Magazine inditex

INDITEX: largest textile distribution company in Spain and the world

INTERNAL ANALYSIS

The success is mainly due to a differentiating strategy, with many strengths: Quality and design: Inditex brands offer a quality product and innovative design. They provide the latest fashion because they have employees dedicated to observe and analyze changes in fashion to become experts in identifying the sources of value creation from the point of view of the consumer.

Just in time: This way the goods are not stored and they save money without inventories. If a model is not sold, is removed and redesigned adapting to consumer tastes or moves to a market to have success.

Strong financial system: Since its inception, the company has developed based on its internal financial resources without resorting to other external capital and acquired essential assets for growth.

Mini-collections every year: Inditex broke with the practice of other fashion retailers designing clothes only for two seasons: springsummer and autumn-winter. Manufactures variety of models, 20,000 throughout the year and each adapted to the moment, in terms of fashion and weather.

Culture instantly buying: With the system of high turnover products, Inditex has managed to instill its customers a new philosophy,

consistent buying at the time because the models are removed if are not sold to replace them with new ones.

Prestigious brands: Inditex brand has a high reputation worldwide, which gives it more value.

Strong international presence: With the consolidation as a leading brand in the Spanish market, Inditex could enter to the international market and increase its growth because the domestic market was saturated.

Segmented Offer: Inditex also covers all available market segments because its eight brands. Sell products for all ages, both genders and all over the world, because all brands have international exposure.

Homogenous group: The store design, lighting and music throughout the Zara brand is decided from the center in Galicia and is the same for all sale points in the world or very similar, adapted to the cultures.

Shops: All Inditex stores are located in prime locations in major cities and commercial areas.

Comfortable post-sale system: There is a great flexibility to change a product, so everything becomes easy for customers. Encourages compulsive buying, without thinking too much, because it assumes no commitment.

Unconventional advertising: Use the bags as advertising system. Therefore, word of mouth is the agent that generates more publicity about the company and of course the most reliable for consumers.

Use of new technologies: Inditex companies use the Internet to promote their brands and products.

Environmental care: Implemented a policy of corporate social responsibility to protect the environment.

There are currently more than

6,600 stores in 73 countries.

Since 2003 international sales represent over 50 %, and year after year is increasing.

During the first nine months of 2009, 90 stores were

opened in Asia, a powerful emerging market.

Competitive and Comparative Advantage

Comparative and competitive advantage are different terms that mainly refer to what informs the decision behind the choice of what to produce in a competitive market.

Competitive advantage is when a company emerges as a leader in its market sector due to the ability to produce goods or deliver services at higher profits than the competition and at a lower cost to the consumers.

Comparative advantage occurs when a company or country can produce something at a relatively cheaper rate than the competition or other countries.

14 Sources of Competitive Advantage Competitive advantage comes from many places beyond simply the product and service and below I have outlined 14 possibilities for advantage. They are supported by considerable data, research and experience;

the data sources are included in a bibliography below for your reference. Sources of competitive advantage lie all along the value chain based on Michael Porter’s seminal work.

Externally-focused Strategies

Technology Development: Sources of Competitive Advantage

1.

2.

3.

4.

Localization in Global Markets Strategic Alliance or Acquisition Competitive Actions Customer Clusters

10. Technological Change 11. Business Analytics

Internal Leadership Role

Logistics and Operations: Sources of Competitive Advantage

5. Company-Wide Market Orientation 6. Strategic Fit between Marketing and Manufacturing

12. Production System 13. Business Processes

7. Implementation of Strategy

Government Programs: Sources of Competitive Advantage Human Resources: Sources of Competitive Advantage

14. National Export Promotion

8. Human Capital 9. Employee Engagement

How we choose competitive strategy is important to evaluate the possible advantages as where your company fits in relation to its competition, also the chosen strategy needs to provide value to our market. Choosing a strategy needs to be lower buyer cost and be profitable to the company.

Zara: the flagship brand of the Spanish

fashion

retail giant

Inditex

(Industrias de Diseño Textil S.A.) Founded in 1975, this super- heated performer in soft retail fashion market in recent years; is engaged in textile design, manufacturing and distribution. The company primarily operates in Europe, where about 80% of its sales are made with La Coruña, the city that saw its earlier operations, home of its central offices.

Zara contributes about 2/3 of the company’s sales making it undoubtedly the firm’s growth engine.

As other retailers like Marks and Spenser and Gap, join retailers in reporting falling profitability it is interesting to note that Zara’s profitability is still soaring; among the highest in the industry.

