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Aalborg University
BSc Economics and Business Administration
             2012 October 24
BSc Economics and Business Administration




                                  Mini Project

                          The ZARA Case Study in

         Economics and The Organisation of Economic Activity




                          The report has been prepared by:




Inga Dragunaite           ___________________________________

Justina Vaidziulyte       ___________________________________

Kristina Kirilova        ___________________________________

Aleksandar Varbanov      ___________________________________

Nebojsa Abadzic         ____________________________________




                              Delivery date: 26-10-2012

                         Number of words of the report: 5425




                                                                  2
Contents
Introduction ..................................................................................................................................... 4
Describe the Value Chain of Inditex ............................................................................................... 5
From Agency Theory view, describe the incentives structure for the store managers .................... 9
From Transaction Costs Economics view, discuss if it makes sense to outsource work to
“captive” suppliers. What would be the alternatives, and how do you evaluate them? ................ 12
In relation to the fashion sector in Europe, does Inditex posses a competitive advantage? Use the
VRIO framework as the basis of your discussion ......................................................................... 16
List of sources ................................................................................................................................ 19




                                                                                                                                                  3
Introduction
Inditex is an eight-brand group of the world’s largest fashion retailers with its headquarters
located in La Coruna, in Spain. Founder and majority owner of the company is Amancio Ortega,
famous Spanish entrepreneur. Chairman and CEO of the company is Pablo Isla Alvarez de
Tejera. Inditex’s corporate culture is based on close communication between the customers and
the   employees. Today     company     has    more    than   100.000    employees     worldwide.
The largest brand of Inditex is Zara, which runs three independent product lines for women, men
and children where most of the accent is stressed on women’s garment. Each of the lines is
managed by separate team which consists of Diression de Tiendas (DTs). DT’s collaborate with
commercials, country managers, HR managers and headquarters. We can freely say that Zara is
a pioneer in fast fashion industry. The customer is at the heart of their unique business model,
which includes design, production, distribution and sales through their extensive retail network.
The Zara case study is an interesting example on how one company can be successful on the
market. The dynamics of the company and its adapting ability show how important is the right
thing regarding market’s needs. Zara is an apparel chain that works differently from traditional
retailers. The main characteristic is the vertically integrated model. Instead of relying fully on
outside partners, the company manages all design, warehousing, distribution, and logistics itself.
The products are distributed in small batches. Due to the stylish garment and affordable prices,
consumers visit Zara’s stores very often.




                                                                                                4
Describe the Value Chain of Inditex

Value Chain Inditex

Primary Value Chain Activities

        Inbound Logistics


        Inditex Group is a vertically integrated group, which controls most of its supply chain.
        About 50 % of its products are manufactured in Spain, 25% comes from Europe, and the
        remaining fraction is produced in locations in Asia and Africa1. After that, the whole
        production is received and warehoused in the logistics centers in Spain before being sent
        to the stores. It does not matter where they have been produced, the main categorization
        is happening in Spain. Materials and fabrics are kept in warehouses without exact colors
        or prints, due to be able to react quickly to market changes.     If it turns out that the
        demand is higher for the particular product, the company is able to react quickly and
        produce additional items with a particular design or color2. Sometimes, transportation of
        merchandise is by plane; for example: clothes, which are produced in Asia, have to be
        transported in logistics centres in Spain, there categorized and again transported to the
        Asia. Furthermore, many countries have small warehouses where they keep extra or
        returned goods3.


        Operations


        Inditex country offices represent headquarters at the country level, supervising and
        coordinating the operations of the various Inditex brands4. Zara's headquarter in Spain
        consists of three spacious halls for each of these centers. There designers work together
        with market specialists and planners for procurement and production. Also, here
        designers can quickly check initial drafts with their colleagues and discuss about new
        styles. Therefore, prototypes can be examined on site. That kind of teams can work very
        efficiently; discuss about new fashion trends and take decisions within a few hours.
        Market specialists are intermediaries between designers and store managers, who can

1
  Notes on Zara case
2
  Notes on Zara case
3
  Zara: managing stores for fast fashion
4
  Zara: managing stores for fast fashion
                                                                                                5
quickly provide feedback to their colleagues in design and procurement. 5 What differs
        Zara from competitors is more capital intensive industry.

        Each brand from Inditex Group has his own autonomy. They can quickly react to market
        requirements, act in a flexible way by making changes without asking permission of third
        parties. For example, Zara has power on operations, such as dying, labeling and
        packaging, all other manufacturing processes are made by Inditex employees.

        Zara has three product lines: one for children, women and men. All product lines go
        parallel with each other, but in an operational different way. Procurement, sales, design
        and marketing operations exist for each of these lines; just they are different and
        separated.

        Outbound Logistics


        At the beginning of each season, the whole merchandise is being distributed to the stores,
        in the quantities decided by the commercials. However, when the production reaches the
        stores, managers are responsible for the order replenishments. It is their responsibility to
        decide how many units of each item to order and to do that, they are taking into
        consideration various data (forecasts of customer demand, how many of that product the
        store had and already sold and etc.)
        European stores are receiving their deliveries within 24 hours; in Asia and America
        receiving deliveries take 40 hours6. Usually deliveries are done by trucks or planes. Each
        week, stores are receiving about 12,000 units. However, sometimes it happens that they
        did not receive the whole order, because inventory at the logistics centers are limited.7
        Also, there were some improvements in time saving process. In the beginning when the
        new merchandise was delivered, employees had to put tags on the products before they
        could reach store shelves, now tags are put by manufactory workers. This improvement
        puts some value on faster delivery of the production to the customer.




5
  Notes on Zara case
6
  Zara: managing stores for fast fashion
7
  Zara: managing stores for fast fashion
                                                                                                  6
Marketing& Sales


       Zara is using very unique marketing strategy. Due to the fact, that they are not
       outsourcing their manufacturing, company can quickly respond to the customers demand
       in fashion trends. Zara’s unique selling proposition is to produce the latest trend products
       within very short time (few weeks) and at affordable prices. Moreover, products are on
       the store shelves no longer than one month. People are more or less forced to buy the
       product, which they like due to the fear that next week it can be sold out. Products, which
       are not sold out are afterwards discounted. Zara has approximately eighteen percent of
       unsold merchandise, which is one of the lowest in the industry.
       Comparing with other similar companies, Zara does not spend much money on
       promotion. However, it does not mean that the company is doing nothing. Zara thinks
       that the store windows and the content is the most necessary advertising for them.
       Last, but not least interesting thing about Zara is that it owns the majority of its stores,
       but also does joint venturing and franchising in markets which are high risk and
       culturally distant.


