Global Strategy Case #2- ZARA: Fast Fashion The case study discusses the strategy of Spanish fashion house Zara and how it has been successful in the retail space. Zara rose to success in the fashion industry because they created a model that allowed the store to look fresh and new to the consumer on a regular basis which in turn created a sense of urgency which in turn moved the product. The low levels of inventory also ensured Zara would not be hit with extensive extra costs or merchandise that would have to be sold for a loss.
Zara was able to establish this successful model through extensive market research which provided a constant stream of customer feedback on the product development and prevented Zara from having to buy in mass quantity/batches at the beginning of a season based on an anticipated forecast. Additionally, Zara was able to locate various business functions in close proximity of the HQ which in turn allowed for tight control and enabled joint decisions to be made in an expeditious manner. The control also extended to the initial investment of the raw materials used to make the end products and the direct/indirect ownership of processing.
As a result of this setup, Zara had the capability to respond very quickly to feedback from their customers. Finally, the communication and information technology were a vital component to managing the company. The tightly woven network allowed for constant interface of the various functions and management of the extensive variety of product information. Because Zara not only creates the merchandise but also sells it, the people who decide on product styling and the product distribution are collocated and can have immediate discussions to make effective decisions.
They can also work together to ensure that any product not reaching a threshold of volume is not reordered. Strengths: The key success factors that created a competitive advantage for Zara were: Short lead times for concepts to reach the market. The short lead times required close control and monitoring of the process. Smaller batches/Reduced Quantities which kept the demand high and urged consumers to buy fast. The ability to have Zara’s own employees perform the market research and spot emerging trends and communicate them allowed for fast turnaround time of emerging trends into the product that Zara consumers were looking to purchase.
Multiple turnovers within a given season which created more products and decreased the likelihood of having to move extraneous merchandise to sale or clearance Challenges: The issues Zara needed to contend with were: Economies of Scale : Vertical integration often leads to the inability to acquire economies of scale, which means Zara cannot gain the advantages of producing large quantities of goods for a discounted rate. Higher costs are then incurred. Increased Costs: Zara’s speedy and recurrent introductions of new products incur increased costs as well.
They have higher research and development costs. They also have elevated costs due to the constant changeover of production techniques to create their different apparel lines. That also means that employees must be trained in order to use the new manufacturing techniques, which again leads to increased costs. Traditional retailers do not experience higher costs in all of these areas. Distribution: Zara has not invested in distribution facilities to support their global expansion. As a result, Zara may not be able to supply more retail locations due to the “centralized logistic” model.
As Zara continues to open stores all around the world and ships product from its single distribution center in Europe, they may start to experience issues with bandwidth. The single distribution center could become a pain point/log jam. Transportation: Since Zara does not have any distribution or manufacturing facility within United States, all the apparel is shipped from Europe which incurs a significant transportation cost. Developing vertically integrated supply chain system in different countries with high labor cost will result in high production cost. Recommendations
Renegotiate overseas shipping costs and terms for lower prices. Zara will need to continue to ship product from its European distribution center. Leveraging the fact that Zara’s shipments will grow as they continue to expand can help them renegotiate overseas shipping costs and terms to reduce overall costs. Longer term, Zara should consider establishing a new distribution center in it’s major hubs. New plants and equipment is very expensive and time but it will allow the company to scale it’s growth and recreate the successful model in other continents- America, Asia, etc.
This will establish a central regional distribution center and smaller/satellite distribution centers in other countries. Zara maintains its competitive advantage in Europe through its fundamental concept to maintain design, production, and distribution processes that enable quick response to customer demand. Global expansion means that Zara needs to carry its business model to America in order to maintain short production and lead times. Smaller distribution centers or satellite centers should be built in countries where expansion will proliferate in order to shorten lead times.
The close proximity of the distribution center to the American market will allow Zara to effectively interpret the particular American fashion. Going Global Increased Competition. Expanding into new countries will pose new competitors. Because Zara offers such a wide variety of products (men, women, maternity, children, & baby) almost any apparel retailer can be a threat. Although financial and direct competition are major risks facing Zara’s expansion, Zara’s ability to maintain short lead time, low production costs, and fast fashion would mitigate the risk of failure in its efforts of global expansion.