Ans 1:

Inditex is a global specialty retailer that designs, manufactures, and sells apparel, footwear, and accessories for women, men and children through its chains around the world. Zara is the largest and most internationalized of the six retailers that Inditex owns: (Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho).

Zara is one of the leading retail garments chain in Europe. Their main competitors are Gap and H&M, and together they form a group of speciality chains in the apparel industry. Zara has operated and adopted a different strategy as compared to Gap and H&M and the following points draw the difference between the players.

1. Vertical Integration: Traditionally the global apparel industry is highly labor intensive rather than capital intensive. Hence outsourcing production to developing countries with low labor rates to lower costs is a common trend amongst the big retailers. The same strategy is followed by Gap and H&M. In contrast, Zara has developed a successful diverse method of doing business in the fashion industry by working through the whole value chain. Zara manufactures 60% of its own products and is able to be flexible in the variety, amount, and frequency of the new styles they produce. In fact the whole line of most fashion sensitive products is produced internally (comprising around 50% of the total manufacturing) and in small batches for the most time-sensitive ones.

2. Distribution System: Zara has one centralized distribution centre compared to H&M and Gap, which have distribution centres in all the countries they operate. This reduces the distribution lead-time of their goods and leads to better inventory control. The distribution centre is highly technically advanced leading to almost negligible flaws and high accuracy rates.

3. Advertisement Expenditure: Zara’s advertising expenditure is 0-.3% as compared to its competitors who spend almost 5% of their revenues. Zara’s cuts in advertising investments reduce total expenses, which make the international expansion more economical. This also means that customers have to visit their stores to get the latest fashion.

4. Store Management: Zara relies mainly on its stores to project its image. Zara stores are established at the most prime real estates with heavy foot-falls. Zara store layouts are frequently refurbished and are more spacious and well organized compared to others. The Store managers are other personnel are regularly trained with a part of their remuneration linked directly to the actual sales.

5. Quick response Time: Zara follows a very flat hierarchical structure and hence the pace of communication is very fast. There is regular real-time interaction between Store Managers and store specialists, which helps in assessing the customer requirements and market trends and the further store fulfilment. Since almost all of Zara’s functions are in-house, they are quickly able to replace trends, add more of the large selling stock and decrease the lethargic one. In fact, compared to the competition which commits 45-60% of production in the six-month pre-season period, Zara commits, just 15-25% before the season begins, 50-60% at the start of the season and the remainder manufactured in-season.

6. Pricing: H&M and GAP have a standard pricing for their products irrespective of the markets and countries where they are being retailed. On the other hand, Zara prices its apparels based on the country and the spending power of the people. Hence the affordability for Zara products increases leading to better sales.

7. Scarcity and Opportunity: Since Zara follows a “Just-in-Time” model of designing and manufacturing, Zara produces the latest trends and keeps replenishing its stock twice a week in its store. This imparts a sense of freshness to the stock for the customers and also urges them to buy as the same garments may not be available next week. In fact, the design process does not seem to stop and the designers are constantly evaluating consumer preferences. Zara provides very limited volumes of new items in the most fashionable of Zara's stores and then uses the results of those sales to decide whether the items should also be sold in other locations.

8. Modes of Expansion: Zara expands basically in three ways- opening up of company owned stores, Franchise System and through Joint ventures. H&M and GAP mainly expand through a Licensing system. 91% of the Zara’s stores are company owned. Hence the ambience, environment and feel is consistent everywhere. Since the stores are company owned, Inditex has a better control on them, in terms of personnel, fulfilment, replenishment, refurbishment etc

9. Vendor Relationships: In almost all the cases, Zara is the only customer for its vendors and there no written contracts. Thus the vendors are heavily dependent on Zara and it can very influentially control the supply strategy. H&M and GAP have multiple vendors who have multiple customers, because of which they do not exert the same kind of influence as Zara. Hence the response time from vendor to Zara is very quick with minimum defects in case of Zara.

