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Digital transformation of retail industries: Case in clothing industries Berlin School of Economics and Law Masters of International Marketing Management WS 2015 Supervisors: Prof. Dr. Andrea Plinke Diplom-Kaufmann Martin Dastig (MBA) Submission: 25 th January 2016 Author: Rashedul Islam (Student Id: 454070)

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Digital transformation of

retail industries: Case in

clothing industries

Berlin School of Economics and Law

Masters of International Marketing Management WS 2015

Supervisors: Prof. Dr. Andrea Plinke

Diplom-Kaufmann Martin Dastig (MBA)

Submission: 25th January 2016

Author: Rashedul Islam

(Student Id: 454070)

i

Table of contents

List of abbreviations ............................................................................................. iii

List of figures......................................................................................................... iv

List of images......................................................................................................... iv

Table ...................................................................................................................... iv

1. Introduction .................................................................................................... 1

1.1 Problem statement ..................................................................................... 2

1.2 Goal ........................................................................................................... 3

1.3 Methodology ............................................................................................. 4

2. Literature review ............................................................................................ 4

2.1 Introduction to digital transformation ....................................................... 4

2.2 Definition of digital transformation .......................................................... 5

2.3 Analysis of clothing retail industries ........................................................ 6

2.4 Analysis of the digital transformation of clothing retail industries .......... 9

2.4.1 Internal digital transformation concerning company’s supply chain .. 10

2.4.1.1 Porter’s value chain ...................................................................... 11

2.4.1.2 The agile supply chain ................................................................. 14

2.4.2 External digital transformation concerning consumer ........................ 16

2.4.2.1 Place ............................................................................................. 17

2.4.2.1.1 Buying process ......................................................................... 17

2.4.2.1.2 Transforming in-store experience ............................................ 17

2.4.2.1.3 Customer service ...................................................................... 18

2.4.2.1.3.1 E-commerce and omni-channel customer interactions ............ 19

2.4.2.1.3.2 Servicing connected devices .................................................... 20

2.4.2.1.3.3 Nurturing customer relationship ............................................... 20

2.4.2.2 Promotion ..................................................................................... 20

2.4.2.2.1 Advertising ............................................................................... 21

2.4.2.2.2 Publicity/ public relation .......................................................... 21

ii

2.4.2.2.3 Visual merchandising and special events ................................. 21

2.4.2.2.4 Video and electronic merchandising ........................................ 22

2.4.2.2.4.1 Social media ............................................................................. 22

2.4.2.2.4.2 Word of mouth (WOM) ........................................................... 23

2.4.2.2.4.3 Mobile and computer technologies .......................................... 24

3. The case study of Zara: Facts and findings ............................................... 24

4. Discussions and conclusions ........................................................................ 29

4.1 Discussions ............................................................................................. 30

4.2 Conclusions and recommendations ......................................................... 37

4.3 Limitations and further research ............................................................. 39

Bibliography ......................................................................................................... 41

Appendix ............................................................................................................... 51

iii

List of abbreviations

ERP Enterprise Resource Planning

CEO Chief Executive Officer

US United State

RFID Radio Frequency Identification

TV Television

QR

CODES

Quick Response Codes

CRM Customer Relationship Management

IOT Internet of Things

WOM Word of Mouth

USP Unique Selling Proposition

POS Point of Sale

DSN Digital Supply Network

R&D Research and Development

iv

List of figures

Figure: 1 Digital readiness among enterprise organizations.................................... 5

Figure: 2 Clothing market demand in worldwide .................................................... 7

Figure: 3 Fashion retail in 2014 ............................................................................... 8

Figure: 4 Demand pyramid ...................................................................................... 8

Figure: 5 Household consumption on clothing in the European Union in 2013 ..... 9

Figure: 6 Digital transformation .............................................................................. 9

Figure: 7 Porter’s value chain ................................................................................ 12

Figure: 8 Lean or agile approach ........................................................................... 15

Figure: 9 Agile supply chain.................................................................................. 15

Figure: 10 Transforming customer service: Omni-channel retail.......................... 20

Figure: 11 Social media users in Worldwide ......................................................... 23

Figure: 12 Zara’s global distribution ..................................................................... 27

Figure: 13 Zara products manufactured in Worldwide .......................................... 27

Figure: 14 Consumers’ buying preferences ........................................................... 33

List of images

Image: 1 iBeacon…………………………………………………….…………..18

Image: 2 Primark digital store………………………………………..……….…18

Table

Table: 1 Overview of the US apparel market in 2015…………………………….6

1

1. Introduction

Digital transformation is a key element of any kind of business in this digital age

where the buying behavior of customers is changing dramatically. Clothing indus-

try is one of the biggest players in the global economy and has a huge impact on

the world economy (Singer, 2015). Therefore, digital transformation is more im-

portant in clothing retail business than in other retail industries in order to boost

customer engagement where customers are more involved. Apparel and textile are

among the world’s largest industries: the total global apparel exports were worth

approximately US$412 billion and global textile exports were worth US$294 bil-

lion in 2011 (Fashionunited, 2015). Clothing industry has been changing faster

than any other industry in the digital era (Spears, 2014). Today’s customers are

more conscious about fashion and trend than a few years ago. Customers are will-

ing to pay more money for quality products and services whether they find it

online or in brick and mortar stores. Therefore, clothing retailers have to be con-

cerned about customer demands and be up to date with the new technologies.

According to Terrar (2015), “Digital transformation is the process of shifting your

organization from a legacy approach to new ways of working and thinking using

digital, social, mobile and emerging technologies. It involves a change in leader-

ship, different thinking, the encouragement of innovation and new business mod-

els, incorporating digitization of assets and an increased use of technology to im-

prove the experience of your organization’s employees, customers, suppliers,

partners and stakeholders” .

Countries like Germany, America, United Kingdom, and China; it is very signifi-

cant for retailers to pursuit with digital transformation. In these countries retailers,

face fierce competition from competitors not only from their home country but

also from all over the world. Germany is the leading strongest European economy

and has a huge impact on European economy (Fox, 2014). Therefore, clothing re-

tailers all over the world have to be conscious about new trends and innovations in

these countries. Digital race has already started and it is at the starting point of

digitalization (Kreutzer and Land, 2014a, p. 38). Retailers have to be careful

which trends and innovations customers give more feedback about digitalization.

2

Without adapting suitable innovations or trends retailers would not be able to

achieve customers’ engagement or customer retention.

Nevertheless, executives from all retail industries are trying to optimize digital

opportunities in their business such as analytics, mobility, social media and smart

embedded devices. These are also remodeling their use of technologies such as

enterprise resource planning (ERP) to change value propositions, customers rela-

tionships and internal processes (Westerman et al., 2011). Furthermore, customers

are always looking for new technologies, innovations, and new offers, where they

can purchase on their selected products without any difficulties and time con-

sumption. However, digital transformation can create new opportunities for busi-

ness models (Berman, 2012, p.16-24). Therefore, companies should be careful

about disrupting technologies and current trends. The world foremost clothing

companies are trying to manipulate digitalization on their business model. For ex-

ample- Zara, H&M, Burberry, Primark, Wal-Mart, Tommy Hilfiger, Debenhams

etc. are using ongoing trends and technologies for their business models.

1.1 Problem statement

In this digital era, many new trends and technologies are adapted by the clothing

industries which have an impact on the turnover of companies. Therefore, it is still

unclear for companies which trends and innovations are suitable for clothing re-

tailers. It is really difficult to predict which trend is perfect for companies and

which can provide higher customer engagement and profit for the company. In

apparel industry, supply chain is very crucial to create competitive advantages for

company. Marketers have to identify which supply chain can create more value

for company centralized or decentralized? In clothing industries, marketers are

adapting new trends and technologies in their existing business model to get more

customers loyalty and retention towards make company lucrative. Especially in

clothing industries it is not easy to adapt new trends and innovations because eve-

ry year new technologies are implemented in clothing industry. Clothing industry

is a competitive market where marketers face huge competition from other com-

petitors globally. The clothing companies also face huge challenges to be digital-

ize and do not know which initiative they should take. Therefore, clothing retail-

ers have to identify the trends and technologies which can boost their profit and

3

customer relationships. In the clothing industry, supply chain has a huge impact

on the company’s turn over. The company has to identify how the supply chain

can be more effectively manipulated in terms of new technology.

