Zara: Fast Fashion, Essay Example

Competitive advantage is the firm’s ability to earn greater than normal profits, either through cost advantage or product differentiation. One of the best examples of a firm that has achieved competitive advantage through cost advantage is Wal-Mart. Wal-Mart is known to offer lower prices on the average than its competitors because of its scale that enables it to extract favorable terms from the suppliers. Similarly, Apple is one of the best known companies to have achieved competitive advantage through differentiation. Apple’s products are considered innovative, intuitive, and cutting edge which is why the customers are willing to pay higher price premiums for Apple’s products as compared to its competitors. As far as Inditex is concerned, the company has a resource-based competitive advantage. The image most associated with Zara in its customers’ minds is fast fashion and Zara is actually one of the first companies that started the trend of introducing new product styles at a rapid pace, shortening fashion products’ life cycles in the process. Zara has high degree of control over its supplies and the company’s culture enables it to be more responsive to changing trends as well as introducing new products at a faster pace than the competitors.

Applying McKinsey 7S Model to Inditex requires analysis of seven interdependent factors which are strategy, structure, systems, shared values, skills, style, and staff. The first three factors are categorized as hard elements and the rest are categorized as soft elements. Inditex strategy in case of Zara is to identify consumers’ tastes and fashion trends and respond to them faster than its competitors can. The company strives to win customers’ loyalty and encourage them to visit its stores more often by continuously updating the offerings. In order to be more agile and faster than its competitors, Zara has ignored many of the prevailing trends in the retailing industry by retaining majority ownership of both its retail and production operations. Even though it does increase Inditex’s capital expenditure but it also allows Inditex to align different aspects of itsoperations better than its competitors. This close alignment of different business departments explains Zara’s extremely short design to production cycle as compared with the industry average. Information technology has also been an important part of Inditex overall business strategy to gain efficiency advantages over the competitors. Due to founder Amancio Ortega’s personal interest in latest technology, Inditex was an early adopter of information technology. Information technology continues to assist Inditex in maintaining an efficient and reliable supply chain.

In terms of organizational structure, Inditex management maintains tight control over different business units. The management at the headquarters regularly sets goals, devises strategies, and reviews performances of its different business units but gives them autonomy to manage their operations as they see fit. As of early 2002, Inditex had six separate chains which were Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho. These chain’s retailing subsidiaries are grouped into 60 companies and almost a similar number is involved in textile purchasing and preparation, manufacturing, logistics, real estate, finance and others. Retailing generates 82% of Inditex’s income while also accounting for quite similar share of group’s total capital investment and employment. Each of the six chains operates independently of each other. The coordination between the units has been increasing as the management sees opportunities for greater efficiency and resource utilization by sharing certain resource between units where feasible.

Inditex upper management consists almost entirely of Spanish leaders. The headquarter closely monitors its global operations but does allow a certain degree of decentralization to account for geographical and cultural differences. Even the country managers come from the parent country Spain except where country conditions and cultures are quite different than the parent country. In such cases, country managers may come from the country of operations but in almost all cases, these countries are less strategic in terms of contribution to Inditex overall performance.

Inditex strives for close working relationship among different parts of the systems that together form Inditex. This is why Inditex main warehouse is in close proximity of its headquarter and the company also has invested in advanced telecommunications system to connect headquarters with supply, production, and sales locations. The company first expanded into neighboring countries instead of pursuing opportunities in Asia and the US so that it could exercise better control over its international operations as well. The company’s design and manufacturing facilities coordinate with each other on regular basis which helps explain why Inditex is so much more efficient than its competitors in turning designs into finished products. Even though Zara could save by outsourcing some of its activities to specialized outsourcing companies like its competitors but the company still preferred major ownership of manufacturing facilities and retail stores to ensure high degree of control over its operations. This is how Zara is able to implement Just-in-Time manufacturing and its stores hold low inventory as well as enjoy high inventory turnover rates.

As far as Inditex staff is concerned, the company primarily seeks employees with strong sales skills. In terms of workforce structure, 80% of Inditex employees engage in retail sales at its stores, 8.5% in manufacturing, and the remainder in design, logistics, distribution, and headquarters’ activities. In addition, Inditex overall operations require high degree of coordination among different departments as well as between retail stores and manufacturing. Thus, Inditex employees are expected to have strong coordination and teamwork skills as well as the ability to work in a fast paced environment. It may be assumed that Inditex hires and retains employees with strong sales skills because most of the promotions come from within the group. Thus, many employees who reach the rank of store manager can be expected to have spent significant time working with the group and acquiring desirable skills. Almost every promotion comes with additional training which shows management’s commitment to its employees’ continuous learning.

Inditex values itself as a European company which is reflected in the company’s emphasis on European markets. The group tries to adapt its products to some extent in order to reflect local tastes and preferences and use ‘Made in Europe’ label on products which may be why some of Zara’s loyal French customers perceive it be a French company. Inditex values its employees which is why it develops internal talent and fills top slots mostly from within. Inditex is also committed to the welfare of the communities in which it operates and joined the Global Impact, an initiative by U.N’s Secretary General Kofi Annan which aimed to improve the global companies’ social performance. Inditex employees share mutual commitment to the group because many of them reasonably expect to have a long career at the group. This possibly creates a family environment where the emphasis is on everyone’s success rather than individual achievements.

The leadership style prevalent at Inditex is democratic style. The upper management does make major decisions regarding the strategic direction of the company but it also doesn’t hesitate to delegate operational responsibilities where appropriate and regularly seeks feedback and ideas from its different business units. The employees and store managers are encouraged to provide ideas and trends that may not be captured by the information technology systems and international operations are given the autonomy to adapt to local conditions as they see fit.

Inditex formula of maintaining owning production facilities and retail stores has served it well so far. But as Amancio Ortega’s daughter Marta Ortega takes the place of her father, she should consider outsourcing some of the production and supply chain tasks as well as leasing new retail stories instead of outright purchasing them. Globalization has led to increasingly mobile factors of production and greater competition where more and more companies are setting up international operations. The customers’ are also becoming more price sensitive because of the wider choices available to them as a result of increasing competition. This means greater competition for Inditex and this will put additional pressure on Inditex to lower its prices.

Inditex has maintained ownership of much of its production facilities to ensure a reliable supply chain but some specialist companies such as Li & Fung of Hong Kong have proven themselves over time to be a reliable partner. Li & Fung has a global network and because it solely focuses on production and supply chain tasks, Li & Fung has advantage over Inditex whose focus is more widely distributed. As far as retail stores are concerned, owning retail stores is expensive and high capital investments also make it difficult to mobilize operations when the operating climate turns unfavorable. Leasing provides flexibility and doesn’t tie up the company’s capital like capital investments do. Thus, Marta Ortega may be wise to take steps to reduce capital investments and make Inditex more flexible in terms of operations and resource mobilization. This is particularly important as the profit opportunities in Europe will continue to disappear and non-European markets such as China and India may emerge as more attractive options.