really new in supply chains?. The Bangkok Post, p. 1A. Euromonitor Database. (2012).

Ferdows, K. , Lewis, M. & Machuca, J. (2003). Zara. International Journal, 5(2), 62-66. Retrieved June 12, 2012, from Business Source Complete Database. Folpe, J. M. (2000). Zara has a made-to-order plan for success. Fortune, 142(5), 80. Retrieved June 13, 2012, from Business Source Complete Database. Gap Official Site. (2012). About Gap Inc. Retrieved on June 15, 2012 from http://www. gapinc. com/content/gapinc/html/aboutus. html Global Briefing. (2011). International Challenges and Opportunities for Clothing and Footwear Retailers. Retrieved on June 14th, 2012 from Euromonitor Database. H&M Official Site. 2012). H&M Life. Retrieved on June 15, 2012 from http://www. hm. com/us/life#comp_00000058bc Hoover’s Database. (2012). Inditex. (2012) Inditex, Industria de Diseno Textile in Retailing (World). Retrieved on June 13, 2012, from Euromonitor Database. Leong, C. , & Ying, F. (2009). Internalization of the Spanish Fashion Brand Zara. The Journal of Fashion Marketing and Management, 13(2), 279-296. Retrieve June 14, 2012, from the ProQuest Central database. Mccue, D. (2010). A New Spin on Just in Time. World Trade: WT100, 23(12), 28-31. Mhm, B. (2010). Fast Fashion In A Flat World: Global Sourcing Strategies.

The International Business & Economics Research Journal, 9(6), 55-63. Retrieve June 14, 2012, from the ProQuest Central database. Quadri, K. (2010). What Are the Real Benefits of Vertical Integration in a Retail Supply Chain? Retrieved on June 13th, 2012 from: http://blog. technologyevaluation. com/blog/2010/04/15/what-are-the-real-benefits-of-vertical-integration-in-a-retail-supply-chain/ Retail Week. (2001). Supply chain: Zara streaks ahead. Retrieved June 13, 2012, from Business Source Complete Database. The “Inditex Way” Business Model. (2008). Black Book – Inditex: Best-in-Class Mass-Fashion Retailer, 35-43.

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Zara, Fast Fashion

The global apparel market is a buyer-driven market. Along with the globalization and technology development, consumers are easier to access to fashion. As a result, the customers are changing and the companies are evolving to deliver customers satisfaction. Zara, the most profitable brand of Spain clothing retail group Inditex, has leveraged its unique strategy to achieve success and will be expected to maintain a sustainable growth in the fashion industry. Zara’s core competencies can be divided into four areas: process development, distribution, marketing and integrated business structure (referred to Appendix 1).

Zara’s unique process development allowed Zara to produce in a shorter cycle time and more quickly response to the customer’s needs than other competitors. When the fashion season started, Zara’s designers attended trade fairs and ready-to-wear fashion shows to translate the latest trend of fashion into their design. Zara’s product development staff, at the meanwhile, researched the market through different retail stores and university campuses to understand customer’s preferences.

Zara’s IT system, on the other hand, played a key role on the internal communications. This helped Zara’s managers constantly track the sales data and therefore capture the customer’s desire. Moreover, Zara’s centralized distribution facility gave the chain efficiency. Both internal and external products passed through the distribution center, and were inspected and shipped immediately. Then, to increase the delivery speed, Zara scheduled shipments by time zone. Products were shipped by truck or air and were usually delivered to worldwide stores within 24-48 hours.

In contrast to other companies’ outsourcing activities, Zara’s in-house manufacturing created a rapid product turnover since its products were limited and the inventories were strictly controlled. This rapid turnover created an opportunity to Zara’s retail stores and a sense of scarcity that “buy now because you won’t see this item later”. This increased the frequency of the customer visit and also allowed Zara to sell more products at full price. Zara’s business structure was very imperative to help the company develop its business strategy successfully.

