Retail Case: Zara

Situation Analysis

Established in 1975, Zara is the largest and the most internationalized apparel retailing chain among those belonging to Inditex, the Spanish owner of a stores network selling clothes (Ghemawat and Nueno 15). The business system of the company is characterized by a specific set of features. First of all, Zara is the core company of Inditex group, which serves as a primary driver for its growth. It also plays a major role in the increase of group’s sales on a global scale. Due to its leading position, the company mostly relies on its internal resources both in the process of product development and manufacturing (up to 85% of goods are produced in-house) (Ghemawat and Nueno 15). On the contrary, the other members of Inditex group are too small to afford such a strategy. Moreover, the retailing chain is focused on the production of fashion-sensitive goods through tracking of customers’ preferences around the world and establishment of contracts with both internal and external suppliers. At the same time, vertical integration of time-sensitive items in manufacturing process minimizes the response time and improves the overall flexibility of the retailing chain, thus giving it a competitive advantage. The product line of the company is standardized, i.e. the assortment of goods is mostly the same in all the regions where Zara operates. The advertising and promotional campaign, which receives a relatively low amount of funds, is also uniform. Moreover, regardless of the country of operation, the business model of the company remains unchanged, with minor tweaks at the local level. In particular, this feature simplifies the coordination process of country management teams, thus improving the solidity of company’s organizational structure and its efficiency. Such an approach has also been manifested in the fact that the company has rejected many proposals on acquirement of other retail chains. This step has been taken in order to avoid the conflict between different business models and corporate cultures, which would have resulted in the decrease of work productivity, as well as the control span.

Since 1988, the company begun the process of international expansion. It started from Portugal, covering such regions as Europe, North and South America, Middle East, and Japan by 2001 (Ghemawat and Nueno 15). Such rapid expansion is explained by the utilization of the so-called “oil stain” pattern. In general, it is focused on opening of a flagship store in a country to obtain experience of local operation before expanding further. Moreover, the company is actively using joint venturing in order to pass through the entry barriers in some countries (Ghemawat and Nueno 16). It is possible to assume that the same strategy will be used for entering the Asian market.

Therefore, it is possible to say that the business model of Zara is highly efficient. As a result of its implementation, the Inditex group has managed to improve its position on the international apparel market, overcoming such competitors as The Gap (the U.S.). Moreover, the firm stays in line with such acknowledged apparel retailing chains as Hennes and Mauritz (Sweden) and Benetton (Italy) (Ghemawat and Nueno 5).

Advantages and Disadvantages

By analyzing the case, it is possible to define the following advantages of Zara’s business model:

1. The strong dependence on internal resources improves the survivability of the company on the market, making it less sensitive to changes that occur in its external environment (Bruce, Moore and Britwistle 24);
2. The short product cycle, as well as the introduction of distribution centers, allows to restructure the supply chain of the company, completely removing the warehouses from it. In turn, this measure results in the decrease in the working capital intensity, and allows to keep the average costs of the retailing chain on a relatively low level (Ray 87);
3. The “oil stain” pattern of expansion allows obtaining experience of local operation in a particular country before covering it with the network of stores, which increases the efficiency and speed of expansion (Ghemawat and Nueno 16).

On the other hand, the current business model also has the following disadvantages:

1. The focus on fashion-sensitive goods requires thorough planning of manufacturing and marketing processes as well as precise forecasting of the demand on a particular market, i.e. more human and financial resources. At the same time, the probability of risks, including force majeure events, is significantly higher (Kimball 34);
2. The strong dependence on internal resources may provide little opportunities for outsourcing for some of the business process (e.g. logistics, manufacturing, and marketing). In particular, it can be critical during the operations on the international market, and may lead to excessive expenditures in certain areas of company’s activity (Dlabay and Scott 51);
3. The standardized product line may make it difficult for the company to obtain a significant share of the apparel market, namely in Asian countries (Dawson and Lee 73).

Alternative Solutions

By taking into account the business model of Zara as a whole, as well as its advantages and disadvantages, it is possible to propose the following alternative solutions for the company:

1. The development of a specific product line for each region where the company operates (Europe, America, and Middle East);
2. The outsourcing of a part of the company’s manufacturing processes to the Asian region, namely after entering the local markets (Dawson and Lee 38);
3. The introduction of a segment of goods that are not very sensitive to fashion trends to the company’s product line.

Recommendation and Justification

By analyzing the provided case, as well as the advantages and disadvantages of Zara’s business model, it is possible to recommend introducing a non-fashion-sensitive segment of goods to the company’s assortment as an alternative solution for the retailing chain. This recommendation can be justified by the fact that the company strongly depends on the rapidly changing fashion trends and is thus exposed to the risks that accompany such trade. Such uncertainty may result in a significant profit loss as in the case of Hennes and Mauritz, which had its net income reduced by 17% because of the fashion miss (Ghemawat and Nueno 5). In order to avoid such turn of events, it is possible to recommend introducing sportswear to Zara’s product line. The demand for sportswear has always been strong, and it continues to grow nowadays due to the growing popularity of a healthy lifestyle (Wall and Rees 27). As a result, it is possible to say that such a solution will provide the company with a solid financial backup, namely in case of force majeure events (Dawson, Roy and Mukoyama 48). Moreover, since the firm’s name is already well-known on the international market, the expenditures for the advertisement and promotion of a new product line will be minimal (Helpman 76). In addition, instead of partially remodeling Zara’s manufacturing line to produce sportswear, it is beneficial to involve some of the smaller chains belonging to Inditex in this process. Such an initiative will be cost-efficient since there will be almost no need for establishing new connections with suppliers and manufacturers (Rugman 62). Therefore, the average expenditures of the group will not experience a significant growth. As a summary, it can be said that all the above-mentioned facts contribute to the feasibility of the proposed alternative solution for Zara, making it the best option out of the listed three.