Reasons of Zaras Success Driving - Essay Example

Reasons of Zara’s Success Driving Global fashion retailers are currently operating in a very competitive environment that is highly characterised by constant changes in customer preferences; however Zara is one retailer that has buckled this trend. This success is reflected in Zara’s financial position, which has seen an oversubscription in the price of its shares, and a sustained sales growth of more than 10% per annum for the past ten years. This has resulted in a net profit margin of 10% whilst their competitors are still netting 3% (Matchette et al 2005). Zara’s success is mainly the result of their supply chain innovation, which means that unlike their competitors who often have to forecast the season’s fashion trends, and then wait another five months to sell them, Zara can deliver new styles and fashions in three to six weeks. Reasons Driving Zara’s Success This supply chain innovation was essential as the industry was prone to risks in mismatches of supply and demand, and this would result in disruption, longer waiting times and smaller margins of error (Kleindorfer 2004). To negate these effects Zara produces 50% of its products in-house, instead of outsourcing all manufacturing and production related processes. This has largely been made possible by Zara’s background, as Zara started life as a manufacturer. When Zara, as a manufacturer decided to compete in the retail sector, they became a retailer with manufacturing capacity (AI 2004). Instead of getting rid of this capacity, Zara identified this as an opportunity. This capacity also means that Zara is in possession of 18 manufacturing plants that are responsible for producing their fashion garments (AI 2004). Whilst other retailers are outsourcing to Asia and the Far East, Zara has integrated their manufacturing and retail aspects to minimise the uncertainties associated with long lead times, and predicting fashion trends months in advance. By outsourcing to outside the European continent or their home countries, Zara’s competitors are also introducing delays and errors in their business, as incorrect fashion predictions, could result in a massive loss of profits through dozens of unsold clothing. Clothing also needs to be stored, and as their competitors store large quantities, they have to store them in warehouses which add additional costs on the organisation. The risks of storing clothes in warehouses were recently highlighted by two separate cases in the media. In one case, fire gutted a warehouse used to store clothing for Primark and other retailers, and in another separate case, the European Union (EU) had placed quotas on clothing coming from China, which is were most retailers had outsourced their manufacturing and production. This resulted in significant delays and costs to these organisations, as they had to rectify a situation which could have been avoided. Zara also owns its own design and distribution teams that cover all the segments of retailing, further reducing any time delays with teams located in different locations, and it also ensures that their design and distribution quality is maintained as it is operated by people who understand the strategy and principles of Zara. Zara have managed to mass produce clothing with relatively higher levels of customisation than what normal mass production techniques would allow, but this is due to their smaller stock levels and the fact that they change their style on a frequent basis. This supply chain innovation seeks to eradicate the expenses and losses associated with mismatching demand and supply (Kleindorfer et al 2004). The current market demands that an organisation is able to deliver the goods and/or services as and when the customer demands. It is no longer acceptable for fashion retailers to delay trends for longer periods, so that they can get rid of existing stock. The stock sold at lower prices then represents a loss, as it would have taken up storage space further impeding on capacity. Customers also like to differentiate themselves and their own personal styles and this is not possible if the retailers are providing one trend or style for most of the year, when the customer is demanding regular changes. By outsourcing the production and manufacturing most retailers cannot control the timelines or design processes in much the same way as Zara, as they are really at the mercy of the organisations they have outsourced their processes to. So for instance, if a flood or major earthquake happens to affect the zone with the outsourced services, the retailers will obviously lose out on a significant proportion of the sales profits. Another success factor is Zara’s centralisation of its manufacturing and logistics in its home country – Spain (AI 2004). Zara’s centralisation of the distribution process basically follows the spoke and hub principle commonly used by express courier organisations such as DHL and UPS. This principle means that all distribution and processing of the physical goods are done in one location. All of Zara’s clothing is shipped and distributed from Spain and no other country can undertake this task. This has major advantages for Zara, as uncertainty and risk are reduced, and shorter lead times become a reality. As a result Zara gains further control of its distribution line and allows it to build in risk management processes into the distribution process. Zara’s risk management process seeks to identify underlying sources of risk and determining pathways by which such risks can materialise (Kleindorfer et al 2004). Zara has clearly identified, that risk lies in the manufacturing and distribution process, and the risks are associated with the timelines or the time it takes to obtain an output. The potential consequences of these risks materialising could mean that the organisation is vulnerable to environmental pressures which does include competitors and those involved in the supply chain process. Zara is only minimising the risk to its survival by paying attention to better coordination and integration of its activities along the total value chain by controlling a large section of it .