Friday, 1 August 2014
Blogpost 3
Zara case/ business strategy, organisational strategy & business processes
Gallagher (the author of this week's case study) says that Zara is using "counterintuitive moves" to help it beat the pants off the competition.
i) Explain one of these counter-intuitive moves.
ii) Why is it counter-intuitive and how is it creating success for Zara?
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One key move which is described as counter-intuitive on Zara's part is its highly vertically integrated production style. This refers to their decision to keep as much of the processes throughout their supply chain managed in-house and minimising out-sourcing. Of particular interest is the decision to maintain the majority of manufacturing in-house rather than using overseas factories and cheap foreign labour. This is considered counter-intuitive as it means costs of production are higher than the cheaper option of outsourcing which is employed by the rest of the industry. Instead Zara decided to employ a technology-centric manufacturing process. This benefits them in two major ways. Firstly it enables them to create high quality garments at a very fast rate. Secondly it enables them to coordinate and transport goods from their factories much faster than their competitors. Overall this enables Zara to maintain an agile method which is key to outmaneuvering their competitors.
ReplyDeleteOne of Zara’s counterintuitive moves is that they rarely run sales. This move is counterintuitive as they are differentiating from other competing retailers to assist in making Zara more successful. Zara rarely mark down the price of their clothing as new collections enter their stores twice a week and they only have limited production run of their apparel. This means that items often sell out very quickly, and if they don’t they are moved to make room for the new range. This encourages customers to purchase the items fast and therefore, at full price. This move is successful for Zara as it means that they are not losing revenue through sales, as only 15% of their products are being sold at discounted prices, whereas the rest of the fashion industry sells an average of 50% of their inventory at discounted prices.
ReplyDeleteOne counterintuitive move is that Zara does not use advertising. It has been referred to as a "pointless distraction" by Zara's founder. This is counterintuitive because it causes consumers to go into the stores and find out for themselves what collections are available. As a result, consumers are likely to purchase clothing because they know that the item will likely not be included in a sale. This can be identified as another counterintuitive move - Zara rarely run sales.
ReplyDeleteThis move is creating success for Zara because through technology, they are aware of what sort of styles the consumer wants. The consumer also knows that Zara is likely to have something of interest - the average Zara customer visits the store 17 times a year. Most fashion retailers spend an average of 3.5% of revenue on advertising, while Inditex (Zara's parent company) spend 0.3%. It is not necessary for Zara to promote products, because they know that the consumers will definitely like the new styles that arrive.
Zara’s use of keeping most of the manufacturing in house is thought to be counter intuitive when compared to the other companies in the fashion industry. This is because the normal way to do business in the fashion industry is to outsource the manufacturing to developing counties. This brings one advantage to the company which is that products can be produced at very low cost and that therefore means the fashion organisation can sell products to customers at low cost or make larger profit margins from each sale. However, with low cost typically brings low quality, low safety and no environmental awareness from the outsources as well as child labour. All these things are bad marketing for the companies who use this strategy and it can tarnish there brand names. By Zara keeping a majority of their production in house they therefore have better quality control and avoid any bad media which helps contribute to the success at Zara.
ReplyDeleteOne of Zara’s counter-intuitive moves is to shun advertising. This has been counter-intuitive by Zara because their competitors are spending more on advertising and their sales are dropping, whereas Zara’s sales continue to increase with minimal advertising. For example Zara’s competitor Gap increased their advertising spending but their sales dropped. ‘Fashion retailers spend an average of 3.5% of revenue on advertising promoting their products, while Zara’s is only 0.3%’. The firm’s founder says advertising is a “pointless distraction”. This statement shows Zara’s approach to selling clothing is completely different and more successful than their competitors. Zara has been able to spend very little on advertising by their use of technology that helps them to make clothes the customers want, get them produced quickly and have products displayed on the shelves in stores twice weekly. Even without the huge amounts of advertising Zara’s customers visit the stores 17 times per year compared with the 3 visits to their competitor’s stores.
