STRATEGIC MANAGEMENT PAPER

ZARA

Created By: Anggita Sulisetiasih Kenji Wibawa Junardy Patricia M. A. Adam 1006718706 1006718990 1006805694

International Undergraduate Program Faculty of Economics University of Indonesia Depok 2013

2 TABLE OF CONTENTS

Chapter 1 .................................................................................................................................... 4 INTRODUCTION ..................................................................................................................... 4 1.1. 1.2. 1.3. Company Background ................................................................................................. 4 Vision and Mission...................................................................................................... 4 Long-term Objectives .................................................................................................. 5

Chapter 2 .................................................................................................................................... 6 VISION MISSION ANALYSIS ............................................................................................. 6 2.1. 2.2. 2.3. 2.4. Importance (Benefits) of Vision and Mission Statements .......................................... 6 Characteristic of a Mission Statement ......................................................................... 7 Mission Statement Components .................................................................................. 8 Vision and Mission Relation: Is It Achievable? ........................................................... 10

Chapter 3 .................................................................................................................................. 11 EXTERNAL ASSESSMENT .................................................................................................. 11 3.1 3.2 3.3 Michael Porters Five-Forces Model......................................................................... 11 External Factor Evaluation (EFE) Matrix ................................................................. 13 Competitive Profile Matrix ....................................................................................... 15

Chapter 4 .................................................................................................................................. 19 INTERNAL ASSESSMENT ................................................................................................... 19 4.1 4.2 4.3 Resource-Based View Analysis ................................................................................ 19 The Internal Factor Evaluation (IFE) Matrix ............................................................ 22 Financial Analysis ..................................................................................................... 27

Chapter 5 .................................................................................................................................. 33 STRATEGIES IN ACTION .................................................................................................... 33 5.1 5.2 The Strategies ............................................................................................................ 33 Michael Porters Five Generic Strategies.................................................................. 34

Chapter 6 .................................................................................................................................. 36 STRATEGY ANALYSIS AND CHOICE .............................................................................. 36 6.1 6.2 6.3 6.4 The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix ........................ 36 The Strategic Position and Action Evaluation (SPACE) Matrix .............................. 37 The Boston Consulting Group (BCG) Matrix ........................................................... 39 The Internal-External (IE) Matrix ............................................................................. 40

3 6.5 6.6 The Grand Strategy Matrix ....................................................................................... 41 The Quantitative Strategic Planning Matrix (QSPM) ............................................... 44

Chapter 7 .................................................................................................................................. 46 IMPLEMENTING STRATEGIES: MARKETING, FINANCE/ACCOUNTING, R&D, AND MIS ISSUES ............................................................................................................................ 46 7.1 7.2 7.3 7.4 Marketing .................................................................................................................. 46 Finance ...................................................................................................................... 49 Research and Development (R&D)........................................................................... 49 Management Information System ............................................................................. 51

Chapter 8 .................................................................................................................................. 53 STRATEGY EVALUATION AND GLOBALIZATION CULTURE ................................... 53 8.1 8.2 The Balanced Scorecard ............................................................................................ 53 Globalization Culture ................................................................................................ 56

Chapter 9 .................................................................................................................................. 59 CONCLUSION ........................................................................................................................ 59 9.1 9.2 Zaras Competitive Advantage.................................................................................. 59 Vision, Mission, and Strategies ................................................................................. 60

BIBLIOGRAPHY .................................................................................................................... 62

4 Chapter 1

INTRODUCTION

1.1. Company Background Zara is a Spanish brand of clothing founded by the visionary Amancio Ortega Gaona and Rosalia Mera in Artexio, Galicia. Zara was founded in the year 1975. It is one of the major selling brands of one of the biggest fashion retailer "INDITEX". Zara is now available in 86 countries with total of 1,763 stores worldwide. Inditex itself is a huge fashion retailer company which owns 8 brands namely Zara, Pull &Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and last but not the least Uterque. Amancio Ortega is the founder of Inditex, which was established in 1963. Amancio Ortega adapted unique business model, which were innovative and flexible. This made Inditex one of the biggest retailers in the world. In 1975 Inditex established Zaras first store in downtown A Coruna, Spain. Zara offers fashionable designs for men, women, and kids. They also sell accessories to complete their product lines.

1.2. Vision and Mission The companys vision as stated on the website: Zara is committed to satisfying the desires of our customers. As a result we pledge to continuously innovate our business to improve your experience. We promise to provide new designs made from quality materials that are affordable. Zara states that its mission is that Through Zaras business model, we aim to contribute to the sustainable development of society and that of the environment with which we interacts.

5 1.3. Long-term Objectives The company states on their website the following as their objectives in the long-term: 1. Save energy, the eco-friendly store: They are implementing an eco-friendly management model in their shops in order to reduce energy consumption by 20%, introducing sustainability and efficiency criteria. This management model sets out measures to be applied to all processes, including the design of the shop itself, the lighting, heating and cooling systems and the possibility of recycling furniture and decoration. 2. Produce less waste and recycle: Zara recycles their hangers and alarms, which are picked up from their shops and processed into other plastic elements. This is an example of their waste management policy. Millions of hangers and alarms are processed each year and both the cardboard and plastic used for packaging are also recycled. 3. Their commitment extends to all their staff, increasing awareness among the team members: The Company holds In-company awareness campaigns and specific multimedia-based training programs to educate their staff in sustainable practices, such as limiting energy consumption, using sustainable transport and modifying behavior patterns. 4. Use ecological fabrics, organic cotton: Zara supports organic farming and makes some of its garments out of organic cotton (100% cotton, completely free of pesticides, chemicals and bleach). They have specific labels and are easy to spot in the shops. 5. Use biodiesel fuel: Zaras fleet of lorries, which transport more than 200 million items of clothing a year, use 5% biodiesel fuel. This allows them to reduce their CO2 emissions by 500 tons. We can see from the objectives that Zara is aiming to be an environmental-friendly company. It is their top priority at least until the year 2020.

