Business Report for Inditex
Since 1975 when it was first launched in Spain, La Coruna, with Zara, by its founder Amancio Ortega Gaona, Inditex has known a permanent growth and profitability throughout the markets that it reached ever since. Activating now in European and international market (with 5527 stores at the end of 2011 (Inditext Annual Report 2011, p. 14)), the company is not about to stop there, but it is pursuing new territories, aiming to make its brands “a hip”, being determined to position them (Zara, mostly), as top brands, for high end consumers.
This report will mostly focus upon Zara’s operations, but in order to reflect the full business philosophy of Inditex, the group to which Zara belongs, it will also refer to the other brands included in this group, such as Bershka, Pull & Bear, Stradivarius, Oysho or Massimo Dutti.
The focus of this report is the ongoing growth of Inditex, especially of Zara, and its global approach to fashion. When its sales number quadruples (reaching €13,8 billion, compared to its initial value from 2001, when it occurred the firm’s first public offering (Economist, “Fashion Forward”, 2012)), the group is naturally continuing to pursue its expansion, making its brands known throughout the world, and breaking the barriers of recession when it comes to fashion. Zara and other Inditex brands say “no” to recession, selling and selling and overpassing their turnover, when other brands barely make it through the economic crisis.
Analysts are constantly asking what it’s the secret of Inditex continuous growth and customer appreciation. One cause for its success might be the fact that unlike the other famous brands, who are creating the clothes in China, Inditex is following its own fashion line, creating more than half of its production in Spain, Portugal or Morocco (Economist, “Fashion Forward”, 2002). However, other significant aspects contribute to the company’s appreciation throughout the world, but mostly in Europe. Considering the fact that the company is not advertising, it actions on other levels for creating awareness: its positioning in chic locations and shop window displays, its market positioning for the top edge consumers (determining a trend for being in – style if wearing Zara), but especially its taste for fashion. As a former Inditex executive considers, it is “the genius of Mr. Ortega’s model” that is renewed every season and that does not resemble anything else in the market (Economist, “Fashion Forward”).
Inditex reached €13.793m in 2013, more than €1m from 2010 (when it reached 12,537 in sales). In 2011 it operated with 5.527 stores around the world, being present in 82 markets, inaugurating new stores in Australia, South Africa, Taiwan or Azerbaijan, and employing around 109,512 people in all its markets (Inditex Annual Report 2011, p. 1).
As recognized by its Chairman, Pablo Isla, the sales were supported by the expansion of the online platforms, in Europe, US and Japan, mostly (Inditex Annual Report 2011, p. 7), which indicates that in this space there are still new markets to conquer.
For following its goal of gaining as much market share in the new locations, the store opened in Manhattan was invested with a breakthrough concept, of uniting the beauty and utility with the latest trends in the eco – efficiency aspect, designing an architectural space that was to represent a fashion innovation, meant to set the trends in the commercial fashion sector (Inditex Annual Meeting, 2011, p. 6). This represented a statement coming from Inditex’s side, expressed in a grandiose manner, in order to emphasize its capacity expansion objectives.
OPERATIONAL PROBLEM
Being in its commercial apogee, Inditex and its main brand Zara are decided to conquer the world, to see clients throughout the world as dependent on Zara’s products for being chic and in – style, as the European customers are. As specialists appreciate, Europe is stagnating and the market is going old (Economist,“Fashion Forward”, 2012), and this might represent a challenge for Inditex to make its brands recognized and appreciated just as they are in Europe, in other continents.
However, the concerning aspect regarding this global perspective, which has started in 1988, when Zara opened its first store outside Spain in Oporto, Portugal (Inditex official website, “Timeline”) is that the taste differs in other regions of the world, and Zara is somehow entrenched in the European style. Nonetheless, there has been observed no significant difference in the Europeans’ tastes compared to Chinese’s fashion preferences, except the fact that the Chinese women prefer the pastel colors to complement the pallor of their skin, while the cuts of the dresses are similar to the ones designed for European ladies. Another aspect is to be mentioned here, which might threaten Inditex supremacy on the Chinese market: the prices (Economist, “Fashion Forward”, 2012).
