Acquiring Competitive Advantage through Supply Chain Management

EXECUTIVE SUMMARY

Competitive advantage is crucial for a company’s success. For many business models, strategic supply chain management has become the cornerstones of their competitive weapons, for differentiation or cost leadership strategy. They create added value for product and consistently support organizational objectives. This paper will demonstrate how to achieve competitive advantage with corresponding supply chain techniques. A case of Zara will be used to explain in depth.

Table of Contents

1 INTRODUCTION

In today’s increasingly global marketplace, companies and enterprises are confronted with the relentless pressures from competitors all around the world. The well-connected transport network and advanced information technology have addressed the geographical gap to a large extent and render an unprecedentedly fierce and direct competition among different companies. Competitive advantage over rivals is essential for a business model to survive and thrive.

This report is consisted of three parts. The first one will discuss how firms gain competitive advantage via differentiation and cost leadership. Secondly, it will demonstrate how supply chain management supports competitive strategy. The last section is going to analyse the specific case of Zara and its supply chain management in the aspects of agile supply chain vertical integration. Also, comparison with its competitors will be presented to illustrate how supply chain management differentiates Zara’s business model.

2 Where competitive advantage comes from

According to Porter (1980 P.3), ‘Competitive advantage (CA) grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it’. Also, he identifies two basic types of CA, namely differentiation and cost leadership, in broader market or particular segments. The following section will focus on these two strategies respectively and the threat to the sustainable competitive advantage.

2.1 Directive Diffentiatiation for gain competitive advantage

To win business competition, companies seek to differentiate their products or service in some way to retain qualitative and valuable uniqueness. In this process, it is of paramount importance to understanding target group of customers’ demand and achieves the differentiation in accordance with demanders’ perceived value (Sharp 1991). Because the perceived value largely depends on subjective preference, directive differentiated products could exclusively match demanders’ specific requirement, which would significantly increase its value, and thereby, achieve value creation. Only when demanders gain satisfaction from its consumption would they have the willingness to pay a high price for a product (Pienaar and Vogt 2009). While determining strategy, differentiation can be achieved through a host of features like better quality or customer service, quick response, or greater availability, which also depends on the characteristics of niche market and targeted customers’ inclination.

2.2 Cost leadership

Apart from differentiation, low cost is another approach to enhance a company’s competitiveness. Because of the lower cost, companies are able to set a more competitive price for their commodities. This can significantly enhance the product attractiveness, especially among those price-sensitive customers. It is an effective strategy to expand market share. On the other hand, low cost is not necessarily consistent with low price. A lowest-cost producer has more flexibility to set their price in accordance with changes in the external environment and marketing strategy. Therefore, along with higher flexibility and efficiency, the company would have a higher profitability than the average in the industry.

2.3 Sustainable the uniqueness and make it an advantage

Additionally, to acquire competitive advantages, the differentiation must be applicable and sustainable. The sustainability of differentiation depends on its degree of replicability. A unique and unduplicated product or service could ensure companies gain a sustained advantage and achieve substantial economic growth. To cope with duplication, company needs to find an innovative and efficient skill to distinguish their business model, which will discourage competitors’ imitation because of huge capital investment involved or intellectual barriers. Also some legislated barrier can be used to protect the unique strategy.

Besides, some other aspects will also erode the continuity of advantages. The uncertainty relating to the supply of material resource or finance, and the changes in customers’ habit will also undermine the sustainability of CA (O’Shannassy 2008). Thus, to retain a continuous advantage, companies should be aware of the dynamism of the outside environment and maintain a flexible structure to differentiate.

3Supply chain management- a friend for competitive strategy achievement

In consideration of the profit-pursuing nature of business, activities relating to supply chain management (SCM) must be value-added and consistent with the company’s competitive strategy at the tactical level.

3.1 Supply chain management support differentiation

Differentiation advantage is based on the value-perception of the demander. In order to generate profit, different differentiation strategies are utilized according to the characteristics of specific markets and products. While implementing this strategy, supply chain management is able to maximize the value-added utilities for consumers. Effective supply chain operation could ensure that the right products in the right quantity and quality are received at the right time when they are needed.

From the argument of Pienaar and Vogt (2009), supply chain strategy (SCS) should depend on the characteristics of the products. In case of that with high uncertainty in demand, such as fast fashion apparel, a responsive or agile strategy should be implemented to cater for constantly changing demand in the market. A late entrant with efficient supply chains strategy will obviously endure a high risk of obsolescent stock and not appropriate for demand-uncertainty market (Christopher, Lowson and Peck 2004). However, for the functional products, the efficient supply chains can achieve the economy of scale and is helpful for cost reduction in terms of physical flows manufacture. For different specific market, SCS will be and need to be different.

