Zara: The World’s Largest Fashion Retailer – Competitive Analysis And Value Chain Activities

Value Chain Analysis

Question:

You are required to know the Competitive Situation and the Internal Functioning of Zara.

The case study under consideration is called “Zara: The world’s largest fashion retailer” by Ferdows, Machuca, and Lewis (2014). This case study won the production and operation management category during a competition held in the year 2017 called The Case Center Award and Competition. We first consider competitive situation based on Zara case study so as to determine the internal functioning of Zara along with aspects of the competitive environment surrounding the market venture.

Through the application of value chain activities, the concept of the internal functioning of Zara can be analyzed from several concepts of marketing environment. First, it is significant to state that the value chain of Zara is not simple to copy. Again, the value chain is not invulnerable and finally, the value chain failed to dominate the present and future business operations in the market (Thomas, 2009). All these aspects are caused by business model applied in Zara. Zara needed to respond to the business environment, react to threats and opportunities or rather gaps in the markets so as to achieve competitive advantage.

Zara value chain analysis involved primary activities that are inbound logistics. Inbound logistics typically relate to the raw material used to make fashions and designs in the industry. First, Zara outsourced raw materials from Hong Kong as well as from China so as to improve the quality of fabric used in manufacturing process. Again, Zara had to force prices to stay down so as to retain competitive advantage in the market.

Again, Zara ensured that half of the fabrics retained original plain color so as to facilitate seasonal updating.  This value chain activity was achieved via vertical integration. Zara managed to receive finished fabrics. This fabric was obtained from 100% owned subsidiary of Inditex. Inditex is widely known for the application of just in time manufacturing system. Zara also received patterned and dyed fabric from the same company.

This section deals with operations in terms of intermediate goods and components. Zara employed an advanced system in telecommunication so as to connect sales locations, supply, and production unit to headquarter. Again, Zara managed to manufacture fashion sensitive items from inside operations and later managed to outsource 85% of price-sensitive items in-house production.

In addition, automation of factories was highly regarded which was demonstrated via application of specialized garment type. Lastly, Zara managed to maintain long-term ties and long-term relationship with 450 sewing workshops and many suppliers which reduced their contractual commitment.

Operations

From figure 3.1, there are several aspects that can be considered. Zara made consistent growth in terms of sales. Each year, the number of sales made increased. This is a positive trend from 1991 to 2013. This trend can be associated with product innovation. Zara deal with clothes manufacturing. The business achieved growth from application of advanced technological measures which probably increased sales made each year.

The technological business model was applied by Zara. Through value chain analysis, it was clear that Zara used technology for clothes identification and clothes manufacturing which was later used to reach the market. This was able to reduce operating costs and expenses such as advertising costs. All these aspects assisted in achieving appropriate internal functioning of Zara.

Zara has managed to venture different market areas despite facing unhealthy competition in the market. Initially, Zara was faced with a problem of retailing where customers had to make orders. This process delayed the supply of clothes based on consumers’ fashion and design. This process paved the way for competitors who would dominate the market at the expense of Zara. Competition is about knowing what consumers want so as to satisfy their lists of preference. In that connection, Zara needed to consider the design and fashion that consumers needed. This can be determined via application of modern technology. Technology has a wider application in designing different fashions and models in clothing industry (McGregor, 2012). Aspects to be considered in clothing design and fashion would include the color of the clothes, the texture of skin sensitivity, changes in temperatures such as hot weather and cold weather. This competitive strategy in clothing industry will attract consumers and customers. Zara used technology to identify fashions and designs in the clothing industry. At the same time, technology was applied in manufacturing those fashions and designs.

For subsequent years, Zara managed to increase retail stores in different corners of the globe. Statistical data have been used to determine a trend. This data from figure 3.1 indicates the net worth of Zara despite competition in the market. The number of countries ventured along with retail stores operated. Therefore, considering the revenue generated by Zara, the aspect of market shares, the value of the market, key players in the market and growth rate of the business become vivid.

In addition, the concept of external environment and internal environment that arise on Zara can be analyzed critically using SWOT analysis model indicated in table 3.2. This model provides details on strengths, weaknesses, opportunities, and threats. Zara had to face these issues so as to realize growth as indicated in growth rate demonstrated by an increase in the number of countries ventures along with retail stores operated. Strengths and weaknesses demonstrate internal environment while opportunities and threats demonstrate external environment.

