ZARA: Fast Fashion

Strategic Positioning Case Analysis by Betty Halegoua Tamara Levi Lora Santurdzhiyan Lena Stangl

ZARA
500 Stores in 30 countries Created in 1975 Continuous innovation based on customer desires Clothes and accessories for women, men and youth from infants to age 45

1.

Identify the resources and competences and analyze them through a strategic capability analysis.
Strategic capability analysis is the resources and the competences of an organization needed for it to survive and prosper.

Strategic Capability Analysis

Resources
Threshold resources 1. Tangible 2. Intangible

Competences

Threshold capabilities

Threshold capabilities

Capabilities for competitive advantage

Unique resources 1. Tangible 2. Intangible

Core capabilities

Strategic Capability Analysis

Threshold resources : resources needed to meet customers minimum requirements Threshold competences : Activities and processes needed to meet customers minimum requirements

Unique resources : resources that create the competitive advantage and are difficult for competitors to imitate or obtain Core competences : Activities that create competitive advantage and are difficult for competitors to imitate or obtain

Strategic Capability Analysis

Tangible resources are the physical assets of an organization such as: 1. Physical resources (Machines, buildings) 2. Financial resources (capital, cash, debtors creditors etc. ) 3. Human resources (skills and knowledge of employees) Intangible resources are non-physical assets such as information, reputation and knowledge.

Threshold resources

Strategic Capability AnalysisZara

Human Resources Creative team of designers Product development personnel specialists

Strategic Capability AnalysisZara

Machines and Buildings Totally automated factories 130,000 square meters warehouse telecommunication system to connect headquarters with supply, production and sales departments 507 stores (488,400 square meters of selling area) (Today approx. 2,000 stores) 20 fully owned factories Distribution channels (400,000 square meters faculty)

Strategic Capability AnalysisZara

Unique resources Highly visible location of the stores (central) Attractive storefronts (great care in the presentation)-customer comes 17 times/year Vs 3-4 years for competitors Mainly working with grey fabric (flexibility) 11,000 distinct items/year while just 2,0004,000 for competitors Shipments by time zone (24-36 hours inside Europe, 24-48 hours outside Europe)

Strategic Capability AnalysisZara

Threshold competences Manufacturing the most sensitive products internally- fast fashion- production in house Designers track customers preferences Locally targeted brand Vertical integration reduces the Bullwhip effect Limited outsourcing Producing only 20% in advance and 55% in the middle

Strategic Capability AnalysisZara

Core competences Short cycle time : Entire new design within 45 weeks (6 months for competitors), modification and restocking of existing goods within 2 weeks (3 months for competitors) Low administrative expenses (20% of its revenues while40% for competitors) Learning by doing failure rates 1% while 10% for the sector No advertisements (pointless distraction)0,3% Vs 3,5%

Strategic Capability AnalysisZara

Other competences Clients have the opportunity to create their own clothes makes them feel special They select their own preferences then they receive a mail with the new arrivals matching their selection Large variety, small quantity

2.

Provide a value chain and conclude where the value is created

2. Provide a value chain and conclude where the value is created

The value chain describes the categories of activities within and around an organization, which together create a product or service. by Michael Proter

Primary activities are directly concerned with the creation or delivery of a product or service. e.g.:
Inbound logistics Operations Outbound logistics Marketing and sales Service includes

Support activities help to improve the effectiveness or efficiency of primary activities.

Procurement Technology development Human resource management Infrastructure

PROTERS MODEL FOR VALUE CHAIN ANALYSIS

2.1 Inbound Logistics

Inbound Logistics the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required Raw material: Italy, Spain, and Greece 5 days to facility in Spain - road haulage does not stock inventory reduced inventory risk Comditel (a 100%-owned subsidiary)
more than 200 external suppliers of fabric and other raw

materials

dyeing, patterning, and finishing of gray fabric supplying finished fabric to external and in-house

manufacturers

2.2 Design

Store managers - info directly from the points of sale continuously tracked customer preferences
IT system product life cycles

catwalk trends - for the mass market No maestros - very flat design structure Designers work with store managers trend spotters on university campuses and discotheques young, fashion-conscious staff

several dozen items designed each day

Learning by doing

2.3 Operations

Operations the processes of transforming inputs into finished products and services. 11,000 distinct items produced during the year (2,0004,000 competitors) Vertical integration into manufacturing & a just-in-time system The most fashionable and riskiest items - produced in small batches internally or under contract by suppliers located close by better control! Vs. basic items - outsourced to Asia (1/3 of items) 20 owned factories highly automated to control costs and speed up production Factory in Spain: flexible manufacturing systems (FMS) fast turnaround in designs and productions

2.4 Outbound Logistics

Outbound Logistics the warehousing and distribution of finished goods

Zaras own centralized distribution system - Arteixo DC

early morning - the DC packed and shipped to the Americas, the Middle East, and Asia afternoon - European stores

Shipments from the warehouse:

twice a week to each store shipments two days a week to one part of the store network, two days a week to the other

Proximity reduces shipping costs

2436 hours in Europe

2448 hours outside of Europe only a few hours in warehouses

2.5 Marketing & Sales

Marketing & Sales the identification of customer needs and the generation of sales. only 0.3% of revenue for marketing (3%-4% used by competitors)

stores and word-of-mouth - more influential than advertising

a cost advantage over its competitors

invests in store locations and store layouts

broad, rapidly changing product lines

using the stores to promote market image

power coming from:

freshness of the offerings an attractive ambience in stores buy now because you wont see this item later

climate of scarcity and opportunity

2.6 (support) Organizational infrastructure

Organizational infrastructure support systems and functions, such as finance, planning, quality control, and general senior management Flat and decentralized decision-making prices are fixed centrally, the store managers focus on volume and mix The store managers
deal with the customers, property owners, and contractors