6 Chapter 2

VISION MISSION ANALYSIS

2.1. Importance (Benefits) of Vision and Mission Statements Zara clearly has a formalized mission statement and they are currently striving to achieve their mission through strategies implemented though their objectives in long-term period. According to King and Cleland, taken from Fred Davids Strategic Management book, it is said that there are six benefits of having carefully-developed mission statement: 1. To ensure unanimity of purpose within the organization 2. To provide a basis, or standard, for allocating organizational resources 3. To establish a general tone or organizational climate 4. To serve as a focal point for individuals to identify with the organizations purpose and direction, and to deter those who cannot from participating further in the organizations activities 5. To facilitate the translation of objectives into a work structure involving the assignment of tasks to responsible elements within the organization 6. To specify organizational purposes and then to translate these purposes into objectives in such a way that cost, time, and performance parameters can be assessed and controlled In case of Zara, their mission statement clearly and firmly emphasizes their purpose, which is to be an environmental-friendly company and contribute to society development. Their purpose is also their base in making allocation to their resources in which we know that Zara allocates more on creating an eco-friendly operations and boosting its supply and value chain other than spending for marketing campaigns. The mission statement, combined with its corporate culture, somehow produces a conducive organizational climate for achieving their objectives. Moreover, since the mission statement is very clear and direct, it is easier for the employees to set their mindset and behavior to be aligned with the companys objective. In other words, employees know what they should do, how they should do it, in order to achieve those objectives. Finally, Zara as a determined company, with the purposes of being a fast fashion company that concern its environmental-friendliness, combined with their long-term

7 objectives that are derived from their mission statement, create somewhat a clear standard of their cost, time, and performance assessment, and it has been working well so far.

2.2. Characteristic of a Mission Statement A Declaration of Attitude A mission statement is more than a statement of specific details; it is a declaration of attitude and outlook (David, 2013). A good mission statement sets the companys objectives and strategies without limiting the managements creativity. It also needs to be broad enough to reconcile the stakeholders differences. Moreover, a good mission statement indicates the relative attention that the organization/company will devote to; it reflects judgments about future growth directions and strategies that are based upon forward-looking external and internal analysis. In case of Zaras mission statement, based on what is stated on the website and quoted on this paper, it is said that through its business model, Zara aims to contribute to society development and environment sustainability. That is their objective and the attention that they devote to. Zara states that an eco-friendly company is what their direction is, other than fulfilling their consumers fashion needs. Furthermore, Fred David on his book summarizes nine Characteristics of a Mission Statement, they are: 1. Broad in scope 2. Less than 250 words in length 3. Inspiring 4. Identify the utility of a firms products 5. Reveal that the firm is socially responsible 6. Reveal that the firm is environmentally responsible 7. Include nine components 8. Reconciliatory 9. Enduring In Zara case, we can conclude that it is broad in scope. It clearly states their mission statement and differentiated from their objectives, though the two are still aligned one another. The length also does not exceed 250 words. However, in our opinion, their mission

8 statement is too simple in order to inspire people to take actions. We think that a brief statement of their act would be better if it is mentioned on the mission statement also. Moreover, their mission statement is too direct to the companys direction that it does not identify the utility of their products. However, Zara shows their emphasis on environmental and social responsibility very well. The word sustainable development of society on their mission statement not only shows that they are socially responsible, but also clarifies as an enduring mission statement in term of program and actions. On the other hand, Zaras mission statement does not completely include the nine components of a Mission Statement. More of this will be discussed on the next section. Lastly, it is also not reconciliatory.

A Customer Orientation Fred David says on his book that a good mission statement reflects the anticipations of customers. It identifies the customers needs and then provides a product or service to fulfill them. Moreover, a mission statement should identify the utility of a fir ms products to its customers. Zara implicitly states its customer orientation by using the phrase through our business model. This will lead us to the explanation of Zaras unique business model, the fast fashion. The term fast fashion, by its definition, is an expression used by fashion retailers for designs that move quickly from the catwalk to capture current fashion trends (Wikipedia, 2013). The designs are manufactured quickly and directly distributed to stores for endconsumers. Specifically for Zara, they claim that they only take two weeks for new designs to be sold at their stores, while normally it would take more than three months. This is a form of Zaras quick-response for their customers who desire the latest trend of apparels.

2.3. Mission Statement Components Zara may not state all of the 9 components on their mission statement; however, they do explain those components on the company website. 1. Customers: The customers of Zara are men, women and kids who love fashion and like to wear the latest trend of clothing and accessories in their daily life. 2. Products or services: Clothing, accessories, home and bedding sets collection

9 3. Markets: Geographically, Zara now operates in 86 countries across the globe, in every continent, with total of 1,770 stores. 4. Technology: Zara uses the Hybrid Model Information, in which information
from stores to headquarters relies from combined human intelligence input and from information technology, such as their PDA devices (Sandoval). The technology used allows the company to boost its value chain and eventually lower the manufacturing time. Moreover, nowadays Zara is aiming to practice an ecofriendly technology throughout its worldwide operations.

5. Concern for survival, growth, and profitability: As one of the leading brands in the fashion industry, company profitability and growth is of course important. At the beginning of 2013, Inditex reported a 22% increase in their earnings as they expanded in many emerging markets such as China, India, and Indonesia as well as the online retail. 6. Philosophy: Zara, under the Inditex umbrella, shares the same core values with the overall group, which is based on teamwork and open communication, and performance expectations are very high. These principles underpin each staffers personal commitment to meeting customers needs (Inditex, 2013). Moreover, the company believes that in the course of doing business, they must implement sustainable development standards that promote environmental protection, ensure that resources are properly managed and meet society's needs. Inditex has the strategy called Sustainable Inditex, which was initiated in 2007 and continued up to today in which they try to reduce the CO2 emission by 10% in 2015, and 20% in 2020. Moreover, they are opening sustainable and environmental- friendly stores worldwide. 7. Self-concept: Zaras competitive advantages as one of the members of Inditex group are that it has compelling mix of latest fashion and quality at relatively affordable price. It has unique product strategy with 36,000 new designs per year with 2 6 weeks delivery time to each store. Zara also emphasizes customer interaction by using the daily-in store feedbacks. Lastly, Zara also has attractive stores in prime locations. 8. Concern for public image: As mentioned on their company mission, Zara aims to be an environmental-friendly company that is successful in meeting their customers needs.

