Zara Company’s Business Model Analysis

Introduction

Zara is one of the leading firms in the global apparel industry. The firm was founded in 1974 in Arteixo, Spain, and it has achieved remarkable market success. The firm’s market expansion strategy has enabled it to establish over 2,000 stores in different parts of the world. The firm’s success can be associated with adoption of feasible business model.

Harvard Business Review (2010) defines business model to include four main elements that include the profit formula, key processes, resources, and customer value proposition. Teece (2010) emphasizes that the changing business environment has augmented the need for businesses to be concerned about capturing value by satisfying the market demand, which is only possible if an effective business model is adopted. This case study entails an evaluation of the business models adopted in the apparel industry. The case study compares Zara Incorporation business model with other industry competitors.

Industry analysis – business model

A large number of players characterize the global apparel industry due to its profitability potential. Subsequently, the intensity of competition is remarkably high. The major industry players include GAP, Zara, Hennes & Mauritz, JTX, Fast Retailing, Arcadia Group’s Topshop, Benetton, and Uniqlo. The intensity of competition and the short product lifecycle in the fashion industry present a major challenge in the industry players’ quest to attain business excellence (Penanster, 2012).

Thus, the industry players have adopted diverse business models. Moreover, the industry players are increasingly reviewing their business models in an effort to develop sustainable competitive advantage. Some of the business models adopted by the major players are evaluated herein.

In an effort to develop sustainable competitive advantage, the majority of fashion retail firms are adopting multichannel business model. This move has been motivated by the realization of the high probability of increasing sales revenue by reaching diverse customer groups. A study conducted by Kurt Salmon shows that firms that adopt multichannel business model increase their sales revenue by over 100% (Yrjola, 2014).

Fashion retail firms such as Gap Incorporation, Uniqlo, and H&M have adopted ‘click-and-mortar’ format in an effort to maximize sale revenue. This goal has been achieved by integrating the mobile and online models. The online model has enabled fashion to gain competitiveness by giving customers an opportunity to engage in real-time communication. Subsequently, the firms have been in a position to foster a high level of customer loyalty. Furthermore, the online models have enhanced the firms’ capacity to adapt to market changes.

Yrjola (2014) emphasizes that the “multi-channel business model can enhance value creation through segmentation, efficiency, or customer satisfaction (p. 93). However, the success of multichannel business model is influenced by the firms’ commitment in implementing structures in order to individualize customer interactions. In line with its commitment to adopt an effective multichannel approach through online mediums, Gap Incorporation has developed an extensive shared online checkout that provides customers with an opportunity to shop and fill a single sales order in over five different branded stores. In their quest to enhance the competitiveness of their online model, most fast fashion firms have integrated mobile shopping by developing mobile applications. The applications have improved the firms’ capacity to deliver unique customer experience across all their stores.

In their pursuit for profit maximization, most fast fashion companies such as H&M, Gap Incorporation, Uniqlo, and Benetton have adopted market expansion as one of their business models. Their move to adopt market expansion has been motivated by the realization of the high market potential in different local and international regions. Subsequently, most fast fashion firms have established retail outlets in the domestic and international market.

The four major industry players [Uniqlo, Zara, Gap, and H&M] have established extensive retail chains worldwide. Uniqlo and Gap have established 1,100 and 1,587retail outlets respectively. On the other hand, Zara has established over 2,000 outlets, while H&M has established 2,353 outlets (Penanster, 2012). By 2012, Uniqlo had established operations in 12 countries while GAP had expanded into 41 countries. Conversely, H&M and Zara had established retail outlets in 44 and 82 countries respectively (Penanster, 2012).

The firms’ success in entering international markets has arisen from their investment in conducting extensive market research. The market research enables the firms to assess the market potential available in the emerging economies. The decision to target the emerging economies has enabled the firms to attain a high rate of growth. Some of the emerging markets that the firms have targeted include the BRIC economies, which comprise of Brazil, India, China, and Russia. It is estimated that entry into these markets have increased the firms’ growth by an average rate of 5% to 10% as opposed to their growth in developed economies such as the European countries and the US.

The fast fashion success in the global market has also been enhanced by the adoption of product localization and differentiation strategies. The localization and differentiation strategies have enabled the firms to develop a broad understanding of their customers’ behavior. For example, Uniqlo follows a traditional business model by focusing on technological differentiation. In a bid to differentiate its products successfully, Uniqlo has adopted long product differentiation cycles (Petro, 2012). Conversely, H&M has adopted a hybrid business model that focuses on timelessness and trendiness. The firm has succeeded in adopting the hybrid model due to its vertical integration (Petro, 2012).

