IB Case Study
Gunjan Jadon Roll No.116 PGDM-B 1/13/2012
Five top competitors for Zara are. Earlier apparel firms used to concentrate only on one activity at a time. executive and technical expertise across countries.Q1. c) Coordination between market researcher s sales people with the Design production and delivery as they are the ones who are responsible for punching in trends. 2) Integration in markets. International Business Environment The typical apparel manufacturer is almost always located in low wage market that employs a few dozen workers.What fashion trend is followed in Paris can be easily be made available in Germany through better communication via internet and other channels. 4) Diffusion of business. Urban Outfitters
. 3) Advancement of technology such as inventory tracking system helped in quick delivery and managing the inventory. The final output is then supplied to the retailers. The demand in the market has forced these trading companies to co ordinate their activities to cater to the consumer demand in stipulated time. . GAP. a) Creation in value chain through co ordination of activities. The cycle time has been reduced significantly of supplying of apparel from supplier to the buyer. This has been possible because
1) Reduction in tariff barriers leads to the ease in transportation of goods easily from one country to another. 5) Change in government Regulations. Name any 5 key competitors for Zara today.H &M. The retailers had major percent of their sale from the National selling rather then outside home country market. Outline briefly the International Business Environment for the Global Fashion Retail Industry in 2005. Today the global fashion retailer industry has changed a lot. In highly labor intensive process workers make specific pieces of clothing which are then integrated with output of hundred of other companies spread across dozens of other countries. b) Using just in time techniques for delivery of goods. How has it changed today? Explain your rationale.
Porter Five Forces Model Attractiveness Parameter The Global Fashion Retail Industry 1) The Growth rate in the industry is the attractive parameter for rivals to enter into the market 2) Industry Profitability 3) Size of the market and the amount of customers in the market attracts the customer in the industry 4) Ease in the availability of raw material and supplier in the industry. Using the diagram for Porter's Five Forces framework. analyze the Global Fashion Retail Industry for its industry structure and attractiveness. Explain your rationale.Q2. 5) Factor conditions Such as technology required Skilled labour availability Machinery
Firms in other industries offering substitute
Competitive pressure created by the supplier bargaining and supplier seller collaboration
Competitive pressure created by other firms in the market
Buyers bargaining power creating pressure
Competitive pressure created from the threat of entry of new entrants.
education levels around the world. such as privatization. Eg. Changing customer preferences. massive outsourcing etc. to the customers who are ready to pay premium for the faster availability of fashion apparels and as such leveraged on the dominant features for fashion retail industry like fast moving fashion trend. The entry or exit of major firms. such as the emergence of large scale foreign companies The driving forces for the Global Fashion Retail Industry are:
y y y y y y
Increasing globalization Manufacturing process innovation Marketing innovation Changes in cost and efficiency Growing buyer preferences for differentiated products. internet. Zara provides the differentiated product at a faster speed to the market. Name and explain the driving forces for the Global Fashion Retail Industry and their strategic significance for Zara Ans : "Industry Driving Forces" are the forces that can change/transform an industry's structure.Ability of the industry to convert one time customers to regular customers
. : Globalization. "Industry Driving Forces" are strategically significant for an MNE as these forces essentially drive the International Business Strategy of an MNE and can transform the industry structure including the following:
y y y y y y y y y
Changes in the long term growth rate of the industry. huge consumer spending. Evolving customer buying and usage patterns like online buying. Changing attitudes and lifestyles Zara focused on the above mentioned driving forces and adopted a Porter's generic strategy and placed itself at Industry wide area. Manufacturing innovations that revise cost and efficiency frontiers. Explain the term "Industry Driving Forces" and its strategic significance for an MNE. executive and technical expertise across countries. Changing technologies. FDI limits etc. Changing income levels. technology etc. It provides differentiation strategy combined with low cost leadership to win over the competitors. Change in government regulation. The diffusion of business.
Elaborate on how and why Zara's value chain is different from those of its competitors. TV. Zara s 300 designers continuously track market events. distributed and sold almost as quickly as their customers fleeting tastes.Q4. Using a diagram explain Zara's value chain. No style lasted for more than 4 weeks. internet. Designers get ideas from store managers. fashion trends and customer preference in designing about 11000 distinct items per year compared to 2000 to 4000 items by rivals. film content and trend spotters who focus on university campuses and night clubs. Sol.
