Zara brand - Assignment Example

Zara brand Introduction: Zara, a $6.08401 billion company, is the third largest fashion clothing company in the world. It deals with various attractive varieties of fashion clothes for men, women and kids keeping in mind the demographic variations. Zara is worldwide known for its exceptional strategies that made it outperform its competitors e.g. Benetton, The Limited and Next. Zara currently operates successfully and substantially in more than 78 countries across 4 continents (Inditex 2011). Zara started its journey in 1975 when Amancio Ortega Gaona, now Chairman of Inditex Group, started a small scale clothing business. He opened clothing stores called ‘Zara Shops’ in metropolitan cities of Spain. With the successful turnover of Zara Shops, the business was expanded further to other European countries. Sensing the success and profitability of fashion market, Mr. Ortega proceeded in the market. He founded Inditex Group and Zara became its subsidiary. He also included in this line four other fashion clothing brands--Pull & Bear, MassimoDutti, Bershka and Stradixarius. But among these, Zara was the dearest one. Zara leads the international expansion of Inditex Group by contributing 78% to the overall revenue of the Group from its all subsidiaries. It was the successful and substantial expansion of Zara that made Mr. Ortega one of the richest persons of Spain (Inditex 2011) After 1980s, when it was at a very profitable point, Zara expanded its business across Europe. Till 1995, it operated through its 180 flagship stores, which were mainly located in Spain. Other countries, Zara expanded its business to, were USA, Canada, Turkey, France, UK and Portugal. But the firm’s growth in 1995-2000 was very surprising. In this five year period Zara reached to 1080 stores in more than 30 countries across 3 continents. Till 2000, Zara captured the considerable market share of Asian countries too. Now it welcomes fashion clothing lovers in the largest cities of the world with 1557 stores located around more than 78 countries. Continuing its expansion strategy, Zara started online shopping facility in 2010, in about six European countries. It also launched its flagship stores in India the very year. Though Zara has been behind the well known fashion brands Gap and H&M in revenue terms, its growth rate has remained higher than both the competitors. In September 2010, Zara reported $835 million profit- a 68% substantial increase in first half’s net profits- that pushed the aggressive growth rate. The firm considered this success as the outcome of satisfactory customer reception in Asian markets (BBC 2010). Logistic and Value-Chain Analysis: A firm involves in many activities from getting raw material from the suppliers to distributing the final goods to consumers. Logistics is actually a careful organization of these activities which leads them to success and efficiency. If performed efficiently, these activities develop competitive advantage of the firm in terms of cost reduction and/or differentiation and create value for its shareholders. The sequence of all these value-creating activities, which aim at earning a firm an edge in the market, is called Value-Chain. The value-Chain provides competitive advantage to a firm by either reducing the firm’s cost of production, or creating differentiation for its products. The basic value generating activities are almost similar to a wide range of firms. Porter identified few basic value activities referred as Porter’s Value-Chain model. Porter’s value chain is depicted below in the model. Inbound Logistics activities are those which help get raw material from the suppliers and warehouse it. Operations activities transform the raw material into finished goods and services. Outbound Logistics deal with warehousing and distributing the final products. Then, Sales are generated by identifying the customer needs and providing them value by Marketing and Sales. And after-sale Services are provided to customers to engage them in future business (NetMBA n.d) The firm has to carefully analyze the rivalry and then design such a value chain that earns it the profitable market share. It can use its value chain to gain competitive advantage in two ways; whether it must improve its value chain to create differentiation; or it should reduce the cost associated with its value chain or decrease the amount of resources it uses. In result, both the strategies will create margin for the company. Doing business internationally is more complex and challenging than operating in a single country. The timely supply of raw material and efficient distribution of final goods are the key challenges to international firms. The following paragraphs will discuss the problems Zara, the third largest fashion clothing company, faced when it started to expand its business from Spain to other European countries and to the rest of the world. The following discussion will reflect on the winning aspects of Zara’s logistics and value chain supply and the extent of the effectiveness of such strategies in coping with the basic logistics and value chain challenges that a firm faces when it goes global. Market Development approach-Zara Zara is praised widely as the leader in clothing industry. Inditex group-Zara is the most successful clothing company the profits of which rose substantially. In its Inditex’s all subsidiaries, Zara is the key contributor and the backbone of Inditex strength in profitability. The major motivation to the Zara for going global was Cost Reduction. The diminishing transportation costs and low tariffs and duties in many countries facilitated the firms to geographically disperse their operations and take the advantage of inexpensive labor providing countries. Another reason for this internationalized model wasthat it was becoming more difficult for Zara to curb the costs in Europe because most of the firms were labor intensive and labor cost was very high in Europe then. Although these facilitations were also exploited by its competitors, Zara outperformed all. Its distinctive operating strategies regarding Logistics and Value Chain brought impressive results compared to its competitors. Zara’s Value Chain Strategies to cope with global market: Innovation Zara spends substantially on Research and Development which results in the latest fashion items. Special focus on Research and Development is Zara’s most important value creating activity. Zara has a team of more than 500 fashion designers, who visit the world and sense the new trends going on. These designers are provided with handheld computers for reporting and being in touch with the