ZARA Fashion

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?

The four companies shown above have very different business models. Inditex owned
much of the production and most of its stores. Inditex is thus a vertically integrated
company. This made Inditex gain a competitive advantage, which is quick response to the
market requirements. On the other hand, The Gap and H&M have a different business
model. They owned most of the stores, but outsourced all the production. Benetton had a
third business model. It invested heavily in the production, but licensees ran its stores.

The most interesting company to compare Inditex is The Gap. Although The Gap has
much higher revenues than Inditex (almost five times Inditex), it incurred a net loss, as
opposed to Inditex, which achieved a 23%, return in investment. This is due to the
extremely high costs of good sold for The Gap. This could be caused -at least partially-
by the complete outsourcing of the production. They do not have enough control over the
production costs. Although The Gap has larger market share than Inditex and has equity
almost double that of Inditex, Inditex is much more profitable.
2)

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 sources fabric, other inputs, and finished products from external suppliers. It has
purchasing offices in Barcelona and Hong Kong. This gives Zara a competitive
advantage towards the costs of goods sold, as it can purchase from both Europe and Asia
according to prices. Buying more from China in the future might reduce even more the
costs of goods sold.

Inditex fully owns Comditel that managed dyeing, patterning and finishing of grey fabric
of Inditex’s chains, and supplied finished fabric to external as well as in-house
manufacturers. This gave Zara further competitive advantage, in terms of both cost and
control.
Inditex also fully owned 20 factories for internal manufacture. These factories apply just-
in-time production (JIT). Again, this gave Zara further competitive advantage, in terms of
both cost and control.
Zara’s business model makes it more profitable then any other retailer. We already
know from marketing that the retailer gets almost half the price of the commodity sold.
So by playing both the role of the manufacturer and the role of the retailer, Zara is
definitely much more profitable than the average retailer with similar posted prices.

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 does not compete on price. The usual Zara customer is not very price sensitive. Zara
rather competes on fashion. They can only do that by having that quick response
capability.
Comditel, Inditex’s subsidiary, took only one week to finish grey fabric. The 20
fully owned factories responsible for internal manufacture applied the JIT production
system. All the production was fully under control of Inditex. Vertical integration helped
reduce the “bull whip effect�: the tendency for fluctuations in final demand to get
amplified as they were transmitted back up the supply chain. Zara could originate design
and have finished goods within four to five weeks for entirely new designs and two
weeks for restocking or modifying existing products vs. six months for other competitors.
Due to this impressive response capability, Zara was able to follow fashion instead of
betting on it. The amount of required forecasting with all the accompanied risk was
minimized to a level that no competitor would ever reach.

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?
The vast expansion plan of Zara on one hand and its standardized production line and
strategy on the other hand could lead to the failure of Zara. This is basically due to the
differences in the economic, cultural, social and political conditions in each of the
regions/countries it is expanding into. Hence, such strategies and product lines should be
customized on a country/region basis to be able to effectively attend to the local demand
without incurring additional costs. For example, certain product lines will not meet
success in the Middle East due to cultural norms; hence, it would have been better and
feasible from the beginning if such lines would have been directed to other regions where
it would meet heavy demand.
Zara’s competitive advantage mainly revolves around the high turnover of its
products, low level of inventory, efficient distribution system, and commitment of its
employees as well as meeting the consumer demands relating to fashionable clothes.

5) Was Galicia/Spain fertile ground for the emergence of an apparel retailing

powerhouse?
No. Galicia/Spain was not a fertile ground for the emergence of an apparel retailing
powerhouse. This is due to the fact that this region was considered the third poorest of
Spain’s independent regions, with high unemployment rate, poor communication
links in addition to the heavy reliance on agriculture and fishing.
Despite its famous history, as tailors for the aristocracy; Galicia lacked strong local
demand for the apparel industry, technical institutes and universities that would help in
the education and training of its citizens as well as the absence of an industry association
that monitors such activities.
The only advantage of this region was its geographical proximity to Europe, as it lies in
the corner of Europe, hence reducing transportation costs.

6) How well does Zara’s advantage travel globally?

Until the writing of the case study, Zara’s advantage succeeded in traveling globally.
However, with the upcoming expansion into additional countries and new markets, such
advantages should be adopted to the special circumstances relevant to these areas. This
would assist in decreasing additional expenses in addition to meeting the direct demand
of the consumers; hence, achieving more success.

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
Zara’s international strategy was excellent because it adopted a balanced mixture of
standardization and customization:
• It followed standard procedures in selecting and entering a certain market, which
made scaling operations easier (flagship store – market test for 4Ps – expanding into
countries with similar culture-favorable micro and macro economic conditions –
backward market-based pricing – reporting and ordering procedures).
• The standard procedures left room for customization required by different cultures
and countries (entry mode – freedom to order items suitable for market – brand
positioning differed from one market to the other).
Zara did not withdraw from a single market, which reflected sound market selection
decisions. It followed a systematic procedure to insure extensive market testing before
expanding its operations (oil-stain method). Moreover, countries were initially selected in
concentric groups to facilitate shipping problems evolving with the complexity
introduced by a certain range of distance. Commercial teams carefully studied markets
before making the entry decision. Zara would immediately expand into a favorable
market to reach economies of scale after setting market-based prices.
Zara adopted 3 different modes of entry that depended on local factors (regulations –
economic complexities – entry barriers). The company preferred company-managed
stores even if the operation was a joint venture. Franchised operations were controlled by
strict QA procedures and the company provided extensive free services to its partners
(human resources-training-logistics). Zara always retained the right to open company-
owned stores and the option to buy out its partners in case of problems.
Marketing decisions varied from one market to another thus reflecting the different
parameters and challenges posed by the market forces. The flagship store in each market
was used to verify data about market conditions while pricing differed according to
shipping cost, taxes and tariffs. The brand positioning in each market differed from one
market to the other based on purchasing power and taste. Products reflected local
preferences and measurements.