Value Chain

Value Chain

Zara-Inditex

is distinguished by a unique business model in the field of fashion retailing, in which vertically integrates all major chain activities including the design of value models, production of garments, logistics input and output as well as sales in company stores. That control provides a very important bond strength of speed and flexibility against its competitors. Having integrated design models, cutting fabrics who buy at the best price, the sizing and marking of garments and of course the control and finishing. The other processes such as making are outsourced to about 2000 workshops (external and own) so that many costs are cheaper.

Although logistics system requires a very important and complex network of connections between the factories and logistics center that stretches over 200 kilometers of rails to distribute the clothes in stores.

It is distributed twice a week at different stores worldwide where they are placed directly in the exhibitors to sell quickly. It is based on the transience strategy and product rotation in the full cycle, from the purchase of fabrics to the final sale to the customer, within minimum production compared with that of its competitors takes 15 days.

Corporate and trade strategy for international market

Market Performance Inditex shares experienced a 18.0% gain in 2014, closing at €26.14 per share on 31 January 2015 compared with a 11.2% rise on the Stoxx 600 Retail and 4.9% on the leading Spanish index Ibex 35 in the same period. The average volume traded was about 8.4 million shares a day.

Inditex’s market capitalization stood at €81,454 million at the end of the year, 789% higher than when the company was floated on the stock exchange on 23 May 2001, compared to a 8.1% gain on the Ibex 35 over the same period.

A total dividend of €0.484 per share corresponding to the financial year 2013 was paid out in May and November 2014.

The Zara-Inditex business model is based on horizontal, flexible organization, focused on innovation and team work. This allows all professionals in the organization to participate in identifying global fashion, social, demographic and environmental trends, while remaining aware that the entire company is focused on the customer and the customer's needs. This enables a swift and efficient reaction to the identification of any trend that could aid the business in a sustainable way or that could affect the business.

So their Strategic Plan has a global scope, implemented on the local level in all countries where Inditex produces goods. To this end, Inditex has established CSR teams located in 10 key production regions (Spain, Portugal, Morocco, Turkey, India, Bangladesh, South East Asia, China, Argentina and Brazil). These teams are made up of local experts who create spaces for dialogue within communities which

are known within Inditex as supplier clusters.

These clusters ensure that the guidelines contained in each policy and programs have the same shared objective of guaranteeing the sustainability of the supply chain and the welfare of the workers within that chain. The supplier clusters are also adapted to each of the regions where production takes place.

Consumers are more and more informed and demand direct, personalized communication with companies. In response to this general trend, Inditex has invested in new technologies to provide an immediate response to customer demand and to possible changes in habits of consumption, the quality of its products (safe, healthy and sustainable) and to customer care. This is what Inditex describes as quality fashion in the long-term.

Key Success Factors behind Zara



Fashion and Variety

 Speed and quick responsiveness to Market

Zara main competency is selling Fashion and Trendy cloth with high range of variety. Zara designers are on a constant lookout for new ideas to keep the product line fresh. Zara introduces 11000 new garments in a typical year. Many lines will only be available for a matter of weeks before being replaced. As per Adel Hassan (Store Manager at Zara-UAE, Burjuman center), “We do sell fashion. We ask our customers what they want, and then we give it to them.”

Zara prices are affordable for people of different income class.

Zara is geared around speed and responsiveness providing fresh baked products. Store managers communicate customer feedback on what shoppers like, what they don’t like and what they’re looking for. That data is instantly funneled back to Zara’s designers who begin sketching on the spot. The responsiveness effects the customer behavior as it plays role in pushing the customer to buy quickly and have higher visits frequency as new models arrive very frequent.

This creates an environment of shortage and opportunity in Zara’s retail stores.

The environment also increases the regularity and quickness, in which consumers visit the stores and buy the products. The usual customers know that new products are introduced every two weeks and most likely would not be available the next day.

Therefore, Zara’s scarcity background allows the company to sell more items at full price.

This strategy minimizes Zara’s total cost because it reduces the percentage of markdown merchandise compared to its competitor.

ZA : Obstacles

1

& Weaknesses

Zara’s over- dependence on the

European market

Most of Zara’s stores as well as production sights are located in European countries making the firm vulnerable to anything that may cause disruptions in the region–weather, terrorism, political unrest, labour strife or natural disaster. According to the group’s annual report, Inditex operates 1,747 stores (all brands) only in Spain and another 1,362 stores in the other European regions. Spain accounted for 33.9% of the group's revenues during 2008 and the other European regions made up another 43.4% of Inditex’s total revenues.

Hence it can be found that the group is heavily dependent on Spain and the European markets for its revenues. Therefore the company and its flagship brand is extremely vulnerable to economic, political or social change occurring in these markets.

