ANALYSIS of GLOBAL OPERATIONS

Eva Russo | Craig Schlottmann | Gareth Zerr

Gap versus Zara

COMPANY ANALYSIS

History | Globalization | Supply Chain | Trends

Gap Inc.

Timeline of how Gap Inc. got started

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Gap’s globalization catalyst stemmed from the need for production efficiencies, cheaper inputs, and reaching new markets

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Manufacturing / Production Sites...

... To Retail Outlets

Gap’s entry mode for globalization

• Initial globalization efforts spurred through manufacturing efficiencies and cheaper production inputs
• Gap would then often establish retail storefronts in those markets

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Gap’s entry into India:

Manufacturing and production

Retail Store Launch

Early- Mid 2000s

May 2015

Textile production for GAP Kids

On ground promotion to build excitement

Press conference for Business Media

Exclusive party for New Delhi elite

Public Launch Day (+3.5K attendees)

https://www.youtube.com/watch?v=aU1pAd7G9pc

Gap’s entry mode process over time

• Initial Process: expand globally to fashion capitals of the world: Paris, London, Milan, Tokyo
• As time progressed...the company looked for new areas of opportunity such as areas that manufactured Gap apparel and took advantage of the extreme disparity between the working and middle class

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Typical in emerging markets: Central and South America, Middle East, Asia, Indian subcontinent

Working Class: cheap labor input to fuel profits

Middle Class: burgeoning class with disposable income to spend on American apparel

Always focused on creating significant buzz for store openings, no matter the location

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What is Gap doing different than their main competitors?

• Gap is the largest specialty apparel retailer in the US.
• Sells low cost, American fashion
• Enjoys very high brand loyalty

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How does Gap source inputs?

• Raw materials are sourced directly by the production factories.
• Typically Asian countries.
• Often, Gap does not know exactly where the raw materials come from. For instance, yarn from Uzbekistan can bring up human rights issues.

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Gap works to make sure that people working along the supply chain are treated with fairness, dignity, and respect.

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Where does Gap manufacture today and how is their distribution setup?

Factories in over 60 different countries; mainly Asian countries such as China, India, Saipan, Bangladesh, Myanmar (Burma).

Exposes Gap to issues of workers rights: low wages, poor conditions.

How have they leveraged IT for a supply chain advantage?

• High use of technology in the supply chain leading to high supply visibility and responsiveness to demand and changing trends.
• Rapid adoption of designs from existing trends and popular designs into clothing.
• Ship frequently in small quantities and deliver to stores with minimal storage.
• Study demographics information to offer better fitting merchandise and manage inventory.

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How do they integrate/add supply chain partners?

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• Ask suppliers to adhere to corporate social responsibility: supply chain, environmental impact, community and charitable giving.
• Independent factory auditing as well as their own internal factory monitors.
• Limited supplier power, since Gap deals with so many manufactures.

Research & Development at Gap

Gap invests money in R&D in order to:

• Specialize in name brands
• Improve quality and styles
• To keep up with competitors
• To bring in new customers & maintain loyal customers

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Gap’s R&D Process

R&D conducted in each major region: North America, Europe, Asia

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Team researches what consumers want and forecast what will be popular for future seasons

Team commits to these forecasts and starts sourcing the materials needed

Hire quality designers and partner with them to execute designs for that season

Technology

Gap uses technology to:

Leverage big data analytics

Tailor the e-commerce experience

Determine what channels to be available on

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Gap - Exchange Rates & Production

Gap has faced repeated hits to company profits due to the strengthening dollar, which makes sales in foreign currencies worth less once they are translated back into U.S. dollars.

