...Vertical Integration vs Outsourcing of Zara Written by Mohd Rahman October 04, 2014 “The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by” -- Jose Maria Castellano Rios, Inditex CEO. 1 Introduction to Zara Zara is an icon in the fashion world and largest international fashion designing and manufacturing company. Zara is the flagship chain store of Inditex Group owned by Spanish tycoon Amancio Ortega, Inditex is one of the world's largest fashion retailers with eight brands and over 6,460 stores throughout the world (Ref-1). Headquarter of the group is in Coruña, Spain where the first store of Zara was launched in 1975. This paper will analyse the company and try to link its activities with supply chain strategy of vertical integration and outsourcing. Later will come to a conclusion that Zara is vertically integrated with justification and made recommendation for further improvement. Definition of Vertical Integration In strategic management, the term vertical integration describes a style of management control, when a company expands its business into areas at different points of the same production path. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or services, and the production combine to satisfy common need. In the following paragraph I will try to...
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...Vertical integration is the expansion within a company to grow its business areas at different points along the same production and sales path. Vertical integration can help companies reduce their costs while improving efficiency and flexibility. Zara, founded in 1975 by Amancia Ortega, is the world’s largest fast fashion flagship chain retailer owned by Inditex Group and is vertically integrated in all aspects of its business. Zara, according to Ferdows et al (2002), has a decentralized communication and decision making process based on an autonomous ordering of clothing and fulfillment method. Zara’s vertically integrated structure of owning everything from the processes of manufacturing and design of its products to the individual stores is due to the fact they produce more of their products in-house, with only forty percent of its activities outsourced. The outsourced activities include the simpler labour intensive quick turnaround activities such as sewing and basic clothing designs while in-house activities are the more complex, complicated and trendy designs for their clothing. Zara’s top management’s opinion on the concept of most products produced in-house is it increases flexibility and speed as the products have a short cycle time. Zara also produces roughly half of its products within their own factories located in different regions around the world. Zara’s governance structure for gaining access to assets is continuous as they leverage their own assets, keeping their...
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...new competitors rise seemingly overnight, that truly sustainable advantage might seem like impossibility, but there are winners and the Zara chain is one of them. The Zara fashion chain, founded in 1975 in Arteixo, is perhaps the world's most successful clothing chain. Zara has helped its parent, the Spanish firm Inditex, grow from obscurity in the mid. 90’s to the world's third largest pure-play fashion retailer after the Swedish H&M and US-based Gap Inc. with financial performance well ahead of these rivals. With 1021 shops, at 13.04.2007, in 55 countries, Zara appears to have found the formula for success: Give the public what it wants, at the lowest possible price, in the shortest time possible. In order to think about how the firms achieve sustainable advantage, it's useful to start with two concepts defined by Michael Porter: operational effectiveness and strategic positioning. (I) OPERATIONAL EFFECTIVENESS According to Porter, the reason so many firms suffer aggressive, margin eroding competition, is because they've defined themselves according to operational effectiveness rather than strategic positioning. Operational effectiveness refers to performing the same tasks better than rivals perform them. Everyone wants to be better, but the danger in operational effectiveness is in "sameness". At its heart Zara is building on a vertically integrated demand and supply chain, while most other textile chains rely on outsourcing and cheap labor in China. It enables company to...
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...THE CASE OF ZARA: PLANNING AND STRATEGIC CONTROL Alexandra Iacob University of Huelva HUELVA, SPAIN 2015 Abstract Zara is a retail company belonging to the Spanish company Inditex Group. Currently, Zara has 1,808 stores in 86 countries. This paper will analyse Zara’s business model, based on innovation and flexibility, as well as logistics chain and the various tools used to recognize the continuous changes in fashion trends and turn them into a product marketable within a few weeks. Compared with the competition, Zara has three distinctions: vertical integration to achieve a faster turnaround time; rapid expansion; and use of the store as the main tool for promotion, with low spend on advertising. This company offered a product design and quality, low price. In addition, resources and competences have allowed develop a different business model, where all processes from product design, to manufacturing, distribution and sales are carried out within the same organization. Key words: Strategic Management, Strategy, External Environment, Michael Porter’s Generic Strategies, Vertical Integration, Balanced Scorecard, Globalization Culture Introduction Company Background Four letters that make up a fashion brand known around the world. Zara is a Spanish brand of clothing and accessories and the foundation of Inditex’s success as well as their first retail format. Inditex S.A. is a Spanish multinational group of textile manufacturing and distribution established in 1975 in...