Each business function under this structure could be narrowly defined and management teams could frequently communicate across the functional departments. In addition to provide training, Zara enhanced Managers’ performance on store operations by the use of standardized reporting systems. This allowed Zara to work horizontally in an open communication environment. Moreover, Zara’s country managers were almost selected from locals. They transferred the information between top management at headquarters and store managers and thus making Zara adjust to the market quickly.

This, in turn, would deliver customer’s satisfaction and boost the sales. Vertical integration, Zara’s distinctive business system, provided Zara with the competitive edge in the fashion industry. Zara manufactured its most fashion-sensitive products internally. About 11,000 distinct items were produced during the year, variations in color, fabric and sizes. This allowed the company to supply a broader product line into the market and to align with its business strategy. Furthermore, this vertical integration helped the company reduce the “bullwhip effect” in the chain.

Products took place in small batches, flowed into the central distribution center and were shipped directly from the central distribution center. This helped the company not only keep low inventories but also avoid the potential amplification of the final demand. More importantly, Zara’s vertical integration shortened its cycle time of entire design to four to five weeks and two weeks for modifications, compared with traditional companies’ up to six months and three months, respectively.

Such integration system provided Zara with the flexibility to constantly update its design and also reduced its working capital intensity, thereby maintaining a sustainable growth in the fast fashion market. Zara positioned its brand on the fashion-conscious market and offered fresh assortments of designer-style clothes and accessories with relatively low prices. Zara had a cost advantage over other competitors due to its low advertising costs. Zara spent only 0. 3% of revenue on the media advertising, compared with other retailers.

Zara promoted its brand by offering rapid changing product lines and creating customers’ positive word of mouth that resulted. In addition, to target at the ages between 18 and 34 with middle to middle-high income, Zara mainly relied on its attractive stores which located in highly visible locations to project its image. Zara’s frequent refurbishing of store, creative window display and varied staff uniforms also allowed Zara to position its image in the elegant, high-end and fashion-driven market. However, Zara implemented a different positioning strategy for Zara overseas.

In contrast to Spain, where all of Zara’s stores were company-owned, Zara used three different methods to enter into the international markets: company-owned stores for high-profile countries, joint ventures for important countries where there were barriers to direct entry, and franchises for small countries. This helped Zara reduce operational risks and gained a detailed insight into local demand. Although pricing was market-based, prices in other countries were higher than in Spain, for example, 70% higher in Americas and 100% higher in Japan. The higher retail prices implied a different positioning for different countries.

For example, while Zara targeted at 80% of Spanish citizens, it aimed at the upper and middle class in Mexico, and presented a high-end image in South America. It also implied that Zara promoted its image of “made in Spain” to emphasize the local produce, whereas built its image of “made in Europe” to emphasize its high-end and prestigious positioning. Although Zara had a successful business module in the fashion industry, its strategy also had some weaknesses to prevent its future growth. First of all, Zara’s vertical integration couldn’t create the economics of scale, which means, Zara couldn’t supply a larger quantity of products.

This, in turn, would increase its production cost. Moreover, the higher pricing in oversea markets was a barrier for Zara to gain more market share. H&M, Zara’s competitor, also focused on the fast fashion market and adopted a lower price strategy to the international market. In the end, Zara could not explore well in the U. S. and Asia markets. The U. S. is the key market to North America, which required a larger size on average and exhibited considerable internal variation. Therefore, the best way for Zara to maintain its sustainable competitive advantage is to re-position in the U. S. nd Asia markets. For the U. S. market, which was less fashion-forward than Europe, Zara can focus on the design that specifically caters to the American preferences, for example, emphasizing on the natural, casual style. In addition, Zara can seek the opportunities on the large emerging markets in Asia, like China and India. China has a large population and similar fashion preferences to Europe. Through opening flagship stores, Zara can build its image at the middle to upper class in Chinese big cities to create shopper traffic. Another way to expand its business is setting up internet retailing model.

