The Case Study of Zara's Business Model and Strategy

Every company wants a sustainable competitive advantage and Zara the “flagship chain of Inditex Group” one of the world’s largest fashion retailers is no different (Correa, 2010). In our BUS 5114 MIS and Technology, week one discussion the class shared information about Zara’s success. The resource-based view of competitive advantage showcases Zara’s items as valuable, rare, difficult to imitate, and non-substitutional (Bourgeois, 2014). Zara maintained this resourced-based view primarily by utilizing innovative distribution process and rapidly adapting and integrating technology. This advantage resulted in Zara’s sales increasing “around 12 percent a year over the last 15 years”. (Petro, 2018, para. 2). However, can Zara continue to dominate the marketplace and grow in the same fashion?

Zara Specifics and Case Study

Zara’s consumer demographics are those who love to stay in fashion, have a medium to high purchasing power, maybe enjoy flaunting their style, and appreciate the blend of high end fashion without the high end cost. The headquarters are in Spain, but they serve customers worldwide. Sales revenue was over 26 billion euros in 2018 (Inditex, 2019). Zara’s main competition is H&M, GAP, Benetton, Mango, and Uniqlo (Petro, 2018). In this case report we are examining two components of Zara’s competitive advantage and analyzing the long term sustainability of the current model. Two main components of Zara’s success are their vertical integration as a distribution model and in-store customer focused technology. These two successful models work well, however like all models there are limitations and this case study will present suggestions to elevate both the distribution and the technology component of Zara’s business model.

Issue of Distribution Pros and Cons

Zara uses vertical integration, a business model where the company owns and controls more of the service line than traditional models (Bourgeois, 2014). Zara manufactures a new item in small quantities in Asia, ships it as a “greige good” (i.e. without color or final cutting/sewing), and then finishes it” close to the most consumers in Europe, specifically Spain (Petro, 2018). This actually makes the landed cost far higher than the landed cost of an item manufactured in high volumes completely in Asia where all production costs are much lower (Petro, 2018). However, Zara sacrifices margins for speed to market to stay at the forefront of trends and relevant in today’s fashion forward concerned market (Petro, 2018). By doing this Zara is creating a valuable, rare and difficult to imitate product.

While this vertical integration business model has been extremely successful for Zara, it is not perfect. Centralized distribution is like putting all your eggs in one basket. If and when a technical issue occurs in the distribution network the entire system suffers as there are no alternative routes, this makes Zara susceptible to unpredictable distribution issues.

Issue of In Store Technology Pros and Cons

Technology is one of the big reasons for Zara’s success. The sales staff use personal digital assistants (PDAs) to store an assortment of data (Gallaugher, 2015). Zara’s application of information technology to collect, store, analyze, and interpret data constantly provided the scaffolding to devise the company’s next course of action in regards to fashion trends (Gallaugher, 2015). Typical data collected includes customers feedback on what they’d like to see more of, how could a given style be more desirable, and gathering hard data on how different garments rank by sales. Technology is used in conjunction with customers, not separate from them. It is in the face-to-face interactions with customers that Zara’s employees gather the most useful data to input into their PDAs. In the Zara case study, the reader is told “to gather customer input, staff regularly chat up customers to gain feedback on what they’d like to see more of.” (Gallaugher, 2015).

Although Zara uses impressive technology in its distribution, stores, and interfacing with customers it was actually late to the on-line store, only starting e-commerce in 2010 (Arlidge, 2019). Meanwhile, Amazon has dominated the e-commerce stores concept and continues to develop in this area with $23 billion in research and development last year alone (Arlidge, 2019). It is time for Zara to up its game if it wants to stay the leader as “growing competition from younger, online-only players like Boohoo.com and Missguided” who are now “churning out clothes at higher speeds - as little as one week from design to point of sale - refreshing their sites daily with hundreds of new items” (Petro, 2018).

Solutions, Strategies and Specific Recommendations

Customers are buying online more than ever in this current consumer climate. “Inditex is seeking to integrate online sales with its bricks-and-mortar network by focusing on large, attractive stores where customers might try on items to buy later on computers or smartphones” (Dowsett, 2018). For Zara to stay at the top of the clothing sales industry, it needs to also capture more customers that like to shop online. Internet retailers such as Boohoo and Misguided are online competitors for Zara’s sales and if Zara intends to secure the online market this is an area they need to be more aggressive in. The overhead for these online companies is much less than that of Zara because they do not have to finance brick and mortar stores, nor do they have to pay on the ground employees.

Another recommendation for Zara is to leverage crowd sourcing by utilizing social media. They already have a moderate to high reliance on technology so recruiting their customers en masse as well as through individual face-to-face interactions would further their exposure and leverage group decision making not just individual decision making.

Zara should also consider alternative distribution routes in case the main centralized distribution channel runs into any issues. They should have contingency plans for alternate sourcing, storage and dispersal to their front line stores. Just like Amazon has many warehouses across many geographical locations, so too should any large industry who doesn’t want an unexpected distribution blockage issue.

Conclusion

Zara is at the top of its game; their vertical integration and effective use of technology are two of the main reasons for this. In the coming years, both of these strengths could become weaknesses if they do not evolve with the current competition. Fashion is a fickle industry and so far, Zara has played it expertly. A couple of missteps could cause them to go the way of the GAP if they are not careful. However, all evidence points to Zara being a well-managed company with policies and procedures in place that makes its fall from grace seem unlikely in the near future. However, just because it has worked in the past does not mean it will continue to work, and if any industry should know this it would be fashion where one minute you are in, and the next moment you are out.