1.2 Goal

The goal of this thesis is to show how clothing retailers could manipulate disrupt-

ing technology in their business models. Why clothing retailers are more affected

rather than other retail industries? How could clothing retailers manage digital

transformation and achieve more customer engagement? How are clothing retail-

ers manipulated by their supply chain in terms of digitalization? This thesis will

analyze the ongoing trends of clothing retail business all over the world. This the-

sis will clarify how the leading clothing retailers are operating digital transfor-

mation in their business models. Therefore, a case study is presented after the lit-

erature review. Furthermore, in the analysis part clarifies the current market situa-

tion, how big the market is, the leading retailers and the impact of social media,

online marketing, and omni-channels in retail business. It is also describes how

retailers, customers, and stakeholders would benefit from using these channels

and new technologies.

Indeed, retailers face many challenges to adapt new technology particularly small

sized retailers. In discussion part it will be identified what challenges company

face to be digitalized and what initiatives should take to manage it. The last sec-

tion of this thesis outlines the problems faced by clothing retailers and how cloth-

ing retailers could solve them and improve customer relationships. Therefore, rec-

ommendations provided for the clothing retailers which would be adaptable in

business models.

Research Question

How are clothing retail businesses affected by digital transformation and how it is

significant to companies?

Sub-questions

o How can a supply chain create a competitive advantage?

o Why do retailers face challenges to the implementation of digital

transformation?

4

o What initiatives should a company implement to manage digital

transformations?

1.3 Methodology

This thesis is formulated on the theoretical basis of the digital transformation of

retail business by Rajagopalan who specially defined digital transformation in re-

tail business (Rajagopalan, 2015). Secondary research was conducted to screen

the current situation of digital transformation in retail business. In terms of digital

transformation, the case study of Zara, which is one of the leading clothing com-

panies in the world, is discussed in this thesis. Meta-analysis was conducted to

expose ongoing trends on digital transformation, relevant academic journals, arti-

cles and web sources were used to create a scenario of digital transformation in a

business model. In addition, ongoing trends like social media, omni-channels,

online marketing, mobile marketing, analytics and supply chains are discussed

later in this thesis. This thesis discusses how ongoing trends can impact a retail

business model and the importance of digital innovation.

2. Literature review

2.1 Introduction to digital transformation

Digital transformation is nowadays a very hot topic in the clothing industries.

Since the second industrial revolution it has been implemented into every retail

business sectors. We are now facing the so called “third industrial revolution”,

where digitalization is the key to business success (Berman, 2012, p.16-24). The

implementation of digital transformation sometimes affects large parts of organi-

zations and even go beyond their borders, by affecting products, supply chains,

sales channels and business processes (Matt et al., 2015, p.339-343). As a result,

retail business models can be reshaped or replaced in terms of digitalization

(Downes and Nunes, 2013, p.44-56). The key to digital transformation in retail

business is optimizing and changing how the company operates new technologies

and trends (Westerman et al., 2011). It means not only implementation of new

technology but also the advantages technology provides and how retailers recipro-

cate with customer (Bloomberg, 2014). Social media, internet, and mobile devices

have revolutionized the retail customer experience where customers can do re-

5

search and buy anytime and anywhere (Hansen and Sia, 2015, p.51-66). In retail

industry, the latest appearances of digital transformation are mCommerce (mo-

bile) and sCommerce (social) which has already adapted (Bonnet and Ferraris,

2012). E-commerce is the dominant players in retail industry (Guppta, 2015).

Digital transformation is changing the habits of how people exchange and utilize

content with new technologies (Lanzolla and Anderson, 2008, p.72-76). Digital

transformation involves redesigning of the business model to take the advantage

of digital transformation rather than adapting new technology (Trends Magazine,

2015, p.1-6). Research showed 14% of organizations are digital transformers and

only 21.5% of enterprises are considered innovators in the digital space and 46%

are considered to be weak and inconsistent in their digital implementation which

is shown in Figure 1. Many companies are using digital channels in an opportunis-

tic and shortsighted way. They are inconsistent in the adaptation of digital trans-

formation in their business.

(Source: Claxton, 2015)

Figure: 1 Digital readiness among enterprise organizations

2.2 Definition of digital transformation

According to Dorner and Edelman (2015), digital transformation is “Creating

value at the new frontiers of the business world, create value in the processes that

execute a vision of customer experiences and building foundational capabilities

that support the entire structure”.

6

“The re-alignment of, or new investment in, technology and business models to

more effectively engage digital consumers at every touch point in the customer

experience lifecycle” (Solis et al., 2014).

From those definitions it is clear that the digital transformation is how executives

can execute their business model for get more customers’ engagement and rela-

tionship with existing technology and upcoming trends. Digital transformation is

not only the implementation of new technologies and innovation but also the

proper use of technologies and trends.

2.3 Analysis of clothing retail industries

Clothing retailers from all over the world are facing a huge challenge of digital

transformation. Clothing retailers are not only dependent on store retail but also

on online retail. Nowadays, ecommerce is a very crucial part of clothing business.

A few years ago they just try to implement multi-channel customer segmentation

but nowadays they are doing omni-channel retailing to achieve higher customer

engagement. Nevertheless, currently retailers are trying to manipulate their market

segmentation using omni-channel. The value of global apparel market was

US$1.7 trillion in 2012 and it employed approximately 75 million people (Fash-

ionunited, 2015). Many people are employed by the clothing industry and it is the

main source of income for many families. Therefore, clothing retailers have to be

more conscious about digital innovations and trends which can contribute to the

optimization of technology. Clothing market demand globally estimated from

2011 to 2018 shows in Figure 2. The estimated clothing demand in Asia and Aus-

tralia between 2011 and 2018 is almost nominal US$350 million. In North Ameri-

ca and Western Europe, the clothing demand has been predicted to be stable be-

tween 2015 and 2017. Figure 2.0 shows that the globally clothing industry experi-

ences a huge demand.

7

(Source: Cheng, 2015 adapted)

Figure: 2 Clothing market demand in worldwide

An overview of the US apparel market in 2015 is shown in table 1. The value of

the apparel market in the US was US$225 billion and half of it from women’s ap-

parel.

(Source: Statista, 2015a)

Table 1 Overview of the US apparel market

Women are the most significant customer segment in apparel industry not only in

the US but also all over the world. Figure 3 shows fashion retail in 2014, where

40% of consumers say they love to buy clothes and 22.7% consumers have

primarily used online channels to buy clothes.

0

50

100

150

200

250

300

350

400

2011 2015 2018

Clothing: Market demand in worldwide

(nominal US$ million)

Asia and

Australia

Western Europe

North America

Latin America

Economies in

transition

Overview of US apparel market value

Size of US apparel market $225b

Sales of women apparels in US $110,826m

Price per apparel article in US $19

Clothing store sales in US $178.52

8

(Source: Carter and Parsons, 2014a, p.5 adapted)

Figure: 3 Fashion retail in 2014

The clothing and accessories market has been predected to grow by 19 percent

between 2012 and 2017 (Carter and Parsons, 2014b, p.7). Customers’ demand for

fashion industries’ which is called demand pyramid is shown in Figure 4. The

demand pyramid shows different types of demand for fashion products, fashion

basic products and basic products.

(Source: Daspal, 2015)

Customers show a very high demand for fashion products, high demand for

fashion basic products and moderate demand for basic products. Figure 5 shows

the household consumption of clothing in European Union in 2013, which varied

40% love shopping

for clothes

22.7 % used

online channels to buy clothes

30% shoppers willing to spend on clothing

£75bn online fashion sales by

2017

£46bn clothing market

value by 2017

71% shoppers decisions are driven by price

Fashion Retail 2014

Figure: 4 Demand pyramid

High

Very High

Moderate

fashion

product

fashion basic product

basic product

9

in different countries. Germany has the highest household expenditure in

European Union (about 62.8 billion euros in 2013). It showed the demand in all

countries has dramatically increased.

(Source: Statista , 2015b adapted)

Figure: 5 Household consumption on clothing in the European Union in 2013

2.4 Analysis of the digital transformation of clothing retail industries

From the all what was discussed previously it is clear that clothing retailers have a

tremendous global importance. Therefore, digital transformation has had a huge

impact on clothing retail business. Clothing industries are affected by many ongo-

ing trends which are clarified in this chapter. In clothing industries, digital trans-

formation is affected by internal and external digital transformation which is

shown in Figure 6 below.

