Zara Case Study

1. How does Zara's performance compare to its competitors?

        Zara had three main competitors that were outlined as potential threats to their business: The Gap, H&M, and Bennetton.

The Gap

The Gap went through extreme growth from the 1980s thru 1990s. Being labeled as more of smart casual, they went more international production and outsourced nearly 90% of their production. Though they faced much success in the earlier times, they began missing on the consumer needs and began declining the 2000s. Per Exhibit 6, in 2001, The Gap posted higher revenues but a negative in net income – whereas Zara/Inditex had positive net income performance. The Gap in this year also -60% in market value whereas Zara had 47% growth.

H&M

Hennes an Mauritz was probably the closest in competition that Zara had. H&M outsourced all of their production yet still in Europe they had difficulties on lead times compared to Zara. They employed 60% fewer designers than Zara even though Zara was 40% smaller – suggesting they had a very lean model for simplicity compared to Zara. Overall financially, H&M was outperforming Zara posting a higher net income – though not by much. They still grew 8% in market value for 2001, but not as significant as Zara had that same year. H&M also has almost 2x the amount of store sizes with significantly less employees compared to Zara as well.

Bennetton

Bennetton is the last competitor noted as is an interesting one – they invested more in controlling their production throughout. Lead times were operated months in advanced, and in the 1990s they consolidated key production activities and expand their focus on existing outlets. Bennetton still was performing in positive range of net income, but saw a large market value decline of 20%. Their performance indicates that the changes they are making are necessary and pivotal, yet until they find and execute their position will continue to decline.

2. Which features of Zara's strategy are critical to its performance?  

I        n order to maintain Zara’s continued growth and strong performance, they have to post quite of bit of continuity and structure. For instance, from the case, we know that all of Zara’s mission is to be more stable rather than extremely profitable. Another feature that is critical to their performance is where they are sourcing their resources from – for instance, fabric and many of their inputs are from outside suppliers. With various locations, they are able to purchase these at-cost within the source country rather than pay any tax or premium from being outsourced. Lastly, similar to H&M, they are lean in their production and cut costs in areas necessary. For instance, in marketing efforts they do not heavily invest in – rather they let their customers and designs do the marketing for them. They also focus on trimming working capital costs even while opening new stores and expanding. Zara’s ability to manipulate their production and operational costs while still being trendy and post shorter lead times makes them a force to be reckoned with.

3. Why haven't these features been imitated by competitors?

Their competitors have not imitated these key features because of various reasons. For one, The Gap has scaled so large across the world that they did not initially place themselves in strategic areas. For instance, though they outsourced 90% of their production, they still had large difficulties in finding productive areas in these countries. Their expansion across so many countries and attempted large growth in a short amount of time made it difficult for The Gap to keep up – market became saturated, inability to match consistent fashion across the globe, and inconsistencies within their own three owned stores – anchored their inability to process at a lean production level like Zara’s. Their constant expansion essentially limited them from being able to replicate Zara.

H&M, on the other hand, seemed to be the best competitor to match Zara’s model – outsourcing half of their production outside of the home country. They were also building distribution centers in each country they entered in, on at a time.  Thus, they were in a much better strategic positioning than The Gap ever was. But, even with strategic movement, H&M still had trouble keeping up with lead times, and ultimately performed longer lead times than Zara did. H&M also focused more on lower price and battle with price manipulation on top of attempting to be lean. For instance, H&M have more locations and larger reach was still operating with less employees and fewer designers – yet, with a lower price point than most competitors, it forces H&M to have to sell at a higher production rate in order to keep up with growth. We see this as they posted a higher net income but a smaller amount of market value share. Zara’s ability to still present a good price point and not match their competitors with each price cut allows them to still be relevant and produce at a high rate.