       Service


       Zara’s customers are young people, who are usually in a hurry; want to buy quickly
       something what they like without being bothered. Due to this fact, sales associates are
       required to help, when they see that customers need help or ask directly for help.
       Therefore, company is putting more effort in managing products than customers. Also, it
       is very important to make sure that customers do not wait in long queues. Zara respects
       customers complain and try to respond as soon as possible.




Support Activities

       Procurement
       Zara sources fabric, other inputs and finished products from external suppliers who are
       usually in low cost source markets. After certain designs are chosen for production,
       material is drawn from stock, cut, manufactured and delivered to company stores around


                                                                                                 7
the world. Zara also owns 20 other factories for internal manufacturing that apply just in
        time.8
        Inditex is purchasing raw materials through the company’s regional offices in the UK,
        China, Holland and other offices based in Europe, Asia and Australia.9


        Technology Development


        Company puts the value on information transfer. The whole Zara’s supply chain is
        connected through the constant flow of information. Zara developed way how to transfer
        information easier than before. They invested a lot in IT in the 1990’s before major phase
        of international expansion. They developed quick response systems in the industry.
        Company is using PDA (Personal Digital Assistance) in stores, which ensures a quick
        information flow within the company and creates value for the customers.10 Also, this
        system helps for the company to find out about new market trends as fast as possible and
        possibility to react quickly.


        Human Resource Management


        All brands of Inditex Group have HR directors, who are supporting the stores on all HR
        issues, which are not linked to the operations and are organized by the geographical area.
        HR department is well developed in this company. Company puts a lot of emphasize on
        training of their employees, so usually sales associates before starting to work have at
        least one week training. Zara’s product development teams are responsible for attending
        high fashion fairs and exhibitions to translate the latest trends of the season into their
        designs. In this type of company hierarchy exists similar to one like the pyramid model.
        Although thing that is interesting is that store managers have in their work autonomy.
        The idea is that make them understand the value of freedom and to motivate them and
        give an opportunity to feel like the owners of their own store. For the Zara Company’s
        CEO it is very important that there will not be disconnection between the store and
        headquarters. CEO thinks that the feeling in the store can be transmitted and can make




8
   http://www.slideshare.net/binotrisha/zara-procurement-strategy
9
   Notes on Zara case
10
   Notes on Zara case
                                                                                                8
huge damage for the entire company, so it is important to make sure that employees are
          satisfied and motivated to work efficiently.11


          Firm Infrastructure


          Zara developed business model where speed and decentralized decision making was
          essential. This business practice, in turn, led to shorter lead times and introduction of
          more fashion styles. The implementation of the information and communications
          technology helped augment the business processes at Zara. At the heart of infrastructure
          is the IT technology. The organizational structure supports IT technology. The
          company’s CEO is Isla A.de T., the “head” of the company. Next to the CEO there are
          headquarters, which are responsible for coordinating the brands, HR, IT, transportation
          and real estate. Below the headquarters are “commercials”, which are organized into
          teams to analyze and interpret the sales figures for around 40 stores in a geographical
          area. Next to “commercials” are HR directors who are supporting the stores on all HR
          issues that were not linked to operations and who are organized by geographical area.
          Each Inditex brand has regional networks of DT, equivalent to regional managers and
          known internally as DTs, who are responsible for the operations and performance of 15
          stores and have to evaluate how those stores are performing.
          Country managers are also expected to be proactive in social issues. Beside the central
          management above, each Inditex brand is managing independently, with its own network
          of stores, logistic centers and production facilities. 12




11
     Zara: managing stores for fast fashion
12
     Zara: managing stores for fast fashion
                                                                                                 9
From Agency Theory view, describe the incentives structure for the store managers

In today’s world each company is trying to attract the best employees from the market that will
give their best to achieve a company’s goals. The most common problem that can occur is the
possibility that your employees can have lack of motivation to contribute enough. Where
employer’s goals reach employees incentives? How the employer can motivate his employees in
order to achieve best results? There are plenty of methods that people invented to monitor the
work of others and constantly control the process. It could be by direct supervision, cameras or it
could be also by reports regarding financial performance. Is it the best way to monitor the work
of your employees all the time to insure yourself that the job is done? Many managers today
decide that besides the salary, the workers should receive also a percentage of the sales or the
whole salary could be depending on their contribution in the company. Each individual has
different way to measure his own contribution and the contribution of the people around him. If
we look at Zara’s store managers what will be their motive to work hard instead of shrinking?
For Zara’s shareholders, CEO and etc, their goal is to increase the sales and profits. Working
hard raises the probability of making more sales, but the increased effort cost the store managers
or salesperson from the other side. In order to provide that effort they have to receive something
for return which can be some kind of reward. Zara puts a lot of emphasize on its employees.
Approximately 87% of them are at the stores and thanks to great communication they are
interrelated with the company’s headquarters, commercials and DT’s. Interesting thing is that
people from bottom (sales associates) can be promoted to store managers, and we can see also
this on other levels as well.

Let first start with the role of store managers. At each store, three product lines are managed by
three independent section managers, each with a team of sales people and cashiers. Each
manager is in charge for women’s, men’s and children’s section. Woman’s manager is also the
overall manager of the store. Main characteristic that these managers have is autonomy. They
feel like entrepreneurs of the store as they have impact on orders for the store and this helps Zara
to deal with different culture issues in various countries as they know local values. This
autonomy is in fact a bonding, as store managers can govern the store. Zara’s philosophy isn’t
just monitoring employees to perform well, but also to have them satisfied with their job. So,
sometimes we can see the situations when employees aren’t satisfied with the atmosphere and
then they have the possibility to be transferred to another store (bonding). In our case we treated
store managers as agents and commercials and DT’s as principals due to the fact that store
managers should meet the principal’s goals. To increase the productivity of the store and
                                                                                                 10
increase sales the store manager has to increase the productivity of the all employees working at
the store. To manage all this responsibilities, the manger has to develop specific skills that will
meet the requirements. Store managers receive competitive salary and a bonus based on how
well they meet target sales. In order to perform well they need also to coordinate sales associates.
As they are organized in teams there is an opportunity for shrinking, because of huge number of
employees in an average store. One of the sale manager’s task is to monitor sales associates and
ensure work efficiency. In one way we see that incentives are aligned because of monitoring
which occurs at each level: sales associates are monitored by store managers, store managers by
DT’s and commercial and DT’s and commercials by headquarters. All their bonuses are affected
by overall sales, so all of them should have an incentive to put more effort. Another interesting
factor that we found is the risk that store managers face when they are ordering replenishments.
They need to use their previous experience together with their ability to forecast new orders. We
see the risk due to the fact that store managers aren’t aware how many units will be sold, what
will be the bestseller and how many units are available in warehouse. For this reason Zara
created incentive-intense payment model for store managers to motivate them to seek better
results in their performance.




