IB Case Study

ZARA
Assignment- 3

Gunjan Jadon Roll No.116 PGDM-B 1/13/2012

Q1. Outline briefly the International Business Environment for the Global Fashion Retail Industry in 2005. How has it changed today? Explain your rationale. Name any 5 key competitors for Zara today. . International Business Environment The typical apparel manufacturer is almost always located in low wage market that employs a few dozen workers. In highly labor intensive process workers make specific pieces of clothing which are then integrated with output of hundred of other companies spread across dozens of other countries. The final output is then supplied to the retailers. The retailers had major percent of their sale from the National selling rather then outside home country market. Earlier apparel firms used to concentrate only on one activity at a time. The demand in the market has forced these trading companies to co ordinate their activities to cater to the consumer demand in stipulated time. Today the global fashion retailer industry has changed a lot. The cycle time has been reduced significantly of supplying of apparel from supplier to the buyer. This has been possible because

1) Reduction in tariff barriers leads to the ease in transportation of goods easily from one country to another. 2) Integration in markets- What fashion trend is followed in Paris can be easily be made available in Germany through better communication via internet and other channels. 3) Advancement of technology such as inventory tracking system helped in quick delivery and managing the inventory. a) Creation in value chain through co ordination of activities. b) Using just in time techniques for delivery of goods. c) Coordination between market researcher s sales people with the Design production and delivery as they are the ones who are responsible for punching in trends. 4) Diffusion of business, executive and technical expertise across countries. 5) Change in government Regulations. Five top competitors for Zara are- H &M, GAP, Urban Outfitters

Q2. Using the diagram for Porter's Five Forces framework, analyze the Global Fashion Retail Industry for its industry structure and attractiveness. Explain your rationale.

Firms in other industries offering substitute

Competitive pressure created by the supplier bargaining and supplier seller collaboration

Competitive pressure created by other firms in the market

Buyers bargaining power creating pressure

Competitive pressure created from the threat of entry of new entrants.

Porter Five Forces Model Attractiveness Parameter The Global Fashion Retail Industry 1) The Growth rate in the industry is the attractive parameter for rivals to enter into the market 2) Industry Profitability 3) Size of the market and the amount of customers in the market attracts the customer in the industry 4) Ease in the availability of raw material and supplier in the industry. 5) Factor conditions Such as technology required Skilled labour availability Machinery

Ability of the industry to convert one time customers to regular customers

Q3. Explain the term "Industry Driving Forces" and its strategic significance for an MNE. Name and explain the driving forces for the Global Fashion Retail Industry and their strategic significance for Zara Ans : "Industry Driving Forces" are the forces that can change/transform an industry's structure. Eg. : Globalization, internet, technology etc. "Industry Driving Forces" are strategically significant for an MNE as these forces essentially drive the International Business Strategy of an MNE and can transform the industry structure including the following:
y y y y y y y y y

Changes in the long term growth rate of the industry. Changing technologies. Changing customer preferences. Evolving customer buying and usage patterns like online buying. Changing income levels, education levels around the world. Manufacturing innovations that revise cost and efficiency frontiers. The diffusion of business, executive and technical expertise across countries. Change in government regulation, such as privatization, FDI limits etc. The entry or exit of major firms, such as the emergence of large scale foreign companies The driving forces for the Global Fashion Retail Industry are:

y y y y y y

Increasing globalization Manufacturing process innovation Marketing innovation Changes in cost and efficiency Growing buyer preferences for differentiated products, Changing attitudes and lifestyles Zara focused on the above mentioned driving forces and adopted a Porter's generic strategy and placed itself at Industry wide area. It provides differentiation strategy combined with low cost leadership to win over the competitors. Zara provides the differentiated product at a faster speed to the market, to the customers who are ready to pay premium for the faster availability of fashion apparels and as such leveraged on the dominant features for fashion retail industry like fast moving fashion trend, huge consumer spending, massive outsourcing etc.

Q4. Using a diagram explain Zara's value chain. Elaborate on how and why Zara's value chain is different from those of its competitors. How has Zara encountered the impact of its Industry environment and industry structure through its value chain? Explain your rationale. Sol. Zara s Value chain Primary Activities

Purchase supplies and inbound logistics

operations

Distribution & outbound logistics

Sales and Marketing

Profit Margin

Procurement Support Activities Technology and systems development Human Resource management Firm Structure

Primary Activities Design: Zara rejected the idea of conventional spring and autumn collection and adopted live collections that can be designed, manufactured, distributed and sold almost as quickly as their customers fleeting tastes. No style lasted for more than 4 weeks; Zara s 300 designers continuously track market events, fashion trends and customer preference in designing about 11000 distinct items per year compared to 2000 to 4000 items by rivals. Designers get ideas from store managers, industry publications, TV, internet, film content and trend spotters who focus on university campuses and night clubs.