More and more youngsters prefer to shop at home at anytime. Therefore, the form of direct retailing will help Zara to gain more customers and reach them faster. In conclusion, Zara’s unique business model demonstrates a strong success in the fashion market. By expanding internationally and focusing on different geographical preferences, Zara will maintain a sustainable competitive advantage in future and enjoy its increasing profit margins from oversea retail markets. Appendix 1. VRIN Valuable| Rare| * Rapid product turnover * Relatively low price| * H&M| Inimitable| Non-substitutable| Fast response * Short cycle time of entire design * Unique organizational culture (staff, communication, etc. )| * Process development (in-housing production, IT system, distribution, etc. ) * Vertical integration| 2. Value Chain * Inbound logistics * Zara’s designers attended trade fairs and global ready-to-wear fashion shows to translate the latest trend of fashion into their design; * Zara’s purchasing offices connected store managers to understand customer preferences; * The 100%-owned subsidiary of Inditex Comditel managed the entire dyeing process and supplied to production in only one week. Operations * Most fashionable items were produced in small lots or under contract by suppliers located close by, and recorded if they sold well; * More price-sensitive items were likely to be outsourced to Asia; * Zara’s factories were heavily automated and focused on the capital-intensive parts of the production process, finishing and inspection; * Unique IT system allowed employees to quickly transfer information and track sales record; * Long term relations with about 450 workshops. Outbound logistics * Distributed garments by a dual-shift basis and featured a mobile tracking system; * Scheduled shipments by time zone to increase efficiency; * Products were shipped by truck or air, and typically delivered within 24-48 hours to worldwide stores; * Started to build a second distribution center with a 120,000 square meters of warehouse space that had direct access to local airport, the railway and road network. * Marketing and sales Emphasized broad, rapidly changing product lines, relatively high fashion content and reasonable quality to be a quick fashion follower; * Spent limited revenue in advertising (0. 3%); * Created rapid product turnover and offered customers with limited products to create a sense of scarcity that “buy now because you won’t see this item later” * Expanded internationally and opened the flagship stores in worldwide main cities. * Service * Located stores in highly visible locations; * Invested more heavily in store refurbishing to provide customers with superior shopping experiences.

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Consumer Profiling for Zara Home USA

The Situation CUSTOMER PROFILING In 2010, eMarketer reported that 71% of Americans use the internet. They estimated that figure would grow to 78% by 20141. The latest figures by Internet World Stats show that, in 2012, 78% of Americans are already using the Internet2. Internet use is growing at breakneck speeds, and internet shopping is a big part of that use increase. As an exclusively e-commerce outlet in the United States, Zara Home could view every American internet user as a potential customer.

However, Zara Home products are targeted toward women in the age group of 18-34. 27% of the total American population online falls in that age bracket3, almost evenly distributed between men (51%) and women (49%)4. The target audience for Zara Home can therefore, be narrowed down to approximately 13-14% of the American population – women who actively use the internet. The Zara Home target is extremely active online. Usage5 statistics show that they have very high awareness of digital media beyond simply browsing, including social media, mobile and video.

This high engagement and activity is an advantage for the brand. Zara Home must now identify which smaller targets within this group will be most open to the brand’s specific, timely and relevant information. It is extremely important to find niche targets that will integrate the brand into their digital experience. Keeping this insight in mind, two niche targets are suggested: Social Moms and Generation “Connected” Women.

These niche targets add up to roughly 62 million potential customers for Zara Home,6 though there is bound to be overlap between the two groups. 1 2 http://www. emarketer. com/Article. aspx? R=1007519 http://www. internetworldstats. com/stats14. htm 3 http://www. emarketer. com/Article. aspx? R=1007519 4 http://www. emarketer. com/Article. aspx? R=1008382 5 http://www. emarketer. com/Article. aspx? R=1008382 6 http://www. emarketer. com/Article. aspx? R=1008085 4

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Supply Chain Management and Zara

Zara Case Analysis Operations Management MBM1110 Table of Contents Executive Summary

3 Introduction

3 Outstanding Operational strategies

Layout

4 Forecasting

5 Product life cycle

5 Product Design and Supply Chain Management

Marketing

5 Just in time

6 Vertical Integration

6 Incorporation of Bershka

Conclusion

7 Bibliography

8 Executive Summary Zara, a flagship chain store of the Inditex group owned by Spanish business tycoon Amancio Ortega is one of the top names in the mid-priced fashion industry. Zara was established in 1975 in Acoruna, Galicia, Spain and has expanded to 1395 stores all across the globe.