10 9. Concern for employees: Related with its philosophy, Zara places teamwork and communication among employees as one of the companys top priorities. This is also aligned with their practice of IT which requires fast-delivering information, which is why they educate their staff in sustainable practices. It is one of their long-term objectives stated on their website.

2.4. Vision and Mission Relation: Is It Achievable? Today, Zara is one of the worlds largest brands. They are successful and still expanding in many emerging markets. Even in Indonesia, they are loved by the fashionistas. They produce new and good designs that their customers love, and their customers are also loyal. Zaras customers are so loyal that the value of each fan of Zara is placed the highest among other customer-favorite brands (as shown on Figure 1). If we take a look back to their vision, we can conclude that Zaras vision is not only achievable, but actually achieved. Further, in case of their mission, since it is enduring and talks about their direction in the future, we think that Zara is getting there. In addition, if we consider their long-term objectives and their current strategies, then their mission is achievable, promising and actually undergoing.

Figure 1 Value of a Fan: Across Brands 2013 Source: Syncapse 2013

11 Chapter 3

EXTERNAL ASSESSMENT

3.1 Michael Porters Five-Forces Model The model identifies and analyzes 5 competitive forces that shape and help companies to determine their industrys degree of competitiveness and therefore helping the companies to develop their strategies. The following is the Five-Forces Model for FastFashion with further analysis relevant to Zara:

MODERATE

LOW

HIGH

MODERATE

HIGH

Figure 2 Fast Fashion Five-Forces Model

We can take a look at each one more specifically of their measurement: 1. Barriers to entry: HIGH a. High fixed cost business requires economics of scale for sustained profitability b. High SG&A which includes advertising, in-store promotions, etc.; up to 3.5% of its revenue, even though for Zara, the company is famous for spending minimum level of advertisements and commercials. However, recently the company announced that it invested 450 million in commercials as well as logistics area (Inditex, Inditexs net sales rise 6% to 7.7 billion euros, 2013).

12 c. Concept to store which takes 6 months to a year which refers to long sales cycle. However, in case of Zara, the lead time of clothes first-designed by the designer teams to finished products sold at the store take only about two weeks. d. Brand equity which is valuable to consumers 2. Substitues: MODERATE a. Buyer propensity to substitute is high with several competitors to choose from (H&M, Uniqlo, MANGO, and many other fast-fashion brands) b. Low buyer switching costs and easily substitutable where a customer can walk into its neighboring store instead of Zara c. Zara has gained substantial customer loyalty which has more visits per year than its competitors store d. Copying of styles is quite prevalent in this industry, which can attract the customer who does not mind lower quality but similar looking apparel. The example will be counterfeiting of Zara products in Indonesia which is currently trending.

Example of Zara counterfeiting in Indonesia

3. Buyer Power: MODERATE a. Trendy fashion wear is appealing to regular consumers and they would not shop lower quality apparel or accessories b. Apparel consumers have lots of choices when it comes to trendy clothing and accessories, but price can be a factor. In the case of Zara, for European, American, and eastern Asian countries, Zara is positioned as the low-end

13 products, however, in emerging markets such as India, China, and Indonesia, Zara is considered as the high-end products. 4. Supplier Power: LOW a. Contract based cloth production and stitching functions readily available b. Low price of fabric c. Local cooperatives work without contracts or labor unions 5. Rivalry: HIGH a. High exit barriers due to high fixed and SG&A costs and excess inventory with lots of cash tied up in out-of-fashion inventory b. High advertising expenses; 3.5% of revenue indicative of intense competition

3.2

External Factor Evaluation (EFE) Matrix KEY EXTERNAL FACTORS OPPORTUNITIES 1. Increasing middle class in Asia 2. Opportunity to build distribution centers in developing countries to lower costs 3. New designers for better designs 4. Rising environmental issues 5. International Recognition THREATS 1. Fierce Competition 2. Lawsuit related to sweatshops 3. Possible imitation of goods 4. Dilution of Brand Equity TOTAL The Opportunities of ZARA: 1. Increasing Middle Class in Asia weighs as 0.10 with a rating of 3; it is categorized as highly-rated since it is an important factor. Not only because Asia is a booming continent in which there are populous countries with growing GDP, but also because people in Asian countries have the taste which Zara offers for its clothing. Moreover, people in Asian countries, especially the teenagers and young adults are usually western oriented. Meaning, they like to follow the trends that the western culture currently has and adapt those trends in their country. One of those trends is definitely apparel. Zaras rating for this factor is 3, which indicates that Weights 0.0 to 1.0 0.10 0.05 0.10 0.05 0.20 Rating 1 to 4 3 1 3 4 4 Weighted Score 0.3 0.05 0.3 0.2 0.8

0.2 0.05 0.05 0.2 1.00

4 2 2 4

0.8 0.1 0.1 0.8 + 3.45

14 the response is above average because Zara is expanding aggressively in these emerging markets of Asia (India, China, and Indonesia). They are also the first mover in these countries. Therefore, we conclude that they have higher response rate. 2. Opportunity to Build Distribution Centers in Developing Countries to Lower Costs weighs only 0.05 because even though it sounds interesting in order to cut costs of distributing the finished products, but there are problems that may occur, such as infrastructure problems in developing countries which might actually hamper the companys super efficient supply and value chain. That is also the reason why we put Zaras response as 1 or poor, because they are not interested in this option. 3. New Designers for better design weighs a 0.10 with a rating of 3; this is very important since they are based on fast-fashion which they need to change products every 2 weeks. Therefore, excellent team of designers is crucial in this business. Since Zara just cooperated with a lot of new designers, consequently their response is categorized as above average. 4. Rising Environmental Issues weighs a 0.05 with a rating of 4 or superior; They are keen to have a good reputation of being an eco-friendly company, they even set their mission regarding this issue, but too bad that sometimes the consumers do not care about the eco-friendly issue, especially consumers in Asian-emerging markets like India, Indonesia, and China. They simply want exclusive and trendy clothes. 5. International Recognition weighs a 0.20 with a rating of 4 or superior response; undoubtedly this factor is the most important for Zaras opportunities because it is the key to successful expansion. In case of Zara, it is widely-known across the globe with good reputation in most of the countries. Therefore, it is a winning point for Zara to have such brand image in the eyes of global consumers.

