Corporate Strategy and Operations Performance - Zara - Case Study Example

Corporate Strategy and Operations Performance Corporate Strategy Among the different brands under Inditex SA, clothing retailer Zara is the most profitable brand of the Spanish clothing retail group, which started its operation in 1975 in La Coruna. With its headquarters still at La Coruna, Zara has gone on to expanded its operations to cover over forty five countries where retailer operates 531 stores strategically located within important shopping districts of more than 400 cities in the globe. Even as Zara expanded from Europe to the Americas, Asia and Africa, the retailer stayed focused on its core fashion philosophy, which is creating innovative, and quality designs in addition to ensuring timely reaction to demands from their global market are essential in yielding profitable results (Tiplady, 2006). Therefore, to create sustainable profitability from their brands, Zara has a business model that depends on developing a system that relies on short lead times, keeping quantities produced at a minimum to lower inventory risk in addition to increasing the varieties of available customer style and choice (Badia, 2009). The business model that is the cornerstone of Zara is guided by the retailer’s unique value proposition that is combining modest prices with provision of latest clothing styles faster than the competitors are. Zara’s dedication to be a market leader can be analysed through the five operations performance that covers quality, speed, dependability, flexibility and costs (Slack, Chambers and Johnston, 2010) which reveals how the retailer has been able to stay ahead of competitors in terms of profit generated while keeping production at a minimum. Operations Performance Support to Corporate Strategy and External Benefits Zara relies on over 200 designers who lead in the making of creative and innovative designs based on information generated from boutiques around the world. This information is about the new trends in the market, which the designers have to respond to by making products that adapts to customer purchasing behaviour. The designers are also updated on models that are selling in important world cities which might be in some cases from different and from which they have to determine the selling potential of every piece. Therefore, Zara has various teams within its ranks whose purpose among others is to create products of high quality while also attracting sales within a short period after being released (Loeb, 2013). To ensure smooth performance of various areas of operations, Zara’s business model consists of three basic components that include value drivers, concept and capabilities (Peng, 2008). The fashion retailer’s basic concept recognizes the importance of creating efficient processes for designing, producing, and distributing products in order to ensure a quick response to any change in consumer needs so that they are always satisfied with what is available in the stores every time they visit. This is due to the recognition that the world of fashion is always in a state of flux, which is not as a result of change in supply but customer demand. To keep up with consumer demand and therefore high quality of products, Zara studies new trends closely by observing ratings from catwalks in addition to changes in climate which are necessary undertakings for the retailer to keep on producing trendy products that are also sensitive to the weather of a particular geographical location (Tiplady, 2006). Capabilities, which represent possessing the necessary resources that are essential for exploitation of potential openings in the market in addition to executing organizational conceptual strategy, are areas of strength for Zara (Peng, 2008). The retailer oversees tight controls over all aspects of production processes by ensuring designing and manufacturing is done in-house especially during in-season adjustment where the retailer’s factories produce an output of 85 per cent of all production. Whenever there is need for outside production, Zara has in place strategic partnerships with factories situated near their Headquarters (Wu and Blackhurst, 2009). About 80 percent of Zara’s production processes are in Europe with Spain alone accounting for almost 50 per cent of these figures, which are specifically located around La Coruna headquarters. Such proximity ensures the strategic agreements that Zara has with a number of local manufacturers contributes to timely delivery and service. Taking advantage of partnerships has resulted in flexibility to react to changes in demand and therefore be able to design and produce over 12000 new items on a yearly basis (Kotler & Armstrong, 2011). For Zara, the key value drivers are both tangible and intangible benefits stakeholders earn as returns for their investments where tangible benefits are represented by Inditex’s 11.02 per cent net margin on operations with a market capitalization of €13, 981, 000 for the year 2002. Zara’s success story is pegged their excellent financial performance where Inditex SA has seen corporate profits tripled since 1996 up to 2000. Customer loyalty in addition to brand recognition is Zara’s Intangible benefits that have continued to offer considerable value to the retailer over the years. This has ensured the number of consumers for their products is always rising while Zara’s brands become identified as trend setters in the fashion industry (Badia, 2009). The cornerstone of Zara’s success as a retailer in the fashion industry is their continued dedication towards rapidly responding to changing trends in fashion which has seen the retailer produce different