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Team 1:

Melanie Luxem 311 082 203


Ishan Sane 307 174 980
Eugenia Baydikova 308 160 886
Thi My Hanh Dinh 308 008 561

1.0 EXECUTIVE SUMMARY


As a global retail success story Zaras business strategy can be analysed from both an
internal and external perspective using widely accepted theoretical frameworks.
However, many of these models are limited in their ability to account for dynamics.
As such it is necessary to adopt an integrated view of the theoretical literature in order
to gauge whether Zara is able to sustain its competitive advantage over time in an
industry that is fiercely competitive, yet characterised by traditionally slow-moving
inventory despite the perishable nature of fashion and the potential of reaping
significant margins in a globalised economy with an abundance of cheap labour. The
fundamental success of Zaras strategy lies in its complete transformation of the retail
business model, rather than using a stopgap measure like outsourcing to reduce costs
they have entirely redefined the fashion landscape by mastering what has been coined
Fast Fashion. Most importantly, it is the consistent implementation of its strategy
across its vertically integrated value chain, which positions Zara as a formidable
player in the retail industry in time to come.
2.0 INTRODUCTION
The first Zara store was opened in 1975 (Inditex, Annual Report, 2009, p.16). It is
now one of eight commercial formats that comprise the parent company Industria de
Diseo Textil, S.A. (hereafter Inditex) (Figure 1). The group consists of more than
100 companies spanning textile design, manufacturing and distribution in addition to
the eight retail chains. Although Inditex is responsible for administration, logistics
technology, general HR policy, legal and financial concerns and is the sole or
majority shareholder of stores across the portfolio; each concept retains significant
managerial autonomy (Inditex Press Kit 2010, p.13) (Figure 4b). So while they share
a common business model premised on rapid innovation and flexibility, the following
report will focus on Zara, as the most prolific of the Inditex brands, contributing to
63.9% of the groups total EBIT in FY2009 (Consolidated Annual Accounts 2010,
p.67).

3.0 KEY CHARACTERISTICS OF THE COMPETITIVE CONTEXT


Competitive context has been widely analysed in Business Strategy to account for
firms competitive positioning. It is possible to identify a number of macro and micro
factors that influence the strategy and performance of a firm over time and across
different markets. As an admired player in global retail, Zaras competitive advantage
can be examined using exogenous frameworks such as a PEST analysis
complemented with a SWOT approach, as well as Porters Five Forces and the
industry Value Chain, which suggest that wider environmental factors and industry
forces determine the strategic direction of a firm and its profitability. However, these
models are not exhaustive, and can be supplemented with more contemporary theories
of competitive analysis to develop a more comprehensive understanding of Zaras
context.
Zaras competitive environment is the global fashion apparel industry. As fashion is
defined as a broad term that typically encompasses any product and market where
there is an element of style that is likely to be short-lived (Cristopher, Lowson, 2004,
p.1), it is a market in which strategic planning is made difficult due to short product
life cycles, a wide product variety, high volatility and uncertain demand due to low
predictability of consumer preferences based on a high degree of impulse purchases
(Cristopher, Lowson, 2004, p.1).
3.1 The Macro Environment
Although the PEST framework does not offer a dynamic perspective, it does provide
a starting point for understanding the external characteristics of the macro
environment that lead to the emergence and survival of particular business models. As
can be seen in Figure 2, political, economic, social and technological factors have a
joint impact on the competitive opportunities and constraints affecting Zara,
consequently shaping its strategy.
The first quadrant represents the surrounding political climate, culminating in the
2005 liberalisation of trade between members of the World Trade Organisation and

