Zara is a Spanish clothing and accessories retailer, which was founded in 1975 has become one of the world’s largest apparel retailer. The key to Zara's success was its vertically integrated structure where design, production, distribution, and retailing were integrated. The vertical integration of their production system allows them to place a garment in any store around the world in a period between two to three weeks. Zara's vertically integrated supply chain received the attention of industry players and analysts. According to Richard Hyman of Verdict, a retail consultancy in London, "Vertical integration has gone out of fashion in the consumer economy, Zara is a spectacular exception to the rule." Zara introduced about 12,000 designs every year; the shelf life of each design was about four weeks. Instead of more quantities per style, Zara produces more styles, roughly 12,000 a year. Thus, even if a style sells out very quickly, there are new styles already waiting to take up the space. By reducing the quantity manufactured in each style, Zara not only reduces its exposure to any single product but create artificial scarcity. As with all things fashionable, the less its availability, the more desirable the object become.

By January 2006, Zara had 853 stores, located across the world. These stores received two deliveries from Zara's central distribution center every week. The deliveries were customized in accordance with the data sent by them every day. Zara pioneered the concept of customized retailing and was able to conceptualize the garment, develop, and deliver it to the stores within two to three weeks. One of the secrets behind Zara's success was its ability to spot emerging trends and react quickly. Zara had a dedicated design team in in northern Spain. Ideas for new designs or for modifications to be made in existing designs mainly came from Zara's stores. The store managers and sales staff updated the head office every day about the moving stock and about customers' demands. Across all the stores, Zara's sales staff was equipped with wireless handsets which provided data to the store manager about the pieces sold. The manager consolidated the data and sent it to the company headquarters through the Internet. Instead of projecting sales for a certain color, fabric, or style and launching such products, Zara reacted swiftly to emerging trends in the fashion industry. The company ensured that its stores were stocked with the products that the customers wanted at that point of time. In contrast, other retailers took between 8 and 12 months to forecast and arrive at a style and send it for production. Zara's initial forecast was limited to the kind of fabric and the amount of fabric it would buy. The fabric thus procured was unprocessed and undyed and Zara colored the product only before selling it, based on the need and demand by consumers.

Zara sourced undyed fabric from the Far East, Morocco, and India. Of the outsourced production, about 60 % came from Europe, and 30% from Asia, while the balance from the rest of the world. In fact, almost half of its production is in owned or closely-controlled facilities. While this gives Zara a tremendous amount of flexibility and control, it does have to contend with higher people costs, averaging 17-20 times the costs in Asia. Industry analysts were of the opinion that Zara could not continue with its supply chain model for too long. With many retailers moving their manufacturing processes to India and China to control costs, Zara would have to follow suit sooner or later in order to remain competitive. However, if the production was to move out to low cost countries, Zara could lose its advantage and might not be able to refurbish its product lines in quick succession, the analysts felt.

Design and product development is a highly people-intensive process, too. The heavy creative workload of 1,000 new styles every month is managed by a design and development team of over 200 people, all based in Spain, each person in effect producing around 60 styles in a year (or 1-2 styles a week). With new styles being developed and introduced frequently, each style would provide only around 200,000-300,000 of retail sales, a far lower figure than other retailers or brands, and certainly not “cost-efficient” in terms of design and product development costs. But obviously, this higher cost of product development is more than adequately compensated by higher realised margins. In addition, the entire product development cycle begins from the market research. This combines information from visiting university campuses, discos and other venues to observe what young fashion leaders are wearing, from daily feedback from the stores, and from the sales reports. This has meant a significant investment in information technology and communications infrastructure to keep streaming up-to-date trend information to the people making the product and business decisions. At the leading edge of research are the sales associates and store managers in Zara stores, who zap orders on customized handheld computers over the Internet to Zara headquarters based on what they see selling. And not just orders, but ideas for cuts, fabrics or even a whole new line. They draw upon customer comments, or even a new style that a customer might be wearing that could be copied for Zara's stores. Traditional daily sales reports can hardly provide such a dynamically updated picture of the market. Garment styling for Zara starts from the email or phone call received from the stores. Thus, from the beginning, Zara is responding to an actual need, rather than forecasting for a distant future.

Question

(a) How does Zara’s strategy lead to competitive advantage? How does the company achieve this strategy?

(b) As compared to other firms in the industry, Zara chooses to source mainly from Europe. Evaluate the pros and cons of this approach.

Answer rating: 100% (QA)

a Z ara s strategy of vertical integration and customized retail ing leads to competitive advantage by allowing the company to react quickly to emergi... View the full answer