products frequently and in short life spans. Zara is a fashion retailer that thrives on being flexible enough to the extent that products are in most cases produced in limited edition to avoid overstocking. Additionally, the retailer does not restock and the remaining stocks are replaced on a monthly basis by new trends. This dedication has resulted in a competitive advantage over the retailer’s competitors that has become apparent in several areas of operation of the retailer such as product development, advertising and marketing, information technology infrastructure and strategic partnerships and cost of production (Prater and Biehl, Smith, 2001; Wu & Blackhurst, 2009). In the area of product development, Zara allows store managers to exercise independence in such areas as decision on the products to put on display in their respective stores. Moreover, those that are to be placed on sale in addition to making reports of market research and store trends that are to be sent officers at the headquarters in La Coruna. The reports created by managers are essential components for teams located at the headquarters as they are used when designing, planning and producing Zara’s products. The retailer has created an effective chain through which information is transmitted from the stores to design and production teams at the headquarters. This communication chain plays an important part in shortening the time taken to get a finished product to the market within a few weeks for the retailer and therefore speedy delivery in terms of customer needs (Walker, Bovet and Martha, 2000). This mechanism put in place in Zara is quite different from what is the practice in competing organizations that have to depend on a specialized design team that undertakes all the activities from designing to production, which is always in anticipatory of market needs of the future. The stores at various market ends for such organizations do not have autonomy in matters such as display sale since everything has already been determined at the headquarters while available quantities have already been forecasted. The link between store managers and commercial teams at the headquarters offers Zara the necessary speed that ensures customer feedback is responded to quickly by management at the top of the organization which results in delivery of new trends in as minimum time as possible (Prater , Biehl, Smith, 2001). Zara ensures dependability of their products through various mechanisms that ensure customers get their products at the most opportune time. Zara has established a clear policy that guides sending of information to the retailer’s headquarter, working on the customer demands by the designers to shipping the required products to all stores. Shipment to every affiliated store is sent twice weekly, where small batches effectively distributed. Further, the retailer has invested heavily in information technology and logistics in order to effectively coordinate communication from various stores as the main points of linkage with customers. The managers at Zara stores have all been assigned communication equipments that send standardized information about customer feedback and orders directly to in-house designers (Peng, 2008). This interaction between customers and designers as mediated by store managers keeps the designers informed of fast-changing customer trends and demand that the company should concentrate on. Additionally this feedback mechanism gives a clear picture of which product is not moving and therefore requires termination of production. This communication chain ensures effective external benefits of dependability as customers are made aware of the exact time to wait for new arrivals that are responsive to new trends and the current weather. Further, ownership of most of most of the manufacturing plants also creates dependability for Zara given that it can control production of the fabrics (Peng, 2008). There are other aspects of product delivery that does not rely on the store managers for example the fulfilment of orders. In such instances, store managers are passed over with a group of commercials being tasked with meeting the orders of different stores. Authority has been given to this group to act on orders because store managers do not have an overview of the combined demand of all stores in around an area of operation. This situation makes it impossible for managers to have rational interpretation what would be enough for each store based on the company’s target for the region (Iglesias, 2009). . Consequently, it becomes more practical for the retailer to assign this function to a team that would effectively assign orders based on the collective analysis of demand and supplies of the inventory available at the distribution centre in the area. In situations where there is a short fall in supply, it the commercial teams at the headquarters that will establish stores that had been most effective in recent days in order to assign the new order to the right store (Caro et al, 2010; Iglesias, 2009). Given the fact that availability of a given item in Zara retail stores is dependent on the demands of a local customer in addition to local trends, a store manager does not have much power over the extend orders will be met. This situation leaves true decision making in the hands of commercial teams who must in special cases such as those requiring decision on future production for each Stock Keeping Unit order, work together with respective product managers. Depending on differences between demand and supply of a given areas, projections for trends in the coming days can be made in by considering how much the demand will be and