ReplyDeleteOne counterintuitive move that Zara has benefited from implementing is their method of having to not introduce sales. Zara has integrated limited production runs to support their ‘no sale’ method and has created much success by differentiating themselves from the likes of GAP and H&M. Their success has come from supplying a variety of products and offering ‘first in first serve’ for products which ultimately helps them retain their customer base. Zara are able to produce their product designs within a matter of weeks unlike H&M who take three to five months thus creating a much better competitive advantage in the fashion industry. For example, Zara shoppers mentioned that “At Gap, everything is the same” and while shopping at Zara “you’ll never end up looking like someone else”. Furthermore, Zara’s innovative designers have made it essential for shoppers to purchase products straight away because of the ongoing changes to fashion. Although there is a possibility of losing customers, this is not the case for Zara according to Bain & Co estimating 85% of their products are sold at full price. Zara’s customer base know that if they don’t purchase the product, it will be gone the next time they visit.
ReplyDeleteOne of Zara's strategies which seems counter intuitive to me is how they are constantly under producing. I would have expected that customers would have quickly grown tired of shopping at Zara only to find what they are looking for has sold out already. Especially since Zara doesn't design there own clothes but copies other brands they should be able to find what they are looking for at other stores.
ReplyDeleteInstead of shopping at other stores however the customers tend to buy anything they like the look of as soon as they see it. This increases demand even further because aren't thinking through their purchases fully which in turn creates an even bigger shortage making this an even more successful strategy.
Another advantage of this strategy is that it means they never have left over stock at the end of a season meaning they never need to have clearance sales or dispose of stock.
Zara's counter intuitive moves stem from their vertically integrated supply chain management where their production processes are managed in house. This is seen as counter intuitive as it differs from conventional processes that may be typically found within the fashion industry where the activities of a traditional supply chain may take three to five months. In contrast, Zara aims to have a concept design become a product on a shelf within three weeks. Therefore this idea of vertical integration facilitates the speed of "just in time manufacturing" and ultimately a more responsive approach to customer demand.
ReplyDeleteThe significance of Zara's fast approach to production can be attributed to the industry. This is a reflection of the dynamic nature of fashion where style and trends are constantly changing. An emphasis on speed and delivery can create success for Zara because it reinforces this vision of supplying to actual preferences of local clientele. In effect, what Zara sells is a direct reflection of demand at that time.
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ReplyDeleteA strategy that Zara employs is choosing to follow what customers are already demanding rather than attempting to "sell to" or influence their customers so that they purchase their products.
ReplyDeleteA counter-intuitive move that Zara makes to do this is choosing to hire younger "hungry" designers to work on their new designs. This is counter-intuitive in the fashion industry as the standard strategy employed by Zara's competitors (e.g Gap) is to use well known designers whose names the brands can use to push their products onto consumers. By using these younger unknown designers Zara is able to coax new designs that stand out from competitors offerings. Additionally this strategy removes or mitigates the presence of egos or reputations that can hinder the teamwork and collective innovation that Zara fosters, and allows the design function of the organisation to become flexible and reactive to the demands of their customers. The flexible and reactive nature of the design team is a critical element in achieving Zara's short production cycles and gives them a competitive edge in meeting their consumers' product demands.
One of Zara’s counter-intuitive moves is to produce a limited amount of items. By producing only a set amount of items, you would expect their sales to be hindered. Unlike other firms that find success in mass producing items, Zara proves that a limited production can be successful. The key is in the exclusivity as only a small group of people will actually have a certain item as they sell out quickly. Items are unique, a typical shopper would describe it being as if “you’ll never end up looking like someone else.”
ReplyDeleteThis strategy also encourages customers to visit often to check for new items and to purchase things as they find something they like on the spot, as within a week or two, the item could be completely out of stock and never to be produced again. This leads to Zara being able to sell 85% of its products at full price, when the industry average markdown ratio is 50%.
Another benefit is that limited production allows them to have a very low product failure rate of 1 percent, compared to the industry average of 10 percent. Despite all the research and data they have on current and future trends, they can never be 100 percent spot on, as there is still a risk of product lines failing. However, they are able to minimize it to the absolute minimum by only producing a limited line.
