business

1. Zara s Strategy for Value Creation.�
Case in the Global Apparel Industry.
Traditionally, national retailers outsource apparel production
via global brokers to thousands of small apparel makers.
The typical manufacturer, usually located in a low-wage
country, is a small-scale operation that employs a few to
a few dozen workers. In a labor-intensive process, workers
make specific pieces of clothing, often in a narrow range of
sizes and colors, which are then integrated with the output
of hundreds of other such companies spread across dozens
of countries. As more companies in more countries make
more specialized products i.e., one factory makes zippers,�
one makes linings, one makes buttons, and so on�
multinational trading companies perform as cross-border
intermediaries and supervise the assembly of component
pieces into finished goods, which are then shipped to
apparel retailers.
Responding to market shifts relentlessly pressures
apparel retailers. In turn, they push multinational trading
companies to improve coordination among themselves and
apparel makers. By planning collections closer to the selling
season, testing the market, placing smaller initial orders, and
reordering more frequently, retailers can reduce forecasting
errors and inventory risks. The final links are markets and
customers. Although tastes overlap among countries, local
customers preferences traditionally vary. For example, the�
British seek stores based on class sensitivities, Germans
are value-conscious, Chinese shoppers are brand-aware,
and shoppers in the United States look for a mix of variety,
quality,
and price. Collectively, these conditions create
a buyer-driven chain that links fragmented factories, global
brokers, dispersed retailers, and local customers.
Industry wisdom spurred firms to choose a sliver of a particular� �
activity make zippers, manage�
logistics, focus on store design, cater to customer segments instead of�
creating value across multiple
slivers. Effectively, Do what you do best and outsource the rest drove� �
strategy. Globalization reset the
game board. Fewer barriers, better logistics, and improving communications
created new industry standards
and strategic choices.
A compelling example is the compression of cycle times in the apparel-buyer
chain (see Figure 12.1).
In the 1970s, getting a garment from factory to customer took approximately nine
months six to design�
the collection and another three to make and ship it. Now, it takes the typical
company from six months
down to six weeks to run this cycle. For a firm named Zara, it takes between two
to four weeks. By rejecting
conventional standards, Zara implemented disruptive innovations that reset the
relationship among
industry structure, company strategy, and value creation. In the process, it
became the world s leading�
apparel company and its founder, Amancio Ortega, one of the world s wealthiest�
people.
Zara Who?.

2. The Inditex Group, a Spanish apparel MNE, is the parent corporation of eight
global retail chains, including
Zara, Bershka, Massimo Dutti, Stradivarius, and Oysho. No matter the brand, the
all-trendy, reasonably
priced products are sold in attractive stores worldwide. Zara is the flagship of
Inditex, generating the bulk
of total sales. Inditex runs operations from The Cube, its gleaming,� �
futuristic headquarters in Artexio,
near La Coru a, a small, seaside town in northwest Spain about 300 miles from�
Madrid (see Map 12.1).
Inditex employed more than 111,000 in 2012, up from 90,000 in 2010. The company
workforce is young
(average age: 26) and female (besides representing more than 80 percent of
employees, women hold
more than half of the executive, technical, and managerial positions).
Inditex s revenue approached $21 billion in 2012, far ahead of Sweden s Hennes� �
& Mauritz (H&M) at
$18.8 billion and long-time worldwide leader Gap s $15.6 billion. Spain,�
Inditex s home market, accounted�
for about a quarter of sales, while Asia s and the Americas continued growth� �
accounted for more than a
third of 2012 sales. Its nearly 6,000 storefronts spanning 85 countries
collectively sold the 840 million
garments Inditex made that year.
The first Zara shop opened its doors in 1975 in La Coru a. Today, there are�
nearly 1700 outlets
and, on average, a new one opening every day. Zara uses an innovative strategy
to power its global
performance, integrating fashion and information technology to make and move
sophisticated clothing
at compelling
costs. One analyst calls it Armani at moderate prices, while another� �
characterizes its
fashions as Banana Republic priced like Old Navy. No matter the portrayal,� �
all agree that Zara s strategy�
has challenged historic
ideas of value creation in the global apparel industry. Understanding its
success
requires understanding its competency
in configuring and coordinating value-creating activities.
Design
Zara rejects the idea of conventional spring and fall clothing collections in
favor of live collections that� �
are designed, manufactured, and sold almost as quickly as customers fleeting�
tastes no style lasts more�
than four weeks. The company s 300 or so designers monitor market events,�
fashion trends, and customer
preferences in designing about 11,000 distinct items per year. Compare that to
2,000 to 4,000 items made
by rivals. Zara translates the latest fashion trend from a catwalk in Paris to
its store shelves in Shanghai in
as little as two weeks, versus the industry standard of several months.
Zara s designers get ideas from store managers, industry publications, TV,�
Internet, and films. Its
trend spotters focus on university campuses and nightclubs. Its so-called
slaves-to-fashion staff snap
shots at couture shows and post them to designers who quickly reproduce the look
for the mass market.
For example, when Madonna played a series of concerts in Spain, teenage girls
arrived at her final show
sporting a Zara knock-off of the outfit she had worn during her first show.

