BA

Learning Objective

Understand how Zara’s parent company Inditex leveraged a technology-enabled strategy to become the world’s largest fashion retailer.

Operating in the northern coastal city of La Coruña (or A Coruña in the local Galician language), Spanish entrepreneur Amancio Ortega was brainstorming names for his new shop and settled on “Zorba” after the classic movie Zorba the Greek. He simply thought it was “a nice name.” Unfortunately, there was a bar with the same name a few blocks away and the bar’s owner was worried patrons would be confused. The molds for the letters for Ortega’s shop had already been cast, so they played around with what they had and came up with “Zara.”[] As it turns out, for Zara it’s technology, not the name, that has made all the difference in its rise to dominate the decidedly ungeeky fashion industry.

Today, Zara is the game-changing crown jewel in the multibrand empire of Inditex Corporation (Industrias de Diseño Textil), the world’s largest pure-play fashion retailer and a firm that’s bigger than Gap, H&M, Topshop, and anyone else in the space. The firm’s supremacy is plotted and executed from “The Cube,” the gleaming, futuristic headquarters located in La Coruña’s Arteixo industrial area. The blend of technology-enabled strategy that Zara has unleashed seems to break all of the rules in the fashion industry. The firm shuns advertising and rarely runs sales. Also, in an industry where nearly every major player outsources manufacturing to low-cost countries, Zara is highly vertically integrated, keeping huge swaths of its production process in-house. These counterintuitive moves are part of a recipe for success that’s beating the pants off the competition and has catapulted Ortega to become the world’s third richest man, ahead of Warren Buffet.

Figure 3.1

Zara’s operations are concentrated in Spain, but they have stores around the world like these in Manhattan and Shanghai.

Source: Used with permission from Inditex.

The firm tripled in size between 1996 and 2000, and then its revenue skyrocketed from $2.43 billion in 2001 to more than $20 billion in 2012. In August 2008, sales edged ahead of Gap, making Inditex the world’s largest fashion retailer.[] Table 3.1 “ Gap versus Inditex at a Glance” compares the two fashion retailers. While Inditex supports eight brands, Zara is unquestionably the firm’s crown jewel and growth engine, accounting for roughly two-thirds of sales.[]

Table 3.1 Gap versus Inditex at a Glance

Gap

Inditex

Revenue

$16.2 billion

$22.7 billion

Net Income

$1.28 billion

$3.23 billion

Number of Stores

3,179

6,393

Number of Countries

31

88

Biggest Brand

Gap

Zara

Number of Other Brands

4

8

Based in

San Francisco, USA

Arteixo (near La Coruña), Spain

First Store Opened

1969

1975

Sources: Year-end 2013 figures from http://www.gapinc.com, http://www.inditex.com, and http://www.bloomberg.com.

Why Study Zara?

While competitors falter, Zara is undergoing one of the fastest global expansions the fashion world has ever seen, opening one store per day and entering new markets worldwide—eighty-eight countries so far. The chain’s profitability is among the highest in the industry.[] The fashion director for luxury goods maker LVMH calls Zara “the most innovative and devastating retailer in the world.”[]

Zara’s duds look like high fashion but are comparatively inexpensive (average item price is $27, although prices vary by country).[] A Goldman analyst has described the chain as “Armani at moderate prices,” while another industry observer suggests that while fashions are more “Banana Republic,” prices are more “Old Navy.”[] Legions of fans eagerly await “Z-day,” the twice-weekly inventory delivery to each Zara location that brings in the latest clothing lines for women, men, and children. One well-known fan of the brand is the Duchess of Cambridge. The day after the wedding of Prince William and Kate Middleton, she made an appearance in a cornflower blue, pleated polyester dress from Zara. The price was £49.99[] for high-quality, inexpensive fashion that’s good enough for a future queen.

In order to understand and appreciate just how counterintuitive and successful Zara’s strategy is, and how technology makes all of this possible, it’s important to first examine the conventional wisdom in apparel retail. To do that we’ll look at former industry leader—Gap.