Strengths. Conventional wisdom in apparel retail makes the technological model much strategic for Zara in the competitive environment. Zara has applied advanced technology so as to dominate the retail fashion industry. The technology was available for identification and manufacturing process of new cloth designs and fashions.

Weaknesses. Zara has also struggled with the downside of cost-centric contract. There were a lot of unsold items in different stores across different markets. Again, overseas contract manufacturers may need confiscated leading timeframes, attempting to determine what customers and consumers require months in advance. This is a tricky business to operate.

Opportunities. Zara had an opportunity to have chain profitability from the new designs and fashions in the market. Contract manufacturing also becomes appropriate in providing Zara with several benefits such as reduced expenses and increased profits. There was a business expansion for fashion and design in the clothing industry as operated by Zara within the various market of the world. In that case, there was an opportunity for global expansion.

Threats. Many fashion retailers provide invoices to place orders for a periodic collection months before these lines make an appearance in stores. Many stores were shut down by Pressler as a result of bad bets on style as well as in color. This reduced value chain profitability. Just in time manufacturing model was in initiation phases. Zara was not aware of what may result from the application of just in time manufacturing model.

Growth and Expansion

The secret behind Zara’s success is based on market dominance. This facilitates attainment of competitive advantage in the market. Again, the secret of Zara is based on the application of technological advancement in identifying designs and fashion along with manufacturing process.

From figure 3.3, Zara demonstrates a series of value chain activities. There are primary activities and support activities. In primary activities, Zara deals with inbound logistics, operations, outbound logistics, sales, and marketing. For the case of support activities, Zara deals with the organization, human resources, technology, and purchasing.

Zara has managed to venture into different markets including Asia. It is possible to gain a strong foothold in Asia because Zara has managed to reach online retailers using technological advancements. Zara managed to get closer to consumers who are in demand for their products. Again, population involving consumers in Asia is quite high that may need close attention. There are few clothing industries in Asia. This implies the possibility of market trend in Asia will increase in future. Again, the population in Asia is an upward trend which implies more gaps need to be filled by Zara.

Those threats indicate the competitive pressures faced by Zara. In that case, Zara can respond to these pressures or rather threats by employing the following strategies. First, Zara can apply technology in the manufacturing process as well as in the identification of different designs and fashions (Clardy, 2013). Technology can solve cases of color management and styles. Again, through technology, Zara can manage the marketing of clothes to different parts of the market venture thus reducing advertising costs and other corresponding expenses.

In figure 3.4, we consider supply chain management employed by Zara.  From statistical data on the supply chain, we find out that Zara releases 12,000 new designs each year. Again, there are about 30,000 stock keeping units per year. The inventory turnover made by Zara is estimated to be 12 each year. Zara commits more than 50% of their production in advance for the coming season. Lastly, the entire industry report 20% unsold items on average (Cocca & Alberti, 2012). In that case, Zara holds 10% of unsold items in terms of stock per year.

Zara can as well respond to competitive environment by applying competitive strategy to bargain market dominance. Zara can offer quality designs and fashions with admirable prices so as to attract customers and potential consumers. This can as well be achieved by absorbing small-scale competitors via mergers, acquisition, and amalgamation.

Figure 3.5 indicates the market area covered by Zara in Asia. The demographic data provided demonstrate the trend of consumers toward new designs and fashions. Based on age and level of income, demographic distribution of consumers increase as age increase and an income increase. Thus, more items are consumed by high-income earners and consumers beyond 30 years old.

In the case of online retailers, Zara needs to apply new technology so as to facilitate communication strategy without delays in decoding and encoding of necessary data for making orders regarding online retailers.

The customers and consumers need quality fashions and designs at affordable prices. Zara has managed to offer quality fashions that are inexpensive to consumers and customers in the different market venture.

References

Clardy, A. (2013). A General Framework for Performance Management Systems: Structure, Design, and Analysis. Performance Improvement, 52(2), 5-15.

Cocca, P., & Alberti, M. (2012). A framework to assess performance measurement systems in SMEs. International Journal of Productivity and Performance Management, 59(2), 186-200.

McGregor, D. (2012). The Human Side of Enterprise. New York, 21.

Thomas, K.W. (2009). Intrinsic Motivation: What Really Drives Employees Engagement. Berret-Koehler publishers.