Zara and IT-enabled Zara and IT-enabled InnovationInnovation

MI703- Computer MI703- Computer Information SystemsInformation Systems

The Defending ChampThe Defending Champ

Who is the largest “Who is the largest “pure playpure play” ” clothing retailer in the world?clothing retailer in the world?

Problems at the GapProblems at the Gap• Previous CEO (Mickey Drexler, fired in Previous CEO (Mickey Drexler, fired in

2003, went to turn around JCrew)2003, went to turn around JCrew)• Most recent CEO (fired in 2006)Most recent CEO (fired in 2006)

Maybe it’s not the CEO’s faultMaybe it’s not the CEO’s fault• Looking to sell the companyLooking to sell the company

Gap’s Chief Competitive AssetsGap’s Chief Competitive Assets

Brand Brand • Thoughts and feelings associated with a Thoughts and feelings associated with a

product (best US brands?)product (best US brands?)• How does Gap build brand?How does Gap build brand?

Coverage/ scaleCoverage/ scale Size of operation gives buying powerSize of operation gives buying power They have lots of retail channels to touch They have lots of retail channels to touch

customers.customers.

Location, Location, LocationLocation, Location, Location

Where does Gap make clothes? Where does Gap make clothes? • Offshore, in AsiaOffshore, in Asia

Why?Why?• Cheaper laborCheaper labor

The Problem?The Problem?• Most firms design a 'collection' for an Most firms design a 'collection' for an

entire season. entire season. • Place a huge order for stocking at the Place a huge order for stocking at the

start of the season.start of the season.

““To everything there is a season.”To everything there is a season.”

What do you suppose are their lead-times from What do you suppose are their lead-times from design to manufacture to store: days, weeks, or design to manufacture to store: days, weeks, or months? months? • MonthsMonths• H&M is #2, it's 3-5 months from creation to delivery.H&M is #2, it's 3-5 months from creation to delivery.

How many new items Gap & H&M produce in a How many new items Gap & H&M produce in a season?season?• 2,000-4,0002,000-4,000

How do they decide what to produce?How do they decide what to produce?• Hire and monitor the “fashionistas.”Hire and monitor the “fashionistas.”

What challenges does this raise for clothing What challenges does this raise for clothing retailers?retailers?• If you get it wrong…If you get it wrong…

The ChallengerThe Challenger

Inditex Group = ZaraInditex Group = Zara ““The Most Dangerous Retailer in the The Most Dangerous Retailer in the

World"World" Products may seem different than Products may seem different than

GapGap• Trendier, more glamorous.Trendier, more glamorous.• Same market segment - mass market Same market segment - mass market

low end consumer fashions. low end consumer fashions. • Not mutually exclusive.Not mutually exclusive.

Praise for ZaraPraise for Zara Fashions more Banana Fashions more Banana

Republic – prices more Old Republic – prices more Old Navy.Navy.

Goldman analyst as “Armani Goldman analyst as “Armani at moderate prices”.at moderate prices”.

Founder, Amancio Ortega, is Founder, Amancio Ortega, is Spain's richest man & the Spain's richest man & the world's richest fashion world's richest fashion executive.executive.

Anyone here ever shop Anyone here ever shop atat Zara? Zara?

What do you think? What do you think?

Success in Success in face of face of

competitors competitors

Since 2000, Index has Since 2000, Index has doubled stores to 2,240 doubled stores to 2,240 (through ’04 end) with (through ’04 end) with sales of $76 billion.sales of $76 billion.

In contrast to Gap’s In contrast to Gap’s woes, Inditex stock price woes, Inditex stock price more than tripled more than tripled between '96 and '00.between '96 and '00.

Fast Fashion!Fast Fashion! La Coruna warehouse is 5 million square La Coruna warehouse is 5 million square

feet = 90 football fields. feet = 90 football fields. • Nine times the size of Amazon's warehouse Nine times the size of Amazon's warehouse • These facilities move about 2.5 million items a These facilities move about 2.5 million items a

week. week. • Connected to 14 Zara factories through tunnels Connected to 14 Zara factories through tunnels

with ceiling-mounted rails.with ceiling-mounted rails. Cloth is ironed and products are packed on Cloth is ironed and products are packed on

hangers so they don't need ironing when hangers so they don't need ironing when they arrive at storesthey arrive at stores• Price tags are affixedPrice tags are affixed• Unpack them & they're ready to be soldUnpack them & they're ready to be sold

How’d they do it?How’d they do it?

