Analysis of Zara's market position. ZARA is the main success factor of Inditex's growth and plays the leading role of the group's sales and profit. For this reason, we will go into details with the regard to ZARAs success factors or rather its strategic

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1 ZARA SWOT analysis

ZARA is the main success factor of Inditex's growth and plays the leading role of the group's sales and profit. For this reason, we will go into details with the regard to ZARA´s success factors or rather its strategic advantages, before we start to analyse ZARA´s issues concerning its supply chain and its possible opportunities and threats in the future.

ZARA is not has not only a different market positioning as to its direct competitors (see figure 1.1) but also has a unique business model which is one of the world´s most successful. ZARA is positioned more fashionable compare to its competitors but surprisingly with a relatively low price behaviour. Unlike H&M or GAP chasing low production costs by outsourcing its complete production, ZARA produces nearly half its merchandise in-house. Rather than utilize its factory´s capacities to maximize their output, the company leaves some capacity left on purpose. Instead of take the benefits of economies of scale, the retail giant does manufacturing and distributing in small batches. Not relying on extern service providers, ZARA manages design, distributing and logistic operations by itself. It leaves even empty shelves in its retail shops allows occasional stock-outs and waives the advertising completely. In short, ZARA´s business model defies the past and current conventional practised supply chain operations. Even because of that some of Zara's practices concerning its supply chain activities seem to be questionable.

  1. Strategic advantages (Strength)

As already mentioned, Zara´s strategy seems first to be a disadvantage regarding to their competitors. Zara´s most interesting and at the same similar successful competitor is H&M. Both companies are European based, are leading fashion retails in the middle-low price segment and have a strong and global expansion strategy. The difference is that H&M outsources all of its production, spends more money on advertising and is price-orientated. However, the figures are clear: In April 2006, Zara overtook H&M by posting $8.15 billion in sales in 2005, compared to H&M’s $7.87 billion. Due to this fact we have to be aware of ZARA´s competitive advantages over traditional operating retailers what makes this company so successful. The figure below shows the financial differences between the companies in 2008.

Vertical integration

The company´s business model is characterized by a high level of vertical integration over all aspects of the fashion process as design, sourcing, manufacturing, logistics and distribution by managing its own stores, too. It is the ZARA´s most powerful strategic advantage and helped the company to develop a fast fashion system. Zara produces 60% of its own merchandise in-house what enables the company to be flexible in the diversity, amount and frequency of the new merchandise. Furthermore, 85% of the production is done within the season. This makes it possible to react more speedily and flexibly to current fashion trends. Where traditional retailers need 6 months to react, by placing the orders to overseas manufacturers in advance, ZARA is able to provide merchandise within 3 weeks. Moreover, traditional companies are designing and developing before the fabric is procured. Zara is fabric driven and is doing the whole process the other way round. Designs are developed with already owed fabrics what removes the waiting process for long fabric procurement. The figure below shows ZARA´s product developing process compare to traditional retailers.

In-house production

Furthermore, Zara´s in-house production causes a quick product turnover and thereby increases a rapid frequency of customer´s shopping behaviour. Rather than utilize its factory´s capacities to maximize their output, the company leaves some capacity left on purpose. By reducing the quantity of the single merchandise manufactured and creates a kind of scarcity what makes the products more desirable. Instead of take the benefits of economies of scale, the retail giant manufactures and distributes in small batches. The achieved benefit of lower quantities is that if a style does not find its customer, there is not much to be discounted. ZARA´s customers are aware of the fact that new products are introduced every two weeks and that they do not keep any further products in stock. Therefore, Zara’s sells more merchandise at full price and thus less lose of earnings of markdown merchandise (only 15 – 20%) compare to a traditional retailer (30 – 35%).

Centralized distribution facility

A further competitive advantage is ZARA´s centralized distribution facility helping the fashion giant to minimize the lead time of their merchandise. Internal and external produced items go through the distribution centre. Because of the closely based distribution centres (moves 2.5 million items per week) in Arteixo and Zaragoza, to the factories in La Coruna, the transportation costs and time can be kept at a low. In the distribution centre the merchandise are checked and directly shipped without any storage. To increase the delivery processing even more, the shipments are scheduled by time zones and shipped by air or land. Because of the short lead times and small batches, the company can take the risk for a seasonal downturn but also benefits by a possible success of this product. Through its agile inventory management, Zara is enabling to maximize the hit rate concerning a successful product and minimizing the costs of error investments, for example during unseasonably hot winters, to contain profit slashing markdowns. So Zara´s fast production chain excludes a huge amount of risks concerning to fashion forecasting and helps to reduce the Bullwhip effect. Furthermore, Zara´s short lead times for merchandise reducing the working capital requirements and makes more liquid assets available.

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Hybrid strategy

Companies operating in the fashion industry with mixed portfolio of products and markets must be aware of the fact that there always will be some products where demand is stable and predictable and some where it is exactly the opposite. H&M for example is using a lean strategy to with a high volume turnover and compare to it, with a low variety of products in a predictable environment using forecasting. Instead, Zara is using a combination of lean and agile for its supply chain – a so called hybrid strategy. Nearly 40% of standard ...

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