Strategy

Case -1: Zara Case Study

Bia

1. Outline the major changes in the global business environment decade by decade for the global fashion retail industry from 1970 onwards

Saurabh Shah(141),

Class of 2012, PGDM(B),

K.J. Somaiya Institute of Management Studies & Research,

Mumbai.

1970’s:In the 1970's, the apparel industry spent more on capital investments than it had during the 1950's and 1960's combined.The apparel industry started export oriented industrialization in South Asian economies like Malaysia, China. In US, the apparel industry trimmed one-third of its jobs since its peak in 1973.Examples of technologies that were developed in the 1970's and 1980's are programmable sewing machines that allow operators to work more than one machine at a time, Computer Aided Design (CAD) that reduces lead time, and computer controlled cutting of material. Labor productivity increased by 26 percent between 1969 and 1979; this was slightly less than the 33-percent rate for all manufacturing.Major industry driving forces during this decade were:-A major trend of in export oriented industrialization in most of the South Asian Economies.The US fashion apparel industry had trimmed almost one-third of its task during this decade immediately after attained its peak during the FY73-74.A large range of innovative technology was developed during this decade that helped in making the manufacturing process faster. Some of these technologies were programmable sewing machines that allowed operators to work on more than one machine at a time, Computer Aided Design (CAD) that reduces lead time, and computer controlled cutting of material.

Industry structureFirms in the apparel industry are typically smaller and more disconnected than firms in the textiles industry. The size of many apparel firms was often an obstacle to large capital investments. Small firms typically operate on a low profit margin, and the cost of new, technologically advanced equipment would be prohibitive to many of them

1980’sUse of computers in textile and apparel industry started leading to a better and accurate logistic system.

1990’s Design choices and visual possibilities can be infinite if the designer is given the time and freedom to be creative and to experiment using the computer.According to National Knitwear Association of US, of 228 Apparel manufacturers:

65% use CAD to create color ways 60% use CAD to create printed fabric design 48% use CAD to create merchandising presentation 41% use CAD to create Knitwear designs

Industry structure:In US, both production and employment have continued to decline in the 1990's after the peak production in July 1987.

 2000’s

 4 seasons in west - Spring Summer Fall/Autumn WinterIndustry structure = Five forces Driving force of global apparel industry

Mix of product Buying Distribution

The apparel commodity chain is organized around 5 main segments: raw material supplies: including natural and synthetic fibers; the provision of components, such as yarn and fabric manufactured by textile companies; production networks made up of garment factories, including their domestic and overseas subcontractors; the trade channels established by export intermediaries; and the marketing networks at the retail levels. Each of these segments encompasses a variety of differences in terms of geographical locations, labour skills and conditions, technology and scale.The textiles industry produces base products such as threads, yarn, and cordage and woven fabrics, carpets, and rugs; in contrast, the apparel industry produces finished clothing products made from base fabrics. Developing countries rapidly increased their share of the world export market in apparel. In 1965, world apparel exports totaled $3 billion and developing countries supplied only 14 percent; by 1991, world apparel exports totaled $119 billion and developing countries supplied 59 percent. The developing economies in Asia (China, Korea, Mongolia, and Vietnam) supplied half of the world's apparel exports in 1991, while the United States supplied less than 3 percent. At the same time, the Unites States received 19.4 percent of world exports, including a third of the exports from developing countries.

From 2003 to 2006, global consumers increased their spending on apparel by 4%. Increased spending was seen in all countries except Japan, where spending fell 16%, to an average of $1,228 per year. Italian, English, and German consumers spent the most on apparel ($1,716, $1,605, and $1,396, respectively), while Indian consumers spent $190, the least among all countries surveyed. According to the 2006 Lifestyle Monitor, U.S. consumers spent an average of $918 on apparel. Not surprisingly, the countries where consumers spent the most on apparel were those with the highest per-capita gross domestic product (GDP). However, spending as a percentage of per-capita GDP gives a different picture. Though the United States has the highest per-capita GDP, U.S. consumers spent only 2.2% of it on apparel. China has a relatively low per-capita GDP, but Chinese consumers spent 10.7% of it on apparel—the most for any country surveyed in the Global Lifestyle Monitor, up 1.6 percentage points from 2003. The percentage of per-capita GDP spent on apparel increased from 2003 to 2006 in five of the nine countries surveyed. Among those showing declines were Japan and the United States— the two leaders in apparel consumption—along with the Latin American countries Brazil and Colombia.