Gap: An Icon in Crisis

Most fashion retailers place orders for a seasonal collection months before these lines make an appearance in stores. While overseas contract manufacturers may require hefty lead times, trying to guess what customers want months in advance is a tricky business. In retail in general and fashion in particular, there’s a saying: inventory equals death. Have too much unwanted product on hand and you’ll be forced to mark down or write off items, killing profits. For years, Gap sold most of what it carried in stores. Micky Drexler, a man with a radar-accurate sense of style and the iconic CEO who helped turn Gap’s button-down shirts and khakis into America’s business casual uniform, led the way. Drexler’s team had spot-on tastes throughout the 1990s, but when sales declined in the early part of the following decade, Drexler was left guessing on ways to revitalize the brand, and he guessed wrong—disastrously wrong. Chasing the youth market, Drexler filled Gap stores with miniskirts, low-rise jeans, and even a much-ridiculed line of purple leather pants.[] The throngs of teenagers he sought to attract never showed up, and the shift in offerings sent Gap’s mainstay customers to retailers that easily copied the styles that Gap had made classic.

The inventory hot potato Drexler was left with crushed the firm. Gap’s same-store sales declined for twenty-nine months straight. Profits vanished. Gap founder and chairman Dan Fisher lamented, “It took us thirty years to get to $1 billion in profits and two years to get to nothing.”[] The firm’s debt was downgraded to junk status.

Drexler was out and for its new head the board chose Paul Pressler, a Disney executive who ran theme parks and helped rescue the firm’s once ailing retail effort. Under Pressler, Gap’s struggles continued, largely due to bad bets on colors and styles.[] Pressler’s tenure saw same-store sales decline in eighteen of twenty-four months.[] The marketing model used by Gap to draw customers in via big-budget television promotion had collapsed. A Fortune article on Pressler’s leadership was titled “Fashion Victim.” BusinessWeek described his time as CEO as a “Total System Failure.”[] Under the firm’s third CEO in a decade and after years of restructuring that resulted in the closure of hundreds of stores, Gap profits have finally returned, but the firm’s admiration of Inditex, and its inability to act on this envy, remains clear. Says one Gap exec, “I would love to organize our business like Inditex, but I would have to knock the company down and rebuild it from scratch.”[]

Contract Manufacturing: Lower Costs at What Cost?

Conventional wisdom suggests that leveraging cheap contract manufacturing in developing countries can keep the cost of goods low. Firms can lower prices and sell more product or maintain higher profit margins—all good for the bottom line. But many firms have also experienced the ugly downside to this practice. Global competition among contract firms has led to race-to-the-bottom cost-cutting measures. Too often, this means that in order to have the low-cost bid, contract firms skimp on safety, ignore environmental concerns, employ child labor, and engage in other ghastly practices.

The apparel industry in particular has been plagued by accusations of sweatshop labor and unsafe working conditions. Incidents such as the Spring 2013 Bangladesh Rana Plaza disaster, which killed more than 1,100 people in the collapse of an illegally constructed eight-story building housing multiple contract garment factories, underscore the human toll of unacceptable contract manufacturing practices. Walmart, The Children’s Place, and Benetton were among the firms said to have purchased clothing from firms operating in Rana Plaza.[] The track record of Bangladeshi garment factories has been notably grim. In the dozen years prior to the Rana Plaza incident, over 700 workers in Bangladesh were killed in garment factory fires.[] While Gap was not implicated in the Rana Plaza incident, the firm was singled out as a protest target because it is one of the largest importers of clothing from Bangladesh,[] and it refused to sign a safety accord backed by H&M and Zara, among others.[]

Big firms are big targets, and those that fail to adequately ensure their products are made under acceptable labor conditions risk a brand-damaging backlash that may turn off customers, repel new hires, and leave current staff feeling betrayed. Today’s manager needs to think deeply not only about their own firm’s ethical practices, but also those of all of their suppliers and partners.

Source: Wikimedia, http://en.wikipedia.org/wiki/File:Dhaka_Savar_Building_Collapse.jpg.