It is said that Zara, unlike any other retail organization in the clothing industry takes just two weeks to design, develop and get a new product into the stores. However, the retail industry has a six month average to do so. By using its operational strategies in a very successful manner, Zara is able to launch 10,000 new products every year. This report will discuss the operational strategies that Zara uses which works as order winners and order qualifiers. It also discusses the strategies that they use which makes them one of the top names in the fashion industry.

Introduction Zara uses very innovative strategies for its business. By doing so, Zara is able to avoid outsourcing its manufacturing process to low cost and developing countries like most of the other companies in the industry. Zara does not even spend a lot of money on marketing, hence increases its profit margin. It however does spend on the layout of its stores. Unlike many of its competitors, Zara is a vertically integrated retailer since it controls most of the step in it supply chain by designing, producing and distributing itself.

This unique business model has resulted in the emergence of one of the most successful retailers in the fashion industry. Terry Hill in 1993 came up with the terms ? order qualifiers? and ? order winners? , against which it is believed that manufacturing strategy should be determined (Add Reff. Hill, T. (1993), Manufacturing Strategy: Text and Cases, 2nd ed. , Macmillan Press, London. ). Order Winners are characteristics that serve as a competitive advantage for one firm over others.

Order winners enable the customers to choose a particular firms goods and services over the competitors. Order winners in this case for Zara are: y High-end fashion at a reasonable price Even though Zara¶s products are highly fashionable, they comparatively cost way less compared to other big names in the fashion industry Supply Chain Management y As discussed below in the report, due to Zara¶s outstanding SCM, it is able to order order the latest in fashion every two weeks for a reasonable price. Thus, are able to offer something to their clients that none of their competitors can.

Order qualifiers are the competitive characteristics that a firm must take advantage of in order to be a viable competitor in the market place. To provide order qualifiers, companies need only to be in par with the competitors, however, in order to provide with order winners, companies need to be way better than its competition. Having said that, order qualifiers are in no way less important than the order winners, in fact, they both complement each other. In Zara¶s case the order qualifiers are: y Quality They offer good quality products at relatively cheaper price compared to the competition.

Outstanding Operational strategies While Zara maybe a very successful high end retailer, the main facet of Zara that has got academics buzzing is its completely novel approach to its operations and supply chain for a retailer in high-end fashion. Layout The main intention of a layout strategy is to develop an economically viable layout that will be in line with the company¶s Competitive requirements (Render & Heizer, 2005). Zara invests a lot in their store layouts to make sure that their store maintains the fresh and trendy look.

They have a testing facility close to their head office in Spain, where they test different types of store layouts on a regular basis. Zara remodels each of its stores every five years in order to keep up with the current trends (Zara¶s Business Model, 2010). The entire layout, including the furniture and the window displays are all designed at the testing facility in order to maintain a standardized image globally. A flying team from the head office usually flies down to a new location to set up the store. Their motto is that they want the store managers to focus more on sales than anything else.

Zara can afford to do this since they do not spend lot advertising and marketing campaigns. Forecasting One of Zara¶s major competitive advantage over other retailers is it technique of forecasting. Unlike, other retailers, Zara has developed its business model around reacting promptly. Zara focuses heavily on its forecasting effort on the amount and the type of fabric it will purchase. Zara tends to do this since it¶s usually cheaper to rectify mistakes on raw fabric as compared to a finished product. It also uses the same fabric to produce something else (Render & Heizer, 2005).