                                                                                                 11
From Transaction Costs Economics view, discuss if it makes sense to outsource work to
“captive” suppliers. What would be the alternatives, and how do you evaluate them?

Outsourcing is becoming more demanding nowadays. The biggest international companies pay
more attention to it in sense of trying to reduce their transaction costs. Transaction costs consist
of search costs, bargaining costs and policing/enforcement costs.

Firstly, we will assume that a company of the rang of Zara will not have financial problems
concerning making a research about outsourcing elsewhere. Also, the company has enough
human resources which could be working on that field.

Secondly, in our case the most important part of the transaction costs of economics are the
bargaining costs. About 50 % of the production is manufactured in Spain (or in its proximity).
Also countries in Asia, Europe and even Latin America contribute to the supply chain of this
well known brand. About 35 % of the production comes from Asia, 14 % from Europe and only
2 % from America. Raw materials come mainly from UK, Holland, China and some other
destinations. 13 Here we should underline that as far as the good comes from; it is more harder to
control the supply process. The small manufacturers in Spain provide the company with
significant number of production. Besides Zara’s own plants, these suppliers represent a good
chance for the company due to their flexibility – they can change their production rapidly and of
course, the smaller they are, the easier for control and price negotiation are they for the Zara.
They can easily depend on Zara, especially if they realize economies of scale and/or economies
of scope. Another example can be if Zara invested some capitals (for example equipment, new
technologies, human resources and etc.) in these small manufacturers.

Third of all, policing and enforcement costs also could be significant, especially if the
investment is based on know-how or patented products. In our case, this is supposed to be
resolved by a certain contract, which defines the exact rights and obligations of the both sides. If
Zara spoiled by some reason their partnership, these small manufacturers probably would face
difficulties to find another big client for their production. On that way, Zara could easily reduce
its transaction costs by pressing the “captive” suppliers. This situation will not seem very likely



13
     Zara: Managing Stores for Fast Fashion – Harvard Business School




                                                                                                 12
to occur in a big fabric which produces for many clients. On the suppliers’ side, this also may be
referred as a post-investment hold-up problem.

Uncertainty is low because if any supplier does not want to work with Zara, the company could
easily find another one. We will assume that the small producers are required to buy or build
expensive machines, which are suitable only for Zara. In this case, we will have highly asset
specificity that could reduce transaction costs.

Another reason for the importance of the small “captive” suppliers in Spain is that they will
probably produce more expensive garment in comparison with low labour costs countries like
China and India. Due to the fact that Zara’s supply chain is short, the company can react quickly
to the new trends. Zara intentionally choose to produce mainly in Galicia and Northern Portugal
because of the suppliers’ ability to accomplish fast changes. However, that reflects on the
transaction costs because producing in Europe is typically 15-20 % more expensive. 14

The relationship between Zara company and the “captive” suppliers in Spain can be also binded
to other small suppliers elsewhere. Small suppliers in China or India for example may have the
same sensitiveness regarding price negotiation if they sell most of its production to Zara. We can
                                                                             15
easily see that 20 suppliers accounted for 70 % of all external purchases.        The bigger suppliers
have long term relationships with Inditex. This allows Zara to minimize formal contractual
commitments with them.

Regarding the opportunities for outsourcing, perhaps in the future in order to remain competitive
and control costs, Zara might have to move manufacturing mainly to China and India. This can
be a good advantage in view of transaction costs economics because the airfreight cost is about
only 1 % of the selling price. The other advantage is the short time for delivery. European stores
received their deliveries within 24 hours and those in Asia and America received deliveries
within 40 hours. Also the average cost on a produced item is supposed to be lower in comparison
with the factories in Spain.16 The cheaper labour cost will contribute to that. This idea should be
good considered even earlier, because the opportunity cost of not having more production in
Asia because of fast changing orders, could be significant.




14
   Zara: Fast Fashion – Harvard Business School
15
   Zara: Fast Fashion – Harvard Business School
16
   Zara: Managing Stores for Fast Fashion – Harvard Business School
                                                                                                   13
On the other hand, the company’s top management should think whether this will be enough to
offset the lost speed ability regarding clothes production. If Zara managed to find somehow low
cost producing suppliers in Asia for example, which could be able to produce for the same time
like the Spanish suppliers, the company will achieve great transaction costs reducement. Of
course, the precise answer of the question whether it makes sense to outsource depends mainly
on account data and detailed further analysis.

Besides the clothes outsourcing, Zara made changes to outsource some of their day-to-day task
in order to decrease operating expenses. “Labour was the largest operating expense at the stores
and any change to improve labour productivity would have significant profit implication.” One
of the day to day task that bothers Isla and could decrease the labour operating expense is a
process delivery. What will be the difference for Zara to outsource their process delivery to a
third-party logistics companies? At least twice per week, Zara stores receive early morning
delivery that they have to move from the selling floor and remove the plastic covers from items
and get ready for shelving. The boxes and hangers held mixed products. If we look at the
situation in France they were encouraged to process at least 85 units per person. The question
that arises here is how to improve the whole process. Zara’s manager could consider to improve
the labour productivity or to outsource process delivery to a third-party. In both cases there will
be positive and negative consequences of their action.

Let’s first consider improving labour productivity and what will be the consequences of that
action. Until now as we see the whole work is done by the store employees and as we know it
takes around 5% of their working time. When we look at the negative aspects we see that they
are doing the job slower that if Zara outsources the delivery process and the cost is higher than if
they hire a third-party. The positive aspect that we could have in that case is that store employees
are familiar with the products and when they remove the plastic covers they can store them faster
for shelving than a person who sees the product for first time.

In order to reduce the time from 5% to 4% or less, store employees have to work under a lot of
pressure and that may affect their later performance. To make that choice managers should
consider what they will receive and what they have to give away.

The second solution that we have is to outsource process delivery to a third party. If Zara decides
to take that step they have to consider the transaction costs of that decision. The first cost that
Zara should pay is “search and informational cost” to determine that the required service is

                                                                                                 14
available on the marker and compare the prices. Outsourcing delivery process would save even
more time and money, but they have to consider what could be the risk of doing that.

When we look at transaction cost point of view we have to evaluate the asset specificity, the
uncertainty and the frequency, in order to compare the cost of market transactions to the cost of
internal transactions.