Tech for Good: The Fair Factories Clearinghouse

The problem of sweatshop labor and dismal industry practices has plagued the clothing industry for years. Managers often feel the pressure to seek ever-lower costs and all too often end up choosing suppliers with unacceptably poor practices. Even well-meaning firms can find themselves stung by corner-cutting partners that hide practices from auditors or truck products in from unmonitored off-site locations. The results can be tragic for those exploited, and can carry lasting negative effects for the firm. The sweatshop moniker continues to dog Nike years after allegations were uncovered and the firm moved aggressively to deal with its problems.[]

Nike rival Reebok (now part of Adidas) has always taken working conditions seriously. The firm even has a Vice President of Human Rights and has made human dignity a key platform for its philanthropic efforts. Reebok invested millions in developing an in-house information system to track audits of its hundreds of suppliers along dimensions such as labor, safety, and environmental practices. The goal in part was to identify any bad apples, so that one division, sporting goods, for example, wouldn’t use a contractor identified as unacceptable by the sneaker line.

The data was valuable to Reebok, particularly given that the firm has hundreds of contract suppliers. But senior management realized the system would do even more good if the whole industry could share and contribute information. Reebok went on to donate this system and provided critical backing to help create the nonprofit organization Fair Factories Clearinghouse. With management that included former lawyers for Amnesty International, Fair Factories (FairFactories.org) provides systems where apparel and other industries can share audit information on contract manufacturers. Launching the effort wasn’t as easy as sharing the technology. The U.S. Department of Justice needed to provide a special exemption and had to be convinced the effort wouldn’t be used by buyers to collude and further squeeze prices from competitors (the system is free of pricing data).

Suppliers across industries now recognize that if they behave irresponsibly the Fair Factories system will carry a record of their misdeeds, notifying all members to avoid the firm. As more firms use the system, its database becomes broader and more valuable. To its credit, Nike has since joined the Fair Factories Clearinghouse.

Key Takeaways

Zara has used technology to dominate the retail fashion industry as measured by sales, profitability, and growth.

Excess inventory in the retail apparel industry is the kiss of death. Long manufacturing lead times require executives to guess far in advance what customers will want. Guessing wrong can be disastrous, lowering margins through markdowns and write-offs.

Contract manufacturing can offer firms several advantages, including lower costs and increased profits. But firms have also struggled with the downside of cost-centric contract manufacturing when partners have engaged in sweatshop labor, poor working conditions, and environmental abuse.

Firms with products manufactured under acceptable labor conditions face multiple risks, including legal action, brand damage, reduced sales, lower employee morale, and decreased appeal among prospective employees.

Questions and Exercises

Has anyone shopped at Zara? If so, be prepared to share your experiences and observations with your class. What did you like about the store? What didn’t you like? How does Zara differ from other clothing retailers in roughly the same price range? If you’ve visited Zara locations in different countries, what differences did you notice in terms of offerings, price, or other factors?

What is the “conventional wisdom” of the fashion industry with respect to design, manufacturing, and advertising?

What do you suppose are the factors that helped Gap to at one point rise to be first in sales in the fashion industry? Why do you suppose Gap profits collapsed?

Where do Gap clothes come from? Who makes them? Why? Are there risks in this approach?

Describe the downside of working with a supplier exposed as having used unethical practices. How does this potentially damage a firm? How can technology play a role in helping a firm become more socially responsible with its supply sourcing?

Describe the Fair Factories Clearinghouse. Which firm thought of this effort? Why did they give the effort away? Think in terms of strategic resources: what happens as more firms join this effort a

3.2 Don’t Guess, Gather Data

Learning Objective

Contrast Zara’s approach with the conventional wisdom in fashion retail, examining how the firm’s strategic use of information technology influences design and product offerings, manufacturing, inventory, logistics, marketing, and ultimately profitability.

Having the wrong items in its stores hobbled Gap for roughly a decade. But how do you make sure stores carry the kinds of things customers want to buy? Try asking them. Zara’s store managers lead the intelligence-gathering effort that ultimately determines what ends up on each store’s racks. Armed with personal digital assistants (PDAs)—handheld computing devices meant largely for mobile use outside an office setting—to gather customer input, staff regularly chat up customers to gain feedback on what they’d like to see more of. A Zara manager might casually ask, “What if this skirt were in a longer length?” “Would you like it in a different color?” “What if this V-neck blouse were available in a round neck?” Managers are motivated because they have skin in the game. The firm is keen to reward success—as much as 70 percent of salaries can come from commissions.[]

Another level of data gathering starts as soon as the doors close. Then the staff turns into a sort of investigation unit in the forensics of trendspotting, looking for evidence in the piles of unsold items that customers tried on but didn’t buy. Are there any preferences in cloth, color, or styles offered among the products in stock?[]

PDAs are also linked to the store’s point-of-sale (POS) system—a transaction processing system that captures customer purchase information—showing how garments rank by sales. Using these two systems, managers can quickly and regularly send updates that combine the hard data captured at the cash register with insights on what customers would like to see.[] All this valuable data allows the firm to plan styles and issue rebuy orders based on feedback rather than hunches and guesswork. The goal is to improve the frequency and quality of decisions made by the design and planning teams.

