Good Zara Case Study Case Study Example

Company background

Zara is the Inditex’s largest fashion chain founded in the year 1975 in Galicia, Spain. The chain has continued to generate highest profit margins for Inditex. Among all the chains, Zara is the most recognized chain since the majority of Inditex captured market is for it. The chain has fruitfully proven itself as a top corporation that is successful in offering service to their clientele. Zara rejects blow-out sales and media advertising and, as a result, it offers a substitute outlook to the clothing retail business model. In addition, Zara maintains the majority of its process of production in-house instead of outsourcing to the low-cost nations. However, Zara has turned out to be the most expansive and largest retail chain since its establishment. Zara had product lines for men children and women when it was established with each product line having its creative team of product development personnel, sourcing specialists, and designers.
The feedback from the fashion-forward young individuals, staff, and managers helped the creative team in creating the product line and making the changes for the fashion chain. Nonetheless, the retail chain’s clothing line changed continually throughout the season. For this reason, Zara's design team had to make the collection in advance just like the other apparel brands. In addition, the design team had to use the retail chain’s IT system to collect information from the market feedback to create the suitable modifications to the fashions. The retail chain continued to maintain a flat organizational system with its designs coming from several sources instead of from one key designer. As a result, Zara made changes to its products all over the season and it is worth noting that its product failure rate was 1 percent compared to the 10 percent for the industry (Ghemawat, Nueno, & Dailey, 2003). The fashion chain considered learning by doing imperative in realizing the positive results.

Problem/Issue Statement

Zara does not spend much on advertising, compared to its competitors. The specialty retailers spent 3 percent to 4 percent of their revenues on media advertising, compared with 0.3 percent for Zara (Ghemawat, Nueno, & Dailey, 2003). Thus, Zara only spent a tenth of what its competitors spent in advertising their products. In addition, the fashion chain’s vertical integration strategy has some shortcomings. For one, Zara’s few manufacturing facilities make it unable to capitalize on the economies of scale so as to create a large amount of clothing for a relatively low-priced unit price. In addition, compared to its rivals, Zara’s supply chain costs of production are quite high. Additionally, Zara’s design team observes the clothing trends and reacts to the tastes of its consumers, implying that it does not forecast the future season’s product before the production. A large amount of Zara’s production is in Spain and, as a result, it faces great pressure to expand its operations globally.

Situation Evaluation

Zara’s success in satisfying its customers and dominance in the clothing industry has been facilitated by the strategies that it implements and its operating environment. The situational evaluation of Zara involves the evaluation of both external and internal environment under PESTLE analysis and SWOT analysis respectively.

PESTLE analysis

Concerning the political factor, Zara has been operating in Spain for quite some time and, this implies that the political environment in this country supports the fashion industry. For this reason, Zara should first evaluate the political support that the governments of the other countries where it desires to expand its operations. About the economic factor, the economic conditions in many countries throughout the world have been changing in the past decades, but Zara has been successful in obtaining its market share. The clothing market in Spain is stable and predictable hence this has facilitated Zara’s success. Concerning, the social, environmental factor, Spain is based on independent cultural roots. In addition, it has a calm social environment with lots of cultural events that attract many tourists. For this reason, the social environment of Spain helps Zara to obtain lots of customers. Many of Zara’s rivals have taken the technological concepts in the market in the manufacturing processes. Zara has established its technological growth through opening eco-friendly stores. On the topic of the legal factor, the rules of Spanish government promote and support the industrial development in the country. Finally, the environmental issues include a combination of competitors, customers, and internal corporate factors. Zara ought to discover new domains and cross boundaries.

SWOT analysis

Concerning Zara’s strengths, it has a vertically integrated structure and owns various supply chain levels that allow it to optimize globally rather than locally. In addition, the centralized decision-making makes it possible for Zara to achieve success over its competitors. Additionally, the centralized decision making at Zara reduces the bullwhip effect on its overall supply chain. Additionally, the information within Zara is centralized and, as a result, this allows permeability among the various layers of the supply chain. One of the weaknesses of Zara is lack of communication of merchandise. The fashion chain does not put much stress on the promotional activities, which is vital to attracting more clients. Zara stresses much on the location of its stores to attract customers. The other weakness of Zara is its overdependence on only the domestic markets and European markets.
One of Zara’s opportunities is the expansion of its operations in the United States and other North America markets. In addition, Zara ought to take advantage of the low-cost labor. Zara can also enter the new marketplaces geographically and provide more customers oriented and specialized products. One of the threats facing Zara is the potential oversaturation of its rivals in the current markets. Additionally, the fluctuation of exchange rates might cause a major hindrance to the operations of fashion chain.