Zara GAP/H&M

Vertical Integration

In-house designing, manufacturing and fulfilment ( almost 50% of the production is in-house)

All production outsourced

60% from Asia

Short Lead Times- freshness Long Lead times in designing, manufacturing and distributing Originate Designs quickly

Distribution SystemOne centralized Distribution Centre Distribution Centre in each countryReduce distribution lead time High CostsBetter Inventory Control Closer to the market

Advertisement

Little advertisement expenditure Higher advertisement expenditureReduced total expenses, making the international expansion more economical

Higher total costs Customers need to visit stores to get the newest fashion

Store Management

Stores as face to the world No special emphasis on stores make upLocated at the most prime real estate with high footfall Not always located at the places with highest

footfallTrained store personnel

Quick Response TimeFlat Hierarchical structure Command based systemHigh Inventory Turnover Low inventory turnover

In season manufacturing as per the fashion trends

Majority of manufacturing is done pre-season

Engages Many designers 60% less designers

Pricing

Pricing- country and market specific Standard Pricing

More affordability for customers Less affordability for customers with less income

Garments with the highest perceived fashion value

Zara products priced higher than H&M and lower than GAP

Scarcity and Opportunity

Just-in-Time model Mainly pre-season manufacturingQuick stock replenishment based on fashion trends

Manufacturing based on pre-decided fashion trends

Modes of Expansion

Three: Company owned stores, Franchise System, Joint Ventures

One-Licensing system

Consistent ambience and environment in stores Not the same look and feel in the stores

Vendor Relationships

Single customer for its vendors with no written contracts Multiple vendors, multiple customers

Heavy dependency of vendors on ZaraLess dependency of vendors on H&M and GAP

Quick vendor response time Delayed vendor response time

Porter’s Five Forces Model applied on Zara

Competitive Rivalry: HIGH

1. Zara’s closes competitors are H&M and GAP.2. The target group is almost the same as is the price range of the products with minor

variations.3. Zara has developed a business model which gives it competitive advantage over its rivals in

terms of fulfilling the requirements of its target audience.4. Zara has been consistently beating its competition in terms of percentage increase in Sales

and Operating Profit

Percent Increase(2004-05) GAP H&M InditexSales -1.78% 13.11% 23.29%

Operating Profit 4.99% 17.57% 47.53%

5. In an industry which is very fast and with short product life cycles, Zara has established a niche for itself over its competitors.

Threat of Substitutes: LOW

1. Clothes and garments are one of the essential consumer goods. There cannot be real substitutes for clothing products in general.

2. Zara has created a niche for itself- fast and trendy fashion at affordable prices which is very hard to substitute.

3. The target audience is fashion conscious youngsters and they cannot go on to designer clothes because of lack of affordability.

Threat of New Entrants : LOW

1. The fashion clothing and apparel market is already dominated by Zara, GAP, H&M, departmental stores and other mass merchandisers. The average size of the revenue pie has already shrunk for the existing players and hence a new entrant would have to compete for the leftovers.

2. Zara is a part of the Inditex Group, and can benefit from the groups economies of scale.3. Zara’s business model has been built over a decade and hence commands respect in terms

of size and economic efficiency. Any new entrant would find it difficult to replicate such a model.

4. Zara had the first mover advantage and the new entrant will have to deal with existing players and their established strategical market knowledge, operational superiority and robust infrastructure.

Bargaining Power of Buyers: MODERATE

1. Clothing retailers have to make sure that they fulfil the customer requirements- what they are looking for and at acceptable quality levels, in order to remain competitive.

2. Information with customers increases due to access to media such as internet and heavy marketing by the competing players which ultimately leads to increased bargaining power for them.

3. Consumers are ready to pay more for what they want or for any particular brand if it meets their requirements. Brand loyalty as such does not exist when a customer is out to purchase.

Bargaining Power of Suppliers: LOW

1. In almost all the cases, Zara is the sole customer for its suppliers and vendors. Hence they are heavily dependent on Zara and have a weak bargaining power.

2. Zara sources around 50% of its raw materials from Inditex’s group companies and hence does not have to depend on external suppliers for its needs.

3. Zara has no written contractual agreements with its suppliers which thus completely tilts the game in Zara’s favour as it can command undue advantage with its suppliers.

Thus we find that Zara because of its business model operates in favourable conditions according to the Porter’s Five Forces Analysis Model.