Production: The factories are highly automated to control costs and further speed production. It also solicited the help of Toyota of Japan to implement just-in time system. . Logistics: Zara added value by means of its logistics arrangement. It had sophisticated distribution centres in Spain, Brazil, and Mexico which are used to keep inventory moving efficiently from factory and supplier to store. Most clothes remained in the distribution centre only for a few hours, and no cloth ever remains there for more than three days. Marketing: The company spends less than 1 percent of its revenue on media advertising as compared to 3-4% spent by its rivals. Instead it relies on word of mouth. It also adjusts pricing for international market, thereby making customers in the foreign market bear the cost of shipping products. Store Operations: Zara s store serves two primary purposes: present the company s face to the world and act as grass-root marketing research agents. By constantly rotating merchandise, Zara creates a climate of scarcity and opportunity for loyal customers. Support Activities Sourcing: Zara sources from most efficient and reasonable external suppliers with the help of purchasing offices in Beijing, Barcelona, and Hong Kong. The suppliers are linked with Zara s network using which they can coordinate their production with Zara s projections. The company purchases much of its fabric not yet dyed so it can make colour changes quickly during and between seasons. Firm Infrastructure: The infrastructure that Zara has built to support its operations is a point of competency for the company. The two most important aspects of this are Manager s sense of customers and markets and their ability to coordinate activities worldwide. Managers adept coordination of overlapping activities among its designers, workers, salespeople and plant testifies to the power of its strategy. Presently no other company can ship new fashion designs to store as quickly as Zara.

Zara encountered the impact of its Industry environment and industry structure through the following features of its value chain: Logistics: The company believed in fast movement of inventory and also keep as less inventory as possible. For this they implemented just- in time inventory practices. To implement this they planned their logistics accordingly. To make it a success they located their design, production and warehousing activities in the same area so as to support fast movement of goods thus gaining a competitive advantage over its rivals. Coordination: Zara s strategy of rapid response to ever-changing fashion trends demands a high degree of coordination. The data is then transferred to headquarters on daily basis where it is used to coordinate design, production and delivery according to trends. The managers at Zara coordinate the tasks from material from dozens of suppliers to transmit orders to factories to delivery of orders to

thousand plus stores. This coordination helped Zara in having a fast movement of inventory giving it a competitive advantage. Satisfying customer needs: The salespeople of Zara also worked as wired grassroots market researchers responsible for punching in trends, customer comments and orders. They used this data to design the garments according to the needs of the customers thus helping Zara to meet the needs of changing environment. Cost factor: Zara adds value by providing quality at moderate cost. Due to its operational excellence and less expenditure on advertising it was able to cut on its costs. The pricing strategy of Zara in the words of one analyst is Armani at moderate prices .

Q5. Using a diagram explain Porter's generic strategy and their strategic significance for an MNE. Locate Zara on this diagram. Explain your rationale.

Ans.

Porters Generic Strategy

ZARA

Porter s generic strategies help businesses to achieve and maintain competitive advantage. The strategies used are cost leadership, differentiation, and market segmentation. Market segmentation is narrow in scope while both cost leadership and differentiation are relatively broad in market scope. Cost Leadership Strategy: This strategy involves the firm winning market share by appealing to costconscious or price-sensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio (price compared to what customers receive). Cost leadership can be achieved by having a high asset turnover. In service industries, this may mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast. It can also be achieved by offering high volumes of standardized products, offering basic no-frills products and limiting customization and personalization of service. The last way of achieving it is having control over the supply/procurement chain to ensure low costs. This could be achieved by bulk buying to enjoy quantity discounts, squeezing suppliers on price, working with vendors to keep inventories low using methods such as Just-in-Time purchasing or Vendor-Managed Inventory. Differentiation Strategy: This strategy aims to differentiate the products in some way in order to compete successfully. Examples of the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL, Nike athletic shoes. A differentiation strategy is appropriate where the target customer segment is not price-sensitive, the market is competitive or saturated, customers have very specific needs which are possibly under-served, and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy. Segmentation Strategy: This strategy generally has a narrow focus; the company ideally focuses on a few target markets. The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm. It is hoped that by focusing marketing efforts on one or two narrow market segments and by tailoring marketing mix to these specialized markets, we can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through product innovation and brand marketing rather than efficiency. It is most suitable for relatively small firms but can be used by any company.