Zara business model

Disruptive growth strategy; innovation and comprehensive decision-making

Unlike most firms in the fast fashion industry, Zara has adopted a unique business model, viz. the disruptive business model, in an effort to improve its decision-making capability as illustrated by the diagram in appendix 1. The firm is cognizant of the dynamic nature of the fast fashion industry. Subsequently, the firm has integrated speed and innovation as its business model. This decision has been motivated by the need to ensure that its products align with the prevailing market trends. Petro (2012) confirms that Zara “has built a supply chain that allows it to follow fashion trends and deliver goods in near real time” (par. 3).

Its commitment towards innovation has enabled the development of products that are characterized by short lifespan. Consequently, a significant number of consumers are attracted to purchase the firm’s product upon their introduction in its stores. Mcafee, Dessain, and Sjomman (2007) assert that over 75% of the firm’s merchandise is changed within 3 to 4 weeks. The high rate at which the firm introduces new products has also played an essential role in increasing customer traffic within its store as they check for new products.

According to Mcafee, Dessain, and Sjomman (2007), customers’ tastes and preferences change rapidly. Furthermore, it a challenge for firms to project successfully the direction of customers’ tastes and preferences. However, Zara has perceived these difficulties as a source of advantage in developing competitive advantage. Thus, in an effort to respond to its target customers’ needs appropriately, Zara Incorporation has implemented an effective information technology system that increases its capacity to understand the target customers’ needs. Consequently, the firm is in a position to develop sufficient market intelligence, hence increasing its decision-making capacity.

In addition to relying on market intelligence in its decision making process, Zara Incorporation also appreciates the importance of leveraging on its internal resources. Therefore, the firm’s decision-making process is the task of a comprehensive decision-making unit. However, the firm does not only rely on the views of the DMU, but it also gathers the opinion of employees from different departments. Additionally, the firm’s commitment in adopting an extensive decision-making approach has played a fundamental role in enhancing the firm’s competitiveness in a number of ways.

First, the firm has been able to break from the commonly utilized business model within the fast fashion industry whereby product designs are conceptualized by a few individuals. On the contrary, Zara’s designing process is the responsibility of an extensive team commonly referred to as ‘commercials’. The decision to incorporate store managers in the designing team has improved Zara’s success in developing new fashion apparels due to their knowledge on fast selling products.

Cost minimization

In their pursuit for profit maximization, most fast fashion companies have adopted a multichannel business model. Additionally, the firms invest in extensive market campaign, for example, by advertising, in an effort to create sufficient market awareness of their multichannel. Unlike its competitors, Zara has adopted a cost minimization approach by eliminating extensive advertising in creating market awareness. The firm has succeeded in minimizing the cost of promotion, which is a major marketing expenditure, by placing adverts when creating awareness on new stores to promote its yearly sales.

Business format

Zara has adopted store-uniformity as one of its business model. All the firm’s stores are designed uniformly in an effort to provide the target customers with a unique store ambience. The firm continuously improves its stores in an effort to satisfy the changing customer tastes. The firm has also maintained uniformity with reference to its product prices across all the stores. In the international market, the firm has adopted a viable formula that ensures that its product prices are harmonized (Mcafee, Dessain & Sjomman 2007). In addition to the above aspects, Zara has largely avoided online marketing channels in an effort to eliminate the complexities associated with return of merchandise sold online.

Conclusion

Business model constitutes a fundamental element in profit-making organizations’ quest for business excellence. The business model adopted determines an organization’s profitability potential and its ability to attain competitive advantage. The fast fashion industry is characterized by intense competition and change in consumer tastes and preferences. Subsequently, it is essential for the industry players to develop and review their business models continuously. Some of the commonly used business model by major fast fashion companies such as H&M, Gap, and Uniqlo include multichannel approach and market expansion.

Unlike its competitors, Zara has adopted a disruptive business model that is based on innovation, comprehensive decision-making process, cost minimization, and uniformity of its stores. These models have improved Zara’s ability to respond to changing market needs, and hence its competitiveness. Subsequently, the firm is in a position to deal with the risks arising from unforeseen market changes. However, it is essential for the firm’s management team to review its business models continuously in order to determine their efficacy.

References

Harvard Business Review. (2010). Harvard business review on business model innovation. Boston, MA: Harvard Business School Press.

Mcafee, A., Dessain, V., & Sjomman, A. (2007). Zara: IT for fast fashion. Boston, MA: Harvard Business School Press.

Penanster, T. (2012). Fast fashion trend; competition. Web.

Petro, G. (2012). The future of fashion retailing; the H&M approach [part 3 of 3]. Web.

Teece, D. (2010). Business models, business strategy and innovation. Long Range Planning, 43(3), 172-194.

Yrjola, M. (2014). Value creation challenges in multichannel retail business models. Journal of Business Models, 2(1), 89-104.

Appendix

Appendix 1: Zara Incorporation Disruptive Business Model

Zara Incorporation Disruptive Business Model