Introduction

Zara is a fashion retailer established in 1975 by the Spanish group Inditex founded by Amancio Ortega Gaona. Inditex runs over more than 5400 stores worldwide and owns brands other than Zara such as Massimo Dutti, Breshka, Oysho, Pull and Bear and Stradivarius. Inditex headquarters are located close to La Corua in northwestern of Spain. The old shipbuilding town of La Corua seems an unlikely home to a tech-charged innovator in the fashion industry. But thats where the Inditex Corporation built its headquarter called The Cube.

Zaras Business Model and Its Success Factors

Zara is the most profitable (75% of Inditex total profit) brand of Inditex with 2,044.7 million euros in 2000. Zara has developed a business model based on following criteria: 1. 2. 3. 4. 5. Short lead-time Scarce supply Large varieties of style and colors Limited Advertising Cost High turnover

The brand succeeds to make moderate prices with a large choice of new clothes every time. Zaras short lead-time system depends on continuous exchange of information throughout every part of Zara's closed loop feedback system (Figure 1). This chain goes from customers to store managers, then to market specialists and designers, then to production staff, from buyers to subcontractors, from warehouse managers to distributors, and so on. Unlike other retailers Zara's organization, operational procedures, and even its office layouts are all designed to make information transfer easy. Zara's employs 200 designers who sit in the center of production center. Zara produces about 11,000 styles each year- perhaps five times as many as competitors. This allows Zara to supply its stores with new styles every two weeks. The store specialists work in the same room as designers and review store sales and speak with store managers to get their feedback.


Figure 1

Zaras production center consists of three spacious halls: women's clothing lines, men's and children's. Unlike most companies, which try to excise redundant labor to cut costs, Zara makes a point of running three parallel, but operationally distinct, product families. Accordingly, separate design, sales, and procurement and production- planning staffs are dedicated to each clothing line. A store may receive three different calls from headquarters in one week from a market specialist in each channel. Although it is more expensive to operate three channels, the information flow for each channel is fast, direct, making the overall supply chain more responsive. The stores act as market information gathering terminals, providing feedback to the design teams. Zara is careful about the way it deploys the IT tools to facilitate its information exchanges. PDA computers and phone calls help bringing the information from all the stores to La Corua and to headquarters; such hard data as orders and sales trends and such soft data as customer reactions and the "buzz" around a new style. While any company can use PDAs to communicate, Zara's fast paced organization ensures that important conversations don't fall through the bureaucratic delays. By reducing the quantity of manufacture style, Zara not only reduces its exposure to any single product but also creates artificial scarcity. Every two weeks Zara introduces new products in small quantities, reduces the usual costs associated with running out of any particular item and markdown management. Although Zara may not be able to meet the customers demand but empty racks don't drive customers to other stores because shoppers always have new things to choose from. In fact, Zara has a policy of moving unsold items after two or three weeks. This can be an expensive practice for a typical store, but since Zara stores receive small shipments and carry little inventory, the risks are small; unsold items account for less than 10% of stock, compared with the industry average of 17% to 20%. Furthermore, new merchandise displayed in limited quantities and the short window of opportunity for purchasing items motivate people to visit Zara's shops more frequently than they might other stores (17 times annually on average for Zara,

compared to 4 for other stores). The high traffic in the stores circumvents the need for advertising: Zara devotes only 0.3% of its sales on ads, far less than the 3 to 4% its rivals spend. A key point in Zaras strategy that helps the brand differentiate itself from the other competitors resides in their high turnover. According to what we know from their current logistics situation, they have developed a large network in their supply chain mostly in Spain and Portugal, and trying to outsource as few quantities as they can in order to respond quickly to the demand of its customers (only 30% of their production comes from Asia). No other competitor such as H&M has managed to create this kind of situation, as these brands are generally cost-oriented, and will therefore choose to outsource the biggest part of their production, in order to produce large batches that will then be sent to the shops. As Zara is historically a European brand, with a strategy based on quality and frequent changes in the fabrics and styles, it has enabled Zara to build the whole process, from design to stores, as a very confined one.