leading to challenges for European Union member states from competition in the
clothing sector in Asia (Lopez & Fan 2009, p.280). While close competitors like
American Gap and Swedish Hennes & Mauritz, outsource their production to low
cost Asian countries, around 80 per cent of Zaras production is strategically located
in Europe (Dutta 2002, p.3). Despite the trade-off of higher labour costs averaging up
to twenty times those of Asian countries, from a SWOT perspective (See Figure 3),
Zara has translated this external threat into an internal opportunity, retaining control
and flexibility over its production facilities (Dutta 2002, p.3). On the other hand, this
does expose Zara to instability in the Spanish labour market whereby the
modernisation of Spain may bring rising wage costs. Therefore Zara must contend
with both opportunities and threats from the external perspective of a SWOT
framework. How it responds to these internally will be determinative of its long-term
success.
Closely related to the political environment, is the economic landscape of the
competitive context. In particular, the fragmented structure of the European textile
and apparel industry resulted in the proliferation of a large number of small and
medium-sized companies, while distribution channels were highly concentrated.
However, with increasing internationalisation and the emergence of international
competitors, there has been consolidation of the sector through vehicles such as
mergers, acquisitions and strategic alliances, as SMEs struggled to compete with
global multinational players (Lopez & Fan 2009, p.280).
A core part of Zaras value proposition is that it is responsive to underlying social
trends and technological developments the two lower quadrants supporting the
PEST model. Accordingly, Inditex is structured as a highly vertically integrated
business model, with each of their brand formats responsible for almost all of the
primary activities that make up the value chain (Figure 4b) (Inditex Press Kit 2010,
p.7). This enables each of the Inditex brand formats to closely control their valuecreating activities from design to customer service. Rapidly changing customer
preferences in a context of material consumerism and the convergence of high and
low fashion are key social trends which Zara has successfully capitalised on by
offering a wide variety of the latest styles in medium quality at affordable prices in
what has been described as the democratisation of fashion (Lopez & Fan 2009 p.
4

281). Lastly, this structure and service offering would not have been possible without
the rapid advancement of information communications technology enabling Zara to
develop the software infrastructure that underlies its store operations and logistics
system.
3.2 Industry Forces and Value-Creation
While the PEST and SWOT frameworks describe factors that have given rise to
Zaras strategy, they do not provide dynamic insight into the competitive forces of a
context which is far from static. Porters Five Forces and an industry Value Chain can
be used to assess what determines profitability in a fast-moving environment such as
the fashion industry. In Porters model, there are five competitive forces that can be
analysed to understand the profit potential of an industry (Figure 5). Two of these
represent threats along the value chain - the bargaining power of suppliers and the
bargaining power of customers - such that the firm be seen as part of a value system
that includes agents on both the supply and demand sides (Rumyantseva 2011)
(Figure 4a). By leveraging both upstream and downstream information from the value
chain, Zara has been able to improve the value system, and indeed the entire fashion
house business model.
The retail fashion industry is intensely competitive. With fierce rivalry between
industry incumbents, fashion brands differentiate through market segmentation and
out-compete other players on either price or quality. While there are some barriers to
entry such as sourcing raw materials only available in the developing world, increased
global competition and high labour costs in developed countries which introduce the
threat of cheaper substitutes from developing countries, barriers to international entry
in terms of Foreign Direct Investment have been relaxed or overcome over time.
Indeed, Zara has pursued a market-based as opposed to hierarchical approach to
governance using joint ventures in markets it is unfamiliar with and where there are
significant cultural differences which make wholly owned subsidiaries risky. Yet,
despite potential gross margins of up to 50-60% due to an abundance of cheap global
labour, many firms end up heavily discounting unsold inventory and not realising the
potential profits (Dutta 2002, p.1).

Although they cannot control the entry of new players and substitutes in an already
saturated market, on the horizontal axis, Zaras approach to the vertical aspects of the
Five Forces dynamic has enabled it to gain greater control over its competitive
performance. Indeed one criticism of the Five Forces model is that it only captures
defensible positions against competitive forces, such that it does reflect the
proactive pursuit of innovation, allowing firms to extract greater profitability from the
market (Teece, Pisano & Shuen 1997, p. 510). However, by adopting a rapid
approach to meeting consumer demands and closely managing their supply chain
through backward vertical integration, Zara has been able to command bargaining
power in both directions of the industry value chain. Although the advent of ecommerce has empowered the consumer through greater price transparency and the
vast number of both online and offline brands, by controlling the availability of stock,
Zara effectively lowers the risk of unsuccessful product lines but also undermines the
buying power of the consumer by taking them by surprise and creating a sense of
urgency which places a premium on its product. Indeed Zara, is now unravelling its
own online stores.
Despite competing in what has traditionally been described as a buyer-driven
industry, and despite the threat of new entrants or incumbents who chose to outsource
their production to cheaper offshore locations, Zara can be seen as part of an
industrial cluster across Southern Europe which is able to generate incremental
innovation by reinforcing its excellence in the textile manufacturing domain over time
(Keenan, Saritas, & Kroener, 2004, p. 317; Rumanyetseva 2011). The cluster
approach can be used to supplement traditional frameworks for analysing competitive
context, as it is less linear and more dynamic in its approach to innovation. As Keenen
et al. have argued, shifting to India or China alone may not be the most effective
strategic decision, due to the need to address demand uncertainty and product
proliferation, which require time-sensitive agility, when making sourcing decisions.
Therefore geographical proximity, supported by a vast network of computerised
infrastructure, enable Zara to produce much of its production internally without
relinquishing power to a network of disparate and slow-moving suppliers (2004, p.
317). The caveat however, is that the region and Zara as a brand, must continuously
invest in technology in order to retain this competitiveness.