. industry publications. Zara s Value chain Primary Activities
Purchase supplies and inbound logistics
Distribution & outbound logistics
Sales and Marketing
Procurement Support Activities Technology and systems development Human Resource management Firm Structure
Primary Activities Design: Zara rejected the idea of conventional spring and autumn collection and adopted live collections that can be designed. manufactured. How has Zara encountered the impact of its Industry environment and industry structure through its value chain? Explain your rationale.
and Mexico which are used to keep inventory moving efficiently from factory and supplier to store. production and warehousing activities in the same area so as to support fast movement of goods thus gaining a competitive advantage over its rivals.
Zara encountered the impact of its Industry environment and industry structure through the following features of its value chain: Logistics: The company believed in fast movement of inventory and also keep as less inventory as possible. The two most important aspects of this are Manager s sense of customers and markets and their ability to coordinate activities worldwide. thereby making customers in the foreign market bear the cost of shipping products. The company purchases much of its fabric not yet dyed so it can make colour changes quickly during and between seasons. and no cloth ever remains there for more than three days. Barcelona. Firm Infrastructure: The infrastructure that Zara has built to support its operations is a point of competency for the company. Presently no other company can ship new fashion designs to store as quickly as Zara. It also solicited the help of Toyota of Japan to implement just-in time system. The data is then transferred to headquarters on daily basis where it is used to coordinate design. Managers adept coordination of overlapping activities among its designers. The suppliers are linked with Zara s network using which they can coordinate their production with Zara s projections. Coordination: Zara s strategy of rapid response to ever-changing fashion trends demands a high degree of coordination.in time inventory practices. Instead it relies on word of mouth. To implement this they planned their logistics accordingly. Store Operations: Zara s store serves two primary purposes: present the company s face to the world and act as grass-root marketing research agents. Marketing: The company spends less than 1 percent of its revenue on media advertising as compared to 3-4% spent by its rivals. It had sophisticated distribution centres in Spain. To make it a success they located their design. workers. The managers at Zara coordinate the tasks from material from dozens of suppliers to transmit orders to factories to delivery of orders to
. production and delivery according to trends. Support Activities Sourcing: Zara sources from most efficient and reasonable external suppliers with the help of purchasing offices in Beijing. For this they implemented just. Brazil. salespeople and plant testifies to the power of its strategy.Production: The factories are highly automated to control costs and further speed production. It also adjusts pricing for international market. and Hong Kong. Logistics: Zara added value by means of its logistics arrangement. . Most clothes remained in the distribution centre only for a few hours. Zara creates a climate of scarcity and opportunity for loyal customers. By constantly rotating merchandise.
Satisfying customer needs: The salespeople of Zara also worked as wired grassroots market researchers responsible for punching in trends. The pricing strategy of Zara in the words of one analyst is Armani at moderate prices .
Porters Generic Strategy
. Cost factor: Zara adds value by providing quality at moderate cost. Using a diagram explain Porter's generic strategy and their strategic significance for an MNE.
Q5. Due to its operational excellence and less expenditure on advertising it was able to cut on its costs.
Ans.thousand plus stores. Explain your rationale. customer comments and orders. This coordination helped Zara in having a fast movement of inventory giving it a competitive advantage. Locate Zara on this diagram. They used this data to design the garments according to the needs of the customers thus helping Zara to meet the needs of changing environment.
and market segmentation. differentiation. This could be achieved by bulk buying to enjoy quantity discounts. Cost leadership can be achieved by having a high asset turnover. Cost Leadership Strategy: This strategy involves the firm winning market share by appealing to costconscious or price-sensitive customers. Zara banks on the freshness of its offerings. It is most suitable for relatively small firms but can be used by any company. Through their rapidly changing product lines they are able to meet the customer requirements bang on every time. It can also be achieved by offering high volumes of standardized products. The firm typically looks to gain a competitive advantage through product innovation and brand marketing rather than efficiency.
. customers have very specific needs which are possibly under-served.