Zara usually buys un-processed fabric and colors it according to the season based on market¶s immediate need. By doing that, and by combining it with a high-speed garment design & production process, it¶s able to the deliver what the market is actually looking for at that time. Product life cycle In a typical Product Life Cycle Curve of the fashion retail industry, sales decreases as products move across the times line. However, Zara¶s Product Life Cycle Curve is totally the other way round since it is in a high fashion industry and it offers products that are of the latest trends and designs with a life of maximum 5-6 weeks.

Product Design and Supply Chain Management The entire process of product design is very unique compared to its competitors. Commercial managers and designers at Zara start working on the design of the fabric, the costs, raw material, selling price etc as soon as they receive the instructions from the Zara stores. Instructions are issued to cut appropriate fabric as soon as approvals are received. All the raw materials are distributed for assembly to a network of small family owned businesses that are mostly in Glacia and in Northern Portugal.

Unlike its competitors, Zara¶s high-tech distribution services system ensures that there is no style lying around at the head office. The finished products are quickly cleared through the distribution centers and are shipped to the stores within 48 hours. Deliveries¶ are received twice a week by each store. This entire process of product design and supply chain management gives Zara a huge edge over its competitors. Marketing Zara has a very unique approach to marketing compared to the other big players in the industry.

Unlike its competition, which spends 3-4 % of total revenues on marketing and advertising campaigns, Zara spends 0. 3%. This is a major competitive advantage over its competitors. Zara strategically locates all of their stores in prime retail districts for µvisibility marketing¶. As mentioned earlier about the product development cycles, customers are rendered immune to visit Zara stores very often since new items are stocked weekly and are often not re-stocked. Zara creates a feeling of scarcity within the customers, and this makes them come back to the store frequently and make purchases.

Just in time Just-in-time (JIT) is a strategy that is used for inventory management in such a way that it helps a business improve its return on investment by reducing in-process inventory and the associated carrying costs (Shingo, 1989). Zara follows a true JIT inventory system. Its inventory system is influenced by the pull of the customer instead of a push from the designer. This helps Zara to have a competitive advantage over the competition since it has a very low inventory to sales ratio. Vertical Integration

Zara is a very vertically integrated company by working through the whole value chain and is highly capital intensive. This is a unique model that let the company develop a strong merchandising strategy that led it to create a unique model of fast fashion system (Craig, Jones, & Nieto, 2004). Incorporation of Bershka Most big brands in the world regardless of the industry they are in usually have more than one brand name. In the fashion retail industry, Gap Inc. Owns few big names as Gap itself, Old Navy, Club Monaco, etc. It is a strategy used to penetrate different segments of a market and to increase the market share.

It also tries to give consumers an impression that different brand names have something different about them. Companies also use the is strategy to create a specific brand for each and every market they try to target. Inditex has also used the strategy of penetrating different segments of the market by creating a different brand name for each segment (Inditex Annual Report, 2008). Inditex owns different brands such as Zara, Massimo Dutti, Pull and Bear and Bershka which tends to cater to different markets. Merging all of these brands or any two brands into one name would not make a lot of business sense for Bershka.

The brand Bershka was launched by Inditex in the year 1998 with an aim of targeting the young fashion-conscious crowd. Incorporating Bershka into Zara¶s operations would not be a very good strategic move for Inditex. Bershka currently owns 638 stores in 41 different countries, hence incorporating that in to Zara¶s operations would raise lot of challenges for Inditex. Since Bershka and Zara both have a very different target market, formulating strategies for both of these firms combined will definitely effect the operations of the company in whole. Both brand names have established different clientele for themselves.

