Zara Company Business Model - Essay Example

 Zara Business Model Introduction In the current highly competitive business environment, several firms opt to send out non-core operations to manufacturers or suppliers so that they may focus on the main operations only. Business entities that choose to outsource some of their operations do so with the sole intentions of reducing their costs by specializing and at the same time making their resources and labor efficient. On the contrary, other firms persistently try to acquire the control over several sections of their operations by analyzing the value chain (Dagnino, 2012). It is worth noting that several firms that have obtained control of the production process through in-house production are capable of achieving shorter lead times. Studies have revealed that firms, successful business entities and even those that operate and compete in the same industry have different models of business. Therefore, this paper shall seek to explain Gap Inc contributions in the apparel industry, disruptive business models, the Zara business model, as well as the manner in which it is different from other business models used by other firms in the apparel industry. Discussion Gap Inc. Gap Inc. commonly known as Gap is a multi-national clothing and accessories retailer in America. Its headquarters is currently in San Francisco, California. However, it also has some of its design offices London, San Francisco and London. The company’s brand name is Gap, and it sells clothing to all groups of people ranging from males, females and children. It operates five principal divisions namely; Banana Republic, Piperlime, the namesake banner, Athleta, and Old Navy. It has outsourced its production to China, Hong Kong, South Korea, Taiwan, among others. Additionally, some of its products are also manufactured in Central America. Some of its strengths that have enabled it to remain relevant in the market include; brand recognition, multiple stores worldwide, segmented markets, product utility, among others (Maheshwari, 2012). However, it failed to acknowledge the importance of its customers by paying lots of attention to its expansion strategies, instead of meeting the customer needs. It is a fact that expansion strategies can only be successful when apposite research is done. Concentrating on expansion strategies is correct for several stores only when they have a strong foothold in the market, or when their customers are extremely loyal. However, these two fundamental factors were not present in Gap’s case. Gap focused on expanding its stores by cutting expenditures in some areas of the company. This resulted in the loss of the company’s core values, goals and objectives (Moin, 2011). In the long run, its competitors such as TJX, Ross Stores, Wal-Mart, just to mention but a few moved into the industry; thus, grasping a strong prominence. Additionally, these retailers were smaller compared to Gap; thus, they did not find difficulties in keeping up with the changing needs of the industry. Gap Inc. inability to quickly respond to the changes in the industry led to a decline in its sales and dividends. Disruptive Business Model Disruptive business model refers to a business idea that is extremely different from the way business is normally conducted. Therefore, it contributes to total interruption of the entire industry leading to market revolution, and not the customary market evolution. This type of business model normally leads immense tectonic shifts in the behavior of customers, market upheavals, as well as change of the market share as innovators of the novel disruptive model roll out the revolutionary service or product. An example of this model was demonstrated by Dell through its direct-to-consumer retail model opposing the archetypal retail store front. Dell’s new model served customers at a fairly cheap price and it put in place the most current components effectively compared to the archetypal store-front retailers. After five years of its existence, several store-based computer retailers such as Computer Land getting out of business. Consequently, this paper will explain how Zara has used this disruptive business model to succeed in the apparel industry at the expense of its competitors. Zara Zara is the most profitable brand of Spanish clothing retail known as Inditex SA. It opened its first store in La Coruna, Spain in 1975; and from then it has extended its operations in more than forty five countries with over five hundred and thirty one stores situated in the most important districts of cities in America, Europe, Africa and Asia (Torun, 2007). Despite this expansion, Zara has maintained its main fashion philosophy that quality design and creativity coupled with a quick market response to demands is the only way to achieve profitable results. This philosophy enabled it develop a business model that incorporated its three goals of operations: developing a system that needs short lead times, increasing the number of styles or choice available, and decreasing the number of quantities produced to minimize inventory risks. Zara’s Business Model Zara’s model of business can be subdivided into three main components: capabilities, concept and value drivers. From its conception, Zara’s main concept has been to maintain design, distribution, and production processes to enable it respond swiftly to change in consumer demands. This was emphasized by Inditex CEO, José María Castellano, assertions that the fashion world is constantly changing; thus they driven by customer demands, and not supply (Badía, 2009). This statement reinforces the significance of Zara’s swift response in its operations. Zara’s resources (capabilities) in order to execute its conceptual strategy and exploit its opportunities are numerous. It has a tight control over the production process; thus, keeping their manufacturing and production in-house. As of today, Zara maintains over eighty percent of all its production processes in Europe, fifty percent in Spain, in proximity to La Coruna headquarters. It also has strategic agreement with its manufacturers that facilitate timely delivery and service. The strategic partnerships as well as the benefits resulting from the proximity of operational and manufacturing processes has enabled Zara to maintain flexibility needed to design and manufacture over twelve thousand new items every year. It is worth noting that this capability has enabled Zara to realize its strategy of swift response to customer demands. Zara’s value drivers can be classified to be both tangible and intangible in respect to the benefits returned to the stakeholders. In terms of tangibility, the parent company of Zara, Inditex, as of 2002 had 11.02% net margin on operations