International Business

VALUE CREATION IN THE GLOBAL APPAREL INDUSTRY

Submitted by: Abin Abraham Roll No 104 PGDM-B

Q1. Outline briefly the International Business Environment for the Global Fashion Retail Industry in 2005. How has it changed today? Explain your rationale. Name any 5 key competitors for Zara today. Till 2005 the global fashion industry was restricted by trade barriers. Global expansion of the apparel industry historically has been driven by trade policy. Apparel is one of the most protected of all industries, ranging from agricultural subsidies on Input materials (cotton, wool, rayon) to a long history of quotas under the General Agreement on Tariff and Trade within the MFA and its successor pact under the WTO, the Agreement on Textiles and Clothing (ATC). The MFA/ATC restricted exports to the major consuming markets by imposing country limits (quotas) on the volume of certain imported products. The system was designed to protect the domestic industries of the United States and the European Union (EU) by limiting imports from highly competitive suppliers such as China. Trade restrictions have contributed to the international fragmentation of the apparel supply chain, whereby low-wage countries typically sew together imported textile components and re-export the finished product. The removal of quotas on January 1, 2005 marked the end of over 30 years of restricted access to the markets of the European Union and North America. Retailers and other buyers became free to source textiles and apparel in any amount from any country, subject only to a system of tariffs and a narrow set of transitional safeguards that expired at the end of 2008. This caused a tremendous flux in the global geography of apparel production and trade, and a restructuring of firm strategies seeking to realign their production and sourcing networks. 5 key competitors for Zara today are: Gap H&M United Colors of Benetton Marks & Spencers Levi Strauss and Co.

Q2. Using the diagram for Porter's Five Forces framework, analyse the Global Fashion Retail Industry for its industry structure and attractiveness. Explain your rationale.

Bargaining Power of Customers Buyers have negligible switching costs and do not face any restrictions in choosing whom to buy from. Brand loyalty is more likely for designer wear while general apparel has poor brand loyalty. Weak buyer negotiation power as it mostly consists of individuals. Buyers are price sensitive. Overall buyer power is assessed as low to moderate.

Bargaining Power of Suppliers As international trade liberalizes, supplier power in the global industry is decreased through competition from manufacturers in low-wage regions most notably China. Switching costs for retailers are not very high. Suppliers need to ensure expected quality. Overall, there is low to moderate supplier power in this industry.

Threat of Substitute Products Substitutes for apparel retail include buying directly from manufacturers which is today facilitated by the growth of online sales. Moderate threat as people still prefer shopping from retailers compared to online stores.

Threat of New Entrants The global apparel retail industry has grown only modestly in value in recent years, which limits its attractiveness to new entrants. Entry to the apparel retail industry does not require large capital outlay Retaliation by existing big players, such as the launch of a price war. Big players have economies of scale advantage in bargaining with suppliers which new entrants with limited capital do not have.

Less IPR involved. Setting up distribution network is biggest challenge. Overall there is moderate new entrant power.

Rivalry within industry Price wars and discount sales common High rivalry among competing sellers Zero-sum game Similarity of players Low cost switching between competitors. Overall there is high degree of rivalry. The apparel industry is of great importance to the economy in terms of trade, employment, investment and revenue all over the world. This particular industry has short product life cycles, vast product differentiation and is characterized by great pace of demand change coupled with rather long and Inflexible supply processes. Despite the current global economic downturn, the apparel retail industry continues to grow at a healthy rate and this, coupled with the absence of switching costs for consumers and great product differentiation, means that rivalry within the industry is high.

Q3. Explain the term "Industry Driving Forces" and its strategic significance for an MNE. Name and explain the driving forces for the Global Fashion Retail Industry and their strategic significance for Zara today. Industry Driving Forces Key internal forces (such as knowledge and competence of management and workforce) and external forces (such as economy, competitors, technology) that shape the future of an organization are the Industry Driving Forces. Strategic significance for an MNE: These factors play an important role in the decisions made in a MNE. 1. The forces of globalization play a huge role. 2. Growing acceptance of Internet shopping, file sharing, and an ever-growing series of Internet applications have been major drivers of change in industry after industry. Companies are increasingly using online technology to Collaborate closely with suppliers and streamline their supply chains and Revamp internal operations and squeeze out cost savings.

3. Shifts in buyer demographics and the way products are used can alter competition by affecting the how customers perceive value, how customers make purchasing decisions and where customers purchase the product. 4. Product innovation tends to alter the pattern of competition by attracting more first time buyers. Successful product introductions strengthen the market positions of the innovating companies. 5. Emerging social issues and changing attitudes and lifestyles can be powerful instigators of industry change.