Ans 2:

Strengths Weaknesses

Vertically Integrated System Tag of ImitatorsFast Fashion Lack of AdvertisingEach Style of Clothing Relates to a Specific Trend Diseconomies of ScaleStrong Distribution Channels/ Supply ChainStore Management and Customer CareDiversified Product RangeEach style of clothing relates to specific trend

Opportunities Threats

Emerging and less fashion conscious market s Potential Oversaturation in IndiaGrowth in different cities in India

Rivals may copy our strategy

Diversified Products PortfolioCompetition from Chinese and other external manufacturers

Internet retailing(E-Commerce) Exisiting CompetitorsZara’s SWOT Analysis

Zara’s strategy can be designed based on the SWOT analysis in reference to its competitors and the changing market conditions.

Zara has to: Protect its STRENGTHS Improve on its WEAKNESSES Grab the OPPORTUNITIES Protect against the THREATS

Zara’s future strategy can be divided as – Short Term and Long Term.Short Term:

1. Further Expansion: Zara is heavily Europe focussed, but its presence in Europe also is fragmented with heavy concentration in some of the bigger countries and almost negligible presence in some other countries. Similarly, its presence in other parts of the world, including Asia-Pacific and Middle East is very little. In the fashion conscious markets, Zara must go with its business model of centralized distribution centre serving specific regions and in less fashion conscious markets it should employ a country-dedicated distribution model with pre-season outsourced manufacturing to reduce costs.

a. Europe: Zara should concentrate on markets such as Switzerland, Austria, Holland, Poland, Luxembourg, Malta, Eastern Europe and Scandinavian countries. The existing presence is very low and presence would be very beneficial with most of these countries having high per capita incomes. It can use its existing supply chain and fast fashion model to cater to these markets.

b. Asia-Pacific: Zara should try to replicate the same model in Asia Pacific (Japan, Singapore, Malaysia, Hong Kong, Korea) which it has employed in Europe. The emphasis should be on one centralized distribution centre catering to these markets and responding to latest trends and just-in-time fashion as these countries are substantially more fashion conscious than the rest of Asia.

c. Middle East: This region is one of the worlds richest and hence offers huge revenue opportunities. But being not a very high trendy society, Zara should go in with a

more traditional approach having dedicated country specific distribution centres and pre-season manufacturing to reduce costs.

Zara can outsource its manufacturing to suppliers in China, thus countering them as a rival and reducing its manufacturing costs. This mixed model would reduce Zara’s risks also and provide ore revenues with more geographically covered area. Pre-season manufacturing will help Zara introduce its own fashion trends, which if successful can be introduced in Fast Fashion markets. Zara should also resort to extensive marketing and advertisement to make sure its lead in its existing markets and gain in the new markets.The best practices and experiences gained with both the models could be clubbed together to generate the maximum results.

Long Term: With a long term view, Zara should look at:

1. Expansion in North America: North America (including USA and Canada) remains the world’s largest consumption economy with heavy fashion consciousness. With its strong operational expertise, it should be able to establish itself in a much better way compared to its competitors. Here also Zara should follow a mixed model strategy- region specific centralized distribution centres serving just-in-time latest fashion trends and dedicated distribution centre with outsourced manufacturing. It may also look to outsource some aspects of manufacturing keeping the most necessary manufacturing operations at hand by establish manufacturing set ups. To reduce lead times, manufacturing can be outsourced to Mexico which again provides labor cost arbitrage and hence cost savings.

2. Internet Retailing: The advent of internet has changed the way businesses are being operated. With increasing number of internet transactions, it bodes well for Zara to start retailing on the internet by going for an ecommerce portal. The portal should be country specific to leverage on the price differentiation advantage which Zara currently enjoys. Internet retail will lead to a lot of savings in terms of logistics and distribution and also in terms of setting up of infrastructure and excessive manpower. It will also give Zara an opportunity to conduct various experiments in various geographies and if successful implement them in the actual stores.

3. Diversification: Zara should look at diversifying its product portfolio. It has established strong expertise in distributions and operations and could leverage this for other product ranges. Zara could try to launch a shoes range, accessories range or cosmetics range and use the mixed model strategy. It would be easier to start it as a part of internet retailing and based on that could be developed further.

Zara should look to focus heavily on advertising and marketing in the long as well as short run- to gain lost ground and get a stronger grip.