We can safely place Zara in the Differentiation Strategy category window because we have already seen through the case that it has unique competency and this has allowed it to garner broad market scope. working with vendors to keep inventories low using methods such as Just-in-Time purchasing or Vendor-Managed Inventory. Asian Paints. and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy. squeezing suppliers on price. or at least the lowest price to value ratio (price compared to what customers receive). or an airline that turns around flights very fast. we can better meet the needs of that target market. The strategies used are cost leadership.Porter s generic strategies help businesses to achieve and maintain competitive advantage. Differentiation Strategy: This strategy aims to differentiate the products in some way in order to compete successfully. offering basic no-frills products and limiting customization and personalization of service. HLL. In service industries. this may mean for example a restaurant that turns tables around very quickly. Three quarters of its merchandise is changed every three to four weeks and its average shopper comes to the chain seventeen times a year as against the industry average of three to four visits a year. A differentiation strategy is appropriate where the target customer segment is not price-sensitive. Market segmentation is narrow in scope while both cost leadership and differentiation are relatively broad in market scope. the company ideally focuses on a few target markets. Their customers are made to believe that if they don t buy now they won t get the items later. The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm. The last way of achieving it is having control over the supply/procurement chain to ensure low costs. Examples of the successful use of a differentiation strategy are Hero Honda. This is achieved by having the lowest prices in the target market segment. the market is competitive or saturated. Nike athletic shoes. It is hoped that by focusing marketing efforts on one or two narrow market segments and by tailoring marketing mix to these specialized markets. Segmentation Strategy: This strategy generally has a narrow focus.
which make the international expansion more economical.
Ans) Core competency is special outlook. Zara s advertising investment is 0-. It allows the chain to constantly provide its costumer with updated products. This also signifies that Zara relies mainly on its stores to project their image. Also throughout the season. Zara by working through the whole value chain is very vertically integrated and highly capital intensive.It is essential to competitiveness and profitability. composed of human resources as well as information technology. By owning its in-house production. amount. Core competency can emerge from various sources including 1) 2) 3) 4) 5) Product Development Employee Productivity Manufacturing Expertise Marketing Imagination Executive Leadership Zara core competency. Zara s product development teams are responsible for attending high-fashion fairs and exhibitions to translate the latest trends of the season into their designs. Zara s chief core competency is its in-house production. allows Zara to respond to the demand of its consumer better than the competition. Most traditional retailers outsource all of its production while focusing on distributing and retailing goods.3% as compared to traditional retailers who expends 3 4%. Therefore. capability or technology that creates unique value for the firm by creating an acknowledged thread that runs through all of the firm s value activities. For that reason. The core competencies for an MNE are the ones which are difficult to replicate by their rivals. In the manufacturing environment.What are Zara's core competencies? How does Zara leverage its core competencies for building and sustaining its competitive advantage? Explain your rationale. Zara s scarcity climate allows the company to sell more items at full price. In contrast. this
. Zara has a department. Regular customers know that new products are introduced every two weeks and most likely would not be available tomorrow. Furthermore. In addition. Zara is a chain that has developed a successful diverse method of doing business in the fashion industry. skill. Explain the term "Core Competence" for an MNE. and frequency of the new styles they produce. Zara s unique quick response system.
Zara s core competencies have provided the chain with a competitive advantage over traditional retailers in the industry. Zara also has an advantage over its competitors due to its low advertising costs. Zara is able to be flexible in the variety. Zara s cuts in advertising investments reduce total expenses. and clubs around the world to track customer preferences.Q6. which exclusively works in acquiring global prime real estate locations. The climate also increases the frequency and rapidity with which consumers visit the stores and buy the products. The rapid product turnover creates a climate of scarcity and opportunity in Zara s retail stores. Zara s product development teams are constantly researching the market by traveling to universities.
educated one that likes fashion and is sensitive to fashion. Using a diagram explain the terms Global strategy. Zara s target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. The display positions Zara in the industry with a prestigious and elegant image. This strategy reduces the need for communications because local subsidiaries can make many decisions. The advantage of this type of approach is that the firm can quickly respond to different local needs and opportunities.
Q7.department is responsible for the frequent refurbishing of store layouts. Global: A global strategy stresses efficiency because there is strong central control from headquarters. as well as the creation of a common window display for Zara s global stores. Multi-domestic strategy &Transnational strategy and outline their relative advantages & disadvantages. An extensive communications and control system is necessary to centrally manage the global firm. as the results from the subsidiaries have to be monitored at a headquarter location. Multinationals: The multinational strategy focuses on local responsiveness. It views world as a single market. Zara uses this to their advantage by offering the latest in apparel. For that reason most of the products that Zara offers globally are relative standardized fashionable products. Economics come from standard product designs and global manufacturing. International strategy. How would you classify Zara in terms of these strategies and why? Explain your rationale.
Pressure for cost reduction
Low Pressure for local responsive ness
. There are heavy reporting requirements though. By targeting a broad market Zara has an international advantage over its competitors. Subsidiaries operate autonomously or in a loose federation. Zara s target market is a young.
