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1- With which of the international competitors listed in the case is it most interesting to

compare Inditex's financial results? Why? What do comparisons indicate about Inditex's
relative operating economics? Its relative capital efficiency? Note that while the
electronic version of Exhibit 6 automates some of the comparisons, you will probably
want to dig further into them.

Background: Inditex is an international fashion retailer that designed, manufactured and sold
apparel, footwear, and accessories for women, men, and children through Zara and other five
chains around the world. The six retailing chains were organized as separate business units within
an overall structure that also included six business support areas and nine corporate departments
or areas of responsibility. They are separate in the sense that each chain is responsible for its own
strategy, product design, sourcing, and manufacturing, distribution, and image, personal and
financial results. Inditex was based in the northwest of Spain; it also operated about 20
manufacturing and distribution facilities in the region

It is most interesting to compare Inditex with its largest competitor-Gap- as Gap have the highest
market capitalization of all Inditex competitors, the highest operating revenues and largest no. of
store locations worldwide. So when comparing the financial results of Inditex with Gap we find out
that:

Gap Vs Zara: Gap had achieved stellar growth and profitability in the last ten years; it was one of
the largest specialist apparel retailers in the world ahead of Inditex. It owned most of their stores
but outsourced all production in contrast wit Inditex. Nevertheless it ends with a massive a decline
in its stock prices and the departure of Its CEO in 2002.

Although Gap and Zara follow the same business model, Zara's business model improved over
time, through the incorporation of technology as they have developed about 95% of the software it
uses, Zara fast response to market changes gave them a competitive advantage in creating fashion
and satisfying customers plus the fact that the company is getting larger and more global than it
has been. For instance, Zara did not face the two basic barriers for going globally which are: oCosts:
that Zara did not incur when entering a new market, as the company does not have extraordinary
advertising expenses to create brand recognition. oLogistics: which involve being ahead of the
curve, volume, SKUs, and delivery points; all are the same in every store which allows the company
to take better advantage of real estate opportunities regardless of the market the company is in.
That is why gap's operating expenses far exceed that of Zara in year 2001.

GAP MILLIONS OF EUROS NET OPERATING REVENUES15559 COST OF GOODS SOLD10904 GROSS
PROFIT4656 OPERATING EXPENSES4276 (NET INTEREST EXPENSE)108 OPERATING PROFITS272
INCOME TAX280 NET INCOME-9 INDITEX MILLIONS OF EUROS NETOPERATING REVENUES3250 COST
OF GOODS SOLD1563 GROSS MARGIN1687 OPERATING EXPENSES

OPERATING PROFITS704 INCOME TAX150 NET INCOME340

2- How specifically do the distinctive features of Zara's business model affect its
operating economics? Specifically, compare Zara with an average retailer with similar
posted prices. In convenient to assume that on average, retail selling prices are about
twice as high as manufacturers' selling prices.

Zara gets a competitive advantage by offering the customer fashionable clothes to affordable
prices. This is not a pure differentiation since zara does not charge a premium price for the product.
Nor either is it a pure cost leadership since the objective is not to become the lowest-cost producer
in the industry. Zara has rather developed a combination of differentiation and cost leadership, and
ended up with a successful formula.

A short lead-time is important for Zara to be able to offer the latest fashion in store at all time. The
reduction in transportation time by having the whole production close to the market give Zara a big
lead-time advantage compared to its competitors, which more commonly keep their production in
the Far East. The geographical close network by keeping the production close to the headquarters
in Europe and keeping the whole team working in the same building might also lead to reduction of
the lead-time. Making collaborating and meeting less time taking. In addition, they have carefully
integrated a good IT- structure. Further, by owning a big part of the facilities they are able to have
better control of the production and are always able to reschedule each factories production plan to
concentrate on that part of the collection that is most important at that moment.

In the fashion industry the customer's demand changes rapidly, and what the customers finds
fashionable today might be impossible to sell tomorrow. Therefore, to base the future revenue on
always offering fashionable clothes depends on good predictions of customers future preferences.
The chance for a miss prediction is quite big and knowing that there is a chance of ending up selling
the whole collection on discount, or not be able to sell it at all, the prediction of the next fashion has
to be prepared carefully.

Zara's short lead-time gives a higher chance for a more accurate predicting the next fashion. This
makes them able to meet the customers demand and offer a higher level of fashionable clothes in
their stores. It also makes it possible for Zara to have a higher turnover and continuously refresh its
stores with new fashion twice a week, this comparing to many of the competitors that refresh their
store once a session. Knowing that there will always be new designs in a Zara store, customer will
visit the store more frequently leading to more sales.

The reduction in lead-time does more than improving the forecasting. It also decreases the level of
inventory, which conduct to release of capital locked up in stock, reduce the cost of holding it and
the risk of stock going out of date.

3- Can you graph the linkages among Zara's choices about how to compete, particularly
ones connected to its quick -response capability and the ways in which they create
competitive advantage? What does the exercise suggest about such capabilities as
bases for competitive advantage?

