A business model is a description of how a company or an organisation makes money. A business model is an exploration of what costs and expenses involved in making a product. Business models are necessary for both new and already existing businesses. They help budding companies attract investment, recruit talent, and motivate management, and create a niche.
The business model of Zara can be seen below:. Zara uses ideas like vertical integration, business strategy, efficient supply chain management, etc. Because of its model, Zara has become one of the most successful clothing brands in the world. Zara is mainly based on a concept called fast fashion.
It is similar to the idea of FMCG i. Fast fashion is used to target an audience which majorly comprises young adults and middle-aged people. The cycle of fast fashion ends early as the fabric of the cloth withers. The primary objective of Zara is to contribute to the sustainable development of society.
It also contributes to the conservation of the environment. It ironically does not mention clothing and instead, incorporates the three principles on which Zara is based. Zara focuses on integrating fronts like designing, manufacturing, distributing, and supplying adequate raw material. The strategy of Zara can be seen from the chart below. Vertical integration makes the Business model of Zara stand out.
Uniqlo responds to changing trends in Japanese fashion and specifically caters its designs to mimic the minimalistic style that is popular in Japan. This affects the appeal that Uniqlo may have for western distribution channels , and may be the determining reason behind its low number of store locations in the U.
Alternatively, Monki sells clothing pieces that are half the price of those sold by Collection of Style and features designs that are comparably youthful. Zara divides the products sold within its stores into lower garments and upper garments, with price points being higher for the upper garments. Zara hopes to be perceived as a high-end retailer with affordable prices.
Its flagship stores are strategically opened in key traffic points worldwide that have high real estate costs, such as its Fifth Avenue location in New York City. Zara does not stress advertising as a part of its branding strategy , differing from Uniqlo; the company instead funnels the dollars that would have gone toward advertising into new store openings. The adapted strategy from The Gap that Uniqlo employs is to position its brand as private-label apparel; the company creates its own clothing, and Uniqlo only sells it within the confines of its brick-and-mortar stores and on its website.
The company also uses sporting events to appeal to the general population. To transport its goods from factories to stores, the retailer relies on rail and sea as a means to promote efficiency within its internal logistics. Zara is able to design, manufacture, and sell its products in stores quickly because the company owns many of the vertical factors of production.
Zara's approach to fashion differs from Uniqlo's in that it attempts to predict customer needs rather than follow current fashion trends. The turnover of products within the store is very high, with an average article of clothing remaining on the shelf for only a month. Uniqlo manufactures its clothing within Japan.
It began using cheap labor in China when Japan experienced a recession in the s. The company has contracts with 84 fabric mills. Uniqlo has also forged a partnership with the Japanese denim manufacturer Kaihara Denim. Fast Retailing. Accessed April 27, Pomona College. Company Profiles. Top Stocks. Dividend Stocks. Warren Buffett.
As mentioned above, vertical integration is one of the factors which makes the Business model of Zara stands out. Through this technique, it manages the design, production, distribution , management, shipment, promotion, and sales all on its own. Being vertically integrated has its benefits.
The brand holds a lot of control over every aspect of its company and can manage it efficiently. Moreover, this technique facilitates natural or fluid communication between the various stages or fragments of the company — design, manufacturing, and transportation. It makes it easier for Zara to establish efficient supply and distribution chains. The company is always at a risk of losing factory space due to the advanced booking of the area by its competitors.
Zara is known to manufacture mostly in Europe, which becomes a costly affair. Zara makes most of its revenue through sales in Europe.
Hence, by incurring maximum sales from Europe itself, Zara can circumnavigate the cost of vertical integration. Other companies cannot orchestrate this circumnavigation due to their substantial reliability over cheap labor from Asia. To keep close contact and control over the design and manufacturing fronts, Xara keeps these two verticals close to the management centers.
The use of high-quality equipment in association with skilled employees plays a crucial role in the quality of clothing made. Since all the products are manufactured in Europe, Zara can rapidly and continuously change designs according to the changing trends.
It somehow resembles the lightning-fast product replacement strategy of Zara, which was unprecedented and unparalleled. This replacement cycle proves to be beneficial for the clothing brand in two practical ways. First, it helps the brand to stay in touch with the ongoing trends.
Moreover, it also helps in transitioning trends and helps in adapting to the demands of the customer. Secondly, this cycle encourages customers to purchase clothes periodically as the clothes which are in-trend today may be replaced by some other trend in the future. Ironically, Zara does not utilize advertising as one of its strategies. All clothing items are processed through the distribution center in Spain, where new items are inspected, sorted, tagged, and loaded into trucks.
