Industry Analysis: Within the global apparel chain, profits are derived from “unique combination of high-value research, design, sales, marketing, and financial services that allow retailers, brand marketers, and branded manufacturers to act as strategic brokers in linking overseas factories” with markets (Gary Gereffi). Barriers to entry are fairly low. Not much capital is needed to enter the industry, as franchises and joint ventures are popular methods of establishing retail stores while keeping costs low. Buyers do not have much bargaining power.
Since buyers are aware apparel companies are quick to do away with failed fashion trends, they usually purchase products as soon as they are available. Most fashion conscious shoppers come from middle to upper income families and therefore, have the discretionary income to spend on clothes. The threat of substitutes in the apparel industry is high. Customers do not incur critical costs or uncertainties when switching to a substitute and therefore, switching to another brand or continuing to wear clothes they already paid for is not challenging.
Suppliers have little bargaining power with apparel retailing chains. Cascading labor efficiencies in developing countries have resulted in cheaper labor and inputs. This results in lower costs and multiple supplier options for retailers. Rivalry among competitors is a concern for apparel retailers. There are many large players of similar size. For instance, Zara has 4% market share in Spain, while H&M hit 10% in Sweden, only to see like-for-like sales declines, proving that there are tight constraints on gaining a dominant market share in the industry. The clothing products are fairly standardized, non-complex, and not heavily differentiated. With three out of Porter’s five forces being of concern, the clothing retail industry is of average attractiveness. Internal Analysis (VRI/N: Valuable, Rare, Inimitable, Non-substitutable): Zara’s strategic advantage lies in the company’s product management control and manufacturing efficiencies.
A core business strategy is synonymous with “continuous innovation based on customer desires” faster than its competition. Rapid communication flows, established through investments in IT telecommunications networks, key store locations, and a “(relatively flat) managerial hierarchy”, facilitate this capability and have proven to be VRI/N for the retailer. This communication network allows Zara to remain more flexible, accurate and efficient with its purchasing, manufacturing and distribution decisions, respective to its wide product portfolio. Specific product performance is clearly recognized, which increases the value of the retailer’s product management control. Nevertheless, Zara’s product management capabilities are only as strong as its manufacturing and distribution processes allow it to be. With this understanding, the retailer has placed itself in a uniquely, powerful VRI/N position, relative to its competitors, through its backwards vertical integration production process.
Zara’s combination of resources provides the retailer with the capability to manufacture and distribute products quickly and cost-efficiently. This web of resources includes internal just-in-time manufacturing processes, global product standardization, heavily invested subcontractor relationships, a centralized logistics model, and a shortened vertically integrated supply chain. Ultimately, Zara’s design and production capability allows it to react quicker than its competitors while maintaining higher profitability. Bold pricing and aura of exclusivity further extend market share. Although Zara is able to capitalize on the strategic advantages noted above, there are tradeoffs associated with this business model. Zara is competing on time and cost. Due to its emphasis on a fast “go-to-market” philosophy, production runs tend to be short, promoting product scarcity and unfulfilled demand. Overall, Zara has thoroughly crafted its resources and capabilities in such a way that will be hard for competitors to imitate. Strategic Issues: Zara faces several challenges in moving forward with its current business model.
As global expansion is planned, positioning a central design team will create superfluous feedback loops. The centralization of design, operations and distribution may have worked thus far but it is a different scenario when applying that framework to 2000 stores as opposed to 1000 stores. The benefits from a quick response (QR) strategy of fashion following resulting in a short product turnover time may not last with global expansion. Zara will need to handle the “Bullwhip Effect”, which it has avoided thus far. A dynamic customer order intake across the globe will build order fluctuation resulting in large inventory swings upstream in the supply chain. Zara’s comfort with backward vertical integration will be put to the test, as it will not be possible to control factors surrounding manufacturing, warehousing, and retailing all at the same time.
Current design mistakes will hurt even more within a more global Zara with impact to logistics (returns), reputation and social media presence so a distributed design function at hub locations will help, as local design teams focus on local markets, reducing the possibility of errors or mishaps. Zara must adjust profit projections, as it gets ready to expand internationally. While sales will increase, the costs associated with shipping, coordinating lead times, modifying design for larger markets and revamping stores will create new costs. Recommendation: It is important to enter new markets in a phased manner. Zara must explore introducing products online before setting up expensive brick and mortar stores. Zara must align with well-established fashion shows to introduce new products, assess public response and decide on pricing by increasing advertising spend.
Zara must outsource operations to locations such as Mexico, China, Vietnam and India to better serve future markets in the Americas and Asia. It must streamline operations and utilize a shared-services model for operations and logistics. Zara must adopt a hub based distribution network while continuing the practice of cross docking to maintain profitability. The regional centers could be chosen next to new operations facilities in Mexico and developing Asia. Zara must start hiring from local markets or schools and develop a world-class in-house training program wherein new store managers have a chance to work at established stores in Europe before returning to their home countries to manage new stores.
Zara must consider opening discount stores in markets where the ratio of per capital spending in apparel to per capita income is low but where there is a sizable population. Even with a 15% markdown compared to the industry standard of 30%, Zara will increase market share, revenues and profits. Zara should also explore creating additional product lines for children, men and women across different age groups to increase product appeal. Additional sales will help Zara meet financial projections. Overall, Zara must continue to expand in North America, Asia and rest of Europe.