Design

Rather than create trends by pushing new lines via catwalk fashion shows, Zara designs follow evidence of customer demand. The firm’s chairman and CEO notes, “Our business model is the opposite of the traditional model. Instead of designing a collection long before the season, and then working out whether clients like it or not, we try to understand what our customers like, and then we design it and produce it.”[] Data on what sells and what customers want to see goes directly to “The Cube,” where teams of some three hundred designers crank out an astonishing thirty thousand items a year[] versus two to four thousand items offered up at big chains like H&M (the world’s third largest fashion retailer) and Gap.[] While H&M has offered lines by star designers like Stella McCartney and Karl Lagerfeld, as well as celebrity collaborations with Madonna and Kylie Minogue, the Zara design staff consists mostly of young, hungry Project Runway types fresh from design school. There are no prima donnas in “The Cube.” Team members must be humble enough to accept feedback from colleagues and share credit for winning ideas. Individual bonuses are tied to the success of the team, and teams are regularly rotated to cross-pollinate experience and encourage innovation.

Manufacturing and Logistics

In the fickle world of fashion, even seemingly well-targeted designs could go out of favor in the months it takes to get plans to contract manufacturers, tool up production, then ship items to warehouses and eventually to retail locations. But getting locally targeted designs quickly onto store shelves is where Zara really excels. In one telling example, when one pop star played a set of concerts in Spain, teenage girls arrived to the final show sporting a Zara knockoff of the outfit she wore during her first performance.[] The average time for a Zara concept to go from idea to appearance in store is fifteen days versus their rivals who receive new styles once or twice a season. Smaller tweaks arrive even faster. If enough customers come in and ask for a round neck instead of a V neck, a new version can be in stores within just ten days.[] To put that in perspective, Zara is twelve times faster than Gap despite offering roughly ten times more unique products![] At H&M, it takes three to five months to go from creation to delivery—and they’re considered one of the best. Other retailers need an average of six months to design a new collection and then another three months to manufacture it. VF Corp (Lee, Wrangler) can take nine months just to design a pair of jeans, while J. Jill needs a year to go from concept to store shelves.[] At Zara, most of the products you see in stores didn’t exist three weeks earlier, not even as sketches.[]

The firm is able to be so responsive through a competitor-crushing combination of vertical integration and technology-orchestrated coordination of suppliers, just-in-time manufacturing, and finely tuned logistics. Vertical integration is when a single firm owns several layers in its value chain.[] While H&M has nine hundred suppliers and no factories, nearly 60 percent of Zara’s merchandise is produced in-house, with an eye on leveraging technology in those areas that speed up complex tasks, lower cycle time, and reduce error. Profits from this clothing retailer come from blending math with a data-driven fashion sense. Inventory optimization models help the firm determine how many of which items in which sizes should be delivered to each specific store during twice-weekly shipments, ensuring that each store is stocked with just what it needs.[] Outside the distribution center in La Coruña, fabric is cut and dyed by robots in twenty-three highly automated factories. Zara is so vertically integrated, the firm makes 40 percent of its own fabric and purchases most of its dyes from its own subsidiary. Roughly half of the cloth arrives undyed so the firm can respond as any midseason fashion shifts occur. When cotton prices rose to record levels, Zara was able to shift offerings away from more costly fabrics, preserving margins. By contrast, during that same period rival H&M saw profits drop 10 percent largely due to margin pressure.[] After cutting and dying, many items are stitched together through a network of local cooperatives that have worked with Inditex so long they don’t even operate with written contracts. The firm does leverage some contract manufacturers, but most of those used for trendy clothes are fairly close (Portugal, Morocco, and Turkey). There are far cheaper places to seek partners, but for Zara, speed beats costs and drives profits.[] Any contractors employed in farther regions (the firm has used partners in Asia and Latin America) produce staple items with longer shelf lives, such as t-shirts and jeans, but such goods account for only about one-eighth of dollar volume.[]

