Zara's Competitiveness in Australian Retail through RBV Analysis

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After Zara's first Australian store in Sydney reportedly sold out 80% of its stock (worth $1.2 million) in its opening day in 2011, sales figures in 2014 have revealed slowing sales momentum and increasing costs. Using the Resource-Based View of the firm (RBV) (Barney, 1986, 1991), critically evaluate the competitiveness of Zara within the Australian retail industry.

The resource based view revolves around the notion of a firms tangible and intangible resources and capabilities allowing the firm to sustain a competitive advantage amongst its competitors. Zara being one of the biggest multinational fashion retailers of our time possesses many resources that enable Zara to maintain a competitive edge.

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Zara’s most noteworthy tangible resources center around financial resources and physical stores. In terms of their intangible resources Zara utilizes it’s designing and manufacturing processes, their brand image and organisational information system.

These resources hold attributes of being valuable, rare, hard to imitate, and non-substitutable. Furthermore the capabilities they retain allowing for incredibly short lead times, manufacturing small batches and the introduction of the fast fashion concept to the Australian retail industry. Examining Zara through the scope of the resource-based view suggests that the company sustains a large competitive advantage in contrast to other players within the Australian industry.

Para 1 what is rbv?

The resource-based view has emerged over time as one of the significant theories of strategic management (Barney 1986). The resource-based view is centered on the notion of sustaining a competitive advantage primarily through the application of a bundle of resources at the firms’ disposal (Wernerfelt 1984).

The concept of resources is all encompassing of organisations assets, capabilities, firm attributes, information and knowledge (barney 1991). Usually divided into two categories, tangible resources are objects within the organisations possession, and can be easily quantifiable; where as intangible resources are those factors within the organisation (reference).

Furthermore in order for these resources to generate a sustained competitive advantage, they are required to be both heterogeneous in nature and not perfectly mobile (Barney, 1991). To elaborate, the found resources must be diverse, and cannot be effortlessly imitable nor interchangeable. The resources must also adhere to the VRIN framework, which sets broad conditions necessary for a resource to be elevated to strategic substance within the firm (barney, 1991). Theoretically, the foundation of the resource-based view confronts the fundamental query of why companies are diverse and in what way they are able to accomplish and maintain competitive advantage by deploying their resources (reference)

In essence, the resource-based view is based on the idea that the effective and efficient application of all useful resources that the company can muster helps determine its competitive advantage.

Vrin model:

In order for a competitive advantage to be developed into a sustained competitive advantage the VRIN framework must be looked at. Within the resource based view it is specified that a firms resources and capabilities must be valuable, rare, inimitable and non-substitutable (Barney 1999).

(reword) A resource creates value when it enables an organisation to develop and implement strategies improving its efficiency and effectiveness (Cardeal & Antonio, 2012). Moreover, the utilizing cost of the resource must continuously remain lower than future associated charges. The ability for Zara to position their retail stores in prime location enables value to be brought to the company, as in turn they get more foot traffic, and spend much less on advertising. Zara’s organisational system and use of technology is a big source of value for the company, and all though may be expensive to start up reaps the benefits in the long run. Furthermore their short lead times allowing the rapid syndication of catwalk designs, and fresh designs to arrive in-store within a number of weeks provides great worth for the company.

Secondly resources have to provide a unique strategy in order to be deemed rare as well as be limited in supply. Adding to this, the resource must be inimitable (reference). Meaning the resource itself must not be easy to duplicate, as competitors could quickly copy them, dissipating all potential for sustaining a competitive advantage (Cardeal & Antonio, 2012). Aforementioned the rapid response of trends to stores is a resource deemed rare and hard to imitate relying on other resources such as Zara’s just in time management system and enabling vertical management within the company. Lastly, a resource needs to be non-substitutable, suggesting that a resource cannot simply be replaced by another one, creating a competitive barrier (Lockett, Thompson, Morgenstern, 2009).

Again the fast fashion concept utilized by Zara is unable to replace by another strategy and still remain as efficient. (ADD MORE). A company needs to care for and protect the resources possessing these above characteristics, and Zara does this by constantly maintaining and updating internal systems and processes. The VRIN characteristics are all individually necessary to develop and sustain competitive advantage, but each characteristic on its own is insufficient. (Priem & Butler, 2001)

Source: Boundless. “The Resource-Based View.” Boundless Management. Boundless, 08 Dec. 2014. Retrieved 03 May. 2015 from https://www.boundless.com/management/textbooks/boundless-management-textbook/strategic-management-12/internal-analysis-inputs-to-strategy-88/the-resource-based-view-429-4023/

Valu- able resources can be used to exploit opportu- nities and/or neutralize threats in a firm’s environment. Rare resources are those that are limited in supply and not equally distributed across a firm’s current and potential competi- tion. Inimitability refers to the extent to which resources are difficult to replicate by other firms, which may be due to factors such as social complexity (Dierickx and Cool 1989), causal ambiguity and specific historical circumstances (Barney 1991) .

they point out that resources differ in their impact on the firm’s ability to generate cost or differentiation advantages, and hence performance.