(Kleindorfer et al 2004). This strategic advantage which Zara inherited has helped the retailer to successfully compete in the retail market by reducing its outsourcing levels, thereby reducing the cost. This has helped Zara pass on these cost savings to the customer in the form of low costs, high quality, and high speed of delivery, variety and innovation. Although this strategy may result in low prices and small profit margins, the weekly sales turnovers and subsequent profit are high. This is because customers clearly identify Zara as the leader, and this results in customers performing repeat visits of up to 17 times a year compared with the High Street average of four visits a year. This supply chain innovation is further enhanced by Zara’s organisational and communications structure which enables Zara to keep in touch with customer demand, and therefore enabling further control of the entire production process. This is achieved through the use of technology in their stores. Managers are provided with hand-held computers to communicate and relay the latest trends and predictions to the head office in Spain. This allows the individual stores to manage the demand and supply process by informing the head office of any developments. This is necessary to achieve flexibility of service as this gives the organisation the capability and capacity to react to changing trends and circumstances. However, Zara implemented and carried this innovation forward as it sought to become the leader in middle market retailing, and establish itself on the basis of its reaction capacity as a competitive advantage. The role of marketing concepts Most businesses do not have total control over their markets, as the customer is constantly changing their demands and setting new trends for suppliers and manufacturers to follow. This creates tremendous pressure for businesses as they are already competing with other businesses for the same target market. This is very typical of the middle market clothing retail industry, where Zara, together with other fashion retailers, has to constantly manage its innovation and marketing in order to gain a significant share of the market. In the UK, Zara is competing with domestic retailers for the same market, and this has partly been enabled by the low trade barriers, as Zara already was at an advantage due to its historic production base and better transport systems (Matchette et al 2005). Zara basically has a choice of the modes of transportation available for its use that are reliable, and essential for it to uphold its strategy. Zara’s supply chain management system has resulted in the decline and sharp fall in sales of the more traditional fashion retailers in the UK such as Next and Marks & Spencer, by applying their philosophy and corporate strategy into a marketing strategy that can operate in the global context. This has become essential and core to Zara’s existence as globalisation, together with competitiveness has helped implement important marketing concepts to maintain their competitive advantage. Zara’s marketing concept has involved forging a relationship with its target market, and this has become a key factor in its corporate planning process. However, marketing concepts require optimum conditions to achieve results for an organisation. Other businesses are production oriented and concentrate on production efficiency, distribution and cost in order to attract customers to their own products (Cole 1998). Whilst this may work well for engineering based firms, it can also work for fashion retailers as its success relies on demand exceeding supply for a product or service, however, this has to incorporate costs so as to encourage customers to buy. This orientation is typical of Zara, as it certainly has recognised this aspect of the market and acted upon it, whereas the other retailers are still viewing the market as one which has supply ahead of demand. Zara’s product orientation is demonstrated in the quality of its products, and it is important that this quality is upheld by Zara because its customers have come to associate the organisation with good quality at affordable prices. Sales orientation in this organisation is certainly not the dominant concept as the target market does not need to be persuaded into buying any of the Zara’s clothing. The customer is already faced with a wide choice and selection of clothing, and therefore the decision to buy does not rest on persuasion but on quality and variety. Finally, Zara’s market orientation focuses on the needs of the customer, and this is demonstrated by Zara’s dedication to finding out what the customer wants in terms of the latest and upcoming trends in fashion. Store managers are equipped with hand held computers to relay this information to its production centres and the head office. This immediately puts Zara at an advantage as they are able to offer their customers a higher level of customer satisfaction and exceed their expectations too. Zara then spends little money on marketing efforts as the customer dictates what they would like to see in the shop windows. Zara’s decision to empower its managers to make decisions and place orders is also supported