Zara1 101017144029-phpapp02

Christian Deing

Simon Luyken

Julika Reusse

Sebastian Stratmann

Anna Worster

1. What are the sources of Zara’s competitive advantage?

What is unique compared to H&M, The Gap and Benetton?

competitive advantage

Competitive advantage is defined as:

• a performance feature, which is silhouetted against othercompetitors

• has to be tenable and economic

• is able to reach dimensions like price, time and quality, e.g.cost advantage or differentation advantage

INDITEX

INDITEX

Brand Number of stores

ZARA 1501

Bershka 573

Pull and Bear 567

Massimo Dutti 461

Stradivarius 444

Oysho 363

ZARA Home 237

Uterqüe 24

Total 4.170

Quelle: www.inditex.com

• 1501 stores in 71 countries in 2008

• Employees 25.000

• Employed €1,050 million of the company´s capital in 200172% of the total capital of INDITEX

•Revenue of €6,264 million in 200767% of the total of INDITEX

ZARA

• Headquarter in Arteixo, outside La Coruna

• Manufacturing most of the fashion-sensitive products internally

• ZARA´s designers produce about 11.000 distinct items during the year

competitors: 2000-4000 items

• Products are shipped to well-located stores twice a week

• Finished goods in stores within four to five weeks (entirely new designs)

in two weeks for modifications of existing products

ZARA

Competitors

H&M The GAP Benetton

stores 1.700 3.100 5.500

countries 33 19 120

employees 68.000 152.000 8.000

designers 100 n.s. 300

revenue €9.6 billion $15.8 billion €2.085 billion

⇒Competitive advantage

-vertical integration⇒Short lead times

-all production outsourced⇒Long lead times

- engages many designers⇒Originate designs in a few weeks

-60 % fewer designers

- one distribution center⇒Better survey over inventory⇒ low costs

-a distribution center in each country⇒High costs

- expand very fast(stores in 39 countries)

-expand very slow(stores in 8 countries)

- stores as a „face to the world“ - no focus on store makeups

Comparison: ZARA vs. H&M

Comparison: ZARA vs. Benetton


- three different modes for expansion:1.Franchise systems2.Company owned stores3.Joint Ventures

-one main mode for expansion:

1. Licensees

Comparison: ZARA vs. GAP


- vertical integration⇒Short lead times

- outsourced all production⇒Long lead times

- fast expansion in 39countries

- slow expansion in 5countries

- freshness (fast production and distribution to offer the latest

fashion)

-Change 75 % of the merchandise on display every 3 or 4 weeks

⇒The frequency of customer visits rises

⇒Scarcity

-few advertisement

⇒Customers need to visit stores to get the newest fashion

⇒Save costs for publicity

What‘s unique about ZARA?

Case Study 2: ZARA: Fast Fashion, Group 7 1

ZARA: Fast Fashion

Case Study 2:

Group 7:Matthias Freese, Thorsten HiedelsKirstin Jansen, Sabine KürtenAleksandra Ludwa, Jennifer MontagJohanna v. d. Asseburg


Table of contents

1 Introduction

2 Zara’s Business System

3 Pros and cons of Zara’s activity architecture with regard to The Gap, H&M and Benetton and in light of the changing environment


- Inditex: - umbrella group of Zara and 5 other apparel chains- founded in 1963 in Galicia, Spain

- Zara:- headquarters in Arteixo, Spain- till 2002: 507 stores in 42 countries- position: “medium quality fashion clothing at affordable

prices“- competitors: The Gap, H&M, Benetton

1 Introduction


2 Zara‘s business system

Activity circle:


Design

- creative teams

- different sources for information: store managers, consumption information system, TV, internet, industry publications, film, trend spotters, ready-to-wear fashion shows

- first sketches about nine months before start of a season

- presentation in certain key stores

- determined prices


Sourcing and Manufacturing

- assistance of purchasing offices in Barcelona and Hong Kong

- more than 200 external suppliers

- 60% of the clothes produced externally, 40% internally

- 450 workshops where garments are sewed


Distribution

- own distribution center in Arteixo

- satellite center in Argentina, Brazil and Mexico

- center works on a dual-shift basis

- equipped with mobile tracking system

- delivery upon Europe takes about 24-36 hours, outside Europe 24-48 hours

- scheduled shipments by time zones

- establishment of a second distribution center at Zaragoza in 2003


Retailing

- consists of merchandising and store operations

- stores placed in premier shopping streets and centers

- set high value on presentation of store window displays: prototypes at headquarters