Figure: 6 Digital transformation

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

Germany

France

Austria

Denmark

Romania

Slovakia

luxemburg

Cyprus

Household consumption on clothing in the

European Union in 2013 - in million euros

10

2.4.1 Internal digital transformation concerning company’s supply chain

Internal digital transformation is a type of transformation that has a direct impact

on the company. The company’s supply chain is the heart of its portfolio, which

directly affected by the internal digital transformation. Supply chain is basically

impacted with internal digital transformation where production, distribution, pur-

chase and sales are connected with each other. All the processes are directly link

with internally in company. Every company should have a flexible and managea-

ble supply chain, which lies at the heart of the company. Without a transparent

supply chain the company cannot run its business in comfortable way which pro-

vides company turnover and customer awareness. An efficient supply chain can

reduce costs and increase profit. In the digital era, the supply chain is also affected

by the digital transformation where marketers want to integrate new technology in

supply chain to be more efficient in production. Clothing retailers want to adapt

new technology in their existing supply chain to be more effective production and

distribution process.

Clothing retailers have to reinvent their supply chain and reimaging supply chain

as a digital supply network (DSN) (Accenture Strategy, 2016). Digital supply

chain is more involved, intelligent, flexible and agile in productivity. Digital sup-

ply chains can ensure superior collaboration and extensive accesses to infor-

mation, as well as agility, effectiveness, and reliability in the running of the com-

pany process (Rajagopalan, 2015). Better understanding of supply chain manage-

ment is the key to achieve and maintain competitive advantage for the company

(Lyons and Ma’aram, 2014, p.1911-1925). Supply is not only a source of inputs

or services but also an integral source of added value (Massow and Canbolat,

2014, p.1940-1955). To increase the company’s competitiveness, is not only nec-

essary to improve company’s efficiency with enterprise, but also to improve the

entire supply chain management (Kuo et al., 2014, p.266-280). To obtain com-

petitive advantage, the supply chain has to be optimized in accordance with new

technologies and customer experiences (Chopra and Meindl, 2016, p.18).

In clothing industries, supply chain could be centralized and decentralized. In cen-

tralized supply chain, all the decisions makes by purchasing department and exer-

cise control over purchasing throughout the company (Enporion, 2009). It means

that all decisions are taken by company. Centralized supply chain can save mon-

11

ey, time and easier to manage logistic demand concerning suppliers and manufac-

turer (Procurement Bulletin, 2012). On the other hand, a decentralized supply

chain, all decisions and activities are executed by the local business unit (Enpori-

on, 2009). In decentralized supply chain, retailers are distinct from the manufac-

turer and emulate with each other (Shao et al., 2013, p.151-163). Decentralized

decision-making can raise the execution of a supply chain (Belavina and Girotra,

2012, p.1-33). Decentralized supply chain not only yields suppliers and retailers

decisions under stability with resembling profits but also manage the economics

that ascertain company’s provoking and interactions in terms of supply risk (Qin

et al., 2014, p.255-279). Decentralized setting is the success of supply chain part-

ners which depends on their capability to coordinate production and purchasing

decisions to fit supply with demand (Tang et al., 2014, p.1198-1211).

The output of supply chain is a combination of a physical product, time, place,

form, and function of a product or service proposition (Zhelyazkov, 2011). There-

fore, to have a real impact on supply chain in a clothing company, it is important

for the company to think of the value chain process. This thesis is discussed Por-

ter’s value chain and Agile supply chain because it is very significant for clothing

industries. Porter’s value is much related with this thesis. By using value chain,

companies are able to measure their entire business model. Therefore, it has been

discussed below:

2.4.1.1 Porter’s value chain

Value chain was developed by Michael Porter (1985) as a company tool for as-

serting ways to create more customer value and competitive advantage (Gustafson

et al., 2004, p.19). Value chain can reduce costs and create competitive advantage.

Using value chain clothing retailers are capable to produce products with less cost

than the market price.

12

(Source: Gustafson et al., 2004, p. 19)

Porter’s value chain consists of five primary activities and four supporting activi-

ties which discussed below.

Primary activities

Primary activities operate directly to create value for customers. The primary ac-

tivities are as follows:

Inbound logistics

Collections of the supply of raw materials or goods by the firms have direct im-

pacts on business. Clothing retailers have to collect raw materials from different

sources to create new products.

Operations

After managing raw materials it need to be different inputs into finish goods or

products. In this process, all products or raw materials used by the company are

verified. In clothing industries, it has to be clarified all materials before used.

Outbound logistics

All products are verified for shipping out such via order fulfillment and warehous-

ing. After that products are ready to be sent to different destinations.

Figure: 7 Porter’s value chain

13

Marketing and sales

In this process, the firm is able to provide goods or services that customers are

willing to buy. Companies provide information about their products and services.

Marketing is a crucial part to sale company products. Potential customers are able

to know to about product via different marketing activities. Companies should use

different digital platforms to sale their products and services they provides. In this

digital age, online marketing, mobile marketing, and social media are very essen-

tial marketing tools for companies.

Service

Service that allows the companies to maintain and enhance the value for products

in order to customer support, repair services, etc. It has huge impact in business.

Without providing good service company are not able to make profit maximize. In

this digital age, customers are looking for faster and flexible service from the

marketers.

Supporting activities

Supporting activities are indirectly related to firm which is also called secondary

activities. Primary activities are facilitated by supporting activities.

Procurement

Procurement is the combination of inputs, resources or raw materials, spare parts,

buildings etc. belonging to firms. It involves all kinds of acquisitions by the com-

pany. In clothing company have to be combine all resources from different desti-

nation.

Technology development

It involves technology to support the value chain activities such as R&D, new

hardware, and software in the firms’ transformation of inputs into outputs. In

clothing industry, companies have to be developed digital technologies on their

business model which can create brand awareness.

Human resource management

Human resource management consists of recruiting, hiring, training, developing,

retention of employees and managers as their compensations. Empowering is one

14

of the key element of today’s’ business success. Therefore, human resource man-

agement department have to recruit efficient and innovative employees and some-

times they have to change management in order to company demand. Human re-

source management department are responsible for changes concerning employ-

ees from higher level to lower level in terms of increase company productivity.

Firm infrastructure

It ties all parts together to serve the companies’ need. It involves the functions or

departments such as general management, planning, finance, legal, public relation,

government relations, accounting, and quality assurance. All the departments have

to work together like a team.

2.4.1.2 The agile supply chain

Different types of supply chain model are available but this thesis found more

convenient with agile supply chain which is much related with clothing industry.

Agile supply chain can makes agile in clothing supply chain. According to My-

erson (2014), “An agile supply chain must be to actual demand, and capable of

using information as a substitute (to some degree) for inventory through collabo-

ration and integration with key customers and suppliers”. Companies with agile

supply chain practice have more service levels than their competitors which are

not using agile supply chains (Dubeauclard et al., 2015). Figure 8 below shows

whether a company needs lean or agile supply chain. The figure suggests that

three proportions of variety, variability (or predictability), and volume are critical

for the perception of the type of approach (Christopher, 2000, cited in Gustafson et

al., 2004, p.27).

15

(Source: Christopher, 2000, cited in Gustafson et al., 2004, p.28).

Figure: 8 Lean or agile approach

“Agility” is required in less predictable environments where demand is volatile

and the requirement for variety is high (Christopher, 2000, cited in Gustafson et al.,

2004, p.28). “Lean” works best in high volume, low variety, and predictable envi-

ronments (Christopher, 2000, cited in Gustafson et al., 2004, p.28).

Agile supply chain can be characterized by four distinguishing marks presented in

Figure 9 below. The agile supply chain is a process where a company can operate

its supply chain in very fast and efficient way as shown in Figure 9.

(Source: Christopher, 2000, cited in Gustafson et al., 2004, p.28).

Figure: 9 Agile supply chain

Agile

Lean

Agile supply chain

Virtual

Prrocess integratio

n

Network based

Market sensitive

High

Varie-

ty/variabili

ty

Low

Low

Volume

High

16

Agile supply chains help companies to operate in an increasingly volatile global

economic climate. Four essential marks which make it agile as followed:

Market sensitive

Being market sensitive means that the supply chain can respond to a real demand

of inventory, raw materials from previous sales or shipment. Companies are able

to obtain data on demand directly from the point-of-sale (POS).

