- Bargaining power of buyers:
- In the case of international clothing retailers, the individual buyer´s bargaining power is very little as they lack the ability to bargain for higher quality products at lower prices.
- Nevertheless, the existence of a large population of buyers demanding high quality products at affordable prices may help to keep retailers´ honesty (Investopedia.com).
- GENERIC STRATEGY OF ZARA ( Source: Michael Porter, 1985)
According to Porter, a business must adopt one of the four different “generic strategies” stated above to gain competitive advantage. If not choice is made between cost leadership and differentiation strategies the company would be stuck in the middle, thus lacking such advantage and obtaining a poor financial performance (Porter, 1980). In contrast, despite Zara has adopted both strategies, it became the world´s biggest clothing retailer in 2008 and actually, its competitors are unable to match their strong international positioning and competitive advantage (newspapers).
Zara began doing business under a low cost leadership strategy, in which costs are reduced through:
- Vertical integration of its supply chain and a Just in Time in-house production system that reduces inventories to almost zero. However, raw materials are acquired at low prices in foreign countries and labor-intensive activities (sewing) are outsourced to independent collaborators to lower costs.
- Centralized production and distribution allows flexibility and fast product turnover –fast fashion strategy- , thus responding faster to changes in fashion and selling more items at full price. Zara moves from identifying a trend to having clothes in store within 15 days, and additionally it reduces 15 to 20% of markdown merchandise – half the levels of competitors-.
- Low advertising expenses - Zara spends just 0.3% compared to competitors´ average of 3 to 4% - that make international expansion more economical.
- A cost-effective number of employees per store.
- Prices are fixed for each market and towards profit analysis, and these compare to competitor´s average.
Operational efficiency has lead to competitive advantage as Zara obtains higher profit margins than its competitors without adopting a low price strategy for its products. (Craig, 2004; Pirone, 2010; Ghemawat and Nueno, 2006).
By 1999 Zara adopted a differentiation strategy focused on selling international prestige of the brand instead quality, which differentiated them from traditional pricy boutiques selling ultimate fashion. Zara offers a premier look by copying from top designers instead creating its own designs –react rather than predict strategy-, while a prestigious and elegant image is projected through its unique stores, which are located in prime locations of major world´s cities to ensure visibility. Regal buildings with standardize but clean, elegant and discrete decoration help to project Zara´s image rather than advertising activities.
In addition, Zara also differentiates from its competitors by offering smaller quantities of more numerous styles – ten times more unique products than its competitors-. Artificial scarcity encourages customers to buy quickly because the less a product´s availability, the more desirable it becomes.
All in all, Zara has identified differences that are important to customers, and this has led to achieve sustainable competitive differentiation and positioning (Craig, 2004; Pirone, 2010; Ghemawat and Nueno, 2006; Dutta, 2003).
- ZARA´S VALUE CHAIN ANALYSIS (Source: Michael Porter, 1985)
Zara’s value chain is vertically integrated, geographically centralized and highly capital intensive in order to respond to shifting trends and consumer preferences faster than competitors do; thus obtaining a cost advantage over them – Zara’s value chain ability to obtain faster lead times than competitors allows to sell more products at full price, thus obtaining higher profit margins- (Craig, 2004; Turconi, 2008; Sunshilde, 2007).
- PRIMARY ACTIVITIES
- Zara acquires and storages in its warehouses fabric and finished products from external suppliers around the world. Design and production’s fast lead times are only possible when fabric is in stock (Dutta, 2008: Ghemawat, 2006).
- Expensive in-house product design which is compensated through higher margins. It allows to achieve fast lead times and to introduce new products more frequently through the season (Turconi, 2008).
- Flexible Just in Time manufacturing system located within a small radius of its headquarters in Spain (Ghemawat and Nueno, 2006).
- Capital intensive operations: Dying, patterning and finishing of gray fabric is done by its own subsidiary Comditel, while cutting is done in Zara’s own automated cutting factories (Pirone, 2010; Turconi, 2008; Ghemawat and Nueno, 2006).
- Labor intensive operations: Sewing and stitching is outsourced to workshops located near to Zara’s headquarters (Pirone, 2010; Turconi, 2008).
- Production in small batches -1% product failure compared to 10% industry average, and 18% product discount which is half the level of competitors- with more numerous styles -11,000 items compared to 2,000 to 4,000 of competitors- (Ghemawat and Nueno, 2006).
- Time sensitive items produced internally and basic items sourced from external suppliers and outsourced to developing countries to lower costs (Ghemawat and Nueno, 2006).
- All production is distributed through Zara’s centralized distribution centers located in Spain, in which items do not remain in stock more than 72 hours, thus keeping minimum inventory levels (Gallaugher, 2008; Ghemawat and Nueno, 2006).
- Clothes are shipped to stores twice a week, and they arrive at stores within 48 hours maximum via third party delivery services (Ghemawat, 2006; Pirone, 2010; Dutta, 2003).
- Customer need identification through high-frequency information collection and shared situation awareness – customer feedback, sales reports, fashion shows, magazines, etc.- (Dutta, 2003; Ghemawat, 2006; Turconi, 2008; Craig, 2004; Gallaugher, 2008).
- Generation of sales through its own stores offering limited run items –scarcity-, more numerous styles and a rapid product turnover (Gallaugher, 2008; Ghemawat, 2006; Pirone, 2010).
- Minimum investments on traditional advertising – 0.3%-. Instead, Zara advertises through glamorous stores located in prime locations (Gallaugher, 2008; Ghemawat, 2006; Turconi, 2008; Pearson, 2011; Craig, 2004) .
