OBD 2019 15 CASE 06 Zara Structure PDF

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ZARA CASE STUDY The retail fashion industry is probably one of the most fast-moving and fickle businesses that can be imagined. The whole process of predicting next season’s colours, fabrics, styles and hemlines is partly determined by the creativity of the major fashion designers; and the reports from the catwalk shows of Paris, Milan or London are expected to set a trend six months or so ahead. The reality of what most people buy, however, is usually more mundane than the fantastic, occasionally shocking, items that parade before the assembled press and celebrities at the spring or autumn shows. On the high street, sales of a genuinely trendy item can be hit dramatically by such uncontrollable factors as the weather, and demand is easily influenced by the whims of celebrities, or even politicians’ wives (Michelle Obama is the subject of a dedicated website ‘Mrs O’ that follows her every fashion move). The business, therefore, of selling the image and the clothing of the moment is a complex one. The organisational structures which support the retail fashion industry are heavily focused on two main tasks: making reliable predictions about design trends, and then achieving cost reduction in the production process. To achieve these cost reductions most fashion businesses source both raw materials and finished products globally. The production of cotton cloth, for instance, is now firmly situated in lower-cost economies such as Turkey, India and China. To spread the risk and achieve further cost savings, fashion chains generally outsource many aspects of their business, particularly the garment manufacturing and distribution operations, to separate supply companies. Often other more creative aspects, such as the design of clothing ranges, are contracted to individual designers or fashion houses. Designer George Davies, who founded the fashion chain Next, has created successful clothing ranges for both Asda and Marks & Spencer, and Stella McCartney has been commissioned by H&M, Adidas and Gap. The industry standard time to get a newly designed and approved range of clothing into high street stores is somewhere between six and nine months. The whole process therefore involves a high degree of risk; misinterpretation of this highly ephemeral market can lead to serious under- or over-stocking of a particular design or product, and either way the company will suffer substantial loss of revenue either through loss of custom, or by having to sell off failed lines cheaply or through discount or ‘outlet‘ stores. Occasionally the whole business can be derailed by politics, as happened during the so-called ‘bra wars’ incident in the summer of 2005. Between 70 and 80 million items of Chinesemade clothing were subject to quotas and a European Union trade embargo after the EU and China had failed to negotiate a replacement for the Multi-Fibre Agreement which had ended in January 2005. Retailers became increasingly anxious as their autumn ranges spent several weeks stockpiled in European ports and warehouses instead of making their way to the shops. One company which has designed itself to minimise risks such as these is the Spanish textile and clothing company Inditex, whose most well-known outlet is Zara. The Galician way Amancio Ortega founded the textile company which

was to become Inditex in the 1960s in the city of La Coruña in the Galicia region of northern Spain. He opened his first fashion retail store in the same city in 1975, and by 2008 it had grown to become a worldwide enterprise with a turnover of a10,407M€ and almost 90,000 employees. In addition to Zara, the Inditex group comprises other brands such as Pull & Bear (young fashion), Massimo Dutti (which pitches at the quality end of the market), Oysho (lingerie), and Bershka for teenagers and children. In 2007 and 2008 it launched Zara Home, and Uterque (accessories). The Zara arm of the business has outlets across the world from Austria to Venezuela, and in August 2008 it reported a 9 per cent rise in sales which saw it overtake Gap as the world’s largest clothing retailer. In February 2009 Inditex anounced a planned joint venture with the Tata Group to open Zara stores in New Delhi, Mumbai and other major Indian cities. By any measure, this has been a fast-growing and profitable business in a market characterised by high risk and where there are already many well-established, dominant global brands. There are many reasons for the extraordinary effectiveness of Zara in the capricious and frenetic world of high street fashion. Analysts have suggested that some of its key attributes are geographically specific. Galicia had a limited textile industry prior to the 1970s, and when the regional and national governments in Spain decided to boost domestic textile production in the area, the developments took the Galician industry in a different direction to that followed in other more traditional Spanish textile-producing areas. The main difference was a tendency to integrate design, production, logistics and sales within companies rather than, as is common elsewhere, to separate and outsource these different business elements. Ortega’s creation was typical of the region, and this very commitment to the principle of vertical integration (keeping control of all major operations) is what has underpinned Zara’s success. But control, in this case, does not mean rigidity. In order to achieve its business aim of adapting constantly to the demands of the market, the company deliberately rejected rigid organisational structures in favour of a more flexible approach. As has been noted already, and unlike many of its rivals, it has not attempted to achieve this by extensive use of subcontracting. Instead, its flexibility comes from the use of a highly integrated, fast and efficient form of communication between its global network of outlets and the central hub of operations in Spain, combined with possibly one of the most sophisticated just-in-time (JIT) operations in the world. As mentioned above, the industry average time for bringing a design into the shops is somewhere between six and nine months. Zara routinely achieves this task in three to four weeks. In his recent book, James Surowiecki describes the Zara operation in New York as follows: Every Tuesday and Saturday in SoHo, a big truck pulls to the curb on the east side of Broadway to have its cargo unloaded. From out of the truck emerge . . . stacks of dress shirts in soft colors, slim-cut black skirts, and elegant women’s jackets that look – from a distance – like they just came off a Milan runway. All the pieces of clothing have two things in common. They come from a