In most cases, clothing items are delivered to stores within 48 hours. This vertical integration allows Zara to retain control over areas like dyeing and processing and have fabric-processing capacity available on-demand to provide the correct fabrics for new styles according to customer preferences.
It also eliminates the need for warehouses and helps reduce the impact of demand fluctuations. Zara produces over million items and launches around 12, new designs annually, so the efficiency of the supply chain is critical to ensure that this constant refreshment of store level collections goes off smoothly and efficiently.
Frequency of customer insights collection: Trend information flows daily into a database at head office, which is used by designers to create new lines and modify existing ones. Standardization of product information: Zara warehouses have standardised product information with common definitions, allowing quick and accurate preparation of designs with clear manufacturing instructions.
Product information and inventory management: By effectively managing thousands of fabric, trim and design specifications and their physical inventory, Zara is capable of designing a garment with available stock of required raw materials. Procurement strategy: Around two-thirds of fabrics are undyed and are purchased before designs are finalized so as to obtain savings through demand aggregation.
The more fashionable and riskier items which are around half of its merchandise are manufactured at a dozen company-owned factories in Spain Galicia , northern Portugal and Turkey. Clothes with longer shelf life i. Even when manufacturing in Europe, Zara manages to keep its costs down by outsourcing the assembly workshops and leveraging the informal economy of mothers and grandmothers.
Optical reading devices sort out and distribute more than 60, items of clothing an hour. In addition to these supply chain efficiencies, Zara can also modify existing items in as little as two weeks. Shortening the product life cycle means greater success in meeting consumer preferences.
If a design does not sell well within a week, it is withdrawn from shops, further orders are canceled and a new design is pursued. Zara closely monitors changes in customer preferences towards fashion.
It has a range of basic designs that are carried over from year to year, but some in-vogue, high fashion, inspired by latest trends items can stay on the shelves for less than four weeks, which encourages Zara fans to make repeat visits. An average high-street store in Spain expects customers to visit thrice a year, but for Zara, the expectation is that customers should visit around 17 times in a year. In reality, Zara is also helping in giving birth to new trends through its stores or even helping in extending the longevity of some seasonal styles by offering affordable lines.
Sustainability has been a hot topic in business for the last decade and is now quickly becoming a must-have hygiene factor for companies that want to resonate with and win the loyalty of its global customers. For Inditex, this means having a commitment to people and the environment. Commitment to people: Inditex ensures that its employees have a shared vision of value built on sustainability through professional development, equality and diversity and volunteering.
It also ensures that its suppliers have fundamental rights at work and by initiating continuous improvement programs for them. Inditex also spends over USD 50 million annually on social and community programmes and initiatives. Commitment to environment: Being in a business where it taps on natural resources to create its products, Inditex makes efforts to ensure that the environmental impact of its business complies with UNSDGs United Nations Sustainable Developmental Goals.
Inditex has pledged to only sell sustainable clothes by and that all cotton, linen and polyester sold will be organic, sustainable or recycled. The company also runs Join Life, a scheme which helps consumers identify clothes made with more environmentally friendly materials like organic cotton and recycled polyester.
Additionally, Inditex takes wide-ranging measures to protect biodiversity, reduce its consumption of water, energy and other resources, avoid waste, and combat climate change. For example, it has outlined a Global Water Management Strategy, specifically committing to zero discharge of hazardous chemicals. It has also been expanding its waste reduction programme through which customers can drop off their used clothing, footwear and accessories at collection points in 2, stores in 46 markets today.
Zara has a very entrepreneurial culture, and employs lots of young talent who quickly climb through the ranks of the company. Zara promotes approximately two-thirds of its store managers from within and generally experiences low turnover. The brand has no fear in giving responsibility to young people and the culture encourages risk-taking as long as learning happens and fast implementation the mantra of fashion.
The variable component amounts to up to half of the total compensation — making store level employees heavily incentive-driven. The organizational structure is also flat with only a few managerial layers. Customers are the most important source of information for Zara, but like any other fashion brand, Zara also employs trend analysts, customer insights experts, and retains some of the best talents in the fashion world. The creative team of Zara comprises of over professionals.
For example, while many companies struggle with long lead times in discussions and decision making, Zara gets around this challenge by getting various business functions to sit together at the headquarters and also by encouraging a culture through structures and processes where people continuously talk to each other.
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