…Drawing on the Resource Based View literature, evaluate whether and how Zara generates sustainable competitive advantage
Introduction
The Resource-Based View, is a model that sees resources a key to superior firm performance. Resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge and other major elements controlled by a firm' (Barney, J, 1991).
Theoretical Models- (Heterogeneity and First-Mover Advantage)
A model identified is that of the 'first-mover advantage' (Lieberman & Montgomery 1988). This theoretical concept highlights that, the first firm to implement a strategy can achieve a sustained competitive advantage over other firms. According to (Barney, J 1991), 'these firms may gain access to distribution channels, develop goodwill with customers, or develop a positive reputation, all before firms that implement their strategies later' (Barney, J 1991).
On the other hand, if competing firms are in possession of identical resources, it is therefore not possible for fast-moving firms to obtain a competitive advantage. Furthermore, 'if one firm in this type of industry is able to conceive of and implement a strategy, then all other firms will also be able to conceive of and implement a strategy, and these strategies will be conceived of and implemented in parallel, as identical firms become aware of the same opportunities and exploit that opportunity in the same way' (Barney, J 1991).
For a firm to obtain a sustained competitive advantage, a theoretical approach has been applied on the basis of resources being Heterogeneous and Immobile. Resource Heterogeneity relates to different firms being in possession of different resources; along immobility which states that it may be costly for firms without specific resources to acquire of develop them. (Barney, J 1991)
Zara's Core competencies
Procurement
Vertical Integrated Manufacturing
As a result of vertical integration manufacturing and a dedicated in-house design team, Zara was able to originate a design and have finished goods in stores within 4-5 weeks in the case of entirely new designs, and two weeks for modification of existing products. In contrast, the tradition industry model might involve cycles of up to 6 months for design and three months for manufacturing (Z9).
As a result this short product cycle time, this reduced the level of working capital required and also assisted in simultaneous manufacturing of new products (Z9). Therefore, this gives Zara the incentives to increase its product line faster than their competitors
Zara's factories were also highly automated and was based on a capital intensive approach, which included designing patterns, cutting, finishing and inspection. This is in contrary to its major competitors (GAP, H&M and Benneton), who outsourced vast majority of their production to nations outside of the UK (Z5).
Design
Zara's design teams transcended design, narrowly defined. The teams also continuously tracked customer preferences and used information about sales potential based, among other things, on a consumption information system that supported detailed analysis of product life cycles.
Retailing and Merchandising
Zara spent only 0.3% of its total revenues on media advertising and marketing, in comparison to the 3-4% spent by most specialty retailers (Z13). Therefore, it is evident that Zara maintain a superior cost advantage over its competitors. In order to compensate for lower advertising costs, Zara places greater emphasis on its store layout, store locations and most importantly its shortened product life cycles. It can be argued that there's a strategic inclination towards placing stores in 'premium shopping streets', for visibility marketing (Z14).
The freshness of Zara's offering was rooted in rapid product turnover, which in turn created a sense of 'buy now because you won't see this item later'. Zara shoppers even knew which days of the week delivery trucks came into stores, and shopped accordingly (Z13). Furthermore, about three-quarters of the merchandise on display was changed every three to four weeks, which also corresponded to the average time between visits. A typical Zara shopper visited the chain 17 times a year, compared with an average figure of three to four times a year for competing chains and their customers (Z13).
Evaluate whether and how Zara generates sustainable Competitive Advantage
In order for a firm to obtain a sustained competitive advantage, a firm's resource must have four attributes: (a) it must be valuable, (b) it must be rare among a firm's current and potential competition, (c) it must be imperfectly imitable, and (d) there cannot be strategically equivalent substitutes for this resource (Barney, J).
Analysis of Zara using VRIN Framework
1) Valuable
According to (Barney, J), 'resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness'. It would appear that the most valuable resource of the firm is the implementation of vertical integration. Instead of Zara placing heavy reliance on external parties, the company 'maintains responsibility for its logistics, design, warehousing and distribution functions' (Z9).
In addition, Zara's emphasis on freshness of its offerings resulted in 'three-quarters of the merchandise on display being changed every three to four weeks, with the average shopper visiting the chain 17 times a year, compared with an average figure of three to four times a year for competing chains and their customers' (Z.13). Furthermore, with vertical integration; this reduces its overall operating expenses incurred by the firm. I would conclude that Zaras' resources are valuable, evident from their ability to effectively adapt to changes in consumer tastes, along with speed and flexibility it possesses to meet the needs of those consumers.