Bershka currently targets the young and fashionable and Zara targets the fashionable crowd as well, however it has different demographics for it. Combining these two brands into one will result in loss of loyal customers and might also impact the company negatively. There¶s no guarantee that Bershka¶s existing clientele will shift to Zara, in fact they might just end up losing majority of that segment. Zara¶s market share might increase by a very small percentage; however Bershka might end up losing a major chunk of its current clientele, which in turn will not be good for Inditex in whole. Conclusion

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Zara Project

Product classification of Zara • Most clothing are classified as an “durable good” as they are used up slowly, • Clothing doesn’t need to be disposed of after being worn once, but rather could be cleaned and reword until a tear within the seams or a stain kills it, or ultimately it goes out of style [pic] Product Lifecycle Due to the clothing industry is mainly backed behind by what is “cool” or “hip” to date, clothing often needs to refresh its look in order to attract customers to purchase the product • Many clothing brands including Zara would refresh its new look to attract customers by refreshing its line of clothing such as push out new garments that have a certain style that was popular at the time and this process of refreshing a line of clothing is never stopping Branding • Zara uses an “one brand name everywhere” concept • No matter within which country it possess the name in Zara • The brand “Zara” is recognized in over 1700 stores in 89 countries

Packaging • Within most clothing store like Zara, packaging is basically non-existent • The lack of packaging is due to the company wanting the customers to be able to feel the material used for the product and able to try it on • If both the material and style is favourable to the customer, there is a higher chance of a transaction being made http://marketingmixx. com/marketing-plan-2/200-marketing-plan-of-zara. html http://www. slideshare. net/gunbal/zara-7936993 http://www. forbes. com/sites/lydiadishman/2012/03/23/the-strategic-retail-genius-behind-zara/ http://blogs. ubc. ca/conradchan/2011/09/16/zaras-marketing-strategy/

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Zara Marketing Plan

New collection Launch | Marketing Plan 22. 10. 2009 1 SITUATION ANALYSIS Zara Brand Wheel Fashionable clothes Varied assortment Trendy colors Feminine cuts Fashionable product lines for moderate costs Customer-­? centered business Runway trends adapted for the streets Brand Essence Fashion-­? oriented woman Trendy in every situaFon Feeling good about looking good Fashion -­? friendly Feminine Hot and trendy High-Street Fashion The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research 5 Keys of the Zara Business Model Store Teams Customer Logis4cs

Design/ Produc4on The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research 5 Keys of the Zara Business Model Customer “Main driving force behind the Zara brand. ” Star%ng point for all Zara ac%vi%es Customer Lead role in: •? Store design •? Produc%on •? Logis%cs •? Team The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research s The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research 5 Keys of the Zara Business Model Store Store “Mee4ng oint between the customer and the Zara fashion o? er. ” 1,520 stores collect informa%on regarding customer demands. New products introduced twice a week. Top loca%ons – 17 visits / year / customer Me%culously designed shop windows Maximum aJen%on to interior & exterior architechtual design Appropriate coordina%on of garments Excellent customer care The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research 5 Keys of the Zara Business Model Design & ProducFon “Inspira4on comes from the street, music, art … but above all, the store. ” Proximity of roduc%on facili%es Immediate reac%on to trends. Con%nuous work for all teams. Managers – teams – customer demand – forms, designs, fabrics, compliments Design/ Produc4on 1,186 suppliers, 200 desginers The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research 5 Keys of the Zara Business Model LogisFcs “Highly frequent and constant distribu4on permiKng the o? er to be constantly renewed. ” 697 million garments distributed 5,000 employees at logis%cs centers Logis4cs Designed with maximum ?exibility. Customer oriented. 24h – receiving order to store elivery (Europe) Designed to absorb growth for next years. 18% annual discount rates. The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research 5 Keys of the Zara Business Model Teams “Teams with vast sales knowledge geared to towards the customer. ” 89,112 professionals Customer oriented. Make the stores a pleasant environment. Apply corporate, social & environmental responsibility in day-­? to-­? day work. Teams The Zara Brand Industry

Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Zara’s Performance 159 store openings in 2008 Brand Value: $ 8,609 M 1,530 stores 4 new countries in 2008 Sales € 6,824 Million ZARA 73 countries The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research 14 The Industry High street fashion brand Industry trends Democra%za%on of luxury Inclusiveness Street trends Designer houses Key success factors Di? eren%a%on & individualism New fashion consumer The Zara Brand Industry Analysis Product Development Consumer

