Get instant access to this case solution for only $15

ZARA- Fast Fashion Case Solution

Solution Id Length Case Author Case Publisher
1008 2430 Words (9 Pages) Pankaj Ghemawat, Jose Luis Nueno Iniesta Harvard Business School : 703497
This solution includes: A Word File A Word File

Essentially, Zara positioned itself as a store selling “medium quality fashion clothing at affordable prices”. Zara’s value proposition can be elaborated on four key aspects of fashionable and affordable clothing, variety of style, scarcity, and prime locations.   

Primarily, strategy of Zara pertains to the offering of the latest fashion trends at affordable prices by keeping in touch with new styles that are prevalent. The designers at Zara visited trade fairs and ready to wear fashion shows at numerous locations including but not limited to New York, Paris, Milan, and London. Additionally, they also go through the catalogues of profound luxury brand collections while working with store managers to come up with the initial sketches for the upcoming collection with almost 9 months in advance. Following this, they look for fabrics and subsequent compliments while simultaneously the price pertaining to the product is also being determined.

The aspect of comparison here is relevant to the design team, which took the role of bridging merchandising and back end of the production process, whilst the competitors including Benetton, H&M, organized individual management teams to consider each process.

Following questions are answered in this case study solution:

  1. What is the value proposition that Zara offers to its customers? How does its value proposition differ from that its competitors?

  2. How specifically do the distinctive features of Zara’s supply chain enable it achieve that value proposition?

  3. How does Zara’s customer’s willingness to pay compare to that of its main competitors? What about its costs? Does Zara have a competitive advantage?

  4. If so, how sustainable is Zara’s competitive advantage relative to the kinds of advantages pursued by other clothing retailers?

  5. What implications does Zara’s value proposition and business model have on its future growth prospects?

ZARA Fast Fashion Case Analysis

Secondly, in terms of variety of style, it should be noted that Zara produces thousands of new styles per year, which demarcates the fact that new trends tend to reach the stores quickly. High frequency information tends to play a pertinent part in this, whereby conversations with store managers, data amalgam from Zara’s IT system, industry publication, internet, TV, and even trend spotters at pertinent locations such as university campuses.

The comparative view depicts the differentiation in that Zara was not run by maestros but rather focused their line on catwalk trends that were rather suitable for the mass market. Other apparel retailers were obsessed with too much creativity that lacked a practical implementation.

Thirdly, scarcity, which implies that by reducing the quantity manufactured of each style, there is a surge in artificial scarcity, which tends to ensure that the risk of stocking is abated. Hence, for customers that walk in to a Zara store, the fast paced turnover tends to create a sense of buying now or the product will not be available later. The counterparts believed in fulfilling the demand, which made sense in terms of heeding towards a profitable bottom line.

Lastly, the prime locations are another pertinent aspect that implies Zara to open a flag ship store in town centre locations, whereby they tend to observe the market trends and subsequently proliferate in their approach towards adjacent locations.

How specifically do the distinctive features of Zara’s supply chain enable it achieve that value proposition?

The specialty of Zara was the emphasis on controlling the vertical market integration and the automation of its production process. Primarily, internal manufacturing was a responsibility carried by 20 fully owned factories. The automation process was thorough from the specialization in garment type to capital intensive parts of the production process and final inspection and finishing. Vertical integration as mentioned, was initiated in the 1980, subsequently, a just-in-time system was put forth within the factories with the assistance of Toyota. This allows for the quick association with current trends in the fashion world to be made available in Zara stores. However, this greater flexibility came with higher cost component.

The adaptation to trends was more of an evolutionary process, which heavily relied on high frequency information. The implication of demand based production is a relatively lower reliance on inventory through the supply chain, resulting in lower working capital requirement. Also, this vertical integration abated the bullwhip effect, whereby; the fluctuations in final demand were rather short lived due to excessive control of the supply chain.

Additionally, there are essentially size economies incorporated, whereby the focus lies on learning by doing (Ghemawat, 2010). The key concept here is that any imitator such as World Co. of Japan is deterred because Zara itself intends to exploit them. Essentially, World Co. of Japan is the only other retailer which has managed to have comparable cycle times. However, its net margins are stuck at 2% due to SG&A (Selling, general, and administration) expenses, which absorbs almost 40% of revenues.

How does Zara’s customer’s willingness to pay compare to that of its main competitors? What about its costs? Does Zara have a competitive advantage?

While making a comparison of four pertinent players in the apparel industry, it is crucial to understand key aspects of each competitor tersely.

The Gap was founded in 1969, and the rather acclaimed profitability time period was during 1980s and 1990s. Following the globalization trends, 90% of it is outsourced from outside of the US. An attempt at repositioning failed and led to excessive write-downs in 2001.

H&M was founded in 1947 and outsourced all of its production. Lead times were longer than that of Zara, yet better by industry standards. The pricing of H&M was lower than that of Zara and utilized a relatively focused approach, entering one country at a time. Its PE ratio while still high dropped due to a fashion miss.

