Zara Fast Fashion

1. Features of Zaras chore computer simulation that affect its operating political economy Zara owns much of its tune and most of its chime ins, while competitors Gap and H&M own all in all of their broths only turn outsource all of their production. Benetton, on the otherwise hand, owns all of its production but goes to market through licensing agreements. Zara places more emphasis on backward vertical integproportionn. Production runs ar short and inventory is strictly concordled. This is in contrast to diligence tr wipeouts of high volume production. Zaras product cycle time from the origination phase to the manufacturing phase is 4 to 5 hebdomads while the industry median(a) is 6 to 9 months. The short cycle time en competents Zara to commit to a bulk of its product much later than its competitors. 85% of Zaras in-house production occurs after the supremacyion has started in contrast to 20% in-house production of traditional retailers. Zaras set is lower than i ts competitors, but profit margins are higher due to direct efficiencies gained from a shortened, vertically integrated, deliver chain.At Zara, a high inventory turnover rate proceedss in token(prenominal) obsolescence costs, clearance sales or mark downs. Zara estimated 15%-20% of inwardness sales as markdowns/c put up-outs vs. 30% to 40% for its competitors. This helps to preserve a strong profit margin and bolster market image as a must buy now destination. Zaras advertising expenses are minimal (avg. 0. 3% of revenue) compared with 3% to 4% for other specialty retailers. These helps lower expenses and preserve strong profit margins. Zara, in turn, invests more money in renovating its terminalfronts and buying visor real estate for store locations. At Zara, 75% of display product is turned each 3 to 4 weeks which corresponds to the intermediate time between node visits. The average Zara shopper visits the chain 17 times a year. In contrast, the competition records an a verage of 3 to 4 customer visits per year. Zaras image creates a sense of urgency and forces loyal customers to check in frequently for the latest fashions. 2. Zaras Quick Response Capabilities Upstream and downriver activities Zaras quick-response cap cleverness is stupidd on improving coordination between retail stores and product manufacturers.This coordination allows Zara to respond faster to fashion trends, thus creating a war-ridden advantage for Zara. effectively utilizing information technology and vertically-integrated manufacturing drives Zaras quick response capability. Upstream Activities Design Teams continuously track customer preferences via information sent electronically from individual storefronts. Additionally, sales data is sent upstream from the stores to bring in instant feedback on Zaras new product lines generating replenishment parades for sold product.This instant upstream feedback, coupled with Zaras rapid product phylogeny gives Zara a compelli ng market advantage. Zara sources fabric and finished products from external suppliers using purchasing offices in Europe and Hong Kong. 50% of the fabric remains undyed to facilitate in-season updating via Comditel, a subsidiary of Inditex that manages the dyeing and patterning of unfinished fabric. Delaying production of unfinished fabric allows information flowing upstream to influence Zaras production. 40% of all garments are manufactured internally or by subcontractors located near Zaras headquarters. This 40% re collapses the most fashionable, time-sensitive garments that Zara considers attempty. Zaras local production network facilitates flexibility and risk-taking on fashion trends. downstream Activities Zara owns its own dispersion center in Arteixo. All merchandise from both internal and external suppliers passes through this distribution center. Shipments occur twice a week to each store. Items move through the center very quickly.For example, a vast majority of items a re at the center only a few hours and no item stays at the center for more than iii eld. On average, Zara spends 0. 3% of its revenue on media advertising, which is focus oned on opening season and end of season sales. Product cycles through the stores rapidly, with new designs arriving every trine weeks. This fast turnover results in a significant reduction of discounted merchandise. Display shelves are sparsely stocked creating a sense of urgency (buy now) in the minds of shoppers, resulting in immediate sales. Location is critical for Zara to attract repeat customers. Stores are from time to time relocated in response to ever-shifting popularity of shopping districts and traffic patterns. 3. Why great power Zara fail? Zara could fail due to falling into what is known as the growth trap. In the beginning, Zara established itself as selling medium-quality fashion wearing at affordable prices. Zara went on to gain a competitive advantage in the industry by growing a quick r esponse capability while at the same time keeping low customer pricing.As Zara begins to expand transnationally, the potential to lose their competitive advantage increases. For example, in South America, Zara had to present a high-end rather than a mid-market image. This goes against the image of medium quality fashion at affordable prices that Zara had build and maintained since their inception. As Zara slip bys to grow, their stores may eventually be found on every street corner around the world. As a result, Zara runs the risk that their products may become less laughable in