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Gap’s Resolution Plan

• Increase the # of foreign stores; especially in China

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GAP’s Strategy Today

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Focus on geographies with the greatest potential

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Streamline the product operational modal

Greater focus on Online

Issues Gap is facing today

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Brand Identity

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No clear brand position

No real established connection to millennial consumers

Working to address gender pay gap inequalities

Gender Pay Gap

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Needs an overhaul of its supply chain to remain competitively priced

High initial prices it charges for its products hurt the company

Inefficient Supply Chain

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Working to improve the labor-management relationships & practices at its garment factories

Labor Practices

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Sustainability

Company is being pressed to find new and sustainable ways to source and produce its products

COMPANY ANALYSIS

History | Globalization | Supply Chain | Trends

ZARA

History of how Zara went global

• Saturation in home market caused Zara to expand retail outlets globally
• Stores crucial to Zara, serving as catalyst for local design and pricing strategies
• 2005+ Expansion into China, Taiwan, Macau, Japan and Australia

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Founded 1975

Centralized production to Spain & parts of Europe

Store expansion by late 90s

Store expansion by late 2005

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Zara’s entry mode for globalization

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Zara’s has 3 primary options

Advantages: Control over fashion design, pricing strategy and brand

Disadvantages: High risk due to direct investment

Advantages: Spread risk with host investors

Disadvantages: Time and effort to establish relationships. Diminished control

Advantages: Maintain brand and image. Minimized growth risk Disadvantages: Weaker core community. Less design innovation

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Own Subsidiaries

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Joint Ventures

Franchising

How Zara’s entry mode has changed over time

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Success to Entry Mode

Globalization Evolution

Reluctance

Caution

(1 country per year)

1975 - 1988

1988 - 1997

1998+

Ambition

(Rapid expansion)

Establish 1 local management team

Mesh corporate strategy with local environment

Diminish vast cultural barriers

Use store as key to communication

Flexible, responsive merchandising & pricing strategy

Utilize e-commerce to target individual regions

Focus on CSR in expanding country

What is Zara doing different than their main competitors?

• Pioneer of fast fashion.
• 70% of the products change every two weeks.

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How does Zara source inputs?

Import raw materials from buying center in Beijing

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Where does Zara manufacture today and how is their distribution setup?

• Main production facility in Galicia, Spain.
• Additional integrated industrial area in Mexico, for servicing North and Central America markets

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https://www.youtube.com/watch?v=iKUmOsmh-Gs

How has Zara leveraged IT for a supply chain advantage?

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Other Ways Zaa Leverages IT

• Use CAD tools and IT links for prototyping
• Automated warehouse, where raw goods, prototypes, and FGI are stored.

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The fast-fashion model is well-known for its tight communication among shoppers, store managers, designers, production staff, and distributors so Zara is able to regularly create and rapidly replenish small batches of new goods.

How does Zara integrate/add supply chain partners?

• Zara manages all design, warehousing, distribution, and logistics functions and produces half of its own merchandise, enabling it to rhythmically order all steps in the supply chain.
• Every 2-3 days, small trucks deliver the garment pieces to the 5000-6000 exclusive sewing assembly cooperatives and collect them when sewn.

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Research & Development at Zara

• Zara spends very little on advertising, primarily the company relies on:
• Word-of-mouth
• Well located shop placements
• Products successfully targeted at tastes of ever-changing young shoppers

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R&D Process at Zara

Zara’s main industrial production area is located in Galicia

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Team of designers walk the streets to get a feel for the latest fashion trends

Create prototypes to test in stores in order to identify future ‘hits’ and which products to drop. Winners scheduled for mass production.

Designs are ready to be shipped with designers having the ability to make final adaptations at the last minute if needed

Technology

Zara uses:

*RFID Technology → Track Inventory → Replenish Items

*Handheld computers → real-time customer feedback → produce new winning designs

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How does Zara handle production with fluctuating exchange rates?

When the company faced lower profits due to currency depreciation the company decided to shift focus to further growing online spend.