3. Nevertheless, though Zara
pushes the edge, its fashions are never too far out there.
Zara does not adapt products to a particular country s preferences. The�
convergence of fashion and
taste across national boundaries endorses management s bias toward�
standardization. Some product
designs cater to physical, cultural, or climate differences smaller sizes in�
Japan, special women s�
clothing
in Arab countries, different seasonal weights in South America. Still, Zara has
standardized about
85 percent of its designs for the global market, believing that fashion trends
are global.
Sourcing.
Zara s headquarters staff and purchasing offices in Barcelona, Beijing, and�
Hong Kong acquire fabric, components,
and finished products from suppliers in Spain, Portugal, India, Turkey, Morocco,
and China. Linked
into Zara s network, suppliers coordinate their production with its�
projections. Zara buys about half of its
fabric gray (not yet dyed) in order to update designs quickly. Jos Maria� � �
Castellano, Inditex s former CEO,�
explains, We have the ability to scrap an entire production line if it is not�
selling. We can dye collections in
new colors, and we can create a new fashion line in days. 2�
Production.
Like its rivals, notably H&M and Gap, Zara sources finished garments from
suppliers in Europe, North
Africa, and Asia. Unlike its rivals, Zara employs nearly 20,000 people,
distributed across 23 factories,
to make more than half of its finished garments. This odd situation stems from
Ortega s original�
intent to run his manufacturing business in La Coru a. Exploiting short-lived�
fashion trends, he
reasoned, obliges making those items close to home. Hence, Zara makes its most
time- and fashionsensitive
products in its 20 factories clustered in La Coru a. Inditex outsources about a�
third of its
remaining manufacturing to China, Bangladesh, Vietnam, and Brazil, and 15
percent or so to factories
in Portugal, Morocco, and Turkey. These suppliers make staple items with longer
shelf lives, such as
t-shirts and jeans. Inditex s factories are highly automated, specialize by�
garment type, and focus on
the capital-intensive parts of the production process i.e., pattern design and�
cutting as well as�
finishing and inspection.
Zara spent 20 to 40 percent more to make garments in Spain and Portugal than
rivals spent in Asia,
mainly due to higher labor costs. It compensates for costlier production by
minimizing advertising, cutting
inventory expenses, and quickly adjusting to fashion trends. Inditex s gross�
margins in 2010 were
56.8 percent half again the 37.5 percent claimed by the Gap.�

4. Making high-end garments requires a human touch, so Zara has organized a network
of some
500 workshops in Galicia, the home state of La Coru a, as well as across the�
border in northern Portugal.
These workshops are small operations, averaging about 20 to 30 workers who
specialize by product type
and hand-sew garment pieces that have been cut at Zara s factories. Zara�
accounts for most, if not all, of
the shops business and provides tools, technology, logistics, and working�
capital while paying standard
rates per finished garment. Many local cooperatives have worked with Inditex so
long they no longer
operate with written contracts.
Logistics.
Most of Zara s garments, both internally made and externally contracted, flow�
through its massive distribution
center in La Coru a about the size of 90 football fields or smaller satellite� � �
centers in Brazil and
Mexico. A state-of-the-art tracking system moves hanging garments to appropriate
bar-coded areas. As
goods travel along 125 miles of underground rails that link production sites,
they are sorted in carousels
capable of handling 45,000 folded garments per hour. Once garments are
completed, Zara ships about
two-and-a-half million items per week to stores worldwide. Third-party delivery
services manage the
transfer of preprogrammed lots to stores; they deliver customized orders within
24 hours for stores in
Europe, the Middle East, and much of the U.S., and 48 hours for Asia and Latin
America. Such fancy footwork
has dropped Zara s inventory to 7 percent of annual revenues, compared with the�
mid-to-high teens
for its rivals.
Marketing.
Zara s trailblazing strategy challenges age-old retail marketing practices. Its�
product policy emphasizes
goods of reasonable quality, adaptability, and high fashion. The company uses
little advertising or promotion.
Its founder, Armancio Ortega, long regarded advertising as a pointless�
distraction; indeed, he has�
never given an interview and rarely allows his picture to be taken.3 Zara spends
just 0.3 percent of sales
on advertising, compared with 3 to 4 percent for most fashion retailers. Its
bare-bones marketing department
avoids flashy campaigns, relying instead on word of mouth among its legions of
loyal shoppers. Like
its founder, it does not promote itself; it leaves that to satisfied customers.
Zara specializes in lightning-quick turnarounds of the latest designer
trends many items you see�
in stores didn t exist three weeks earlier. Explains Marcos Lopez of Inditex,�
The key driver in our stores�
is the right fashion. Price is important, but it comes second. 4 Zara�
aggressively prices its products,
and adjusts pricing for the international market, making customers in foreign
markets bear the costs of
shipping products from Spain. On average, its prices are 10 percent higher in
other European countries,
40 percent higher in northern European countries, 70 percent higher in the
Americas, and 100 percent
higher in Japan.
Zara s stores present the company s face to the world and function as� �

5. marketing research
agents. Indeed, if there is marketing at Zara, it’s done via high-profile real
estate. The stores command
high-profile slots in historically appealing, premier shopping venues such as
the Champs-Elysées in Paris,
Regent Street in London, Fifth Avenue in New York, and Nanjing Road in Shanghai.
Its location strategy has
created interesting tensions. Noted a consultant, ’Prada wants to be next to
Gucci, Gucci wants to be next
to Prada. The retail strategy for luxury brands is to try to keep as far away
from the likes of Zara. Zara’s
strategy is to get as close to them as possible.’
Operations.
Fitting in with fancy neighbors requires that Zara put its best face forward.
Traveling teams of window
dressers and interior coordinators visit each Zara store every three weeks,
ensuring that window displays
and interior presentations convey the targeted message.
Back at headquarters, designers wander the mock store, testing possible design
themes, lighting
schemes, and product presentation. Its ’Fashion Street’ in the basement of ’The
Cube’ houses a
Potemkin row of storefronts meant to mimic some of its locations. Store
employees don Zara’s fashions
while working; store managers and staff suggest merchandise to order,
discontinue, and recommend.
Networked stores transfer data on merchandise sales, along with customer
requests, to Zara’s design
teams, factories,
and logistics center in La Coruña. Relaying color fabric preferences straight
from its shoppers
enables the retail staff to localize otherwise globally standardized products.
Finding store managers
capable of handling
these responsibilities, executives believe, is the main constraint on Zara’s
expansion.
Infrastructure.
A key competency is the infrastructure that Zara uses to coordinates its value
chain. Two features stand
out: managers’ sense of customers and their ability to coordinate worldwide
activities. The allure of Zara
is the freshness of its offerings, the creation of a sense of exclusiveness,
attractive in-store ambience,
and positive word of mouth. These ideas drive rapid product turnover, with new
designs arriving in twiceweekly
shipments. Fans learn which days of the week goods are delivered’so-called ’Z-
days’’and
shop accordingly. About three-quarters of the merchandise on display changes
every three to four weeks,
which corresponds to the average time between Zara customers’ visits: 17 times a
year, versus three to
four visits per year for competitors.
Attractive stores, both inside and out, are vital. Explains Luis Blanc, a
director at Inditex, ’We invest
in prime locations. We place great care in the presentation of our storefronts.
That is how we project our
image. We want our clients to enter a beautiful store where they are offered the
latest fashions. But most
important, we want our customers to understand that if they like something, they
must buy it now because