The Threats of Zara: 1. Fierce Competition weighs a 0.20 with a rating of 4; one of the biggest threats because of new and affordable products from different stores such as H&M, Forever 21, and Uniqlo may harm Zara in terms of consumers loyalty. The analysis from Five-Forces also gives us some details about how this fierce

15 competition can affects Zara. However, somehow, regardless the amount of advertising investments Zara made, this brand can still enjoy remarkable growth across the globe. Allegedly it is the supply chain that makes it the winner. Therefore, we conclude that the response rate is superior. 2. Lawsuit related to Sweatshops weighs a 0.05 with a rating of 2; this threat is not much of a threat because the cases were not highly publicized, and also because the company has created a commitment to stop the practice of sweatshops in every factory; in every country where they produce their products. 3. Possible imitation of goods weighs a 0.05 with a rating of 2; there is a risk of Zaras products being copied, either by their competitor (the designs) or by irresponsible people that practice counterfeiting. However, since Zara is targeting the middle-upper class, therefore, it is not much of concern. Moreover, Zaras consumers are popularly known as loyal consumers to the brand. 4. Dilution of Brand Equity weighs a 0.2 with a rating of 4; this is also an important threat because it can decrease in its brand value in customer eyes. Therefore, Zara is implementing their best strategies to increase the brand equity. Probably more significantly to their European consumers through the eco-friendly company campaign which is highly noticed and precedence by European consumers. Based on the EFE Matrix result, we see that Zara has a score of 3.45 which indicates a strong response from Zara towards the opportunities and anticipation of threats.

3.3

Competitive Profile Matrix

Critical Success Factors Target foreign market selection Enter marketing strategy Timing of entry Recognition of brand Customers knowledge Marketing support in global market Location selection

Weight 0.15 0.05 0.05 0.12 0.1 0.06 0.04

Zara Rating Score 4 2 2 4 4 1 3 0.6 0.1 0.1 0.48 0.4 0.06 0.12

H&M Rating Score 3 2 2 3 3 4 2 0.45 0.1 0.1 0.36 0.3 0.24 0.08

Uniqlo Rating Score 2 4 4 3 3 4 3 0.3 0.2 0.2 0.36 0.3 0.24 0.12

16 Design collection Employee Price policy Sales promotion Organization and control business TOTAL 0.12 0.05 0.1 0.05 0.11 1 3 2 3 1 4 0.36 0.1 0.3 0.05 0.44 3.11 3 2 4 4 2 0.36 0.1 0.4 0.2 0.22 2.91 2 2 4 4 3 0.24 0.1 0.4 0.2 0.33 2.99

a. Target Foreign Market Selection: One of the most important factors in determining success in this highly competitive industry which force its players to have massive expansion strategy. That is why the weight is 15%. Comparing to its other 2 competitors, Zara has the highest score since they have been in the international market longer then H&M and Uniqlo. Zara was the first to start opening new stores in countries outside their country-of-origins continent. Zara expanded outside Europe firstly in 1997 to Israel (Inditex, Timeline, 2013), followed by H&M which is originated in Sweden, first opened their store outside Europe in 2001, located in New York. Uniqlo was the last because they are a new player, established in 2005. b. Enter Marketing Strategy: How the headquarter decides the mode of entering a new market defines the companys interest towards the host country, as well as the companys capability and strategy to do international expansion. Uniqlo takes the lead for this aspect, thanks to its advertisement and promotions which are everywhere. They even outran H&M in Asian countries by expanding rapidly with strategy of wholly-owned subsidiary which potentially gives more concentrated strategy compared with Zara and H&Ms strategies in which both used third-party to enter Asian markets. For example, Zara in Indonesia is under the management of PT Mitra Adi Perkasa. c. Timing of Entry: Uniqlo has the highest rating for its timing to entry because of the booming trend of East Asia in other Asian countries, like Indonesia which is currently suffering from Korean Invasion. This perfect timing result a surge of consumers dying to shop at Uniqlo stores just out of curiosity. d. Recognition of Brand: Zara takes the lead on this factor due to its powerful brand equity across the globe, including in Indonesia and other countries as well, they do not need much advertisement or promotion because they are already strong in international market. Meanwhile, H&M and Uniqlo is catching up to Zara. That is why the company finally realized the need to invest more on commercials. They

17 eventually invested more than 600 million euro to improve their commercials and their logistic simultaneously. e. Customers Knowledge: As the first mover in the international market, Zara wins again for this factor. The first player usually gets the most advantage compared to those who lagged. Moreover, customers knowledge is also important in order to attract new consumers. Note that customers can also become tool for promotions through the powerful word-of-mouth. f. Marketing Support in Global Market: Zara has no lead here since after so many years, the company seemed not care about this factor, which then ties H&M and Uniqlos full on advertisements and marketing. Not until just recently when Inditex finally decided to improve their marketing efforts. g. Location Selection: H&M is behind Zara and Uniqlo since it has just opened in only two stores in Jakarta. That is just one of the examples of how H&M is lagging behind the other two in international market. Zara, on the other hand, is opening more and more new stores in current market, in new market, and almost in every big malls, shopping streets, downtown city, all strategic locations in every countries around the world. Meanwhile, Uniqlo is trying to catch up by opening more new stores concentrated in Asian countries like the one which has just been opened in Indonesia at Lotte Shopping Avenue. h. Design Collection: In apparel industry, designs are the key. In order to be successful in this industry, designers must be able to produce designs that the consumers currently like, designs that consumers will like in the future, and designs that consumers did not expect they would ever like. Impressing the consumers and be creative is important. Zara and H&M, in this case ties while Uniqlo is behind. Zara not only sells clothing, accessories and perfumes, but also furniture bedding, while H&M sells clothing, accessories, home perfume and make up. i. Employee: None of the stores takes the lead and are tied with a rating of 2, because generally all companies evidently put their best service to attract customers considering the high level of competition. In other words, no company outperforms the others in this matter. Moreover, in apparel industry, employees (especially the office employees) are not much of an effect more than the products itself, as a result, the weight given is only 5%.

