European Business School

International University Schloss Reichartshausen

Group Case Study of Zara

To obtain the academic degree
Bachelor of Commerce

Fast Fashion Lessons

Donald Sull and Stefano Turconi
London Business School

Ji Hae (Caroline) Lee

Corentin Adam
Melis Kesgin
RosaCastells Sala
Professor Benjamin Bental Warren (Sid) Tetz
Group 12
March 1, 2010
 European Business School
International University Schloss Reichartshausen

Introduction

Over the past 13 years Zara has revolutionized the fashion retailing through something called
fast fashion. Fast fashion is a competitive advantage created by the efficient functioning and
coordination of many operational areas. Zara can produce, market, and sell high fashion look-
a-likes at extremely reasonable prices faster than any traditional retailer. Through this paper
we will break down the strategic decisions that Zara has made to create this revolutionary
competitive advantage within the fashion industry.

Strategic decision in Supply Chain

Zara favours local production; as a matter of fact, labour intensive operations are outsourced
to local subcontractors. Fifty percent of Zara’s products are manufactured in Spain by 22
factories and subcontractors which are located in Galicia. Despite cheaper labour costs, Zara
avoids sourcing production in Asian countries to avoid waiting long lead times1 for products
they need produced. It is noted, that seventy percent of Zara’s production is in Europe to help
minimize lead times.

Other areas of operative production are vertically integrated within Zara. Large investments in
computer guided cutting equipment ensure efficiency. With some areas of production being
sourced and other areas, such as computer guided fabric cutting, being done in-house Zara
maintains a steady stream of information sharing. Almost all areas inside and outside the firm
receive information simultaneously. (Exhibit 1)

To facilitate this great supply/production chain, Zara also has a great advantage in logistical
power. Products that pass through the logistic platform of La Corogne represent 1 million
products a week. There are more than 200 kilometres of cable and a surface of around 400000

1
The time from productions initiation process until completion
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International University Schloss Reichartshausen

m² in this entirely automatic distribution centre. Even more impressive, two times a week the
centre is emptied and new turnover replenishes the old inventory.

Due to the high volume of products and information that needs to be shared between all areas
of the firm, Zara retains ninety percent ownership to avoid conflict between corporate
decisions and franchises. Due to the span of corporate hierarchy, Zara pays particularly close
attention to teamwork. Zara tries to break the corporate structure and appears as more of a
socialistic firm. Ever person is equal in the eyes of the firm and this helps to enable work to
be done in an efficient way with the most information sharing as possible. Furthermore, this
also reduces the expenditures on fancy corporate offices and helps further reinforce the
corporate culture.

Continuing with efficiency and low costs, Zara avoids extravagant and flashy advertising. In-
store and point-of-sales promotion is the only advertising that Zara utilizes. Not only is this a
strategic decision to lower costs but also to keep consistency with their overall strategy of fast
fashion. The high turnover of inventory within the store does not give Zara many
opportunities to advertise their in-store selections in catalogues, brochures, or other traditional
Medias.

Zara’s Core Competency: Shared situation awareness

Shared situation is the foundation for Zara’s success to respond quickly to changes in
demand. This system is built on three main pillars: raw data collection, hypothesis building,
and testing.

The first pillar is managing huge amounts of raw data and incentivising managers to collect
accurate as well as useful data. Managers are required to collect data that enables those
working in Zara headquarters to find patterns and forecast future trends. The raw data that
 European Business School
International University Schloss Reichartshausen

managers collect consists of everything from what is on the racks to what has been tried on
and left behind.

With the successful collection of raw data, headquarters can analyse, manipulate, and add
environmental2 data to the series allowing for the formulation of hypothesises to anticipate
trends. Zara’s open concept corporate culture is important here to facilitate brainstorming
during the development of hypothesises. This allows for many different hypothesis to be
created without fear that it will not be considered for the next step.

The next step is testing the chosen hypothesises. This is the final pillar in Zara’s shared
situation awareness. Based on the hypothesis, prototypes are created. These prototypes are
then exhibited in a 24,000 m² design hall. It is called “Fashion Street” and it resembles
fashion streets of Milan or London. The prototypes are designed in house so that they can be
produced quickly allowing decisions of whether to keep the prototype or cull it, to be made
quickly. Approximately 25,000 prototypes are made but about sixty percent are culled. This is
due to their failure to fit among the existing collection or bad results, in terms of data
collection, in the first few weeks of testing.

Competitive advantage

Zara’s competitive advantage is developed through their ability to collect data and respond
quickly to fast-changing market trends based on their situation awareness strategy. Observing
environmental factors and collecting copious amounts of data, Zara can anticipate the new
trends in the fashion market. This is vastly different from the typical designer push-pull
retailing model. (Exhibit 2) Furthermore, fifty percent of Zara’s products are introduced on
ongoing basis. This is much more frequently than the typical fashion retailer which typically
introduces new products based on the four seasons. The reason that Zara can change turnover
their inventory so rapidly is due to a very small lead time created by an extremely efficient

2
Data relating not strictly to Zara and their products ie. world events, news, etc.
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International University Schloss Reichartshausen

supply/production chain; which can put products into retail outlets in 15 days. (Exhibit 3)
Further benefits of Zara’s efficiency are realized when we consider their average mark down
ratio and profit margin. Traditional fashion retailer’s mark down approximately fifty percent
of their products where as Zara only marks down about fifteen percent of their products
(Exhibit 4); and realizes a profit margin of sixteen percent compared to the seven percent of
traditional retailers. Overall, Zara has strategically built their competitive advantage on
situation awareness and have been successfully created something now called fast fashion
retailing.

Conclusion

To conclude Zara is a company that can respond quickly to changing demand. They have
succeeded in developing a competitive advantage through strategic planning of operations
management, Human Resources, marketing, and their financial structures. The finally most
important strategic key to their success is the process of situation awareness. Zara benefits
from scale production and economies of scope within their corporate hierarchy saving costs
wherever possible. Furthermore, Zara has integrated technologies well to help with the
management of raw data as well as computerized cutting processes. The combination of in-
house production and local sourcing has proved to be a great success for Zara. We would
expect to see steady growth of this strategically well thought out firm.
 European Business School
International University Schloss Reichartshausen

Appendices
Exhibit 1

Exhibit 2
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International University Schloss Reichartshausen

Exhibit 3

Zara has a very small lead time: 15 days.

The first day, a stylist designs the pattern he looks at customer needs and luxurious clothes.
The third day, materials are computer guided cutting.
The eleventh day, clothes are make in a local subcontractor, and then they come in parent
factory for the coating.
The thirteenth day, products are freighted forward by trucks in Europe and by aircraft in Asai
or USA.
Finally, the fifteenth day, products are sold in the stores over the world.

Exhibit 4