How 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.
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“Do not follow where the path may lead. Go instead where there is no path and leave a trail.” – Ralph Waldo Emerson
“Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.” – Machiavelli
“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.” – Steve Jobs, CEO of Apple
We are the music makers,
And we are the dreamers of dreams,
Wandering by lone sea-breakers,
And sitting by desolate streams;—
World-losers and world-forsakers,
On whom the pale moon gleams:
Yet we are the movers and shakers
Of the world for ever, it seems.
– Arthur O’Shaughnessy
In order to provide strategic recommendations that will provide Zara with a sustainable competitive advantage, a SWOT analysis will be conducted based on the above-mentioned analysis of Zara and their closest competitor H&M, specifically focusing within their South African market. This will assist in identifying which areas Zara need to improve their strategy, and thus recommendations will be based on these factors.
7.1. Zara SWOT analysis
Based on the above analysis, the new strategies that will be proposed will follow two key areas; bringing existing strategies to the South African market and various brand extensions. When approaching these strategies, a design thinking mind-set was used that followed a human centric approach in order to identify key strategies that would positively increase South African’s relationship with the Zara brand and how to best meet the needs of Zara’s consumers (Turnali, 2015).
7.2. Bringing existing strategies to the South African market
The proposed strategies to bring to the South African market include the following:
E-commerce, active wear, their sustainability initiatives ‘Closing the loop’ and ‘Join Life’ and interactive fitting rooms with a proposed additional feature. Zara relies on a uniform brand identity, however by not offering these aspects in all of their markets, this creates incoherence in their brand (Keller et al., 2014). By implementing these strategies in South Africa (and worldwide), consumers can expect to get the same service from Zara worldwide, which will lead to a more coherent brand identity for the company.
Firstly, the E-commerce website is the most important of their strategies to bring to the South African market. However, Zara only have online stores in twenty-seven out of ninety three of the markets that they operate in (Inditex, 2017). According to Pablo Isla, the current CEO of the Inditex group, the average spend per customer online is higher than it is in stores (Inditex, 2017). Online sales are proving to be resilient and a key aspect of this, is that it provides an omni-channel for consumers to purchase, for example, if consumers purchase their products online, they are able to return products in store, and additionally, consumer can order online in store with the help of a Zara employee where they can have access to more sizes and a wider variety of items that are not available in store (Jessup, 2010; Kowsmann, 2017). Specifically within South Africa, E-commerce is continually growing as consumers are looking for more convenient ways to shop (Smith, 2017). In 2016, over 43% of South African adults purchased items online, and it is projected that E-commerce in South Africa will grow to over R53 billion by 2018 (Smith, 2017). The retail market as a whole is moving online, and therefore, without having an E-commerce site, consumers are likely to go elsewhere (Zhu, 2016). Additionally, in conducting primary it was found that majority of participants would purchase Zara products online if it was available in South Africa.
As previously mentioned, a lifestyle trend that has impacted the fashion industry is that consumers are also becoming more health and wellness focused which had led to an increase in demand for athletic wear (The Business of Fashion & McKinsey and Company, 2016). Zara offer an active wear line, but again, it is not available in South Africa (Feller, 2016). In South Africa, “athleisure” has become a major trend amongst consumers, where sports apparel has grown by 6% last year alone (Euromonitor, 2017). It is projected that the sportswear market in South Africa will reach R70 billion by 2021 (Euromonitor, 2017). Additionally, in conducting primary it was found that the majority of participants would purchase Zara’s active wear line if it was available in South Africa.
Sustainability initiatives ‘Closing the loop’ and ‘Join Life’
As previously discussed, consumers are becoming more environmentally conscious (Keller et al., 2014). However, a key issue lies with Zara’s sustainability initiatives that are directly targeted to their consumers. Their garment collecting initiative ‘Closing the loop’ is only available in five out of the ninety-three markets in which they operate, not including South Africa (Inditex, 2017). Through primary research, it was found that their sustainable fashion line ‘Join Life’, is also not available in South Africa. In contrast, both of H&M’s equivalent initiatives are available in the South African market, giving them a competitive advantage over Zara, and therefore if Zara want to take this advantage away from them, they also need to offer their initiatives in South Africa (Pratap, 2017). Within South Africa, it was found that 43% of consumers said that a company’s commitment to the environment swayed their purchase decision (Kgosiemang, 2015). And therefore if Zara offer these initiatives in South Africa, they will be able to meet consumers’ needs of more environmentally conscious purchases, as well as promote a sustainable brand practice within their South African market.
