1. Zara and IT-enabled
Innovation
MI703- Computer
Information Systems

2. The Defending Champ
 Who is the largest “pure play”
clothing retailer in the world?
 Problems at the Gap
• Previous CEO (Mickey Drexler, fired in
2003, went to turn around JCrew)
• Most recent CEO (fired in 2006)
 Maybe it’s not the CEO’s fault
• Looking to sell the company

3. Gap’s Chief Competitive Assets
 Brand
• Thoughts and feelings associated with a
product (best US brands?)
• How does Gap build brand?
 Coverage/ scale
 Size of operation gives buying power
 They have lots of retail channels to touch
customers.

4. Location, Location, Location
 Where does Gap make clothes?
• Offshore, in Asia
 Why?
• Cheaper labor
 The Problem?
• Most firms design a 'collection' for an
entire season.
• Place a huge order for stocking at the
start of the season.

5. “To everything there is a season.”
 What do you suppose are their lead-times from
design to manufacture to store: days, weeks, or
months?
• Months
• H&M is #2, it's 3-5 months from creation to delivery.
 How many new items Gap & H&M produce in a
season?
• 2,000-4,000
 How do they decide what to produce?
• Hire and monitor the “fashionistas.”
 What challenges does this raise for clothing
retailers?
• If you get it wrong…

6. The Challenger
 Inditex Group = Zara
 “The Most Dangerous Retailer in the
World"
 Products may seem different than
Gap
• Trendier, more glamorous.
• Same market segment - mass market
low end consumer fashions.
• Not mutually exclusive.

7. Praise for Zara
 Fashions more Banana
Republic – prices more Old
Navy.
 Goldman analyst as “Armani
at moderate prices”.
 Founder, Amancio Ortega, is
Spain's richest man & the
world's richest fashion
executive.

8. Anyone here ever shop
at Zara?
What do you think?

9. Success in
face of
competitors
 Since 2000, Index has
doubled stores to 2,240
(through ’04 end) with
sales of $76 billion.
 In contrast to Gap’s
woes, Inditex stock
price more than tripled
between '96 and '00.

11. Fast Fashion!
 La Coruna warehouse is 5 million square
feet = 90 football fields.
• Nine times the size of Amazon's warehouse
• These facilities move about 2.5 million items a
week.
• Connected to 14 Zara factories through tunnels
with ceiling-mounted rails.
 Cloth is ironed and products are packed on
hangers so they don't need ironing when
they arrive at stores
• Price tags are affixed
• Unpack them & they're ready to be sold

14. How’d they do it?
 Have you ever heard the old saying, “In
retail, ________ equals death?”
• Inventory.
 Why's this particularly painful in fashion?
• Inventory is perishable
• Fashion world is driven by customer demand.
 If you guess wrong?
• Mark down your inventory and take the loss

15. A radical thought
 Who knows best what you should have in your
stores?
• Customers
 If your bets are more accurate, what would this
mean for inventory?
• Fewer mark downs & write offs
 How might we get a better handle on what
customers want?
• Ask them
 Gap places big bets on fashion trends, Zara does
not.

16. How does Zara do this?
 Point of Sale Systems (POS)
• Fancy term for cash-register. Linked to HQ to
provide data
• Tracks how items in store are selling…what
they have that people want.
 Personal Digital Assistant (PDA)
• Handheld computer for manager.
• Inputs items people come looking for, what
customers want that they don’t have.

17. Competency & Complimentarity
 Sounds sophisticated. Does this cost a lot
of money?
• No, they spend 5-10 times less than rivals on
technology.
• There’s a lot of return-on-investment (ROI) in
Zara IT.
 Are these fancy technologies?
• No.
 Why does Zara succeed with IT?
• They use it in a smart way (IT Competency)
• It’s linked with core strategies (IT
complimentarity)

18. The Process
 What does Zara do with this Data?
• Real-time data from PDAs and POS are
whisked to 300+ designers who crank
out more than 12,000 fresh items each
year.
• Use it to decide on the fabric, cut, and
price points

20. Just-in-time (JIT) manufacturing
 Scheduling materials to arrive exactly when they are
needed in the production process.
• Keeps inventory to a minimum.
• For Zara, adds flexibility and speed.
 The ace behind this is one of the world's most responsive
supply chains (e.g. Dell, Wal-Mart).
• Some use supply chains for efficiency, Zara uses it for
innovation.
 Do they have a Versace working for Zara?
• No stars - mostly newcomers whose designs must take
advantage of cloth & materials Zara can provide.
 Why not?
• Zara does not predict, respond so quickly don’t have to…

21. In-house or Outsource?
 Does Zara outsource production?
 Why Not?
• Production is the critical success factor for Zara
• Fast Fashion.
 Vertical Integration
• Zara produces 60% of its merchandise in-house.
• Zara makes 40% of its own fabric and purchases most
of its dyes from its own subsidiary.
• Fabric is cut & dyed by robots in 23 highly automated
Spanish factories.
• 50% of fabric arrives undyed so the firm can react to
mid-season color changes.
 What about competitors?
• H&M has 900 suppliers and no factories.