4.0 THE INTERNAL CAPABILITIES


More recently business strategy literature has focused on combining both an industry
and firm-level analysis in order to assess the competitiveness of a firm. This is largely
due to the proposition that firms competitive environments are no longer seen as the
sole determinants of their performance. In addition, it has been argued that
competitive advantage can be derived from the configuration of internal resources and
the way these are deployed in relation to the external competitive environment
(Dunford 2011). It is necessary to combine both approaches in order to determine
whether Zara will be able to maintain a sustainable competitive advantage over time.
4.1 A Resource-Based View
According to Barney, resources can be defined as assets such as organisational
processes, firm attributes, information, knowledge (1991, p. 101.) Although some
firms have similar resources, it is access to or the development of an idiosyncratic
bundle of resources which determines a firms competitive position within a particular
context and whether it can sustain above average returns. For a firm to earn sustained
above average returns, it has been suggested that these attributes must be
idiosyncratic, that is heterogeneous, and secondly they need to be imperfectly mobile
or difficult to mimic or steal (Barney 1991, p. 100). Figure 6 illustrates a resourcebased view of Zara, which incorporates the Valuable, Rare, Inimitable and
Organisation aspects that form the VRIO framework (Barney 1991, p. 105).
It is important to understand Zaras internal capabilities because they are the
cornerstones of its strategy; they both inform and are shaped by Zaras strategic
objectives (Davies 2000, p.2). Moreover, internal capabilities are key factors that
create and maintain the firms competitive advantage in an industry over time (Grant
2008, p.125). To clarify the difference between a firms resources and its capabilities,
resources are what the firm has, and dynamic capabilities refer to how the firm
deploys these available resources on a continuous basis (Grant 2008, p.130). Figure 6
extends this to include core competencies which recognise the ability of a firm to

develop excellence in particular capability areas through their exploitation of unique


resources (Barrie 2010).

Heterogeneous
Resources

Dynamic Capabilities

Core Competencies

Trend spotting market


research team - Feet
on the Street (Dutta
2003, p.2).

Rapidly interpreting and


reproducing current
trends rather than setting
them.

Large product range with


12,000 styles per year.
More choice and less risk
due to a greater chance of
satisfying consumer tastes.

Captive production and


distribution owned or
closely controlled
stages of the value
chain (sub-contracted)
instead of outsourced.

Lean production with


rapid turnaround based
on a low inventory rule.

Shorter lead times from


design to production and
sales (30 days compared to
4-12 months) (Dutta 2003,
p.3).

Pre-ordered material
stocks and highly
automated garment
assembly.

Agile response with on


demand capacity.

Centralised business
functions at HQ.

Rapid and joint decisionmaking.

Flexibility to adjust
production throughout the
season. Zara only
discounts about 18% of
inventory (Dutta 2002
p.4).
Increased control and
flexibility to adjust to
changing demands.

Prime real estate


flagship stores located
in central locations
upon entry into a new
market.

Marketing without the


need for intensive
investment in traditional
advertising

ICT staff equipped


Store as a real-time
with handheld computer communication tool.
devices.

RARE

VALUABLE

INIMITABLE

Self-perpetuating brand
reputation based on store
atmosphere. There is a
climate of scarcity and
opportunity (Crawford,
2000 p. 281).
Faster responsiveness and
valuable feedback about
actual needs rather than
future forecasting.
ORGANISATION

