HIGHER NATIONAL DIPLOMA (HND) in BUSINESS (MANAGEMENT) GLOBAL BUSINESS ENVIRONMENT (Batch 1)

Transcription

1 HIGHER NATIONAL DIPLOMA (HND) in BUSINESS (MANAGEMENT) GLOBAL BUSINESS ENVIRONMENT (Batch 1) Qualification Module Number Higher National Diploma in Business Management M14U18 Case Study (Pre-seen) Issued Date 8 February 2018 Exam Date & Time 16 February 2018 (9:00am-12:10pm) Guidance Note The module assessment has two parts: Part 1 is a time-constrained assessment which satisfies the requirements of LO1 and LO2. Part 2 is a written individual assignment which satisfies LO3 and LO4. Page 1 of 8

2 PART 1: Instructions Time-constrained Open Book Assessment (open book examination) 1. This assessment is based on a pre-seen case study. You are required to bring a hard copy of the case study to the examination. 2. There will be three questions based on or relevant to the case study. All three questions are compulsory. 3. The time allowed to provide response to the questions is 3 hours. 4. You are allowed to bring the core text books and the case study. You may write your notes in the case study which shall be attached with the answer script. 5. You are not permitted to retain any other material such as, printed notes, slides and/or any digital form of contents. 6. Your response must show evidence of originality and application to the case study. Page 2 of 8

3 Zara s Strategy for Value Creation in the Global Apparel Industry Traditionally, national retailers outsource apparel production via global brokers to thousands of small apparel makers. The typical manufacturer, usually located in a lowwage country, is a small-scale operation that employs a few to a few dozen workers. In a labor-intensive process, workers make specific pieces of clothing, often in a narrow range of sizes and colors, which are then integrated with the output of hundreds of other such companies spread across dozens of countries. As more companies in more countries make more specialized products i.e., one factory makes zippers, one makes linings, one makes buttons, and so on multinational trading companies perform as cross-border intermediaries and supervise the assembly of component pieces into finished goods, which are then shipped to apparel retailers. Responding to market shifts relentlessly pressures apparel retailers. In turn, they push multinational trading companies to improve coordination among themselves and apparel makers. By planning collections closer to the selling season, testing the market, placing smaller initial orders, and reordering more frequently, retailers can reduce forecasting errors and inventory risks. The final links are markets and customers. Although tastes overlap among countries, local customers preferences traditionally vary. For example, the British seek stores based on class sensitivities, Germans are value-conscious, Chinese shoppers are brand-aware, and shoppers in the United States look for a mix of variety, quality, and price. Collectively, these conditions create a buyer-driven chain that links fragmented factories, global brokers, dispersed retailers, and local customers. Industry wisdom spurred firms to choose a sliver of a particular activity make zippers, manage logistics, focus on store design, cater to customer segments instead of creating value across multiple slivers. Effectively, Do what you do best and outsource the rest drove strategy. Globalization reset the game board. Fewer barriers, better logistics, and improving communications created new industry standards and strategic choices. A compelling example is the compression of cycle times in the apparel-buyer. In the 1970s, getting a garment from factory to customer took approximately nine months six to design the collection and another three to make and ship it. Now, it takes the typical company from six months down to six weeks to run this cycle. For a firm named Zara, it takes between two to four weeks. By rejecting conventional standards, Zara implemented disruptive innovations that reset the relationship among industry structure, company strategy, and value creation. In the process, it became the world s leading apparel company and its founder, Amancio Ortega, one of the world s wealthiest people. Page 3 of 8

4 Zara Who? The Inditex Group, a Spanish apparel MNE, is the parent corporation of eight global retail chains, including Zara, Bershka, Massimo Dutti, Stradivarius, and Oysho. No matter the brand, the all-trendy, reasonably priced products are sold in attractive stores worldwide. Zara is the flagship of Inditex, generating the bulk of total sales. Inditex runs operations from The Cube, its gleaming, futuristic headquarters in Artexio, near La Coruña, a small, seaside town in northwest Spain about 300 miles from Madrid. Inditex employed more than 111,000 in 2012, up from 90,000 in The company workforce is young (average age: 26) and female (besides representing more than 80 percent of employees, women hold more than half of the executive, technical, and managerial positions). Inditex s revenue approached $21 billion in 2012, far ahead of Sweden s Hennes & Mauritz (H&M) at $18.8 billion and long-time worldwide leader Gap s $15.6 billion. Spain, Inditex s home market, accounted for about a quarter of sales, while Asia s and the Americas continued growth accounted for more than a third of 2012 sales. Its nearly 6,000 storefronts spanning 85 countries collectively sold the 840 million garments Inditex made that year. The first Zara shop opened its doors in 1975 in La Coruña. Today, there are nearly 1700 outlets and, on average, a new one opening every day. Zara uses an innovative strategy to power its global performance, integrating fashion and information technology to make and move sophisticated clothing at compelling costs. One analyst calls it Armani at moderate prices. No matter the portrayal, all agree that Zara s strategy has challenged historic ideas of value creation in the global apparel industry. Understanding its success requires understanding its competency in configuring and coordinating value-creating activities. Design Zara rejects the idea of conventional spring and fall clothing collections in favor of live collections that are designed, manufactured, and sold almost as quickly as customers fleeting tastes no style lasts more than four weeks. The company s 300 or so designers monitor market events, fashion trends, and customer preferences in designing about 11,000 distinct items per year. Compare that to 2,000 to 4,000 items made by rivals. Zara translates the latest fashion trend from a catwalk in Paris to its store shelves in Shanghai in as little as two weeks, versus the industry standard of several months. Zara s designers get ideas from store managers, industry publications, TV, Internet, and films. Its trend spotters focus on university campuses and nightclubs. Its so-called slaves-to-fashion staff snap shots at couture shows and post them to designers who quickly reproduce the look for the mass market. For example, when Madonna played a series of concerts in Spain, teenage girls arrived at her final show sporting a Zara knock-off of the outfit she had worn Page 4 of 8