6. Widening of shrinking differences in the costs among key competitors tend to dramatically alter the state of competition. 7. An organizations driving force draws operational activities into alignment with strategic goals by providing a clear sense of the organizations purpose and scope boundaries. Each driving force has positive elements that identify opportunity and negative elements that identify risk. 8. Driving forces analysis when done properly pushes company managers to think about whats around the corner and what the company needs to be doing to get ready for it. The MNEs should understand that real payoff of driving forces analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces. Industry driving forces and its strategic significance for Zara: The following are the key driving forces which drive fashion Apparel Retail Industry nowadays. 1) Emerging new internet Capabilities and Applications Increasing internet usage & Speed -> Growing internet shopping Social Media also plays an important role nowadays as it reaches customers swiftly. So, Zara also should have their presence in sites like Facebook, twitter, etc. Companies using online technology collaborate closely with suppliers and streamline their supply chain. Low cost increases the no. of online rivals and hence the competition of online v/s brick and mortar sellers. Internet gives customer the power to research the product offering and shop the market for the best Value. 2) In-Store Experiences and Time Factor This is important to be noted as customers having a bad experience in stores will not turn up the next time. Zara should ensure the best In-store experience for the customers visiting to their shops. 3) Technology Change & Manufacturing Process Innovation Advances in the technology can dramatically alter an industrys landscape. It gives birth to new and better products at lower costs opening up new industry frontier. Internet based phones are stealing large number of customers from using traditional telephone and that is the major marketing tool nowadays. The tablets made life easier and people can customize their clothing by smart phone/tablet from home itself and can order online. 4) Going Green Each and every company is concerned about the surrounding environment and its productions. The activities taken regarding these activities are increasing the sales of that organisation. Thinking Green is the mainstream now and the more attention it will get in future and Zara also should produce more products to support it.

Q4. Using a diagram explain Zara's value chain. Elaborate on how and why Zara's value chain is different from those of its competitors. How has Zara encountered the impact of its Industry environment and industry structure and through its value chain? Explain your rationale.

Inbound logistics Zara sources from external suppliers with the help of purchasing officers in cities all over the world. Suppliers are linked with Zaras network and coordinate with Zaras projections. Half of the fabric purchased is gray to update designs quickly during the season.

Operations Zara propounds live collections- that can be designed, manufactured, distributed and sold almost as quickly as the customers fleeting tastes. Their designers continuously track market events and preferences. It believes in standardization of fashion across the globe except some which cater to specific physical, cultural or climate differences. Zara takes advantage of the Cluster effects in La Coruna and to manufacture majority of its finished garments. Its factories are automated, specialize by garment type and focus on the capital intensive parts of production process. Zara also has a network of workshops in Galicia that perform the labour intensive parts of production.

Outbound logistics Zaras distribution centre in La Coruna and satellite centres in Brazil and Mexico serve as hub of logistical operations. Mobile tracking systems and carousels equipped with high folding capacity ensure that inventory moves with minimum delay. Zara stores receive deliveries every two weeks triggered by real time data.3PL is used to transfer preprogrammed lots to the stores. Innovation in time to market is their strength ie two weeks v/s six month of industry average.

Marketing and sales The company uses little advertising or promotion. It relies on word of mouth among its loyal shoppers. Management adjusts prices for the international markets; thereby making customers in foreign markets bear the cost of shipping from Spain. Service Shops are located at premier shopping streets. Window displays interior presentations bear the Zara signature touch. Store employees wear Zara clothes to work. Store managers play the most important role in ensuring proper services and information flow. Support activities Firm Infrastructure Managers play most important role. They understand the sense of customers and markets and coordinate the activities worldwide. Zara has very rapid product turnover. This brings in a sense of scarcity. They build attractive stores for customers.

Difference of value chain with competitors: Production: Position itself as fashion imitator vs the industry standars of crating new designs Logistics: Time to market of two weeks vs six month of industry average Marketing and Sales: Zero investing in advertising. Infrastructure: All the company expenditure to increase awareness is concentrated in opening new stores with a strong obsession for finding the best location in town

Q5. Using a diagram explain Porter's generic strategy and their strategic significance for an MNE. Locate Zara on this diagram. Explain your rationale.

A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus. 1. Cost Leadership In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. If a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average. 2. Differentiation In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to meet those needs. It is rewarded for its uniqueness with a premium price. 3. Focus The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. The focus strategy has two variants. (a) In cost focus a firm seeks a cost advantage in its target segment (b) Differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments. Zara would be positioned in the industry wide differentiation strategy because of its unique core competencies namely in Sourcing Design of apparel Production Logistics and distribution Marketing Which are not targeted at a particular segment alone.