Sustainable Competitive Advantage

Figure 6: A Resource Based View

According to Grant, when considering a firms resources, tangible, intangible and


human resources should be examined (2008, p.131). Tangible resources are physical
resources, which appear on the companys balance sheet. One of Zaras most notable
assets is its number of stores and their strategic location, whereby Zara has more than
1700 stores operating across 78 countries (Bridge 2011). Moreover, Zara has a
relatively strong financial position which contributes to 80% of Inditex group sales
(Dutta 2002, p.2). During the Global Financial Crisis, its sales revenue increased by
29% in the financial year of 2008-2009 (Barrie 2010), which is testament to the
resilience of its business model such that unlike luxury fashion items they do not
suffer the same degree of price elasticity and demand volatility during economic
downturns.
Zaras strong financial position is also revealed in Inditex latest annual report. In the
report, Zaras performance is listed as a separate segment which has the highest sales
revenues and amortization and depreciation expense (Inditex 2009) (Figure 7). Zara
not only has the most active financial performance but also owns the greatest number
of long-term assets. Furthermore, it has strategically narrowed the funding gap
between when it receives payments from customers and when it pays its own
suppliers, with about 10.7 days for the former and 94 days for the latter (Wharton
University 2003). This demonstrates that despite concerns over the financial
management of the company being closely tied to personal wealth of Chairman and
founder Mr. Amancio Ortega Gaona, following its Initial Public Offering in 2001,
the company has shown prudential financial management capabilities. Zaras robust
financial position was demonstrated during the recent opening of its Sydney store
which achieved a turnover of $2.7 million within the first two days (Barrie 2010).
Additionally, it has been projected that the two stores opening in Australian this year
will deliver an annual turnover of $50 million per annum (Lewington & Speranza
2011). Hence, there is no doubt that compared with its competitors in the industry,
Zara has a substantial operating network as well as a strong and solid financial
position. These conditions support the success of Zara not only in its home country
but also worldwide.

One of the most important intangible resources that Zara has is its brand equity, the
brand image that is associated with the premium consumers are willing to pay for a
product over other alternatives (Grant (2008, p.132). Zaras trusted brand image was
reflected in the rapid depletion of 80% of store stock within three minutes of the store
opening in Sydney in April, despite other fashion retailers facing dampened demand
(Lewington & Speranza 2011). Indeed the seasonally adjusted figures for March
indicate that retail spending fell 0.5% (ABS, 2011). This example also reflects Zaras
competency in creating a distinct sense of anticipation among customers, many of
whom have viewed the opening of the store in Australia as long overdue, responding
eagerly when it finally opened its Pitt Street Mall flagship store.
Another of Zaras major strengths is its rapid responsiveness systems. The company
has developed information technology across its value chain which allows for the
effective flow of information between store managers, designers and producers,
fostering a short fashion cycle. Indeed as Barney confirms, an information
processing system that is deeply embedded in a firms informal and formal
management decision-making process may hold the potential of sustained competitive
advantage (Barney 1991, p. 114). Zaras concept of rapidly responding to market has
been made possible by their custom made software and logistics centre, which
provides all stores on a global scale with new merchandise on a twice-weekly basis
(Inditex, Annual Report, 2009, p. 17).
Human resources can be analysed using a competency model which examines
employees skills and attributes (Grant 2008, p.134). Zaras management team which
is entirely based in Spain, is largely responsible for the brands strategic development
worldwide. Moreover, Zara has skillful in-store sales assistants internationally, who
must complete a two-week training program and meet certain socialisation
requirements (Ghemwawat and Nueno 2006, p.18). The performance of employees is
largely shaped by the structure and culture of the organisation (Grant 2008, p.134). In
one case, 75% of Zaras staff were given opportunities to work in different chains
across operating stores in seven European markets in September 2001 (Ghemwawat
and Nueno 2006, p.8). This approach can be said to enhance the capabilities of the
employees and enabling the firm strategy to have greater cohesion across market
boundaries.

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4.2 Integrating the VRIO Framework


Barneys VRIO framework has been widely used to assess firms internal capabilities.
It queries four aspects of the resources resources, including how valuable, rare and
inimitable they within the organisation (Self, Weiner and Dunlop, p.3). These were
combined with the resource-based view in order to develop an integrated
understanding of whether Zara is able to sustain its competitive advantage over time.
Valuable resources support the creation and implementation of the firm strategies.
According to Hill, Jones and Galvin (2004, p.131), a resources value can improve the
firms efficiency which can be shown in the improvement of its value/cost ratio.
Moreover, valuable resources allows firm to utilize its competitive advantage and
counteract to the change of external environment (Hill, Jones and Galvin 2004,
p.131). Resources derive value from their heterogeneity, when a resource such as its
ICT system, its roaming research design team and its premium real estate differ from
that of their competitors, this adds to their value. Recalling the resources mentioned
above, it can be said that both Zaras tangible and intangible resources bring value to
the company. The number and centrality of stores, combined with the skill of staff
members creates value in terms of increased annual sales revenue. Other resources
such as its captive production and distribution system or its assemblage infrastructure
save costs. Therefore when deployed as part of the discrete aspects of the firm value
chain, across a sequence of activities (as shown in Figure 4), these different resources
cumulatively create greater added value than the sum of value from each individual
activity (Rumyantseva 2011).
According to Hill, Jones and Galvin (2004, p.131), resources are rare if they are
owned by a small number of competitors or only by one company. Resource rarity is
essential because if those resources are owned by many companies, their value and
ability to develop a sustainable competitive advantage are diminished. While Zara has
a number of competitors, its main rivals are Gap, H&M and Benetton. Even though
the three main competitors have a comparable numbers of stores across countries,
their ability to control their supply chains can be said to be far less efficient than