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?
Zara is a highly internationalized company with a deep level of vertical integration. The
operations are becoming more and more complex with multiple sources of production
and assembly that goes to one centralized distribution system. At this stage, Zara is not
equipped to increase complexity by expanding into new competitive markets like Asia
and North America. Many strategies and changes have to be considered – especially in
production and logistics – before venturing into new markets .
Zara should expand right away into the Italian market then restructure its production and
distribution system before attempting to expand into the Asian market as it is a huge
market that would require abundant resources. The North American market is not a
strategic priority for Zara at this stage because it is unattractive and highly competitive.
Many retailers are competing there mainly on price and discounts, which is not exactly
Zara’s favorite marketing strategy.
Italy is the most attractive option at this stage for the following reasons:
• Zara has huge experience in Europe and is capable of entering this market without
the need to make major changes or adjustments to its operations.
• It is a very attractive market because Italians are very fashion conscious and shop
more frequently than the average European.
• Zara has reached a stage where its centralized distribution system is fast reaching a
state of diseconomies of scale. Scaling the distribution system and shipping to new far-
away markets with different needs is definitely the kiss of death to Zara’s success
story.
Zara should exhaust all expansions opportunities within Europe before attempting a new
foreign region.

9) What other strategic recommendations would you make to Inditex CEO Jose Maria
Castellano?
Zara has expanded too fast while maintaining a highly centralized vertically integrated
supply chain. Operations and distribution are becoming complex and are fast approaching
a state of diseconomy of scale. Jose Maria Castellano should consider the following
options to increase future scalability of the Zara system:
• Decentralized production and setting-up facilities beside major clusters of
countries (Western Europe, Eastern Europe, Asia, etc..). This would decrease the
complexity of the system while catering for the fashion needs of each cluster.
• Setting-up other major distribution centers to avoid the major bottleneck that is
slowly building up in Arteixo–Spain.
• Stop expanding economies of scope i.e. do not acquire any additional chains and
concentrate on expanding the current operations.
Zara IT

1. How would you advise Salagado to proceed on the issue of upgrading the POS
terminals? Should he upgrade to modern operating system? Should the POS applications
be rewritten to include any additional functionality? If so what functionality?

Currently, the existing POS present Zara with stability and scalability. The company
seems to have no problems with sales forecasts and the POS ease of use allows store
managers to do software installation themselves. They only apparent drawback to the
current POS is (to an extent) inaccurate inventory management.

In our opinion, Zara should follow a two dimensional strategy regarding its POS
terminals to cover both its long term and short term risks and opportunities associated
with its POS terminals. The short-term strategy encompasses keeping the current POS
terminals while attempting to upgrade current functionality for better inventory
management capabilities. However, on the long term, the company will definitely need a
full upgrade of its POS terminals in terms of software functionality, otherwise
the system will become obsolete eventually and upgrading will be more complex and
costly, next to being the only choice. POS applications should be rewritten to include all
functions provided by the handheld PDA (ordering and reports). Moreover, information
about inventory in other outlets in the neighborhood should be included as well.
2. In your opinion, what are the most important aspects of Zara’a approach to
information technology? Are these approaches applicable and appropriate anywhere? If
not where would they not work well?

The company’s operations are all IT based to be consistent with its 2 main drivers:
Speed and Decentralization linking stores with design and design with manufacturing.
This in essence is Zara’s competitive edge. The basic but reliable IT function
constitutes a primary support role within this competitive strategy, however, the main
actors are store managers, designers and store product managers; in other words, the
people.
Other companies cannot copy this approach because it is a part of a highly vertically
integrated supply chain where employees are empowered and can make decisions (store
managers and commercials). If competitors copy the technology without the supply chain
and infrastructure that supports it, it will never work the same way for them. IT Packages
are customized to suit Zara’s needs and structure so what works for one company
may not work for another.

3. What benefits does Inditex / Zara get from its IT infrastructure? How difficult would
it be for a competitor to acquire these same benefits?
Same response as question 2.

4. What current or potential weaknesses if any do you see in Zara’s IT

infrastructure and IT strategy?
• Zara has no Chief Information Officer (CIO) to manage IT operations and setup
strategies for expansion and upgrading. Although the management is committed to
sustaining IT operations, they are busy managing the different strategic aspects of the
company (different chains, products, decisions, etc..). Nobody is concentrating only on
this area.
• The current infrastructure is lagging behind the current hardware technology. Zara
will not be able to sustain its growth while avoiding updating the system. How many
computers can it buy for future expansion? And what happens if computer hardware
starts breaking down? Zara’s IT system is the backbone of its operations. It cannot
afford to avoid updating it indefinitely. This is the right time to do it especially that Zara
is expanding aggressively into new markets (Italy, Asia and possibly North America).
• All terminals must be connected to headquarters and other POSs all the time to
insure the consistency and distribution of information.
• Future changes in the IT world may render Zara’s IT mechanism totally
obsolete.