the eyes of the consumer.According to the growth trap, efforts to grow can blur uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage. In the end, Zara runs the risk of becoming an ordinary retail chain as they lose sight of their competitive advantage and become more like every other retail player. In order to maintain their market share, Zara should remember their roots and focus on the excellence of their existing chain with very minimal increases in selling space.Zara betting FashionInditex Zara Fast fashion Case analysis Company Structure and Goals Overview Zaras vision on growth and globose schema -Building up fixed assets -Vertical integration -No advertising, creating premium stores -Fashion follower QR to fashion trends -Strongly customer oriented -Stable growth -Markdowns half the average (15% as supposed to 30% ) -Pricing market based Business model -Vertical operations and downstream activities -Multi-chain concept -Creative design team -Competitive advantage sustainable growth As attachment porters beers Five forces Company structure Financials) Problem Statement Growth challenge 20% per annum expected, 76% of justness value implicit on Inditexs stock price was based on expectations on future growth. Failure to deliver expected growth results might cause a serious startle in social clubs market capitalization. Room fo r non-local growth in average a retailer was present in 10 countries while e. g. a pharmaceutical company averaged operations in 125 countries.Problem statement is In what geographical area(s) should further Zara enlargement follow? Should at that place be some other logistics-distribution centre created as increase of operations might cause dis-economies of scale? Should it acquire additional chains precondition the complexity of managing those and the risk of own-product-replacements? Preserve the margins (visible threat to the sustainability of Indexs competitive advantage) Evaluation of the alternative solutions 1. Growth challenge Notes not much potential on the local market - contrastive markets require different lieu -though costs grow as distance grows, prices as well as change (margins are kept) -50% of all export is to developing countries -Zara shopper visits the store 17 times a year, average is 2-4 times -Creating a climate of scarmetropolis and opportunity in s tores Evaluate growth options in different markets Spain Europe str4 production in sexual union Africa, tur learn and East Europe. US production in Mexico and the Caribbean subjected to retailing oercapacity, less fashion- out front than Europe, demands larger sizes and exhibits considerable internal variations lacquer no quotas to restrict imports, produced in China. puerile market segment considered as the trendiest in the world Italy fashionable, visit stores frequently and spend more on fit out 2. Change in marketing strategy Current Three types of entering a market company owned stores, joint ventures, franchising Strategy is standard across the countries -No adv -One big shop central city (capital) Followed by smaller ones (spreading around the unpolished) -Shop windows used excessively -Products do not differ much from country to country -Model is downstream -No knowledge is shared -From design to stores within 4-5 weeks , industry average 9 months -Due to product testing, mischance rate only 1% compared to industry average of 10% 3. Change in pricing strategy Current Prices vary on the different markets, due to transport costs (all supplied from the base in Galicia) this changes positioning Lower mark-down than industry averageZara Fast FashionThe Spanish retail chain Zara has unique supply chain prudence practices that enable it to gain a competitive advantage over other fashion retailers in the industry. Zaras rapid response time enables the slopped to quickly respond to changing fashions while deliberately under producing products. This strategy, which is supported by competencies in logistic management, design and information systems, allows the company to maintain less inventory and higher profit margins and is a key factor to Zaras success. The firm should continue to add value by seeking new opportunities to expand in the retail market and maintain their sustainable growth.Financial Analysis world aware of a companys financial he alth and profitability of its competitors is highly essential for everyone interested in engaging in business with Inditex. In this part of the paper, through analysis of 4 key ratios and return on invested capital, we are going to discover some of the companys drivers of sustained competitive advantage. The 4 key ratios will focus mainly on companys liquidity, activity, solvency and profitability, while ROIC will show how well the company manages the capital invested in operations of the business.In order to measure ability of Inditex to meet its short term obligations and to assess liquidity, it is important to calculate current ratio. As shown in exhibits sectionalization below, in 2001, Inditedx had 1. 02 million in current assets, while Gap and H&M had 1. 48 and 3. 4 million Euros in current assets for every Euro in short-term debt. This indicates that Inditexs main competitors demonstrate greater ability to meet current wearments of debt therefore liquidity is not one of the companys success drivers. When it comes to comparing companys sales to various assets categories it is significant to take a look at the total assets turnover.This ratio indicates how efficiently assets are creation used to support sale. From 1999-2001, this ratio increased by 1. 