11

Zaras. According to Ghemwawat and Nueno (2006, p.4), all three of these have a
narrower vertical scope. Indeed, although Gap operates fewer stores than Zara, it is
has experienced greater challenges in pricing pressures, market diffusion and the lack
of a distinctive brand image (Ghemwawat and Nueno 2006, p.5). Even though its
entry mode and product range may differ from market to market, through its ability to
develop tightly controlled economies of scale using robust supply chain logistics
worldwide, it has been able to retain a distinct brand equity on the basis of its
flexibility and responsiveness to consumer demands.
Importantly, it is not enough to merely have valuable and scarce resourcee if those
resources are easy to imitate (Hill, Jones and Galvin 2004, p.131). Hill et al. note that
inimitability is the degree of how difficult and expensive it is for other firms to copy
resources. Although Zara may share some common tangible and intangible resources
with its competitors it is the configuration and mutual interconnectedness of these
across its entire value chain which set Zara apart. While it may be difficult for
incumbents to catch up due to causal ambiguity and path dependency (Lippman, and
Rumelt 1982, p.420) of developing a VRIO-consistent set of resources and
capabilities as core competencies, this does not rule out the threat of future entrants
who can reproduce a similar business model given the rapid pace of technological
change and the vast volume of business literature analysing Zara business model.
Certainly a vital aspect that is difficult to imitate is the reputation that Zara has
developed over the last few decades; its capability to excite and surprise consumers
by creating a climate of scarcity and opportunity (Crawford, 2000 p. 281).
According to ORiordan (2006), the organization factor in VRIO framework refers to
the skill of management team in creating a culture that allow all of the above valuable
resources and capabilities to be developed and exploited. The ability to create the
climate of scarcity and opportunity at the front end, derives from the back-end
proximity of the managerial team. By centralising its primary business functions at
its headquarters in Spain it has developed the capability of rapid and joint decisionmaking which ensures increased control and flexibility to adjust to changing
demands, thus completing a fluid value chain. The Activity System shown in Figure 8
is another way of representing the value created through Zaras exploitation of
internal capabilities, demonstrating the strongly interconnected nature of its internal

12

organisation. With its main business system centred around Design, Sourcing and
Manufacturing, Distribution and Retailing, these activities interact in a circular
system, reinforced by supporting activities denoted by the lighter circles.
By examining the resource-based view of the firm and supplementing it with the
VRIO framework it is possible to construct a sustainable advantage scorecard. As we
can see from the matrix in Figure 9, Zara appears to fulfil the VRIO requirements, at
least in the short-to-medium term. Whether this can be maintained in the long-term
will depend on the sustainability of its strategy over time in response to a changing
environment.
5.0 ZARAS STRATEGY
The most fundamental question surrounding firm strategy is whether the separate
elements are internally consistent (Hambrick and Fredrickson 2001, p. 54) (Figure
10). The diamond developed by Hambrick and Fredrickson serves as a valuable tool
for envisioning Zaras strategy as an integrated, mutually reinforcing set of choices,
that is, it is more than simply choices on each of the five fronts identified (Arenas,
Staging, Vehicles, Differentiators and Economic Logic), but rather the greater value
produced by their cohesive combination.
Although it appeals to customers of varied gender and age groups, generally speaking,
Zaras arena is the savvy, middle-class consumer. A consumer that cannot afford
luxury fashion items, but is still image-conscious. Geographically, the scope of Zaras
arena is global, however the staging of its internationalisation has meant that it has
taken a gradual approach to global market entry. It has also adopted a different
approach in markets outside of Spain where it typically positions itself as a higher
cost brand, whereas within Spain it is perceived as being at the lower cost range.
Pricing strategies have predominantly been market based, where prices in Spain are
generally 40% higher in Northern European, 70% higher in American and 100%
higher in Japan (Ghemwawat and Nueno 2006, p.18). Indeed Zara, budgets for the
cost of the material, production and supplies by fixing these to the target price and the
profit margin being pursued by the management department (Lopez & Fan 2009, p
281).