We can safely place Zara in the Differentiation Strategy category window because we have already seen through the case that it has unique competency and this has allowed it to garner broad market scope. Zara banks on the freshness of its offerings. Three quarters of its merchandise is changed every three to four weeks and its average shopper comes to the chain seventeen times a year as against the industry average of three to four visits a year. Their customers are made to believe that if they don t buy now they won t get the items later. Through their rapidly changing product lines they are able to meet the customer requirements bang on every time.

Q6. Explain the term "Core Competence" for an MNE.What are Zara's core competencies? How does Zara leverage its core competencies for building and sustaining its competitive advantage? Explain your rationale.

Ans) Core competency is special outlook, skill, capability or technology that creates unique value for the firm by creating an acknowledged thread that runs through all of the firm s value activities. The core competencies for an MNE are the ones which are difficult to replicate by their rivals.It is essential to competitiveness and profitability. Core competency can emerge from various sources including 1) 2) 3) 4) 5) Product Development Employee Productivity Manufacturing Expertise Marketing Imagination Executive Leadership Zara core competency.

Zara s core competencies have provided the chain with a competitive advantage over traditional retailers in the industry. Most traditional retailers outsource all of its production while focusing on distributing and retailing goods. In contrast, Zara is a chain that has developed a successful diverse method of doing business in the fashion industry. Zara by working through the whole value chain is very vertically integrated and highly capital intensive. Zara s chief core competency is its in-house production. By owning its in-house production, Zara is able to be flexible in the variety, amount, and frequency of the new styles they produce. It allows the chain to constantly provide its costumer with updated products. The rapid product turnover creates a climate of scarcity and opportunity in Zara s retail stores. The climate also increases the frequency and rapidity with which consumers visit the stores and buy the products. Regular customers know that new products are introduced every two weeks and most likely would not be available tomorrow. Therefore, Zara s scarcity climate allows the company to sell more items at full price. Furthermore, Zara s unique quick response system, composed of human resources as well as information technology, allows Zara to respond to the demand of its consumer better than the competition. In the manufacturing environment, Zara s product development teams are responsible for attending high-fashion fairs and exhibitions to translate the latest trends of the season into their designs. Also throughout the season, Zara s product development teams are constantly researching the market by traveling to universities, and clubs around the world to track customer preferences. Zara also has an advantage over its competitors due to its low advertising costs. Zara s advertising investment is 0-.3% as compared to traditional retailers who expends 3 4%. Zara s cuts in advertising investments reduce total expenses, which make the international expansion more economical. This also signifies that Zara relies mainly on its stores to project their image. For that reason, Zara has a department, which exclusively works in acquiring global prime real estate locations. In addition, this

department is responsible for the frequent refurbishing of store layouts, as well as the creation of a common window display for Zara s global stores. The display positions Zara in the industry with a prestigious and elegant image. By targeting a broad market Zara has an international advantage over its competitors. Zara s target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Zara s target market is a young, educated one that likes fashion and is sensitive to fashion. Zara uses this to their advantage by offering the latest in apparel. For that reason most of the products that Zara offers globally are relative standardized fashionable products.

Q7. Using a diagram explain the terms Global strategy, International strategy, Multi-domestic strategy &Transnational strategy and outline their relative advantages & disadvantages. How would you classify Zara in terms of these strategies and why? Explain your rationale. Multinationals: The multinational strategy focuses on local responsiveness. Subsidiaries operate autonomously or in a loose federation. The advantage of this type of approach is that the firm can quickly respond to different local needs and opportunities. This strategy reduces the need for communications because local subsidiaries can make many decisions. There are heavy reporting requirements though, as the results from the subsidiaries have to be monitored at a headquarter location. Global: A global strategy stresses efficiency because there is strong central control from headquarters. Economics come from standard product designs and global manufacturing. An extensive communications and control system is necessary to centrally manage the global firm. It views world as a single market.

Pressure for cost reduction

High

Global Standardization

Transnational Strategy

Low

International Strategy

Multi Domestic

Low Pressure for local responsive ness

High

International: The international strategy is much like the multinational as there are autonomous local subsidiaries. They use existing core competence to exploit opportunities in foreign markets. However, these subsidiaries are very dependent on headquarters for new processes and products. A good example is a pharmaceuticals company. The research labs in the headquarter company develop products for introduction around the world. Local subsidiaries stress product approval by local governments and local marketing. Transnational: The transactional firm attempts to do everything! It seeks global efficiency while retaining local responsiveness. The firm integrates global activities through cooperation among headquarters and foreign same time that it obtains the advantage of global integration, efficiency, and innovation.