Virtual

By using information technology to exchange data between buyers and suppliers,

a virtual supply chain is created. Partners can act upon the same data by using in-

ternet and electronic data interchange. Supply chain collaborates with buyers and

suppliers, joint product development, common systems and shared information to

collaborative work. Virtual supply chains are information based rather than inven-

tory based.

Process integration

Process integration has become essential because companies focus on core com-

petencies and outsource their other activities. The dependency of process integra-

tion on suppliers or partners becomes unavoidable.

Network based

This concept of the supply chain as a confederation of buyers and suppliers linked

together as network provides the fourth ingredient of agility. In this digital era,

prizes will go to those firms who can better structure, co-ordinate and manage the

relationship with their partners in a network committed to better, closer and agile

relationship with customers.

2.4.2 External digital transformation concerning consumer

External digital transformation has a direct impact on consumers. Consumers are

deeply involved in the internal digital transformation of clothing companies. This

thesis not discussed all 4 P’s of marketing mix concerning distribution channels.

This thesis discussed only place and promotion as a distribution channel which

has more impact on digitalization in clothing industries concerning consumers.

Place and promotion are more digitalized than product and price. Product and

price are less related with digital transformation in terms of digitalization in cloth-

ing industry. However, product and price are also distribution channels like place

and promotion but this thesis is not focused on textile digitalize product. Though,

17

textile is a part of clothing industries. How consumers are affected by external

digital transformation is discussed below.

2.4.2.1 Place

Place is very significant in this digital era where consumer buying behavior is in-

terconnected with companies. Therefore, place plays an important role in clothing

industries. The following consumers behaviors are affecting by digital transfor-

mation which in linked with place discussed below:

2.4.2.1.1 Buying process

Buying process is related with externally and internally with companies and con-

sumers. Here it discuss concerning external relationship concerning consumers.

Marketers want to involve customers in the buying process in order to find out

their demands and personalized assortments. By using digital technology like

RFID, IoT, social media and so on, clothing retailers can receive real time updates

about customer satisfaction (Rajagopalan, 2015). In this digital era, marketers

have to find ways to make the buying process easier for potential customers

(Barnes, 2015). To obtain a better understanding of the customer, marketers have

to understand customers’ online habits and purchasing habits. It is quite difficult

to predict which new platforms and technologies become mainstream from the

customer perspective (Abidi, 2012). For instance, social media and online plat-

forms are nowadays very popular as buying platforms.

2.4.2.1.2 Transforming in-store experience

Stores today are more than sales channels. Therefore, marketers should have more

concern about their store. To achieve customer engagement, marketers should

provide different kinds of service which has more customer preferences. In this

digital era, marketers provide different touch points to offer information about

products and services in terms of create brand awareness and customer retention.

Companies, thus provide to creative digital experiences to ensure a connected and

involving in-store experience. Digital transformation in-store occurs when mar-

keters offers custom-made experiences to customers through a convergence of

abundant innovations – for instance, analyzing customer preferences in terms of

behavioral analytics, or detecting customer location in store and delivering con-

text-aware, personalized promotions on mobile devices (Rajagopalan, 2015). By

using interactive digital displays, digital touch points, mobile applications, digital

18

catalogues, iBeacon, RFID, QR Codes, or virtual in mirrors-fitting rooms,

customers can easily find what they need and want (Piotrowicz and Cluthbertson,

2014, p.5-16). Marketers try to be more felxible inorder to provide a comfortable

show-rooming experience or to achieve customer retention and loyalty.

Image: 1 iBeacon (see Appendix) Source: Author’s illustration

Primark is one of the leading clothing companies and it uses digital displays and

digital design in their new flagship store in Madrid along with sophisticated store

decorations to achive a higher customer engagement (Digital Sinagetoday, 2015).

(Source: Retail Design Blog, 2015)

Image: 2 Primark flagship store with digital design

2.4.2.1.3 Customer service

The most obvious aspect of the digital age is not only a shift caused by the new

technology but also a shift in the customer behavior (Rajagopalan, 2015). Cus-

tomers are different from each other. Therefore, they have different demands in

different situations. Marketers have to be provided seamless experience to in-

crease customer satisfaction about their products and provided services. In the

19

clothing industries, customers are more involved than in other industries. Custom-

er service has a huge impact on the clothing companies. Consumers are willing to

pay more money for affordable customer service (Shpanya, 2014). In this digital

era, where technology, society, and business models evolve, the customer is the

king (Solis et al., 2014). According to Hoong (2019, modified), customer services

are as outlined below:

2.4.2.1.3.1 E-commerce and omni-channel customer interactions

E-commerce is growing day by day and connecting more consumers confined to

online shopping (Ternstrand, 2015). E-commerce has created the opportunity for

the clothing industries to increase sales and create more facilities for traders and

marketers to enter the markets around the world (UKEssays, 2015a). Online shop-

ping is increasing day by day due to the available convenience and range. Online

shopping changes consumers’ perception and shopping behavior, which has influ-

enced companies (B2B Source, 2014). Online shopping has a profound effect on

the clothing supply chain (Parthsarthi, 2011). Customers prefer to have a complete

availability of products and as fast home delivery as possible at a tiny cost or

without cost (B2B Source, 2014). In 2014, online sales reached £5.6bn globally

and grew by 185% between 2007 and 2012 (Carter and Parsons, 2014c, p.12).

Omni-channel retailing is the future of e-commerce (Ternstrand, 2015). Therefore,

using single channel approach is not enough to achieve customer loyalty.

Customers are always looking for seamless shopping experience via online and

offline channels, which is very challenging (Hansen and Sia, 2015, p.51-66). Om-

ni-channel retail is vital for integrated retail experience because customers use

three or more channels for their daily shopping (Carter and Parsons, 2014c, p.12).

Because of this, marketers have to be careful to not use only one channel to sell

their products. How customer service are transforming from single channel to

omni-channel shows in Figure 10. Omni-channel approach in customer service

provides convenient and seamless experience, where customers can interact with

different channels to mak further decisions concerning products or services they

want.

20

(Source: Hoong, 2019, modified)

Figure: 10 Transforming customer service: Omni-channel retail

2.4.2.1.3.2 Servicing connected devices

Companies are trying to connect with different dives to increase customer service

towards services revenues. For instance, Canon and British Gas offer their

customers higher value add services shifting further away from simple product

(Hoong, 2019).

2.4.2.1.3.3 Nurturing customer relationship

Customer relationships involves not only millennials engaging on social media

but also the creation of relationship between the company and the customer who

buys its products. Therefore, customer relationship management (CRM) plays an

important role in the organization. The traditional notion of customer relationship

management is challenged by the rise of social media (Malthouse et al., 2013,

p.270-280). It involves the development of relationship between individuals, a

group of individuals, or company (Kreutzer and Land, 2014b, p.163). CRM is a

strategic approach which marketers use to establish how to optimize customer be-

havior (Greenberg, 2009). To gain customers, market insight and profits compa-

nies use CRM to maximize customer relationships via social media platforms

(Goldenberg, 2015).

2.4.2.2 Promotion

The aim of apparel promotion is to make potential customer interested in particu-

lar products or designs which they want to buy. Marketers want customers to feel

as if they can provide the latest products and services. Clothing industries are try-

ing to take an advantage of investments they have made previously to understand

niche market segments and improve their business portfolios. Companies like Za-

ra and H&M work with designers and celebrities to increase the emotional content

of their offer. They try to participate in different market segments. Leading cloth-

ing companies also try to hire celebrities as brand ambassador to retain customers

Single- Channel

Face-to-face

Multi Channel

Web and email

Omni-channel

combination of different channel

21

and increase brand awareness, which is crucial for business portfolio. Clothing

companies use catalogues and newsletters, which customers can receive by email

at certain times to get the information about the latest products and services.

Clothing companies use advertising, publicity/public relation, visual merchandis-

ing, special events, video and electronic merchandising to promote their products

(Goodheart-Willcox, 2015). Clothing retailers are not using only one channel to

promote their products; they are using different promotional channels which dis-

cussed below:

2.4.2.2.1 Advertising

In apparel industries, advertising is a crucial part of promotion. Therefore, digital

advertising is a vital part of apparel industries. Advertising is a paid promotional

function by a specific sponsor. Advertising can be used via different platforms

such as TV, radio, newspapers, and magazines. Clothing companies have also

adopted innovative approaches to claim their place and enhance customer rela-

tionships. Indeed, In this digital era, clothing industries are using not only chan-

nels which discussed but also using digital platforms to advertise their products,

such as mobile, responsive web design, social media and video, online ads and

blogs (Ozbay, 2013).