Two initiatives to support Zara’s e-commerce offering:

• LA stockroom - allows the company to offer 24-hour delivery and lower transport costs
• Virtual storefront - allows the company to reach more middle and upper class Chinese consumers who increasingly buy online

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ZARA’s Strategy Today

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1. Stock less merchandise and update collections often

2. Win over new customers of every age

3. Launch stores in the central shopping districts of large cities

4. Adapt the fundamentals of a style to each country

Issues Zara is facing today

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Marketing

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The company is creating campaigns to stay in touch with its customers

The company and its designers rely on 3 to 4 main colors. Certain markets (like India) desire more variety

Product

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Many argue that fast fashion causes textile waste and the act of “copying” diminishes the art of fashion

Ethical Practices

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Maintaining transparency in the supply chain to ensure the selling of low cost products doesn’t adversely affect workers and the environment

Supply Chain

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Market Risk

Potential to create products too quickly and not find a market or fit in with shoppers’ current tastes

How has each company’s strategy contributed to their success?

Gap

• Broad supplier and manufacturer network leads to low cost apparel
• First in class advertising for generating significant buzz when entering new markets
• Structured merchandising strategy leads to efficiency and standardization

Zara

• Localized manufacturing results in incredibly fast product response time
• Zara relies on strategically placed storefronts and word of mouth to generate buzz when entering new markets
• Flexible, localized merchandising and pricing strategy facilitates tailored experience for host culture

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How has each company’s strategy differed? Impact of that difference?

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Which company is likely to be more successful and why?

• The company owns and controls their E2E supply chain
• Zara has a strong brand, market, and financial position
• The company has revolutionized the crowded retail industry; forcing competitors to change their business models
• Zara continues to be on the forefront of utilizing technology to improve the retail experience
• Zara has managed to give its customers what they want before they want it

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Sources Cited

Gap

http://mmoore.ba.ttu.edu/ValuationReports/Summer2007/TheGap.pdf

http://www.gap.com/browse/info.do?cid=80004

http://www.forbes.com/sites/greatspeculations/2016/02/29/gap-incs-earnings-highlight-its-lingering-weakness/#d93cf5167046

http://www.usnews.com/news/business/articles/2015/05/21/gaps-1q-profit-down-8-percent-on-currency-fluctuations

http://www.gapinc.com/content/dam/gapincsite/documents/Press%20Releases/GPS_Q116_EPR_FINAL.pdf

http://www.gapinc.com/content/attachments/gapinc/Press-Releases/GPS_Q415_EPR_FINAL.pdf

http://www.adweek.com/news/advertising-branding/gaps-biggest-problem-it-lost-its-brand-identity-165367

http://www.nasdaq.com/article/what-are-the-problems-plaguing-gap-inc-cm669698

http://www.gapincsustainability.com/people/working-greater-equality-and-opportunity

http://www.npr.org/2016/04/08/473513620/what-happens-when-fashion-becomes-fast-disposable-and-cheap

http://higheredbcs.wiley.com/legacy/college/sparke/0631231293/Model_Answers/The_Gap.pdf

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Sources Cited

Zara

https://www.ukessays.com/essays/marketing/the-international-growth-of-zara-marketing-essay.php

http://bestattungen-tom.eu/index.php?option=com_content&view=category&id=48&itemid=1052

https://www.behance.net/gallery/5983053/zara-harvards-case-of-study

https://hbr.org/product/marks-spencer-and-zara-process-competition-in-the-textile-apparel-industry/INS849-PDF-ENG

https://rctom.hbs.org/submission/zara-disrupting-the-fashion-industry/

http://www.wsj.com/articles/at-zara-fast-fashion-meets-smarter-inventory-1410884519

http://www.wsj.com/articles/inditex-profit-crimped-by-currencies-1402463821

http://kwhs.wharton.upenn.edu/2016/02/zaras-fast-fashion-business-model/

https://www.ukessays.com/essays/marketing/marketing-problems-and-issues-faced-by-zara-marketing-essay.php

http://goodonyou.org.au/the-ethics-of-fast-fashion-hm-and-zara/

http://www.slideshare.net/Jgahtan/globalization-case-of-zara

https://www.nibusinessinfo.co.uk/content/joint-venture-benefits-and-risks

https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-franchising

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