18 j. Price Policy: Price matters in apparel industry. Moreover, since the rivalry among firms is high, therefore companies must be able to charge at competitive price. In this aspect, H&M and Uniqlo ties on taking the lead for their more affordable products than Zaras, especially Asian-developing countries like India, Indonesia, and China. k. Sales Promotion: H&M and Uniqlo also ties on taking the lead for promotions and advertisement compared to Zara. This will relate to the companys strategy in Marketing. Again, Zara has been very stingy when it comes to marketing campaigns. l. Organization and Control Business: In fast-fashion industry, the business control operation is important. Because the lead time needs to be as low as possible, therefore there is no room for defects. Zara is in the lead for this aspect, thanks to their highly-integrated information response, by using PDA to directly inform the headquarters about what is going on in the store. The report will be daily, or even hourly. Based on the result of CPM matrix, we see that Zara is still the winner among its competitors with 3.11 score. Moreover, it also means that Zaras performance is above average.

19

Chapter 4

INTERNAL ASSESSMENT

4.1

Resource-Based View Analysis The RBV approach to competitive advantage contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage. Therefore, in this analysis, we will look deeper into the internal factors that Zara is relying on for their success. Further, RBV is divided into three main categories: Physical Resources, Human Resources, and Organizational Resources. In order to be valuable, each resource must be either: (1) rare, (2) hard to imitate, (3) not easily substitutable. The following are the analysis of Zara using the RBV: 1. Physical Resources a. Prime Location: One of the best strategies that Inditex applies to all of its brands, including Zara is that the stores are always located in prime locations of the city. If the center of the crowd is in the shopping malls like Jakarta, then that is where you will find Zara stores. In European countries and USA, crowds are usually centered downtown or in shopping streets, and that is exactly where Zara stores are located. Choosing prime locations give more benefits to the company from the amount of store visitors which can result more sales created.

Indoor Zara store (Plaza Indonesia, Jakarta) vs. Outdoor Zara store (42nd Street, New York)

b. Attractive Window Displays: Even though Zara does not have many advertising or commercials, Zara does rely so much on its physical store-

20 experience. Their marketing strategy includes putting attractive and creative window displays to attract consumers, and maintain them inside the store with the store ambiance and service; hence, creating an impressive shopping experience for consumers.

Examples of Zaras attractive window displays

c. Exclusive and Trendy designs: As the leader in fast-fashion industry, Zara is popular for its fast-changing designs. What makes it interesting is that Zara is able to provide apparel designs that their customers love and it is consistent, even in a very short amount of time. Their total designs in 2012 reached 36,000 designs in a year. That is a marvelous number.

Examples of Zara collection per season and customers excitement towards Zara store

d. Sophisticated IT System: One of Zaras secret will be the integrated information system using the PDA and POS. Both will be explained further in the following chapters. 2. Human Resources a. Trained designers: In order to boost their product quality in terms of its couture value, Zara cooperates with many new designers and they give training to the designers for them to able to produce in shorter lead-time, and adaptive enough to produce with materials/fabrics that are available

21 instead of designing the apparel first then finding the material/fabric. That type of operation will cost more also consumer more time to the company.

Zara designer teams in action

b. Caring Employees: In order to enhance the customer service in each of its retail store, Zara, therefore, train their employees to prove better service, including their attitude, professionalism, having a sense of belonging to the store, and hard-working.

3. Organizational Resources a. Market-oriented Strategy: Just like what the old saying says, the customer is the king. In the industry with high competition profile, choosing to emphasize on your customer is important and wise. Because in this type of industry, the key is to be able to make your customer loyal so that they will not shift to other brands easily. By concentrating on customers demand and preferences, supported by its operational strategies, Zara shows their commitment towards their customers. That is why Zaras customers are loyal; thus, Zara can reach its position right now. b. Staff-education: Related with the discussion on Zaras human resources, Zara is concentrating on customer service; thus, the need to educate their staff is one of their top priorities. c. Eco-friendly: The global warming issue is a hot topic nowadays. More and more companies start to put special attention to deal with this issue. Especially in European countries, where the society is fully-aware with the importance of eco-friendly business operation, having a mission of

22 becoming an eco-friendly company will inevitably bring positive response from the society. Note that the society is actually the consumers. d. Production strategy: One of the most innovative strategies that Zara applies is the production process. As mentioned before, instead of designing the clothes first, the designers actually examine the available materials and/or fabrics, then after that they will design apparel based on the existing material and/or fabrics, therefore, the lead time can be reduced and costs will be decreased. e. Value chain: Zaras overall value chain differs from its competitors and it is unbeatable until today, especially its lead time of 2 weeks. Zaras value chain is actually what makes Zara able to produce new designs in just 2 weeks. We will analyze the value chain later in the following chapters.