5 during her first show. Nevertheless, though Zara pushes the edge, its fashions are never too far out there. Zara does not adapt products to a particular country s preferences. The convergence of fashion and taste across national boundaries endorses management s bias toward standardization. Some product designs cater to physical, cultural, or climate differences smaller sizes in Japan, special women s clothing in Arab countries, different seasonal weights in South America. Still, Zara has standardized about 85 percent of its designs for the global market, believing that fashion trends are global. Sourcing Zara s headquarters staff and purchasing offices in Barcelona, Beijing, and Hong Kong acquire fabric, components, and finished products from suppliers in Spain, Portugal, India, Turkey, Morocco, and China. Linked into Zara s network, suppliers coordinate their production with its projections. Zara buys about half of its fabric gray (not yet dyed) in order to update designs quickly. José Maria Castellano, Inditex s former CEO, explains, We have the ability to scrap an entire production line if it is not selling. We can dye collections in new colors, and we can create a new fashion line in days. Production Like its rivals, notably H&M and Gap, Zara sources finished garments from suppliers in Europe, North Africa, and Asia. Unlike its rivals, Zara employs nearly 20,000 people, distributed across 23 factories, to make more than half of its finished garments. This odd situation stems from Ortega s original intent to run his manufacturing business in La Coruña. Exploiting short-lived fashion trends, he reasoned, obliges making those items close to home. Hence, Zara makes its most time- and fashion sensitive products in its 20 factories clustered in La Coruña. Inditex outsources about a third of its remaining manufacturing to China, Bangladesh, Vietnam, and Brazil, and 15 percent or so to factories in Portugal, Morocco, and Turkey. These suppliers make staple items with longer shelf lives, such as t-shirts and jeans. Inditex s factories are highly automated, specialize by garment type, and focus on the capital-intensive parts of the production process i.e., pattern design and cutting as well as finishing and inspection. Zara spent 20 to 40 percent more to make garments in Spain and Portugal than rivals spent in Asia, mainly due to higher labor costs. It compensates for costlier production by minimizing advertising, cutting inventory expenses, and quickly adjusting to fashion trends. Inditex s gross margins in 2010 were 56.8 percent half again the 37.5 percent claimed by the Gap. Making high-end garments requires a human touch, so Zara has organized a network of some 500 workshops in Galicia, the home state of La Coruña, as well as across the border Page 5 of 8

6 in northern Portugal. These workshops are small operations, averaging about 20 to 30 workers who specialize by product type and hand-sew garment pieces that have been cut at Zara s factories. Zara accounts for most, if not all, of the shops business and provides tools, technology, logistics, and working capital while paying standard rates per finished garment. Many local cooperatives have worked with Inditex so long they no longer operate with written contracts. Logistics Most of Zara s garments, both internally made and externally contracted, flow through its massive distribution center in La Coruña about the size of 90 football fields or smaller satellite centers in Brazil and Mexico. A state-of-the-art tracking system moves hanging garments to appropriate bar-coded areas. As goods travel along 125 miles of underground rails that link production sites, they are sorted in carousels capable of handling 45,000 folded garments per hour. Once garments are completed, Zara ships about two-and-a-half million items per week to stores worldwide. Third-party delivery services manage the transfer of preprogrammed lots to stores; they deliver customized orders within 24 hours for stores in Europe, the Middle East, and much of the U.S., and 48 hours for Asia and Latin America. Such fancy footwork has dropped Zara s inventory to 7 percent of annual revenues, compared with the mid-to-high teens for its rivals. Marketing Zara s trailblazing strategy challenges age-old retail marketing practices. Its product policy emphasizes goods of reasonable quality, adaptability, and high fashion. The company uses little advertising or promotion. Its founder, Armancio Ortega, long regarded advertising as a pointless distraction; indeed, he has never given an interview and rarely allows his picture to be taken. Zara spends just 0.3 percent of sales on advertising, compared with 3 to 4 percent for most fashion retailers. Its bare bones marketing department avoids flashy campaigns, relying instead on word of mouth among its legions of loyal shoppers. Like its founder, it does not promote itself; it leaves that to satisfied customers. Zara specializes in lightning-quick turnarounds of the latest designer trends many items you see in stores did not exist three weeks earlier. Explains Marcos Lopez of Inditex, The key driver in our stores is the right fashion. Price is important, but it comes second. Zara aggressively prices its products, and adjusts pricing for the international market, making customers in foreign markets bear the costs of shipping products from Spain. On average, its prices are 10 percent higher in other European countries, 40 percent higher in northern European countries, and 70 percent higher in the Americas and 100 percent higher in Japan. Page 6 of 8