In all business relations both parties have to sign a contract and assure that product specification
is clearly defined in the contract. Here appears “bargaining costs” which requires coming to an
acceptable agreement. Zara’s requirements are the boxes to be moved from the selling floor and
all the products to be stored and ready for shelving. The logistic company will want to be aware
of how often the deliveries take place, when the delivery takes place and how many units
arrived, in order to prepare team for the job. In our case the uncertainty has high level, because
of the fact that stores receive at least twice per week orders but there is no guaranty for that. Here
comes the risk for Zara if there will be enough workers when the delivery takes place. To ensure
that, the logistic company may increase their demand and so the cost for Zara will increase. The
second factor that we have to consider is the possibility that every time when a delivery takes
place there will be different team of workers so they won’t be aware of the situation there. To
remove the boxes from the selling floor and remove the plastic cover has lower asset specificity
but at the same time to store the products by type it may require more time for people that see the
product for the first time. Finding the product and storing them for shelving requires the workers
to be aware of the situation at the store. That gives higher asset specificity. In that case Zara may
want the team to be always the same. To insure that the logistic company will increase their
demand. In order to evaluate the logistic company move, Zara needs only to analyze what
moves their opponent can possibly make and evaluate all possible moves that they could make in
answer to each possible countermove(when they describe the conditions in the contract). When
the delivery will take place and etc.? These are elements of uncertainty/complexity that will
increase the market transaction cost. Of course if Zara conclude a contract for a long run or for
all their stores in a specific country that may decrease the market cost. In order to reach truce
both parties will come up with their own requirements. To decrease the market cost of
outsourcing the delivery process Zara should predict all the moves that their opponent could
make and come with an attractive offer.




                                                                                                   15
In relation to the fashion sector in Europe, does Inditex posses a competitive advantage?
Use the VRIO framework as the basis of your discussion

Competitive advantage is defined as superiority of an organization with regard to at least one
product attribute over relevant competitors. When a firm sustains profits that exceed the average
of its industry, the firm is said to possess a competitive advantage over its rivals. The goal of
business strategy is to achieve a sustainable competitive advantage, which is very difficult task.
We will use the VRIO Framework to analyze the internal environment of the Inditex (Zara)
which will help us to determine whether Zara has resources/capabilities to exploit it’s
competitive potential. “VRIO” is structured in a series of four questions: 1) Question of Value 2)
Question of Rarity 3) Question of Imitability 4) Question of Organization.

Fashion industry is very competitive and subject to rapidly evolving fashion trends. Based on the
VRIO Framework and analysis of competitive advantage, we found that Inditex (Zara) has
competitive advantage. Inside a business model we can see a strong vertical integration and well
organized supply chain, which combined with organizational structure gives to Zara flexibility to
respond, adapt and deliver merchandise faster than its competitors. Unlike their competitors such
as H&M, Mango, United Colors of Benetton in Europe, Zara has disintegrated decision-making
model. And above all, the price of merchandise is affordable.

Now we will analyze each question in detail regarding VRIO Framework.
1) Value – does a resource enable a firm to exploit an environmental opportunity and/ or
neutralize an environmental treat? We see Inditex rather as a combination of resources, so the
most valuable resource we would put is the vertical integration. Instead of relying on third
parties, the company manages all design, warehousing, distribution and logistics function itself.
Doing that they are more flexible and faster than competitors and we know what these two words
mean in apparel industry. Along with the vertical integration which also reduces operating costs
it has excellent conceived organizational structure and values that all employees must respect.
The reward is great autonomy that store managers have. Some skeptic persons could ask whether
this value could be used in future? Our answer is probably yes, as Zara carefully follows changes
in consumer tastes and due to flexibility and speed it can adapt. Second justification could be that
it follows world trends and it might outsource more from Asian markets to reduce its costs.

2) Rareness – how many competing firms already posses particular valuable resources and
capabilities? If we analyze competitors we’ll see that most of them outsource most of the

                                                                                                 16
production, while focusing on distribution and retailing. The reason is that the industry is more
labor-intensive. Inditex does just the opposite .It puts more emphasize on capital-intensive
industry.17 Difference could be easily seen in figures: “Zara is able to produce new items and
deliver them to its stores in less than three weeks rather than the average six months needed for
luxury brands and in terms of production in a typical season it produces about 11000 different
items while competitors would produce typically between 2000 and 4000.”18 So we see that the
resource is rare.

3) Imitability – do firms without a resource or capabilities face a costly disadvantage in obtaining
it compared to firms that already posses it? Nowadays almost everything is imitable. The
question is how long it takes to imitate. In the case of Inditex we freely assume that if
competitors were to copy Zara business model, they could, but only in a long run. It would take a
few years to establish vertical integration model with that kind of supply chain and even more to
create organizational structure (culture) that Zara has. We should also take into consideration
enormous costs that those firms would incur in order to copy the model, which are often
impossible for firms to incur. Although if this is supposed to happen, we think that in meanwhile
Zara would probably progress more in other segments, because as we saw they make small
changes very often. To cite the Inditex’s founder Amancio Ortega when he talked to Pablo Isla
who is CEO: “Once a month, come here thinking that we are near bankruptcy. You will find a lot
of things to change.”

4) Organization – is a firm organized to exploit the full competitive potential of its resources and
capabilities? We can see that it is. If we look at the annual reports we can see that they are
constantly increasing sales and profits. Merit for this goes to top management, but also to every
individual engaged in every process of Inditex. We shouldn’t forget that section managers have
autonomy and that they together with the DT’s, HR managers and commercials contribute to
success. Here lies their strength. Possibility of coordinating all those people despite the fact, that
they have some kind of autonomy in decision-making process.”19




17
   Although Inditex combines it also with labor – intensive industry ( doing that they are more flexible
and faster in producing garment )
18
   Zara: Managing Stores for Fast Fashion – Harvard Business School
19
   Zara: Managing Stores for Fast Fashion – Harvard Business School
                                                                                                           17
The VRIO framework


Is a resource or capability …
Valuable?           Rare?         Costly             to Exploited by Competitive       Economic
                                  imitate?              the             implications   Performance
                                                        organization?
No                  -             -                     No              Competitive    Below
                                                                        disadvantage Normal
Yes                 No            -                                     Competitive    Normal
                                                                        parity
                                                              ↑
Yes                 Yes           No                                    Temporary      Above
                                                                        competitive    normal(at
                                                              ↓
                                                                        advantage      least in the
                                                                                       short run)



Yes20               Yes           Yes                   Yes             Sustained      Above
                                                                        competitive    normal
                                                                        advantage




