Zara Incorporation as a Business - Essay Example

? What Business is Zara In? Contents 2 Case Overview 3 Zara’s Business Model 4 Business Model for the Industry 6 Why Zara’s Business Model could be Disruptive to the Apparel Industry 7 Difference of Zara’s Business Model from a Risk Management Perspective 8 What Business is Zara in? 9 References 10 Appendix: Zara’s Business Model 11 Abstract The case analysis initially requires following the indicated instructions and process outlined in the Zara CaseQuest (Doiron, n.d.). The paper is hereby presented to determine what business is Zara in and in the process, to describe both the business model for the industry and the business model for Zara. The discourse would discuss the reasons why Zara’s business model could be disruptive to the apparel industry. Likewise, the essay would also describe how Zara’s business model is different from the others from a risk management perspective and why is this so important to Zara’s success. Case Overview Amancio Ortega, considered the richest man in Spain, founded Zara in 1975 in La Coruna, Galicia, Spain. As revealed in the Zara CaseQuest (Doiron: Introduction, n.d.), “Zara is one of the most successful apparel manufacturing and retail business in the world today. They are not the biggest, but their profit margins and growth rates are industry leading” (par. 3). The task was explicitly stated as identifying what business is Zara in. To enable to accurately respond, one needs to follow the identified process with twelve distinct learning tasks, including expounding on the disruptive business model; the apparel industry business model (with Gap, as the proxy for players within the industry); the customer characteristics of Zara; the unique customer behaviors and behavior drivers; and finally Zara’s core competencies and its distinct business model to assist in responding to the task. As a retail chain of Inditex, Zara’s major competitors were revealed as Gap, H&M, and Benetton (as shown in Exhibit 4 of the Case) (McAffee, Dessain, & Sjoman, 2007, p. 15). The case analysis would examine the business model of the apparel industry with Gap as the predominant player. Using comparative financial performance, the following bar chart would reveal the comparative performance of these firms using net operating revenues and net income within the apparel industry from 2001 to 2002: Figure 1: Inditex and Key Competitors: Net Operating Revenues in Millions for 2001 and 2002 Source of Financial Data: (McAffee, Dessain, & Sjoman, 2007, p. 15) Figure 2: Inditex and Key Competitors: Net Profits in Millions for 2001 and 2002 Source of Financial Data: (McAffee, Dessain, & Sjoman, 2007, p. 15) It can be deduced from the column charts that despite Gap’s reflecting dominance and leadership in terms of net operating revenues for both 2001 and 2002, one could observe that net income reflected in 2002 for both Inditex (Zara) and Gap are closely comparative; indicating their stiff competition despite differences in applications of business models. After reading the instructions and process outlined in the Zara CaseQuest (Doiron, n.d.), the paper is hereby presented to describe both the business model for the industry and the business model for Zara. The discourse would discuss the reasons why Zara’s business model could be disruptive to the apparel industry. Likewise, the essay would also describe how Zara’s business model is different from the others from a risk management perspective and why is this so important to Zara’s success. Zara’s Business Model Zara is a retail chain of Inditex, a multinational clothing retailer and manufacturer headquartered in La Coruna, Spain, that was founded in 1975 and designs and manufactures clothes for women, men and children according to customers’ desires. Zara eminently applies a disruptive business model, a theory originally adopted by Clayton Christensen from the concept of disruptive innovation. In Christensen’s official website, disruptive innovation was explicitly defined as “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market’, eventually displacing established competitors” (Christensen, 2009, par. 1). As disclosed, the key elements and characteristics of disruptive business include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics (Christensen, 2009, par. 2). In Zara’s case, the disruptive business model is exemplified through their well-structured and simplified operational process that focus on three major cyclical processes: ordering, fulfillment, and design and manufacturing (McAffee, Dessain, & Sjoman, 2007, p. 5). Also, their business model manifested the characteristics of a disruptive business through simpler products and services and manifesting differences from those practiced by its competitors through the following: no advertising; placing ads only to promote twice-a-year sales and to announce opening of new stores; spending heavily on stores; producing clothes for fairly short time span; possessing no backroom for inventory; and focusing on speed and decentralized decision-making. Through the expertise exemplified by their disruptive business model, Zara effectively developed core competencies in satisfying