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ReplyDeleteOne counter-intuitive move by Zara pertains to its vertically integrated supply chain which includes, making 40% of its fabric, in house production equivalent to 60% of its total merchandise, a more simplified and fast delivery channel and products designed on constant feedback from live POS data. Firstly, Zara makes 40% of its fabric and buys most of its dyes from subsidiaries. This means, that only 60% of its supplies are made by external suppliers compared to H&M that has 900 suppliers and no factories at all. Moreover, its ingenious move to produce more than half of its merchandise in-house is definitely creating a competitive advantage for them as many competitors in the market are outsourcing production, which have led to inefficiencies as they have to deal with different suppliers around the world resulting in complex supply chains that will not deliver the products on time. Also, Zara’s ability to produce in-house allows for direct and fast delivery in the distribution channel, taking them only 10 days to deliver a new version of a product which is 12 times faster than one of its competitors, Gap. Lastly, the company’s supply chain is more of an iterative and interactive process as they are providing customized products based on customer feedback. This makes the process more effective as designs are influenced by customer preference and getting these to retail stores within a short period of time. This links back to the 6th S of D'Aveni's hyper-competition model of shifting the rules of competition by taking customer feedback and working their designs around these preferences.
ReplyDeleteAlthough it wasn't mentioned explicitly in the reading the video we watched in class said zara openly copies their competitors designs. In an industry where originality has a premium proce attached zara is bucking the trend by selling other people's fashions at lower prices. The reason they can and have been successful at mimicry is their limited runs and restocking times. If they copy the best of everyone else's work and produce quicker than anyone else can how can they not go wrong?
ReplyDeleteWhoops that last sentence is supposed to read "how can they not be successful?"
DeleteZara's strategy of only allowing limited runs of their products. Only producing a limited run of products that sell out would lead companies to think that this would cause a loss of sales however with Zara this encourages customers do buy their products as soon as they come in and at full price. As one shopper says in the article "If you see something and don't buy it, you can forget about coming back for it because it will be gone". This also works to Zara's advantage as customers like to shop there because they know that what they are buying is not going to be seen on every other person down the street. This limited production also allows for an extremely low failure rate, only 1% compared to other companies which have an average failure rate of 10%.
ReplyDeleteThe limited amount of production also enables Zara to be constantly restocking their stores with fresh new looks. The average Zara customer visits the store 17 times in one year, compared to only three annual visits with their competitors.
Zara circulates stock at a rapid pace by creating and introducing new product lines on a regular basis. Each product is manufactured for a limited production run and customers know that if they do not buy it when they see it, they are likely to miss out. This is a counter-intuitive move for Zara has many fashion retailers stock the same items for months which enables customers to wait for it to go on sale before purchasing. These retailers then loose a large amount of money whereas Zara sells approximately 85% of goods at full price. This reputation of Zara’s products having a short shelf life is extremely beneficial as customers know that due to the constant circulation of clothing, they are always going to be wearing different items to people around them. Also, different stores around the world stock different items according to the customer’s tastes and preferences which differentiates Zara from competitors even further.
ReplyDeleteOne of the many counter-intuitive moves which Zara abides by is the limited production of individual goods. Each item is produced at such a limited amount, that once out of stock they are unlikely to restock such an item. It would be thought that this would decrease the production but the constant thought of missing out on a product has driven the customer to purchasing products on the spot and at full price. As customers are aware of the speed which products leave the store it encourages more visits in comparison to other competition (17 times per year rather than the competitors three). This limited stock also removes the need for advertising due to the fact that the new products and high demand sells themselves. Long term this removes the need for sales due to high turn over.
ReplyDeleteBy producing small amounts of stock that is more or less completely sold at full price Zara’s profit margins are greatly increased than if they were selling at the large discounted rate, which competitors have to do. Another benefit to the limited production is the very low product failure rate, 1% in comparison to the 10% of competition.
One of the counter-intuitive moves that were used by Zara was Don’t Guess – Gather Data approach. To make sure stores carry the kinds of things customers want to buy, staffs were handheld personal digital assistants (PDAs) to gather customer inputs and to gain feedback on what they would like to see more of. These PDAs were linked to the store’s point of sale (POS) system, showing how garments rank by sales and what customers would like to see.
ReplyDeleteIt is a counter-intuitive move because it allows Zara to be up-to-date with customer trends and to improve the frequency and quality of products out in stores. It is creating success for Zara because the valuable data gathered from customer feedback allows the firm to plan styles and issue re-buy orders rather than hunches and guesswork like other big companies in the market. This in particular created success as customers returned after some time they would find their choice of clothing that was given to the staff as a customer feedback.