2

Vertical integration

Although vertical integration is an advantage to the firm, it also has limitations. The integration for instance, often leads to the inability to acquire economies of scale, which means they cannot gain the advantages of producing large quantities of goods for a discounted rate. This leads to high costs a incurred by the Inditex Corporation. Inditex also has to support their own high capital investments for their chains and be able to financially back their “technology and skills beyond those currently available within the organization”.

3

Zara’s quick and frequent

introduction of new products Incurs increased costs, meaning higher R&D costs. They also have high costs due to the constant changeover of production techniques to create their different apparel lines. This also means that employees must be trained in order to use the new manufacturing techniques, which again leads to increased costs. Most competitors don’t experience higher cost in this area.

4

Inditex over dependence on Zara

Zara1 constitutes around 80% of Inditex business (8 companies) which means a failure in Zara can put the whole group at a risk.

5 American Consumer Taste American consumer view of Zara differs from the European one who views Zara as fashionable house. If Zara needs to grow in American market, it needs to address specifically the American needs and perception of fashion.

1

During 2014 Zara has taken its online expansion a step further with the launch of its online store in four new markets (South Korea, Greece, Mexico and Romania). In October Zara also launched its official store on Tmall.com, the largest online sales platform in China, an important development of the brand's Internet business in this market. Some of the most important

openings for the brand this year include the stores in Zürich (Bahnhofstrasse), Miami (Lincoln Road), Madrid (Serrano), Krakow (Rynek Glowny), Hong Kong (Queens Road) and Shanghai (East Nanjing Road), which represent the new model of larger, technologically advanced, sustainable stores.

6

American Supply Chain

Zara supply chain in Europe proved to be extremely efficient. However, Zara has not built a distribution strategy in America which is a constraint to the selling ability in US.

7

Increase in Euro Rate

An increase in Euro rate will increase the consumer selling price in US dollar based economies, consequently Zara will lose price advantage against relative competitors outsourcing in US dollar based economies.

What are the risks?

In order to permit a standard and comprehensive risks management, the Group has established a definition of risk valid for the whole Organization. Thus, the Group defines risk as:

“any potential event which might have a negative impact on attainment of business objectives�.

Risks reviewed are classified and grouped in:

Business environment These are risks stemming from external factors, connected with the Group’s business.

changes in consumption habits, or the consumption decline in certain markets are, inter alia, factors which may have an impact on the effective achievement of the business goals of the Group.

This category encompasses the risks regarding the difficulty in adjusting to the environment or market in which the Group operates, whether as regards procurement processes or distribution and sale of goods processes. This is inherent in the fashion retail business and consists of the eventual incapacity of the Group to follow and offer a response to the evolution of its target market or to adjust to the new situations in procurement countries.

With this respect, geopolitical, demographic and social and economic changes in procurement or distribution countries, the new ways of communication that arise, and

Regulatory risk Those are risks to which the Group is exposed arising from the different laws and regulations in force in the different countries where it does business.

Included in this category are risks regarding tax, customs, employment, trade and consumption and industrial and intellectual property regulations and risks associated with the remaining laws and regulations, namely regulatory risks of a criminal nature, whether or not they determine criminal liability of the natural person.

Reputation

which might have an impact on the reputation of the Organization.

Those are the risks which have a direct impact on the way the Group is perceived by its stakeholders (customers, employees, shareholders and suppliers) and by the society at large.

These risks arise out of a potentially inappropriate management of the issues regarding the social responsibility and sustainability, the responsibility on account of safety of products, the corporate image of the Group, including in social networks, as well as any other potential regulatory noncompliance

Financial

services both in respect of transactions within the Group and outside the Group.

In the regular conduct of its business, the Group is exposed to financial risks. Included in this category are foreign exchange risk and counterparty credit risk. Additionally, given the ever growing international dimension of the Group’s business, the Company is exposed to the country risk in different markets.

Euro is the functional currency of the Group.

Its international transactions involve using a large number of currencies other than the Euro, which gives rise to the foreign exchange risk. The Group has various investments abroad, the net assets of which are exposed to foreign exchange rate risk. As the consolidated financial statements of all the companies in the Group are prepared in the functional currency, i.e., Euro, it is faced with the foreign exchange risk on account of translation, in respect of all its entities outside the European Union. The company is also faced with the risk resulting from transactions in currencies other than Euro of flows of collections and payments for acquisition of goods and rendering of

The Group is not exposed to significant concentrations of counterparty credit risk.

Most of its revenue results from retail sales, where payment is primarily made on demand, in cash or with credit card. At any rate, the Group is faced with the risk that counterparties, mainly financial ones, would fail to comply with the obligations stemming from investment of cash or other financial and securities vehicles, and from derivatives used for financial risks hedging.