4.2

The Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Strengths Global Outreach Strategic Location Distribution Strategy Store Image Fast Changing collection Responsive Employees Brand Image Weaknesses Limited Stocks Price Brand image closely tagged to competitors Lack of Marketing Total

Weight 0.08 0.08 0.12 0.12 0.09 0.03 0.15 0.08 0.12 0.08 0.05

Rating 3 3 4 4 4 3 4 2 1 1 2

Weighted Score 0.24 0.24 0.48 0.48 0.36 0.09 0.6 0.16 0.12 0.08 0.10 2.35

STRENGTHS a. Global Outreach

23 Inditex, as the head company, expands Zara in a large amount of scale. Currently they have more than 1,700 stores in exactly 86 countries around the world. This condition is one of a good strength that Zara has because as an international brand company, especially in apparel industry, Zara should reach every part of the world. Therefore, a weight of 0.08 would be adequate for this factor. We rank this strength 3 out of 4 because we think that this factor is definitely one of Zaras strengths, even though it is not their major strength. Therefore, rating 3 (minor strength) would be sufficient to describe Zaras condition. In addition, reaching global market is a foundation to step for an international brand to dominate the industry.

b. Strategic Location Zara chooses where to locate their stores carefully because they are aiming for a direct communication strategy to promote their products. They have a unique approach in locating their store in each countries, and even cities. For example in Indonesia, Zara locates their stores in almost every big shopping mall because it has a high traffic everyday and it is the main place for people to go shopping. In France, Zara locates their store in downtown and main streets as the local people usually walk down the street to go shopping. We gave this factor 0.08 of weight considering the importance of convenience for consumers in the industry. Consumers will like it if they can find good products available at their beloved shopping centers. Since Zaras locations are strategic globally, we therefore give3 of rating for this brand. It is categorized as their minor strength because we think this is not the main reason why Zara is prominent in fast-fashion industry.

c. Distribution Strategy In the distribution system, Zara control most of the supply chain and distribution of its products from the headquarters. Zara has their main manufacturing place in three different contingents. 50% of the products are produced in Spain, 26% in the rest of Europe, and the rest 24% percent is outsourced in Asia and Africa. Then the products were transferred to Zaras distribution centers located in Spain to be exported to Zaras stores around the world. We can see that their distribution strategy

24 is vertically integrated. This requires a high concentration and control form the headquarters in Spain, and that is exactly what Inditex does. Since the distribution strategy is integrated, combined with their high technology, the products can be distributed globally in just a short amount of time. This is the uniqueness of Zara. They are able to adapt to the latest trend in limited time, using the Hybrid Communication system, then produce those latest trend with available materials to cut production time and cost, and after that the products are immediately transferred to all the stores. We found out that this is strategy has become their strength. An effective distribution, therefore, has a higher weight of 0.12. In our opinion Zara deserves 4 rating for this factor since this is their specialty.

d. Store Image Zara is a trendy yet exclusive fashion store. This is the image of Zara from around the world. A unique concept of fast fashion might become a trendsetter in international fashion industry. A good store image also drives people to consider Zara when they want to purchase fashion items. In addition, their excellent customer instore services result a loyal behavior from consumers. In the industry with a high level of competition, consumer loyalty is crucial; therefore we give a high weight of 0.12 and rank of 4 because this strength is a strong foundation for the company which is highly acknowledged by Zara.

e. Fast Changing Collection This factor is one the specialties and uniqueness of Zara. Every 2 weeks Zara published brand new fashion items. This strategy exists to stimulate and refresh consumers curiosity about Zaras products. This is also the strategy to strengthen the image of Zara as the designer teams always work to find out what the new designs should be. The aim is to be the trendsetter of fashion business. However, in the apparel industry, it is easy to copy the style of designs. Therefore, a rating of 0.09 is given for this strategy. In terms of their response towards the factor, we give Zara 4 rating since they put high concern on this matter through their business model.

f. Responsive Employees

25 Employees presence is important inside the store to control, rearrange items, and also to give information to the customers. Therefore Zara also concerns about Employees responsiveness, especially because they claim to have direct communication as their prominent marketing strategy. Customer control and satisfaction sometimes depend on the service and Zara want to optimize those satisfactions in order to get the customers loyalty. On the other hand, sometimes consumers do not really care about the customer service. Sometimes they care only about the product and price. Consequently, a weight of 0.03 is given for this strength, as it is not as important as the other strengths. In term of Zaras effectiveness in responding to this factor, a rank 3 out of 4 is adequate.

g. Brand Image We set the brand image as the highest weight of 0.15. We do think that this is the back bone of every player in apparel industry; again, considering the amount of competition in this industry. One of the proofs would be the fact where consumers still buy the product from certain brand even though many claim it uses bad fabrics, or the price is sometimes too high, and so on. Eventually, they would still come back because of the image that they will get when they purchase the product. In other words, this symbolic brand benefits do exist and they are important. The brand of Zara is famous for their exclusivity and trendy product. Zara would never have a not up to date image as they always publish new items in every 2 weeks. The strong brand image is admitted around the world. This is what helps Zara to keep improving and reach the sustainability. Therefore, we give a full score of 4 in term of their response towards this factor.

WEAKNESSES a. Limited Stocks Even though Zara has a fast fashion concept, which is publishing new items in every 2 weeks, but some of the items are limited. So for some items, they might not be available in every store. Even though this is actually intentional, but for consumers, this can be included as a weakness as some customers will not be satisfied if they did not get the items that they want when they want it and where they want it. Customers

26 dissatisfaction quite have an effect for Zara, therefore rank 2 out of 4 is given with weight of 8% considering the fact that this strategy of Zara might actually be risky.

b. Price In its country of origin, Zara is categorized as a low-end product. However, Zara is included in a high-end product in Indonesia and in many other countries, 1 item of long sleeve shirt can be priced at 600,000 Rupiah. This is one of the weaknesses for Zara as the customer will think twice to purchase if price is a big consideration for them. This problem occurs mostly in developing countries, where the GDP per capita is still relatively low. Even though the middle class segment is growing, but not all of them are used to spend hundreds of thousand rupiah just to get a T-shirt. Therefore, we rank a low rate of 1 out of four with larger weight of 12%.