13

Throughout its internationalisation process Zara has used different vehicles for entry
to different markets. As a whole, Inditex has pursued a multi-brand strategy by
developing a portfolio through acquisition (Lopez & Fan 2009 p. 283). Whereas Zara,
the brand, typically uses wholly owned subsidiaries in markets that are high growth
and low risk, joint ventures where there are local market idiosyncracies, and lastly
franchising in arenas that are high-risk and culturally different (2009 p.286). The
franchise model is integrated with own-managed stores in terms of activities such as
human resources, training, window- dressing, interior design and logistical
optimisation to ensure uniformity in management criteria and a global image in the
eyes of the customer around the world (Inditex Press Kit 2010, p.6). Therefore
ensuring internal and external consistency of the Zara brand. Although Zara uses
different vehicles to enter markets depending on their risk, there are certain elements
of the firm value chain which are replicated across markets which allows for a robust
economic logic on the basis of efficiencies. Economies of scale occur on both global
and individual-store levels in terms of primary and supporting value-chain activities
as we saw with Figure 4.

The staging of the firm can be described as an initailly cautious expasion (19891996) followed later by a more aggressive roll-out as the brand gains recognition
worldwide (1997-2011). Overall this stage model has been used by Zara to mitigate
the risks associated with internationalisation (Lopez & Fan 2009, p 28), as it has been
able to enter geographically or culturally close markets first before exploiting
opportunities in more distant markets. Within markets, Zara has used an oil stain
approach, opening one flagship store in a prime location of the market at a time to
gauge information (Castellano 2002).
Zaras appeal is inter-generational. Dutta observed that at while the middle aged
mother buys clothes at the Zara chain because they are cheap while her daughter aged
in the mid-20s buys Zara clothing because it is fashionable (2002, p.1). Very few
firms can simultaneously appeal to two target customers within their arena, which
have such a wide variance in tastes. Indeed, its dual strategy of producing fashion at a
medium quality at affordable prices (Lopez & Fan 2009 p. 281) almost seems
counter intuitive, given warnings about companies who try to simultaneously
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outdistance competitors on too broad an array of differentiators - lower price, better


service, superior styling (2001, p.52). However it is this ambidexterity, which lies at
the heart of Zaras strategic intent and differentiates it. The balance of reasonable
quality, affordable and savvy designs is combined with the thrill of scarcity which
allows Zara shoppers to differentiate themselves from other consumers as the brands
product line constantly changes. In terms of the diamond developed by Hambrick and
Fredrickson, Zaras other differentiators can be thought of as its core competencies,
coinciding with the Resource-Based Firm View and the VRIO framework, and
reaffirming the interrelated nature of business strategy frameworks and the need to
adopt an integrated view.
6.0 THE SUCCESS OF THE STRATEGY
The success of Zaras strategy depends heavily on extracting the most out of its
internal capabilities as an organisation. However strategy, without successful
implementation is of little value. Even a winning strategy on paper, may fail to
produce a sustainable competitive advantage over time in practice.
6.1 Strategic Advantages and Benefits
Zara has successfully managed to sustain its growth, even as it grew rapidly over the
last decade. This is due to its policy of investing an adequate amount of resources in
IT infrastructure. Its success will depend on continuinig investment in this ciritical
resource.
The ownership and control of its production facilities has furthermore given Zara its
record lead times and has contributed to increased revenues. This has given Zara
significantly more flexibility and control than its competitors.
The human resources strategy of Zara has also been to an extent highly successful,
extracting the most productive output from its labour force, consisting of designers,
sales managers and factory workers. The design and product development has a very
productive output with over 1,000 new styles managed monthly. This is an
extraordinary amount for a fashion business and has played a large part in ensuring