2.4.2.2.2 Publicity/ public relation

Public relations play a vital role in clothing industries. Publicity is a non-paid

promotion, which can inform about the product and services of the company via

different platforms, for instance, a layout of photographs in a fashion magazine

which shows the manufacturer’s collection. It is the task of the public relation de-

partment to achieve more publicity. Indeed, all activities regarding name, brand,

press, blog, social media, image, and magazine credits belongs to public relations.

Public relations have huge impact on the clothing industries regarding customers’

retention in terms of using social media platforms. Public relations in clothing

sector have been digitalized dramatically by using social media platforms.

2.4.2.2.3 Visual merchandising and special events

Visual merchandising and special events are attractive and presentable products in

an attractive and understandable manner. Visual merchandising shows how prod-

ucts are displayed in a store and how they look like. It is a key to get the custom-

22

ers awareness of certain products and it can increase sales. Visual merchandising

has special effects such as moving parts, lights, and color. For example, luxury

brand Burberry uses “magic mirrors” that transforms into a screen and show a

film of how the garment was made and what it looked like on the catwalk (Dacre

and Urwin, 2012).

2.4.2.2.4 Video and electronic merchandising

Video and electronic merchandising uses videos and electronic platforms in retail

stores to display new apparel trends and innovations to promote merchandise and

increase customer traffic and engagement. Marketers try to set videos on their

store about their new products and sometimes they put music as well to boost cus-

tomer awareness. Indeed, in this digital era electronic merchandising is more sig-

nificant rather than video merchandising. Clothing retailers are using different

electronic merchandising for instance social media, mobile and computers tech-

nology and e-mail. Those are the very vital way to get more customers traffic. The

most useful electronic merchandising is discussed below:

2.4.2.2.4.1 Social media

Clothing industry is perfectly suited and naturally fitted for social media (Ahmad

et al., 2015, p.1-7). Social media is a one of the most powerful platforms that can

be used to increase customer engagement (O’Brien, 2014, p.31-32). The im-

portance of social media has been growing day by day. Over the last decade, so-

cial media have not only been used in marketing but have also provided vast op-

portunities for the marketers to create brand awareness to their potential custom-

ers. Social media can help to create good relationships between customers and

marketers. The significance of social media has changed the world, and their way

of functioning has brought people closer to the marketers (Ahmad et al., 2015 p.1-

7). Social media are more significant platforms for clothing retailers and by using

social media customers can obtain lots of information about the marketer’s activi-

ties.

Therefore, marketers are using different social media like Facebook, Twitter, In-

stagram, Skype, Pinterest, Baidu, blogs, articles and so on to get customer en-

gagement. The number of social media users in 2015 which shown in Figure 11. It

can be seen from the graph that a huge number of consumers are using different

23

social media platforms in their daily life. Facebook is the most popular social me-

dia platform and had more than 1,500 million users in 2015; 1.5 million business-

es have set up their own Facebook fan page for brand communication purposes

(Xie and Lee, 2015).

In terms of social media users marketers might be able to know their status on the

basis of customer satisfaction. They might have negative comments or positive

feedback from customers about their products or services they provide. Therefore,

marketers are able to improve their product or services if customers have com-

plained.

(Source: Statista, 2015c)

Figure: 11 Social media users in Worldwide

2.4.2.2.4.2 Word of mouth (WOM)

Word of mouth (WOM) is a very powerful driver of consumer behavior by con-

sumers obtain information about products and services through using different

social media platforms (Fulgoni and Lipsman, 2015, p.18-21). Marketers have

used word of mouth (WOM) publicly and anonymously in different interactive

media platforms such as social media, e-mails, web forums, YouTube, and blogs

(Levy and Gvili, 2015, p.95-109). Consumers are always influenced by opinion

leaders, friends, and family, who communicate via WOM. WOM drives 13% of

consumer sales, 2/3 of which arises from offline activity and 1/3 online activity

0

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400

600

800

1,000

1,200

1,400

1,600

1,800

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24

(Levy and Gvili, 2015, p.95-109). Nearly 70% of all buying decisions were influ-

enced by WOM ( Thorbjornsen et al., 2015, p.73-80).

2.4.2.2.4.3 Mobile and computer technologies

Mobile technologies and computers are nowadays crucial part of clothing indus-

tries. Smartphone users are predicted to increase from 1.6 billion in 2013 to 5.6

billion in 2019 and 90% of people in the world’s will have access to use fast mo-

bile internet connections (Yee and Heutger, 2015, p.5). Without mobile and com-

puter technologies it is impossible to imagine any organization. Technologies play

a major role in the clothing industries. Apparel retail industry has been changed

by mobile apps (Camilleri, 2012). Mobile apps have a huge impact on clothing

industries. Mobile technologies have become the key factor to differentiate com-

pany products from their competitors (Weng and Lin, 2015, p.223-232). Mobile

technology delivers marketers to prolong the reach of companies existing services

for instance- delivering coupons to mobile devices (Karaatli et al., 2010, p.75-86).

Mobile marketing has created new opportunities for companies to improve rela-

tionships with their target group in an efficient way (Smutkupt et al., 2010, p.126-

139). Clothing retailers are seeking to formulate a mobile experience that satisfies

the demands of potential shoppers (Spears, 2014). By optimizing mobile technol-

ogies, marketers can achieve higher customer engagement. By using a

smartphone, consumers can search and explore new products, take pictures of

specific products they like, scan bar codes, upload digital coupons and make a fi-

nal decision about those specific products. Smartphone’s are turning into smart

terminals or holistic control and navigation instruments for online and offline

world (Kreutzer and Land, 2014c, p.15). It has dramatically changed the purchas-

ing behavior of customers. Customers can do shopping and able mobile banking

via mobile apps.

3. The case study of Zara: Facts and findings

The case study of Zara describes how it has become one of the leading clothing

companies in the world. This case shows how a clothing company can optimize

digital transformation in their business model. This case introduces a fast-

response global supply chain, and production and retail network.

25

Background

Zara was founded by Amancio Ortega in Spain in 1975 (SCM Globe, 2015). The

company started retail operation in all the major cities of Spain during 1980s and

in 1985s, the retailer was recognized as part of a group called Industria de Diseno

Textil (Inditex) (Ferdows et al., 2003, p.62-66). Zara opened its first overseas

store in 1988 in Porto, Portugal. Afterwards, Zara opened another two store in

New York in 1989 and in Paris 1990 (Ferdows et al., 2003, p.62-66). The actual

foreign expansion took place 1990s when Inditex entered 29 countries in Europe.

Inditex does not only operate Zara and has diversified its retail by create new

brands, for instance, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, in order

to increase customer engagement. More than 140,000 critical-thinking profession-

als are currently working for Inditex (Inditex, 2015b).

Zara is the biggest Inditex division and accounts for more than 75% of the total

Inditex sales (Ferdows et al., 2003, p.62-66). Zara has become one of the most

recognized apparel brands worldwide and one of the leading fashion retailers

(Helm, 2008; Caro et al., 2010). Inditex is one of the largest fashion retail groups

in the world with several brands and over 6,700 stores in 88 markets; and it made

€18.12 billion euro revenue in 2014 (Inditex, 2015a). Zara has over 2,000 stores

strategically located in leading cities across 88 countries (Zara, 2015). Zara made

$14.8 billion in revenue in 2015 (Forbes, 2015). Zara’s designers are directly

linked with their customers. It has a specialist team for receiving constant feed-

back from customers. Zara is always addressing the needs of its customers and

uses their feedback to build its ideas and trends.

Supply chain

Zara’s competitive advantage is its supply chain (Clara, 2014). The secret of Za-

ra’s success is its approach to the supply chain (Kumar and Linguri 2006, p.80-

84). Supply chain has had a huge impact on Zara’s success. Zara has two primary

warehouses in Spain, which periodically collect shipments of finished clothes

from suppliers and merchandise it directly to stores worldwide (Caro et al., 2010).