2% still it was hush below industry performance. Currently Inditex is industry loss leader with total assets turnover of 1. 8. This shows that companys recourses are being well managed and that company is able to realize high level of sales from its investments in property, plant and equipment such as manufacturing facilities. Debt to equity ratio is used for solvency evaluation. The main purpose of this ratio is to show companys ability to repay long-term creditors.As shown in exhibits section, this ratio decreased from 1999-2001, however, when compared to its rivals, Inditex confirmed to have the best leverage among them. When it comes to companys financial flexibility and profitability it is highly essential to calculate Net earn Margin ratio. This ratio measures how successful a company has been at the business of making profit for each euro earned.As presented in the exhibits section, Inditex was and still is an industry leader with Net Profit Margin ratio of 10. 6% in 2001 and 13. 10% in 2010 which heart that company has currently . 3 of net income for every sawhorse sale. In addition, according to Inditexs income statement, we could see that company is delivering higher net income due to its ability to defend operating expenses and COGS much lower than competitors. Furthermore, the company is able to gain sustained competitive advantage by making its own products, efficiently covering lower advertising expenses and maintaining cost-effective number of employees per store. In order for Inditex to maintain continuous growth it is important to keep its profit margins at the high level.Last but not least ROIC (Return on Invested Capital) gives a favorable judgment on how well a company is using its money to generate returns. Inditex ROIC varied through past couple of years but is currently able to earn around 7% on each euro invested. From the exhibit table below, we could conclude that the company is making wiser investment decisions than its competitors. SCP Analysis Zara competes in a monopolistically competitive industry due to the number of players. No business in this type of industry has total control over the market price and there are no barriers to entry and exit.Because of its monopolistically competitive playing grounds, Zaras conduct is to increase its market power by producing demand for its heterogeneous products. Through distinction and cost leadership, Zara attempts to increase market demand by offering new items weekly while keeping a low inventory, thus making its products unique and attractive to consumers. Because of its backward vertical integration model, Zara creates a strong synergy throughout its production process.Zara h as sustained a competitive advantage globally by expanding into new markets and becoming more efficient. In a onopolistically competitive industry, Zara is expected to make profits in the short run but will wear out even in the long run because demand will decrease as average total costs increase. This means in the long run, a monopolistically competitive firm, such as Zara, will make zero frugal profit (AmosWEB, 2001). Porters Five Forces Barriers to Entry Due to the recent recession and weak economic market, many an(prenominal) new players have avoided entering the retail industry. Zara has taken advantage of this opportunity to be the first to enter into many markets across the world forrader its competitors.With the economic future improving, Zara will be facing more and more competition especially in the United States. Rather than implementing new strategies on how to narrow itself even more, Zara will need to focus more on creating brand awareness and staying on top in th e game. Zara has been the odd ball in the industry with its creative business model but with more and more retailers quickly catching on and critiquing their business model to match the economy changes, Zara faces intense competition. impertinent other retailers, for example Gap and H&M, Zara needs to fight threats around the globe.In the states, Zara competition is intensified with American retailers because many customers still do not know who Zara is or what it offers. In Europe, Zara is like a Macys for us in the states so the brand awareness is there but competition is still alike high. Many retailers in Europe offer the same products as Zara, at the same or similar prices therefore Zara needs to find ways to keep ahead of competition. Bargaining Power of Buyers Zara is famous for its business model of just in time inventory. No other retailer can produce a garment from scratch and have it hanging in the stores within weeks than Zara.Zara also distributes large number of ship ments to its stores around the world twice a week. All merchandise is shipped from Spain and all stores receive shipment on the same days, Monday and Thursday. Zara produces nearly 16,000 new designs a year which is much more than leading competitors. With the constant changing invest Zara keeps its inventory levels extremely low. Zara customers know that if they see something in the store to buy it right then and there because tomorrow that garment will not be there. US customers are still adapting to this quick turnaround time.With their advanced technology, Zara knows what its customers want and will deliver that to them within 2 weeks time. Bargaining Power of Suppliers Zara manufactures all its clothing in house. This way it has control of the entire process and can make changes more