Zara choices to compete have mainly been concentrated on their quick response capability. Their
ability to quickly respond to market needs with very short business cycles have given the company
a distinctive competitive advantage over the competition. Below is a graph of how Zara choices
created a number of competitive advantages for the company:

The above model clarifies the huge advantages gained by Zara as a result of their reduced business
cycle. Not only does

Zara attain higher customer satisfaction as they are quickly able to respond to their feedback and
needs, but also Zara manages to highly decrease its operating costs as a result of decreased
inventory held and thus lower level of risk when new models are introduced.

4- Why might Zara fail? How would you calibrate its competitive advantage as being
relative to the kinds of advantages typically pursued by other apparel retailers?

Zara's competitiveness comes from: oInnovation: not to stop but always producing new things
based on customer desires and changes in market. oSegmentation: the company took advantage of
unserved segment, a segment where some one might offer good quality fashion at a reasonable
price and managed to insert themselves in. oSimple strategy: the company is looking for a target
without analyzing ages or lifestyles, which simplifies things a lot. It targets buyers who like fashion
and that is not limited by international borders. oSelection of personnel: having motivated and
dedicated personnel, people who think about the company 24 hours a day, people who understood
this type of work from the outset. oQuick response time that led to significant compression of cycle
times enabled by improvements in information technology and encouraged by shorter fashion
cycles and deeper markdowns. oExperience regarding real estate, personnel costs, hiring and other
contract negotiating.

However it is difficult to decide that Zara will not step down because there is always uncertainty in
the market and the degree of certainty in planning decreases over time but as long as the company
continues to maintain the philosophy of adapting to the market and operates from the bottom up, it
will not be dropped out.

5- Was Galicia/ Spain fertile ground for the emergence of an apparel retailing
powerhouse?

It is fair to say that Galicia was a fertile ground for the emergence of an apparel retailing
powerhouse. Galicia is the third poorest of Spain's regions, which meant that labor cost is lower
than the rest of Spain. It had a large unemployment rate which meant that the company would not
find any trouble attracting employees to join. Historically, Galicia had always been famous for its
apparel quality, and has been the home to thousands of small apparel workshops.

Galicia region has also a very important advantage of being in the corner of Europe from the
perspective of transportation costs.

6- How well does Zara's advantage travel globally?

Zara competitiveness as highlighted in number 4 managed to travel globally successfully. As 55%


of Zara revenues coming from abroad, one can see that Zara was successful in migrating its
competitiveness globally. By adapting to each culture, Zara has managed to position itself
differently in different market. Zara strategy of opening one store for information gathering in the
initial phase of entering a new market is one of its key strength points. By starting with such
"information gathering" store, Zara manages to obtain insight of the local market and how best to
adapt to it.

7- What do you think of Zara's past international strategy? Evaluate, in particular, its
past strategy for (product) market selection, its mode of entry , and its standardization
of its marketing approach

Internationally, the strategy ZARA adopted was to test the market by flagging one store then
expanding according to market needs. This strategy helped the fast growth of the company as well
as eliminating the risk factors. Moreover, the image ZARA created over the years minimized the
need for any marketing activity and the flagged pilot store, based on a prototype, would develop
the company brand awareness in the new country.

In contrast to the advantages of their international expansion policy, the price of ZARA products in
USA is more than double same products in Spain ;moreover, as the case stated, what worked with
1000 stores will not work with 2000 stores and the centralized supply chain might collapse or
become a real problem . Accordingly, a competition might find a window of opportunity in that
sense. The other factor is the uniformly fashion adopted by ZARA in all stores , yes it is successful
in Europe and the middle east, yet that might not be the case in Asia and the company will need to
adopt more local customization when entering new international markets.

8- What is the best way to grow the Zara chain? How, specifically, do you see prospects
in the Italian market? And more broadly, what do you think about the strategy of
focusing on Europe versus making a major commitment to a second region?

The best way Zara chain to grow is to focus on the rest of Europe. As an example, Zara can focus
its growth to countries like Italy. Italy is the largest single apparel market in Europe. Italians spent
the highest per capita on apparel. Italian consumers visit apparel stores relatively frequently which
is good for Zara's business model that relies on changing the contents of the stores very frequently.
Italians are also considered very fashion-forward which fits well with Zara's fashionable designs.

The strategy of focusing on Europe is generally the recommended strategy for Zara at this point in
its development. Zara understands the dynamics of the European market and is the fashion
oriented of all markets.

9- What other strategic recommendations would you make to Indirex CEO Jose Maria
Castellano?

Other strategic recommendation would be to make better use of economies of scale. By


centralizing, or at least creating a common party to handle all supporting function for the different
chains, Indirex can make huge savings. By combining distribution, warehousing, purchasing, and
other supporting functions, like financing, IT, .. etc of the different chains, Indirex would highly
benefit of the savings resulting from the economies of scale that would be achieved as well as
reducing the amount of redundant work being done by the different chains independently.