Industry attractiveness:Retail spending on clothing and apparel exceeded $1 trillion worldwide in 2003.Europe accounted for 34 percent of retail spending in 2003.

Speed

Cost

Design Sourcing / Manufacturing Retail Sales

Fast Follower

Greige purchase

Delivery cycle/ IT

FocusedFactories

Asian sourcing for base Items

Best stores,image

Zarasweet spot

Fast design

Test design

Fresh merchandise, low cost

Get it now

Excitement, Immediate purchase

Limited markdowns

High “yield”

Improved costMix

2. What is Zara's business model? Explain briefly Zara's strategic positioning .What tradeoffs Zara has made?

Zara’s Business Model

Zara developed a business model that incorporated the following three goals for operations: develop a system the requires short lead times, decrease quantities produced to decrease inventory risk, and increase the number of available styles and/or choice. These goals helped to formulate a unique value proposition: to combine moderate prices with the ability to offer new clothing styles faster than its competitors. These three goals helped to shape Zara’s current business model.

One of the strongest differentiators of Zara's business model is its closeness to its customers and its ability to transform this into a trendy value proposition. Other fashion chains simply can't follow this speed. ZARA is better than competition for the following reasons. Spotting Trends: Its ability to spot emerging trends and react quickly. Zara had a dedicated design team in northern Spain. Ideas for new designs or for modifications to be made in existing designs mainly came from Zara's stores. Across all the stores, Zara's sales staff was equipped with wireless handsets which provided data to the store manager about the pieces sold. The manager consolidated the data and sent it to the company headquarters through the Internet.

Reaping the Benefits:

Zara reacted swiftly to emerging trends in the fashion industry. The company ensured that its stores were stocked with the products that the customers wanted at that point of time. In contrast, other retailers took between 8 and 12 months to forecast and arrive at a style and send it for production. Zara's initial forecast was limited to the kind of fabric and the amount of fabric it would buy. The fabric thus procured was unprocessed and undyed and Zara colored the product only before selling it, based on the need and demand by consumers.

Looking Ahead:

Industry analysts were of the opinion that Zara could not continue with its supply chain model for too long. With many retailers moving their manufacturing processes to India and China to control costs, Zara would have to follow suit sooner or later in order to remain competitive. However, if the production was to move out to low cost countries, Zara could lose its advantage and might not be able to refurbish its product lines in quick succession.

Zara, distinguishes itself by a number of clever business model building blocks that reinforce each other. At its heart the company is building on a vertically integrated demand and supply chain, while most other textile chains rely on outsourcing and cheap labor in China. Zara studies its customers demand in the stores and tries to instantly deliver. This allows them to have a particularly appealing value proposition: A collection that is in line with the very latest fashion. It takes the company only 5 weeks to come up with a new garment from design to delivery and only 2 weeks for an existing model.

Of course this business model design reaching from customer demand all the way to design and production has been refined to its best. Zara's shops use Information Technology to report directly to its production centers and designers in Spain. Shop managers use PDAs to check on the latest clothes designs and place their orders in accordance with the demand they observe in their stores. Thus, they directly contribute to a streamlined fashion collection of the entire company.

STRATEGIC POSITIONING:

In contrast to operational effectiveness, strategic positioning refers to performing different activities than rivals or the same activities in a different way. While the model itself is often very easy to replicate, technology is essential to creating and enabling novel approaches to business that are defensibly different than rivals and which can be quite difficult for others to copy.Zara is considered as an example of the relationship between technology and strategic positioning. Inditex describes Zara in this way: “Zara is a high fashion concept offering apparel, footwear and accessories for women men and children, from newborns to adults aged 45. Zara stores offer a compelling blend of fashion, quality and price offered in attractive stores in prime locations on premier commercial streets and in upscale shopping centers. The in-house design and production capabilities enable us to offer fresh designs at out Zara stores twice a week throughout the year.”

