Competitive Advantage

The extent to which supply chain activities within Zara supports its competitive advantage

Zara, a flagship brand of the holding group Inditex, has emerged as the world’s fastest manufacturers of affordable fashion clothing. It owns and manages an expanding specialty chain with 1721 Zara stores and 187 Kiddy’s class stores as of October 2012. Some of its stores operate under the Lefties brand, known for low-cost fashion. It has become a well-known brand globally and one of the biggest success stories in Spanish history (Inditex, 2013; Economist, 2012).
The fashion industry in which Zara operates is characterized by intense competition among rivals in the industry with ever changing customer preferences driven by continuous design and output of new fashion items that change every season. This continuous shift challenges the dominance of a company or product in the market over the long term, which can be significant as a competitive advantage in other sectors. The acquisition of competitive advantage in the fashion industry through pricing and production of new lines can hardly be sustained with the intense competition and ever-increasing costs in the competitive business environment (Economist, 2012; Inditex, 2013). Also a major challenge to business in the current business environment is the global economic recession and attendant economic challenges, which has hit the fashion industry’s profitability and growth hard threatening the survival of players in the market, especially the companies serving the wider international market (Economist, 2012).

Given these challenges threatening sustainability and viability of companies in the long term, it is incumbent upon firms in the fashion industry including Zara to enhance focus on developing and implementing strategies to improve bottom line, enhance profitability and assure revenue growth into the future. Pricing, quality, and new designs/items as potential sources of competitive advantage are challenged by characteristic frequent shifts of the fashion and apparel industry and, therefore, the sustenance of such strategies over the longer term as sources of competitive advantage is hindered. In such a case therefore, a focus on efficiency and effectiveness of the supply chain is a possible strategy that can enable competitiveness especially in this industry, enabling companies to enhance bottom-lines and to realise growth in revenue and profitability essential for any economic venture (Cousins, 2005; Ha?kansson and Persson, 2004).
Zara, in light of these challenges in its industry, has managed to create and to sustain its breakthrough strategy enabled by its performance of key activities differently, especially enhancing efficiency and effectiveness of its supply chain. This it has achieved through a myriad of strategies at specific points in its manufacturing and distribution including employment of technology, vertical integration, market intelligence and customer service, among several other tweaks of its production and distribution processes (Inditex, 2013; Economist, 2012). Its success, competitive differentiation and positioning which have contributed to its notable customer preference over its close rivals can be attributed to clear focus and vision in its tapping of the power of fashion, finding key activities that matter to customers and enhancing key operational activities, especially its supply chain (Economist, 2012). It has set the challenge for its competitors in the fashion industry who find it difficult to imitate or equal its achievement, its significant competitive advantage in the challenging industry and business environment (Inditex, 2013).
The supply chain encompasses a network of relationships between organizations and integrated business processes across the boundaries of individual organizations and/or business units that are involved in providing products and services to customers at the end of the chain (Croom and Romano, 2000). In today’s competitive business environment and challenges threatening profitability and growth as have earlier been outlined, there is need to manage this network and constituent processes so as to ensure a smooth flow of goods and information back and forth from the raw materials through several intermediate entities to the end-users (Hand?eld and Nichols, 2002). This synchronization of supply and demand is essential to enhance efficiency necessary for survival and competitiveness of firms in the market (Ketchen and Giunipero, 2004).
A number of theoretical concepts enable the evaluation of the various processes that constitute the supply chain enhancing our understanding of the processes, motives for the engagements in the chain and consequently results expected and obtained. Among the theoretical concepts applicable to Zara’s case are: the Principal-Agent theory, the Transaction cost analysis, the Network Perspective, and the Resource-based view (Svensson, 2002).
The Principal-Agent theory (PAT) is based on the separation between the principal and the agent (in this case Zara and the external suppliers and/or its internal production processes) with regard to the control of activities and ownership, and consequently, the resultant problems. Challenges of this separation include the asymmetry in information between the two players, bounded rationality, conflicts in objectives, variations in their risk aversion, their self-interest leading to inconsiderate behaviour, and the uncertainty of outcomes (Croom and Romano, 2000). This theory aims to facilitate the design of efficient contracts to mitigate such challenges and problems through the governance of the relationship between the two parties. An efficient contract would include a mix of incentives, based on behaviour and outcomes, that would motivate the agent to align their actions to the interests of the principal (Hand?eld and Nichols, 2002).
The Transaction Cost analysis (TCA) offers an economic approach in the endeavour to determine the boundaries of the firm. Through this, efficiency can be aptly presented as an essential motive for inter-organizational engagements such as those necessary in the supply chain (Frohlich and Westbrook, 2001; Svensson, 2002). Relationships in the supply chain are represented by a hybrid of hierarchies which influence costs of transaction and governance between markets. Through cooperation with entities and partners external to the organization, as well as cooperation of business units within, total transaction costs may be reduced. Commitments that are credible as well as safeguards such as long term contracts and penalties for deviations, sharing of equity, and joint investments that enhance the relationship, are some of the mechanism that can be used to mitigate opportunism (Ketchen and Giunipero, 2004).
