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Zara Fashion

Essay by review  •  December 12, 2010  •  Case Study  •  2,398 Words (10 Pages)  •  2,700 Views

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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.

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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 вЂ"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

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