and its equity market value was €13, 981 (in thousands). At the same time, its net working capital was at €133 (in thousands) (Dagnino, 2012). From this, it can be said that Zara’s performance can be linked to their financial performance. On the other hand, intangibility is viewed in terms of brand recognition and customer loyalty. This is because they have played a significant role in the steady growth of Zara. It is worth noting that the number of customers that the retail outlet continues to attract is rising with every single day that passes. Additionally, their brand is tantamount to the fashion’s cutting edge at affordable prices. It is evident that Zara’s successful execution and implementation of is business model is extremely valuable to all its stakeholders and differentiates it from other business entities in the same industry. Strategic partnerships and production cost Zara’s business strategy in terms of its production cost and strategic partnerships gives it a competitive advantage. Unlike its competitors such as Benetton, H&M, and Gap apparels, Zara does not use outsourcing services from Asia. As already explicated earlier, Europe manufactures eighty percent of the products sold by Zara; with fifty percent of the products being manufactured in facilities controlled by Zara in Galacia, a town near its headquarters (Badía, 2009). This is contrary to its main rivals who have outsourced one hundred percent of their production to cheap Asian countries. In as much as production in Spain is twenty percent more expensive compared to Asia, Zara has a competitive advantage over its rivals in regards to the mode of operations. The strategic partnerships maintained by Zara and its manufacturers allows for a period of three to four weeks for a product to be created (“ZARA-Brand Story,” 2013). This is achieved by acquiring textiles in four colors only, then designing and cutting them in-house. The dyeing and printing of the designs is postponed until a date close to the manufacture is reached. This helps in minimizing wastes as well as the necessity to clear any unresolved inventories. The closeness to the suppliers makes Zara flexible in adapting its product lines depending on consumer behavior and the current market trends. Additionally, it minimizes costs of having inventories. On the other hand, Zara’s competitors as a result of outsourcing their production to Asian nations such as China sacrifice the benefits of closeness for low production costs and labor. Even though cost advantage exists in their approach in terms of labor, their lack of flexibility in the changing orders due to current market trends obstructs their operational efficiencies. Zara’s competitors face higher inventory costs since orders are placed in advance for an entire season, and then kept in distribution centers until periodic shipment to the store outlets (Choi, 2011). The proximity effect as well as its flexibility enables Zara to respond fast to consumer demands; thus, giving it a competitive edge against its rivals. Advertising and marketing Zara has a unique marketing and advertising strategy that has contributed to its success. This is attributed to the fact that it spends only 0.3% of its total revenues to advertise and market its products and business (“Analysing Zara’s business model,” 2011). This is considerably less compared to its competitors who averagely spend between three and four percent of their total revenues on marketing and advertising. From this, it is evident that Zara has a cost advantage over its rivals in regard to marketing activities. Therefore, for Zara to compete effectively with its rivals, it uses store layout, location, as well as product life cycles as marketing tools for its products. For example, Zara has strategically located all its store outlets in key retail districts. Additionally, customers are psychologically trained to visit Zara store outlets often since new products are presented every week, and in most cases not restocked. The feeling of scarcity motivates Zara’s customers to visit the outlet stores frequently to check new products and make purchases (Torun, 2007). Lastly, Zara’s stores are always maintained fresh and trendy. It does this by testing the store layout in Spain before rolling it out. It also remodels all its stores after every five years to stay in touch with the current trends. Zara’s Management of risk In as much as Zara has progressed in the apparel industry, it is worth noting that its way managing risk has played an integral role. For instance, it delays production commitments till the last moment. In this way, there products produced are sold fast and do not stay long in warehouses. Additionally, the dyeing and printing of the designs is postponed until a date close to the manufacture is reached. This helps in minimizing wastes as well as the necessity to clear any unresolved inventories. Conclusion In conclusion, it is worth noting that Zara’s success is attributed to its commitment to swift response to customer trends in fashion as well as producing products often with short life spans (arguably ten wears). Zara’s commitment to this goal coupled with the resources they have put in place in order to realize it have played a significant role in ensuring its competitive advantage over its rivals. The efficiencies developed in the product development, advertising and marketing, and production cost and strategic partnership areas differentiate it from its competitors (Choi, 2011). Consequently, they provide additional value and profitability to Zara; thus, making it a force to reckon in the apparel industry. References Analysing Zara’s business model. (2011). Business Thoughts. Retrieved April 13, 2013, from http://www.harbott.com/2011/03/03/analysing-zaras-business-model/ Badía, E. (2009). Zara and Her Sisters: The Story of the World’s Largest Clothing Retailer. Basingstoke: Palgrave Macmillan. Choi, T.-M. (2011). Fashion Supply Chain Management: Industry and Business Analysis. Hershey, Pennsylvania: IGI Global. Dagnino, G. B. (2012). Handbook of Research on Competitive Strategy. Cheltenham, UK: Edward Elgar Publishing. Maheshwari, S. (2012). Gap Gains With Zara Responding to Fast-Fashion Fatigue. Bloomberg.com. Retrieved April 14, 2013, from http://www.bloomberg.com/news/2012-11-08/gap-gains-with-zara-responding-to-fast-fashion-fatigue.html Moin, D. (2011). Gap International Reorganized. WWD. Retrieved April 14, 2013, from http://www.wwd.com/retail-news/specialty-stores/gap-reorganizes-international-business-3586427 Torun, F. (2007). Zara - A European Fashion Brand. Munich: GRIN Verlag. ZARA-Brand Story. (2013).Fashion. Retrieved April 13, 2013, from http://fashiongear.fibre2fashion.com/brand-story/zara/philosophy.asp . Read More