All of the items the firm sells end up in a five-million-square-foot distribution center in La Coruña, or a similar facility in Zaragoza in the northeast of Spain. The La Coruña facility is some nine times the size of Amazon’s warehouse in Fernley, Nevada, or about the size of ninety football fields.[] The facilities move over seventeen million items every week,[] with no item staying in-house for more than seventy-two hours. Ceiling-mounted racks and customized sorting machines patterned on equipment used by overnight parcel services, and leveraging Toyota-designed logistics, whisk items from factories to staging areas for each store. Clothes are ironed in advance and packed on hangers, with security and price tags affixed. This system means that instead of wrestling with inventory during busy periods, employees in Zara stores simply move items from shipping box to store racks, spending most of their time on value-added functions like helping customers find what they want. Efforts like this help store staff regain as much as three hours in prime selling time.[]

Trucks serve destinations that can be reached overnight, while chartered cargo flights serve farther destinations within forty-eight hours.[] The firm recently tweaked its shipping models through Air France–KLM Cargo and Emirates Air so flights can coordinate outbound shipment of all Inditex brands with return legs loaded with raw materials and half-finished clothes items from locations outside of Spain. Zara is also a pioneer in going green, with an environmental strategy that includes the use of renewable energy systems at logistics centers and biodiesel for the firm’s trucking fleet.

Stores

Most products are manufactured for a limited production run. While running out of bestsellers might be seen as a disaster at most retailers, at Zara the practice delivers several benefits.

First, limited runs allow the firm to cultivate the exclusivity of its offerings. While a Gap in Los Angeles carries nearly the same product line as one in Milwaukee, each Zara store is stocked with items tailored to the tastes of its local clientele. A Fifth Avenue shopper quips, “At Gap, everything is the same,” while a Zara shopper in Madrid says, “You’ll never end up looking like someone else.”[] Upon visiting a Zara, the CEO of the National Retail Federation marveled, “It’s like you walk into a new store every two weeks.”[]

Second, limited runs encourage customers to buy right away and at full price. Savvy Zara shoppers know the newest items arrive on black plastic hangers, with store staff transferring items to wooden ones later on. Don’t bother asking when something will go on sale; if you wait three weeks the item you wanted has almost certainly been sold or moved out to make room for something new. Says one twenty-three-year-old Barcelona shopper, “If you see something and don’t buy it, you can forget about coming back for it because it will be gone.”[] A study by consulting firm Bain & Company estimated that the industry average markdown ratio is approximately 50 percent, and less than 1 percent of JCPenney revenue came from items bought at full price.[] Contrast this with Zara, where 85 percent of products are sold without a discount.[]

The constant parade of new, limited-run items also encourages customers to visit often. The average Zara customer visits the store seventeen times per year, compared with only three annual visits made to competitors.[] Even more impressive—Zara puts up these numbers with almost no advertising. The firm’s founder has referred to advertising as a “pointless distraction.” The assertion carries particular weight when you consider that during Gap’s collapse, the firm increased advertising spending but sales dropped.[] Fashion retailers spend an average of 3.5 percent of revenue promoting their products, while ad spending at Inditex is just 0.3 percent.[]

Finally, limited production runs allow the firm to, as Zara’s CEO once put it, “reduce to a minimum the risk of making a mistake, and we do make mistakes with our collections.”[] Failed product introductions are reported to be just 1 percent, compared with the industry average of 10 percent.[] So even though Zara has higher manufacturing costs than rivals, Inditex gross margins are nearly 60 percent compared to 39 percent at Gap.[]

While stores provide valuable frontline data, headquarters plays a major role in directing in-store operations. Software is used to schedule staff based on each store’s forecasted sales volume, with locations staffing up at peak times such as lunch or early evening. The firm claims these more flexible schedules have shaved staff work hours by 2 percent. This constant refinement of operations throughout the firm’s value chain has helped reverse a prior trend of costs rising faster than sales.[]