by its ability to make production respond to marketing of trends by celebrities and other figures in the public eye. This is different for other clothing retailers as they often respond to the demands of production, which then stimulates their marketing campaign. Zara is in a fortunate with its production process ownership, as this enables the business to combine the approaches of production, product sales and marketing to formulate its own marketing concept, which is heavily centred on its market orientation, but with a significant support base from its manufacturing and production plants. Marketing concepts play an important part in this process as they identify the customer as the most important stakeholders in the organisation by ensuring that they form the basis of their corporate strategy (Cole 1998). This concept allows the organisation to diffuse their marketing activity instead of concentrating marketing in one department. This is true in Zara’s case, as the business and corporate strategy is centred on the customer, and the business is run and operated according to customer demand. By employing this marketing concept, Zara has to diffuse its marketing efforts to all levels of the organisation, and proof can be found in the individual stores, as store managers regularly keep in touch with customer demands. This information is relayed to its head office and production plants, who promptly replicate the trend. By the time the trend is available in the shop windows, the marketing concept will have been carried out, as Zara then uses the latest styles and trends in its shop windows to market what they stand for, which is reactive capacity. Customers are automatically drawn into their stores and complete this marketing concept by marketing Zara through word of mouth and referrals. This has the added advantage of reducing Zara’s marketing costs, as their strategy effectively works as a marketing tool. This differs from other fashion retailers whose marketing concepts focus on satisfying the customers’ wants and marketing their clothing with an emphasis on creating or changing their tastes in clothing. This does not guarantee customer loyalty, as some style changes may not suit certain sub-groups in the target market, and the trends offered are not what the customer demanded. This is where the strength of Zara’s marketing concept lies, as they listen and consult with their customers instead of dictating what they should be wearing. By assigning the marketing role to various individuals in the organisation, Zara is also promoting a proactive culture, and maintaining its strong knowledge base, by making sure that all those involved in the success of the organisation are aware of and can contribute to the latest demands. For example, senior managers in Zara and their advisors contribute to the organisation’s corporate plan by fulfilling the marketing role through the examination of the market place and the assessment of Zara’s ability to meet current and future demands on its resources. Zara’s employees also carry out the marketing role during their normal hours of work in their dealings with customer, window dressing and even personnel functions. Zara therefore markets itself by maximising on its image and its brand, by adopting large, spacious stores that focus on maintaining an air of freshness and exclusivity of style (Torrela 2005). Factors for opening Zara stores abroad Unlike other fashion retailers, Zara has decided to concentrate on expansion in Europe, and not in the United States or other parts of the world (AI 2004). By focussing on one geographical location, the supply chain becomes less complex, as it reduces the options for failure. This also reduces the geographical dispersal of risks, by concentrating the risk management process on one area. Zara is looking to sustain its growth, and this can only be achieved by operating in a stable environment in terms of economy, and this makes the European Union a good place to start. Transport and communication links between the head office in Spain and the rest of Europe are also excellent and reduce any risks or complexities that may arise from operating in unstable and unreliable environments. Zara is also looking for countries and areas that are close to their manufacturing and distribution base in Spain. If Zara were to consider other countries, then the logistics of shipping and maintaining their status will be compromised, as they can no longer guarantee this. For example, Zara has 190 stores in Portugal which it shares a border with, and 7 stores in Italy, which is slightly further (AI 2004). Therefore, the factors that Zara takes into account when opening stores abroad include the distance from their operating hub in Spain. By focussing on the proximity to Spain, Zara is reducing the risks in matching supply and demand that is often associated with lean designs and global supply chains that exist to reach dispersed global markets (Kleindorfer et al 2004). This allows Zara to maintain its domestic leadership, whilst expanding to overseas markets. Overseas expansion is essential to Zara as they need to maintain and sustain their growth, and this capacity to earn significant revenue and earnings growth, can only be sustained by expanding to other markets. It is a well known cliché but successful international retailers such as Zara, are thinking globally and acting locally. This success relies on recognising and understanding what drives customer loyalty in individual markets (AI 2004)). Zara have clearly achieved this by recognising one single common factor that is essential to achieving customer loyalty, which is its reaction capacity. The European