Zara changes its clothing design on average every two weeks (SCM Globe, 2015;

Berfield and Baigori, 2013; Caro et al., 2010). The secret of Zara’s success has

been centralization supply chain (Berfield and Baigori, 2013). Zara manufactures

26

almost half of its garments in Asia with low cost (Kumar and Linguri 2006, p. 80-

84). Zara operates it supply chains very fast and cooperates with manufactures and

customers. Zara takes customer choices into account and brings to “The Cube”,

where they manufacture products. Zara’s supply chain can be divided into the four

following parts: product organization and design, purchase and production, prod-

uct distribution, sales and feedback (Zhelyazkov, 2011).

Product organization and design

Zara has more than 200 young talented designers, who create designs based on the

latest fashion from the catwalk and fashion hotspots and adapt them for the mass

market (Kumar and Linguri 2006, p.80-84). Zara offers simple style in three col-

ors and three sizes. Zara uses laser barcode scanners to deliver its products punc-

tually to different destinations; these scanners operate with less than 0.5% error

(Zhelyazkov, 2011). Zara needs 14 days to develop a new product and deliver it to

stores and launches around 10,000- 12,000 new designs each year (Keller, 2012;

UKEssays, 2015b). It produces precise quantities for a certain item and design.

Purchase and production

Zara buys raw fabric from suppliers in Italy, Spain, and Greece and suppliers de-

liver to Zara within 5 days (SCM Globe, 2015). It has short production runs which

creates scarcity of a particular design and creates a sense of agility to purchase

while supplies last. Supply chain operations operate with three main objectives:

maximize the resource used, minimize the inventory and lead times. Those main

aspects have a direct impact on pricing, customer satisfaction and overall business

values (Zhelyazkov, 2011). It produces 450 million items a year for it stores in

worldwide (Berfield and Baigori, 2013). Zara’s basic products like t-shirts and

sweaters are ordered on a traditional schedule, such as, 6 months in advance from

factories in Asia.

Product distribution

Products are distributed from Zara distribution centre and transported to various

stores across Europe by trucks (Kumar and Linguri 2006, p.80-84). Its supply

chain consists of four warehouses located in Spain, Brazil, Mexico and Argentina.

Managers place orders twice a week at certain times, and new products arrive also

twice a week ( Berfield and Baigori, 2013).

27

(Source: SCM Globe, 2015, modified).

Zara has a highly centralized distribution center, which is called “The Cube”.

“The Cube” is the heart of Zara’s global distribution shown in Figure12. “The

Cube” is 5 million square feet big, highly automated, and with underground mon-

orail links to 11 factories within a 10 mile radius of “The Cube” (SCM Globe,

2015).

(Source: SCM, 2015. Graph: Author’s illustration).

Figure: 13 Zara products manufactured in Worldwide

The percentage of Zara products manufactured in different parts of the world is

shown in Figure 13. Half of the products of Zara are being produced in Spain

whereas rest of the products are manufacturing from Europe and Asia.

50%

26%

24%

Manufactured in percentage

Spain Rest of Europe Asia and Africa

Zara Global Distribution

center

"The Cube"

fashion designers

clothing factories

store managers

raw material suppliers

Figure: 12 Zara’s global distribution

28

Sales and feedback

Zara uses CRM software to help managers to understand the needs of their cus-

tomers, i.e., which products they like or dislike (Expertmarket, 2015). By using

CRM, Zara knows the need of their customers’ needs and collects data about them

which helps to improve Zara’s products and services. Zara’s designers collect in-

formation on sales and inventory from each of its stores on a daily basis and try to

optimize it on their production. All the collected data is analyzed in Zara’s head-

quarters in Spain, where the design team, the fast prototyping team, market spe-

cialists and buyers sit together to discuss the situation. After testing an ordered

sample item got mimicked in terms of colors, fabric structure and so on. In com-

parison with its competitors, Zara’s customers visit its store 17 times per year,

whereas its competitors’ stores -three times per year (SCM Globe, 2015).

Business strategy

Business strategy is essential for any business and especially in the clothing busi-

ness. Zara has a unique selling proposition (USP) business strategy, which has a

huge impact on its business model. It has 15-20 per cent markdowns sales consist-

ing in percentage (Kumar and Linguri 2006, p.80-84). It has a different pricing

strategy in terms of different market conditions, rather than using cost plus margin

as its basis, which is the formula used by most of its competitors (Kumar and Lin-

guri 2006, p.80-84). In Spain, Zara products are low cost, while in the US, Japan

and Mexico they are priced as a luxury product. Compared with its competitors,

Zara generally prices it products somewhat higher than C&A, and H&M below

Gap, Next (Kumar and Linguri 2006, p.80-84).

Target groups

Zara sales apparel, footwear, and accessories for women, men and children. Zara’s

target audiences are women and men aged 15-45 and children (SCM Globe, 2015

and College Stuff, 2007). The biggest target group is women (Harbott, 2011).

Promotion

Zara spends only 0.3% of sales on advertising, in comparison to other apparel re-

tailers who spend 3-4% (Pearson, 2007). Zara spends almost nothing on advertis-

ing (Loeb, 2013). Zara’s digital promotional activities including internet online

29

marketing, attending different social media platforms like Facebook, Twitter, In-

stragram, Pinterest, Youtube, smartphone apps and a newsletter. It has 23,538,220

likes on Facebook, 8.5 million followers on Instagram, 1.07 million followers on

Twitter and 174.4k followers on Pinterest. In 2013, Zara’s online sales jumped by

42% to €553 million (Burgen, 2014).

Zara’s ongoing digital transformation

Towards digitalize its promotion; Zara advertises its products on the listed social

media platforms. Zara uses digital transformation to find out customer prefer-

ences, and it has become the leader of using the “customer experience” at their

stores to respond on customers’ feedback more quickly than its competitors. At

every Zara store, the sales staff has the responsibility to collect information about

the customers’ likes and dislikes on products and to use cloud-based apps to send

updated information to the designers and manufacturers. In terms of digitalization,

Zara offers online shopping and mobile application for its customers. Customers

can buy products at anytime from anywhere via a mobile application. It is very

easy for a customer to buy products, and in case of any problems they change it in

a physical store. Zara uses environmental video displays in its stores, which ties in

nicely with the omni-channel experience (Haines, 2013). Customers can scan any

barcode in the store and view product details via the mobile application. It is real-

ly convenient for a customer who is in a hurry.

Zara is one of the leading clothing industries in the world. Zara make up a huge

turn over in global economy. The competitive advantage of Zara’s success is sup-

ply chain. Its supply chain is completely centralized in Spain; 50% of all items are

manufactured in Spain, 26% in the rest of Europe, and 24% in Asia and Africa

(SCM Globe, 2015). Zara is not paying attention on advertising. It uses different

social media platform in order to achieve customer engagement. Zara’s applied

vertical integration in its supply chain.

4. Discussions and conclusions

This chapter discusses main findings of this thesis, in particular those of the case

study and literature review. The aim of this chapter is to clarify the main findings.

30

4.1 Discussions

Zara’s digital transformation has been revolutionized in every sector in its busi-

ness model. Zara’s business has been reshaped by digital transformation. It was

shown in the literature review that only 14% of organizations are digital trans-

formers and only 21.5% of companies are considered as innovators in the digital

space (Claxton, 2015). The case study showed that digital transformation has cre-

ated huge opportunities for Zara. In 2015, the company made $14.8 billion in rev-

enue (Forbes, 2015). More than 140,000 professionals are working for Zara. The

global clothing industry was worth US$1.7 trillion in 2012 and almost 75 million

people were working in this industry (Fashionunited, 2015). Zara’s target groups

are women; research shows that the majority of clothing consumers globally are

women.

Therefore, women are a very important target group for clothing retailers. There is

a huge demand for Zara’s fashion products. Figure 4 shows that there is a higher

demand for fashion products than for basic fashion products or basic products. It

was shown in Figure 3 that in 2017 clothing and accessories market’s growth will

be by 19%. Clothing industries has huge demand in Europe. Figure 5 shows that,

Germany is the leader of household expenditure, which reached 62.8 billion Euros

in 2013. Every sector of Zara has adapted digital transformation its business mod-

el. In this digital age, clothing retailers are affected by many digital trends and

technologies which have a huge impact on clothing industries. Clothing industries

are digitalized internally and externally concerning consumer and company which

showed in figure 6. In internal digital transformation, companies are affected di-

rectly like supply chain.