- continuous training on their personnel

- very low advertising expenditures, no fashion shows

- main retailing-tactic: create a sense of scarcity

- aim: reduce inventories at marked-down prices


3 Pros and cons of Zara‘s activity architecture

- most significant advantage: reduced cycle time due to the implementation of the quick response system



- different product precommitement:



Design:

+ store managers gather information directly at point of sale

+ design department organized in flat structure

- Zara has more staff employed although it is smaller than H&Mhigher labor costs, but lower risk of fashion miss (as H&M)

+ continuous tracking of customer preferencesnumerous variations of items

+ presentation of items in key storesreduced failure rates



Sourcing and Manufacturing:

+ in-house production of 40% of the garmentsbetter control of most fashionable clothesshort lead times

+ offers always the latest fashion trends

+ change of MFA: no import quotas and reduced tariffsno more barriers for outsourcing production, but larger

benefits for H&M

- increasing complexity of cross-border intermediarieshigher coordination costs



Distribution:

+ cost savings by centralized distribution center

- capacity problems with only one center when Zara keeps expanding

establishment of second distribution center

- H&M: closer to the market by decentralized distribution center in each country

does not need scheduled shipments by time zones



Retailing:

+ flexibility of operating in the best spots by using joint-ventures

+ standardized offering: 85%-90% basic itemssatisfaction of many markets with little efforteven easier in the future as tastes assimilate

+ standardization of store window displaysconsistent imagelow costsbut: ignorance of individual preferences

- low advertising expendituresmissing of the chance to gain more customers no communication of social responsibility as Benetton does


Thank you very much for your attention!

Harvard Business Case Study “ZARA: Fast Fashion”

Question 3:Evaluate ZARA’s global strategy in light of the McKinsey recommendations in the assigned reading1. How does it compare?

1: Incandela, D.; McLaughlin, K.L.; Smith Shi, C. (1999): Retailers to the World, in: The McKinsey Quarterly, Vol. 3, pp. 84-97.

Agenda

• Introduction to ZARA’s international operations• Recommendations by McKinsey• Evaluative comparison• Summary of conclusions and recommendations

Agenda


HBS Case Study “ZARA”, Gruppe 8 44

Introduction to ZARA’s international operations

Source: McKinsey (1999)

largest and most internationalized chain of Inditex282 stores in 32 countries outside Spain (in the end of 2001)expansion began in 1988 in Oporto, Portugalrapid internationalization between 1998-1999: 16 countries

ZARA is expanding very rapidly in comparison to other retailers like H&M,

who added only 8 countries in 20 years

Agenda



Five approaches to launch a self-reinforcing cycle of benefits propelled by access, scale and expertise

1. Access3. Expertise

2. Scale

1

2 Get comfortable partnering – access to new distribution systems and brand equity

Choose your sliver - decisions about which sliver to own, which to control without owning and which to off-load are necessary

3 Invest in intangible assets - the new source of competitive advantage• brands and reputation• technology and know how• talent and skills

4 Keep expenses and capital require-ments low – by centralization, restructuring and outsourcing

5 Exploit opportunities to arbitrage –by value proposition arbitrage and/or cross-border arbitrage

The “virtuous circle”


Agenda


HBS Case Study “ZARA”, Gruppe 8 8HBS Case Study “ZARA”, Gruppe 8 8

1McKinsey recommends retailers to optimize the value chain by focusing on slivers

Companies have to decide which slivers of the value chain to own, partly-own or to off-load

Reason: • It is not always efficient to own all parts of the value chain• Some processes have very high outsourcing potential

Outsourcing decision drivers:

Cash Flow Capital Requirements Risk Competitive Advantage


HBS Case Study “ZARA”, Gruppe 8 9HBS Case Study “ZARA”, Gruppe 8 9

Selected Slivers of ZARA’s Value Chain

Slivers and Processes

Design:All design related processes are fullfilled inside the company.

Sourcing:All sourcing activities are done externally.

1

Manufacturing:Basic-items are manufactured in Asia. Fashion items are more risky and therefore produced by ZARA‘s fully owned factories

Logistics:Logistics are completely outsourced. About 75% are delivered by truck. The remeining ones are manily organized by airmal.