International: The international strategy is much like the multinational as there are autonomous local subsidiaries. Transnational: The transactional firm attempts to do everything! It seeks global efficiency while retaining local responsiveness. The firm integrates global activities through cooperation among headquarters and foreign same time that it obtains the advantage of global integration. and innovation. They use existing core competence to exploit opportunities in foreign markets. Local subsidiaries stress product approval by local governments and local marketing.
Strategy Global International
Advantages y Exploit experience curve effects y Exploit location economies y Transfer distinctive competencies to foreign markets
y y y
Disadvantages y Lack of local responsiveness y Lack of local responsiveness y Inability to realize location economies y Failure to exploit experience curve effects Customize product y Inability to realize offerings and marketing location economies in accordance with y Failure to exploit local responsiveness experience curve effects y Faliure to transfer distinctive competencies to foreign markets Exploit experience y Difficult to implement curve effects due to organizational problems Exploit location economies Customize product offerings and marketing in accordance with local responsiveness
. these subsidiaries are very dependent on headquarters for new processes and products. A good example is a pharmaceuticals company. The research labs in the headquarter company develop products for introduction around the world. However. efficiency.
responsiveness. and retailing. and e-business methods to make and move sophisticated fashion. production. distribution. It had refined the idea of InfoTech and fashion through its integration of design. technology. speed.y
Reap benefits of global learning
International Strategy for Zara Zara uses international strategy in its operation. It did not focus on customizing products as per different countries or concentrating its control to a particular place rather they had its headquarters in many places. production. Zara leveraged upon a number of competencies such as span design. By using its competence of well developed.
. efficient supply chain and concept of scarcity and opportunity it still captures most of the market and continues to be competitive in foreign market. adjust to fashion trends quickly at moderate prices. logistics. It advocates a strategy of do what we do best and outsource the rest.
the executives at Zara were continually tested on their decision making and had to continuously answer to questions like where should the product be designed. Zara has built a vertically integrated demand and supply chain which enables company to have short turnaround times. Even if a style sells out very quickly.
Answer. Zara produces more styles with fewer quantities. As we saw in the case. there are new styles waiting to take up the space. Short Lead times: Keeping up with fashion Focusing on shorter response times. It gives Zara tremendous amount of flexibility and control. 4. Zara s production is carried out in Europe. Reducing Risk: By reducing the quantity manufactured in each style.Q8. 3. Leadership in Numbers: Instead of producing more quantities per style. What are your learnings from this case in terms of an MNE's strategic options in the context of ever changing international business environment and its industry structure? Explain your rationale. reducing tock to the minimum and hence minimizing the fashion risk to the greatest extent possible. In fact. half of the production is owned or closely controlled facilities. As
. Zara can move from identifying a trend to having clothes in its stores within 30 days. It means Zara can quickly identify and catch a winning trend while competitors are struggling to catch up. The following are the key learnings that an MNE can take out from the Zara case in the context of ever changing international business environment and its industry structure: 1. much of it within small radius of its headquarters in Spain. what are the most effective marketing tools. Zara not only reduces its exposure to any single product but also creates an artificial scarcity: better buy now in case it is gone tomorrow. The strategy of an MNE corresponds to creating value to its target customer market thereby building and strengthening its competitive strength. Ownership and Control of Production: While most other retailers like American chain GAP and the Swedish retailer Hennes & Mauritz completely outsource their production to factories around their world. and achieve greater flexibility. Zara offers more choices in current fashion that any of the competitors. the company ensures that its stores are able to carry clothes that customers want at that particular time. The styles are changed every week and hence make it more desirable. what kinds of people should be hired to staff retail outlets and what should be the headquarters role in decision making. 2.
The creative workload of around 1000 styles every month is managed by a design and development team of over 200 people. React rather than predict: Zara has set itself apart from its competitors by changing its business information and business process. Supercharged Product Development: Design and product development is given prime importance in Zara. cutting and garment finishing. Product development and inventory management allows Zara to manufacture garments with available stock rather than having to wait for material to come in.already mentioned it has a vertically integrated group with up-to-date equipment for fabric dyeing and processing. Rather than concentrating on forecasting accurately.
. Superior information and communications technology: Information regarding customer needs and wants flow regularly which are fed into the database at head office and designers use them for designing new products. It buys semi-processed or un-colored fabric that it can colors up close to selling season based on immediate need. 6. preferences and needs. The state of the art distribution management which has around 200 kms of underground tracks ensures that Zara s merchandise does not waste time for human sorting. it has built its business around reacting swiftly as and when demand arises. allowing it to quickly and accurately prepare decisions. 7. The entire product development cycle begins from market research and they draw upon customer choices. 5. Zara warehouses the product information with common definitions.