Management. On the other hand, the competitors reduce their costs up to a large extent and there is less innovation in their products due to lack of Research and Development. The leading operations technology is also the key element of Zara’s efficient Value Chain. It enables Zara to transform the latest fashion trends into products on the shelves within 3 weeks. Zara prepares for the coming season just a month before the season arrives. It advertises its fashion items only during the season, not before or after the season, as per company’s policy. On the contrary, due to their inefficient fashion sensing measures, the majority of the competitors take at least 5 to 6 months to prepare products for the next season. Due to its efficient management and innovative designs Zara sells the whole stock of the season on the shelves, but for its competitors the seasonal stock is a headache. Fashionable items at Real World Prices The middle aged women buy clothes at the Zara because they are cheap, while young women aged around 20 buy clothes at the Zara because they are fashionable and trendy. Obviously, Zara associates two concepts with its stores; cheaper and fashionable; and gets a great deal out of the combination (Dutta 2002). Zara’s fashionable and trendy positioning is because of its designing staff that brings almost 40000 new designs from around the world every year. Zara’s designing staff is the significant part of its value chain. The low price characteristic of this firm is supported by the use of less qualitative fabric in its fashion clothes. The customers who perceive Zara a fashionable brand, rarely consider the quality. Because the latest fashion provides them more value than the quality of clothes, so the quality consideration is skipped when fashion is considered. This combination of two characteristics of Zara’s fashion items earns it significant sales. The particular strategy of quick response makes Zara a powerful brand. Although designers who display the clothes at exhibition take months, it takes Zara just two weeks to transform concepts into products. The store employees are told to visit urban areas regularly and report the new trends and concepts to the designers. Zara is best alternative to those who cannot afford designer’s clothes. Facilitating Communication- The most important activity of Zara’s value chain, that transforms Zara’s innovative concepts into products, is its strong communication within the firm. When Zara opened 95 new stores in the first quarter of 2009, the coordination among retail stores and headquarters became more critical. Zara got the services of Telephonica, a Spanish origin telecommunication solution company, which provided Zara all its communication solutions at one platform. Telephonica provided Multi-Protocol Label Switching (MPLS) service that increased the bandwidth while cutting the costs. The Digital Subscriber Line (DSL) connects the stores with MPLS to create a secure network of the firm. Through this network the voice, data, and multimedia application travel easily without signal trafficking interruptions. This virtual private network (VPN) speeds the information transferability that enables Zara distribute its fashion products within time. This value activity reduces the cost along with easing the communication flow (Telephonic 2011) A Distinctive Profitability Strategy Fashion clothes are the perishable products like vegetables which lose their attractiveness by time. To be timely is the crucial factor to gain profits in fashion industry; else the stock will become stale and will be sold at even lower prices probably causing losses to retailers. Due to its effective logistics and value chain activities, Zara has become able to make some distinctive strategies to cope up with this problem. It follows three winning formulae to keep its items upto the fashion and ensure its inventory turnover: Short Lead Time: The First is shorter response time. Zara retail stores keep only the clothes that the customers demand at that time. Because of its efficient logistics it can quickly identify the trend and provide that trend in product forms to the fashion lovers. Lower Quantities: The Second formula is keeping inventory at stores in Lower Quantity. Zara places the latest items at store in lower quantity to make them more desirable by the customers as scarce things are considered more worthy than those are in excess. Another factor for keeping lower quantity in stores is that the firm can supply the required items within time provided with its sound logistics and value chain. There is a case for this notion that when Zara opened its first store in London in Regent Street, customers frequently visited the store and returned without making any purchases thinking they’ll come back to buy when there’ll be a sale. Then the retailers told the customer about the updating of the stock every week- the item you want to buy will more likely not be in the stock later. So due to scarcity concept sales increased and Regent Street store became the most profitable store of Zara. More Designs than Huge Quantity of a single design: The third profitability formula is Leading in Numbers. Fast logistics and value chain facilitate Zara to focuses more on styles, than on increasing the quantity of single style. It approximately selects 10000 designs for production every year. So if the shelves are empty due to large sales, more styles are there to occupy them. Managing Human Resources Human resource is the most significant factor in generating value for the Zara. Its efficient, satisfied and cooperative employees successfully manage the frequent inventory and information flow, quickly respond to new fashion trends, and help Zara successfully expand across the world. Zara’s organizational culture is considered as strong and distinctive, though it is not articulated or written down within the company. This culture is forwarded through managers who communicate the importance of small things to the employees. Organizational culture at Zara is humble enough to learn from the mistakes and accept criticism. There is no scheduled performance check in the organization. However, evaluation is done randomly and performance is appraised. The same informality is followed in recruitment too. Recruitment process is based on empathy and does not give primary importance to formal qualifications, although the formal qualifications are respected. The firm hires local people as country managers who are trained at the headquarters in Arteixo, where they learn corporate culture and organizational norms. The employees inculcate in them the affection towards organization and actively