Have you ever heard the old saying, “In Have you ever heard the old saying, “In retail, ________ equals death?”retail, ________ equals death?”• Inventory.Inventory.

Why's this particularly painful in fashion?Why's this particularly painful in fashion?• Inventory is perishable Inventory is perishable • Fashion world is driven by customer demand. Fashion world is driven by customer demand.

If you guess wrong? If you guess wrong? • Mark down your inventory and take the lossMark down your inventory and take the loss

A radical thoughtA radical thought Who knows best what you should have in your Who knows best what you should have in your

stores?stores?• CustomersCustomers

If your bets are more accurate, what would this If your bets are more accurate, what would this mean for inventory?mean for inventory?• Fewer mark downs & write offsFewer mark downs & write offs

How might we get a better handle on what How might we get a better handle on what customers want?customers want?• Ask themAsk them

Gap places big bets on fashion trends, Zara does Gap places big bets on fashion trends, Zara does not.not.

How does Zara do this?How does Zara do this?

Point of Sale SystemsPoint of Sale Systems (POS) (POS) • Fancy term for cash-register. Linked to HQ to Fancy term for cash-register. Linked to HQ to

provide dataprovide data• Tracks how items in store are selling…what Tracks how items in store are selling…what

they have that people want.they have that people want.

Personal Digital AssistantPersonal Digital Assistant (PDA) (PDA)• Handheld computer for manager.Handheld computer for manager.• Inputs items people come looking for, what Inputs items people come looking for, what

customers want that they don’t have. customers want that they don’t have.

Competency & ComplimentarityCompetency & Complimentarity Sounds sophisticated. Does this cost a lot Sounds sophisticated. Does this cost a lot

of money?of money?• No, they spend 5-10 times less than rivals on No, they spend 5-10 times less than rivals on

technology. technology. • There’s a lot of return-on-investment (ROI) in There’s a lot of return-on-investment (ROI) in

Zara IT.Zara IT. Are these fancy technologies?Are these fancy technologies?

• No.No. Why does Zara succeed with IT?Why does Zara succeed with IT?

• They use it in a smart way (IT Competency)They use it in a smart way (IT Competency)• It’s linked with core strategies (IT It’s linked with core strategies (IT

complimentarity)complimentarity)

The ProcessThe Process

What does Zara do with this Data?What does Zara do with this Data?• Real-time data from PDAs and POS are Real-time data from PDAs and POS are

whisked to 300+ designers who crank whisked to 300+ designers who crank out more than 12,000 fresh items each out more than 12,000 fresh items each year. year.

• Use it to decide on the fabric, cut, and Use it to decide on the fabric, cut, and price points price points

Just-in-time (JIT) manufacturingJust-in-time (JIT) manufacturing Scheduling materials to arrive exactly when they are Scheduling materials to arrive exactly when they are

needed in the production process.needed in the production process.• Keeps inventory to a minimum.Keeps inventory to a minimum.• For Zara, adds flexibility and speed.For Zara, adds flexibility and speed.

The ace behind this is one of the world's most responsive The ace behind this is one of the world's most responsive supply chains (e.g. Dell, Wal-Mart).supply chains (e.g. Dell, Wal-Mart).• Some use supply chains for efficiency, Zara uses it for Some use supply chains for efficiency, Zara uses it for

innovation. innovation.

Do they have a Versace working for Zara?Do they have a Versace working for Zara?• No stars - mostly newcomers whose designs must take No stars - mostly newcomers whose designs must take

advantage of cloth & materials Zara can provide. advantage of cloth & materials Zara can provide.