Sales:ZARA delegated store management espacially in smaller and riskier countries by using franchising. Joint Ventures are used if prime shopping space is not avaiable for ownership.

Distribution:All distribution processes are supervised and executed from one central and fully-owned distribution center in Spain.

ZARA decided carefully on which slivers to concentrate and which to off-loadTherefore ZARA succeeded in implementing McKinsey’s advice concerning the value chain

In ZARA’s Responsibility

In ZARA’s Responsibility

Fully outsourcedPartly outsourced

Partly outsourced

Fully outsourced


McKinsey recommends to establish partnerships to be successful internationally

2

Build partnerships


• To enhance the distribution system

• To get leads

• To build brand equity in new markets

Remain in control of these alliances !


ZARA has established controlled partnerships in production and downstream activities

2

ZARA has successfully implemented McKinsey’s recommendations regarding partnerships

Sales

In smaller and riskier countries, ZARA usesFranchise Systems

Joint Ventures are used in mature and more established markets like for example Germany

Manufacturing

ZARA has long-term relations with suppliers and subcontractors

CONTROL

CONTROL


McKinsey recommends the investment in intangible assets as the new source of competitive advantage

3

Brand and reputation IT, technology, skills People and talents


• Distinct value proposition with adjustments to region/country specific differences

• Personality of the brand must appeal to target group and be reinforced at every contact point

• Total visibility of the brand through all appropriate communication channels

• Invest in proprietary technology to- improve customer access- raise service levels- increase business

efficiency

• Scarcity of qualified managers challenges HR policies

• Build up talent pools in several stages


Regarding the investment in intangible assets, ZARA focuses on innovative technologies

3

Brand and reputation IT, technology, skills People and talents

• adjustment of marketing mix to country individual needs- experience gained in

flagship store- price according to WTP- slightly different portfolio

• concentration on store image

high brand awareness• comparably little

investments in advertising, esp. in foreign markets

• strong investment in technology since 1990- innovative JIT

manufacturing system (co-developed with Toyota)

- advanced telecommunication system

- sophisticated consumption information system

ZARA almost meets the McKinsey recommendations w.r.t. intangiblesZARA should invest more in international brand power using various media channelsand put stronger emphasis on international recruitment

• incentive-intense payment model for store managers- variable parts based on

store performance • low hierarchies

- store managers as entrepreneurs

• advanced training program• But: scarcity of store

managers is main barrier to further expansion- 90% recruited from within


McKinsey recommends retailers to strive to be “expense and capital light”

4

Keep expenses and capital requirements low


Realize greater purchasing benefits and margins by reducing capital commitment and costs

Manage a low need for capital by franchising or renting rather than owning stores

Decide about global sourcing activities and IT investments

Centralize overlapping category groups, e.g. finance functions


ZARA has taken numerous measures to keep expenses and capital requirements low

4

ZARA strategy efficiency control corresponds to McKinsey’s advicesZARA successfully controls its costs, realizing beneficial impact on operational results

• integrated just-in-time manufacturing system,central distribution center with direct shipping to the stores

short lead and cycle times, low storage costs

Operation Impact

low failure rates,reach planned sales

low production and selling prices, but withexpected hold up margins

low financial strain

flexibility and shorter communication lines

• intense market research incl. interviews withstore managers and product development

• long-term leases instead of owning• different business types to go global

(own stores, joint ventures and franchising)

• flat hierarchies, e.g. design department• main organization by divisions

(women, men and children)

• production of price-sensitive items outsourced • minimum amount of advertising• lean administrative organization


McKinsey recommends the exploitation of opportunities to arbitrage in order to reduce costs

5

ZARA is implementing the suggestions of the McKinsey concept

Cross-border arbitrage Value proposition arbitrage

• focus on price level whenentering a new market

• forecasting of prices on local market prices not on own costs

• entering markets with a higher preference for apparel (Italy)

high rate of absorptionof buying power

• no real differentiation among productportfolio across the different countries

• 85%-90% of products are common • no design of products for specificpreferences of only one country

• standardized reporting systems• same business model in similar typesof countries

amortization of centralized concepts by rolling them outacross many markets


Optimal expansion path depends on starting situationMcKinsey strategic control map

(1)Incumbents

(2)Experts

(3)Integrators

low

high

Performance

small large

Size

(4)Super-

leaguers

Initial situation… …determines global strategy

1

4

3

2

Address performance problems first. Then grow by a) investing in intangibles/ load-off unattractive value chain parts and/or b) penetrating home market and global expansion