Zara’s target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Its target market is a young, educated one that likes fashion and is sensitive to fashion. Today, people around the world through various communication devices have more access to information about fashion. Therefore, fashion has become more globally standardized and Zara uses this to their advantage by offering the latest in apparel. For that reason, 80- 85% of the products that the company offers globally are relative standardized fashionable products. The international strategy of this fashion chan is excellent because it adopted a balanced mixture of standardization and customization. Figure 1 shows the Zara’s positioning according to the process and the customization.

3. Using a diagram explain Zara's value chain .Comment on the degree of fit among Zara's activities.

Zara value chain:

Design

Zara keeps a ‘live collection’ that is designed, manufactured, distributed, and sold almost as quickly as it’s customers’ fleeting taste.

Zara did not develop products to respond to a particular country’s requirements. 85-90% of the basic designs sold in Zara stores tend to be the same from country to country.

Sourcing

Zara sources from external suppliers with the help of purchasing offices. It also acquires fabric, inputs and finished products from suppliers in Spain, India, and Morocco and the Far-East. One half of the fabric purchased is “Gray”(not yet dyed), so designs can be quickly updated during a season

Production

Zara employs more than 14,000 people to make about 40% of its finished garments in any of its 20 fully owned factories.

It’s factories are heavily automated, specialized by garment type, and focused on the capital-intensive parts of the production process.

Zara built a network of about 450 workshops, which perform the labor intensive, scale intensive activity of sewing the garment pieces cut at the factories

Logistics:

All garments move into Zara’s massive distribution centre in La Coruna.

Zara has mobile tracking systems that dock hanging garments in the appropriate bar-coded area and carousels capable of handling 45,000 folded garments per hour.

There are twice weekly deliveries to every store triggered by real-time inventory data collected through a network of computer handsets feeding through the internet.

Marketing

Zara spends about 0.3% of its revenue on media advertising, compared with 3-4% of most specialty retailers.

Its advertising is limited to the start of the sales period at the end of each season. It relies on word of mouth to market its products.

Management adjusts pricing for international market, thereby making customers in foreign market bear the costs of shipping products from Spain.

Store operations:

It is made sure that the window displays and interior presentations convey the right image. At headquarters, designers wander the mock store space and test possible themes, color schemes and product presentation model window and store areas.

Store manager specifies the uniform choices twice a season from the current season’s collection.

Store managers and staff choose which merchandise to order, which to discontinue and which to propose.

All salespeople are equipped with wireless handheld organizers that let them punch in trends, customer comments and orders.

4. What is the basis of Zara's competitive advantage? Is it sustainable? Why/Why not?

COMPETITIVE ADVANTAGE:

Zara has created its competitive advantage through :

Operational effectiveness

Operational effectiveness refers to performing the same tasks better than rivals perform them. Everyone wants to be better, but the danger in operational effectiveness is in "sameness".At its heart Zara is building on a vertically integrated demand and supply chain, while most other textile chains rely on outsourcing and cheap labour in China. It enables company to short turnaround times and achieves greater flexibility, reducing stock to a minimum and diminishing fashion risk to the greatest possible extent.

VERTICAL INTEGRATION

One key to zara is its vertical integration. It is vertically integrated ,dealing with design, production, distribution and retailing. Zara manufactures about 60% of its stock in its own factories.JIT concepts and good information systems underlie the integration. Zara has a system with a production and distribution cycle of just 15 days , in contrast of months in other stores. It has permanent , not cyclical, design activity.