2) Rare
For a resource to be defined as rare, 'a firm enjoys a competitive advantage when it is implementing a value-creating strategy that is not simultaneously implemented by large numbers of other firms (Barney, J 1991). A brief analysis of Zaras' major competitors (H&M, The Gap and Benetton) confirm that they outsource a vast majority of their production (Z5); notably due to the industry being labour-intensive and associated cost benefits.
In the case of Zara, placed greater emphasis on capital-intensive production. This is evident as this enabled Zara to 'produce 11,000 items during the year, in comparison to 2,000-4,000 items being product by their direct competitors' (Z9). Furthermore, Zara was able to 'originate a design and have finished goods in stores within four to five weeks, in comparison to the average six-month cycles estimated for that of its competitors via the traditional industry model' (Z9). Therefore, it can be confirmed that the resources Zara currently possess are rare in the sense that this has not been utilised by any other.
3) Non-Imitable
'Valuable and rare organizational resources can only be sources of sustained competitive advantage if firms that do not possess these resources cannot obtain' (Barney, J 1988). In a highly competitive market, most competences are prone to imitation from competitors, however one should take into account how long it takes to imitate it. In order for Zara's competitors to establish a vertical integration model, this could be a rather lengthy process. In addition, the operating costs attributable to imitating their model could prove to be an extreme task for Zara's major competitors to incur at this time, considering H & M, GAP and Benneton have recorded a fall in profits for consecutive periods. Zara however; have proven their ability to adapt to changes in fashion trends quickly, as well as a successful business model. I would therefore conclude, that they can maintain their sustained competitive advantage on these premises.
There are three assumptions that determine why a firm's resources may be non-imitable; these are the combination of Unique Historical Conditions, Causal Ambiguity and Social Complexity (Barney, J 1988).
Unique historical conditions, this acknowledges the unique decisions implemented by a firm that have led to the emergence of their competencies and resources. Looking at Zara case study, their teams ability to produce products tailored to the needs can be traced back to the past with the creation of a design and product development teams, with top management stressing that 'instead of being run by maestros, the design organization was very flat and focused on careful interpretation of the catwalk trends suitable for the mass market'; this resulted in failure rates on new products to be only 1%, compared with an average of 10% for the sector (Z10). Learning by doing was considered a very important in achieving such outcomes (Z10).
'Causal Ambiguity exists when the link between the resources controlled by a firm and a firms sustained competitive advantage isn't understood clearly' (Barney, J 1991). In relation to Zara, their ability to engage in fast-fashion, simultaneously with product innovation and shortened manufacturing lead times was the causal ambiguity of the company. Their competitors were unable to replicate the ideas generated by its designers, product development team and in-house manufacturing strategy. Personnel in different companies will possess different ideas which will inevitably reduce the chances of imitation in the short-term.
4. Non-Substitutable
'For a firm resource to be a source of sustained competitive advantage is that there must be no strategically equivalent valuable resources that are themselves either rare or imitable' (Barney, J 1991). There are a number of competitors within the fashion industry, therefore the switching costs are relatively low, coupled with changes in consumer taste could suggest substitutes exist. The case study indicates that Zara's ability to produce fashionable clothing in conjunction with low advertising and distribution costs are a major element of their strategy, and has enabled them to become market leaders.
Conclusion
On the basis of the VRIN test, Zara has satisfied all criteria which and has thus achieved a sustained competitive advantage. I believe that Zara was able to inculcate its bundle of resources and competencies in manufacturing, extensive product development and speed and adaptability in to changes in consumer tastes to establish a sustainable competitive advantage in the clothing industry.
At this present time, Zara has achieved its competitive advantage; however due to the competitive nature of the market, its essential that they maintain consistent product innovations in order to safeguard its position for the foreseeable future.
References
Barney, J. (1991). Firms Resources and Sustained Competitive Advantage. Journal of Management. 17 (1), p99-105.
Lieberman, M.B and Montgomery, D.B.. (1988). First-Mover Advantages. Strategic Management Journal. 9 (1), p41-54.