University of the Philippines Cebu

School of Management

Case Study #3 – ZARA

In partial fulfillment
of the requirements in
BA 243 Management of Innovation

Submitted to

Dr. Mary Gretchen F. Chaves

19 September 2017

Group 5

Calienta, Dominique Suzanne L.

Ceniza, Anthony Fiel V.
Delos Reyes, Geraldine C.
Encarnacion, Michael L.
Hilvano Jr, Renie Jaime J.
I. Situation Analysis
Zara has proved to be the top retailing brand in the world, with its founder, Amancio Ortega
leading the innovation on their production process. They are best known in the retail industry for
their “fast fashion” business model in which the whole process of planning and production takes
just 3 weeks as compared to the industry’s average of 6 months. Aside from their efficiency in
manufacturing, the market leadership of the company was driven by their rapid response and
extensive use of information and communication technologies.

Currently, Zara has its online app store but the availability of online shopping is only limited
to certain areas/countries. Also, their designs focus on the “Italianate look of current trends” which
makes it challenging for them to penetrate the global market especially on countries that find it
hard to adapt to their designs. With the current fast changing demand in the market and the
increasing demand for creative clothing lines in countries outside of Europe and the US, there is
a need for Zara to come up with an incremental innovation strategy to be able to sustain their
global competitive advantage in order to increase the company’s profitability and maintain market
leadership.

II. Problem Identification

Zara needs to come up with an incremental innovation strategy that will sustain their global
competitive advantage, in order to increase company’s profitability and maintain its market
leadership.

III-IV. SWOT Analysis

The following SWOT Analysis serves as the bases for determining the problem situation
and identifying the problem as well as the KRAs (increase profitability and maintain market
leadership). The SWOT analysis also facilitates the identification of the Critical Success Factors
and the potential alternatives that allow the achievement of the KRAs.

Strengths and Opportunities

One of Zara’s strengths is its fast production process wherein clothing designs that are
produced by other companies in five to six months can be produced by Zara to the market in just
3 weeks. This competitive advantage opens opportunities to the company to consistently meet
market demands and allows them to penetrate the market better than other competitors. Because
of their flexibility to meet market demands, the company is able to adjust their designs and
productions that best fit the current clothing trend.

Zara’s strong commitment to design allows them to cater to more customers as more
designs get to be produced. The company employs more than 200 designers. This allows them
to be more creative and productive. The use of relevant information in sales and demand gives
them the opportunity to forecast possible salable designs. Since a large portion of their target
markets is able to afford their clothing lines, the company can take advantage of this opportunity
by using their strengths in providing a variety of clothing design choices for these target markets.

Strengths and Threats

It has been proven that the Company’s fast production process translates to faster sales
turnover. This production process has been observed by other competitors which puts Zara in a
position where they have to mitigate the possibility that these competitors may copy their
production processes. In terms of their flexibility in meeting up with markets demands and their
strong commitment to design, the possibility that other players in the market may imitate their
clothing designs is also a threat.

Zara’s target markets are middle class and upper middle class earners. This is a strength
of the company as these target markets comprise a large portion of the entire clothing industry
and these target markets contribute greatly to the company’s profitability and market reach. The
threat of a market recession happening may disrupt the company’s operations and may cause
the decline in its sales. The decline in this situation may also be attributed to the fact that
customers will turn to other competitors’ clothing lines as alternative to what Zara can offer.

Weaknesses and Opportunities

Though Zara is highly committed to providing the best clothing designs, the innovation
efforts in coming up with improved textile quality is not much perceived1. This puts Zara in the
spot where they may lose the opportunity of making greater sales especially when the information
of this situation, pertaining to the quality of their textile, goes out on the market.

In addition, one of Zara’s weaknesses is their traditional business model wherein they
focus more on putting up physical stores but very minimal efforts provided in engaging with online
shopping. The convenience offered by providing a platform in the mobile world is not being taken
advantage of by Zara. This situation decreases the possibility of them making additional sales on
their clothing lines. In addition, the company is also not able to take advantage of their vast
clothing lines because they are not able to sell these out in the online market. The limited sizes
they offer on their products in relation to the increasing variations of customers that need different
clothing fit is incongruent which gives opportunity losses to the company.