the customers’ demands through the creation and manufacture of designs that have been sourced from inputs ranging from observing what the customers’ desires are, what the residents from different countries wear, what clothes could be saleable, and by keeping abreast with changing trends and demands. Another core competency is the effective operational process that enable Zara to conceptualize and , design and manufacture innovative styles and new garments within three weeks’ time. The speed, efficiency and lack of inventory contribute to lesser costs and its ability to maximize revenues through utilization of the most efficient use of logistics and supply chain management. As emphasized in a white paper presented by the Verity Partners LLC, the business model of Zara “stresses speed and integration of store operations with the design, sourcing and manufacturing operations. Through technology, Zara quickly identifies trends and items that sell or don’t sell at a store level, and then makes appropriate sourcing, manufacturing, and replenishment decisions to maximize sell-through, minimize stockouts, and drive overall in-season performance” (Verity Parners LLC, n.d., p. 4). Likewise, in a research conducted by Goransson, Jonsson and Persson (2007) on “Extreme Business Models in the Clothing Industry” it distinctly revealed that Zara’s business model focused on in-house production, in contast to a key competitor’s business model, that of H&M, that espoused outsourcing (Goransson, Jonsson, & Persson, 2007). Zara’s business model was described as manifesting short lead times, control in the production process, efficient distribution centers and the stock count systems that effectively monitored demand and supply. Business Model for the Industry In contrast, the business model for the branded apparel industry was disclosed to be characterized by: “slow to adopt technology, with many branded manufacturers content to introduce two selling seasons per year, and operate with inventory turns between two and three per year” (Verity Parners LLC, n.d., p. 4). From the experience of Gap, regarded as the fashion giant, their own business model that exemplified the current industry’s model focused on lack of regard to incorporate the customers’ desires. As noted in the article written in Bloomberg Businessweek in an article entitled “Paul Pressler's Fall From The Gap”, there were structural flaws from the operational process causing delays in creation of designs and in manufacturing much needed apparell. As disclosed, “some designers and merchants didn't believe that the group's output--which included findings from consumer focus groups, polls, and surveys of customers and store employees--was particularly useful in the fashion business, because consumers aren't good at predicting what they'll buy in the future” (The Corporation, 2007, p. 1). The belief that consumers are not adept in predicting what they would purchase is itself misjudging the customers’ behavior and the forces that drive their purchase decisions. From the Table shown below (Table 1: Ranking of Retailers in Portugal, 2011), it can be seen that Inditex already surpassed other competitors ranking number 1 with a turnover of 710 million euros in 2010. H&M, which showed leadership as manifested in the financial figures provided in the case for 2001 and 2002 was already surpassed by four other competitors, with Inditex (Zara) topping the list: Table 1: Ranking of retailers in Portugal, Sector: Fashion & Clothing Rank Company name Amount Year Type Nr. Year 1 Inditex 719 2010 outlets 332 2010 2 Cortefiel 150e 2009 outlets 124 2011 3 Modalfa 125 2010 outlets 105 2010 4 C&A 105 2010 outlets 37 2010 5 H & M 63 2010 outlets 21 2011 Source: Veraart Research, 2012 Why Zara’s Business Model could be Disruptive to the Apparel Industry As emphasized, “Zara and similar companies are shattering long-held industry perceptions, and are injecting a new level of competition” (Verity Parners LLC, n.d., p. 4); thereby prompting disruptive forces to the apparel industry. With the efficiency developed using vertically integrated manufacturing operations and virtually no backroom for inventory, the financial performance of Zara consistently showed positive and increasing net profits, net margins, return on assets and return on equity (McAffee, Dessain, & Sjoman, 2007, p. 16) and have posed stiffer competitive pressures for its major competitors H&M, Gap and Benetton. The financial and operational strengths exemplify Zara’s competitive advantages and core competencies in their field of endeavor. The apparel industry was reportedly exhibiting diverse business models. As noted by Goransson, Jonsson, & Persson (2007), to stay competitive within the apparel industry, key players need to “become more flexible and achieve shorter production lines, since the demand for higher quality increases” (p. 27). There were various firms that opted to venture into offshoring with the objective of shortening the time for production. Most have been reported to subcontract certain phases of their manufacturing process where, as emphasized by Goransson, et al. (2007), “low-wage labour can be found” (p. 28). In contrast, Zara’s simple