On the contrary, the things are different for the United States market. While there is a higher expenditure potential there, other aspects are undermining Zara’s supremacy on that market: the fashion tastes, which are complex and varied and the market positioning. As such, even if Zara invested $324m in 2011 doe buying a very trendy store on the Fifth Avenue in Manhattan, the brand is having difficulties in convincing the targeted population that it is a “hip” (Economist, “Fashion Forward”, 2012).
Even so, the firm is pursuing its operational goal of expanding and increasing its market share as much as possible, although it is on its commercial pick, outrunning famous brands, with tradition in the fashion industry. But in the conditions mentioned earlier (fashion style, price and market positioning correspondence), there might arise the risk of losing the direction in the expansion process so that the company might register losses.
Operations Management and Inditex
Operations management refers to the specific activity of a company that is concerned with managing the products or services of the company. There are various processes included in this activity, and all of them need managing, in order to provide a strategic advantage for the company. It becomes significant that the operations management and the firm’s overall business strategy to be connected in a logical manner, creating a coherent plan for reaching the organizational goals (Slack et al., 2009, p. 1).
Regarding the case of Inditex, this report raised the concern that its intended expansion might turn into an uncontrolled action, as the company might not be prepared to answer the needs of the targeted markets in order to position its brands properly. Moreover, another concern should be raised at this point. Extending the operations implies the growth of the resources and if the expansion occurs in a fast – moving manner, this aspect might be detrimental to the company’s expansion policy, as in a short period of time the resources might not be available.
When discussing about resources, there should be considered the human resources, logistics, suppliers and even locations, as it is in Inditex corporate policy (mostly when it comes to Zara) to choose selective locations, which might not always be at hand.
Mahadaven appraises that capacity expansions require a large capital outlay (2007, p. 219) and although this might not look as a problem for Inditex because of its gross market share, uncontrolled expansion might generate budget deficiency.
In relation to this observation, there is an increasing concern regarding the firms’ decisions to expand their capacities, as this might raise constraints regarding the supply chain. Besides the resources required for a proper and efficient capacity expansion, there should be also considered the structure of the supply chain, which includes three main components: goods, information and finances (Yuan & Ashayeri, 2009, p. 356).
Yuan and Ashayeri considers that insufficient capacity can lead to deteriorating delivery performance, impacting negatively the incomes of the company, its sales and its market share (2009, p. 360). With reference to Inditex, this is actually a concern, because the company’s production needs increase from year to year. Therefore, one of the company’s strategic priorities is “to ensure sustainability to its supply chain” (Annual Report Inditex, 2011, p. 55).
Presenting a break – even analysis of the capacity expansion, Slack et al. demonstrate how in this situation a company can go from profitability to loss. The authors state that capacity expansion implies a gradual process and at each step there is a fixed – cost break for each unit, which must be covered before undertaking any other operation, which implies that at low level of output it is unlikely that the operation will be profitable (2009).
Form this financial perspective, Yuan and Ashayeri strengthen the fact that a supply chain should invest in expanding capacities in limited operations at one time and for this reason the authors recommend an attentive consideration to the main factors that determine the capacity expansion decision, in order to offer a clear perspective on how the expansion will be implemented, step by step (2009).
As for the decision that determines the expansion, this is viewed as being based on an infinite horizon or a one stem based expansion on a determined period. As factors to be considered in an expansion case, there can be enumerated the global production strategy of the company, the forecasted market conditions or the competitive forces in different locations (“A Review of Multi – Factor Capacity Expansion”, 2007, p. 2).
SOLUTIONS FOR EFFICIENTLY MANAGING CAPACITY EXPANSE
Returning to Inditex and the business background presented at the beginning of this report, there has been observed that the company is set to conquer other commercial spaces such as Asia or North America, targeting top positions for its brands within the fashion industry. This is a global strategic objective, and in order to reach it, it needs to implement a global strategic approach.