STORE MANAGEMENT

Store management is important. Customer service is vital. Zara has a policy of allowing customers to return garments – and the company will refund cash, regardless of how the customer paid originally. The shop itself must be refitted every 4 or 5 years – more frequently than competitors. The Zara brand is more than the product itself. It is the whole concept: the store; its distribution system and so on.

PROPERTY AND LOCATION

Zara has stated that finding good locations is more important to it that to its competitors – because it does not advertise. Location is key. It must locations with high pedestrian flow, and the window is vital in attracting customers. Inside the stores, it aims for a spacious environment – at least 400 or 500 square meters and often more – to display the merchandise.

Property is vital to Zara, but real estate market in different countries are difficult to deal with. Contracts and contract terms vary wildly. Considering the british situation – when Zara entered the property market it was sluggish, but now rents have shot up and acceptable sites are harder to find.

STRATEGIC GROUP:

The fashion market has changed considerably over the past few decades. Fashion products, which used to be an elite consumption product and now, are mass consumption market, are embodying what has been called “the democratization process of fashion. In the last years the fashion market has polarized. On the one hand there are producers and retailers of premium

products on a high price level offering luxury products. On the other hand the low price young fashion producers, often foreign international operating chains like the Swedish chain H&M (Hennes & Mauritz), the Dutch chain C&A (Clemens and August ), the Spanish chains Mango and Zara or the American chain Gap.

CORE COMPETENCIES:

Scanning: Zara designs all its products. It has almost 300 staff in its headquarters “commercial team” – comprising designers, market specialists and buyers. Together they produce designs for approximately 40,000 items per year from which about 10,000 are selected for production. Unlike their industry peers, these teams work both on next season’s designs and, simultaneously and continuously, also update the current season’s designs. The firm tries hard to encourage a collegial and dynamic atmosphere and design inspiration is sought from myriad global sources (e.g. trade fairs, discotheques, catwalks, magazines). Extensive feedback from the store network also forms an integral part of the design process.

Fast supply chain: All products pass through Zara’s major distribution center in La Coruña. This 5-storey, 50,000 m2 distribution centre employs some of the most sophisticated and up-to-date automated systems: many developed by Zara/Inditex staff with the support of aDanish supplier. With a workforce of 1200, the distribution center normally operates four days per week with the precise number of shifts depending on the volume of products that have to be distributed. Orders for each store are packed into separate boxes and racks (for hanging items) and are typically ready for shipment 8 hours after they have been received. Interestingly, although in June 2001 the distribution center was only operating at around 50% of its full capacity, October 2001 saw Inditex announce the construction of a new €100 million logistics center in Zaragoza:.In addition to the central distribution center, Zara has three other smaller warehouses in Brazil, Argentina, and Mexico in order to cope with distance and different seasons in the Southern Hemisphere. In 2001, the distribution center shipped 130 million pieces - i.e. about 400,000 pieces in a typical day. 75% of these shipments were to stores in Europe. Around 300,000 new items (SKUs or “stock keeping units”) are introduced every year (the 10,000 new product designs in typically five to six colors and five to seven sizes).Fashion garments represent around 80% of Zara’s products and the rest are more basic items. Contractors, using trucks bearing Zara’s name , pick up the merchandize at La Coruña and deliver it directly to Zara’s stores in Europe. The trucks run to published schedules (like a bus timetable). For example, an order for a store in The Netherlands catches the truck leaving La Coruña at 6a.m. on Thursday. It is also easy to schedule a pick up at a specific destination for transport back to La Coruña (for example a shipment from China to be picked up at the port of Rotterdam). Products shipped by air are flown from either the airport in La Coruña or the largerairport in Santiago. Typically, stores in Europe receive their orders in 24 hours, the United States in 48 hours and Japan in 48 to 72 hours. Speed is clearly an overriding concern; as Compared to similar companies in the industry, shipments at Zara are almost flawless - 98.9% accurate with less than 0.5% shrinkage.

