Zara: Case Write-up

MANA 6240-702
Aaron Walton
10/8/14

Zaras Generic Business Strategy: Differentiated Focus

Zara pursues differentiation through its choice of product design and
presentation. Where its competitors push real clothes, lower prices or
leaving store management to licensees, Zara places emphasis on
fashionable clothes meant to be worn just 9 10 times, sold at competitive
prices and in meticulously planned stores for the purposes of instilling its
brand. Behind the scenes, Zaras focus becomes quite apparent. Whereas
its competitors are content to continue in the vertical structure of commodity
chains, Zara has been successful in its operation as a producer-driven chain.
Response to External Environment
Three main environmental threats are apparent in the retail apparel market.
First, the market is buyer-driven. Second, market operations are dominated
by the dynamic of strategic overseas factory brokers. Third, the market is in
a constant state of an ever-increasing pace to outrun commoditization.
Zaras business strategy responds to each of these threats by seeing them
through three different lenses, which turn them into opportunities. The first
lens is one of design. The second lens is the vertical integration of its
manufacturing process. The third lens, and most important, is the lens of a
producer-driven value chain.
Evidence of External Environment Response in Value Chain
Lens 1: Design
Top management stressed that instead of being run by maestros, the
design organization was very flat and focused on careful interpretation
of catwalk trends suitable for the mass market

The process of adapting to trends and differences across markets was

more evolutionary and placed greater reliance on high-frequency
information.
conversations with store managers were as important in this regard
as the sales data captured by Zaras IT system.
Time permitting, very limited volumes of new items were prepared
and presented in certain key stores and produced on a larger scale
only if consumer reactions were unambiguously positive.
Lens 2: Vertical Integration
Fashion sourcing: purchasing offices in Barcelona and Hong Kong
Fabric processing: much of this volume was funneled through
Comditel, a 100%-owned subsidiary of Inditex
Apparel Manufacturing: most fashionable done close by with more
basic/price-sensitive outsourced to Asia. Internal manufacture was
the primary responsibility of 20 fully owned factories cut
garments were sent out to about 450 workshops As subcontractors,
they generally had long-term relations with Zara.
Distribution: Zara had its own centralized distribution system.
Lens 3: Producer-driven Value Chain
Emphasis: using backward vertical integration to be a very quick
fashion follower
Production: limited and inventories strictly controlled even if that
meant leaving demand unsatisfied
Merchandising: emphasized broad, rapidly changing product
lines
Store Operations: we want our customers to understand that if they
like something, they must buy it now, because it wont be in the shops
the following week. It is all about creating a climate of scarcity and
opportunity.

Zaras Core Competence

Like Toyota, and even assisted by them, Zara implemented a just-in-time
apparel delivery system, but unlike Toyota they were able to truncate it with
one step further to create even greater added value. This step could be
called the too-slow system. As previously mentioned, creating a climate
of scarcity and opportunity was what drove sells.
Effect of Business Model on Operating Economics
The effects of Zaras design focused, vertically integrated and producer
driven value chain business model on operating economics occurs in two
major ways. First, the design focused aspect encourages a flat management
structure, substantially decreasing its selling, general and administrative
expenses. By comparison, the case mentions World Co. of Japan as the only
other apparel retailer in the world with comparable cycle times, leading to
similar gross margins. Even so, World Co. is unable to obtain net margins
greater than 2%; whereas, Zara is hovering around 10%. This is due largely
to Zara spending half as much on SG&A as World Co. The second is how the
vertically integrated and producer-driven value chain fosters a climate of
scarcity and opportunity. While this drives sales and achieves a competitive
gross margin, it also leads to Zara spending less than any of its competitors
to maintain the operation of this climate. It is by this distinguishing factor
that this component of Zaras business model is able to result in a significant
added value to the firm.

Why Zara Might Fail

By expanding too rapidly, Zara may begin to lose its ability to continue to
benefit from its core competency by over-extending its supply lines. In
addition, by spreading itself too thin across three continents at once may
cause the extreme, meticulous branding presentation to lose quality, luster
and succumb to generalization. Finally, it seems that the U.S. and Asia
present a different set, quite different in the case of the U.S., than Europe in
terms of market dynamics. Without fully understanding how to grasp the
motivations behind what drives consumers in these markets to pull the
trigger on apparel purchases will most definitely lead to failure.
Sustainability of Competitive Advantage

By defining its competitive advantage as the ability to create a climate of

scarcity and opportunity; Zaras ability to sustain this is moderate to high.
The reason for the range is due to the fact that the just-in-time system can
be adopted by one of its competitors and furthermore truncated with a socalled too-slow system to create this same climate, and the chances of this
happening are moderate. By moderate, it is possible that a competitor could
do this. However, the likelihood of a competitor doing this is low, which in
turn creates a high level of sustainability for Zara. Even so, Zaras greatest
threat could be construed to be the possibility of one of its competitors
partnering with a producer-driven retail chain in either the U.S. or Asia and
take advantage of its distribution system. That being said, this competitor
would also have to upgrade its manufacturing as well. In the mean time,
Zara might expand its manufacturing and distribution centers to the U.S. and
Asia along with its manufacturing to counter. Evidence and planning of this
exists in Zaras further expansion and reliance on its Hong Kong operations.
Recommended Adjustments
1) Forget the U.S. Market Both Benetton and H&M have tried and failed,
not to mention the still existing retailing overcapacity, less fashionforward market state and considerable regional variations.
2) Focus on Italy This market is far from in the bag or secure enough to
not require a significant amount of attention. Just because Italians
spend more on clothes than the rest of Europe doesnt mean that Zara
will automatically benefit by simply entering it. Due to the substantial
investment required to enter the Italian market, Zara will not benefit
unless this outlay can reap a profit. Italy has shown its favor for
independent stores which account for a 61% market share.
3) Explore cautious expansion into Asia Through significant capital
expenditures on distribution and production and doubling down on the
Hong Kong presence, this may lead to a greater understanding of local
market, current trends and cultural navigation. The thought would be
for Zara to strengthen its ability to overcome the already existing
competition and barriers to entry found there. Furthermore, keeping a
look out for potential joint-ventures such as that developed in Italy
might help in reducing the level of cautiousness required without.