20
     Bold text refers to Inditex’s ( Zara’s ) case
                                                                                                      18
List of sources


Zara: Managing Stores for Fast Fashion – Harvard Business School
Notes on Zara case
Inditex Group: Annual report 2011
The Economist:Inditex - Fashion Forward
The Economist: Global Streach - When will Zara hit its limits?
The Economist: Good Darning Vietnam
The Forbes: The Strategic Retail Genius Behind Zara
The Forbes: The Future of Fashion Retailing - The Zara Approach


http://www.gallaugher.com/Zara%20Case.pdf
http://hbswk.hbs.edu/archive/4652.html
http://researchingsustainability.files.wordpress.com/2012/01/zara-harvard-case.pdf
http://www.slideshare.net/binotrisha/zara-procurement-strategy




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Zara case study

  • 1. Aalborg University BSc Economics and Business Administration 2012 October 24
  • 2. BSc Economics and Business Administration Mini Project The ZARA Case Study in Economics and The Organisation of Economic Activity The report has been prepared by: Inga Dragunaite ___________________________________ Justina Vaidziulyte ___________________________________ Kristina Kirilova ___________________________________ Aleksandar Varbanov ___________________________________ Nebojsa Abadzic ____________________________________ Delivery date: 26-10-2012 Number of words of the report: 5425 2
  • 3. Contents Introduction ..................................................................................................................................... 4 Describe the Value Chain of Inditex ............................................................................................... 5 From Agency Theory view, describe the incentives structure for the store managers .................... 9 From Transaction Costs Economics view, discuss if it makes sense to outsource work to “captive” suppliers. What would be the alternatives, and how do you evaluate them? ................ 12 In relation to the fashion sector in Europe, does Inditex posses a competitive advantage? Use the VRIO framework as the basis of your discussion ......................................................................... 16 List of sources ................................................................................................................................ 19 3
  • 4. Introduction Inditex is an eight-brand group of the world’s largest fashion retailers with its headquarters located in La Coruna, in Spain. Founder and majority owner of the company is Amancio Ortega, famous Spanish entrepreneur. Chairman and CEO of the company is Pablo Isla Alvarez de Tejera. Inditex’s corporate culture is based on close communication between the customers and the employees. Today company has more than 100.000 employees worldwide. The largest brand of Inditex is Zara, which runs three independent product lines for women, men and children where most of the accent is stressed on women’s garment. Each of the lines is managed by separate team which consists of Diression de Tiendas (DTs). DT’s collaborate with commercials, country managers, HR managers and headquarters. We can freely say that Zara is a pioneer in fast fashion industry. The customer is at the heart of their unique business model, which includes design, production, distribution and sales through their extensive retail network. The Zara case study is an interesting example on how one company can be successful on the market. The dynamics of the company and its adapting ability show how important is the right thing regarding market’s needs. Zara is an apparel chain that works differently from traditional retailers. The main characteristic is the vertically integrated model. Instead of relying fully on outside partners, the company manages all design, warehousing, distribution, and logistics itself. The products are distributed in small batches. Due to the stylish garment and affordable prices, consumers visit Zara’s stores very often. 4
  • 5. Describe the Value Chain of Inditex Value Chain Inditex Primary Value Chain Activities Inbound Logistics Inditex Group is a vertically integrated group, which controls most of its supply chain. About 50 % of its products are manufactured in Spain, 25% comes from Europe, and the remaining fraction is produced in locations in Asia and Africa1. After that, the whole production is received and warehoused in the logistics centers in Spain before being sent to the stores. It does not matter where they have been produced, the main categorization is happening in Spain. Materials and fabrics are kept in warehouses without exact colors or prints, due to be able to react quickly to market changes. If it turns out that the demand is higher for the particular product, the company is able to react quickly and produce additional items with a particular design or color2. Sometimes, transportation of merchandise is by plane; for example: clothes, which are produced in Asia, have to be transported in logistics centres in Spain, there categorized and again transported to the Asia. Furthermore, many countries have small warehouses where they keep extra or returned goods3. Operations Inditex country offices represent headquarters at the country level, supervising and coordinating the operations of the various Inditex brands4. Zara's headquarter in Spain consists of three spacious halls for each of these centers. There designers work together with market specialists and planners for procurement and production. Also, here designers can quickly check initial drafts with their colleagues and discuss about new styles. Therefore, prototypes can be examined on site. That kind of teams can work very efficiently; discuss about new fashion trends and take decisions within a few hours. Market specialists are intermediaries between designers and store managers, who can 1 Notes on Zara case 2 Notes on Zara case 3 Zara: managing stores for fast fashion 4 Zara: managing stores for fast fashion 5
  • 6. quickly provide feedback to their colleagues in design and procurement. 5 What differs Zara from competitors is more capital intensive industry. Each brand from Inditex Group has his own autonomy. They can quickly react to market requirements, act in a flexible way by making changes without asking permission of third parties. For example, Zara has power on operations, such as dying, labeling and packaging, all other manufacturing processes are made by Inditex employees. Zara has three product lines: one for children, women and men. All product lines go parallel with each other, but in an operational different way. Procurement, sales, design and marketing operations exist for each of these lines; just they are different and separated. Outbound Logistics At the beginning of each season, the whole merchandise is being distributed to the stores, in the quantities decided by the commercials. However, when the production reaches the stores, managers are responsible for the order replenishments. It is their responsibility to decide how many units of each item to order and to do that, they are taking into consideration various data (forecasts of customer demand, how many of that product the store had and already sold and etc.) European stores are receiving their deliveries within 24 hours; in Asia and America receiving deliveries take 40 hours6. Usually deliveries are done by trucks or planes. Each week, stores are receiving about 12,000 units. However, sometimes it happens that they did not receive the whole order, because inventory at the logistics centers are limited.7 Also, there were some improvements in time saving process. In the beginning when the new merchandise was delivered, employees had to put tags on the products before they could reach store shelves, now tags are put by manufactory workers. This improvement puts some value on faster delivery of the production to the customer. 5 Notes on Zara case 6 Zara: managing stores for fast fashion 7 Zara: managing stores for fast fashion 6