operating cycle and its ability to control various facets of its design to production, including ordering and fulfillment enable them to minimize costs and still deliver the latest fashion trends at such as short span of time. This could therefore be considered disruptive to the apparel industry since manifestation of technological progress and success surpassed the dominant key players. Difference of Zara’s Business Model from a Risk Management Perspective Zara’s business model actually lessens the risk in terms of keeping abreast with the demands and effectively balances this information with the organization’s resources. As key people were given the responsibilities to know their customers, their demands, and the products that would sell within their respective markets, Zara is able to create the most effective and innovative designs that the consumers would buy. Through clearly establishing their strategy that they produce clothes for fairly short time span, the customers are made aware that they need to frequent the stores to buy the items they want on the spot and that they are purchasing not for durability but to satisfy their fashion desires and their demand for new styles that Zara effectively delivers. This strategy likewise lessens the risk of clothes not being sold (since most are designed according to perceived customers’ desires, needs and demands) and therefore lessens holding time and inventory management. The business model and meeting customers’ demands were instrumental in Zara’s success. Through the use of a clear and efficient cyclical process, Zara have developed expertise in speed at coming up with new and stylish designs at the minimum inventory. In addition, by relying on highly competent and creative personnel: their store managers, commercials (designers, product managers, and store product managers); as well as other employees who effectively discern and determine the clothes that each store would be able to sell, Zara delivers products that satisfies the demands and desires of customers at heart. As emphasized by Goransson, Jonsson, & Persson (2007), Zara’s business model that exemplifies development of “its own in-house team designers, which made clothing based on popular fashion at the same time as producing the firm’s own design… the fact that Zara coordinates all Zara activities… enables Zara to respond to the customers’ demand of the latest trends and offer fresh designs… twice a week during the year” (Saminather cited in Goransson, et al. 2007, p. 36). This competitive advantage and the success of its business model have validated lesser risks and greater generation of returns, as reflected in their financial performance. What Business is Zara in? In sum, to respond to the task: what business is Zara in? Zara is in the clothing retail business that effectively reponds to the customers’ changing demands through their disruptive business model that highlighted their core competencies, incorporates customers’ behavior, and uses a simple three cyclical operating process that is effectively monitored, controlled and utilized their core competencies and resources to maximize profits. References Christensen, C. (2009). Key Concepts - Disruptive Innovation. Retrieved April 4, 2012, from http://www.claytonchristensen.com/disruptive_innovation.html Doiron, D. (n.d.). What Business is in? Retrieved April 4, 2012, from casequest.net: http://www.casequest.net/Zara%20CaseQuest/Homepage.html Goransson, S., Jonsson, A., & Persson, M. (2007, December). Extreme Business Models in the Clothing Industry: A Case Study of H&M and Zara. Retrieved April 5, 2012, from Kristiandstad University: hkr.diva-portal.org/smash/get/.../FULLTEXT0 McAffee, A., Dessain, V., & Sjoman, A. (2007). Zara: IT for Fast Fashion. Harvard Business School, 1-23. The Corporation. (2007, February 26). Paul Pressler's Fall From The Gap. Retrieved April 4, 2012, from Bloomberg Businessweek: http://www.businessweek.com/magazine/content/07_09/b4023067.htm Veraart Research. (2012). Ranking of retailers in Portugal, Sector: Fashion & Clothing. Retrieved April 5, 2012, from retail-index.com: http://www.retail-index.com/HomeSearch/RetailIndexSearchresults.aspx?countryid=8§orid=2 Verity Parners LLC. (n.d.). Responding to New Challenges in the Branded Apparel Industry. Retrieved April 4, 2012, from http://www.veritypartnersllc.com/files/phatfile/Verity%20Branded%20Apparel%20whitepaper%20final.pdf?&MMN_position=31:31 Appendix: Zara’s Business Model Disruptive Business Model Source: Christensen, 2009 Characteristics: well-structured and simplified operational process focus on three major cyclical processes Practices: simpler products and services manifesting differences from those practiced by its competitors no advertising placing ads only to promote twice-a-year sales and to announce opening of new stores spending heavily on stores producing clothes for fairly short time span possessing no backroom for inventory focusing on speed and decentralized decision-making Core Competencies: product design and manufacturing according to customers’ demands and desires speed integration of store operations with the design, sourcing and manufacturing operations Read More