Benetton was founded in 1965 and outsourced through networks with respect to subcontractors. In other words, it sold franchise licenses to individuals, mostly entrepreneurs. It changed its strategy hitting a saturation point, whereby it initiated the consolidation of production activities into production poles. It moved on to create mega stores rather than selling franchise licenses.

Spain

 

Manufactured in Spain

42.24 euro

Cycle Time

6 weeks (30 days)

Labour cost

1.4 euro / hour =

Value Added

2.2 euro

Mark down for Zara

30 %

Mark down for other retailers

30 %

Profit percentage by Zara

40%

Profit percentage by others

25%

Price on average at Zara (WTP)

76.87 euro                (42.24*1.4*1.3)

Price on average at other retailers (WTP)

68.40 euro                   (42.24*1.25*1.3)

Willingness to pay difference

8.47 euro

 

 

Gap

H&M

Benetton

Inditex

Revenues

15,559

4,269

2,098

3,250

Operating expenses

4,276

1,615

624

982

One year change in market value of equity

-60%

8%

-20%

47%

Employees

166,000

22,944

6,672

26,724

Countries of operations

6

14

120

39

Sales in the home country

87%

12%

44%

46%

Stores in the home country

87%

15%

40%

60%

The aforementioned key figures depict the relative performance of each player. A careful analysis shows that Inditex has remained rather persistent, which is the key strength of sustaining superior performance. Its market value of equity has been rising with the highest figure, which depicts satisfaction of shareholders remains of paramount importance. However, since a major driver of Inditex is Zara, it would be fair to make the assumption of mirrored performance. The higher operating expenses can be justified through the automation argument which implies the relative cost of maintaining an automated system.

   

ZARA

  • Vertical Integration leading to short lead times

  • Numerous designers research to initiate designs within a few weeks

  • One distribution centre so low inventory cost

  • Fast expansion

  • Emphasis on the look of the stores

H&M

  • Completely outsources with long lead times.

  • Almost 60% fewer designers

  • Distribution centre per country leading to higher cost

  • Slow expansion

  • No emphasis on store outlook

ZARA

  • Mode of expansion:

  • Joint Ventures

  • Franchise system

  • Company owned

Benetton

  • One mode of expansion:

  • Licensees

ZARA

  • Vertical Integration leading to short lead times

  • Fast expansion

GAP

  • Production outsourced so longer lead times

  • Slow expansion rate

Zara’s competitive advantage is prevalent from the above comparison, whereby its strength of fast production and subsequent distribution emphasises on following latest trends. Additionally, it changes 75% of the display almost every three to four weeks; therefore, the frequency of customer visits rises. Also, Zara makes sure to limit the stock to act on the concept of scarcity and frenzy of shopping spree the moment customer steps in the store. It is important to point out that Zara does not advertise that much, which can be understood key for saving costs with respect to publicity activities.

If so, how sustainable is Zara’s competitive advantage relative to the kinds of advantages pursued by other clothing retailers?

To analyze the sustainability of competitive advantage pertaining to Zara, the tetra threat framework can be utilized. It is based on the identification of a few factors: Imitation, substitution, holdup, and slack. A detailed analysis would clarify the perspective(Ghemawat, 2010).

Primarily, Imitation pertains to the identification of superior performance with respect to the act of imitation to extent that the concept of scarcity would diminish posing as a direct threat to the sustainability of additional value(Ghemawat, 2010). In case of Zara, imitation is handled through scale economies. It deals with national scale suppliers, and is completely vertically integrated, which emphasizes the elimination of imitation lags. Additionally, it also builds barriers in terms of upgrading and private information(Ghemawat, 2010). Private information tends to denote the latest trends through catwalks, journals, and trend spotters in universities. Following the utilization of identifying the latest trends, Zara upgrades the initial sketches to contrast with its target market and sells in limited stocks.

Secondly, the substitution threats faced by Zara relate to straddling or defending, whereby, Zara was created with the perspective of medium quality fashion clothing at affordable prices; thus, straddling and defending pertain to the ability of a competitor to adapt a similar business model and imitate Zara while Zara attains the position of defending itself(Ghemawat, 2010). However, the probability is relatively low due to its excessive automation and astounding vertical integration, requires a whole of capital investment especially in case of a start-up. As opposed to other retailers, Zara utilizes the Just in time inventory stocking method that abates the cost while keeping it efficient.

Get instant access to this case solution for only $15

Get Instant Access to This Case Solution for Only $15

Standard Price

$25

Save $10 on your purchase

-$10

Amount to Pay

$15

Different Requirements? Order a Custom Solution

Calculate the Price

Approximately ~ 1 page(s)

Total Price

$0

Get More Out of This

Our essay writing services are the best in the world. If you are in search of a professional essay writer, place your order on our website.

Essay Writing Service
whatsapp chat icon

Hi there !

We are here to help. Chat with us on WhatsApp for any queries.

close icon