The Lee Kong Chian School of Business

Academic Year 2018/19

Term 1

MGMT102 Strategy

Instructors: Li Zhefei (Tracy), Dr Terence Fan

Assignment: Case Analysis (ZARA)

Group: G15

Name: Yeoh Theng

Q: What is Zara’s strategy? Perform a value-chain analysis.

Zara’s strategy lies in differentiation, creating a unique, valuable position for itself in the fast-
fashion industry by positioning itself as a designer boutique store offering low to middle-
income customers of women, men and children, both fashionable and trendy clothing pieces at
affordable prices. This unique position that Zara stakes out allows itself to create and sustain
competitive advantage over its peers, by delivering superior performance via its competencies
such as a flexible supply chain, great responsiveness to changing consumer demands, and
having a great eye for spotting market fashion trends and changes. Compared to its competitors
The Gap and H&M, Zara gets a fashion product into its stores much faster. A value chain
analysis is performed to observe how Zara’s overall strategy aligns with its operational
processes.

Value Chain Analysis

Zara’s strength lies in its vertically integrated value chain, enabling operational efficiencies
and improved coordination in scheduling and planning of its value-chain activities. Some of its
primary activities includes supply chain and distribution, whereas supporting activities include
firm infrastructure and information systems.

Supply Chain

Zara’s raw material sourcing, cutting fabric and sewing facilities are mainly near its design
headquarters in Spain. Apart from external suppliers from low cost countries, Zara sources for
raw materials heavily inhouse through Comditel (owned by Inditex) who converts raw
materials to intermediate goods, giving Zara a shortened lead time of just one week for finished
fabric. Zara’s solid supply chain is contributed by keeping mainly 40% of manufacturing
production in-house in Spain (outsourcing rest to Europe, North Africa and Asia) and
purchasing one half of fabric undyed, giving itself maximum flexibility to react and update
product designs quickly to market changes. The geographical proximity and long-term
partnership of suppliers also facilitated Zara’s small lot orders, reducing shipment costs and
lag. Hence, unsuccessful batches can be kept to the minimum. Some of the cut garments were
further outsourced to northern Portugal with cheaper labor costs (reducing costs along value
chain) for sewing before sending back to Zara’s manufacturing complex.
Support activities like automation in their factories in Spain also reduced labor-intensive work
across production process, from pattern design and cutting to inspection. Both Zara’s external
and internal manufacturing efforts flows into its main distribution center.

Distribution

Zara’s solid centralized distribution network in Spain allows its stores in Europe to receive
deliveries within 24-36hours and stores outside Europe to receive deliveries within 24-48hours.
Twice-a-week shipments to stores and mobile tracking system and technology integration also
enhanced Zara’s logistics and supply chain capabilities. Coupled with support activities like
just-in-time system production, products were shipped directly from the central distribution
center to stores, keeping inventories at minimal levels, reducing warehousing needs and
overheads, further reducing overall costs of distribution for Zara’s value chain. In the event of
short supply, allocation from distribution center was also based on historical sales data, further
creating a sense of scarcity and exclusiveness for Zara’s brand identity.

Marketing & Sales

This scarcity and freshness was strengthened by Zara’s rapidly changing product lines and new
designs, sparsely stocked display shelves, where they rather leave demand unsatisfied with
limited production runs and strict inventories than achieve manufacturing efficiencies but build
up excess inventories. If consumers do not buy the product now, they may fear it being sold
out next week. As such, Zara spends very little (0.3%) on advertising as opposed to most
retailers (3-4%), relying mainly on word of mouth from customers, fortifying brand
exclusiveness and drawing power, especially in Spain. Due to exuding this exclusiveness,
Zara’s mark-downs requirements for merchandises are drastically reduced compared to its
peers, allowing it to redirect the money on shipment costs and labor when consumers change
preferences in fashion designs. Zara stores were also located at premium shop locations which
are conspicuous and attractive.

Design

Zara was able to adapt extremely fast to seasonal fashion trends, producing fashionable wears
seen on catwalks into stores within weeks. It can go from originating a design to having finished
goods in stores in four to five weeks contrasting to industry average of 6 months. Zara also
engages designers and specialists to expand and vary existing seasonal products creatively
while working on future seasonal designs as early as nine months in advance. Designers and
employees keep themselves abreast with latest fashion trends. Supporting activities like
working closely with store managers, integrating up-to-date sales data with changing consumer
preferences helps feedback back into their product line designs. Hence, Zara’s clothes are
always trendy and chic, increasing the products’ perceived value in consumers’ eyes.

Overall, the streamlined vertical integration of Zara’s value chain allows cross functional
operational efficiencies which lowers costs and fast adaptation to fleeting fashionable trends,
which goes back into its product designs, creating value and lowering costs for its stakeholders.

Q: How sustainable are the competencies/capabilities underlying the performance of Zara’s

activities?

Zara’s core competencies lie in its supply chain, distribution and design arm.

Zara’s supply chain is relatively sustainable as it involves taper integration. It mixes both in-
house and external suppliers, allowing it to flexibly adjust to demand fluctuations like change
in fashionable clothes and place small-lot orders, reducing inventories on-hand. However,
exposing in-house supplier Comditel, to market competition might be beneficial for Zara in the
long term as it increases the incentive for Comditel to improve quality and offer Zara the best
prices.

Zara’s centralized distribution center might not be sustainable in the long term as it is
susceptible to diseconomies of scale. When scaling up, pollution risks and slim profits from
textile factories, increase in administrative costs and more, might undo the initial savings in
operational costs. This is evident from how Zara built its second major distribution facility in
2003. As such, it may be beneficial for Zara to have a system of regional core distribution
centers (e.g. 1 in Europe, 1 in Asia etc.) to have an interconnected network, enjoying the
benefits of a centralized distribution center but at a bigger global scale without isolated major
facilities.

It’s fleet of designers are costly to imitate for other competitors as they are managed by Zara.
The expertise and ability to predict fashion trends may take years to imitate and
creativity(human mind) is an intangible asset that is not easily copied or replaced by machines.
Overall, the vertical integration of Zara’s core competencies aligned with its strategy allows it
to streamline its whole operations as a business fluidly and adaptably. It is also hard to imitate
as they are well integrated with one another. As such, Zara’s competencies are likely to be
sustainable in the long-run, enabling Zara to have a sustainable competitive advantage over its
peers.