Xin Yi Wang
Professor Alex Kalafatides
INTB 200
29 January 2015
Zara Case Study
Opening its first store circa 1975 in Galicia, Spain, Zara today has become a multi-billion
dollar retail business in the apparel industry. Zara’s global success can be attributed through their
company’s business structure. By being in the forefronts of innovative fashion design,
minimizing costly product mistakes, optimizing manufacturing and distribution, and creating
competitive pricing, Zara is able to enter global markets at competitive rates and with high
success.
Zara’s business structure in fashion design has not only allowed them to thrive in the
Spanish market, but it has led them to expand globally. Because Zara invests a large amount of
their profits and time in their design team, they are able to continuously supply stores with new
innovative styles every four to five weeks. This approach had made Zara a forerunner in fashion
merchandise because the “industry standard averaged six months for design, and three months to
manufacture” (Ghemawat 9). In addition, Zara also structures their design team to bridge
merchandising, and the back end production together, which minimizes mistakes that would have
been costly and time consuming.
With limiting the volumes of new items to certain key stores, Zara is also able to test their
market before manufacturing costly mistakes. If a merchandise proves to receive positive
customer reaction, only then would Zara produce it on a larger scale. This allows for Zara to
“lower its failure rate on new products to 1% compared with an average of 10% for the industry”
(Ghemawat 10).
By using a strategic manufacturing structure and optimizing distribution, Zara is also able
to cut costs and deliver a competitive price to their customers. All of the fabric manufacturing
process is done through a subsidiary of Inditex, Zara’s parent company. This not only decreases
manufacturing cost, but also optimizes their manufacturing timeline. In addition, about 40% of
Zara’s finished garments are manufactured internally. These products consist of Zara’s higher
priced fashion merchandise, and accrue a higher financial risk. By keeping these products
manufactured by suppliers located close by, Zara is able to keep a closer eye on their production
and therefore, can decrease the chances of mistakes to be made. On the other hand, Zara is also
able to be competitively priced because they outsource their basic items with lower price margins
to countries with cheap labor.
Because Zara optimizes their manufacturing process both internally and externally, they
are able to minimize their distribution time. Merchandise is shipped twice during regular season
and three times during sale seasons. Order processing is also made based on time zones in order
to optimize shipping through time differences. Distributions facilities are all strategically located
in order to access distribution networks at the fastest rate. With Zara’s distribution process being
optimized, it enables their company to use their warehouses to move merchandise rather than to
store it. This enables Zara to cut down on warehouse and company costs, and ultimately results
in being price competitive in many global markets.
Zara’s approach to international expansion starts with one flagship store in a major city.
Eventually after gaining experience operating in the new market, more stores would be added in
surrounding areas. As a general rule of thumb, Zara will “focus more on market prices than its
own costs in forecasting its prices in a particular market… forecast will then be overlaid on cost
estimate… to see whether a potential market could reach profitability quick enough” (Ghemawat
10). This shows that Zara is able to position themselves in their targeted market effectively
through the logic of different market equals different approaches.
With its three modes of market entry, company owned stores, joint ventures, and
franchises, I believe Zara competitively prepares themselves to enter any market. Expanding
businesses internationally often times creates problems for companies. This is because every
country conducts business differently. By creating three modes of entry, Zara not only creates
more opportunities to expand, but also enables for the company to easily transition into a new
global market. “Company owned stores entail most commitment of resources including
management time. As result, Zara had to use two other modes of market entry” (Ghemawat 16).
Franchises are used in small, risky or significant cultural different stores, while joint ventures
offered a chance to enter bigger, and more important markets where there are barriers to direct
entry.
Different market means different products. This statement is not entirely true for Zara.
While the company does focus on having different products for its global markets, it only
accounts for 10% to 15% of the products. The majority of their products have the same basic
designs across each market. “Zara does not develop products to meet just one country
requirement…the implementation of this relatively standardized strategy had become easier over
time as tastes converged across national boundaries” (Ghemawat 24). Zara stands for their
marketing strategy in global markets because they understand their company brand. They are the
innovative trendsetters price competitively, and they want to appeal to customers that understand
that innovative style. Therefore they stand behind having consistent style across all markets as
long as it is innovative.
For future markets, I think Zara should invest deeper within the European market. As
pointed out in the case study, Europe offered the brightest prospects for significant growth, while
Asia is the hardest market to penetrate. Europe is also more fashion forward than Asia or the US
market, which is the type of customers Zara would attract. Although prime locations could be
harder to find in Europe, Zara could do joint ventures similar to how they entered the Italian
market with the Percassi. Overall, I think Zara has a competitive advantage through their
business structure that allows them to achieve their objective of obtaining innovative style
through competitive pricing.