  • 7. Marketing& Sales Zara is using very unique marketing strategy. Due to the fact, that they are not outsourcing their manufacturing, company can quickly respond to the customers demand in fashion trends. Zara’s unique selling proposition is to produce the latest trend products within very short time (few weeks) and at affordable prices. Moreover, products are on the store shelves no longer than one month. People are more or less forced to buy the product, which they like due to the fear that next week it can be sold out. Products, which are not sold out are afterwards discounted. Zara has approximately eighteen percent of unsold merchandise, which is one of the lowest in the industry. Comparing with other similar companies, Zara does not spend much money on promotion. However, it does not mean that the company is doing nothing. Zara thinks that the store windows and the content is the most necessary advertising for them. Last, but not least interesting thing about Zara is that it owns the majority of its stores, but also does joint venturing and franchising in markets which are high risk and culturally distant. Service Zara’s customers are young people, who are usually in a hurry; want to buy quickly something what they like without being bothered. Due to this fact, sales associates are required to help, when they see that customers need help or ask directly for help. Therefore, company is putting more effort in managing products than customers. Also, it is very important to make sure that customers do not wait in long queues. Zara respects customers complain and try to respond as soon as possible. Support Activities Procurement Zara sources fabric, other inputs and finished products from external suppliers who are usually in low cost source markets. After certain designs are chosen for production, material is drawn from stock, cut, manufactured and delivered to company stores around 7
  • 8. the world. Zara also owns 20 other factories for internal manufacturing that apply just in time.8 Inditex is purchasing raw materials through the company’s regional offices in the UK, China, Holland and other offices based in Europe, Asia and Australia.9 Technology Development Company puts the value on information transfer. The whole Zara’s supply chain is connected through the constant flow of information. Zara developed way how to transfer information easier than before. They invested a lot in IT in the 1990’s before major phase of international expansion. They developed quick response systems in the industry. Company is using PDA (Personal Digital Assistance) in stores, which ensures a quick information flow within the company and creates value for the customers.10 Also, this system helps for the company to find out about new market trends as fast as possible and possibility to react quickly. Human Resource Management All brands of Inditex Group have HR directors, who are supporting the stores on all HR issues, which are not linked to the operations and are organized by the geographical area. HR department is well developed in this company. Company puts a lot of emphasize on training of their employees, so usually sales associates before starting to work have at least one week training. Zara’s product development teams are responsible for attending high fashion fairs and exhibitions to translate the latest trends of the season into their designs. In this type of company hierarchy exists similar to one like the pyramid model. Although thing that is interesting is that store managers have in their work autonomy. The idea is that make them understand the value of freedom and to motivate them and give an opportunity to feel like the owners of their own store. For the Zara Company’s CEO it is very important that there will not be disconnection between the store and headquarters. CEO thinks that the feeling in the store can be transmitted and can make 8 http://www.slideshare.net/binotrisha/zara-procurement-strategy 9 Notes on Zara case 10 Notes on Zara case 8
  • 9. huge damage for the entire company, so it is important to make sure that employees are satisfied and motivated to work efficiently.11 Firm Infrastructure Zara developed business model where speed and decentralized decision making was essential. This business practice, in turn, led to shorter lead times and introduction of more fashion styles. The implementation of the information and communications technology helped augment the business processes at Zara. At the heart of infrastructure is the IT technology. The organizational structure supports IT technology. The company’s CEO is Isla A.de T., the “head” of the company. Next to the CEO there are headquarters, which are responsible for coordinating the brands, HR, IT, transportation and real estate. Below the headquarters are “commercials”, which are organized into teams to analyze and interpret the sales figures for around 40 stores in a geographical area. Next to “commercials” are HR directors who are supporting the stores on all HR issues that were not linked to operations and who are organized by geographical area. Each Inditex brand has regional networks of DT, equivalent to regional managers and known internally as DTs, who are responsible for the operations and performance of 15 stores and have to evaluate how those stores are performing. Country managers are also expected to be proactive in social issues. Beside the central management above, each Inditex brand is managing independently, with its own network of stores, logistic centers and production facilities. 12 11 Zara: managing stores for fast fashion 12 Zara: managing stores for fast fashion 9
  • 10. From Agency Theory view, describe the incentives structure for the store managers In today’s world each company is trying to attract the best employees from the market that will give their best to achieve a company’s goals. The most common problem that can occur is the possibility that your employees can have lack of motivation to contribute enough. Where employer’s goals reach employees incentives? How the employer can motivate his employees in order to achieve best results? There are plenty of methods that people invented to monitor the work of others and constantly control the process. It could be by direct supervision, cameras or it could be also by reports regarding financial performance. Is it the best way to monitor the work of your employees all the time to insure yourself that the job is done? Many managers today decide that besides the salary, the workers should receive also a percentage of the sales or the whole salary could be depending on their contribution in the company. Each individual has different way to measure his own contribution and the contribution of the people around him. If we look at Zara’s store managers what will be their motive to work hard instead of shrinking? For Zara’s shareholders, CEO and etc, their goal is to increase the sales and profits. Working hard raises the probability of making more sales, but the increased effort cost the store managers or salesperson from the other side. In order to provide that effort they have to receive something for return which can be some kind of reward. Zara puts a lot of emphasize on its employees. Approximately 87% of them are at the stores and thanks to great communication they are interrelated with the company’s headquarters, commercials and DT’s. Interesting thing is that people from bottom (sales associates) can be promoted to store managers, and we can see also this on other levels as well. Let first start with the role of store managers. At each store, three product lines are managed by three independent section managers, each with a team of sales people and cashiers. Each manager is in charge for women’s, men’s and children’s section. Woman’s manager is also the overall manager of the store. Main characteristic that these managers have is autonomy. They feel like entrepreneurs of the store as they have impact on orders for the store and this helps Zara to deal with different culture issues in various countries as they know local values. This autonomy is in fact a bonding, as store managers can govern the store. Zara’s philosophy isn’t just monitoring employees to perform well, but also to have them satisfied with their job. So, sometimes we can see the situations when employees aren’t satisfied with the atmosphere and then they have the possibility to be transferred to another store (bonding). In our case we treated store managers as agents and commercials and DT’s as principals due to the fact that store managers should meet the principal’s goals. To increase the productivity of the store and 10
  • 11. increase sales the store manager has to increase the productivity of the all employees working at the store. To manage all this responsibilities, the manger has to develop specific skills that will meet the requirements. Store managers receive competitive salary and a bonus based on how well they meet target sales. In order to perform well they need also to coordinate sales associates. As they are organized in teams there is an opportunity for shrinking, because of huge number of employees in an average store. One of the sale manager’s task is to monitor sales associates and ensure work efficiency. In one way we see that incentives are aligned because of monitoring which occurs at each level: sales associates are monitored by store managers, store managers by DT’s and commercial and DT’s and commercials by headquarters. All their bonuses are affected by overall sales, so all of them should have an incentive to put more effort. Another interesting factor that we found is the risk that store managers face when they are ordering replenishments. They need to use their previous experience together with their ability to forecast new orders. We see the risk due to the fact that store managers aren’t aware how many units will be sold, what will be the bestseller and how many units are available in warehouse. For this reason Zara created incentive-intense payment model for store managers to motivate them to seek better results in their performance. 11