15

that the products in the store are different every few weeks. The team employs over
200 staff with each person producing 60 styles per year on average. Though it spends
17-20 times more on workers relative to factories in Asia, it has still managed to stay
cost-effective, (Dutta, 2002).
Zaras market research strategy has leveraged itself in many ways to allow itself to
receive daily feedback and sales reports. The head office is well informed as a result
of the market dynamics and any trends. Following this, orders are placed by sales and
store managers in store via handheld computers to the headquarters. Ideas for fabrics,
cuts and products can also be communicated to the headquarters from stores. This
system of reporting when compared with traditional sales reports give a more accurate
and dynamic picture of the market.
Zaras industry standard supply chain management has also played a crucial role in its
success and is considered to be leading in terms of agility. The idea of an agile
supply-chain is that, instead of trying to improve the quality of the forecast, the focus
is on concentrating on the management of the Time-to-market, Time-to-serve and
Time-to-react lead-times (Cristopher, Lowson, 2004, p.2). Time-to-market describes
the length of time it take a business to translate a recognized trend into a product.
Time-to-serve describes the delivery-time of a product and Time-to-react is the time it
takes to adjust to the demand of a product. (Cristopher, Lowson, 2004, p. 2). An agile
supply chain has certain characteristics, which ensure that it can react rapidly to
change. In Zaras case, due to its vertical intergration and supply-chain management
those lead-times are very short (Inditex, Annual Report, 2009, p. 16) which enables
them to rapidly react to changes. The table below shows Zaras business strategy in
comparison with its competitors as evidence of the success of its strategy.

16

Business function

Zara

Gap

H&M

Global expansion

Stores in 59 countries

Stores in 5

22 countries

countries
Business model

High level of vertical

Partial vertical

Partial vertical

integration

integration

integration

Production

Self-owned

Outsourced

Outsourced

Marketing

Uses its stores as the only

3-3.5% of annual

4% spent in

source of marketing

turnover spent

advertising tools

Another indicator of the success of Zaras strategy is its corporate social


responsibility approach (Inditex Annual Report, 2009, p. 27). According to the UGT
Business Social Responsibility Observatory, of the companies quoted on the Ibex 35
Index, Inditex along with Red Electrica have the best practices with regard to
corporate social responsibility. For the fourth year running, Inditex appears on the
world-wide list of companies showing most concern for the environment. This,
according to the Global 100 Most Sustainable Corporations in the World prepared by
the Canadian Corporate Knights magazine.
6.2 Strategic Drawbacks and limitations

The cost of maintaining several brands and the risk of cannibalisation are the major
drawbacks of the groups strategy. Inditex has tackled cannibalisation by
differentiating the brands mainly through the product, target market, presentation and
retail image (Fabrega, 2004; Lopez & Fan 2009 p. 283). However as all Inditex
Chains have a similar target market, there is a remaining threat of other Inditex stores
cannibalising Zaras sales (Craig, Jones, 2004, p.7).

Looking at Inditex as an entity, its success largely depends on Zaras performance, as


its sales contribution is 63.8 % (Inditex, Annual report, 2009, p.21). Taking into
account the fact that Inditex consists of eight chains, this seems to indicate that

17

Inditex is putting all of their eggs into one basket (Craig, Jones, 2004, p.6). This can
be seen as a problem, as the cost of having so many different chains is not reflected in
its profit.

Zaras vertical integration, which is an important part of its business model has the
drawback of making it difficult to acquire economies of scale, which leads to higher
production costs than its competitors (Craig, Jones, 2004, p.6). Furthermore Zara
incurs higher costs than its competitors in research, development and general
production costs (Craig, Jones, 2004, p.6) due to its rapid product changeover. This is
a drawback that has to be accepted, as it can only be prevented by changing the otherwise highly competitive - business model.

Zara focuses on Spain as its centralised distribution centre has many advantages in
terms of rapidly responding to market demand. However, if Zara wishes to pursue its
strategy of focussing on Asia as a geographical area for growth (Inditex, Annual
Report, 2009, p.50), being solely located in Spain might prove to be a disadvantage in
terms of managing their supply-chain. Furthermore, as Asia is growing to be the
biggest supplier of fashion products after Europe (Inditex, Annual Report, 2009,
p.74), part of the stock actually travels the distance Asia-Europe twice.

In several studies (Ghemwawat, Nueno, 2006: Craig, Jones, 2004) H&M and Gap
were defined as key competitors of Zara on a global scale. Especially H&M, which
has a similar concept as Zara, as its business concept is to offer fashion and quality at
the best price(H&M, Annual Report, 2009, p. 11) but offers its styles on a cheaper
rate while incurring lower costs (Craig, Jones, 2004, p. 6) can be seen as a major
threat. Furthermore, like Inditex, H&M is expanding globally on a fast rate and has
invested heavily into a rapid expansion. Zara, with a number of net openings of 343,
compared to H&Ms 250 and a percentage of sales of 22.5 % in Non-European
countries, compared to .H&Ms 12.5 %, seems to have a more aggressive execution
of this strategy but this can also have draw-backs in the long-run. In contrast to that
Gap has decreased its total number of stores by 54 and concentrates mainly on the US
market. This means that as of now, H&M seems to be Inditexs main competitor.