Why not?Why not?• Zara does not predict, respond so quickly don’t have to…Zara does not predict, respond so quickly don’t have to…

In-house or Outsource?In-house or Outsource? Does Zara outsource production? Does Zara outsource production? Why Not?Why Not?

• Production is the critical success factor for ZaraProduction is the critical success factor for Zara• Fast Fashion.Fast Fashion.

Vertical IntegrationVertical Integration• Zara produces 60% of its merchandise in-house. Zara produces 60% of its merchandise in-house. • Zara makes 40% of its own fabric and purchases most of Zara makes 40% of its own fabric and purchases most of

its dyes from its own subsidiary.its dyes from its own subsidiary.• Fabric is cut & dyed by robots in 23 highly automated Fabric is cut & dyed by robots in 23 highly automated

Spanish factories. Spanish factories. • 50% of fabric arrives undyed so the firm can react to 50% of fabric arrives undyed so the firm can react to

mid-season color changes. mid-season color changes. What about competitors?What about competitors?

• H&M has 900 suppliers and no factories. H&M has 900 suppliers and no factories.

The Value Chain (M. Porter)The Value Chain (M. Porter)

Inbound Operations Outbound Marketing Servicelogistics logistics & Sales

•Infrastructure: general mgmt, planning, finance, IS•HRM: recruiting, hiring, training, and development•Tech. Development: R&D•Procurement

SupplyChain

Fresh FashionFresh Fashion At Zara, most of the products you see in stores At Zara, most of the products you see in stores

didn't exist three weeks ago, not even as didn't exist three weeks ago, not even as sketches.sketches.

What about the Madonna concert example?What about the Madonna concert example? How often does the average Zara store accept How often does the average Zara store accept

delivery of new products?delivery of new products?• Twice-a-week! It's like groceries! Twice-a-week! It's like groceries! • Items rarely remain on shelves for more than a week. Items rarely remain on shelves for more than a week. • You essentially walk into a new store each time you visit. You essentially walk into a new store each time you visit.

What advantage does this give Zara?What advantage does this give Zara?• Exclusivity! No single model is on the market for more Exclusivity! No single model is on the market for more

than four weeks. than four weeks.

All this translates into speed.All this translates into speed.

Turn-around from idea to shelves is Turn-around from idea to shelves is 15 days.15 days. • H&M takes H&M takes 3-5 months3-5 months from creation to from creation to

deliverydelivery• VF Corp (Lee, Wrangler) takes VF Corp (Lee, Wrangler) takes 9 months9 months • JJ . Jill takes up to . Jill takes up to a yeara year• Average = Average = six monthssix months to design + to design + three three

monthsmonths to manufacture. to manufacture. • Zara is 18 times faster than competitors!Zara is 18 times faster than competitors!

Advertising CostsAdvertising Costs

What does Zara spend to advertise? What does Zara spend to advertise? • 0.3% of sales0.3% of sales

What’s the industry average?What’s the industry average?• 3-4% of sales3-4% of sales

For those keeping score, the average For those keeping score, the average in the industry is 10 to 12 times in the industry is 10 to 12 times more!more!

Why no advertising?Why no advertising?• Their business model does it for them.Their business model does it for them.

Z-daysZ-days If your store looks entirely new twice-a-week, how If your store looks entirely new twice-a-week, how

do customers react to this? do customers react to this? • They visit far more frequentlyThey visit far more frequently

How does this impact marketing costs?How does this impact marketing costs?• You don't need any. You don't need any. • Zara customers visit 17 times a year (compared to 4 on Zara customers visit 17 times a year (compared to 4 on

average in London)average in London)• Highest sales per square foot (everywhere).Highest sales per square foot (everywhere).

Zara does almost no advertising. Zara does almost no advertising. • Customers are rabidly loyalCustomers are rabidly loyal• Line up for 'Z' days when new shipments come in.Line up for 'Z' days when new shipments come in.

““But it costs more…”But it costs more…” Gap follows cheap labor costs, Gap follows cheap labor costs, Zara manufactures Zara manufactures

where?where?• In Europe. In Europe.