Strategy Global International

Advantages y Exploit experience curve effects y Exploit location economies y Transfer distinctive competencies to foreign markets

Multi-domestic

Transnational

y y y

Disadvantages y Lack of local responsiveness y Lack of local responsiveness y Inability to realize location economies y Failure to exploit experience curve effects Customize product y Inability to realize offerings and marketing location economies in accordance with y Failure to exploit local responsiveness experience curve effects y Faliure to transfer distinctive competencies to foreign markets Exploit experience y Difficult to implement curve effects due to organizational problems Exploit location economies Customize product offerings and marketing in accordance with local responsiveness

Reap benefits of global learning

International Strategy for Zara Zara uses international strategy in its operation. It advocates a strategy of do what we do best and outsource the rest. Zara leveraged upon a number of competencies such as span design, production, logistics, distribution, and retailing. It had refined the idea of InfoTech and fashion through its integration of design, speed, production, responsiveness, technology, and e-business methods to make and move sophisticated fashion, adjust to fashion trends quickly at moderate prices. It did not focus on customizing products as per different countries or concentrating its control to a particular place rather they had its headquarters in many places. By using its competence of well developed, efficient supply chain and concept of scarcity and opportunity it still captures most of the market and continues to be competitive in foreign market.

Q8. What are your learnings from this case in terms of an MNE's strategic options in the context of ever changing international business environment and its industry structure? Explain your rationale.

Answer. The strategy of an MNE corresponds to creating value to its target customer market thereby building and strengthening its competitive strength. As we saw in the case, the executives at Zara were continually tested on their decision making and had to continuously answer to questions like where should the product be designed, what are the most effective marketing tools, what kinds of people should be hired to staff retail outlets and what should be the headquarters role in decision making. Zara has built a vertically integrated demand and supply chain which enables company to have short turnaround times, and achieve greater flexibility, reducing tock to the minimum and hence minimizing the fashion risk to the greatest extent possible. The following are the key learnings that an MNE can take out from the Zara case in the context of ever changing international business environment and its industry structure: 1. Short Lead times: Keeping up with fashion Focusing on shorter response times, the company ensures that its stores are able to carry clothes that customers want at that particular time. Zara can move from identifying a trend to having clothes in its stores within 30 days. It means Zara can quickly identify and catch a winning trend while competitors are struggling to catch up. 2. Reducing Risk: By reducing the quantity manufactured in each style, Zara not only reduces its exposure to any single product but also creates an artificial scarcity: better buy now in case it is gone tomorrow. The styles are changed every week and hence make it more desirable. 3. Leadership in Numbers: Instead of producing more quantities per style, Zara produces more styles with fewer quantities. Even if a style sells out very quickly, there are new styles waiting to take up the space. Zara offers more choices in current fashion that any of the competitors. 4. Ownership and Control of Production: While most other retailers like American chain GAP and the Swedish retailer Hennes & Mauritz completely outsource their production to factories around their world, Zara s production is carried out in Europe, much of it within small radius of its headquarters in Spain. In fact, half of the production is owned or closely controlled facilities. It gives Zara tremendous amount of flexibility and control. As

already mentioned it has a vertically integrated group with up-to-date equipment for fabric dyeing and processing, cutting and garment finishing. 5. Supercharged Product Development: Design and product development is given prime importance in Zara. The creative workload of around 1000 styles every month is managed by a design and development team of over 200 people. The entire product development cycle begins from market research and they draw upon customer choices, preferences and needs. 6. React rather than predict: Zara has set itself apart from its competitors by changing its business information and business process. Rather than concentrating on forecasting accurately, it has built its business around reacting swiftly as and when demand arises. It buys semi-processed or un-colored fabric that it can colors up close to selling season based on immediate need. 7. Superior information and communications technology: Information regarding customer needs and wants flow regularly which are fed into the database at head office and designers use them for designing new products. Zara warehouses the product information with common definitions, allowing it to quickly and accurately prepare decisions. Product development and inventory management allows Zara to manufacture garments with available stock rather than having to wait for material to come in. The state of the art distribution management which has around 200 kms of underground tracks ensures that Zara s merchandise does not waste time for human sorting.