18

7.0 RECOMMENDATIONS

There is no doubt that Zara has certainly been successful in establishing itself as a
leading global retailer. However, there are still certain areas in which the company
can improve and make the brand formidable against any changes in the business
environment. In order for Zara to sustain its success, it has to constantly look at
pursuing new opportunities just like it did by entering the US market.

Zaras focus on Spain as its centralised distribution centre has many advantages in
terms of rapidly responding to market demand. However, if Inditex wishes to pursue
its strategy of focusing on Asia or the US as a geographical area for growth (Inditex,
Annual Report, 2009, p.50), being solely located in Spain might prove to be a
disadvantage in terms of managing their supply-chain. Furthermore, as Asia is
growing to be its biggest supplier of fashion products after Europe (Inditex, Annual
Report, 2009, p.74), part of the stock actually travels the distance Asia-Europe twice.
One recommendation would therefore be to assess the possibilities of reducing its
over dependence on its centralized distribution centre in Spain by developing a
secondary distribution centre. This would not only decrease costs of shipping and
logistics, but also ensure that goods are delivered at the fastest pace. Apart from the
possibility of developing such a centre in Asia, they could also possibly expand one of
their already existing distribution facilities in South America. This could allow the
company to enhance its interpretation of the American market. The additional
investment would also channel funds into advertisement in the American market.

E-commerce is also another avenue in which Zara could exploit the market demand
for fashionable apparel. Zara could spend more of its resources on developing a
sophisticated online store. There are impediments to this due to the ever-changing
nature of its inventory. Zara also needs to diversity its stock geographically to a
greater extent so that shopper traffic is increased and cannibalization of its other
stores does not occur.

Furthermore Inditex reliance on Zara might prove to be a problem as its success as an


entity largely depends on Zaras performance. Using Zaras brand image and

19

performance to grow the other chains on a national and international scale, would add
diversification, thus making Inditex less dependent on Zara. Or, if that proves to be
impossible, reducing the number of chains would free capital to invest in the
remaining chains and ensure their financial success.

Even though Zaras business model is not the most cost-effective model possible in
the global fashion apparel industry, a change of it is not recommended as it
would impede other competitive advantages. Instead it would be recommended to
invest in constant innovation of its production techniques to make them more costeffective.

Zara should also be wary of its competitors springing into the market and their
strategy. This is because, as Zaras business model and success has become
increasingly popular that there might be chances that there would be rival firms that
might enter with an identical business model and products. Zara would have
challenges in meeting its fast timings for the delivery of new trends into its stores if
the expansion of stores occurs at a fast pace, so the growth rate has to be carefully
planned so that it can be supported.

In conclusion, Zara still has room to exploit its competitive advantage further by the
above-mentioned recommendations. This will also enhance its ability to face future
challenges of the clothing industry.

20

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21

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23

APPENDIX 10.0
Figure 1: Organisational Structure of Inditex

Inditex
Zara

Pull&Bear

Massimo
Dutti

Bershka

Oysho

Zara Home

Uterque

Stradivarius

Figure 2: PEST Analysis of Zara

Economy

Fragmented textiles industry: large
number of small and medium-size
companies and highly concentrated
distribution channels

Increasing internalisation and
consolidation

Political

Liberalisation of world trade

Threat of low labour costs in Asia

Zara

Technology

Rapid advancement of information
communications technology in gloabl
tracking and logistics software and
personal copmuting hardware

Social

Rapidly changing consumers preferences

Convergence of high and low fashion:
"democratisation" of fashion

24

Figure 3: SWOT Framework

Figure 4) a. Extended Industry Value Chain (Rumyantseva 2011)

25

Sustainable
Competitive
Advantage

Figure 4) b: Porters Firm Value (Grant 2008, p.136)

Figure 5: Porters Five Forces

Figure 5: Porters Five Forces

26

Figure 7: Annual Report Extract

Figure 8: The Activity Stream

Figure 11: Five major elements of strategy (Hambrick and Fredrickson 2001, p.51)

Figure 9: The VRIO matrix (Self, Weiner and Dunlop, p.3)

27

Figure 9: (Self, Weiner and Dunlop, p.3)

Figure 10: The Hambrick and Fredrickson Diamond (2001)

28