Value Creation In Global

Apparel Industry
Assignment 1

SUBMITTED BY

Shivi Shrivastava
PGDM B
Roll no 143
Q1. Outline major changes in International Business environment decade by decade for the
global fashion retail industry from 1970 onwards

Ans

1970’s

In 1950’s and 60’s apparel industry was labour intensive whereas in the 1970's, the industry
spend on capital investment for automation and cycle time reduction. Industrialization in south
asian economies like Malaysia & China happened mainly for export as labour cost was less in
these countries. With development of new technologies in 1970’s there where job cuts in many
developed countries.

Firms in the apparel industry were smaller and more disconnected than firms in the textiles
industry. The size of many apparel firms was often an obstacle to large capital investments.
Small firms typically operate on a low profit margin, and the cost of new, technologically
advanced equipment would be prohibitive to many of them. Many of these firms where restricted
to the local market for sales of their product.

1980’s

In 1980's are programmable sewing machines, Computer controlled cutting of material machine
& Computer Aided Design (CAD) machines were used in the industry that allows operators to
work more than one machine at a time & also reduces lead time. The industry was moving
towards more capital and labour requirement decreased more as compared to 1970’s.This made
the industry more viable for globalization.

1990’s

In 1990's by using the computer there more designer choices and visual possibilities to designer
is given the time. Designer also got more freedom to be creative and experiment as these more
demand in market. Some big firm invested in these area.
2000’s

The big firm started invested into the apparel industry. In 2003 apparel industry exceeded $ 1
trillon worldwide.

Industry Market Share

(%)

Europe 34

US 29

Asia 23

Rest of 14
world

Also by 2005, the top 10 company in apparel business worldwide operated in average of 10
countries.
Ques 2. What is Zara’s business model? Explain Zara’s strategic positioning. What trade-offs has
Zara made?

Ans

Zara’s Business Model:

Zara’s Business model is characterized by a high degree of Vertical integration compared to

other models developed by their International competitors. It covers all phases of the fashion
process: design, manufacture, logistics and distribution to its own managed stores. It has a
flexible structure and a strong customer focus in all its business areas.

The Zara’s business model is unique, comprising each and every stage of the fashion retail
business: design, manufacture, distribution and sale of fashion in own-operated stores.

The key to this model is the ability to adapt the offer to customer desires in the shortest time
possible. For Zara, time is the main factor to be considered, above and beyond production costs.
This signifies there clear cut policy of valuing time even more then money.

Vertical integration enables them to shorten turnaround times and achieve greater flexibility,
reducing stock to a minimum and diminishing fashion risk to the greatest possible extent.

Zara’s team of designers, made up of more than 200 professionals, continuously assessing the
customers´ preferences, wishes and demands offering each year comprised some 12,000 different
models for sale in its stores. The availability of the factories owned by the company, together
with a wide range of highly experienced external suppliers who have a solid commercial
relationship with the format, allow Zara to manufacture a model and to have it for sale in its
stores worldwide within the average term of approximately two weeks.

Garments, both the in-house manufactured and those purchased from external suppliers, arrive at
the hubs Zara has in Spain, wherefrom they are dispatched to the stores worldwide. Clothes are
dispatched twice a week, and this frequency allows a continual renewal of our fashion offer.

Zara sells three lines of items, for women, men and children. Each of them has its own
independent creative team who carries out the fashion proposals for each campaign. That is why
their customers may find in Zara stores, located at the major shopping streets of more than 500
cities in the world, a high quality fashion proposal that takes into account the latest trends at
affordable prices

At the first stages Zara followed ethnocentric strategy by encountering unexpected difficulties in
some countries due to cultural differences Zara changed its international marketing strategy to
geocentric strategy.
STRATEGIC POSITIONING

 Zara’s main competitive advantages include quicker delivery of products by reducing the
lead time from the manufacturer’s place to the customers, wide variety of fashion
apparels, moderate prices and well developed centralised distribution network.

