Case Study 1 – Zara: Fast Fashion
Kevin McKeever
Question 1
The critical factor that helped Zara (the most productive and internationalized brand among Inditex’s six
separate chains) achieve superior financial performance relative to other industry leaders was its
distinctive business level strategy. Zara uses a combination of low cost leadership and differentiation
strategies to compete against other retailers in the industry to gain a competitive advantage and acquire
market share.
Zara has been able to provide “medium quality fashion clothing at affordable prices” to its customers by
drastically cutting its costs through superior production/distribution channel efficiency, low cost
advertising, and quick inventory turnover. Instead of entirely outsourcing its production to developing
countries like most other companies in the industry do, Zara invested in developing manufacturing
logistics, IT, and JIT manufacturing system, so that it could manufacture a large percentage of its
products through its own production facilities. This allowed Zara not only to cut its production costs, but
also to achieve shorter lead times compared to its competitors. In addition, Zara carefully selected the
locations of its distribution centers and warehouses to cut down shipping costs. The 2nd large distribution
center that Zara built was built by a local airport, near the railway, and next to road networks in order to
maximize flexibility in distributing their products. To further cut costs, Zara spent a fraction of what other
industry competitors spent on advertising and marketing (0.3% of the total revenue for Zara, compared to
most competitors who often spent more than 3.0% of their total revenues).
Zara’s differentiation strategy is accomplished through a rapid product turnover, highly fashionable
designs, and frequently refurbished store displays. Customers perceive Zara’s products to be more
valuable than its competitors’ because they are differentiated through quick product turnover and are very
trendy. Well-organized, fancy store displays also draw customers into the stores, as well as highly visible
locations around different countries.
Case Study 1 – Zara: Fast Fashion
Kevin McKeever
Zara’s various strategies to keep its cost as low as possible have generated large profit margins and have
led to superior financial performance in the industry. According to Dr. Rutherford’s favorite model, Zara
is very competitive because people perceive its products to be valuable, but affordable at the same time.
The cost at which Zara produces its products is relatively low as well, so there is a nice balance of value,
price, and cost that contributes to Zara’s overall wellbeing as a company.
Question 2
Zara’s strategy in comparison to Gap, H&M, and Benetton was particularly unique in many different
ways. One of the strategies employed by Zara that was not employed by the other major retailers that
were analyzed in this case study was Zara’s production methods. Zara, unlike the other 3 major retailers,
owned much of its production and most of its stores. This put Zara in the position to take advantage of a
number of different opportunities given the circumstances. They were able to achieve an incredibly fast
level of inventory turnover relative to industry standards, which in turn gave them the ability to market
and sell the most up-to-date and fashionable items at any given time. Zara was able to crank out
fashionable garments and accessories weeks before any of the other retailers discussed in this article were
able to which increased their overall market share in the industry. While Zara was able to keep production
of their products primarily in house and prosper from the value it added for their customers, Gap and
H&M on the other hand outsourced their production to places like Asia. They took advantage of the low
cost of labor to produce mass quantities of certain products at a lower cost per unit (as is evident in
Exhibit 3 in the Zara Case Study reading, the “landed costs” of manufacturing a large men’s shirt in Spain
was 42 Euros as compared to 29 Euros when manufactured in Asia). Utilizing economies of scale by
outsourcing bulk orders of production to Asia helped these companies save money on production overall,
but they had to sacrifice the speed at which their inventory reached the shelves as well as the
variability/diversity of their product offerings. This increased overall lead time, an opportunity cost that
would prove to be quite costly to these firms and their respective established market shares in the long
run. Benetton was a company that sold its production through licensees and produced its own products
Case Study 1 – Zara: Fast Fashion
Kevin McKeever
but had very long lead times which crippled its ability to stay hip and fashionable in the industry. This
model would cause Benetton to seem as though they had hit saturation in the market by the 1990s,
causing the company to undertake a new strategic approach that would change the business level strategy
of the company from what it operated under traditionally.