Who's got the higher manufacturing costs? Who's got the higher manufacturing costs? • Zara. Zara. • The firm spends 15-20% more on manufacturing (less of The firm spends 15-20% more on manufacturing (less of

a gap than you'd expect).a gap than you'd expect).

How can Zara manage to survive with higher How can Zara manage to survive with higher labor costs? labor costs? • Zara produces lots of products in small lotsZara produces lots of products in small lots• Gap produces a smaller # of product in bigger lotsGap produces a smaller # of product in bigger lots

Deal or No Deal…Deal or No Deal… How does this influence Zara’s profitability?How does this influence Zara’s profitability?

• No slack inventory. No slack inventory. • What it makes it sells. What it makes it sells. • It has low prices but almost never has an additional sale, It has low prices but almost never has an additional sale,

they rarely marks down items.they rarely marks down items.

They take fewer risks.They take fewer risks.• Write-offs at Zara are a single-digit percentage. The Write-offs at Zara are a single-digit percentage. The

industry average is 17-20%.industry average is 17-20%.

Zara says: "Being so quick allows us to reduce to Zara says: "Being so quick allows us to reduce to a minimum the risk of making a mistake - and we a minimum the risk of making a mistake - and we do make mistakes - with our collections."do make mistakes - with our collections."

Gap’s mistakesGap’s mistakes Spring line '02 – trumpeted as a return to basics, Spring line '02 – trumpeted as a return to basics,

was a bust. Discounted within a month.was a bust. Discounted within a month.

And they did it again! You know what the And they did it again! You know what the industry said of round 2? Here are some quotes:industry said of round 2? Here are some quotes:• "The colors for women's wear are drab and for men, "The colors for women's wear are drab and for men,

what's with the racks and racks of track pants?"what's with the racks and racks of track pants?"• "The women's' printed shirts are wrong and the horrible-"The women's' printed shirts are wrong and the horrible-

looking men's graphic tees are really wrong“looking men's graphic tees are really wrong“

Heavy markdowns have sliced Gap margins 40% Heavy markdowns have sliced Gap margins 40% in two years.in two years.

Why doesn't Gap copy Zara? Why doesn't Gap copy Zara?

They can't – they'd have to unwind They can't – they'd have to unwind their model & fund new everything.their model & fund new everything.

InimitabilityInimitability - “Making things is easy, - “Making things is easy, supply chaining is hard.”supply chaining is hard.”

Couldn’t if they wanted toCouldn’t if they wanted to• They have no creditThey have no credit• Their debt is junkTheir debt is junk

Double-edged swordDouble-edged sword What vulnerabilities do you see in Zara’s What vulnerabilities do you see in Zara’s

model?model?• Where are almost all of its products Where are almost all of its products

manufactured?manufactured?• Europe – specifically Spain.Europe – specifically Spain.

Financially vulnerable. Financially vulnerable. • The Euro – it’s a strong currency. It’s been The Euro – it’s a strong currency. It’s been

cleaning the dollar’s clock since its cleaning the dollar’s clock since its introduction. introduction.

• Downside is that the cost differential with Asia Downside is that the cost differential with Asia becomes even more pronounced.becomes even more pronounced.

Geographical vulnerabilities?Geographical vulnerabilities?

What dangers can arise from being What dangers can arise from being centrally located in Spain?centrally located in Spain?• If there’s a natural disaster (think New If there’s a natural disaster (think New

Orleans), terror attack, strike your whole Orleans), terror attack, strike your whole supply chain is shot.supply chain is shot.

• Pottery Barn Story.Pottery Barn Story. Geographic Location hurting global Geographic Location hurting global

expansion. expansion. • Hard to be “fast” when have to travel Hard to be “fast” when have to travel

around the world.around the world.

Brainstorming?Brainstorming?

Where to from here?Where to from here?• What business issues does this bring What business issues does this bring

up?up?• Which of these concepts are most Which of these concepts are most

important to your company?important to your company?• What other companies use IT to What other companies use IT to

innovate? Who are the leaders?innovate? Who are the leaders?• What are other ways that IT can be used What are other ways that IT can be used

to support innovation?to support innovation?