Q6. Explain the term "Core Competence" for an MNE. What are Zara's core competencies? How does Zara leverage its core competencies for building and sustaining its competitive advantage? Explain your rationale. Core Competence is a special outlook, skill, capability or technology that creates unique value for the firm and is a source of competitive advantage and enables the firm to introduce new products. MNEs often try to identify core competencies, unique skills and/or knowledge that is better than that of its competitors, and link these through different parts of the value chain. Examples of core competencies include Procter & Gambles marketing and distribution skills and R&D capabilities or Apples ability to convert innovative ideas into well designed products.

Zara Core Competencies include Design of apparel Production Logistics and distribution Services Zara believes in live collections" that can be designed, manufactured, distributed and sold as quickly as customers fleeting tastes. Zara makes its most fashioned sensitive products internally with strength of 14000 people and automated factories. Infrastructure that Zara built to support the operations is a particular competency. Managers sense of customers and markets and their ability to co-ordinate activity among designers, workers, sales people and plant stand out Zara. Leverage Zaras strategy and business design leave rivals with less time to integrate design, manufacturing, and distribution systems. Zara has been able to achieve excellent financial status due to its core competencies that provide the chain with a competitive advantage over traditional retailers in the industry. global apparel industry is highly-labor intensive rather than capital intensive. Zaras unique quick response system, composed of human resources as well as information technology, allows Zara to respond to the demand of its consumer better than the competition. Also throughout the season, Zaras product development teams are constantly researching the market by traveling to universities, and clubs around the world to track customer preferences. Zaras centralized distribution facility gives the chain a competitive advantage by minimizing the lead-time of their goods. Zaras internally or externally produced merchandise goes to the distribution center. By targeting a broad market Zara has an international advantage over its competitors. Zaras target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Zaras target market is a young, educated one that likes fashion and is sensitive to fashion. Today, people around the world through various communication devices have more access to information about fashion. Therefore, fashion has become more globally standardized and Zara uses this to their advantage by offering the latest in apparel. For that reason, 80- 85% of the products that Zara offers globally are relative standardized fashionable products.

Q7. Using a diagram explain the terms Global strategy, International strategy, Multidomestic strategy & transnational strategy and outline their relative advantages & disadvantages. How would you classify Zara in terms of these strategies and why? Explain your rationale.

GLOBAL
HIGH
Pressure for Global integration

TRANSNATIONAL Prefers a flexible value chain to facilitate local responsiveness, adopts complex coordination mechanisms to facilitate global integration. MULTIDOMESTIC

Views the world as a single market. Tightly controls global operations from headquarters to preserve focus on standardization.

INTERNATIONAL
LOW

Uses existing core competencies to Relies on foreign subsidiaries exploit opportunities in foreign operating as autonomous units to markets. customize products and processes for local market.
LOW HIGH

Pressure for national responsiveness

International strategy Advantages Extension and better leveraging of the core competencies

Disadvantages Ethnocentric view might lead to missing of market opportunities Low level of Customization

Global strategy Advantages Cost leadership is achieved High-quality standardized products can be made through scale economies Better use of distribution networks and financial control mechanisms

Disadvantages Customization of products for a particular market increases the cost

Transnational strategy Advantages Better sharing of knowledge, ideas, innovations and methods/processes across the world

Disadvantages Difficult to co-ordinate value activities

Multi-domestic strategy Advantages Lower political risk Higher growth due to innovation and entrepreneurial spirit

Disadvantages Its economically more expensive Subsidiaries might become autonomous resulting in loss of control by headquarters

ZARA follows a Global strategy because the company believes in standardization of a universal product and tries to achieve a convergent taste of fashion across nations by looking it as a single market; hence it is clear that ZARA follows a Global strategy.

Q8. What are your leanings from this case in terms of an MNE's strategic options in the context of ever changing international business environment and its industry structure. Explain your rationale. Identifying the position on the integration responsiveness grid: Once an MNE has identified its place on the integration responsiveness grid it can design its strategies accordingly. Hence, if a company is global its strategies will consist of leveraging economies of scale. Identifying the porters generic strategy: By identifying its own competency in terms of cost leadership or differentiation a company can know how it is suppose to build its profits. Thus, if a company had a cost leadership as its strategy then is has to, at all times; maintain a very good efficiency in its processes. Also it should keep innovating for the same.

Identifying the core competency: A company needs to identify its core competency and strategize in terms of leveraging it. For example in case of Zara, their core competency was to create a turnaround time of 2 weeks in comparison to the industry average of 6 months. Thus, the company can leverage its core competency in terms of grabbing the market share. Strategizing in accordance to the industry structure: The industry structure is an important factor to define the companys strategy. Also the industry structure could change from country to country. Thus, across the value chain, the movement is defined by the industry structure. The margin at each level is defined by how much the buyer and the supplier power is in the industry. Consumer behavior: A company should most importantly understand the consumer behavior and hence respond accordingly. In a fashion industry the low switching costs makes it very important to remain attractive for the customers. Thus, the company strategy is largely driven by the consumers in the market.