Business System of Zara, Case Study Example

The brand name Zara was created by a Spanish magnate named Amancio Ortega Gaona as part of the Inditex Group, one of the biggest retailers in the world of fashion. A crucial element in Zara’s business system is the store organization, serving a two-fold purpose: (1) customers can comfortably discover fashion concepts and, (2) the company can acquire information relating to customer preferences. Zara also has a strong commitment and focus on its customer base along with a flexible structure.

Zara’s success can be greatly attributed to its business model which utilizes vertical integration, comprising of the following processes:

• Design: recognizing current fashion trends and assimilating input from customers themselves. Zara’s flexible business model comes into focus here as they put more value to turnover time and ability to meet customers’ demands rather than production costs.
• Sourcing/Manufacturing: Zara’s products are sourced from Europe and recently, from Hong Kong. Due to vertical integration, Zara purchases fabric and other raw materials such as dyes from its own firm. Combitel, another company owned by Inditex manages the dyeing and other such processes for Zara. An in-house production allows Zara to become flexible in terms of the volume, frequency, the array of products they produce. These methods therefore contribute to Zara having a rapid turnover time and being able to respond to the demands of consumers.
• Distribution: A centralized system allows Zara to minimize the lead-time for their products. Zara’s biggest facility is located in Spain with smaller facilities in Brazil, Argentina and Mexico. Product delivery takes an average of 24 hours within Europe and 48 hours for store in Asia and America.
• Retailing: Zara offers designer – style clothing and accessories in affordable prices. Stores are located in prime locations to attract customers. Backward vertical integration again comes into focus here in order for Zara to respond to consumer demands.

It is most interesting to compare Zara’s business system with Benetton as they are both major players in the realm of fast fashion at an international level. Like Zara, Benetton utilizes vertical integration and produces clothing and accessories. They both utilize their own subsidiary in terms of production and manufacturing. Unlike Zara however, Benetton stores are run by licensees although

Zara’s fashion standards have been up to par with global standards as they offer the latest trends and their dedication to a short lead time to get these products to consumers. According to Inditex Management, Zara’s expansion can be described as an “oil stain”, as they would open one store initially and subsequently adding stores in neighboring areas after getting a feel for the local market. Most of these countries, however, are within Europe although Zara has turned its focus to Asia and America more recently, but is less fortunate in gaining entry to the latter. Zara’s supply chain strategy has a disadvantage in this area as they do not have any facilities within America which largely contributed to their success in Europe.

Another strategy enforced by Zara is zero-advertising. Comparing with other retailers, Zara invests a mere 0.3% in advertising compared to the 3-4% by other retailers. Zara stores are such a crucial factor that they employ a department to set-up stores in premier locations and relying on word of mouth by consumers. In addition to this strategy, Zara employs rapid product turnover, with new designs arriving every two weeks. A combination of these strategies has served Zara well as they are able to create a climate of product scarcity, thus encouraging consumers to buy their products now. I believe that this is a great strategy as this allowed Zara to reduce their expenses and making expansion more cost-effective.

Despite Zara’s success, the risk of failure still looms. Firstly, the increasing value of the Euro against the American dollar will mean an increase in production costs for Zara and subsequently falling on consumers. Sales may decrease due to increased product costs for consumers. Secondly, competition from other retailers is stiff as Zara’s merchandise is quite broad. These retailers are entering the global market as well and may have cheaper and trendier clothing lines.