Analysis Market Analysis Market & Consumer Research Customer Focused Product Development Saturated industry Need to increase brand value Responding to current industry trends Iden%fying the need for the product in the market A full-­? shaped body is a beau4ful body The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Customer Focused Product Development Market entry barriers Design challenges Saturated industry Need to increase brand value Responding to current industry trends Iden%fying the need for the product in the market Exis%ng customer eac%ons “Fat is not fashionable” Challenges Opportuni>es The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Consumer Analysis Today’s fashion consumer: More choice, more educated, more savvy & demanding “New breed of shoppers” Loyalty, variety, freshness The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Fashion Consumer Behavior Analysis Interest Gives pleasure & enjoyment Means of self-­? expression Involvement Emo%ons Behavior The Zara Brand Industry Analysis Product

Development Consumer Analysis Market Analysis Market & Consumer Research Fashion Consumer Behavior Analysis Interest Hedonics Involvement Purchasing experience Fun, fantasy, social or emo%onal gra%? ca%on Emo%ons Behavior Impulse buying The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Fashion Consumer Behavior Analysis Interest Hedonics Involvement Importance: •? Consumers aJach meaning to their clothes •? Role of fashion in society Drivers: •? Individual mo%ves •? Projec%ng a desired self-­? image Linked to personal values & needs: •?

Express and communicate value •? Values guide consumer behavior •? Types of values: personal, economic, aesthe%c Emo%ons Behavior The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Fashion Consumer Behavior Analysis Interest Hedonics Involvement Posi%ve vs. nega%ve •? Shorter decision %mes •? More impulse buying •? A feeling of being unconstrained •? Desire to reward oneself How to generate posi%ve emo%ons? •? Use the retail environment to posi%vely in? uence moods: •? suitable layouts, •? colors, •? e? ec%ve sales personnel, •? emo%onally pliking atmosphere Impulse buying Emo%ons Behavior The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Fashion Consumer Behavior Analysis Interest Hedonics Involvement Impulse buying •? Fashion oriented: strongly oriented to fashion involvement: providing sensory or experien%al cues of fashion products. •? Created by the symbolic interac4ons of the product & the consumer emo4onal experiences Emo%ons •? Need to understand impulse buying behavior for fashion products from an experien4al perspec4ve = guidance in developing strategies Behavior

The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Plus Size Consumer Analysis 1 in 3 women are unhappy with the way clothes ?t them 14 happy 12 8 16 10 18 6 22 20 24 unhappy The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Plus Size Consumer Behavior AJribute Plus size product Psychosocial consequence Feel more a
acFve Func%onal consequence Cut ?[ng the body shape Values Self-­? esteem Self esteem: important moFvaFon driver for consumpFon Consumers tend to assign their own eanings to clothes. Clothing: over consumer behavior The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Market Analysis 120 Market Share 15% PeFte 60% 25% Plus Size Normal 100 80 60 40 20 0 76 100 Size 2006 2012 Segment growth: 40% increase by 2014. Only 5% of retail space is dedicated to the +size products The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Types of CompeFtors 1 2 3 4 Dedicated Ranges Extension of Size Ranges Designer Bou%ques E-­? commerce The Zara Brand Industry

Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research New Line PosiFoning High Fashion Zara Torrid H&M BouFques Low Price High Price M&S Charming Shoppers 1 2 Dedicated Ranges Extension of Size Ranges Designer Bou%ques E-­? commerce Market & Consumer Research Junonia 3 4 Low Fashion The Zara Brand Industry Analysis Product Development Consumer Analysis Market Analysis Di? erenFaFon Brand awareness Brand loyalty New in this segments More experienced compe%tors Lack of e-­? commerce Size & growth High fashion for modest prices Strengths Weaknesses The Zara Brand Industry