Alternatives and Recommendations

Huge media advertising is necessary for the clothing industry for the players to make great sales. In fact, massive media advertising has continually had a positively direct relationship with production sales in the clothing industry. Ideally, Zara lacks an identifiable face in the industry. The fashion retail first releases its clothing in its stores instead of releasing in the runway. As an alternative to media advertising, Zara centers greatly on the location of its stores and the brick-and-mortar design to attract its customer base. The fashion chain also creates the illusion of insufficiency for its clothing to attract customers. Ghemawat, Nueno, & Dailey, (2003:13) claim that the clients had a sense of urgency to buy a Zara product as they knew that the shelf-life of Zara’s clothing was only two weeks. For this reason, Zara should combine its location strategy as well as brick-and-mortar design strategy with media advertising to make great sales. Specifically, the fashion chain should spend much of its revenues on the mass advertising to reach its customers.
Regarding the issue of inability to take advantage of the economies of scale, Zara’s highly centralized distribution system possesses a great threat to its global expansion. The fashion chain’s products pass over the technological distribution center in Spain. As a result, the extra administrative coordination costs and transportation costs needed to ship products poses a major hindrance to Zara's expansion. A single distribution center also causes the problem of the possibility of diseconomies of scale. Ideally, there would be a permanent surge of products in the distribution center if Zara’s expands its operation in another country/continent. As a result, the excess volume of merchandise might exceed the capital working capacity in the distribution center and render it unable to handle the old and new demand. For this reason, Zara ought to establish another distribution center to facilitate the excess demand that would be brought about by the expansion. In particular, the retail chain should locate another distribution center around a promising new market.
Zara’s supply chain costs of production are high as already mentioned in the issue statement section. The alternative to the retail chain’s production costs is cost minimization in machinery and workforce. For this reason, Zara should invest in highly skilled workforce and highly flexible machinery so as to produce clothing in an efficient and quick manner. In addition, Zara should start forecasting on the future season’s product before the engaging in the production. It is imperative for Zara’s mother company, Inditex to concentrate its energy on Zara specifically because this fashion chain has greatly facilitated its success. Inditex already has an efficient production in the Asian market. For this reason, it should look for other promising markets where it will establish itself firmly. In particular, Inditex should make efforts to establish Zara in the United States. Zara ought to focus on online shopping in the United States to identify the tastes and trends of the market and, thus, establish a distribution center to help in curbing the high transportation costs. The establishment of Zara in the United States will facilitate its expansion in the North American markets.

Action Plan

Zara should have a short term and long term plan to weave effectively into the America Fashion fabric. Regarding the short term plan, the fashion chain should use its online shopping environment to enter the US market and observe the preferences and trends of various demographics. In addition, Zara needs to save the overhead costs by delivering their products in the United States through the delivery systems such as Fed Ex and UPS. The instantaneous update of Zara’s inventory and selection on the website will help the fashion chain in reducing its overhead costs. Additionally, Zara ought to market itself aggressively to encourage online shopping in its website since American buyers are used to to marketing campaigns that are aggressive.
After gathering adequate data through its online shopping environment, Zara should now go on to the long-lasting goal of producing products targeted precisely for the United States market. In the United States market, they should target younger men and women and retain the clothing line for the children. In addition, Zara should expand physically into the United States to increase its presence. In fact, the fashion chain should expand from the high demand areas to no demand areas and build distribution hubs to maintain their physical expansion. It is worth noting that these distribution hubs would function as the disbursing and receiving hubs and facilitates its recognition.

Reference List

Ghemawat, P., Nueno, J. L., & Dailey, M. (2003). ZARA: Fast fashion (pp. 1-35). Boston, MA: Harvard Business School.