According to the VRIN framework, if a company possesses and exploits valuable, rare, inimitable and non-substitutable resources and capabilities,
it will achieve sustainable competitive advantage. (talaja 2012)

A resource-based view of a firm explains its ability to deliver sustainable competitive advantage when resources are managed such that their outcomes cannot be imitated by competitors, which ultimately creates a competitive barrier (Mahoney and Pandian 1992 cited by Hooley and Greenley 2005, p. 96, Smith and Rupp 2002, p. 48). RBV explains that a firm’s sustainable competitive advantage is reached by virtue of unique resources being rare, valuable, inimitable, non-tradable, and non-substitutable, as well as firm-specific (Barney 1999 cited by Finney et al. 2004, p. 1722, Makadok 2001, p. 94)

Source: Boundless. “The Resource-Based View.” Boundless Management. Boundless, 08 Dec. 2014. Retrieved 27 Apr. 2015 from https://www.boundless.com/management/textbooks/boundless-management-textbook/strategic-management-12/internal-analysis-inputs-to-strategy-88/the-resource-based-view-429-4023/

it belongs to Inditex one of the world‟s largest distribution groups. Established in 1975, Zara is one of the most prestigious and famous Spanish fashion retail brands;

Zara:

Zara belongs to Inditex, a multinational clothing company and one of the worlds largest distribution groups (Inditex). Zara is an industry leader in the world of fashion with over 2000 stores located worldwide, and average global revenue per store is $6.4 million (retailbiz.com.au). Opening in 1975 in Spain, Zara is viewed as one of the most esteemed and celebrated Spanish retail brands. The brand specializes in apparel for men, women, and children, also providing shoes and accessories As well as now branching out into home furniture and designs. The primary target market for Zara is an upper middle class woman aged between 16 and 35 (global logistics and supply chain strategies). Zara has recently moved into the Australian retail industry with almost 10 stores throughout the country all positioned within prime locations. Zara is a hugely successful company that delivers a lot of triumph not only for themself but also to its parent company Inditex.

Zara is a huge company that contributes a lot of success not only to itself but to its parent company Inditex.

Human Resources:

Trained designers: in order to boost their product quality in terms of its couture value, zara cooperates with many new designers and they give training to the designers for them to able to produce in shorter lead time, and adaptive enough to produce with materials/fabrics that are available instead of designing the apparel first then finding the material/fabric. This costs more also consumer more time to the company Caring employees: in order to enhance the customer service in each of its retail store, zara, therefore train their employees to prove better service including their attitude, professionalism having a sense of belonging in the store and hard working

Australian retail industry southern hemisphere location means that its seasonal rhythms are the reverse of those in Europe, and puts Australia six months behind the leading edge of global fashion trends (Well 2007) now have to be more fierce than ever – invigorate themselves need to offer lower prices and improve customer services (lauren magner, media ibis) geographical location/isolation of Australia has often discouraged international retailers from setting up shop For some domestic retailers, the competitive advantages of international retailers seem daunting. International retailers generally have the benefit of economies of scope and scale, due to the size of their operation and often to the efficiencies created by vertical integration.

This allows these retailers to offer a wide variety of goods at a low price. International retailers' significant profit margins also give them more bargaining power to secure highly sought-after store locations. Disappointingly for domestic retailers, Australian shoppers often associate international fashion brands with a certain cachet and may be more likely to purchase goods from an international retailer like Zara than from a domestic retailer like Cue. (DLA piper austral (mondaq.com, Melinda upton and carly Roberts) 68% percent of respondents cited that increasing competition from international business as a barrier to growth rent has increased nationwide by an average of 3.7%, victoria sbd retail rents rose by 7.8% (moneyinbusiness.com.au, Stephanie zillman)

core capabilities:

Capabilities are ‘first-order’, and when firms demonstrate capabilities of deploying resources to attain a desired goal they are likely to result in improved performance. Core capabilities are ‘second-order’ and are a bundle of a firm’s resources and capabilities that are strategically important to its competitive advantage at a certain point of time. For example, the success of Zara in the fast changing fashion industry relies on its core capability in responsiveness to customers, which in turn is derived from a bundle of capabilities including swift copy of catwalk design, advanced information systems, just-in-time production and shop-floor led stock control that combine together for success. Therefore, the emphasis of core capabilities is on the ‘integration’ of resources and capabilities in light of a firm’s (dynamic capabilities a review and research agenda Capabilities – small batches, short lead times, fast fashion concept

Capabilities – swift copy of catwalk (fast fashion concept), just in tme management , small batches 1. Zara's designers create approximately 40,000 new designs annually, from which 10,000 are selected for production. 2. This "fast fashion" system depends on a constant exchange of information throughout every part of Zara's supply chain—from customers to store managers, from store managers to market specialists and designers, from designers to production staff, from buyers to subcontractors, from warehouse managers to distributors, and so on 3. Inditex describes business model “creativity and quality design together with rapid response to market demands” and the “democratization of fashion.” (Inditex) 4. ara and Inditex have developed a fast fashion model that has revolutionized the fashion industry Zara’s biggest and most capitalising capability they possess is the implementation of the fast fashion concept and their ability of short lead times.