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...http://www.papercamp.com/essay/39587/Zara-Recommendations http://jacennedyconsulting.wordpress.com/2012/03/04/social-media-integration-risks-and-challenges-zara/ http://europe.chinadaily.com.cn/business/2011-04/20/content_12360712.htm Some of its risks and challenges lies in its strategy, principles and company structure. Zara is a vertically integrated retailer. Unlike similar apparel retailers, Zara controls most of the steps on the supply chain, designing, manufacturing, and distributing its products. Regarding the design strategy, an article inBusinessworld magazine describes it as follows: “Zara was a fashion imitator. It focused its attention on understanding the fashion items that its customers wanted and then delivering them, rather than on promoting predicted season’s trends via fashion shows and similar channels of influence, which the fashion industry traditionally used. 1.Diseconomic of scale – in long term, the costs is getting higher. Zara is a vertical Integration that work differently from traditional retailers Because of managing distributions on their own, designing and production process. 2.Centalized distribution system Recommendation Design: cooperate with vary range of designers in order to maintain its competitive advantage to be “the fast fashion” ,remain a distinctive design. Production: cooperate with any channel of production all over the world new improvement in operation technology can be applied into Zara instead of …old Distribution:...
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...1.0 Introduction: Zara is the flagship chain store of Inditex group which is owned by Spanish tycoon Amancio Ortega. It’s a Spanish based company essentially known for its clothing and accessories which was founded in 1975 (Mo, 2015). Zara believes in following the fast fashion policy, unlike its competitors. The discipline in Zara’s supply chain management has played vital role in its success (Anonymous, 2005). Zara follows vertical integrated strategy where it has total control of number of business activities such as manufacturing, sourcing, and distribution and retail stores, it allows the organization to accomplish greater flexibility, less stock and fashion risk. The main object of this report is to analyse Zara’s current supply chain and to propose suggestions for their central distribution and alternate solutions for their logistics management costs and their labour cost. 2.0 Zara’s Supply Chain Management 3.1 Supply Chain: Zara is the biggest and most successful chain of Inditex, the design and production is situated in La Coruna in Spain. In order for Zara stores to be able to offer front line style at moderate costs requires the firm to apply a solid impact over the whole supply chain network which incorporates design, purchasing, production, distribution and retailing. Zara utilizes its quick supply chain management to offer the most recent style outlines accessible in stores only fifteen days after...
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...Zara is vertically integrated as a result of its focus on being the quickest and most agile fashion retailer in the market. Zara’s structure vertically integrates the design process, just-in-time production, sourcing, delivery and sales which provides a very close and informal information network and efficient coordination across all of the production and sales units. For example, store managers are able to share feedback on how new designs are being received by the market with the relevant design and production departments to help improve the process. Production and delivery of items, such as incremental design and volume adjustments, can thus be tweaked and improved during the season and put into the stores with little lead time. Another example is the speed at which Zara’s can take a product from design to market. The industry standard is for a design to market cycle of six weeks while Zara is capable of executing a three week production to market cycle. One can think of Zara’s strategy as using its speed and agility to be the quickest to react to existing market demand, rather than trying to directly influence market demand. This is evidenced by the fact that Zara, unlike most of its competitors, avoids employing star designers or participating in the major fashion shows. Zara’s success in this area has been self-reinforcing. Customers, knowing that items will typically not remain in stores for longer than a few weeks with no guarantee of being restocked (most likely...