participate in their respective value generating activities. Salaries to employees are 15.6% of Zara’s total costs. The significant portion of the salaries is based on performance. When the firm went for Initial Public Offering (IPO) in 2001, $100 million, that was 1% of total shares, was distributed among employees to empathize them more with the organization. Excellent Value Chain Management The successful expansion across the world and the efficient management of the resources-human and non human- is the result of Zara’s effective and efficient logistics and value chain. Zara owns approximately 100 small firms which help it in fabric selection, fabric cutting, designing, manufacturing, warehousing, distribution, and after purchase services. Zara controls all its value activities, from suppliers to retail stores, and depends less on outsourcing firms. It schedules and controls the performance measures, directs the operational procedures and makes office configurations to ensure the quick transferability of the products and information. Zara schedules the task very efficiently. Its inventory is centrally managed that ensures the timely delivery of clothes in all stores across the world. It responds quickly to the new fashion demands and has frequent turnover that reduces its Design Cycle Time. Strong communication system enables Zara to frequently communicate the sales and inventory information across enterprise. And due to efficient scheduling of shipments inventory reaches its destination within one hour (thinkingmadeeasy 2011) Suggested logistics and value chain strategies for Zara Zara leads the apparel sector successfully through its strong and efficient logistics and value chain throughout the world. It has widely spread its retail stores across the continents. It controls all its stores centrally and delivers products to the stores on time. But due to global environmental, political and social changes, many opportunities and threats arise, which need serious and immediate consideration. The Zara’s value chain needs to be strengthened further in order to maintain efficiency and effectiveness to avail the rising opportunities in new markets and deal with possible threats in the way. Some suggestions regarding the issue are given in following discussion: Market Development-special consideration to US market Zara must continue its global expansion of retail stores to avail the opportunities. Specially Zara should increase its focus on the US market as the suffering of US department stores due to globalization and changing consumer behaviors, made the US market accessible and more attractive for specialty retail stores like Zara. It has the globally desirable trendiest and low price concept through which Zara can achieve success worldwide. Develop the second Central Distribution Center To ensure value chain efficiency with the rapid market development, Zara should develop the second central distribution center. Currently, Spain is the only manufacturing and distribution center of Zara from where the items are shipped to rest of the world. It seems uncertain and not rational to rely on a single center for manufacturing and distribution, as the varying environmental and social conditions has sometimes greater potential to affect the distribution efficiency. Invest in Internet Retailing Along with developing the second distribution center, Zara should also invest in Internet retailing. At retail stores worldwide, Zara exposes its fashion. But most of the people in developed countries like to make purchases at their comfort at homes. So, while expanding its business to developing countries specially the American market, it will have to go for direct selling through Internet strategy, as Zara did in some European countries few years ago. Providing specialized products at stores in the same region In many cities of the world there are more than 20 retail stores of Zara in a single city. These stores expose the similar products to the customer, which decreases shoppers’ traffic to retail stores. A significant strategy to increase the customer traffic at stores is to provide specialized products at stores located in the same city or region. Due to specialized stores customers will pay a visit to them. This will provide customers with more styles and designs, so they will be lured to maintain the latest trend and rush towards the Zara’s stores. Another benefit of specialized stores is that Zara’s stores in the same city will not snatch or cannibalize each other’s sales shares. Rather each store will be visited for different demands of fashion (Craig, Jones & Neito 2004). Conclusion In conclusion, it is believed that Zara has much potential to explore the new opportunities and deal with the possible threats. European customers identify Zara as the similar face but with the newest trends and latest styles. American customers consider Zara to soon be dominant in American apparel industry. The credit of Zara’s worldwide success is taken is by its effective value chain and logistics which make possible for it to sense the latest trends, transforming them into products on shelves and distributing the final products to all stores globally within a short span of time. Despite its dominant success in the apparel industry, Zara must continue to re-innovate and invent its products. It should further strengthen its value delivery network so that the expansion and distribution of the products can be facilitated efficiently. References 1. Inditex 2011, Zara, accessed on November 26,2011 from http://www.inditex.es/en/who_we_are/concepts/zara 2. Inditex 2011, The most famous asset is Zara brand, accessed on November 26,2011 fromhttp://1x9x.com/inditex-the-most-famous-asset-is-the-zara-brand/ 3. BBC,2011, Zara owner Inditex's expansion policy lifts profits, accessed on November 25,2011 from http://www.bbc.co.uk/news/business-11387262 4. NetMBA, n.d, Value Chain, accessed on November 27,2011 from http://www.netmba.com/strategy/value-chain/ 5. Devshagu Dutta, 2002, Retail at the speed of fashion, accessed on November 26, 2011 from http://thirdeyesight.in/articles/ImagesFashion_Zara_Part_I.pdf 6. Telephonica, 2011, Connecting all parts of your global business, accessed on November 27, 2011 from http://www.multinationalsolutions.telefonica.com/> 7. Thinking made easy, 2011, Strategic management of Zara, accessed on November 27,2011 from http://ivythesis.typepad.com/term_paper_topics/2010/10/strategic-management-of-zara.html 8. Amanda Craig, Charles jones and Martha neito, 2004, Zara: Fashion follower, industry leader, accessed on November 25,2011 from http://www.philau.edu/sba/news/zarareport.pdf Read More