Weaknesses and Threats

As mentioned previously that one of Zara’s weaknesses is that their business process
model can be copied or imitated, the threat of having other competitors in the clothing industry
and them having to possibly imitate Zara’s processes, poses a threat that may drag Zara down
from being the market leader. Furthermore, Zara’s designs are very standard that they focus more
on the European trend that they minimally consider the fashion trends that exist in other areas.
Other competitors, such as Uniqlo who is a competitor to Zara in the Asian market, put effort in
catering to the trend that is existing in that region. This places the company in a lower position
when it comes to addressing customer preferences in current fashion on a specific area.

The increasing number of built-up companies and startup businesses selling their products
on the online market is also a big threat to Zara’s profitability as this threat may cause the
decrease of Zara’s market share. Since Zara is more focused on making sales with their physical
stores, the company is slow in adapting to the changes in the market brought about by
technological advancements. An example of this situation is the increasing number of people who
prefers to no longer come into stores and just browse for whatever clothing they need online.
Although Zara provides an online shopping platform for their customers, this application is only
available in selected areas.

V. Critical Success Factors

The following Critical Success Factors serve as the bases for presenting potential
solutions and evaluating the best alternative in order to further increase the company’s profitability
and maintain market leadership:

1. Global Market Share (40 points)

2. Sales from New Markets (35 points)
3. Cost – Benefit (25 points)
 The group has assigned the greatest weight (40 points) to a solution’s impact on the
company’s global market share. Considering that Zara is an international brand, a solution must
be able to maintain or increase its market share internationally, not only in a certain region, for it
(the solution) to be chosen as the best alternative. This critical success factor also aims to
measure the increase of scope of the market segments the company currently serves.

Following the global market share potential, the group assigned the second greatest
weight (35 points) to the impact of a solution on sales from new markets. This will somehow
address the company’s need for expansionary activities. If sales from new markets prove to be
substantial, the company will have been successful in expanding its operations. Considering that
the western world is now recessionary, Zara must be able to ride on the development of the
emerging markets while keeping its stronghold in the western shores.

The last critical success factor, the group has chosen, is the cost-benefit impact of a
solution. It goes without saying that the benefits from a certain action must outweigh the costs
from implementing it. This factor will determine the possible contribution of a solution to the
company’s bottom line. For this, the group has assigned 25 points.

VI. Alternatives Presentation

The following alternative courses of action presented provide potential solutions that will
increase the company’s profitability and maintain its market leadership. Each course of action
shall be expounded on what it is about, what it entails, and how it shall provide relief to the current
problem. Each course of action shall then be evaluated on its advantages and disadvantages
against each of the Critical Success Factors. These assessments shall serve as the bases for
recommending the best alternative.

Alternative #1: Decentralized Design Team and maintain existing E-commerce Structure
The textile and clothing industry has drastically evolved over the years, from having staple
designs and plain prints to having unique cuts and elaborative patterns. This allowed companies
to venture into investing in more fast processes and ways to produce clothing and make unique
cloth patterns using different threads and materials. The demand for mid to upper-mid fashion
has grown with consumers wanting to get their hands on the latest fashion fast, on the other hand
these consumers also want fashion to be more personal and this heavily differs per region. Thus,
the need for companies to address these demands.
 This alternative proposes that the company, Zara, decentralize its design team to fully
address the needs of its target market and to be able to expand to new locations. Consumer
preferences differ from one place to another, thus the need for distinct design and clothing types.
Zara having a centralized design team will not be able to fully know what the market needs in
various regions since they will be basing their designs on European body types and trends.
Decentralizing their design team, by breaking them into smaller groups focusing on a specific
region will enable the company to have a more tailored study of the different markets and be able
to capture more customers in places that they already operate in, as well as potentially open new
stores in new locations. This will allow the designers to feed in the different data gathered from
the various regions to modify the designs for production. These designers will not be based in the
regions they are responsible for. But in order for them to know current trends, they will have to do
market research (e.g. travel to specific region to know trend, review popular social media
searches and trends, etc.).