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...INTRODUCTION Zara is one of the world’s most successful fashion retailers operating in 59 countries. However, there is little research about the firm in English as the majority of publications have been written in Spanish. This paper seeks to address this gap in the literature by examining the internationalisation process of Zara. This study adopts an in-depth case approach based on extensive secondary research. Literature published in both English and Spanish has been reviewed, including company documents such as annual reports. The paper starts with a brief overview of the global textile and clothing industry, followed by the case study of Zara. The main part of the case examines the key aspects in the internationalisation of Zara namely: motives for internationalisation, market selection, entry strategies, and international marketing strategies. In the final section, comparisons are made between Zara and two of its main competitors, H&M and Gap. The global textile and clothing industry The removal of all import quotas in the textile and clothing industry from January 2005, involving the unrestricted access of all members of the World Trade Organization (WTO) to the European, American and Canadian markets is considered a key driving force in the development of the clothing sector (Keenan, et al., 2004). This new scenario has created opportunities for large exporters like China and India 2 that are considerably increasing their market share...
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...CASE OF ZARA FASHION CHAIN Sunhilde CUC, Simona TRIPA University of Oradea, Faculty of Textiles and Leatherworks, e-mail: hectic@rdslink.ro, tripasimona@yahoo.com, Keywords: Company Strategy, Competitive Advantage, Operational Effectiveness, Strategic Positioning Abstract. In this case study we want to analyse this phenomenon called Zara, a strategic unit of the Inditex Group, and evaluate the strategies of Zara on the European fashion market. Finally within the clothing market, it shows the competitive advantage gained through modern systems by comparing Zara to its opponents. 1. COMPANY PROFILE Firms strive for sustainable competitive advantage, financial performance that consistently outperforms their industry peers. The world is so dynamic, with new products and new competitors rising seemingly overnight, that truly sustainable advantage might seem like an impossibility. But there are winners and the Zara chain is one of them. The Zara fashion chain, founded in 1975 in Arteixo, a small town in the north of Spain, is perhaps the world's most successful clothing chain. Zara has helped its parent, the Spanish firm Inditex, grow from obscurity in the mid 90s to the world's third largest pure-play fashion retailer after the Swedish H&M and US-based Gap Inc. with financial performance well ahead of these rivals. The Inditex Group is present in 64 markets in Europe, the Americas, the Middle East, Asia and Africa, with upwards of 3,100 stores [8]. In addition to Zara Inditex...
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...Zara is a clothing and accessories retailer selling stylish apparel at affordable prices, and it is also the most profitable brand of the Spanish clothing retail group Inditex SA. Originally, the first Zara store opened when a German wholesaler suddenly cancelled a big lingerie order in 1975 and owner Amancia Ortega worried it might bankrupt his young clothing company. Ortega planned for this new Zara outlet, located near his factory in La Coruna in northern Spain, to sell this overstock merchandise himself. Since then, Zara has expanded into 500 stores in 68 countries as of January 2007 and has become a leader in customized fashion retailing. Learning from his early bad experience, Ortega developed a highly vertically integrated operation where a majority of the company’s production processes are kept in-house. Zara’s operational brilliance does not rest upon one specific operational component, but rather on a very unique and almost counterintuitive “jigsaw puzzle” of supply chain structure that has allowed it to grow market share and sales, even in times of economic decline. Zara has developed a business model with some basic operational goals: provide consumers with affordable and stylish clothes in very short lead times, supply small quantities of each style to reduce inventory risk and cost and increase the number of available styles and choice. It has created a unique value for its customers – offer very affordable and cutting-edge designer knock-off fashion much faster...
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...different business models. Inditex owned much of the production and most of its stores. Inditex is thus a vertically integrated company. This made Inditex gain a competitive advantage, which is quick response to the market requirements. On the other hand, The Gap and H&M have a different business model. They owned most of the stores, but outsourced all the production. Benetton had a third business model. It invested heavily in the production, but licensees ran its stores. The most interesting company to compare Inditex is The Gap. Although The Gap has much higher revenues than Inditex (almost five times Inditex), it incurred a net loss, as opposed to Inditex, which achieved a 23%, return in investment. This is due to the extremely high costs of good sold for The Gap. This could be caused -at least partially- by the complete outsourcing of the production. They do not have enough control over the production costs. Although The Gap has larger market share than Inditex and has equity almost double that of Inditex, Inditex is much more profitable. 2. How specifically do the distinctive features of Zara business model affect its operating economics? Specifically, compare Zara with an average retailer with similar posted prices. Zara sources fabric, other inputs, and finished products from external suppliers. It has purchasing offices in Barcelona and Hong Kong. This gives Zara a competitive advantage towards the costs of goods sold, as it can purchase from both Europe and Asia according...