Although not a new entry on these markets, the company should permanently adjust its business style to its surrounding business environment. This is why, the following market analysis strategies should be implemented, for evaluating the internal and external factors that might affect its business in the targeted locations:
- The PESTEL analysis is always helpful for identifying the macro – environment, reflected through political (P), economic (E), social (S), technological (T), environmental (E) or legal (L) aspects of the business environment in which the company activates (Lorat, 2009, pp. 6 - 7).
For Inditex this implies that the company should adjust its business model to the hosting country’s political, economic and juridical aspects, involving taxation system, commercial VAT and so on. Highly important is to understand the society, the people’s buying power, their shopping behavior and their tastes in fashion. At this point, the company has the possibility of making a change, if the potential customers’ tastes are difficult to predict and to satisfy (as it is the case in United States), by generating a changing of their attitudes through trend setting.
The company should apply a social research upon the targeted population (the customers of similar brands that have the same positioning within the industry) and understand them, their shopping behaviors and their tastes in fashion. The purpose is not to change Zara fashion style (of course, it should be adjusted to the trends identified), but to identify a common perceptions about style that can be exploited towards introducing a revolutionary fashion concept that should be embraced by the company’s targeted customers.
Zara is an European brand with tradition and in the same time it is designed for the persons that need to be ahead of fashion. For a complex market as United States, such an approach should raise the interest of the targeted customers. From this point, it is the duty of the customer care departments to maintain the customers satisfied through excellent in – store services and it is the responsibility of the marketing departments to make the customers loyal to the brand.
United States was the location in which Inditex also stated its positions towards environment sustainability, through its eco – efficiency store, located in Manhattan. As for the technological aspects, the company’s brands benefit of online platforms, where customers can make their buying and this is one of the company’s operational strength, which contributes to enriching the company’s brands awareness and also enlarges its market share.
- Marketing Mix (4Ps) – refers to an internal evaluation of the company’s products, price, promotion, and placement (Richter, 2012, p. 1).
This evaluation will refer to Zara, as the main brand of Inditex. Its product line includes clothes, shoes and accessories and also fragrances for women, men and children. The brand initiates “up – to – the – minute” trends, and its articles move quickly within the stores (“Zara Marketing Mix”, n.d., slide 3).
The price aspect differs from location to location. While in some countries the brand is placed as a cutting edge brand, proposing high prices, in other locations (especially domestically, in Spain), the prices are considerably lower (Zara Marketing Mix”, n.d., slide 5).
Zara’s promotional strategy implies “0 Promotion”. The only promotion that it implements is through its stores. As for its placement, as it was indicated, Inditex solely opts for selective locations, in chic neighborhoods.
This marketing mix states that Zara is an exclusive brand and precisely because of this aspect it is traditionally known for its lack of promotional or advertising campaigns and activities. Nevertheless, in order to reach an effective capacity expansion, the company could generate a word of mouth campaign among its clients, precisely because of its excellent in – store customer services, with the aim of reaching additional customers, through the buzz created.
- Based on Porter’s Five Forces model (appendix 1), the company should play it safe in the countries wherein it intends to win more market share. Small steps are sometimes the key to success. Entering gradually, while learning more about the customers and the business model that it should apply for attracting more customers should be the approach that Inditex has to develop for Zara in U.S. and China.
- Capitalizing on its strengths (its figure sales) and opportunities (capturing more market share in key locations in terms of fashion – US and China), while acknowledging its weaknesses (difficulties in positioning properly the brand in US and China) and threats (the potential of the local fashion brands and even more, the fact that its products can be copied) (appendix 2) this report recommends that Inditex should stop and analyze whether it is worth the risk. The risk is that its main brand, Zara might be wrongly positioned on the intended target markets and it can become from an exclusive brand a second – option store. This is why, in this case it is recommended to wait for the proper moment, when the targeted markets are prepared to absorb and appreciate Zara’s products as they are appreciated in Europe.
CONCLUSIONS
While Zara is now the leader in the fashion industry in Europe, Inditex is betting on U.S. and China as two highly potential markets, where the brand could develop, reaching the leader in those markets also, sensing the fact that the European population gets old and stagnates in terms of fashion, hence, in terms of shopping appetite.