3.2Efficiency in supply chain to lower the cost

The implementation of cost leadership strategy requires a firm to maintain a high degree of inward orientation (Sharp 1991). Referring to the contributions to cost advantage, he argued, cheaper input and efficiency are two key elements. Cheaper input relates to the procurement management and relationship management with suppliers. Comprehensive investigation and analysis about the suppliers before relationship establishment would be conducive to achieve a substantial saving in terms of transaction cost and materials cost. On the other hand, improvement of operation efficiency also needs a proper supply chain strategy, in which economies of play an indispensable role. For example, by applying the postpone strategy, most standardized product could be differentiated at the very downstream. The scale of standardized production and distribution could reduce the cost that each commodity needs to share. Therefore, appropriate supply chain management can be significantly supportive for the achievement of cost leadership.

4Case analysis of Zara-agile supply chain and vertical integration

Established in 1975, Zara is one of the largest and most successful international apparel companies, advocating the concept of ‘democratizing fashion by offering latest fashion in medium quality at affordable prices’ (Lopez and Fan, 2009). It is a typical example about achieving distinguished CA with support from SCM.

4.1Zara’s Agile supply chain strategy

In the era of 21th century, the world has witnessed a new type of competition which is based on the effectiveness and efficiency of a supply chain to create a value delivery system rather than independent organization competing with each other (Christopher 2005 cites in Marcus 2010). The transform process from design to product need to be considered systematically and every section of a supply chain is able to create value for products and enhance its competitiveness by effective and efficient operation.

Fast fashion market, according to Christopher et al (2004), has special features of short life-cycle, high volatility, low predictability and high impulse purchasing. Given the high dynamism of demand, the SCM should place more focus on rapid manufacture, delivery and distribution rather than the achievement economy of scale that lowering costs. In every section of the chain, effort should be taken to reduce time waste and strive for seamless connection between different processes. The implementation of agile supply chain strategy supports Zara for rapid realization of the design. This enables them to be ahead of their competitors and reduce the risk of obsolescence and cater for changing demand. Thanks to agility, Zara produces more than 11000 distinct items every year, compared with 2000 to 4000 items of its key competitors (Lopez and Fan 2009). Therefore, logically, Zara is more likely to satisfy more diversified requirements in time.

4.2Vetical integration in Zara

A vertical integration in a SC will be of significant impact on quick response owing to the substantial time saving in secure distribution channels (Guan and Rehme 2012). Through the integration, Zara is able to strengthen the control in the entire chain (from design to product), and thereby, they can easily monitor procedures and reduce inefficiency. This allows Zara to minimize time waste and increase the turnover rate. Also the threat from external environment to interrupt supply chain operation could be lessened and it can enable Zara maintain its high and sustainable efficiency. Its contribution to time saving and reliability play a vital role in the support for Zara’s long-term competitive strategy.

In addition, downstream integration as Zara do can reap some benefit from downward market and foster customers’ loyalty (Guan and Rehme 2012). Companies can effectively collect the latest information about fashion tendency and preference from customers’ feedback from their self-operated stores. With the messages, Zara can constantly be market sensitive and their designers can acquire accurate and timely information about the characteristics of demands. It is an essential contribution to Zara’s competitive advantage of directive differentiation.

4.3Zara and its competitors

In terms of market share, Zara has two major competitors worldwide, H&M and Gap, Inc (Lopez and Fan, 2009). The main distinction lies in the aspect of production outsourcing.

According to Lopez and Fan’s (2009) report, while Zara’s vertical integration remains total control of its production, H&M and Gap, Inc have 700 and 1100 production suppliers respectively. The time saving from transaction with suppliers has enabled Zara to have competitive advantages in the fast fashion market. To be more specific, Zara has an extensive network of more than 300 small subcontractors that complete the labour-intensive manufacturing activities for Zara (Christopher 2000). Most of them locate in Europe and work exclusively for Zara’s parent, Inditex SA. The quality of supplier relationships has afforded Zara a substantial flexibility to deal with the sudden and emergency in the turbulent market condition. Also, compared with competitors outsourcing some manufacturing process to low labour cost area like Asia or South America, Zara remain most of its production (more than 50 percent) in Europe (Bruce and Daly 2006).

Even thought standing higher cost, it allows Zara to work closely with local supplier and customaries production more rapidly in accordance with requirements. Given to the importance of time in the fast fashion industry, the reduction in transit time of products justifies the sacrifice of low cost and contributes to faster turnaround time. Compared with competitors like Benetton in Italy, their manufacturing system is similar but Zara’s is refined from the ideas in Toyota, Just-in-time manufacturing (Christopher 2000). It affords Zara’s agile supply chain with lean characteristics and maximizes the material efficiency. Besides, it compensates the high cost derived from fast cycle time, to some extent.

5. Conclusion

In general, competitive advantage is of strategic importance for a company’s success and remains its sustained profitability in a fiercely competitive market. Supply chain management would certainly provide fundamental support for the execution of competitive strategy at the operational level. This paper has analysed the agile supply chain of Zara and its distinctive contribution to the fast turnaround time. Vertical integration in Zara’s business model enables it to better control throughout entire chain and is supportive for the product differentiation.

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