quickly and efficiently when needed. After the garments are cut and touch on for assembly, Zara sends out the fabric to different sewing companies to assemble the pieces. There are many competito rs that Zara can choose from when deciding where they want its clothes put together which makes the bargain power weak.Zara also took control of this process by taking over Comditel. Comditel is in charge of nearly the entire garment process. Once the garments are ready and fully assembled they are then stored in Zaras own distribution centers. From the distribution centers they are then shipped around the globe to the thousands of Zara stores. Like many other aspects of Zaras business model, the distribution center moves even more quickly. Once the garments are in the distribution centers, they only stay there for a maximum of 3 days before be sent out to the appropriate destination.Substitutes Some may describe Zara as a higher end replica of fashion forward items. The items featured on Prada, Chanel, and St. John runways will be replicated in 2 weeks in Zara stores at a much more affordable price but poorer quality. Therefore, there are not many substitutes that customers can us e because a majority of the products are out of the price range of many customers. This is a massive benefit for Zara because its customers are willing to pay a much less price for a lesser quality replica.Competition Zaras direct competitors include H&M, Gap, and Benetton. H&M offers nearly the same products as Zara to its customers, but a much lower quality and price. For those customers who are price sensitive, H&M would be their choice of retailer. The Gap possesses more competition in the states because it has been around longer and has its loyal customer base which is hesitant to shop elsewhere. Even though these retailers give Zara a run for its money, none of them can keep up with Zaras business model.Other retailers do not have in house production like Zara and ship their production to other countries for the brasslike labor costs. This does save money but it increases time. Time is money so while others are still in production stage, Zara is already selling out of the ga rment. VRIO Analysis We can use the VRIO framework to determine the competitive potential of Zaras resources and capabilities. As we break apart Zaras resources and capabilities, it is evident that Zara has create a highly effective, self-reinforcing business system.Three elements in particular (1) extensive vertical integration, (2) the companys flat management structure, and (3) exceptional communication and coordination throughout the business system allow Zara to successfully execute its Very Quick Fashion Follower business model. Each of the three make the grade of being Valuable, Rare, costly for competitors to Imitate, and for which the company has Organized to take advantage. Extensive Vertical Integration Zara prides itself in its vertical integration, with near full control over its value chain through to the end-user.The company owns or closely controls its manufacturing and distribution facilities, manages its own logistics and transportation, and wherever possible o wns its own stores (except for in markets with high risk or barriers to entry). This integration brings value primarily through speed-to-market, as Zara has achieved significantly shorter cycle times than its peers. Full vertical integration is rare in the preen industry, which typically sees companies foregoing direct involvement in elements of the value chain (e. g. , H&M outsourced all of its production, and Benetton sold the bulk of its production through licensees).It would be extremely costly for a competitor to imitate Zaras vertical integration, and even if they were able to do so it is unclear how much or how soon they would profit from it, as much of Zaras advantage comes from the degree to which it has developed its integrated organization over many years. Flat Management Structure while the drive, insight, and guidance provided by founder Amancio Ortega and other top executives have obviously been crucial to the success of Inditex, it is the structure and incentives t hey have put in place that authentically drive Zaras exceptionality.Zaras management structure is very flat, with autonomy and significant incentive-based compensation for store managers, thus closely aligning their interest with that of the company. This structure adds value to the company through diligent hands-on management at the local level, something so rare that Zaras CEO noted that the availability of store managers capable of handling these responsibilities was the single most important constraint on the rate of store additions. The structure would be highly difficult for ompetitors to imitate, as it has been built into the culture and processes of the company over several decades. Zara has certainly proven that it is able to organize around the flat structure model in fact many of the companys business processes depend on the communication and input of enabled employees at the edges of the business system. Exceptional Communication and Coordination From early on, Zara d eveloped a focus on communicating and coordinating activities up and down the value chain and across functions.This capability focused on speeding important information on customer preferences and trends to the store network, and feedback on successful and unsuccessful products back up the line to headquarters. Exceptional communication and coordination are crucial