Zara Case Study

European Business School International University Schloss Reichartshausen

Group Case Study of ZaraTo obtain the academic degree

Bachelor of Commerce

Fast Fashion LessonsDonald Sull and Stefano Turconi

London Business School

Professor Benjamin Bental

March 1, 2010

Ji Hae (Caroline) LeeCorentin Adam

Melis KesginRosaCastells SalaWarren (Sid) Tetz

Group 12


Introduction

Over the past 13 years Zara has revolutionized the fashion retailing through something called

fast fashion. Fast fashion is a competitive advantage created by the efficient functioning and

coordination of many operational areas. Zara can produce, market, and sell high fashion look-

a-likes at extremely reasonable prices faster than any traditional retailer. Through this paper

we will break down the strategic decisions that Zara has made to create this revolutionary

competitive advantage within the fashion industry.

Strategic decision in Supply Chain

Zara favours local production; as a matter of fact, labour intensive operations are outsourced

to local subcontractors. Fifty percent of Zara’s products are manufactured in Spain by 22

factories and subcontractors which are located in Galicia. Despite cheaper labour costs, Zara

avoids sourcing production in Asian countries to avoid waiting long lead times1 for products

they need produced. It is noted, that seventy percent of Zara’s production is in Europe to help

minimize lead times.

Other areas of operative production are vertically integrated within Zara. Large investments in

computer guided cutting equipment ensure efficiency. With some areas of production being

sourced and other areas, such as computer guided fabric cutting, being done in-house Zara

maintains a steady stream of information sharing. Almost all areas inside and outside the firm

receive information simultaneously. (Exhibit 1)

To facilitate this great supply/production chain, Zara also has a great advantage in logistical

power. Products that pass through the logistic platform of La Corogne represent 1 million

products a week. There are more than 200 kilometres of cable and a surface of around 400000

1 The time from productions initiation process until completion


m² in this entirely automatic distribution centre. Even more impressive, two times a week the

centre is emptied and new turnover replenishes the old inventory.

Due to the high volume of products and information that needs to be shared between all areas

of the firm, Zara retains ninety percent ownership to avoid conflict between corporate

decisions and franchises. Due to the span of corporate hierarchy, Zara pays particularly close

attention to teamwork. Zara tries to break the corporate structure and appears as more of a

socialistic firm. Ever person is equal in the eyes of the firm and this helps to enable work to

be done in an efficient way with the most information sharing as possible. Furthermore, this

also reduces the expenditures on fancy corporate offices and helps further reinforce the

corporate culture.

Continuing with efficiency and low costs, Zara avoids extravagant and flashy advertising. In-

store and point-of-sales promotion is the only advertising that Zara utilizes. Not only is this a

strategic decision to lower costs but also to keep consistency with their overall strategy of fast

fashion. The high turnover of inventory within the store does not give Zara many

opportunities to advertise their in-store selections in catalogues, brochures, or other traditional

Medias.

Zara’s Core Competency: Shared situation awareness

Shared situation is the foundation for Zara’s success to respond quickly to changes in

demand. This system is built on three main pillars: raw data collection, hypothesis building,

and testing.

The first pillar is managing huge amounts of raw data and incentivising managers to collect

accurate as well as useful data. Managers are required to collect data that enables those

working in Zara headquarters to find patterns and forecast future trends. The raw data that


managers collect consists of everything from what is on the racks to what has been tried on

and left behind.

With the successful collection of raw data, headquarters can analyse, manipulate, and add

environmental2 data to the series allowing for the formulation of hypothesises to anticipate

trends. Zara’s open concept corporate culture is important here to facilitate brainstorming

during the development of hypothesises. This allows for many different hypothesis to be

created without fear that it will not be considered for the next step.

The next step is testing the chosen hypothesises. This is the final pillar in Zara’s shared

situation awareness. Based on the hypothesis, prototypes are created. These prototypes are

then exhibited in a 24,000 m² design hall. It is called “Fashion Street” and it resembles

fashion streets of Milan or London. The prototypes are designed in house so that they can be

produced quickly allowing decisions of whether to keep the prototype or cull it, to be made

quickly. Approximately 25,000 prototypes are made but about sixty percent are culled. This is

due to their failure to fit among the existing collection or bad results, in terms of data

collection, in the first few weeks of testing.

Competitive advantage

Zara’s competitive advantage is developed through their ability to collect data and respond

quickly to fast-changing market trends based on their situation awareness strategy. Observing

environmental factors and collecting copious amounts of data, Zara can anticipate the new

trends in the fashion market. This is vastly different from the typical designer push-pull

retailing model. (Exhibit 2) Furthermore, fifty percent of Zara’s products are introduced on

ongoing basis. This is much more frequently than the typical fashion retailer which typically

introduces new products based on the four seasons. The reason that Zara can change turnover

their inventory so rapidly is due to a very small lead time created by an extremely efficient

2 Data relating not strictly to Zara and their products ie. world events, news, etc.


supply/production chain; which can put products into retail outlets in 15 days. (Exhibit 3)

Further benefits of Zara’s efficiency are realized when we consider their average mark down

ratio and profit margin. Traditional fashion retailer’s mark down approximately fifty percent

of their products where as Zara only marks down about fifteen percent of their products

(Exhibit 4); and realizes a profit margin of sixteen percent compared to the seven percent of

traditional retailers. Overall, Zara has strategically built their competitive advantage on

situation awareness and have been successfully created something now called fast fashion

retailing.

Conclusion

To conclude Zara is a company that can respond quickly to changing demand. They have

succeeded in developing a competitive advantage through strategic planning of operations

management, Human Resources, marketing, and their financial structures. The finally most

important strategic key to their success is the process of situation awareness. Zara benefits

from scale production and economies of scope within their corporate hierarchy saving costs

wherever possible. Furthermore, Zara has integrated technologies well to help with the

management of raw data as well as computerized cutting processes. The combination of in-

house production and local sourcing has proved to be a great success for Zara. We would

expect to see steady growth of this strategically well thought out firm.


Appendices

Exhibit 1

Exhibit 2


Exhibit 3

Zara has a very small lead time: 15 days.

The first day, a stylist designs the pattern he looks at customer needs and luxurious clothes.

The third day, materials are computer guided cutting.

The eleventh day, clothes are make in a local subcontractor, and then they come in parent

factory for the coating.

The thirteenth day, products are freighted forward by trucks in Europe and by aircraft in Asai

or USA.

Finally, the fifteenth day, products are sold in the stores over the world.

Exhibit 4

Documents

Zara Case Study