This report explained that there are risks for Inditex to damage Zara’s image if it chooses to expand it, positioning it on the targeted markets (U.S. and China) in an unsuited moment, when the market is not prepared to absorb the brand at an exclusivist level.
However, with a controlled management of its resources, an efficient integration of its suppliers in its operations, with an in – depth evaluation of the current situation and the forecast of the potential of the markets that the company targets for achieving commercial supremacy, through its brand Zara, it can avoid the risk of falling into losses as a result of an unbalanced and uncontrolled capacity expansion.
The recommendations included in this report stated that Zara should take the following approaches in terms of capacity expansion in U.S. and China:
- Adapt to those markets in terms of style and shopping possibilities;
- Act as a trend – setter, proposing revolutionary fashion concepts;
- Apply a discrete word of mouth campaign that would generate buzz precisely on the targeted audience;
- Play it safe, while taking baby steps in its capacity expansion;
- Considering the risk of positioning wrongly Zara and postpone the moment for capacity expansion until the market is prepared to absorb it as an exclusivist brand.
References
“A review of multi – factor capacity expansion models for manufacturing plnts: Search for a holistic decision process”, 2007. International Journal of Production Economics. Vol. 106, no. 2, pp. 607 – 621.
Fashion forward. Zara, Spain’s most successful brand, is trying to go global, 2012. Retrieved on 12 January, 2013 from < http://www.economist.com/node/21551063>.
Griffin, R, W, 2009, Fundamentals of management. Mason, South – Western Cengage Learning.
Inditex Annual Report 2011. 2012. Coruna: Communication and institutional Relations Corporate Division. Inditex S.A.
Inditex official website, n.d., Timeline. Retrieved on 12 January 2013 from
< http://www.inditex.com/en/who_we_are/timeline>.
Kachru, U, 2007, Production and operations management. New Delhi: Excel Books.
Lorat, N. 2005, Market audit and analysis. Germany: Grin Verlag.
Mahadevan, B, 2007, Operation management theory and practice. Delhi: Dorling Kindersley, Pvt. Ltd.
Porter’s five forces model. 2009. Retrieved on 12 January, 2013 from
< http://notesdesk.com/notes/strategy/porters-five-forces-model-porters-model/>.
Richter, T, 2012, International marketing mix management. Berlin: Logos Verlag Berlin GmbH.
Slack, N, Chambers, S, Johnston, R & Betts, A, 2009, Operations and process management: principles and practice for strategic impact. Edinburgh: Pearson Education Limited.
Yuan, X & Ashayeri, J., 2009, “Capacity expansion decision in supply chains: a control theory application”. International Journal of Computer Integrated Manufacturing. Vol. 22, no. 4, pp. 356 – 373.
Zara marketing mix, n.d., retrieved on 12 January 2013 from <http://ayodhiart.wordpress.com/2010/08/24/zara-marketing-mix>.
Appendices
- Appendix 1 – Porter’s Five Forces Model
- Porter’s five competitive forces analysis contributes to identifying the competition from the industry in which a company activates in a certain market. The following figure clearly identifies which are the competitive forces in an industry.
Figure 1 – Porter’s five forces
Source: notedesk, “Porter’s Five Forces Model”
- Appendix 2 – SWOT Analysis
SWOT – internal analysis of the company’s potential, regarding its strengths, weaknesses, opportunities and threats on the market that it targets (Griffin, 2011, p. 68).
This analysis should be implemented separately for each market (country) in which the company operates, as the environment is different in every location. This report identifies the company’s internal environment based on its business development needs from China and United States, considering the context information provided in the beginning of this report.
The strength of Inditex is that is recognized throughout the world and that it has great sales figures, especially with its brand Zara and the online market is also on the right track. Also, the fact that its operational strategy implies managing the suppliers for sustaining an increased production, the company has potential for expanding. However, this does not assures its success and one weakness of Inditex with positioning its brand Zara in China is that it is not very affordable, while in United States, for the moment it doesn’t manage to capture the market through its fashion line. Opportunities refer to increasing the company’s market share on these markets (China and US), through a revolutionary concept in United States, and through a price adaptability in China. As threats, there should be considered the local brands or other local brands and their strategies of capturing market share.
