CASE APPLICATION 1

Fast Fashion

When Amancio Ortega, a Spanish former bathrobe maker, opened his first Zara clothing store, his business
model was simple: sell high-fashion look-alikes to price-conscious Europeans. After succeeding in this, he
decided to tackle the outdated clothing industry in which it took six months from a garment’s design to
consumers being able to purchase it in a store. What Ortega envisioned was “fast fashion”—getting
designs to customers quickly. And that’s exactly what Zara has done! The company has been described as
having more style than Gap, faster growth than Target, and logistical expertise rivaling Walmart’s. Zara,
owned by the Spanish fashion retail group Inditex SA, recognizes that success in the fashion world is based
on a simple rule—get products to market quickly. Accomplishing this, however, isn’t so simple. It involves
a clear and focused understanding of fashion, technology, and their market, and the ability to adapt
quickly to trends. Inditex, the world’s largest fashion retailer by sales worldwide, has seven chains: Zara
(including Zara Kids and Zara Home), Pull and Bear, Massimo Dutti, Stradivarius, Bershka, Oysho, and
Uterqüe. The company has more than 6,340 stores in 87 countries, although Zara pulls in more than 60
percent of the company’s revenues. Despite its global presence, Zara is not yet a household name in the
United States, with just 45 stores open, including a flagship store in New York City. What is Zara’s secret
to excelling at fast fashion? It takes approximately two weeks to get a new design from drawing board to
store floor. And stores are stocked with new designs twice a week as clothes are shipped directly to the
stores from the factory. Thus, each aspect of Zara’s business contributes to the fast turnaround. Sales
managers at “the Cube”—what employees call their futuristic-looking headquarters—sit at a long row of
computers and scrutinize sales at every store. They see the hits and the misses almost instantaneously.
They ask the in-house designers, who work in teams, sketching out new styles and deciding which fabrics
will provide the best combination of style and price, for new designs. Once a design is drawn, it’s sent
electronically to Zara’s factory across the street, where a clothing sample is made. To minimize waste,
computer programs arrange and rearrange clothing patterns on the massive fabric rolls before a laser-
guided machine does the cutting. Zara produces most of its designs close to home—in Morocco, Portugal,
Spain, and Turkey. Finished garments are returned to the factory within a week. Finishing touches
(buttons, trim, detailing, etc.) are added, and each garment goes through a quality check. Garments that
don’t pass are discarded while those that do pass are individually pressed. Then, garment labels (indicating
to which country garments will be shipped) and security tags are added. The bundled garments proceed
along a moving carousel of hanging rails via a maze of tunnels to the warehouse, a four-story, five-million
square-foot building (about the size of 90 football fields). As the merchandise bundles move along the
rails, electronic bar code tags are read by equipment that send them to the right “staging area,” where
specific merchandise is first sorted by country and then by individual store, ensuring that each store gets
exactly the shipment it’s supposed to. From there, merchandise for European stores is sent to a loading
dock and packed on a truck with other shipments in order of delivery. Deliveries to other locations go by
plane. Some 60,000 items each hour—more than 2.6 million items a week—move through this
ultrasophisticated distribution center. And this takes place with only a handful of workers, who monitor
the entire process. The company’s just-in-time production (an idea borrowed from the auto industry)
gives it a competitive edge in terms of speed and flexibility. Despite Zara’s success at fast fashion, its
competitors are working to be faster. But CEO Pablo Isla isn’t standing still. To maintain Zara’s leading
advantage, he’s introducing new methods that enable store managers to order and display merchandise
faster and is adding new cargo routes for shipping goods. Also, the company recently announced that it’s
developing a new logistics hub that will be able to distribute almost half a million garments daily to its
stores on five continents. Zara’s CEO says that this new facility will lay the groundwork for continued rapid
expansion worldwide. And the company has finally made the jump into online retailing. One analyst
forecasts that the company could quadruple sales, with a majority of that coming from online sales.

Discussion Questions

1. How is strategic management illustrated by this case story?

CASE APPLICATION 2

A Simple Strategy at Costco

Costco launched the warehouse shopping model when it opened its first location in 1976, requiring
customers to purchase an annual membership in order to shop at the store. The first location was called
Price Club and initially sold only to small businesses. More than 40 years later, Costco is one of the nation’s
top retailers and the nation’s largest membership warehouse chain. They operate more than 700
warehouses located around the world, with more than 80 million members and over $116 billion in annual
revenues. In addition to demonstrating steady growth throughout its history, the company consistently
performs better than competitors. For example, Costco’s sales per square foot are nearly 70 percent
higher than their closest competitor, Sam’s Club. So how has Costco achieved this level of success? Experts
agree that Costco’s simple strategy has allowed the company to persist, even in challenging times. In fact,
some say Costco has the best business model in the retail industry. The company’s strategies that
differentiate it from its competitors are to treat employees well, limit the number of items it sells, and
keep markups low. Costco clearly values its employees. The company pays its employees on average 40
percent higher than competitors and offers health care insurance to all employees who work more than
20 hours per week. The company is also known for promoting from within, with 98 percent of their store
managers and many of their company executives having started out as stock clerks or cashiers. These
efforts have helped build a loyal and hard-working employee base that actively contributes to building a
profitable bottom line. Furthermore, low employee turnover helps save the company in recruiting and
training expenses. The company’s average annual turnover rate is about 5 percent, compared to the
average turnover rate of about 20 percent in the rest of the retail industry. Costco also has a sales strategy
that has contributed to its success. They only sell a limited number of brands and, as a result, they are
able to increase sales volume that leads to purchasing discounts. For example, Costco only carries four
brands of toothpaste, compared to about 60 brands you’d find on the shelf at Walmart. Thus, the company
is able to purchase those four brands in significant volumes, which allows them to negotiate with the
product manufacturers for discounts. The company then passes along those savings to their customers
through lower prices. Costco prices items at no more than 15 percent above their purchasing price. This
markup strategy assures they are offering the lowest price possible, which is what draws customers and
creates a loyal customer base. Sticking with these simple strategies has helped Costco build their retail
empire. Can the company continue their growth trajectory and maintain their leadership position in the
retail industry? There is some speculation that as consumers build confidence in online shopping, Costco
and other brick-and-mortar retailers will face declining sales due to the competition. Costco has
responded to this threat by expanding the diversity of their inventory, offering deep discounts on high-
ticket items such as jewelry, electronics, and even cars. Such tactics help to encourage membership by
making the company the go-to location for purchases that consumers prefer to make in person. And while
they are there, they can pick up some toothpaste at a pretty good price.

Discussion Questions

1. How is Costco’s business model different from other retailers such as Walmart and Sam’s Club?
Why do you think Costco’s strategy works?
2. Beyond lower turnover, how else does Costco benefit from treating its employees well?
3. Are you surprised that Costco sells cars? How does offering diverse products help the company
attract new members?
4. Costco now has a comprehensive website and sells online. Is this a threat to Costco’s business
model? Is there a downside to selling online?