7 Zara s stores present the company s face to the world and function as grassroots marketing research agents. Indeed, if there is marketing at Zara, it is done via high-profile real estate. The stores command high-profile slots in historically appealing, premier shopping venues such as the Champs-Elysées in Paris, Regent Street in London, Fifth Avenue in New York, and Nanjing Road in Shanghai. Its location strategy has created interesting tensions. Noted a consultant, Prada wants to be next to Gucci, Gucci wants to be next to Prada. The retail strategy for luxury brands is to try to keep as far away from the likes of Zara. Zara s strategy is to get as close to them as possible. Operations Fitting in with fancy neighbors requires that Zara put its best face forward. Traveling teams of window dressers and interior coordinators visit each Zara store every three weeks, ensuring that window displays and interior presentations convey the targeted message. Back at headquarters, designers wander the mock store, testing possible design themes, lighting schemes, and product presentation. Its Fashion Street in the basement of The Cube houses a Potemkin row of storefronts meant to mimic some of its locations. Store employees don Zara s fashions while working; store managers and staff suggest merchandise to order, discontinue, and recommend. Networked stores transfer data on merchandise sales, along with customer requests, to Zara s design teams, factories, and logistics center in La Coruña. Relaying color fabric preferences straight from its shoppers enables the retail staff to localize otherwise globally standardized products. Finding store managers capable of handling these responsibilities, executives believe, is the main constraint on Zara s expansion. Infrastructure A key competency is the infrastructure that Zara uses to coordinates its value chain. Two features stand out: managers sense of customers and their ability to coordinate worldwide activities. The allure of Zara is the freshness of its offerings, the creation of a sense of exclusiveness, attractive in-store ambience, and positive word of mouth. These ideas drive rapid product turnover, with new designs arriving in twice-weekly shipments. Fans learn which days of the week goods are delivered so-called Z-days and shop accordingly. About three-quarters of the merchandise on display changes every three to four weeks, which corresponds to the average time between Zara customers visits: 17 times a year, versus three to four visits per year for competitors. Attractive stores, both inside and out, are vital. Explains Luis Blanc, a director at Inditex, We invest in prime locations. We place great care in the presentation of our storefronts. That is how we project our image. We want our clients to enter a beautiful store where they are offered the latest fashions. But most important, we want our customers to Page 7 of 8

8 understand that if they like something, they must buy it now because it will not be in the shops the following week. It is all about creating a climate of scarcity and opportunity. Zara feeds scarcity with small shipments say, three or four dresses in a particular style to a store. Small shipments make for sparsely stocked shelves and products have a display limit of one month. Rapid turnover does the rest: even though consumers visit Zara frequently, when they return, things look different. The CEO of the National Retail Federation, reflecting on Z-days and fast fashion, marveled, It s like you walk into a new store every two weeks. Besides keeping its stores looking fresh, these policies reduce price markdowns: Zara books some 85 percent of its unit sales at full price against the industry average markdown ratio of about 50 percent. The number of items Zara puts on clearance sale is about half the industry average. Challenge and Change Despite its aura of strategic excellence, not all is picture-perfect in the land of Zara. Some wonder how long Zara can charge different prices in different countries. Others question how much longer it can continue running global operations from its centralized base in Spain especially given the rise of the U.S. and Chinese markets, which accounted for a third of total sales in 2012 despite few stores (China has about 400, the U.S. 50 or so). Does it still make sense to keep product design, manufacturing, and logistics activities in Spain with Asian sales set to soar? In its concentrated value chain, some clothes that Zara makes in China are shipped to Spain for finishing and, amazingly enough, then sent to stores in China. Despite this quirk, the chief executive of Inditex, Pablo Isla, sees no need for a second product base: We re not thinking of replicating the brain in Asia, he maintains, though he concedes that they may adjust logistics. Ultimately, Zara s adept coordination of the overlapping activities among its designers, plants, storefronts, and salespeople testifies to the power of its strategy. No other company can design, make, ship, and sell fashion as speedily as Zara. Its business design leaves rivals with less time to figure out how to configure and coordinate operations better. Some believe companies have little option but to follow Zara s strategic lead. If they do not, warns a leading retail analyst, they won t be in business in 10 years. Note: Learners are recommended to carry out further research on the industry and organisation mentioned in the above case study to meet criteria requirements. Your answers in the assessment (LO 1, 2) requires sufficient evidence from the case study organisation ZARA. BMS Printed on :03:26 PM HND GBE 2018 [B 01] ED: ~ End of Paper ~ Page 8 of 8