 This fast fashion system requires a constant exchange of information throughout every
part of Zara's supply chain. Zara has a single centralized design and production centre in
Spain. It launches the products across the geography at the same time without least
customization for the customers in that particular geography.
 Zara by working through the whole value chain is very vertically integrated and highly
capital intensive, while the global apparel industry is labor intensive.
 Zara is vertically integrated. The company has its own in-house team of designers, more
than 200 who develop clothes based on popular fashions, while at the same time
producing the company's own designs.
 The team is able to respond almost immediately to emerging consumer trends as well as
to the demands of the company's own customer through the company owned retailers.
State-of-the-art production and warehousing procedures, as well as the installation of
computerized inventory systems linking stores to the company's growing number of
factories, enabled the company to avoid taking on the risk and capital outlay of
developing and maintaining a large back inventory.
 Zara reduces this risk of bulk production by producing in lesser quantity. This approach
gives Zara's double benefit, such as lesser risk and creating more demand by making
artificial scarcity. Zara instead produce more styles (new items) than any other retail
store; generating profit through greater number rather than bulk production.
 Zara targets a broad market without restricting itself to specific target segments and has
low advertising costs (0 – 0.3% of revenues)

TRADE OFFS

Zara's case is good from one perspective that organisation has a culture of making decision at
tactical levels. But, Zara might be trading off by taking skilful and costly managers. It is good to
see their business model embracing customer's needs and customer's requirements at different
levels but the question is of how long.
Zara was aware of the trade-offs it had to face. For example, Zara choose QR as its main strategy
and gave away being cost leader since it chose to produce most of its products in Europe where
labour was expensive. It chose to use lower quality raw materials to reduce costs by which it
admitted to sell “products to be worn ten times”. By making these and many trade-offs, it
designed its business model with highly fitted and reinforcing activities.
Q3. Using a diagram, explain Zara’s value chain. Comment on the degree of fit among Zara’s
activities.

Ans

Zara as a chain has developed a successful diverse method of doing business in the fashion
industry. Zara by working through the whole value chain is very vertically integrated and highly
capital intensive.

1. Design - Zara's designers create approximately 40,000 new designs annually, from which
10,000 are selected for production. Some of them resemble the latest couture creations.
Zara offers the same products as the high end fashion houses at much lower prices. They
develop clothes based on popular fashions, by adding new colors or patterns to existing
designs etc.

2. Materials Supply – Sourcing is done from around the world. Less expensive material
resembling the high end materials are used hence provide them at lower prices. Fabric
purchased is gray so that designs can be easily added

3. Production – Twenty fully owned factories. Production units are capital and technology
intensive. 450 workshops are present to perform labour intensive activities. Zara
manufactures 60% of its own products. By owning its in-house production, Zara is able to
be flexible in the variety, amount, and frequency of the new styles they produce.

4. Logistics - Under Castellano's computerized system, the company reduced its design to
distribution process to just 10 to 15 days. There is twice a week delivery to every Zara
store with quick movement of inventory from warehouses to Zara stores around the
world.
5. Resources The key resources of Zara are the skills of the design and production
employees, capital intensive production process and distribution network Resources.
Individual resources do not yield to a competitive advantage. The synergistic
combination and integration of sets of resources provides the competitive advantages.

6. Capability is the capacity for a set of resources to integratively perform a stretch task or
an activity. As a source of competitive advantage, a capability "should be neither so
simple that it is highly imitable, nor so complex that it defies internal steering and control
Q 4 What is the basis of Zara’s competitive advantage? Is it sustainable? Why or Why Not?

Ans.: -

In contrast to operational effectiveness, strategic positioning refers to performing different

activities than rivals, or the same activities in a different way.In the last years the fashion market
has polarized. On the one hand there are producers and retailers of premium products on a high
price level offering luxury products. On the other hand the low price young fashion producers,
often foreign international operating chains like the Swedish chain H&M, the Spanish chains
Mango and Zara or the American chain Gap.

The in-house design and production capabilities enable us to offer fresh designs at out Zara
stores twice a week throughout the year.