customer base is fairly homogenous in their characteristics and they are also affected by the same environment and factors. Customers in this area are looking for constant updates to fashion, in a timely and acceptable manner. They also want this to be available for a reasonable price. By acting globally and acting locally, Zara retains its strength in its home markets, and this strength enables it to generate more revenue and cash flow to enable investments in other international markets. This further supports the identity of Zara and enhances its brand as customers come to associate it with quality, and as an international company. This concept is further enhanced by the use of technology, such as the use of hand held computers for managers in their stores. This technology impacts on the supply chain, by enabling Zara to implement improvements and updates by tracking the performance of their sales more quickly and in greater detail (AI 2004). Zara is clearly aware of the risks in the supply chain and distribution processes, and it has taken every step to minimise this risk. Zara could open more stores in the United States or in Japan or China, however, as the stores start becoming further away from their distribution, risk is introduced in the form of delays and uncertainties, which is what Zara is trying to avoid. Another solution may be to build or acquire another distribution plant in Asia, however, this would mean more resources and expenditure from Spain, because they would still have to manage the process and people located in that part of the world. They would also have to filter their organisational culture, or adapt it to suit Zara, or the country, and this consumes time and resources, and may actually fail. By keeping the supply chain and distribution process simple, Zara is able to locate potential markets that could offer significant growth and revenue. The effect of Zara’s growth on the market environment and measures available to minimise the possible harmful effects. However, such high rates of growth and the superior competitive advantage are not beneficial and may actually be harmful to the market environment, as Zara’s practices may have the potential to permanently alter the nature of the retail clothing sector, by getting rid of other smaller efficient suppliers, and by also increasing the likelihood of further unemployment, especially in countries with very competitive retail markets such as the UK. Zara’s growth could drive out the older, established players by introducing new process methods and reducing the choice for the consumer, as there are some other consumers who prefer to shop at alternative retailers and would rather have trends dictated to them. The marketing industry is also more likely to suffer if other retailers adopt this method of production and distribution. Supply chain innovations are also relatively new concepts, and the long term benefits are still to be assessed. The appropriate supply chain innovation would find the right balance between product availability, cost and asset management (Kleindorfer et al 2004). Whilst this innovation may sell the benefits of smaller inventories and stock holding procedures, against the traditional method of maintaining large inventories, which involves large supply chains; smaller inventories are also susceptible to disruptions in revenue, as any changes or deviations are immediately felt. Larger inventories on the other hand, are vulnerable to high inventory costs from storing large amounts of stock which is a result of the production process. Whist this may not have significant cost advantages; it does however guarantee income for the retailers employing this form of supply chain management. This makes Zara vulnerable to inaccurate predictions, as they stand to lose out in a single transaction or month than other traditional retailers. These effects could be minimised by developing better methods of controlling inventory and stock holdings such as capacity planning and Just-In-Time and other management philosophies that are often employed in manufacturing industry. Zara’s expansion could also be monitored perhaps with quotas in place for the number of stores they can have in location or geographical region, to avoid the creation of powerful monopoly in the retail sector. Conclusion In conclusion, Zara has clearly used its historical advantage to take a lead in the fashion retailing industry, and to lead the way for better control of the entire production and distribution process. Whilst they have the competitive advantage, other retailers are adapting to this new way of selling and marketing themselves, however, when the industry becomes occupied with experts, Zara will just become another retailer. There is no doubt that they have correctly and accurately identified what the customer demands, however, this may work against Zara in the long term, as the problem with any new concepts or innovation is that the effects on the general markets are generally not identified, until it is too late for some in the market. References Advent International (2004) Advent International on Retail. pp 16 -17 Cole, G A. (1998) Management: Theory and Practice. 5th Edition. Letts, London Kleindorfer, P R., Wassenhove, L N., Gatigon, H., and Kimberly, J (eds.), (2004) Managing Risk in Global Supply Chains. Chapter 12. The Alliance on Globalization, Cambridge University Press Matchette, J B., Von Lewinski, H. (2005) Is Your Supply Chain Ready to Enable Profitable Growth and High Performance? ASCET Keynote, Accenture. Torella, J. (2003) Whole-being retail branding: and the concept of a brand as a living being. J.C. Williams Group. Toronto Read More