The company’s ability to swiftly imitate designs seen in major fashion shows, catwalks and trendy magazines is their most renowned feature. However Zara dons the ability to duplicate these seasonal trends, offering almost identical products with less expensive fabrics and at much lower prices (reference). Pursuing the fast fashion concept is made easy for Zara, boasting a 200-person team constantly updating information on latest and incoming fashion trends (Bonnin, 2002). Christopher, Lowson & Peck (2004) believe that the fast fashion system relies heavily on constant communication and exchange of information ranging throughout every part of the supply chain. Zara’s process model of vertical integration along with their technological PDA and POS systems enable the company to achieve fast fashion, a concept that has revolutionized the fashion industry as a whole.

Capabilities refer to a firm’s aptitude to utilise and coordinate a combination of resources to attain a desired goal (Amit & Shoemaker 1993). They are inherently intangible processes that are specific to individual firms and are usually established over time using interactions amongst the resources the firm possesses (Prahalad & Hamel, 1990). Amit & Shoemaker (1993) suggest capabilities differ from resources in their purpose, the primary concern of capabilities is to enhance the effectiveness and productivity of resources, acting as intermediate goods. Zara’s capabilities stemmed from their resources are small manufacturing batches, just in time production system, and their core capability being the invigoration of the fast fashion concept.

Zara makes a conscious effort to produce and dispatch small consignments of fashion collections, as well as to carry little inventory (reference). By doing this the company is cutting costs by having unsold items accounting for less than 10% of stock, rather than the industry average of 20% and avoiding costly overproduction (Ferdows, lewis & Machuca, 2005). Furthermore Zara is creating a sense of tantalising exclusivity with their products as what may be there one week will most likely be gone the next, urging customers to buy now. Studies show that Zara customer will visit their store on average 17 times per year due to rapid replenishment (Global Strategy, Mike Peng) (look over)

Zara’s intangible resources resources – focus mainly on the short delivery times – 2 eeks – fast fashion (in general)

Intangible resources are referred to as ‘soft resources’ that are generally based on knowledge, human resources, and reputation (Robinson, QLD thesis). These resources although having no physical presence are owned by the organisation, and are suggested to be the most important resources strategically (Carmeli, 2001). In terms of Zara, the three main intangible resources they are in possession of are the Zara brand, the organisations information system, and the process model.

Although Zara invests little to none in terms of advertising campaigns, the brand has become one of the most recognized within the fashion industry worldwide (helm, 2008). In fact a low 0.3% of Zara’s revenue is devoted to advertising, where as major competitors are spending around 3-5% (mike peng, global strategy) The fashion brand is regularly perceived, as a company that is successful in keeping up with the ever-fluctuating fashion desires, as well as being able to rapidly adapt. As Zara keeps expanding through different countries, the more acknowledgements the company will obtain. The building of a brand reputation can be a lengthy process, however is a resource that competitors may not purchase from the market (Robinson, Qld thesis). Zara’s following of loyal consumers and their trendy designs explain why an average Zara customer will visit the store seventeen times per year on average.

ORGANISATION INFORMATION SYSTEM – pda and just in time personal digital assistant Zara employs very fundamentally basic, but overwhelmingly successful technology amongst the organisation. A key resource to Zara’s success is the implemented technology in use, including advanced IT structures and its highly responsive communication channels. Within the store retailers are provided with personal digital assistants (PDA) these are customized handheld computers that enable information and data to be sent back and forth between the individual store, and the company’s headquarters in La Coruna (IPR case study). These PDA devices are used to collect data such as trends in sales and orders, as well as customer input information and the ‘buzz’ around fresh designs (Mihm, 2010).

This data gets collected from each retail store and in turn assists the Zara designers in modifying existing styles and creating new lines hence tailoring styles to meet consumer demand. Furthermore Zara collects data through a point of sales system, where amidst a transaction a customer’s purchase information is immediately recorded, and transmitted to Zara’s headquarters. (reference). Zara’s simple use of technology plays a part in the just in time inventory. A management system where products are produced only as demand requires (Christopher, Lowson, Peck, 2004). Zara is effectively integrating the consumers’ needs and wants into their business strategy, and satisfying their customer’s demands.