Supply chain is the most important part of a company’s success. Without a well-

organized supply chain, company cannot operate its business. Only an effective

supply chain can reduce costs and increase the company’s profit. Digital supply

chain can makes company process agile, effective, and superior collaboration. The

supply chain is the key to obtaining competitive advantage. To have a competitive

advantage company has to digitalize entire supply chain management. When one

sector is digitalized and the others are not, they cannot be integrated within each

other. It has been seen in literature review supply chain might be a combination of

technology, product, time, place, function of a service proposition and customer

31

experience. It has been showed that supply chain can be centralized and decentral-

ized in clothing industry.

Decentralized supply is more connected with local suppliers and manufactures

which can provide products to the store with in very short time. They don’t need

to wait for headquarters command for decisions. Therefore, they can makes prod-

uct with very agility in different store. On the other hand, centralized supply chain

is located in specific distribution centre like Zara did. All the distributions are

made from Spain. All managers have to provide information to headquarter then

headquarter takes final decisions which would be matter of time. As discussed in

case study, Zara takes 14 days to deliver a new product to store in worldwide

(Keller, 2012; UKEssays, 2015b).

Porter’s value chain and agile supply chain were already discussed earlier. Por-

ter’s value chain was developed as an important tool for companies to create value

for customers and achieve competitive advantage. Porter’s value chain consists of

primary and secondary activities. Primary activities are creating value for custom-

ers, which include inbound logistics, operations, outbound logistics, marketing,

and service. The case study shows that the key factor for Zara’s success is its sup-

ply chain (Kumar and Lingury, 2006, p.80-88). This is supported by the literature

review, where it was state that a better understanding of the supply chain is the

key to achieve and maintain competitive advantage for a clothing company (Ly-

ons and Ma’aram, 2014, p.1911-1925). Michael Porter’s value chain discussed

supply chain can create more value for customers and competitive advantage

(Gustafson et al., 2004, p.19).

According to the case study and the literature review, the supply chain can boost

awareness to get more customer relationships and competitive advantage. The

case study shows that Zara’s vertical integration of supply is completely central-

ized in Spain (Berfield and Baigori, 2013). It has four warehouses which located

in Spain, Brazil, Mexico, and Argentina and half of its products are manufactured

in Spain. Figure 2 Shows that the demand for clothing in Asia and Australia has

increased dramatically. It has been estimated that between 2011 and 2018 in Asia

and Australia nominal clothing value approximately $350,000 million. In the US

the profit of the clothing industry was $225billion (Cheng, 2015).

32

Zara’s supply chain is divided into four main parts: product organization and de-

sign, purchase and production, product distribution, and sales and feedback. As

discussed in the literature review, the supply chain is a combination of a physical

product, time, place and the function of proposition product or service (Zhel-

yazkov, 2011). Zara has implemented every element in it’s his supply chain. Zara

needs 14 days to launch a new product and deliver it to stores. Every year it pro-

duces 10,000-12,000 new products (Keller, 2012; UKEssays, 2015b). It produces

specific quantities and designs which have only three sizes: large, medium and

small. Zara is capable of such production because of its agile supply chain. Agile

supply chain works on actual demand, inventory, and integration with customers

and suppliers (Myerson, 2014). Zara has more service levels than its competitors

that use agile supply chain (Dubeauclard et al., 2015). Agile supply chain operates

an increasing volatile and unforgiving economic growth for Zara.

External digital transformation is when consumers are affected by the digital

transformation. Therefore, external transformation is tightly linked to the compa-

ny’ turnover and customer engagement. How do companies provide services to

their potential consumers? It can be seen in the Zara case study that all their stores

are well-designed and centrally located in the city where consumers can get easily.

All employees working at the store collect information from customers about their

likes and dislikes. Afterwards, they send it to the headquarters in Spain on a daily

basis. Managers and designers decide which products they like to launch on the

basis of customer feedback. Retailers analyze customers’ preference according to

their location. It was shown that Zara is not using digital touch points, digital

signage, iBeacon, or magic mirrors in their stores. It was shown in literature re-

view that in terms of digital transformation of in store experience companies are

using those technologies to achieve higher customer involvement with the compa-

ny. It has been shown that customer service is one of the key aspects of digital

transformation. Customers are like to receive easy service to buy products either

online or offline.

Therefore, ecommerce is becoming a major platform of companies’ sales. Zara

online sales have jumped by 42% to €553 million in 2013 (Burgen, 2015). Zara

made a huge turnover from the online sales in 2013. It has been seen in last few

years online shopping is increasing day by day and research shows that consumers

33

like to buy apparel products online and in brick and mortar stores. In 2014, the

online sales made £5.6 billion profit worldwide and it grew by 185% between

2007 and 2012 (Carter and parsons, 2014c, p.12). E-commerce has a profound

effect on company’s supply chains (Parthsarthi, 2011). Companies have to be ac-

tive on online platforms. It has been shown customers are not same: they have dif-

ferent choices, different ideas and level of economic efficiency. Some of them like

to buy online and some of them like to buy offline, and it has been seen that there

are also consumers who like to visit a company’s website, see the product, and

order it online but like to receive it offline. Consumer buying preferences in the

digital age are shown in Figure 14.

(Source: Author’s illustration).

Figure: 14 Consumers’ buying preferences

Zara is not using just one channel to sell its products but also many channels such

as omni-channel approach. There are different environmental video displays in

Zara stores where customers can easily buy products using application. It has been

discussed in literature review that customers like to buy products in places or ser-

vice in places where they receive seamless experiences without any difficulties

online or offline (Hansen and Sia, 2015, p.51-66). Therefore, clothing retailers

should use more than one channel in order to achieve customer involvement with

the company. Customer relationships are very important to clothing companies.

The case study shows that Zara uses CRM software to obtain more information

from customers to understand their needs and wants which products and services

they like or dislike (Expertmarket, 2015). As discussed in the literature review,

CRM is a strategic approach by which marketers want to observe customer behav-

ior (Greenberg, 2009). CRM is an essential element to build a customer relation-

ship. Promotion via different platforms can boost companies profit and brand

awareness. By using different promotional activities, the company can increase

customer awareness and loyalty towards company profit. Zara does not care about

Online Offline Online+Offline

34

advertisement. It spends only 0.3% of sales on advertising (Pearson, 2007). In lit-

erature review it was shown that other retailers are spent more money on advertis-

ing than Zara did.

Nevertheless, social media are becoming the most important platforms to promote

company products or services. They are particularly well suited for the clothing

industry, and companies can achieve more customer awareness via social media

(Ahmad et al., 2015 p.1-7). Social media are the most powerful platforms to

achieve more customers engagement (O’Brien, 2014, p.31-32). The case study

showed that Zara is involved with different social media platforms like Facebook,

Twitter, Instagram, Pinterest, Youtube, smartphone apps, etc. It has more than

23,538,220 like on Facebook. It has been seen in literature review social media

users are using day by day in worldwide. Figure 11 showed that Facebook has

more than 1,500 million users worldwide (Statista, 2015c). Clothing retailers post

new products or services on their social media pages. It was shown in the case

study Zara posts its new arrivals at their stores on its Facebook page. This way

post marketers can see which product potential customers like or dislike. Potential

customers can comment and leave likes or dislikes on the Facebook page. By us-

ing this information, marketers can improve their service or product.

The case study showed that Zara uses WOM via social media, Youtube, and mo-

bile apps. This supported in literature review, which discussed marketers that use

WOM in different interactive social media platforms (Levy and Gvili, 2015, p.95-

109). Consumers are influenced by WOM to make decision before purchasing

products or services. Approximately 70% of all purchase decisions are influenced

by the WOM (Thorbjornsen, et al., 2015, p.73-80), which was discussed in the

literature review. Zara uses cloud-base apps to send updated information to its de-

signers and manufacturers. Zara adapts mobile application for customers to allow

them to buy products from anywhere at any time. Mobile technology has played

significant role in the clothing retail because most customers use a smartphone.

Mobile is very easy to access anywhere and they can search company website. It

should be well-designed webpage which smart phone users can access easily and

read all information. It has been estimated that in 2019, 90% of people in world-

wide will have access to fast mobile internet connections (Yee and Heutger, 2015,

p.5).

35

To make a better relationship with customers, the most efficient way is mobile

marketing (Smutkupt et al., 2010, p.126-139), which was discussed in the litera-

ture review. Mobile applications have a huge impact on clothing retailers. As

shown in the case study, Zara has unique selling proportion business strategy

which has huge impact in its business. Zara has different pricing strategy in terms

of different market segments which gives it a competitive advantage. Therefore,

business strategy is really important for clothing industries and helps to gain cus-

tomers loyalty towards company a product or service.