million-square-foot warehouse owned by a company called Zara, in the town of La Coruña . . . And, in all likelihood, three weeks before they were unloaded, they weren’t even a glint in their designers’ eyes. Managing a fashion laboratory Unlike other companies which design and order their clothing ranges many months in advance, then stock up distribution centres with about three months’ supply ahead of expected sales, Zara only makes what is selling at the moment. Its design team is based in La Coruña (other Inditex brand designers are based in Barcelona and Alicante) and with its hi-tech and highly integrated manufacturing centres close by, individual designers can see their creations turned into small batches of finished products within days, and shipped out to stores within a few weeks. If the design sells well, then more is produced and shipped out; if it flops, then the company has lost very little as the volume of remaindered items is small, and the design is scrapped. This small batch production process can enhance sales, as customers snap up eye-catching items quickly in case they aren’t there tomorrow. As the recruitment page for fashion designers on the company website explains: At Inditex collections are launched to enrich every week with new designs and proposals that improve our product offer. We re-invent trends because we adapt them to what our customers want, and win the battle of the very latest style. The close integration of design, production and logistics is only part of the story. The other crucial element in the company’s design is the role of the stores, and in particular the store managers. Inditex describes its stores as ‘fashion laboratories’. They are where customers tell us what they want to wear. We listen to their opinions and tastes, and the store team passes it on to us. With this valuable information our fashion industry swings into action to offer our customers new items every week. Thanks to our store teams, we have changed the rules of the fashion game. They are . . . teams of entrepreneurs with initiative, who take fashion into the streets every day. Store assistants and managers constantly collect information about what is selling and how quickly it leaves the racks, meaning that local managers have a strong influence on the success of their stores, and thus the company overall. If customers are asking for items in a different colour, or want certain styles that they can’t find, their comments are recorded on hand-held computers, and a digest of both sales and customer feedback is transmitted daily to Zara HQ to alert the designers to trends. This degree of flexibility also allows Zara’s store and regional product managers to adapt collections to local preferences; if Mexican customers want their strappy summer dresses in vivid reds and yellows, but the Swiss prefer them in pastel pinks and blues, Zara can deliver. With its flexible and integrated organisational structure, Inditex, and Zara in particular, has clearly rewritten many of the rules of the industry. The structure affects the nature of both the work (the work of a designer for instance becomes a blend of both long-range forecasting based on trends unveiled at catwalk shows, and constant innovation based on day by- day sales data) and the nature of relationships within a global company which puts individual store managers in direct and regular contact with design and production. It may have become a trendsetter in more ways than one.

Your tasks 1 Analyse Zara’s structure in relation to the ‘Interrelated levels of organisation’ diagram at Figure 14.3. How does it match, and how does it differ from the model?

2 Critically assess Zara’s structure against each of Urwick’s principles of organisation. “PRINCIPLES OF ORGANISATION The classical writers placed emphasis on the definition of structure in terms of division of work, chain of command, span of control and reporting relationships. Attention was focused on the requirements of the formal organisation and the search for a common set of principles applicable to all circumstances. Probably the leading authority in the UK was Lyndall Urwick, who originally specified eight principles of organization: 1 The principle of the objective ‘Every organisation and every part of the organisation must be an expression of the purpose of the undertaking concerned, or it is meaningless and therefore redundant.’ 2 The principle of specialization ‘The activities of every member of any organised group should be confined, as far as possible, to the performance of a single function.’ 3 The principle of co-ordination ‘The purpose of organising per se, as distinguished from the purpose of the undertaking, is to facilitate coordination: unity of effort.’ 4 The principle of authority ‘In every organised group the supreme authority must rest somewhere. There should be a clear line of authority to every individual in the group.’ 5 The principle of responsibility ‘The responsibility of the superior for the acts of the subordinate is absolute.’ 6 The principle of definition ‘The content of each position, both the duties involved, the authority and responsibility contemplated and the relationships with other positions should be clearly defined in writing and published to all concerned.’ 7 The principle of correspondence ‘In every position, the responsibility and the authority should correspond.’ 8 The principle of span of control ‘No person should supervise more than five, or at the most, six direct subordinates whose work interlocks.’ 9 The principle of balance ‘It is essential that the various units of an organisation should be kept in balance.’ 10 The principle of continuity ‘Re-organisation is a continuous process: in every undertaking specific provision should be made for it.’

3 Organisations could be said to sit somewhere along a continuum between complete vertical integration, that is in-house control of all aspects of the operation, and complete outsourcing, that is externalisation of all operational aspects with the core acting as a coordinating agent. What are the advantages and disadvantages of each structure in terms of responsiveness, resilience and efficiency? 4 How transferable is the Zara model to non-business sectors? Discuss this in relation to either a public sector operation (such as an NHS hospital) or a not-for-profit one....