IT systems: Here’s another interesting thing about Zara. Given the sophistication and level of technology integration into the firm’s business processes, you’d think that Inditex would far outspend rivals on tech. But as researchers Donald Sull and Sefano Turconi discovered,

“Whether measured by IT workers as a percentage of total employees or total spending as a percentage of sales, Zara’s IT expenditure is less than one-fourth the fashion industry average”. Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact, making sure that every dollar spend on tech has a payoff

Flexible production system:

Zara manufacture approximately 50% of its products in its own network of 22 Spanish factories (18 of which are located in and around the La Coruña complex) but use subcontractors for all sewing operations. These factories generally work a single shift and are managed as independent profit centers. The other half of its products are procured from 400 outside suppliers, 70% of which are in Europe, and most of the rest in Asia. Many of the European suppliers are based in Spain and Portugal, and Zara exploit this geographical proximity in order to ensure quick response to Zara orders – critical for fashion products. From Asia, Zara procure “basic” products and those for which the region has a clear cost or quality advantage. With its relatively large and stable base of orders, Zara is a preferred customer for almost all its suppliers.

5. What are the challenges Zara is currently facing and likely to face till 2015? What are your recommendations to Zara for dealing with these challenges?

Following are the threats to Zara's success:

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

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

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

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

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

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

Recommendations

1. See if setting up a production unit makes sense with respect to the operating expenses.

2. Zara can use Franchises for high risk and conservative countries.

3. Acquiring small chains may not be a good idea for Zara given its business model.

4. Spend more on Information Technology to remain in close touch with store and customers.

5. May need to spend more on advertisement

6. The best way for Zara to maintain their sustainable growth is to seek new opportunities in the apparel market. With changing consumer behaviors as a result of globalization, and U.S. department stores suffering, there are growth options available for specialty retailers like Zara.

Zara has the opportunity to be one of the trendiest/low priced retailers that America has seen recently. Zara should most likely develop a second central distribution center in the Americas to decrease logistics in order to deliver fashionable goods in a faster manner. Their second central distribution facility should be an expansion of one of their smaller distribution centers located in Argentina, Brazil or Mexico. The close proximity of the distribution center to the American market will allow them to effectively interpret the particular American fashion. The distribution center will also allow them to have additional funds to spend in other areas of business such as advertisements: a necessary feature to penetrate the American market.

7. Another market opportunity for Zara is to invest in Internet retailing especially directed toward the U.S. market. Though Zara is wary of overexposure, Americans like to be able to purchase all goods including apparel from the comfort of their own homes at any time they chose.

Therefore, since Zara is looking to expand in the U.S. market they could realize the potential for a direct Internet selling strategy. That form of direct marketing will reach more consumers faster and easier. Though it may be difficult to display all of Zara’s ever-changing fashions online, it may prove profitable for shoppers to purchase a moderate selection of trendy Zara pieces along with some of their staple basics.

8. Seek new market opportunities - Continue appealing to its current market segment – The best way for Zara to maintain their sustainable growth is to seek new opportunities in the apparel market. With changing consumer behaviors as a result of globalization, and U.S. department stores suffering, there are growth options available for specialty retailers like Zara.

9. Expansion in untapped market – Zara should expand in developing countries like india and china. Large population and changing socio –economic environment are the factors which make these countries more attractive to invest.

10. Invest in Internet retailing strategy Consider opening fewer stores and increase sales through internet sites developed market such as U.S

reaches a wide customer base with minimal investment minimizes inventory costs allows rapid introduction of new lines with minimal distribution requirements provides a vehicle for immediate customer feedback

11. A final recommendation for Zara is to offer specialized products for different geographic locations within the same city. Zara already does this to an extent for different international preferences but more specialization will increase consumer demand and will motivate them to visit more Zara locations within their own region. In some cities the company is possibly experiencing cannibalization because there are too many Zara stores that carry the same product within one city. Zara could differentiate its product from location to location to increase shopper traffic. This would work because shoppers would hear about new/different products (possibly from word of mouth or increased advertising) that another Zara store is carrying across the city and they would be intrigued to pay a visit. That way sales wouldn’t be stolen from their own Zara stores, decreasing cannibalization for the chain.