The team will be able to improve design in terms of the following factors:
- Regional Body Types
There are designs that can be sold globally but restructuring these styles to fit target
regional body types will boost consumer purchases and minimize the need for alteration
(e.g. pants length, plus sizes)
- Seasonal Needs
Some countries do not have four seasons; Southeast Asian countries only have two. The
company must sell clothing that would cater to these seasonal needs rather than offer
those that might just stay on the racks longer. This will also enable Zara to sell clothing
that is more responsive to the climate of the regions (e.g. the use of cotton fabric in
countries where the weather is hot or the use of knitted fabrics in countries where it is a
bit cold).
- Design Preference
Culture plays a big factor on the types of clothing one wears, what colors are more
attractive, or what styles are allowed. Having a design team that will design clothes that
will fit in to these factors will minimize items that will not be sold. Breaking up the design
team will allow the company to study and respond to regional preferences.

This alternative will maintain the current E-commerce structure of Zara, offering the online
feature only to the specific countries like China and America where consumers are highly
digitalized. For other countries like the Philippines, where the in-store shopping experience is
preferred, the company will continue to strengthen and maintain customer relationship where staff
will make the in-store experience highly convenient and stress-free.

Alternative #2: Centralized Design Team and expanded E-commerce Structure

Zara currently adopts a centralized design and distribution system, which originates in its
global headquarter in Spain. According to Inditex, Zara’s parent company, instead of designing a
collection long ahead of its release, Zara tries to continuously recognize emerging fashion and
incorporate them in its designs and products. Through sales data capture and shopper anecdotal
feedback, store managers report daily tens of thousands of customer reactions to design teams.
Sale trends are analyzed along to runway releases and quickly incorporated into the next line of
production, creating a cycle of iteration and innovation. Once designed, new fashions are
produced in relatively small quantities, so “misses” can be quickly identified and discontinued and
“hits” built-upon and re-released2.This strategy revolutionized how the fashion industry works over
the years. Its centralized and fast design and distribution strategy had made Zara one of the
leading innovators in the world of fashion.

Currently, Zara operates an online, E-commerce platform for its garments and designs.
However, the accessibility and functionality of this platform varies from one country or region to
another. For example, in Spain, London and the rest of the European countries, the online
platform allows customers to make orders and purchases while in the Philippines and other Asian
regions, the platform only serves as an online catalog where purchases and orders are not
accommodated.

This alternative proposes that Zara maintains its centralized design and distribution
strategy as this has already been proven to work for the company and expand its online, E-
commerce platform to cater to the global market.

The expansion in its online, E-commerce platform will require Zara to implement a unified
services catalog across the global market. This means that services such as placing orders,
checking out purchases and delivery are now widely available across global locations. Zara can
also leverage on this online technology by introducing “Fast Fit”, a customized online fitting
software. Fast Fit allows customers to upload their body measurements online that will recreate
a digital mannequin. Customers can do mixing and matching and fitting of clothes by just swiping
their desired apparel to their digital mannequins. Through this technology, customers can
generate a better and more accurate impression of how a design would actually look on them
based on their uploaded body types.

Consequently, maintaining a centralized design and distribution strategy will make the
implementation of the expanded online, E-commerce services platform easier and more
streamlined as these processes can easily be monitored over a centralized environment.

Alternative #3: Decentralized Design Team and expanded E-commerce

This alternative proposes to break Zara’s existing design team into more focused and
smaller design groups that will evaluate and cater to the needs of certain regional locations.
Additionally, the decentralization do not entail a physical dispersion of the design team but only
an organizational rearrangement. These decentralized design teams will create products based
on the factors affecting the preferences of each region. Products are tailored fit to match the
specifications, such as body structure and cultural requirement, of the customers of its target
market. For example, Asian customers, who are relatively shorter that the Westerners, are custom
made with pants with shorter lengths. In Muslim areas, the team can focus on designing clothes
that would fit the country’s cultural and religious requirements such as incorporating Zara designs
in the Hijabs of Muslim women.