Strategic Threats to Zara

In this study strategic threat analysis to Zara has been done using Porters five forces framework. 1. Buyer Power: It lies in the hands of customers of what they like and purchase. It appears so that Zaras customers are loyal to the brand and they dont mind the scarcity of products. 2. Rivalry: In todays Market, there are not many fast fashion shops like Zara around. The uniqueness of Zara allows the brand to profit from its customers without even spending on advertisement in order to gain market share. However, more and more competitors struggle to gain market share, and we can wonder if Zara will not be forced to go towards more discount prices due to an increase in competition. 3. Threats of New Entrant: Profitability and Success of Zara may attract potential individual with investment to enter the market. Though still, it would be difficult to gather the entire workforce needed in a short period of time. The only issue might be about the evolution of the Internet distribution channel. It contributes to smaller needs in terms of investment to become a big player on a market. 4. Supplier Power: Zara or any other fashion retailer would have low supplier power due to the reason that their goal is to attract every potential consumer to buy their merchandises. The internet channel is oriented towards a decrease in differentiation between suppliers. All information can be collected much more easily.

5. Threat of Substitute: The fashion industry is unpredictable to project the next big trends. Though Zara distinct from others by continuous innovation and creative design (every two weeks) of most up-to-date fashion. Internet is a potential threat for Zara as it expands the size of the market (for example, with Asos.com).

Barriers to Copy
Studying in detail the current situation of Zara and seeing that they are especially successful in their management (their financial results exceed those of their competitors by far), we can wonder why no other brand has tried to copy their current approach. Even if the whole process seems clear in the eyes of other competitors, the biggest barrier to copy Zaras approach is the capital needed to invest in such a system. Being able to struggle against such a big player in the fashion industry requires money but also enough knowledge in design, operations, in order to meet customers demand and build a strong network. Zara does not need high level of expenditures on advertising to please its customers and to expand its market share. However, for a new entrant, it will be harder to succeed without advertisement considering the current number of brands that have been developed in this market. It may seem strange that Zara does not spend money on advertising. But on the other side, their advertising investments reside in the choice of locations for stores. The better the location is, the higher visibility the brand will have, and the higher the reputation of the brand will be. Consequently, to be able to manage such expenses, the potential competitor needs to be sure about its future projects and financial results. If we consider now a current competitor of Zara, why not trying to follow Zaras business model? It is mostly because of the essence of the brand. If a competitor was to try to imitate this approach, it would have to completely redesign its supply chain, procurement and production systems, and it would be very costly and not necessarily efficient. Another point that represents a barrier to copy Zaras approach is its vertical integration in the whole process. Being able to build the entire network from procurement to stores by linking all components using efficiently the information flows has enabled Zara to have control on all steps of the supply chain. What will be tough if some brand was to copy this approach will be to find the right links that can work together and master the costs of such a channel.

Outsourcing
Zara, unlike its competitors such as Gap, Benetton, and H&M, does not rely on Asian outsourcing. 70% of Zaras materials are manufactured in Europe, with 50% made in Zara controlled facilities in the Galicia region of Spain near headquarters. Zara outsources only 30% of its production outsourcing from Asia and Morocco. Though the cost of production in Spain is 17-20% more expensive than Asia, Zara does have a competitive advantage over its competitors in regards to operations. The local strategic partnerships that Zara maintains with manufacturers in Europe allow for a total control and product throughput time of 3-4 weeks from conception to distribution. Zara postpones dyeing and printing designs until close to manufacture, thereby reducing waste and minimizing the need to clear unsold inventories. The proximity of these suppliers gives Zara great flexibility in adapting their product lines based on up to date market trends and consumer behavior. It also decreases costs of holding inventory. Zaras competitors, through outsourcing to Asian countries such as China, sacrifice the benefits of proximity for low labor and production costs. Though there is a cost advantage in their approach in regards to labor, the lack of flexibility in changing orders based on current trends hinders their operational efficiencies. Inventory costs are higher for competitors because orders are placed for a whole season well in advance and then held in distribution facilities until periodic shipment to stores. This process has the advantages of being very responsive to any kind of changes in demand from the customers, and of having very short lead times. However, disadvantages of this system are two-fold. Firstly, it is very exposed to a pressure from the suppliers: if a supplier decides not to respond to the demand or faces issues in the procurement, Zara does not have another potential way to be served. A second point to mention concerns the potential international expansion. If Zara was to decide to increase its market share on the US market for example, it would need to build a strong supply chain on this territory to be as efficient as in Europe. Therefore, finding new resources from other parts of the world should be a point to consider to be able to recreate the successful process: JIT manufacturing, high turnover, short lead times.