Interactive fitting rooms
Zara offer their interactive fitting rooms in a few of their markets, which allow consumers to request the advice from staff as well as more information on a certain garment, such as different sizes and which stores it is available in, via tablet devices located in each fitting room (Inditex, 2015). Although this is a very useful feature, ‘smart’ dressing rooms are moving towards a new idea of virtual dressing rooms, whereby consumers are able to try on clothes without actually taking them off, where the benefit of this is that it saves consumers time in trying on clothes, and also allows them to try different sizes or styles without actually having to go look for them in store (Ruddick, 2014; Riccio, 2015). Additionally, it allows consumers to have more than six items in the fitting room and consumers are able to view simultaneously how they look in each outfit and are thus able to decide which outfit looks best (Poggi, 2008). By incorporating this new dressing room into their stores, they will be able to provide their consumers with a unique and memorable in store experience that can lead to brand loyalty for the company (Riccio, 2015). Specifically in South Africa, there is a trend moving towards giving consumers a reason to visit a physical retail store, other than to shop, which creates a memorable experience for the consumer and increases brand loyalty (Begg, 2014). According to Porter, a primary method that allows a company to achieve a sustainable competitive advantage is by using a differentiation strategy, where differentiation means that a company delivers better benefits than anyone else (Amadeo, 2017). By implementing this strategy into their South African stores, they will be able to achieve a sustainable competitive advantage by differentiating themselves within the South African market, as none of their closest competitors offer this feature in their stores. Additionally, offering this new virtual dressing room is in line with their business model of their on-going commitment to innovation and listening to consumers requests (Inditex, 2015).
7.3. Brand extensions
A brand extension occurs when an organisation extends their product offerings, and specifically, a horizontal brand extension involves creating a new product that can be from similar product class to their existing offerings (Klopper and North, 2011). The benefit of using this strategy is that it allows an organisation to capitalise on their well-known brand name and therefore benefit from the equity of the core brand (Klopper and North, 2011). Many consumers use their past experiences with a brand to assess their extensions, which reduces the consumer’s risk of purchasing a new product if they buy from one of their already trusted brands (Klopper and North, 2011). As many consumers already trust the Zara brand and many are very brand loyal, they are more likely to purchase new offerings from them (Klopper and North, 2011; Petro, 2013).
An aspect of the basis of these proposed extensions is that their closest competitors, as found in their positioning; H&M, Topshop, Woolworths and Cotton On, offer these items in their product offerings, and therefore by Zara not offering these items, consumers will revert to shopping at these competitors (Infoentrepreneurs, 2009). This gap in Zara’s product offering provides them with an opportunity for the company to respond to their rivals as well as further meet consumer demand. The proposed strategy of brand extensions includes the following offerings: stylish underwear and pyjamas.
Zara currently only supply a very small selection of men’s underwear, however the new proposed brand extension includes fashionable and stylish underwear and pyjamas for both women and men. As these proposed extensions are included in the fashion industry, they can fit in well with Zara’s existing productions strategies, and therefore instead of having to follow a whole new strategy, it is easy for them to implement the proposed extensions into their existing strategies.
According to Euromonitor, the global underwear market is worth over $110 billion (R1, 440 billion) (Abnett, 2015). And in particular, fast-fashion companies, for example, Topshop and Forever21, have created their own underwear lines (Abnett, 2015). Where these fast-fashion companies have the advantage, are that millennial consumers are more acquainted with them than traditional lingerie brands or department stores, and therefore prefer to purchase their underwear from them (Abnett, 2015).
The pyjama industry is also growing, where consumers are moving towards a more stylish and luxury-like pyjama (Raphael, 2016; Laws, 2016). And according to Euromonitor, the global nightwear market has reached over $29,2 billion (R383,5 billion) which is also expected to grow at a compounded rate of 16% per annum (Mellery-Pratt, 2016). The reason the growing pyjama trend is so popular, is that sleepwear has become more versatile, where it is not just worn in bed, but at the weekend and at home (Mellery-Pratt, 2016). Additionally, consumers are becoming more relaxation and mindfulness focused, allowing luxe-nightwear to become the perfect companion (Mellery-Pratt, 2016). Additionally, fast-fashion brands like Topshop are also bringing out these luxe-nightwear products (Mellery-Pratt, 2016).
Therefore by implementing the above-proposed strategies, Zara will be able to increase their sustainable competitive advantage and at the same time build their brand equity as they are able to offer additional products to their South African consumers which will allow them to meet their competitors and in turn increase their brand loyalty. Additionally, these recommendations aim to increase Zara’s competitive advantage with their South African consumers when companies like H&M are being perceived to be more affordable by South African consumers and therefore a preferred choice for a fashion retail destination.