Expand the business into new markets through organic growth or acquisitions; skills transfer and synergies are crucial success factors

Stabilize the successful business concept

Invest in intangible assets and take further means to increase performance



ZARA heavily invested in technology to increase profitability before starting major global expansion

ZARA’s expansion path

(1)Incumbents

(2)Experts

(3)Integrators

low

high

Performance

small large

Size

(4)Super-

leaguers

ZARA has gone the recommended global expansion path,starting from an incumbent’s position

• high investments in intangible assets (esp. IT) in the 1990s, i.e. beforemajor phase of international expansion

• having a strong performance, ZARA grows in size on a global scale, opening 16 stores from 1998-1999(282 stores in 32 countries today)

Agenda



ZARA almost completely lives up to McKinsey’s requirements; few improvements to be realized

1

2 Get comfortable partnering

Choose your sliver

3

5 Exploit opportunities to arbitrage

Approaches recommended by McKinsey


Invest in intangible assets

4 Keep capital requirements low

Further improvements to be addressed by ZARA in the future

• increase international investments in advertising

• increase international recruitment efforts

Thank you for your attention.

Case Study Zara

“What do you think of Zara’s past international growth strategy? Evaluate, in particular, its strategy for market

selection, its mode of entry, and its marketing approach. What is the best way to grow Zara now?“

Market Entry

Market Selection

International Growth Strategy

Introduction – What is ZARA?

Marketing Approach

Best way to grow Zara now

21.11.2008

AgendaAgenda

IntroductionWhat is ZARA?

Case Study ZARA: Fast Fashion 21.11.2008 3

Foundation of Inditex (Industria de Diseno

Textil) by Amancio Ortega in 1975

ZARA is one of the six apparel chains of Inditex(completely independent and organized

individually)

ZARA is Inditex’s most important chain

ZARA has over 500 stores in 30 countries

Fashion Collection changes twice a year (autumn/winter & spring/summer)

Benetton, H&M and the GAP are their most

important global competitors

Unique selling proposition is due to short cycle

times

International Growth StrategyMarket Selection - Overview


Waterfall Strategy

Market Selection Process:

Countries which are similar to ZARA’s home market

Macro Analysis

Micro Analysis

Preconditions for entering:

Minimum level of economic

development

Low entry barriers

Oil-Stain Strategy

International Growth StrategyMarket Selection - Evaluation


Enough time to explore markets from the outside

Test if their business model can be applied to foreign markets (to reduce risk)

No danger of loosing control

Possibility to meet the special cultural demands

Risk of competitors copying ZARA‘sbusiness model and entering markets before ZARA is able to

-> Increasing market barriers

High headquarter costs for only a few shops in the beginning

Time-and-money consuming process

Lately, ZARA decided to grow faster, enabled through their bigger experience and equity which is a step in the right direction

International Growth StrategyMarket Entry - Overview


International Growth StrategyMarket Entry - Evaluation


High level of influence over the behavior of the employeesAbility to control the Brand presentation at POS

Opportunity to generate fast growth without needing a lot of equityOvercoming cultural barriers

Sharing core competencesMore control of the actions taken

Require many resources such as high capital commitment

Lack of control -> Image lossesDependency on their partner

Dependency on a partner -> need of a trust base

Different methods enable ZARA to meet the demand of every country

Company-owned stores

Franchising

Joint Ventures

International Growth StrategyMarketing Approach - Overview


International Growth StrategyMarketing Approach - Evaluation


International Growth StrategyBest Way to grow ZARA now (1/2)


ZARA needs to be more present in more

countries worldwide to strengthen the brand name and their significance

Growth potential: Russia, East & North Europe, Italy, Australia, South Africa

Exploration of new Markets in a short time period -> Danger of competitors growing

Increase the amount of shops rapidly &

drastically to play a greater role in the

people‘s mind

International Growth StrategyBest Way to grow ZARA now (2/2)


ZARA has big growth potential but they need to find the optimal balance between risk and innovative methods to address their customers

People who bought online any of the following products or services during the last three months

Establish a department whose task is

to visit the franchise stores

Use E-Commerce

Bigger focus on marketing (e.g.

internet, (TV) commercial, billboards)

Thank you for your attention!

Questions?

Education

Zara1 101017144029-phpapp02