consequently how much of specific items needs to be produced for each stores at a given time. Therefore, product managers have important roles to play in this area; they will have to base their decision on orders made by store managers (McAfee, Dessain & Sjoman, 2007). On costing, Zara does not focus on its cost of doing business but on the market prices when assigning prices to it products. By responding to the market prices, Zara is able to ensure it keeps its prices at a minimum for their high value products for particular markets. The cost estimates for Zara includes reflection of distance covered to ensure products get to the market, tariffs and taxes applied on them among other areas which are grounds for determining if a potential market could reach profitability level quickly. This procedure that acts as a template for making market analysis differs from country to country. Therefore, based on this approach, customers are given value for their purchase based on market realities of the geographical region they are (Willems et al., 2011). Advertisement is one area that Zara has taken advantage of to keep costs at a minimum while generating maximum value for their products. The retailer does not take part in elaborate advertisement for the products available with its advertisement budget being kept at a minimum. While most organizations in the industry set aside three to four per cent of their budget for advertisement, Zara invests about 0.3 per cent only. Promotion of Zara’s image is largely undertaken at the store level, which explains the establishment of a department within the retailer whose chief function is acquiring global prime real estate locations for construction of new stores. The department is also tasked with frequently renovating store layouts in addition to designing a common window display for the retailer’s stores worldwide. Such undertakings create a prestigious and elegant image for the global leader in the fashion industry (Peng, 2008). Zara has a number of other was of cutting cost such as imitating the latest couture designs then making similar clothing using less expensive fabric (Ferdows, Lewis, & Machuca, 2005). To keep the cost of these fabrics cheap the retailer has in place a number of practices that have been adopted over the years. The company has been able to avoid outsourcing its raw materials from Asia which has enabled it establish a competitive advantage over competitors. The retailer recognizes the fact that outsources from Asia would cut costs by up to 20 percent given the higher cost of production in Spain; however Zara has been able to create a competitive advantage over competitors in operations. This advantage has been established by creating strategic partnerships with local factories in Europe which makes it possible to have a product throughput time of 3 to 4 weeks from conceptualization to distribution of finished product (Peng, 2008). Zara has an in-house mechanism for designing and cutting available fabric which are obtained in strictly four colours to minimize costs. Dying and printing of designs is also not done until the fabric is close to a manufacturer which decreases wastage and the need to clear unsold inventories. Being near suppliers provides the retailer with the necessary flexibility to adjust their product based on latest market trends and consumer behavior (Bruce and Daly, 2006). Although outsourcing some of its operations to Asian countries such as China might result into cutting costs, Zara is against forgoing the benefits of proximity in search of low labor and production costs. Operational efficiency based on business model established by Zara recognizes flexibility in dealing with new trends within minimum time duration. Therefore, inventory costs would be higher if the company made orders for a season in advance and then be forced to hold the orders in distribution facilities waiting for shipment to particular stores. References Badia, E. 2009. Zara and her sisters: the story of the worlds largest clothing retailer. New York: Palgrave Macmillan. Bruce, M. and Daly, L. 2006. Buyer behaviour for fast fashion, Journal of Fashion Marketing and Management, 10 (3), 329-344. Caro, F., Gallien, J., Diaz, M., Garcia, J., Corredoira, J. M., Montes, M. & Correa, J. 2010. Zara uses operations research to reengineer its global distribution process. Interfaces, 40(1), 71-84. Iglesias, C. 2009. An analysis of market-orientated supply chain management in the retail fashion industry with particular reference to the case of Zara. Munich: GRIN Verlag. Ferdows, K., Lewis, M. A., & Machuca, J. A. (2005, February 21). Zaras Secret for Fast Fashion. Harvard Business School [Online], Available at: http://hbswk.hbs.edu/archive/4652.html Kotler, P. J., & Armstrong, G. M. 2011. Principles of marketing. Toronto: Pearson. McAfee, A., Dessain, V. & Sjoman, A. 2007. Zara: IT for fast fashion. Boston: Harvard Business School. Peng, M. W. 2008. Global Strategy. Connecticut: Cengage Learning. Prater, E., Biehl, M. and Smith, M. 2001. International supply chain: Tradeoffs between flexibility and uncertainty, International Journal of Operations & Production Management, 21(6), 823-839. Slack, N., Chambers, S. & Johnston, R. 2010. Operations management. New York: Pearson. Tiplady, R. 2006. “Zara: Taking the Lead in Fast Fashion”, BusinessWeek, April 4, 2006. Walker, B., Bovet, D. & Martha, J. (2000) Unlocking the supply chain to build competitive advantage. International Journal of Logistics Management, 11(2), 1-8. Wu, T., & Blackhurst, J. (Eds.) 2009. Managing supply chain risk and vulnerability: tools and methods for supply chain decision makers. New York: Springer. Read More