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Zara Case

Essay by   •  May 25, 2013  •  Essay  •  1,661 Words (7 Pages)  •  7,682 Views

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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.

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.1 of store locations worldwide. So when comparing the financial results of Inditex with Gap I 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 with Inditex.

Although Gap and Zara follow the same business model, Zara's business model improved overtime, 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:

Costs: that Zara did not incur when entering a new market, as the company does not have extraordinary advertising expenses to create brand recognition.

Logistics: 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.

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 followed a highly price-competitive business model that was based on three winning formulate: short lead time, lower quantities and more styles. It pursued a high degree of vertical integration which allowed it to set the pace of product and information flow. Zara could move from identifying a trend to having clothes in its stores within 14 days.

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.

Inditex fully owned twenty factories for internal manufacture. These factories apply just-in-time production. Also, 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. It gave Zara further competitive advantage, in terms of both cost and control.

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.

Zara's business model makes it more profitable than 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 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.

Twenty fully owned factories responsible for internal manufacture applied the Just-In-Time 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. What do you think of Zara's past international strategy? Evaluate, in particular 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.

Zara's international strategy followed standard procedures in selecting and entering a certain market, which made scaling operations easier. The standard procedures left room for customization required by different cultures and countries Zara did not withdraw from a single market, which reflected

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