Also among the theoretical frameworks is the Network Perspective which describes the supply chain as a series of interactions which are reciprocated between institutions, with a firm’s performance depending not only on its partner’s cooperation with it, but also on these partners’ cooperation with their own business partners (Frohlich and Westbrook, 2001). These interactions become important factors in the development of new resources with the value of such resources based on their synergy combined with other resources. Gradually, partners build trust mutually through their social exchanges and cooperative relations (Hand?eld and Nichols, 2002).
The resource-Based view is concerned with the competitive advantage obtained from the possession of resources and capabilities which are considered to be a firm’s core competence. Efficiency in this case would not just be related to productivity and mechanisms of operation, building competencies in-house, but could also be obtained through access to core competencies of partner firms in cooperation with it. Decisions for such associations are based on finding complementary competencies among partners through inter-organizational collaborations towards mutual benefit (Hand?eld and Nichols, 2002, Ketchen and Giunipero, 2004).
With regard to Zara, and its supply chain, the company has partnered with a number of organizations that enable its successful performance of its production operations (Inditex, 2013; Min and Mentzner, 2004). In the realization of the potential problems resulting from inefficiencies in dealing with numerous partners in the supply chain such as those envisaged in the Principal-Agent theory, and in an attempt to minimize transaction costs as outlined in the transaction cost analysis theory, Zara has, however, made an attempt to limit its exposure to external players and partners by conducting most of its manufacturing and distribution in-house thus ensuring greater efficiency (Womack and Jones 2003). Through its production facilities, it makes 40% of its fabrics and 60% of its merchandise, a strategy which has also enabled the company to significantly enhance efficiency and therefore competitiveness. This is unlike its closest rivals such as H&M which has no factories and therefore employs over 900 suppliers (Inditex, 2013).
Key to the fashion industry is the sourcing of inputs such as fabrics and dyes among other goods, as well as services such as labour to enable production. In acknowledgement of the need to tap into core competencies of partners, according to the resource-based view, and into synergies in association with aligned partners envisaged in the Network Perspective theory, Zara partners with contract manufacturers in Turkey and Asia that produce its staple, long shelf-life items such as jeans and t-shirts and a network of local cooperatives that stitch items together after the cutting and dyeing stage (Ketchen and Giunipero, 2004; Inditex, 2013). Also part of its supply chain are the entities that supply its fabrics and dyes which include Zara’s own subsidiary which purchases most of its dyes, and Comditel, a subsidiary of Inditex, through which Zara makes its fabric purchases. All these entities take charge of assigned tasks and the bulky and intensive production process so that Zara can focus on its specialty lines and core business which earns a significant portion of its revenues (Cox, 1999; Inditex, 2013).
Zara, in the endeavour to turn its supply chain into a significant source of competitive advantage, has sought to enhance its control over the entire supply chain so as to enhance efficiency overall and thereby enable its substantial differentiation from its rivals in the industry (Womack and Jones 2003; Cox, 1999; Inditex, 2013). To this end, Zara has been quite successful and has managed to sustain its leading position with regard to efficiency and speed in the delivery of new items to stores and the replenishment of stock. Its industry leading frequency of twice weekly deliveries drives customer preferences and ensures that its stores receives a high number of return visits to its stores by customers, beating industry averages (Economist, 2012).
Zara’s value chain linkage, often tweaked to enhance efficiency and performance is a major platform which Zara continues to employ to differentiate itself with its closest rivals (Economist, 2012; Min and Mentzner, 2004). This enhanced efficiency is enabled by vertical integration in which Zara runs its own manufacturing and production facilities; control of crucial production processes; efficient coordination of suppliers and processes through technology; outsourcing to countries close to its headquarters; as well as finely-tuned logistics and its just-in-time manufacturing strategy.
Other beneficial strategies include its centralized distribution which has enabled substantial reduction of lead-time and better inventory control; enhanced store management and control with its focus on the full ownership model; as well as a highly flattened hierarchical structure which enhances communication and enables effective conduct of market intelligence (Economist, 2012; Hand?eld and Nichols, 2002). Through these initiatives, Zara has managed to acquire a leadership position in the industry gaining substantial preference, and achieving high growth and profitability (Inditex, 2013).
Various theories in literature regarding the management of the supply chain can be useful tools which can be used to enhance understanding of the supply chain. They enable the evaluation of the chain so as to ensure that the company obtains maximum benefit from its management. Useful theories, especially with regard to Zara’s case include the transaction-cost analysis which is concerned with the employment of effective partnerships among players in the supply chain to reduce overall transaction costs; the principal-agent theory which is concerned with the development of efficient contracts to mitigate potential conflicts in supply chain associations and partnerships; the Network perspective which focuses on the wide network of inter-relationships between two partners in addition to their individual business partners resulting in synergy and the development of new resources through a series of reciprocated interactions; and the resource-based view which is concerned with competitive advantage gained through access to and employment of a partner’s core competencies and the mutual benefit enhancing the relationship.
The supply chain when well managed and controlled can be a significant source of competitive advantage as can be seen in Zara’s case in the fashion and apparel industry. Zara’s deliberate strategies to enhance efficiency in its supply chain, made in consideration of the theories outlined above, have been significant factors that have enabled the achievement of its level of competitiveness and given it a strong market presence in the fashion and apparel industry. Through its deliberate endeavour to enhance efficiency in its supply chain, Zara has managed to differentiate itself from its rivals in the industry, as well as to find differences that matter to consumers thereby driving their preference. Consequently, these differences have enabled it achieve its growth and profitability targets.
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