to maximizing the value derived from Zaras vertical integration and flat management structure. A look at the more disjointed businesses systems of peers such as The Gap and Benetton demonstrates how rare it is for all of a companys capabilities to simultaneously reinforce each other, and how difficult it would be for them to imitate Zara.Zara has successfully organized to coordinate its activities around the fast communication of close information about designs, customers, competitors, and micro- and macroeconomic factors both up the line to top management and to the edges of the network where store managers and employ ees interact with its customers. Each of these three capabilities passes the VRIO test, indicating that they are and then key competencies for Zara. Four Actions Framework In order to understand how Zara created a new value for both the buyer and the company, we utilize the Blue Ocean 4 Forces Analysis.Starting with what factors Zara raised above standard, we see what is also Zaras key resource, the companys application of vertical integration. While Zara is involved in both backward and forward integration, what sets it apart is precisely its backward integration into manufacturing. For instance, its competitors Gap and H&M are both practicing forward integration and unlike Zara, outsourcing their production. Zara is also constantly in communication with employees at the edges of its business system such as store managers in order to better identify and track customer preferences and trends.The company encourages increased frequency of customer visits with its short cycle times cu stomers flock to the stores in order to catch the current fashion trends and product lines. In addition, the company also raised responsibility and accountability for store managers by hiring experienced employees promoted within which the CEO believed was a necessary judgment especially for store additions. Zara increased market saturation leading to better economies of scale thus significantly cutting costs and raising higher awareness and increasing sales.On the other hand, Zara reduced several factors well below the industry standard in order to cut costs and increase customers willingness to pay. For instance, the company decreased the failure rate for new products with its intensified product testing program which included store-level personnel in the process. Zara also reduced its cycle time for design which enabled the company to offer the customer new designs in four to five weeks and existing products in two weeks the industry standard for this process was six months for d esign and three months for manufacturing.A pioneer in its industry, Zara proudly enjoyed engendering revenues at full price with only 10%-15% of its sales generated at discount prices compared to its European industry at 30%-40%. Lastly, Zara reduced its ad spending below industry standard at 0. 3% of its revenue while its competitors advertised 3%-4%. Although it is relatively unlikely for an apparel company to create factors that its industry has never offered, Zara formed a distinct vision among its competitors. The company was the first within its main rivals to saturate international markets as fast as it did.Zara is a global apparel retailer with a truly international scope. While from 1980s to 2011 H&M added eight-spot countries to its international expansion, and Gap five, while Zara was at thirty two countries. In the competitive apparel industry, Zara managed to eliminate what its competitors continuously took for granted. The company focused on a flat management system which allowed capturing trend preferences directly from the customer and applying to mass markets. Eliminating the separation between merchandising and manufacturing was especially beneficial to a fast and prolific design team.Strategic Vision Based on our analysis, Inditex has proven to be financially stable and can successfully manage its capital invested in its operations. Therefore, to maintain their sustainable growth and continue to add value, Inditex should use their commercial teams micro/macro evaluations to seek new country market opportunities. They should to continue to use one of the three modes of entry company-owned stores, joint ventures, and franchises, to open additional stores in European countries that have high apparel markets.Italy, Germany and United Kingdom are markets that show promise, especially Italy because of its high per capita spending on apparel. As discussed in our analysis, one of Zaras core competencies is its extensive vertical integration, and because the case mentioned a second base distribution hub already being built in Zaragoza, Spain, it can support additional European stores without being subject to diseconomies of scale. Increasing the density of Zaras store locations in Europe will achieve logistic efficiencies.Zara keeps transportation costs low on the supply side, since most of the production takes place in Spain. competent distribution and inventory systems help Zara minimize costs. Demand based production means there is very little inventory in Zaras supply chain, which results in lower working capital requirements and lower supplier opportunity costs. Another market that has potential is the United States. With changing consumer behaviors as a result of globalization, there are growth options available for specialty retailers like Zara.For example, Gaps current ratio of 2. 18 is higher than Zaras 1. 71 however Zaras 13. 10% net profit margin is preferred over Gaps 8. 