c. Brand image closely tagged to competitors As mentioned earlier, the problem in apparel industry is that it is very easy to copy each others designs. This weakness is one of the toughest to deal with. Beside Zara, there are a lot of other brands that reach the international market that also build an exclusive image for them self. Therefore sometimes public cannot differentiate product from Zara and their competitors. In other words, it is going to be easy for them to switch from one brand to another. Moreover, this will affect peoples judgment that all the brands that in the same level as Zara is actually the same or similar in term of types and products, or in other words, no clear differentiation between those brands. As a player in this industry, Zara needs to obtain consumer loyalty; therefore, we rank this weakness as their major weakness with rating 1 out of 4. However, the weight of this factor is not that high since in apparel industry, despite the existence of problems in the designs differentiation, a brand can develop a strategy to build consumers loyalty, just like what Inditex is trying so hard to do to its brands, including Zara.

d. Lack of Marketing Zara is lack of marketing such as promotion and advertisement. In Indonesia it is very rare to see Zara logo and advertisement outside the store and in public area. In fact, Zara in different countries also does not have that much of advertisement. They only depend on the strong brand image that they already have. This can be a tough

27 weakness if the competitors keep on increasing their marketing strategy, especially in emerging countries.

From all the strengths and weaknesses we come out with the result of 2.35. This is an average result from a perfect score of 4. So we can conclude that their effectiveness in utilizing their strengths to cover the weaknesses is satisfactory enough.

4.3

Financial Analysis LIQUIDITY RATIO 2012 1.4589 2011 1.4366

Quick Ratio

Current ratio defined as how much power does the current asset can cover current liabilities. The result shows that both in 2011 and 2012 the current ratio is above 1, which is good for the company as their asset have more power to cover the liabilities from their assets.

Current Ratio

2012 1.5180

2011 1.5104

Quick ratio basically has the same indication like current ratio. But quick ratio only looks from the companys quick asset. So inventory is not included in the formula. The result shows that the quick asset of the company still could cover the liabilities that they have.

LEVERAGE RATIO 2012 0.3420 2011 0.3197

4.4 Debt To Total Asset

This ratio is to find out how much from the total asset that financed by the total debt. The higher the result will cause a higher financial risk. A healthy company should

28 have a low debt to total asset ratio because they need a more flexible finances. Debt financing could lower the degree of flexibility. Zara in both 2012 and 2011 had a low result on this ratio, which means only a small amount of the total asset that financed by the debts. A slight decreasing trend also shows a positive progress for their assets.

Debt To Total Equity

2012 0.5198

2011 0.0469

As like the debt to total asset, this ratio defines how much equity that financed from total debt. The result shows below 1 which is a good result. The equity was not mainly financed by debt. But, in this case, Zara had a quite significant increasing trend from 2011 to 2012. The increasing result is not good because it means they have a bigger proportion of debt that finances the equity. 2012 0.1089 2011 0.1074

Long Term Debt To Equity

This ratio is much the same like debt to total equity. The different is that this ratio only analyze from the long- term debt side. So how much equity that financed from the long- term debt. The result shows a good sign. The long- term debt had a small amount of proportion in financing the equity. A decreasing value of the result is also an improvement for the company. 2012 220.5988 2011 68.1513

Times interest earned

Times interest earned indicates the earning that is available to meet the interest payments. A lower times interest earned will result in a less earnings available to meet the interest payments and the company will be more vulnerable to increase the interest rate. Zara has a significant increasing trend which is good for the company as they are more powerful in term of the interest payments.

29

ACTIVITY RATIO 2012 24.6203 2011 N/A

Inventory Turnover

(5612216/0)

Inventory turnover defines how fast the business can liquidate their inventory. The higher result shows a good sign of the inventory circulation. Unfortunately we cannot define the inventory turnover for 2011 as we have an insufficient data. But, for the year of 2012 itself Zara has a quite good performance on their inventory turnover. 24 is quite a high result for inventory turnover.

Total Asset Turnover

2012 1.2371

2011 1.2585

Total Asset turnover measures Companys effectiveness in generating asset to sales. So, the higher the value will show a higher effectiveness of the Company in managing their assets. Zara had a slight decrease on the trend which actually is not a good performance by the company. 2012 2.5727 2011 2.4978

Fixed Asset Turnover

As like total asset turnover, fixed asset turnover also measure the effectiveness of the Company in managing their asset. But this time is only for their fix asset. The greater the value means a high effectiveness of the Company in generating their fixed asset to sales. From only the fixed asset, eventually Zara has a positive trend. The value is also higher than comparing to the total asset turnover. So Zara is effective and keep on improving in managing their fixed asset.

30 PROFITABILITY RATIO

Gross Profit Margin

2012 0.5976

2011 0.5930

Gross profit margin has a vital role in indicating the financial health. It shows the power that the company has to pay its operating and other expenses and build for the future. It was a stable gross profit margin for Zara in 2011 and 2012, which is good because gross profit margin should be stable and not too much fluctuation.

Operating Profit Margin

2012 0.1955

2011 0.1828

This ratio measures the Companys operating efficiency. The higher result shows a higher efficiency of the company. Zara had a slight positive trend for their operating profit margin. It means Zara had an improvement in managing their operation. Zara also had bigger revenue leftover to pay their variable cost of production.

Net Profit margin

2012 0.1484

2011 0.1410

Net profit margin measures how much out of every dollar of sales a company actually keeps in earnings. A higher profit margin indicates a more profitable company which has a good control on their costs. There is not much difference from 2011 and 2012 for Zara. So we could say that there is no improvement for Zara on their costs control.

Return on Total Asset

2012 0.1836

2011 0.1775

31 This ratio basically measures the Companys effectiveness in generating their assets into earnings. The higher the value, the better for the company as they are more effective in managing their assets. Zara does not have a significant improvement from 2011 and 2012.

Return on Stockholders Equity

2012 0.2791

2011 0.2609

Return on stockholders equity indicates the amount of net income generates to the stockholders equity. The higher value shows a bigger amount of percentage from the net income to the equity. So a high return on stockholders equity will attract investors to invest to the company. Zara had a slight increasing trend for this ratio but it is not significant enough to attract the investors.