Zara distinguishes itself by a number of clever business model building blocks that reinforce
each other. At its heart the company is building on a vertically integrated demand and supply
chain, while most other textile chains rely on outsourcing and cheap labor in China. Zara studies
its customers demand in the stores and tries to instantly deliver. This allows them to have a
particularly appealing value proposition: A collection that is in line with the very latest fashion.

Zara’s target market is very broad because they do not define their target by segmenting ages and
lifestyles as traditional retailers do. Its target market is a young, educated one that likes fashion
and is sensitive to fashion. Today, people around the world through various communication
devices have more access to information about fashion.

Zara’s pricing strategy is, in the words of one analyst “Armani at moderate prices”. Interestingly
management adjusts pricing for the international market, thereby making customers in foreign
markets bear the cost of shipping products.

It moves fast. With an in-house design team based in in La Coruña, Spain, and a tightly
controlled factory and distribution network, the company says it can take a design from drawing
board to store shelf in just two weeks. That lets Zara introduce new items every week, which
keeps customers coming back again and again to check out the latest styles.

E.g. – “When Madonna gave a series of concerts in Spain, teenage girls were able to sport at her
last performance the outfit she wore for her first concert, thanks to Zara”. It takes the company
only 5 weeks to come up with a new garment from design to delivery and only 2 weeks for an
existing model.

Zara's success is all the more surprising because at least half its factories are in Europe, where
wages are many times higher than in Asia and Africa. But to maintain its quick inventory
turnover, the company must reduce shipping time to a minimum. The fast-fashion approach also
helps Zara reduce its exposure to fashion faux pas. The company produces batches of clothing in
such small quantities that even if it brings out a design that no one will buy -- which happened
during an unseasonably warm autumn in 2003 -- it can cut its losses quickly and move on to
another trend.

At its heart the company is building on a vertically integrated demand and supply chain, while
most other textile chains rely on outsourcing and cheap labor in China. Zara studies its customers
demand in the stores and tries to instantly deliver. This allows them to have a particularly
appealing value proposition: A collection that is in line with the very latest fashion. The
Economist, for example, writes: "When Madonna gave a series of concerts in Spain, teenage
girls were able to sport at her last performance the outfit she wore for her first concert, thanks to
Zara". It takes the company only 5 weeks to come up with a new garment from design to
delivery and only 2 weeks for an existing model.

One of the strongest differentiators of Zara's business model is its closeness to its customers and
its ability to transform this into a trendy value proposition. Other fashion chains simply can't
follow this speed.
Q5 What are the challenges Zara is currently facing and likely to face till 2015? What are your
recommendations to Zara for dealing with these challenges?

Ans

Current Challenges:

 Inability to penetrate into the American Market – This is mainly due to the differences in
the tastes and preferences of the consumers and the lack of development strong supply
chain and production facilities in America.
 Strong Vertical Integration – This has some problems like Vertical integration often leads
to the inability to acquire economies of scale. Zara’s speedy and recurrent introduction of
new products also incurs increased costs.
 They have higher research and development costs.
 Reduced customer reach due to the lack of a proper advertising channel

Future Challenges

 Zara’s direct competition may be their largest threat, especially when expanding into new
geographic territory. The Gap and H&M (Hennes and Mauritz) are Zara’s most similar
and threatening competitors
 Zara also has the issue of cannibalization. Zara’s extensive location strategy may
cannibalise the sales of some retail outlets due to the popularity of the others.
 While Zara may find it difficult to manage the vertically integrated model for its large
scales of operation, local retailers may follow Zara's formula to success and can emerge
as big threat to its success.
 Advertisement is becoming an important part of the business and it reflects directly in the
sales. Zara's in-store advertisement model may not work in future.

Recommendations

 The company can venture into the production of specialized garments which cater to the
specific needs of the customers rather than selling only standard products.
 Internet retailing is picking up fast due to the technological advancements in the
communications sector. Zara can leverage this to its cause.
 Build decentralized distribution and production in each region (Asia, Europe and
America) to high penetrate into market
 Enter into all Trade block
 Try to contact with fashion designers