  • 12. From Transaction Costs Economics view, discuss if it makes sense to outsource work to “captive” suppliers. What would be the alternatives, and how do you evaluate them? Outsourcing is becoming more demanding nowadays. The biggest international companies pay more attention to it in sense of trying to reduce their transaction costs. Transaction costs consist of search costs, bargaining costs and policing/enforcement costs. Firstly, we will assume that a company of the rang of Zara will not have financial problems concerning making a research about outsourcing elsewhere. Also, the company has enough human resources which could be working on that field. Secondly, in our case the most important part of the transaction costs of economics are the bargaining costs. About 50 % of the production is manufactured in Spain (or in its proximity). Also countries in Asia, Europe and even Latin America contribute to the supply chain of this well known brand. About 35 % of the production comes from Asia, 14 % from Europe and only 2 % from America. Raw materials come mainly from UK, Holland, China and some other destinations. 13 Here we should underline that as far as the good comes from; it is more harder to control the supply process. The small manufacturers in Spain provide the company with significant number of production. Besides Zara’s own plants, these suppliers represent a good chance for the company due to their flexibility – they can change their production rapidly and of course, the smaller they are, the easier for control and price negotiation are they for the Zara. They can easily depend on Zara, especially if they realize economies of scale and/or economies of scope. Another example can be if Zara invested some capitals (for example equipment, new technologies, human resources and etc.) in these small manufacturers. Third of all, policing and enforcement costs also could be significant, especially if the investment is based on know-how or patented products. In our case, this is supposed to be resolved by a certain contract, which defines the exact rights and obligations of the both sides. If Zara spoiled by some reason their partnership, these small manufacturers probably would face difficulties to find another big client for their production. On that way, Zara could easily reduce its transaction costs by pressing the “captive” suppliers. This situation will not seem very likely 13 Zara: Managing Stores for Fast Fashion – Harvard Business School 12
  • 13. to occur in a big fabric which produces for many clients. On the suppliers’ side, this also may be referred as a post-investment hold-up problem. Uncertainty is low because if any supplier does not want to work with Zara, the company could easily find another one. We will assume that the small producers are required to buy or build expensive machines, which are suitable only for Zara. In this case, we will have highly asset specificity that could reduce transaction costs. Another reason for the importance of the small “captive” suppliers in Spain is that they will probably produce more expensive garment in comparison with low labour costs countries like China and India. Due to the fact that Zara’s supply chain is short, the company can react quickly to the new trends. Zara intentionally choose to produce mainly in Galicia and Northern Portugal because of the suppliers’ ability to accomplish fast changes. However, that reflects on the transaction costs because producing in Europe is typically 15-20 % more expensive. 14 The relationship between Zara company and the “captive” suppliers in Spain can be also binded to other small suppliers elsewhere. Small suppliers in China or India for example may have the same sensitiveness regarding price negotiation if they sell most of its production to Zara. We can 15 easily see that 20 suppliers accounted for 70 % of all external purchases. The bigger suppliers have long term relationships with Inditex. This allows Zara to minimize formal contractual commitments with them. Regarding the opportunities for outsourcing, perhaps in the future in order to remain competitive and control costs, Zara might have to move manufacturing mainly to China and India. This can be a good advantage in view of transaction costs economics because the airfreight cost is about only 1 % of the selling price. The other advantage is the short time for delivery. European stores received their deliveries within 24 hours and those in Asia and America received deliveries within 40 hours. Also the average cost on a produced item is supposed to be lower in comparison with the factories in Spain.16 The cheaper labour cost will contribute to that. This idea should be good considered even earlier, because the opportunity cost of not having more production in Asia because of fast changing orders, could be significant. 14 Zara: Fast Fashion – Harvard Business School 15 Zara: Fast Fashion – Harvard Business School 16 Zara: Managing Stores for Fast Fashion – Harvard Business School 13
  • 14. On the other hand, the company’s top management should think whether this will be enough to offset the lost speed ability regarding clothes production. If Zara managed to find somehow low cost producing suppliers in Asia for example, which could be able to produce for the same time like the Spanish suppliers, the company will achieve great transaction costs reducement. Of course, the precise answer of the question whether it makes sense to outsource depends mainly on account data and detailed further analysis. Besides the clothes outsourcing, Zara made changes to outsource some of their day-to-day task in order to decrease operating expenses. “Labour was the largest operating expense at the stores and any change to improve labour productivity would have significant profit implication.” One of the day to day task that bothers Isla and could decrease the labour operating expense is a process delivery. What will be the difference for Zara to outsource their process delivery to a third-party logistics companies? At least twice per week, Zara stores receive early morning delivery that they have to move from the selling floor and remove the plastic covers from items and get ready for shelving. The boxes and hangers held mixed products. If we look at the situation in France they were encouraged to process at least 85 units per person. The question that arises here is how to improve the whole process. Zara’s manager could consider to improve the labour productivity or to outsource process delivery to a third-party. In both cases there will be positive and negative consequences of their action. Let’s first consider improving labour productivity and what will be the consequences of that action. Until now as we see the whole work is done by the store employees and as we know it takes around 5% of their working time. When we look at the negative aspects we see that they are doing the job slower that if Zara outsources the delivery process and the cost is higher than if they hire a third-party. The positive aspect that we could have in that case is that store employees are familiar with the products and when they remove the plastic covers they can store them faster for shelving than a person who sees the product for first time. In order to reduce the time from 5% to 4% or less, store employees have to work under a lot of pressure and that may affect their later performance. To make that choice managers should consider what they will receive and what they have to give away. The second solution that we have is to outsource process delivery to a third party. If Zara decides to take that step they have to consider the transaction costs of that decision. The first cost that Zara should pay is “search and informational cost” to determine that the required service is 14