21% (as illustrated in Exhibit A-1). The refore, as long as Zara can maintain its low production and overhead costs, which are high for its competitors, they should be able to compete in the US market. Inditex should invest in prime locations in major cities such as New York, Chicago and Los Angeles to maintain its positioning strategy. Zara should most likely develop a second central distribution center in America.Zara can strategically locate its central distribution center in or near countries where manufacturing can be done with cheap labor cost, such as Mexico. The close proximity of the distribution center to the American market will decrease logistics and help maintain Zaras model of fast fashion and economies of scale. Internet retailing is another market opportunity that Inditex should consider. Zara can reach consumers faster and easier in the countries they are trying to expand into.This system can also help gauge consumer preferences from country to country. The internet retailing market will increase sales re venues and has a very low business risk considering the products are already being produced for the retail stores. Zaras online shop would complement its stores, adding an extra level of service for its customers. It would also expand its customer base to reach areas where stores are not located. Patrons can shop from anywhere in the world and at any time of day or night.This essentially means more shoppers and more sales for the business. Based on our analysis, the monopolistically competitive industry structure is not the key factor driving Zaras significant performance. Zara has leveraged its key resources to combine low price with product differentiation to create value and succeed in this industry structure. Zara has been able to increase the customers willingness to pay by constantly rotating its merchandise and creating a climate of scarcity and opportunity for customers.In conclusion, Zara has the potential for sustainable growth due to its competitive advantage and its abil ity to increase customers willingness to pay while decreasing its opportunity cost. The company keeps its operating income high, has a solid business model with unrivaled synergy and has various opportunities for expansion in the retail industry. Zara must continue to re-invent their image in order to stay fresh in the apparel industry and as long as they maintain their core competencies, they will continue to succeed.Zara Fast FashionInditex Zara Fast fashion Case analysis Company Structure and Goals Overview Zaras vision on growth and global strategy -Building up fixed assets -Vertical integration -No advertising, creating premium stores -Fashion follower QR to fashion trends -Strongly customer oriented -Stable growth -Markdowns half the average (15% as supposed to 30% ) -Pricing market based Business model -Vertical operations and downstream activities -Multi-chain concept -Creative design team -Competitive advantage Sustainable growth As attachment Porters Five forces Company structure Financials) Problem Statement Growth challenge 20% per annum expected, 76% of equity value implicit on Inditexs stock price was based on expectations on future growth. Failure to deliver expected growth results might cause a serious offset in companys market capitalization. Room for non-local growth in average a retailer was present in 10 countries while e. g. a pharmaceutical company averaged operations in 125 countries.Problem statement is In what geographical area(s) should further Zara expansion follow? Should there be another logistics-distribution centre created as increase of operations might cause dis-economies of scale? Should it acquire additional chains given the complexity of managing those and the risk of own-product-replacements? Preserve the margins (visible threat to the sustainability of Indexs competitive advantage) Evaluation of the alternative solutions 1. Growth challenge Notes not much potential on the local market -different markets require differ ent positioning -though costs grow as distance grows, prices also change (margins are kept) -50% of all export is to developing countries -Zara shopper visits the store 17 times a year, average is 2-4 times -Creating a climate of scarcity and opportunity in stores Evaluate growth options in different markets Spain Europe str4 production in North Africa, turkey and East Europe. US production in Mexico and the Caribbean subjected to retailing oercapacity, less fashion-forward than Europe, demands larger sizes and exhibits considerable internal variations Japan no quotas to restrict imports, produced in China. teenage market segment considered as the trendiest in the world Italy fashionable, visit stores frequently and spend more on clothing 2. Change in marketing strategy Current Three types of entering a market company owned stores, joint ventures, franchising Strategy is standard across the countries -No adv -One big shop central city (capital) Followed by smaller ones (spreadi ng around the country) -Shop windows used excessively -Products do not differ much from country to country -Model is downstream -No knowledge is shared -From design to stores within 4-5 weeks , industry average 9 months -Due to product testing, failure rate only 1% compared to industry average of 10% 3. Change in pricing strategy Current Prices vary on the different markets, due to transport costs (all supplied from the base in Galicia) this changes positioning Lower mark-down than industry average