Even the store displays are directed from “The Cube,” where a basement staging area known as “Fashion Street” houses a Potemkin village of bogus storefronts meant to mimic some of the chain’s most exclusive locations throughout the world. It’s here that workers test and fine-tune the chain’s award-winning window displays, merchandise layout, and even determine the in-store soundtrack. Every two weeks, new store layout marching orders are forwarded to managers at each location.[]

Technology ≠ Systems. Just Ask Prada

Here’s another interesting thing about Zara. Given the sophistication and level of technology integration within the firm’s business processes, you’d think that Inditex would far outspend rivals on tech. But as researchers Donald Sull and Stefano Turconi discovered, “Whether measured by IT workers as a percentage of total employees or total spending as a percentage of sales, Zara’s IT expenditure is less than one-fourth the fashion industry average.”[] Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact, making sure that every dollar spent on tech has a payoff.

Contrast this with high-end fashion house Prada’s efforts at its flagship Manhattan location. The firm hired the Pritzker Prize—winning hipster architect Rem Koolhaas to design a location Prada would fill with jaw-dropping technology. All items for sale in the store would sport radio frequency identification (RFID) tags (small chip-based tags that wirelessly emit a unique identifying code for the item that they are attached to). Walk into a glass dressing room and customers could turn the walls opaque, then into a kind of combination mirror and heads-up display. By wirelessly reading the tags on each garment, dressing rooms would recognize what was brought in and make recommendations of matching accessories as well as similar products that patrons might consider. Customers could check inventory, and staff wielding PDAs could do the same. A dressing room camera would allow clients to see their front and back view side-by-side as they tried on clothes.

It all sounded slick, but execution of the vision was disastrous. Customers didn’t understand the foot pedals that controlled the dressing room doors and displays. Reports surfaced of fashionistas disrobing in full view, thinking the walls went opaque when they didn’t. Others got stuck in dressing rooms when pedals failed to work, or doors broke, unable to withstand the demands of the high-traffic tourist location. The inventory database was often inaccurate, regularly reporting items as out of stock even though they weren’t. As for the PDAs, staff reported that they “don’t really use them anymore” and that “we put them away so tourists don’t play with them.” The investment in Prada’s in-store technology was also simply too high, with estimates suggesting the location took in just one-third the sales needed to justify expenses.[]

The Prada example offers critical lessons for managers. While it’s easy to get seduced by technology, an information system (IS) is actually made up of more than hardware and software. An IS also includes data used or created by the system, as well as the procedures and the people who interact with the system.[] Getting the right mix of these five components is critical to executing a flawless information system rollout. Financial considerations should forecast the return on investment (ROI)—the amount earned from an expenditure—of any such effort (i.e., what will we get for our money and how long will it take to receive payback?). And designers need to thoroughly test the system before deployment. At Prada’s Manhattan flagship store, the effort looked like tech chosen because it seemed fashionable rather than functional.

Key Takeaways

Zara store management and staff use PDAs and POS systems to gather and analyze customer preference data to plan future designs based on feedback, rather than on hunches and guesswork.

Zara’s combination of vertical integration and technology-orchestrated supplier coordination, just-in-time manufacturing, and logistics allows it to go from design to shelf in days instead of months.

Advantages accruing to Inditex include fashion exclusivity, fewer markdowns and sales, lower marketing expenses, and more frequent customer visits.

Zara’s IT expenditures are low by fashion industry standards. The spectacular benefits reaped by Zara from the deployment of technology have resulted from targeting technology investment at the points in the value chain where it has the greatest impact, and not from the sheer magnitude of the investment. This is in stark contrast to Prada’s experience with in-store technology deployment.

While information technology is just hardware and software, information systems also include data, people, and procedures. It’s critical for managers to think about systems, rather than just technologies, when planning for and deploying technology-enabled solutions.

Questions and Exercises

In what ways is the Zara model counterintuitive? In what ways has Zara’s model made the firm a better performer than Gap and other competitors?

What factors account for a firm’s profit margin? What does Gap focus on? What factors does Zara focus on to ensure a strong profit margin?

How is data captured in Zara stores? Using what types or classifications of information systems? How does the firm use this data?