  • 15. available on the marker and compare the prices. Outsourcing delivery process would save even more time and money, but they have to consider what could be the risk of doing that. When we look at transaction cost point of view we have to evaluate the asset specificity, the uncertainty and the frequency, in order to compare the cost of market transactions to the cost of internal transactions. In all business relations both parties have to sign a contract and assure that product specification is clearly defined in the contract. Here appears “bargaining costs” which requires coming to an acceptable agreement. Zara’s requirements are the boxes to be moved from the selling floor and all the products to be stored and ready for shelving. The logistic company will want to be aware of how often the deliveries take place, when the delivery takes place and how many units arrived, in order to prepare team for the job. In our case the uncertainty has high level, because of the fact that stores receive at least twice per week orders but there is no guaranty for that. Here comes the risk for Zara if there will be enough workers when the delivery takes place. To ensure that, the logistic company may increase their demand and so the cost for Zara will increase. The second factor that we have to consider is the possibility that every time when a delivery takes place there will be different team of workers so they won’t be aware of the situation there. To remove the boxes from the selling floor and remove the plastic cover has lower asset specificity but at the same time to store the products by type it may require more time for people that see the product for the first time. Finding the product and storing them for shelving requires the workers to be aware of the situation at the store. That gives higher asset specificity. In that case Zara may want the team to be always the same. To insure that the logistic company will increase their demand. In order to evaluate the logistic company move, Zara needs only to analyze what moves their opponent can possibly make and evaluate all possible moves that they could make in answer to each possible countermove(when they describe the conditions in the contract). When the delivery will take place and etc.? These are elements of uncertainty/complexity that will increase the market transaction cost. Of course if Zara conclude a contract for a long run or for all their stores in a specific country that may decrease the market cost. In order to reach truce both parties will come up with their own requirements. To decrease the market cost of outsourcing the delivery process Zara should predict all the moves that their opponent could make and come with an attractive offer. 15
  • 16. In relation to the fashion sector in Europe, does Inditex posses a competitive advantage? Use the VRIO framework as the basis of your discussion Competitive advantage is defined as superiority of an organization with regard to at least one product attribute over relevant competitors. When a firm sustains profits that exceed the average of its industry, the firm is said to possess a competitive advantage over its rivals. The goal of business strategy is to achieve a sustainable competitive advantage, which is very difficult task. We will use the VRIO Framework to analyze the internal environment of the Inditex (Zara) which will help us to determine whether Zara has resources/capabilities to exploit it’s competitive potential. “VRIO” is structured in a series of four questions: 1) Question of Value 2) Question of Rarity 3) Question of Imitability 4) Question of Organization. Fashion industry is very competitive and subject to rapidly evolving fashion trends. Based on the VRIO Framework and analysis of competitive advantage, we found that Inditex (Zara) has competitive advantage. Inside a business model we can see a strong vertical integration and well organized supply chain, which combined with organizational structure gives to Zara flexibility to respond, adapt and deliver merchandise faster than its competitors. Unlike their competitors such as H&M, Mango, United Colors of Benetton in Europe, Zara has disintegrated decision-making model. And above all, the price of merchandise is affordable. Now we will analyze each question in detail regarding VRIO Framework. 1) Value – does a resource enable a firm to exploit an environmental opportunity and/ or neutralize an environmental treat? We see Inditex rather as a combination of resources, so the most valuable resource we would put is the vertical integration. Instead of relying on third parties, the company manages all design, warehousing, distribution and logistics function itself. Doing that they are more flexible and faster than competitors and we know what these two words mean in apparel industry. Along with the vertical integration which also reduces operating costs it has excellent conceived organizational structure and values that all employees must respect. The reward is great autonomy that store managers have. Some skeptic persons could ask whether this value could be used in future? Our answer is probably yes, as Zara carefully follows changes in consumer tastes and due to flexibility and speed it can adapt. Second justification could be that it follows world trends and it might outsource more from Asian markets to reduce its costs. 2) Rareness – how many competing firms already posses particular valuable resources and capabilities? If we analyze competitors we’ll see that most of them outsource most of the 16
  • 17. production, while focusing on distribution and retailing. The reason is that the industry is more labor-intensive. Inditex does just the opposite .It puts more emphasize on capital-intensive industry.17 Difference could be easily seen in figures: “Zara is able to produce new items and deliver them to its stores in less than three weeks rather than the average six months needed for luxury brands and in terms of production in a typical season it produces about 11000 different items while competitors would produce typically between 2000 and 4000.”18 So we see that the resource is rare. 3) Imitability – do firms without a resource or capabilities face a costly disadvantage in obtaining it compared to firms that already posses it? Nowadays almost everything is imitable. The question is how long it takes to imitate. In the case of Inditex we freely assume that if competitors were to copy Zara business model, they could, but only in a long run. It would take a few years to establish vertical integration model with that kind of supply chain and even more to create organizational structure (culture) that Zara has. We should also take into consideration enormous costs that those firms would incur in order to copy the model, which are often impossible for firms to incur. Although if this is supposed to happen, we think that in meanwhile Zara would probably progress more in other segments, because as we saw they make small changes very often. To cite the Inditex’s founder Amancio Ortega when he talked to Pablo Isla who is CEO: “Once a month, come here thinking that we are near bankruptcy. You will find a lot of things to change.” 4) Organization – is a firm organized to exploit the full competitive potential of its resources and capabilities? We can see that it is. If we look at the annual reports we can see that they are constantly increasing sales and profits. Merit for this goes to top management, but also to every individual engaged in every process of Inditex. We shouldn’t forget that section managers have autonomy and that they together with the DT’s, HR managers and commercials contribute to success. Here lies their strength. Possibility of coordinating all those people despite the fact, that they have some kind of autonomy in decision-making process.”19 17 Although Inditex combines it also with labor – intensive industry ( doing that they are more flexible and faster in producing garment ) 18 Zara: Managing Stores for Fast Fashion – Harvard Business School 19 Zara: Managing Stores for Fast Fashion – Harvard Business School 17
  • 18. The VRIO framework Is a resource or capability … Valuable? Rare? Costly to Exploited by Competitive Economic imitate? the implications Performance organization? No - - No Competitive Below disadvantage Normal Yes No - Competitive Normal parity ↑ Yes Yes No Temporary Above competitive normal(at ↓ advantage least in the short run) Yes20 Yes Yes Yes Sustained Above competitive normal advantage 20 Bold text refers to Inditex’s ( Zara’s ) case 18
  • 19. List of sources Zara: Managing Stores for Fast Fashion – Harvard Business School Notes on Zara case Inditex Group: Annual report 2011 The Economist:Inditex - Fashion Forward The Economist: Global Streach - When will Zara hit its limits? The Economist: Good Darning Vietnam The Forbes: The Strategic Retail Genius Behind Zara The Forbes: The Future of Fashion Retailing - The Zara Approach http://www.gallaugher.com/Zara%20Case.pdf http://hbswk.hbs.edu/archive/4652.html http://researchingsustainability.files.wordpress.com/2012/01/zara-harvard-case.pdf http://www.slideshare.net/binotrisha/zara-procurement-strategy 19