One of Zara’s counter-intuitive moves is their choice to manufacture a limited production run of goods. Most importantly, this generates exclusivity. The La Coruña facility moves around 2.5 million items a week, with no item staying in house for more than 72 hours. Stock is then allocated to stores tailoring to the specific tastes of local clientele. Each item that is manufactured is produced only to a limited amount. Limited production, and a high level of movement of stock in and out of the store means that the Zara shopper is encouraged to purchase the item immediately to avoid missing out. The exclusivity of limited good also forces the shopper to purchase the item at full-price. Allocating the newest items to store to black hangars also means that savvy Zara shoppers can identify the most recent items into store. In doing so heightens the urgency that the Zara shopper feels to be the first of only a small group with the brand new item. Limited production also encourages a shopper to visit the store more often in order to check for new items in store. The average Zara customer visits the store 17 times per year, compared to only three annual visits made to competitors. By manufacturing limited amounts of stock Zara is able to sell 85% of its products at full-price, compared to the industry average markdown ratio of 50%. Being able to sell the majority of their stock at full-price greatly increases their profit margins. Furthermore, this reduces the level of risk that there is a mistake made on a particular collection. Failure rates of the chain’s product line are reported to be just 1%, compared with the industry average of 10%. With such an insignificant failure rate of their product lines it is no wonder that Zara are so successful.
ReplyDeleteBeing highly vertically integrated is one of the counter-intuitive moves contained by Zara as a recipe for its success.
ReplyDeleteThis is counter-intuitive because other companies who are in the same line of business as Zara like Gap, Wal-mart and other apparel firms, outsource their production process. In addition, conventional wisdom suggested that leveraging cheap contract labour in developing countries can help reduce cost-of-goods sold, thus, reduce prices, increase sales and help maintain a higher profit margin. However, Zara keeps a huge part of its production process in-house as stated, 60% of its merchandise is produced in house. For a business who's targeting the taste of its local clientele, being vertically integrated gives them a competitive advantage by being able to respond quickly to customer demand, ability to provide new fashion in their store as it only takes 15days to covert their ideas into appearances. Also in stores, employees being able to gather customer feedback through the use of PDAs gives Zara the benefit of identifying what customers want and be able to provide these for them as soon as possible.
One of Zara’s counterintuitive moves is their vertical integration model, in which they insourcing much of their production and services. The articles notes that Zara produces nearly 60% of their merchandise in-house, making and dying 40% of their fabrics. In comparison, competitors in the industry – for example H&M – outsource a lot of their production. While outsourcing can give the advantage of cheaper labour (and therefore increased profit margins or sales), it does have the drawback that comes with decreased control – the risk of bad publicity through undesirable sourcing through child labour. Zara’s competitive advantage from this vertical integration model is its flexibility. Zara has short design cycles, producing 30,000 items per annum in comparison to competitor’s 2,000-4,000 items. Through their insourcing, Zara is able to quickly produce their items as the designs are finalized by the design teams – including providing prototype samples for the design process. As Epifania Afano highlights, competitors have to deal with the inefficiencies that are involved when outsourcing. Zara, in contrast, has full control over processes and information flows. This feeds into Zara’s ability to respond quickly to any changes in fashion demand or the insights produced through the customer feedback and intelligence gathering. They can produce new designs and shipping to store floors within 15 days, whereas competitors can take 9 months and upwards for the same process, giving Zara a competitive edge through the combination of rapid turn-around, huge variety and frequency of items, and the demand created via limited amounts of items.
ReplyDeleteComments from Janelle F.:
ReplyDeleteOne industry ‘counter-intuitive’ move that Zara is implementing is its use of an internal information repository.
Zara has created an information repository that contains information about customer preferences and body types that can be openly accessed and shared with designers, market specialists, procurement planners, and production managers.
Zara’s use of PDA technologies allow regular input of information to the repository, such as customer input and feedback. Live updates from the PDAs’ linkage to Zara’s POS system updates sales figures and information faster and more efficiently. Combining sales figures with customer feedback, Zara is able to stock products that they not only know will sell well, but also meet customer needs. Industry competitors, on the other hand, work only to predict what customers are going to demand within a season using catwalk fashion shows – they design, produce and evaluate seasonally, like concentrating on a long term goal without breaking it into sizeable, achievable chunks.
Zara’s method of production mimicking customer demand has been made possible through the use of PDA technologies. Identifying and manufacturing the clothes customers want, while eliminating costs relating to advertising, inventory and markdowns (due to low sales statistics – Zara does not have these as their products sell well enough not to need sales).