Strategic Management CASE Solution :
Information technology, the internet and changing strategies in the fashion world.
Q1. What business model and strategies is Zara pursuing?
Unlike other fashion brands, which outsource their production, Zara has successfully developed a vertical integration model including design, just-in-time production, marketing, and sales (The Economist, 2001). With vertical integration, Zara is able to meet consumer demands within a relatively short timeframe and respond to market trends quickly. Because the fast fashion industry is constantly changing and hard to predict, the flexibility and efficiency provided by this model is becoming the key factor in Zara’s success.
OVERVIEW OF ZARA’S BUSINESS MODEL
• CONCEPT- Zara basically pays a lot of attention on the designs, process of production and the distribution of its products; it’s the fundamental concept of Zara. It always focus on what the customers want and desire and then works in the direction of making the best possible product available to them to satisfy their needs. Zara thinks that the firms have to be flexible in terms of providing products and delivering services to the customers as the customers are surrounded with lot many options and choices in the market place.
• CAPABILITIES- Capabilities of Zara are required for exploiting the market opportunities to get the profitable results and Zara tries to put control over all its activities like designing, production, manufacturing, strategic partnerships, etc. for getting maximum out of its capabilities. Zara always maintains the required flexibility and speed in the designs as well as the production of its products that is how it is able to produce 12000 of new items annually. This defines the capability of Zara that allows it to attain the set objectives and strategies helping Zara to flourish and expand in the market overseas.
• VALUE DRIVEN- The Value drivers of Zara can be categorized into two- Tangible and Intangible. OVERVIEW OF ZARA’S BUSINESS MODEL
5 C’s OF BUSINESS MODEL
• CO-ORDINATION - The Coordination between the Inventory distribution and Pricing markdown is the key ingredient of Zara’s business model.
• COMMERCE- Zara earns revenue from in- store, online sales, and special offerings of it products. But, mostly it fetch great revenues from its in- store operation and provides almost 18% of overall discount.
• COMMUNITY- In Zara’s business model its customer segment (Girls, Women, Men) plays a vital role and build its community.
• CONTENT- The content related to the products, their different categories, discounts and special offers on Zara’s website seems attractive to the customers and provide relevant information to them.
• COMMUNICATION- Zara mostly communicates with its customers with the help of fashion shows where it portrays its collections. It also make use of social media platforms like Face book, Twitter, Instagram, Pinterest as well as its online shopping website to do the same.
Zara is pursuing a differentiation strategy focused on a speedy supply chain with a quick-response to changes in the market. The company is a quick fashion follower, putting more emphasis on their vertical integration than on a low-cost strategy like Wal-Mart. Zara recognizes that they are in a volatile, buyer-driven industry and heavily invests in manufacturing logistics and IT to stay on top of their competition. With their JIT manufacturing system, mobile tracking system in retail stores, information systems that support detailed analysis of product life cycles, and fashion-conscious staff, Zara can respond quickly and accurately to changes in the market. Using these systems and vertical integration tactics, the Spanish chain has an extremely short lead-time and a mitigated bullwhip effect. The short lead-time combined with their large, centrally located distribution centers allows the company to make changes later in the fashion season to increase profits by season’s end. Products are produced in small batches, not staying at the distribution center for more than 3 days. The majority of merchandise in the stores last only 3 to 4 hours. Experienced Zara customers know that if they see something they like at the store they better buy it because it won’t be around much longer. The frequent changes of merchandise cause customers to visit more often, which plays in favor of Zara’s business strategy.
Business Level Strategy – Cost Leadership
In order to achieve low costs but maintain high fashion, Zara imitates the latest haute couture designs and makes similar clothing with less expensive fabric (Ferdows, Lewis, & Machuca, 2005). Furthermore, for each new design, Zara only produces small quantities to sell. By doing this, Zara can cut losses quickly when a certain design is not popular, and it can also cut inventory costs effectively (Tiplady, 2006).
Corporate Level Strategy – Single Business
More than 95% of Zara’s sales revenue comes from its clothing business. Although Zara also makes home furnishing under the brand Zara Home, this only contributes 2.3% to total revenue (Inditex, 2011).
International Strategies – Transnational Strategy
Zara seeks to achieve both global efficiency and local responsiveness. Due to vertical
integration, Zara has more flexibility than its rivals in terms of moving products from the designing stage to the store shelf (The Economist, 2001). In order to respond to local customer preference changes, Zara transmits customer feedback directly to its massive design team in Arteixo in Spain, facilitated by information technology (Hume, 2011).
Q2. How has Zara’s business model changed the nature of industry competition?
Zara’s business model compelled other competitors to adopt a similar approaches like Zara, that is bringing out new cloths collection several times a year and instituting price markdowns to sell inventory quickly.
Q3. What new strategies have emerged in the fashion industry as a result?
The changing dynamics of the fashion industry have forced retailers to desire low cost and flexibility in design, quality, and speed to market, key strategies to maintain a profitable position in the increasingly demanding market.
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