Moreover, this alternative also suggests that Zara expand its online E-commerce platform
making all services available across the global locations where the company operates.
Regardless of geographical location, customers can place orders, make purchases and avail of
delivery services. The Fast Fit technology, the digital mannequin fitting software, will also be
implemented in this alternative, thus, providing a more convenient and rewarding experience for
customers who avail of the online services platform.

Adopting a decentralized design team and incorporating its design outputs in an expanded
E-commerce platform will require Zara to implement tremendous enhancements, especially in its
digital development since this platform will need to accommodate all the various designs made
for all the regional areas in which the company operates. Zara may need to also expand its digital
resources and capabilities to mobilize this initiative.
VII. Alternatives Evaluation

1. Global Market Share – 40%

Alternative 1: Decentralized Design Team and maintain existing E-commerce Structure

Decentralizing the design team will create more customized and specialized designs that
will cater to the specific countries or regions of the global market. More focused designs possess
an opportunity for Zara to tap new market segments that were not catered by the more generic
and uniform designs currently present in all its stores, hence, increasing its global market share.
Moreover, the decentralized team will be doing extensive market research in the areas assigned
that will identify and address the current needs of the market in a specific location, thus, applying
a market-pull approach.

On the contrary, keeping up with Zara’s existing E-commerce structure would limit the
company’s potential from expanding to a wider global market reach, which can result to an
increased global market share. Hence, this alternative scored 35 / 40 points.

Alternative 2: Centralized Design Team and expanded E-commerce Structure

Expanding the company’s E-commerce platform creates an opportunity for Zara to
increase its global market share. The online platform intensifies and magnifies the company’s
availability across the global arena, making Zara products more accessible even to areas without
its physical stores. Additionally, maintaining Zara’s centralized design team is a proven strategy
that the company has been implementing over its years of operations. This further strengthens
and enhances Zara’s brand identity across the global market.

Despite Zara’s tested centralized design strategy, this strategy may not be instrumental to
increasing the company’s global market share. In continuously implementing this, it is highly
possible that Zara would still only be catering to its existing customers who have signified their
patronage over Zara apparels. Moreover, the generic or universal designs that the centralized
design team may not be adaptable to certain regional locations despite making it available in an
online store. These universal designs may not suit a country’s current trend or cultural orientation
that would instead be detrimental to achieving an increased global market share. With these
impacts to consider, the alternative is given 33 / 40 points.
Alternative 3: Decentralized Design Team and expanded E-commerce
This alternative adopts a decentralized design team strategy and an expanded E-
commerce structure, which gives the company a high opportunity of capturing a large share of
the global market. The decentralized design team results to more regional-customer focused
design outputs that provide the opportunity for the company to gain more customers. The
expanded E-commerce structure also increases Zara’s availability across the global market that
could potentially increase sales, especially in areas where there are no physical stores yet.

On its negative effect, this alternative can possibly challenge Zara’s manufacturing
capacities. The decentralization will demand a higher operational requirement from the company’s
manufacturing department since it will need to slightly customize or modify its designs to tailor-fit
a regional preference. Not being able to meet the production requirement can possibly affect the
company’s customers and result to a negative effect on global market share. Despite this, the
alternative still scored 37 / 40 points, due to its more positive impact in increasing Zara’s global
market share.

2. Sales from New Markets – 35%

Alternative 1: Decentralized Design Team and maintain existing E-commerce Structure

By decentralizing the design team, breaking them into smaller groups, the company will
be more focused on making designs that will be regionally accepted. Zara will be able to gather
data that will be more specific to regional needs and preferences. This will attract more customers
to buy from Zara stores or their online platform.

The team will also be able to conceptualize new designs that will potentially be acceptable
to other markets where Zara has no physical stores yet. Zara in turn can open new stores in
regions where they do not operate in, thus increasing their market share. Though this alternative
will give Zara an edge in knowing their consumers, it will also increase operating and production
cost since the company will have to invest more on research and development for designers
assigned to specific regions and increase the need for additional production task like pattern
making and cutting. With this, the group has decided to give this alternative 29 / 35 points.
Alternative 2: Centralized Design Team and expanded E-commerce Structure
Having a centralized design and distribution system made Zara one of the leading fashion
innovators today. Given that it is highly efficient for the company to have a centralized design
team, since they will not invest in additional manpower or incur cost for additional research efforts,
it would be more beneficial if Zara focuses on expanding their E-commerce structure. This
alternative will pave way for the company to capture new markets especially areas where they do
not have physical stores. Expanding the E-commerce structure to serve equally the countries
where they operate in will allow customers easy access to Zara products.

