Zara Case Study

Strategy – Zara Case Analysis

Zara Case StudyHow specifically do the distinctive features of Zara’s business model affect its operating economics?

Zara’s business model allows for substantial economic savings throughout their value chain.  Starting with raw materials, Zara has a policy of acquiring only un-dyed fabric initially, allowing the flexibility to change colors and designs and netting a substantial material savings.  In terms of manufacturing and production, Zara relies heavily on their central location in Spain to reduce shipping and distribution costs, tap into skilled labor in a high wage economy and keep the flow of items moving from production to distribution with minimal storage times.  To that point, the Zara case highlights the Zara view that warehouses are viewed more as a pass-through area rather than a storage area.

Adding to operating economic efficiency, Zara works simultaneously on multiple lines and process phases.  As one item is being finished, another may be in early or mid-production phases.  Zara also splits their production forces, using Asia for their less risky, basic clothing lines.  Critical, high-risk lines are created and controlled internally.  Asia provides labor and production savings.  In addition, eighty-five percent of their product line is made and distributed after the fashion season begins.  They wait to see what trends are solid bets.  They also observe market failures to make rapid adjustments to avoid similar mistakes.

Further, Zara produces distinct items in small batches for faster turnaround and placement.  With all of this rapid flow of product to market, their speed to market is reduced to just five weeks.  Competitor time to market averages six months!  Rapid flows of small batches create a sense of urgency and demand for Zara clothing lines, with the consumer feeling the push to buy a limited offering during a limited availability.

Finally, Zara does very little marketing.  They rely heavily on high-traffic and beautiful, high-visibility stores to attract customers.   They also use customer preference tracking to stay on top of changing consumer demand.

 

Explain the linkages among Zara’s choices about how to compete, particularly ones connected to its quick-response capability, and the ways in which they create competitive advantage.  What does this tell us about such capabilities as bases for competitive advantage?

Zara has chosen to compete in the garment retail industry as a quick-response, small production run chain that targets fashion-conscious middle- to high-income sectors of society.  Their large proportion of design and trend-spotting staff allows them to stay abreast of current fashion movements and, coupled with their quick-response small-run production, minimizes the risk involved with introducing new products.  In addition to this, their relatively early embracing of the use of telecommunications and information technology to track trends in sales from their own stores has kept them ahead of the competition when it comes to producing only what sells.

Zara has also built an image that fosters an atmosphere in which it is the buyer more than the seller who is under pressure.  Zara buys and leases prime locations for stores in central shopping centers, adding to their fashionable image; at the same time, their small production runs and ever-changing inventory communicates and environment of scarcity, pressuring the buyer.  They know that if they do not buy what they see now, it will not be there the next time they visit the store.

The linkage of the previously mentioned elements is what has been truly crucial to Zara’s success–the big picture, rather than any one item, has led to their competitive advantage.  As a prime example of this point, the case discusses how World Co. of Japan achieved a comparable response time in production along with similar gross margins, but failed to reach such a favorable bottom line.

 

Why might Zara fail? How sustainable would you assess its competitive advantage as being relative to the kinds of advantages pursued by other apparel retailers?

One of the unique qualities about Zara is the fact that it pays high labor wages in a market that thrives on minimizing costs of production. While this quality is unique, it could also be a reason why Zara may fail. Since Zara is a high wage labor company, it might be an issue. Labor regulations and wages in Spain are less flexible than the regulation in Asia, the dominant area from which competitors receive their goods.

Zara’s approach in designing obsolescence into their products could also be dangerous. Zara designs clothing that can only be worn around ten times before wearing out and warranting replacement.  For trendy items that are based on fads and short-term popularity, wearing an item ten times is all that is required.  Regarding Zara’s basic goods, however, the lower standards of quality could encourage people to seek brands that are more reliable. The stress that Zara puts on being trendy also could cause a problem since it delays its production on items until after the season has already begun. While this has been successful so far, a shortage of fabric or a problem with the supply chain could create a missed opportunity to create a new product.

One of the biggest concerns for Zara is the international model.  This model may be overreaching its market. Fashions are not the same from country to country and most of the international stores are franchises that are not completely responsible for upholding the Zara name. It is also hard to sell clothing internationally because of the possibility of tariffs and the cost of importing the clothing.

Finally, Zara has no marketing plan, creating an unsustainable branding position. Without marketing and advertising, there is no chance to build a sufficient image.  This is especially critical since Zara is a smaller company.  It is difficult to go head-to-head with larger retailers that already have established brands and reputations.

How well does Zara travel globally?

One of Zara’s definite challenges as a brand relates to how it will travel globally. Several factors present suggest that Zara may find itself to be less successful abroad as it continues to globalize and expand than it has been in the Spanish market. To begin with, Zara currently conducts business in Euros, given its base in Spain. The Euro is already one of the highest valued currencies in the world, and should the Euro become stronger against other foreign currencies, Zara’s exports may become unaffordable abroad. (Additionally, should the Euro become stronger, the relatively lower price in Europe of American and Asian imports may challenge Zara’s market share in Europe.)

Several other factors also allow for the possibility that Zara may not travel well as a brand. Most of their distribution is centered in Spain, with only a few small satellite centers outside of Spain. While this reduces shipping costs and allows for quick distribution in the European and specifically the Spanish market, it translates into higher shipping costs and longer distribution cycles in foreign markets as the company expands. The company also has a history of allocating little funding in comparison with their main competitors for marketing campaigns, relying on bright storefronts and word-of-mouth. While this has proven effective in the past, the company may find that in new areas where they are essentially unknown and native brands hold the advantage, a change in marketing tactics may be necessary, at least initially.

Lastly, unlike their domestic stores, which are company-owned and managed, the majority of their foreign stores are franchises. If these stores are poorly managed or do not mirror the practices of their domestic stores, the brand could potentially be damaged and the company could gain a negative reputation overseas.

Posted in WFU Summer Management Program.