2.7 (support) HRM

HRM- activities concerned with recruiting, developing, motivating, and rewarding the workforce of the organization. Promotions - approximately 90% of store managers from within

Training - responsibility of the section manager & on-the-job

comprehensive training program including training at other stores and a two-week training program at Zaras headquarters

Personnel assessment - job of the store manager

Store managers
receive a fixed salary plus variable compensation compensation very incentive-intensive

2.8 (support) Technology development

Technology development managing information processing and the development and protection of knowledge in the organization

computer-assisted ordering (CAO) from hand-held computers in the stores invested heavily on IT platform agents are sent to pick up latest designs within 6 hours using technology they send the sketches to the factory with slight differences in the design Madonnas dress

2.9 (support) Procurement

Procurement how resources are acquired for the organization (e.g., sourcing and negotiating with suppliers)

Europe had historically dominated Zaras sourcing patterns sourcing from the Far East (China) will expand substantially

Most significant advantages:

Reduced cycle time due to the quick response system ECR (Efficient Consumer Response):

Integration of the roles of manufacturer, designer and

retailer Synergies due to IT tools

Demand- and consumer-driven

Vertical integration Lower quantities and more styles Broad target market

ZARA was described by Louis Vuitton Fashion Director Daniel Piette as "possibly the most innovative and devastating retailer in the world.

3. Provide a value network and conclude where the value is created

A Value Network...
... is the set of interorganisational links and relationships that are necessary to create a product or service. ... is based on collaboration between the network participants who focus on valuecreating activities and aim at creating value through collaboration.

The value network (Bovet and Martha, 2000a)

Value Network - Main Characteristics

collaborative

flexible
agile & dynamic focus on end-customers use of technology intangible assets ability to respond rapidly information sharing

focus on value-creating activities

future-oriented

constant development

The Value Network Key Questions

Where are cost & value created? Which activities are centrally important to the organisation? o Retain direct control of core capabilities o Outsource less important activities Where are the profit pools? o Potential profits at different parts of the value network o Availability of competences to compete in these areas

Make or buy? o Outsourcing o Develop competence in influencing performance of other organisations

Who are the best partners?

o What kind of relationships are required?

The value network - Zara

The value network - Zara

4. Undertake an analysis of the strategic capability of the organisation using the VRIN analysis

VRIN Analysis
VALUE

RARE

RESOURCES
INIMITABLE

sustainable competitive advantage

NONSUBSTITUABLE

VRIN Analysis
VALUE
Company resources which:

improve the effectiveness of the firm outperform competitors reduce weakness / eliminiate threats ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ZARA a combination of resources

The Vertical Integration
design, warehousing, distribution and logistics function done by Zara itself more flexible and faster than competitors (apparel industry!)

Chief core competency: In-house production

flexible in the variety, amount, and frequency of the new styles which are produced costumers constantly provided with updated products rapid product turnover // scarcity increases the frequency and rapidity of consumers visiting the stores/ buying the products company sells more items at full price

VRIN Analysis
VALUE

Quick-response system (HR + IT ) Product development teams (high-fashion fairs) translate the latest trends of the season into Zaras designs Better response to the demand of consumers vs. the competition

VRIN Analysis
RARE

Unique resources or resource or used only by a small number of competitors The extent to which rarity of competences might provide sustainable competitive advantage: Ease of transferability Sustainability / Rarity could be temporary Core rigidities

ZARA
emphasize on capital-intensive industry / labor-intensive able to produce new items and deliver them to its stores in less than three weeks! (average six months needed) production / typical season ~ 11000 different items (competitors ~ 2000 /4000)

VRIN Analysis
INIMITABILITY
Sustainability mainly relies on competences, rather than resources The competences must lead to levels of performance that are significantly better than competitors The competences must be difficult for competitors to imitate or inimitable

Complexity
Internal linkages (ability to link activities and processes that together deliver customer value) External linkages (difficult for others to imitate / activities developed together with the customer)

Culture and history

taken-for-granted activities/ managers may not understand them explicitly path dependant

Change
Innovation Competitive advantage

VRIN Analysis
INIMITABILITY
Today: almost everything is imitable

The question: How long it takes to imitate?!

If competitors were to copy Zara business model / only in a long run few years to establish vertical integration model specific supply chain organizational structure (culture) unique for Zara enormous costs which firms would face in order to copy the model (often impossible ) Meanwhile : Zara = constant small changes would probably progress more in other segments

Once a month, come here thinking that we are near bankruptcy. You will find a lot of things to change.
Inditexs founder Amancio Ortega

VRIN Analysis
NONSUBSTITUABILITY
Resources that are like bricks in the business-model; hard for others to remove/ substite Competence substitution Product or service substitution

ZARA
Produces ~ 11 000 items much more than average wide item variety (small quantities, high flexibility) Highly developed internal communication systems and distribution model shorter lead-times/ consumer in a very center (industry innovation!) responds instantly to shifts in the new consumer trends Clothing industry basic technology changes rather slowly (high capital needed) STILL : firms which outsource today have almoust as short lead-times as in-house producers (transportation decreased remarkably) Zaras advantage unstable in a long perspective

5. Provide a weighted strength assessment based on the example below

THANK YOU FOR YOUR ATTENTION!