By incorporating this new structure as well as introducing the “Fast Fit” feature will give
the customers an accurate representation on how the clothes will look on them, eliminating the
need for the consumers to go to the stores and try on the actual products. This feature will also
revolutionize how consumers purchase clothes for other people, in such a way that a person can
now share his/her digital mannequin to friends or personal shoppers.

But by maintaining the centralized design team, the company might fail in determining
what designs “click” and what does not, in certain regions. The company will only rely on the
inputs from actual purchases that the stores provide. This process somewhat makes it too late for
designers to modify or adjust the designs since the products are already produced and are already
sold in store or online. The group scored this alternative the highest, with 32 / 35 points.

Alternative 3: Decentralized Design Team and expanded E-commerce

Implementing a decentralized design team and expanding its E-commerce market will
entail tremendous work to modify Zara’s existing process. Decentralizing its design team will
address the need for personalization and customization based on regional preferences. But by
having the teams focus on certain regions, they must exert more effort in communicating and
coordinating with other members of the design team in order to create fashion collections in line
with the Zara brand.

The company will have to develop and enhance their current E-commerce platform to
accommodate the number of designs that will be made as well as program their platform to
present such designs to their specific target audience. The online shopping feature will now be
available to all the countries that Zara is currently present and not just to the highly digitalized
countries. The same platform will also be available to countries where Zara stores are not yet
established. Customers can now log in and have items delivered right at their doorsteps. This
feature will allow the company to gain global reach and attract new customers. The group has
given this alternative 31 / 35 points.

3. Cost – Benefit – 25%

Alternative 1: Decentralized Design Team and maintain existing E-commerce Structure

This alternative has the lowest score when it comes to Cost-Benefit. The group finds that
this alternative will disrupt the current production level as the responsibilities of some of the current
designers will now be shifted to the regions or areas they will be assigned to. Because of the
move to decentralize the design team, productivity will not be as high compared to when all of the
designers were focused on a single design trend. This then translates to the company not being
able to fulfill the demand of the current market that they serve as their designers will be divided
to designing clothing lines that fit the preference of the different regions. The benefit that comes
along with this alternative is that the clothing line will be designed considering what that region or
area prefers which in turn will increase the market reach of the company.

Because the alternative’s cost outweighs its benefits, the group scored this 13 out of 25.

Alternative 2: Centralized Design Team and expanded E-commerce Structure

This alternative has the highest score in terms of Cost-Benefit. The cost that comes along
with this alternative is the creation of “Fast Fit”, the application that allows customers to upload
their body measurements. The cost of development for the software in addition to the
maintenance support cost are the only costs that Zara has to pay for the benefit that comes along
with it. By providing an expanded E-commerce platform, customers will not only be able to browse
for their clothing but they will also be provided the environment where they can get the perfect
clothing fit and have those purchased in one go. In addition, the increase in the number of people
using their mobile phones for purchasing will allow Zara to expand its market reach to these
potential customers. In terms of convenience, this alternative provides the ease of ordering in bulk
and lessens the probability of having returned items.

Because of the convenience this alternative provides to its customers and possibility of
increasing the company’s market reach to mobile phone users, the group scores this alternative
23 out of 25.
Alternative 3: Decentralized Design Team and expanded E-commerce
The combination of decentralizing the design team and implementing an expanded E-
commerce platform provides increased market reach but incurs more cost to Zara. The combined
costs which are the decreased productivity level of the company due to the decentralization of the
design team and the investment incurred to develop “Fast Fit” is still higher as compared to the
benefits that come along with each activity. The benefit of having additional sales coming from
the expanded E-commerce plus the potential sales generated by focusing on the preferences of
a region will still be lower compared to the costs that is incurred in implementing these activities.

Because the group finds that the costs to be paid in implementing these two activities
outweighs the benefit that comes along with them, the group scored this alternative 17 out of 25.