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...This paper proposes to use Zara as a case study to analyze the internationalization process and its impact on the international context. Through the analysis, it seeks to gain some insights from this Spanish fashion retailer’s internationalization strategies that we could learn and apply in international business today. Zara started as a clothing retailer in Spain in 1975 and became incorporated within Inditex in 1985 (Keeley and Clark 2008). From its first inception, Zara focused its growth in the domestic market. In 1988, Zara was motivated to search for new markets when the Spanish market became saturated. From 1989 to 1996, Zara expanded into markets geographically. From 1997 to 2005, the internationalization experience acquired has enabled Zara to expand rapidly disregarding the geographical distance and cultural differences (Lopez and Ying 2009). Zara has 1,723 stores located in 77 countries by end 2010. Overseas sales contributed more than 60% of its total sales (Inditex 2012). Push and pull factors influenced Zara’s global expansion. The limited market growth opportunity in Spain was the key push factor to expand internationally. The key pull factors were (i) Spain’s entering the European Union in 1986 and (ii) globalization of economies that creates potential economies of scale. Other pull factors include the lifting of export barriers and information technology advancements (Lopez and Ying 2009). Initially, Zara followed the ‘Uppsala Internationalization...
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...customers an exclusivity feeling in its stores with fashionable products, service, store design, and store locations by executing the following. * Target Customer: Zara targets fashion-conscious customers who are at the same time price-sensitive and have frequent shopping behavior. * Product: Zara offers designer-style garments and accessories with broad, rapidly changing product lines; relatively high fashion content; and reasonable but not excessive physical quality. * Marketing Mix: Zara's well-designed marketing mix is consistent with its "medium quality fashion clothing at affordable price" positioning and its selling idea. * Stores: Zara owns and manages almost all of its retail stores. They are typically located in highly visible locations, often including the premier shopping streets and upscale shopping centers. * Promotion: Zara spends only 0.3% of revenue on advertising, compared with ~3-4% by rivals. It relies on store windows / interior displays and word of mouth to promote its market image. Zara smartly determined that the best way to execute its go to market strategy, and to develop a competitive advantage, was to vertically integrate its operations to a large degree. Short lead-times are critical for Zara to be able to offer the latest fashion in stores at all times. To that end, Zara keeps its entire design team in one building which increases collaboration. They further increase speed to market by having the majority of its garment production...
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... Sunder Elements of Dynamic Capabilities of ZARA Prepared by, Ashis Lamba (005EPGP2014) Bhupender Singh (007EPGP2014) Chandan Singh (008EPGP2014) The success of Zara in the fast changing fashion industry relies on its core capability in responsiveness to customers, which in turn is derived from a bundle of capabilities including swift copy of current designs in fashion, advanced information systems, just-‐in-‐ time production and shop-‐floor led stock control that combine together for success. Therefore, the emphasis of dynamic capabilities is on the ‘integration’ of resources and capabilities in light of a firm’s strategic direction. Here in this article we try to analyze elements of dynamic capabilities of Zara as we go through its various functions. Zara Business Model The dynamic capability of Zara’s...
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...Individual Assignment 1 Zara: Fast Fashion 1. + 2. Zara’s business and operating model is focused on speed and the need for fast fashion, I think a word that would classify it is mass customisation. It is targeted at young fashion and price conscious urban dwellers and is built on a vertically integrated system focussed on demand and supply. Zara is constantly updating its design and production base to deliver exactly what the client wants based on their buying habits and the latest trends. They have limited outsourcing and produce almost everything all in house. Zara is very close to its customers and provides them exactly with what they want, making Zara sell a trend value proposition at affordable prices. They can achieve this because of their integrated verticle supply chain; production time of a new product (estimated at under 5 weeks) and re-production and delivery of an existing product (estimated at under 2 weeks). Following this brief introduction it would be best to compare Inditex’s financial results with H&M as they are competing in very much the same markets and although their products and value chains are different their target consumer has the most overlap. Also GAP and to a lesser extent Benetton do not follow the fashion precisely but predict and produce in advance in bulk. Inditex despite being present in 39 countries, compared to H&Ms 14, and having over 50% more stores than H&M, they still manage to have considerably lower operating expenses...
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