Analysis Product Development Consumer Analysis Market Analysis Market & Consumer Research Zara vs. CompeFtors Zara 1,000 new styles / month 200 designers Higher cost of product development is more than adequately compensated by higher realized margins Strategy: reacFve, not predicFve CompeFtors 3-­? 5 months: develop the ideas into physical samples Sales budgets & stock plans developed one year ahead of the targeted styles Few weeks / months to procure fabrics, have them approved by the retailer – produce a number of samples – put samples in producFon The Zara Brand Product development Industry Analysis

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Zara & Pandora Recommendations

Zara case Zara uses a vertically integrated system (VMS): In this system, wholesalers, retailers and distributors work as a unified system. One channel owns the others. They have a corporate VMS system, because Zara has managed to build a system that is controlled from the headquarters and it allows a quick response to decide and solve problems. Inditex, Zara’s parent company owns most of the resources to design, produce and distribute.

Recommendations: Instead of doing everything themselves, Zara could train their managers in the local stores to already make quick decisions than to just send many ideas to the main headquarters in Spain and let them decide what is best. So spread the decision making process among their local stores. Zara’s vertical integration has many advantages, but there is a drawback for Zara as they focus distributing small batch quantities and do not receive any discounts on manufacturing large quantities. Pandora

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. The activities of a business could be grouped under two headings: Primary Activities – those that are directly concerned with creating and delivering a product. -Inbound logistics: All the raw materials are collected from their distributors and in Pandora’s case these are the songs from musicians. – Operations: is transforming the raw materials into a finished product and service.

Pandora’s software gets smarter through the listener’s inputs of likes and dislikes and marks them as unique playlist for that same user. – Outbound logistics: All those activities associated with getting finished goods and services to buyers. Pandora has pushed the music service into a variety of channels, including apps for smart phones and tablets as well as through home entertainment systems such as video game players, DVD players and Internet radios. – Marketing & Sales: Essentially an information activity – informing buyers and consumers about products and services (benefits, use, price etc. Pandora informs their listeners firstly through web page, and then music has become more mobile. Pandora has formed strategic partnerships to push their music service into different channels, such as apps for smartphones and tablets, as well as through video game players, DVD players and Internet. Since listening to music goes through the radio, Pandora has also collaborated with new car brands. – Service: All those activities associated with maintaining product performance after the product has been sold. The service plays musical selections of a certain genre based on the user’s artist selection.

The user then provides positive or negative feedback for songs chosen by the service, which are taken into account when Pandora selects future songs. Recommendation: The client should have more possibilities to have an opinion on the music instead of likes and dislikes. So after each opinion they have, they get a small questionnaire. Global market The activity of buying or selling goods and services in all the countries of the world, or the value of the goods and services sold. Global marketing is sometimes used to refer to overseas expansion efforts through licensing, franchises, and joint ventures. Zara got stores all over the world.

If the designers design new clothes, it will come in all the stores. Zara does most of the things by themselves, like making their own fabric, produce their own clothes and having their own designers. Recommendation Zara could create a joint venture with distributors in the markets such as Asia or the US, to produce the products for them. Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency. Procurement: When the raw material is purchased together with other inputs to create value to the product and support the value chain activities.

In the case of Pandora the raw materials purchased are the songs from musicians. – Technology development: Includes research and development, process automation, and other technology development to support the value chain activity. For Pandora they have an automated software-driven machine that discerns the types of music and places them in genres. – Human Resource Management Using people as a resource to support the value chain. Young analysist analyze of the music by a professional musician to analyze and decode them in different genres.

Young analysts sit together with senior analysts to encode the music and add features to differentiate its service. – Firm Infrastructure Includes activities such as finance, strategic planning and control, general management, etc. Pandora is mostly focused on strategic planning ; control, because they have to critically analyze their songs they get delivered from musicians. This takes a lot of time and need be planned strategically. Strategic planning is then linked to general management. Recommendation: Pandora can hire more junior analyst which can be trained to become senior analyst so that the work is divided.