6. it won’t be in the shops the following week. It is all about creating a climate
of scarcity and opportunity.’
Zara feeds scarcity with small shipments’say, three or four dresses in a
particular style’to a store.
Small shipments make for sparsely stocked shelves and products have a display
limit of one month.
Rapid turnover does the rest: even though consumers visit Zara frequently, when
they return, things look
different.
The CEO of the National Retail Federation, reflecting on Z-days and ’fast
fashion,’ marveled, ’It’s
like you walk into a new store every two weeks.’6 Besides keeping its stores
looking fresh, these policies
reduce price markdowns: Zara books some 85 percent of its unit sales at full
price against the industry
average markdown ratio of about 50 percent. The number of items Zara puts on
clearance sale is about
half the industry average.
Challenge and Change.
Despite its aura of strategic excellence, not all is picture-perfect in the land
of Zara. Some wonder how
long Zara can charge different prices in different countries. Others question
how much longer it can continue
running global operations from its centralized base in Spain’especially given
the rise of the U.S. and
Chinese markets, which accounted for a third of total sales in 2012 despite few
stores (China has about
400, the U.S. 50 or so). Does it still make sense to keep product design,
manufacturing, and logistics activities
in Spain with Asian sales set to soar? In its concentrated value chain, some
clothes that Zara makes in
China are shipped to Spain for finishing and, amazingly enough, then sent to
stores in China. Despite this
quirk, the chief executive of Inditex, Pablo Isla, sees no need for a second
product base: ’We’re not thinking
of replicating the brain in Asia’ he maintains, though he concedes that they may
adjust logistics.7
Ultimately, Zara’s adept coordination of the overlapping activities among its
designers, plants, storefronts,
and salespeople testifies to the power of its strategy. No other company can
design, make, ship,
and sell fashion as speedily as Zara. Its business design leaves rivals with
less time to figure out how to
configure and coordinate operations better. Some believe companies have little
option but to follow Zara’s
strategic lead. If they don’t, warns a leading retail analyst, they ’won’t be in
business in 10 years.’

7. it won’t be in the shops the following week. It is all about creating a climate
of scarcity and opportunity.’
Zara feeds scarcity with small shipments’say, three or four dresses in a
particular style’to a store.
Small shipments make for sparsely stocked shelves and products have a display
limit of one month.
Rapid turnover does the rest: even though consumers visit Zara frequently, when
they return, things look
different.
The CEO of the National Retail Federation, reflecting on Z-days and ’fast
fashion,’ marveled, ’It’s
like you walk into a new store every two weeks.’6 Besides keeping its stores
looking fresh, these policies
reduce price markdowns: Zara books some 85 percent of its unit sales at full
price against the industry
average markdown ratio of about 50 percent. The number of items Zara puts on
clearance sale is about
half the industry average.
Challenge and Change.
Despite its aura of strategic excellence, not all is picture-perfect in the land
of Zara. Some wonder how
long Zara can charge different prices in different countries. Others question
how much longer it can continue
running global operations from its centralized base in Spain’especially given
the rise of the U.S. and
Chinese markets, which accounted for a third of total sales in 2012 despite few
stores (China has about
400, the U.S. 50 or so). Does it still make sense to keep product design,
manufacturing, and logistics activities
in Spain with Asian sales set to soar? In its concentrated value chain, some
clothes that Zara makes in
China are shipped to Spain for finishing and, amazingly enough, then sent to
stores in China. Despite this
quirk, the chief executive of Inditex, Pablo Isla, sees no need for a second
product base: ’We’re not thinking
of replicating the brain in Asia’ he maintains, though he concedes that they may
adjust logistics.7
Ultimately, Zara’s adept coordination of the overlapping activities among its
designers, plants, storefronts,
and salespeople testifies to the power of its strategy. No other company can
design, make, ship,
and sell fashion as speedily as Zara. Its business design leaves rivals with
less time to figure out how to
configure and coordinate operations better. Some believe companies have little
option but to follow Zara’s
strategic lead. If they don’t, warns a leading retail analyst, they ’won’t be in
business in 10 years.’