VIII. Recommendation
The following matrix summarizes the weighted CSF scores. After a thorough analysis of
the alternatives, it is recommended that Alternative 2: Centralized Design Team and expanded
E-commerce Structure, be pursued by Zara in order to increase company’s profitability and
maintain its market leadership.

By taking actions that focus on incremental changes in Zara’s business process, the group
finds that the company will be able to achieve corporate success by implementing Alternative #2
- Centralized Design Team and expanded E-commerce Structure.

For the increase in global market share, the group finds that Alternative #2 to be the lowest
in this critical success factor although the scores of each alternative in this is not far off from each
other considering that the other alternatives also may possibly allow the company to penetrate
other markets in the global scene. The group sees that this alternative will strengthen customer
loyalty by providing ease in searching and buying Zara’s products.
 For the generation of sales from new markets, implementing Alternative #2 has the highest
score in this critical success factor. The increase in mobile phone usage and the high demand
for ease of purchasing products online provides the avenue for customers in all regions that Zara
is servicing to purchase their Zara products through this platform. In addition, for regions that do
not have physical Zara outlets, this alternative provides customers coming from these areas the
ability to find and purchase the Zara products they want.

In terms of Cost – Benefit analysis, this alternative scored the highest. The cost to create
the expanded E-commerce platform is lower as compared to the benefits that come along with it.
The other alternatives scored lower than this as the costs that come along with them outweigh
the benefits that they offer.

IX. Implementation
In order to increase profitability and maintain market leadership, the following programs /
activities are to be implemented:

1. Zara must develop the technology needed to offer the “Fast Fit” feature of the online app.

2. Information campaign on how to use this technology must be done so that Zara can realize
the potential of this innovation of their online shopping availability. The implementation of
this technology should be smooth such that it would help customers to choose the designs
they like and the app will choose the size of the design they selected that will match their
body type. Trends in the most salable designs should be evident and Zara can access this
information to improve their design process.

3. The design team, although still centralized in Europe, must be able to capture the trends
in the increased online shopping presence. The action proposed will add additional
information about what is working and what is not.

4. The new information gathered above must then be relayed to Zara’s production process.
This will allow Zara to match production capacities and capabilities to the designs that are
currently doing well in the market.
 5. After production, the company must then be ready to ship the goods out from the
production facilities to the addresses specified in the confirmed orders.

It is to be emphasized that these actions will be added to the processes that Zara has
already implemented under its current operating model.

X. Evaluation and Control

To ensure the success of implementing the programs or activities that will increase its
profitability and maintain its market leadership, the following evaluation and control mechanisms
must also be observed:

1. Zara must look into the additional orders arising from the expanded coverage of its
enhanced online shopping availability.

2. The company must also determine which of these orders have been made due to the
implementation of the “Fast Fit” technology. Zara can do this by checking if the customer
used this feature before confirming their orders. It can also check how the customer
experience has been affected by this technology (whether it improved or worsened the
customer experience).

3. Zara must also check how the design teams are incorporating the new stream of customer
information into their processes, whether they are incorporating the new design preferences
as soon as it is evident that the design preference will make their products sell more.

4. Customer feedback on the orders made thru the enhanced online must also be
considered. Customer comments on whether the goods they received satisfied their needs
or not, or if the dimensions of the product offered a good fit must be taken into account to
improve the accuracy of the Fast Fit technology. This will ensure that this new technology
will be improved.

5. Deliveries must be monitored to check if the company has delivered the orders to the
addresses indicated. If there are reports of incorrect deliveries, these must be considered
and fed back into the delivery system to: first, investigate the reason for incorrect delivery,
and second, improve the address-taking section of the ordering process. It goes without
 saying that Zara should partner with logistics companies to also ensure the same level of
commitment to satisfy customers’ needs.

References:
1
Duffort, D. (2017, March 15). How Even Large Clothing Brands Fail on Fabric Quality Control
http://www.sgtgroup.net/textile-quality-management-blog/how-even-large-clothing-brands-fail-
on-fabric-quality-control

2
http://www.inditex.com/en/our_group/business_model