What role does technology play in enabling the other elements of Zara’s counterintuitive strategy? Could the firm execute its strategy without technology? Why or why not?

How does technology spending at Zara compare to that of rivals? Advertising spending? Failed product percentages? Markdowns?

What risks are inherent in the conventional practices in the fashion industry? Is Zara susceptible to these risks? Is Zara susceptible to different risks? If so, what are these?

Consider the Prada case mentioned in the sidebar “Technology ≠ Systems.” What did Prada fail to consider when it rolled out the technology in its flagship location? Could this effort have been improved for better results? If you were put in charge of this kind of effort, what would determine whether you’d go forward with the effort or not? If you did go forward, what factors would you consider and how might you avoid some of the mistakes made by Prada?

3.3 Moving Forward

Learning Objectives

Detail how Zara’s approach counteracts several profit-eroding challenges that many fashion retailers struggle with.

Identify the environmental threats that Zara is likely to face, and consider options available to the firm for addressing these threats.

The holy grail for the strategist is to craft a sustainable competitive advantage that is difficult for competitors to replicate. And for nearly two decades Zara has delivered the goods. But that’s not to say the firm is done facing challenges.

Consider the limitations of Zara’s Spain-centric, just-in-time manufacturing model. By moving all of the firm’s deliveries through just two locations, both in Spain, the firm remains hostage to anything that could create a disruption in the region. Firms often hedge risks that could shut down operations—think weather, natural disaster, terrorism, labor strife, or political unrest—by spreading facilities throughout the globe. If problems occur in northern Spain, Zara has no such fallback.

In addition to the operations vulnerabilities above, the model also leaves the firm potentially more susceptible to financial vulnerabilities during periods when the euro strengthens relative to foreign currencies, especially the dollar (which many developing nations peg their currency to). A stronger euro means Zara’s Spain-centric costs would rise at higher rates compared to competitors. Rising transportation costs are another concern. If fuel costs rise, the model of twice-weekly deliveries that has been key to defining the Zara experience becomes more expensive to maintain.

Still, Zara is able to make up for some cost increases by raising prices overseas (in the United States, Zara items can cost 40 percent or more than they do in Spain). Zara reports that all North American stores are profitable, and that it can continue to grow its presence, serving forty to fifty stores with just two U.S. jet flights a week.[] Management has considered a logistics center in Asia, but expects current capacity will suffice for now.[]

Another possibility might be a regional center. China has surpassed France to become Zara’s second largest market after Spain,[] meaning some of the clothing that Zara sells travels from Asia to Spain, only to be routed back to stores in China.[] If Zara could replicate what it does in Spain with a facility in China, Vietnam, or other nation in the region, this could give the firm more global sourcing flexibility and likely decrease cost. Still, experts remain skeptical of Zara’s ability to replicate the firm’s high-tech, flexible capacity half a world away.[] One advisor to the firm voices concerns in having “two brains, one in Spain and one in China.”[] A similar facility in the Maquiladora region of northern Mexico could serve the U.S. markets via trucking capacity similar to the firm’s Spain-based access to Europe, while also providing a regional center to serve expansion throughout the Western Hemisphere. Rising incomes and a cultural link to Spain make Latin America look like an increasingly attractive market, but United States may not be as ripe for growth. While Zara now has over forty-five stores in the United States and is running a profitable stateside business, one industry watcher calls the United States a “graveyard of European retailers.”[] Among U.S. expansion challenges cited are American fashionistas tend to be concentrated on the coasts and American sizes are often a significantly different in cut than the rest of the world.[]

Rivals have studied the Zara recipe, and while none have attained the efficiency of Amancio Ortega’s firm, many are trying to learn from the master. There is precedent for contract firms closing the cycle time gap with vertically integrated competitors that own their own factories. Dell (a firm that once built its own PCs while nearly all its competitors use contract labor) has seen its manufacturing advantage from vertical integration fall as the partners that supply rivals have mimicked its techniques and have become far more efficient.[] In terms of the number of new models offered, clothing is actually more complex than computing, suggesting that Zara’s value chain may be more difficult to copy. Still, H&M has increased the frequency of new items in stores, Forever 21 and Uniqlo get new looks within six weeks, and Renner, a Brazilian fast fashion rival, rolls out mini collections every two months.[] Rivals have a keen eye on Inditex, with the CFO of luxury goods firm Burberry claiming the firm is a “fantastic case study” and “we’re mindful of their techniques.”[]