22. The Value Chain (M. Porter)
•Infrastructure: general mgmt, planning, finance, IS
•HRM: recruiting, hiring, training, and development
•Tech. Development: R&D
•Procurement
Inbound Operations Outbound Marketing Service
logistics logistics & Sales
Supply
Chain

23. Fresh Fashion
 At Zara, most of the products you see in stores
didn't exist three weeks ago, not even as
sketches.
 What about the Madonna concert example?
 How often does the average Zara store accept
delivery of new products?
• Twice-a-week! It's like groceries!
• Items rarely remain on shelves for more than a week.
• You essentially walk into a new store each time you
visit.
 What advantage does this give Zara?
• Exclusivity! No single model is on the market for more
than four weeks.

24. All this translates into speed.
 Turn-around from idea to shelves is
15 days.
• H&M takes 3-5 months from creation to
delivery
• VF Corp (Lee, Wrangler) takes 9 months
• J . Jill takes up to a year
• Average = six months to design + three
months to manufacture.
• Zara is 18 times faster than competitors!

25. Advertising Costs
 What does Zara spend to advertise?
• 0.3% of sales
 What’s the industry average?
• 3-4% of sales
 For those keeping score, the average
in the industry is 10 to 12 times
more!
 Why no advertising?
• Their business model does it for them.

26. Z-days
 If your store looks entirely new twice-a-week,
how do customers react to this?
• They visit far more frequently
 How does this impact marketing costs?
• You don't need any.
• Zara customers visit 17 times a year (compared to 4 on
average in London)
• Highest sales per square foot (everywhere).
 Zara does almost no advertising.
• Customers are rabidly loyal
• Line up for 'Z' days when new shipments come in.

27. “But it costs more…”
 Gap follows cheap labor costs, Zara manufactures
where?
• In Europe.
 Who's got the higher manufacturing costs?
• Zara.
• The firm spends 15-20% more on manufacturing (less
of a gap than you'd expect).
 How can Zara manage to survive with higher
labor costs?
• Zara produces lots of products in small lots
• Gap produces a smaller # of product in bigger lots

28. Deal or No Deal…
 How does this influence Zara’s profitability?
• No slack inventory.
• What it makes it sells.
• It has low prices but almost never has an additional
sale, they rarely marks down items.
 They take fewer risks.
• Write-offs at Zara are a single-digit percentage. The
industry average is 17-20%.
 Zara says: "Being so quick allows us to reduce to
a minimum the risk of making a mistake - and we
do make mistakes - with our collections."

29. Gap’s mistakes
 Spring line '02 – trumpeted as a return to basics,
was a bust. Discounted within a month.
 And they did it again! You know what the
industry said of round 2? Here are some quotes:
• "The colors for women's wear are drab and for men,
what's with the racks and racks of track pants?"
• "The women's' printed shirts are wrong and the horrible-
looking men's graphic tees are really wrong“
 Heavy markdowns have sliced Gap margins 40%
in two years.

30. Why doesn't Gap copy Zara?
 They can't – they'd have to unwind
their model & fund new everything.
 Inimitability - “Making things is easy,
supply chaining is hard.”
 Couldn’t if they wanted to
• They have no credit
• Their debt is junk

31. Double-edged sword
 What vulnerabilities do you see in Zara’s
model?
• Where are almost all of its products
manufactured?
• Europe – specifically Spain.
 Financially vulnerable.
• The Euro – it’s a strong currency. It’s been
cleaning the dollar’s clock since its
introduction.
• Downside is that the cost differential with Asia
becomes even more pronounced.

32. Geographical vulnerabilities?
 What dangers can arise from being
centrally located in Spain?
• If there’s a natural disaster (think New
Orleans), terror attack, strike your
whole supply chain is shot.
• Pottery Barn Story.
 Geographic Location hurting global
expansion.
• Hard to be “fast” when have to travel
around the world.

33. Brainstorming?
 Where to from here?
• What business issues does this bring
up?
• Which of these concepts are most
important to your company?
• What other companies use IT to
innovate? Who are the leaders?
• What are other ways that IT can be
used to support innovation?