From the discussion it has found that to optimize digital transformation is not easy

for clothing retailers. They face many challenges to adapt digital transformation in

their business model. The challenges faced by clothing companies that want to

digitalize are discussed below.

o Lack of investment

Zara is a big company which belongs to well-established Inditex group. But for a

small company which does not have enough investment it might be difficult to

digitalize. In order to digitalize a company needs huge investment. Companies

have to change their old technology which requires a huge amount of capital.

o Lack of technology

Digital technology means not only new technology but also optimization technol-

ogy for the company. Zara’s case study shows that it has lack of technology in

terms of digitalize its supply chain. Not only Zara but also many other clothing

companies are not able to digitalize in terms of lack of technology. It is not easy to

adapt new technology in clothing industries.

o Coordination issues

In clothing industries, many companies fail to integrate because of coordination

difficulties between their business units or sectors like IT sector and marketing

sector. Zara case study shows that there are connections between every depart-

ment. Information can be shared by every store to every sector via a sales person.

But many companies do not collaborate with different departments. In clothing

industries, having different initiatives in design, product, and marketing require

investment in coordination.

36

o Complexity

Digital transformation is not a easy to adapt in a business model. It is too complex

for clothing retailers to optimize. Retailers have to be careful to have partnership

with different parties. Even Zara which is one of the leading clothing companies

has not digitalized yet because of complexity.

o Training

To digitalize clothing industries, companies have to arrange training programs for

employee and try to educate them about specific technologies which they like to

use in their company. More than 140,000 employees are working therefore for

Zara it is difficult to train them and it could also cost a lot of money.

o Change management

Change management is very essential for clothing companies. When company

wants to adapt new trends and innovations, then they have to change not only

technology but also its employee as well. It is not easy to change technology or

employees because customers are used to their connections with employees and

trends. It is a big decision, which can bring company either success or failure.

The discussion shows that clothing retailers should use a couple of initiatives to

manage digital transformation in their business model. This thesis has found the

below initiatives which might be helpful for clothing retailers to manage disrupt-

ing technology in their business model.

o Market research or segmentation

Clothing retailers should do market research to adapt new technologies in their

company. Otherwise companies are not able to find out customers’ demands.

Without market research it would cost a lot of money and time. Only with opti-

mized market segmentation marketers are able to find out which trends customer

like the most. For instance, it has been shown that social media are the most im-

portant platforms for clothing retailers to establish customer relationships and in-

crease their awareness.

37

o Investment

Companies need a huge amount of money to adapt new technologies. Therefore,

clothing retailers should have a precise budget for their IT sector in every year and

should also update their budget every year.

o New technology

Marketers should be aware of new trends and technologies that customers like

most and have to adapt those technologies in their business model. Customers are

always like to have updated products and services. Without implementing new

technologies it would not be possible to retain customers.

o Collaboration with different departments

It is really important for company that all the departments are working as a team.

It has been seen in companies that the entire department are not working together.

The marketing department with the IT department have to work together to adapt

new trends and technologies. The marketing department can give new ideas and

the IT department has to implement technologies in the company.

o Omni channel approach

Customers now like to buy products not only via one channel but also many chan-

nels like online or offline. Consumers are always looking for flexibility in their

shopping provided by online shopping, online payments, mobile application to

buy product.

4.2 Conclusions and recommendations

Digital transformation has had an impact on clothing industries as seen from this

thesis. It creates many opportunities for marketers to increase their customers’ en-

gagement and loyalty. A company like Zara takes a huge advantage of use digital

transformation. Zara is leading the fast fashion company for their vertical integra-

tion of the supply chain, which is able to produce a new product in 14 days and

deliver it from manufacture to the store. Therefore, clothing industries might have

to rethink their supply chain in terms of digitalization. In this digital era, it is im-

possible to imagine a company which does not use social media platforms. There-

fore, all clothing companies should try to use these platforms. Sometimes it is not

easy to for a small sized company which has lack of investment. It involved is not

38

only adapting new technology but also optimizing it to boost the company’s prof-

its and the number of customers.

Clothing industry is a huge industry, which has an important role in the global

economy. Therefore, companies have to think about digitalizing. It’s not only par-

ticipated in different social media platforms and developed new technology in

company but also optimize it. It is a part of proper usage of technologies where

company is able to get more customers engagement and maximizing profit. Nev-

ertheless, clothing industries have to use digital technology to change value prop-

ositions, customer relationships and their internal process. This thesis found an-

swers for those questions which arisen in 1.2. The answer for the first question is,

clothing companies are affected by digital transformation in every sector on it for

instance- supply chain, customer relationship, and company turnover as well. An-

swers for the sub-questions are supply chain create competitive advantage with in

short time production in terms of decentralized, to adapt digital transformation

retailers faces challenges for lack of investment, technology, coordination issues,

complexity, training and change management. To face those challenges, compa-

nies should take initiatives such as market research, investment, new technology,

omni-channel approach.

Zara is a leading clothing company with an efficient supply chain but it supply

chain is totally centralized in Spain. Zara need 14 days to develop a product and

deliver to store in deferent destination. This thesis found that it might be more

productive if they could decentralize in different countries like Germany, China,

and Brazil. In order to decentralize it could consume time less than 14 days dura-

tion. While they decentralized their supply chain they do not need to depend on

headquarter to develop new products. It would be save money because they do not

transport from far way. As the thesis showed Germany has huge demand on cloth-

ing product. So, it would be great opportunities for Zara to transfer their distribu-

tion center in Germany.

Furthermore, Zara is not paying attention on advertising as discussed before in the

case study. In today’s digital world advertising is a heart of business success in

terms of customer relationship. Zara should be more concentrate on advertising.

They have to use different digital advertising platforms which discussed in this

39

thesis like digital touch point in heart of the city like main train station. Have to

take initiatives to be more digitalized company. It supply chain should be integrat-

ed with computerized supply chain where they makes faster their supply from

suppliers, merchandiser and need less workforce. Zara might have to use new

technologies on their store (like Burberry did with magic mirror) and implement

new digital store design (as Primark did in Madrid). It has to be combined with

different channel to get customer retention like Omni channels to retain custom-

ers, such as omni-channel approach. Zara should use more social media and apps

in their business strategy (Facebook is forbidden in China). As discussed, social

media and mobile commerce are very crucial now days for customer engagement

and retention.

4.3 Limitations and further research

Digital transformation is an ongoing topic, which has not enough academic books

to research. There are a few books on this topic, but due to the download rules and

regulations in Germany they were very difficult to access. Therefore, this paper

was based on secondary research. All secondary research is based on academic

journals, academic articles, website, blogs, newspapers, company websites etc.

Due to the time management, it was quite hard to discuss such a huge topic with-

out primary research. Primary research requires more time, and companies do not

want to share their internal information.

Digital transformation has a huge impact on clothing industries. Therefore, there

should be more research on digital transformation. As a marketing student it is not

easy to clarify which supply chain is suitable for clothing industry. To have actual

clarification on supply chain which is perfect for company have to use mathemati-

cal terms but as a marketing student and for time perspectives it would not be pos-

sible on this thesis. Therefore, it makes more sense to have mathematical terms to

clarify it which supply chain is perfect for clothing company decentralized or cen-

tralized. This thesis was discusses only the Zara case study, but it might be more

interesting to do more research on a similar clothing company like H&M, Primark

etc. It was hard to collect primary data from the company. It makes more sense to

do primary research where more information could be obtained. It would be

40

worthwhile might be online survey to know potential customer behavior in terms

of digitalization and also hypothesis for expert form clothing industries.

41

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Appendix

iBeacon

“iBeacon is a apple’s version of the Bluetooth-based beacon concept, which al-

lows Bluetooth devices to broadcast or receive tiny and static pieces of data within

short distances. In simplistic words, it consists of two parts: a broadcaster (beacon

device) and a receiver (Smartphone + app). Two broadcaster is always advertising

“I am here and my ID is..” while the receiver detects these signal and does what-

ever it needs to do based on how close or far it is from them”. (Beacon Sandwich,

2016).

Source: Beacon Sandwich. (2016). What is iBeacon? Beacon Sandwich.

[Online]. Available: http://www.beaconsandwich.com/what-is-ibeacon.html [Ac-

cessed 11 January 2016].