Finally, firm financial performance can also be impacted by broader economic conditions. When the economy falters, consumers simply buy less and may move a greater share of their wallet to less-stylish and lower-cost offerings from deep discounters like Walmart. Zara is also particularly susceptible to conditions in Europe since that market accounts for roughly two-thirds of firm sales.[] Global expansion will provide the firm with a mix of locations that may be better able to endure downturns in any single region. Recent Spanish and European financial difficulties have made clear the need to decrease dependence on sales within one region, underscoring the importance of the firm’s continued, aggressive pace of opening stores in new markets worldwide.

Zara’s winning formula can only exist through management’s savvy understanding of how information systems can enable winning strategies (many tech initiatives were led by José Maria Castellano, a “technophile” business professor who became Ortega’s right-hand man in the 1980s).[] It is technology that helps Zara identify and manufacture the clothes customers want, get those products to market quickly, and eliminate costs related to advertising, inventory missteps, and markdowns. A strategist must always scan the state of the market as well as the state of the art in technology, looking for new opportunities and remaining aware of impending threats. With systems so highly tuned for success, it may be unwise to bet against “The Cube.”

Key Takeaway

Zara’s value chain is difficult to copy; but it is not invulnerable, nor is future dominance guaranteed. Zara management must be aware of the limitations in its business model, and must continually scan its environment and be prepared to react to new threats and opportunities.

Questions and Exercises

The Zara case shows how information systems can impact every single management discipline. Which management disciplines were mentioned in this case? How does technology impact each?

Would a traditional Internet storefront work well with Zara’s business model? Why or why not?

Zara’s just-in-time, vertically integrated model has served the firm well, but an excellent business is not a perfect business. Describe the limitations of Zara’s model and list steps that management might consider to minimize these vulnerabilities.

What challenges might Zara face in expanding to China or to the United States? Do you think Zara should increase capacity in Spain or open a regional distribution center in another part of the world? What are the pros and cons of each approach?

Search online to find examples of firms that suffered production problems because they employed just-in-time manufacturing or kept limited inventory on hand. What caused the production problems? List any steps you can think of that the firms might consider to minimize the potential of such problems from occurring in the future. What role might technology play in your solution?

Footnotes

[1] J. Tagliabue, “A Rival to Gap That Operates Like Dell,” New York Times, May 30, 2003.↑

[2] C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to Fight Its Rising Cheap-Chic Rivals,” Wall Street Journal, February 20, 2008.↑

[3] C. Robertson, “Inditex’s Zara Faces Rising Competition,” eft, April 22, 2014.↑

[4] T. Buck, “Fashion: A Better Business Model,” Financial Times, June 18, 2014.↑

[5] S. Berfield and M. Baigorri, “Zara’s Fast Fashion Edge,” BusinessWeek, November 14, 2013.↑

[6] S. Berfield and M. Baigorri, “Zara’s Fast Fashion Edge,” BusinessWeek, November 14, 2013.↑

[7] S. Hansen, “How Zara Grew into the World’s Largest Fashion Retailer,” New York Times, November 9, 2012.↑

[8] S. Hansen, “How Zara Grew into the World’s Largest Fashion Retailer,” New York Times, November 9, 2012.↑

[9] T. Friscia, K. O’Marah, D. Hofman, and J. Souza, “The AMR Research Supply Chain Top 25 for 2009,” AMR Research, May 28, 2009, http://www.amrresearch.com/Content/View.aspx?compURI=tcm:7-43469.↑

[10] M. Pfeifer, “Fast and Furious,” Latin Trade, September 2007; and C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to Fight Its Rising Cheap-Chic Rivals,” Wall Street Journal, February 20, 2008.↑

[11] C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to Fight Its Rising Cheap-Chic Rivals,” Wall Street Journal, February 20, 2008.↑

[12] M. Baigorri, “Inditex 2011 Profits Rise 12% on Asian, Online Expansion,” Bloomberg, March 21, 2012.↑

[13] C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to Fight Its Rising Cheap-Chic Rivals,” Wall Street Journal, February 20, 2008.↑