Zara approached the industry as a whole from more of a “customizable” standpoint as opposed to a
“uniform distribution” platform as well. They incorporated a vertical integration method of design and
production into their business level strategy which allowed them to cater to the different wants and needs
of the people who lived in different geographical locations all around the world. Depending on a store’s
location in different countries with different socioeconomic conditions, even the sales representative
uniforms were different. Zara placed a lot of power and autonomy in the hands of store managers, who
were in charge of ensuring the products being sold at their stores were popular and fashionable in the eyes
of the local inhabitants in that area. They were even given monetary incentives to pull dud products off
the shelves and replace them with more favorable items given that specific time and place. Zara wanted
its store managers to feel as if they were running their own small business as opposed to working for
some giant cooperation so they pushed decision making down the chain of command to the store
managers who were more in touch with what was going on in their specific regions (this is a good
example of minimal rationality from the organizational inertia model, there wasn’t a whole lot of
bureaucracy in the company, it maintained a hierarchically flat management structure which contributed
to its overall success in the industry) Also, because Zara employed a very high number of designers in
comparison to other companies in the industry, they were able to get feedback from store managers based
on historical sales, trends in the area etc. very quickly. The designers were then able to quickly create a
product (which would be produced shortly thereafter) that fit the requirements for that specific region’s
tastes and preferences, in turn creating a competitive advantage that just couldn’t be mimicked by the
other industry leaders because of their differing business models. Firms like Gap, H&M, and Benetton
Case Study 1 – Zara: Fast Fashion
Kevin McKeever
were unable to reach the level of regional customization and short lead times that Zara was able to
achieve with their inventory, and this gave Zara quite an edge over its competitors in the industry
Another strategy that differentiated Zara from its competitors was its overall supporting operations. Zara
did very little advertising (.3% of revenue) in comparison to H&M, Gap, Benetton and other industry
leaders at the time (generally 3%-4% of revenue). Zara refurbished their stores more often (every 3-4
years) than other companies in the industry. Zara had superior telecommunications systems in place to
connect key components of their business strategy together, and they also were logistically superior using
JIT systems.
The companies also maintained some similarities as well however. They all analyzed markets based on
micro/macro factors before attempting to enter in order to try and determine profitability and potential
success rate upon entry. Some used multiple brands to market their good (like Gap with Banana Republic,
Gap, and Old Navy...like Inditex with Zara, Massimo, Dutti, Pull & Bear, Bershka, Stradivarius, and
Oysho). These companies all marketed to the same types of demographics, which spanned a very large
portion of any population (children, men, women). Finally, all the companies experienced a positive net
income in 2001, except for Gap.
Question 3
Zara’s competitive advantage in the future of the fashion marketplace seems as if it will continue to grow
and will be sustainable if they continue their current business practices. Zara was effectively able to
minimize its expenditure on key expenses (like advertisements) and streamline its distribution and
production (by owning its facilities and using vertical integration), in turn allowing the company to earn a
higher profit margin than Gap, Benetton, and H&M. They keep their products positioned in a desirable
place compared to other retail fashion stores, with high fashion products hitting the store shelves much
quicker than competitors at moderately low prices. One good reason to explain why this has happened in
Case Study 1 – Zara: Fast Fashion
Kevin McKeever
this industry is because the traditional companies like H&M, Gap, and Benetton have experienced
organizational inertia. They can’t change, instead they just keep doing what they have done for years.
According to the VRIO model we learned in class, Zara does not particularly have a rare product or
resource. They don’t have products that are inimitable from a physical product standpoint, but from a time
standpoint in regards to most up-to-date fashions their products are inimitable because these companies
lack the ability to get their products out to the general public quickly enough to compete with Zara.
Overall, people do perceive that Zara’s products are valuable. This is most likely because of the unique
fashions and designs that Zara is able to instill in its products and how quickly they can create articles of
clothing or accessories/get them on the shelves in stores. Finally, Zara’s business practices are organized
in a way that turns their resources into a profitable venture, which creates a competitive advantage for
Zara that is very hard for its competitors beat out. One of the most concerning threats to the sustainability
of Zara is that current competitors could mimic Zara’s business processes to steal customers away from
Zara’s market share. These companies would essentially be able to produce products that would become
viable substitutes for Zara’s products, which would hurt Zara’s sales in the industry according to Porter’s
5 Forces. The threat of new entrants (Porter’s 5 Forces again) is relatively low because there are barriers
to entry like large capital requirements, brand loyalty, and potential legal barriers etc., but these new
entrants could potentially pose a threat to Zara’s profits if given the opportunity to set up shop because
they could mimic Zara’s business strategy and operations. If other retail fashion companies begin to use
their backward vertical integration strategy or learn to cut costs like Zara did, Zara’s competitive
advantage could be mimicked and diminished. If this does end up happening in the future (new
entrants/existing competitors mimicking their operations and strategy), Zara will need to revise their
current strategy in order to remain competitive in an increasingly competitive market. Lastly, one very
unlikely outcome that could potentially occur is that the environment in which Zara operates under could
change. Maybe in the future fashionable clothes will become unpopular, in which case Zara’s specialized
business model and processes would cease to add any additional value/profits to the company.