- SUPPORT ACTIVITIES
- See Organizational Culture for references to managerial infrastructure*
- Human Resource Management
- Personnel are recruited by store managers. Selection criteria include ability to work in teams (Turconi, 2008).
- On-the-job training is provided and there are opportunities for promotion (Ghemawat and Bueno, 2006).
- 90% of store managers are promoted from inside (Ghemawat and Bueno, 2006)
- Managers receive variable compensations based on their store’s performance and individual bonuses are linked to the success of teams (Gallaugher, 2008; Ghemawat, 2006) .
- Information Technologies connect headquarters with supply, production and sales activities, and support efficient communication infrastructures (Ghemawat, 2006).
- Information Systems allow information’s collection and analysis of consumer needs, market trends and sales performance, which support product decision making – design, quantities, prices, etc- (Dutta, 2003; Pearson, 2011; Gallaugher, 2008; Sunshilde, 2007; Craig, 2004) .
- Fabric and dyes are purchased in advance from its own subsidiary –Comditel-, as well as from the Far East, India, China and Morocco (Dutta, 2003; Pirone, 2010; Gallaugher, 2006).
- Purchased fabrics are un-dyed (gray) to provide flexibility – the same fabric can be turned into different garments according to immediate season needs – (Dutta, 2003) .
- TELESCOPIC OBSERVATIONS ANALYSIS (Source: Panagiotou, 2005)
6.1 METHODOLOGY
Table 1: Telescopic observations model
Table 2: Description of variables
Table 3: Matrix used to integrate analysis information.
6.2 TELESCOPIC OBSERVATIONS, SWOT and PEST INTEGRATED ANALYSIS.
Source: Dutta, 2003; Craig, 2004; Ghemawat and Nueno, 2006; Sunshilde, 2007; Turconi, 2008; Gallaugher, 2008; Pirone, 2010; and Pearson, 2011.
- ORGANISATIONAL CULTURE MODEL (Gerry Johnson, 1992)
Analysts assert that Zara´s real strength is its well developed, autonomous and flexible corporate culture (Craig, 2004; Pearson, 2011). Its culture is very appropriate for the fast fashion industry; it supports their communication strategy which is necessary to adapt to fast environmental changes of fashion trends.
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Mission: Zara is committed to satisfy the desires of its customers through continuous innovation in order to improve their shopping experience. Zara promises its customers to provide new and affordable designs with quality materials, and always following the latest fashion trends (Inditex Annual Report).
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Values: freedom, perfectionism, responsibility, rapidness, flexibility and respect to others and to its management team (Craig, 2004).
- Standardize reporting systems focused on sales growth, EBIT and ROCE to control store performance (Ghemawat and Nueno, 2006).
- Standardize reporting systems between managers that enables information´s constant flow (Craig, 2004; Turconi, 2008).
- Rulebooks: Internal Code of Conduct and Internal Guidelines (Inditex.com).
- Organizational Structures.
- The organizational design is very flat and there is also a flat managerial hierarchy. Managers, designers, and shop assistants work in teams to facilitate the passing of information and communications from customer to designer teams. Corporate aristocracy is avoided and reporting lines are clear. (Ghemawat and Nueno, 2006; Turconi, 2008).
Figure: Reporting lines and hierarchies within Zara (Source: Turconi, 2008)
Figure: Decision making and power structures (Source: Ghemawat and Nueno, 2006; Turconi, 2008)
- Zara has open facilities and avoids enclosed offices to facilitate open discussion and communication´s flow, ensuring that people feels free to speak. (Turconi, 2008).
- Each night after closing, store managers and shop assistants turn into a single team to scan unsold items (Turconi, 2008)
- The first sales day, all Zara´s members - including regional managers- help the sales staff in stores to promote a good atmosphere of camaraderie (Turconi, 2008).
- Zara´s culture encourages people to talk to each other and peers use to praise each other (Dutta, 2003; Turconi, 2008).
- Zara encourages decision making and wrong decisions are not punished (Pearson, 2011).
- Competition across teams is also encouraged, and team members are switched regularly to bring new ideas. (Turconi, 2008)
Table: Zara’s Corporate Social Responsibility (Source: Inditex.com)
- RECOMMENDATIONS
Zara’s winning business formula brought company to the world’s leading position in the clothing industry. However, further recommendations may help to improve its current business multi-strategy.
- In first place, due to international expansion Zara should consider to slightly decentralize its vertically integrated production and distribution chains in order to remain cost-effective. Therefore, the company should open plants in the American and Asiatic continents in order to benefit itself of lower production costs, while it would also avoid risks derivate of future rising international shipping costs.
- In second place, the company should promote and reinforce its e-commerce business model if they want to remain competitive in the future -online retailers have the ability to shape traditional retailers’ competitiveness; while due to improvements in e-shopping methods, people tend to acquire products online with more frequency-.
- In regards to marketing issues, Zara may consider to adopt similar strategies to the ones employed by H&M and other brands of doing collaborations with famous designers. It would slightly increment the marketing budget, but we believe it would report additional benefits.
- Finally, if several stores are located within the same high street –as it is the case of London’s Oxford Street- Zara should offer a different range of products in each one of these stores, aiming to motivate customers to go to visit each store, and thus decreasing a “cannibalism” competitive phenomenon among the several chain’s shops.
Zara’s business strategy is very successful overall, it has been copied by many other businesses and it got them to the place they are in now.
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