PROCESS SYSTEM

One of Zara’s biggest resources is the vertically integrated process model widely executed throughout the organisation. A vertical integration model is an arrangement where large portions of the supply chain occur all together within a corporation (reference). This model is all encompassing, with all the designing, warehousing, distributions and logistics functioning internally (reference). This centralized process allows and enables new designs to be produced, delivered and available in one of their many retail stores within a cycle of two to three weeks (Mihm, 2010).

In order for this to be possible, Zara designers approach the available materials and fabrics firstly and will then scheme apparel based on existing materials (reference). This allows for shorter lead times, and decrease in costs. In 2011 Inditex (2011) claimed that 50% of production remains in-house, with the rest in close proximity within surrounding European countries, and only a small amount outsourced to Asia. Zara’s time compressed production process and fast delivery practice allows for swift inventory turnover, with stores getting stock deliveries twice a week (caro & Gallien, 2010).

Fast fashion system that gets clothes to stores within 2 weeks Intangible resources usually stay within a company and are the main source of sustainable competitive advantage.

According to the logic of the RBV, intangible resources are more likely than tangible resources to be strategic assets since they are more likely to be rare, valuable, and imperfectly imitable (Barney, 1991). In addition, intangible resources are less likely than tangible resources to depreciate with use (Arthur, 1996).

Zaras tangible resources

Unlike intangible resources, tangible resources are those that are easy to gauge, duplicate and substitute. Fitting in to this category are assets like land and equipment possessed by the organisation, possessions that have a physical existence. Zara’s main tangible resources within the company include their flagship stores, and financial resources. With Zara’s CEO being ranked the fourth richest person in the world enjoying a net worth of $62.6 billion this gives Zara the freedom to not cut on costs (forbes.com.au). Zara’s grand amount allows the company to reject the idea of outsourcing to Asia and other countries, and in turn keep manufacturing as a vertically integrating process. Furthermore their financial resources contributes to their ability to purchase and maintain retail stores in the most popular locations from city to city.

One of Zara’s most notable physical resources is their flagship retail stores. Not only does the Zara group always make a conscious effort to place their flagship stores in prime locations only, but relies on these stores as a means to market the companies products. The company positions their stores to be where the people are, whether it’s in the heart of the city, or within a busy shopping mall. An example of this is Zara’s stores in Melbourne, with one within Chadstone shopping centre, and one in Bourke Street.

By carefully choosing the placement of a store Zara are able to achieve a direct communication strategy that promotes their products. This strategy is attractive for the company as it increases foot traffic, which in turn may increase sales. Furthermore Zara exerts a large amount of energy and creativity on its window displays whilst also relying heavily on the physical store experience. The window displays are exhibited in an inspired and striking manner as a means to draw potential customers inside

Zara has been able to sustain a competitive advantage within the Australian retail industry through the tried and tested resources and capabilities they possess, thus elevating its strategic significance. Whilst not every resource is able to provide a competitive advantage (Barney, 1991), Zara capitalises on the ones that enable an edge against its competitors. The company’s long list of intangible resources are its main source as they are most likely to comply with the VRIN framework, and less likely than tangible resources to deprecate with time. (Barney, 1991). Zara’s flexible vertical integration and responsive supply chain allow the company to produce new trends and designs within a matter of weeks, where as other players in the Australian retail industry take up to six months (Harbott, 2011).

This entices consumers to visit the store more often, and purchasing more. As a means of edging ahead of it’s competitors Zara offers a broad range of products ranging from clothing, accessories and shoes, Zara is now branching out into home furniture within the Australian market (Inditex). The use of an effective technology and communication systems integrated within all retail stores help Zara gain superiority, with daily messages being transmitted in relation to consumers’ behaviour. Adding to this is the way Zara utilizes their consumer’s self-concept to their advantage by designing and producing copies of clothing worn by celebrities and seen on the high fashion catwalks. Furthermore Zara has snubbed the mainstream idea of outsourcing for cheaper prices, and most of their designs are made in house allowing Zara flexibility and shorter lead times. Because of these resources and capabilities being bundled together, and executed flawlessly Zara has generated $106.8 million in sales, and a gross profit margin of 66.7% in Australia 2013, beating the global average of 60% for Zara (Ruehl, 2013)

Zara enjoys a gross profit margin of 66.7 per cent in Australia,

Australian fashion industry

Furthering this Inditex presents a score of 60% for gaining and retaining talent with an average industry score of 36% (Inditex Annual Report 2010). With this information one can deduce that Zara’s ability to retain employees is quite effective compared to competitors.

Human resources:

Zara has a 200-person professional designer team who constantly update new information on fashion trends for Zara in order for them to continuously pursue the fast fashion market (Inditex, 2011). 1. Over three hundred Inditex designers continuously seek information about what customers may from variety of sources.