Earnings per share

2012 3.7981

2011 3.2888

Earnings per share (EPS) is a portion of companys profit that allocated to each share of the outstanding stock. This ratio will also attract investors attention, as they will hold the shares. Zara had quite of an improvement her. They have 0.5 bigger portions in 2012 comparing to 2011. The higher the earnings per share the better it is for the investors.

Price Earnings Ratio T

2012 30.0410

2011 30.4414

he P/E Ratio is a comparison and valuation ratio of the companys current share price compared to the price- share earnings. A higher price earnings ratio could define a better performance of the company. Zara had a quite negative trend on their priceearnings ratio, which means a decreasing performance and investors less expectation on the earnings growth.

32 GROWTH RATIO

Based on the financial statement, Zara had a 16% growth of sales. This could be affected by an improvement on the effectiveness of managing their assets and inventories. 16% is quite a large number of growths in one year. Net Income had a growth of 22%. This is even bigger than the sales growth. So, it shows that Zara not only improve in managing their assets and debt, but Zara is also good in managing their expenses so that the net income was boosted up. Zara also has an increase of 13.47% in earning per share growth. With an increase of net income, Zara allocates more from their earning to the outstanding shares.

33 Chapter 5

STRATEGIES IN ACTION 5.1 The Strategies A. Integration Strategies Zara applies the Forward Integration. Since Inditex demands a high integration between the headquarters and all branches across the globe, therefore Inditex controls its retailers and distributors all around the world in order to standardize the overall business performance. In addition, Zara also performs some horizontal integration through its acquisition of Massimo Dutti from the Massimo Dutti group and the acquisition of Stradivarius. B. Intensive Strategies As an aggressive expander in global market; hence, Zara practices the Market Development strategy in which they are entering new market with Asian-developing countries being their first targets. Countries include China, India, and Indonesia. That is why nowadays, almost in every new shopping malls in Jakarta, you can find Zara store in it. Currently Zara is targeting the Asian market, hoping it will generate much profit from this promising market. Not only that it applies the Market Development, Zara also applies the Market Penetration strategy, especially in European and American markets. Their techniques of doing this strategy are by improving its online store and increase customer service in all retail stores. C. Diversification Strategies To complete its product lines, also as a form of their differentiation, Zara sells accessories to complement their main product which is apparel. This kind of strategy is called the related diversification. Further, Zara also has the unrelated form of diversification which is the Zara Home. Zara Home is a retail store which specializes in home fashion and decoration. Zara Home, similar to Zara, emphasizes exclusivity in all f its products and it is also relatively more expensive than its competitors. Zara Home is available in 55 countries including Indonesia. However, in Indonesia we can only find Zara Home store in Plaza Indonesia, Jakarta, Indonesia.

34

Zara Homes first store in Indonesia, located in Plaza Indonesia on 2 nd Floor

D. Defensive Strategies Zara has no defensive strategy because the company is in good condition, not in any kind of jeopardy. Therefore, it does not need any defensive strategy at the moment.

5.2 Michael Porters Five Generic Strategies According to Porter, strategies allow organizations to gain competitive advantage from three different bases: cost leadership, differentiation, and focus. Porter called these strategies the Generic Strategies. The following is the framework of Porters Five Generic Strategies and the position of Zara in this classification.

GENERIC STRATEGIES Cost Leadership Large SIZE OF MARKET Small Type 3 Type 4 Type 5 Type 1 Type 2 Differentiation Type 3 Focus

35 Zara is categorized as the Type 3 because it is aimed to the industry-wide, in which the size of the market is large. Moreover, Zara also has some strong differentiations that make them the leader in the industry. Differentiations such as the concept of fast-fashion (which was pioneered by Inditex), that is supported by its excellent and integrated supply and value chain.

36 Chapter 6

STRATEGY ANALYSIS AND CHOICE

6.1 The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix Recalling the previous explanation about Zaras External and Internal Analysis, we can now develop the four types of strategies: SO (strengths-opportunities) strategies, WO (weaknesses-opportunities) strategies, ST (strengths-threats) strategies, and WT (weaknesses-threats). Remember that there is no one best set of matches among these strategies. Strengths Global Outreach Strategic Location Distribution Strategy Store Image Fast Changing collection Responsive Employees Brand Image SO Strategies Open new stores in developing countries in Asia (S1, O1) Build distribution centers in Asia to lower distribution costs for Asian countries (S3, O2) Be the trendsetter (S5, O3) Promote the companys vision to be an eco-friendly company (S7, O4) Weaknesses Limited Stocks Price Brand image closely tagged to competitors Lack of Marketing

Opportunities Increasing middle class in Asia

Opportunity to build distribution center in developing countries to lower costs Cooperation with new designers Rising environmental issues

WO Strategies Charge products at competitive price in Asian countries standards (W2, O1) Produce a signature collection (W3, O3)

Enhance the current brand image and companys image (W4, O4, O5)

International Recognition Threats Fierce Competition ST Strategies Expand in new market and be the first player in the market (S1, S2, T1) Produce the new trends with higher turnover (S5, T3) WT Strategies Increase spending for marketing campaign (W4, T1) Enhance ZARAs differentiation through its unique designs (W3, T4)

Lawsuit related to sweatshops

37 Possible imitations of goods Increase the brand equity through better service (S6, S7, T4)

Dilution of Brand Equity

The SO strategies include aggressive strategies of the company to take advantage of the existing opportunities matched with their strengths. Many companies pursue the other three strategies first in order to be able to apply the SO strategies. As for Zara, they are already in the position which enables them to apply those SO strategies given their current weaknesses and threats. Currently Zara has already opened new stores in Asia, they are also transforming into the trend-setter instead of trend-follower through its major cooperation with many designers. In addition, Zara has promoted their eco-friendly campaign through the companys vision and mission that is applied all the day down to the retail stores. For example, Zara sells t-shirts that are made from organic cotton which considered as environmental friendly. Unfortunately, they currently do not have any intention to open a new distribution center in Asian country just yet. However, they already have their purchasing office in Hong Kong and they are maximizing the use of this office to boost sales in Asian region. They have also invested a large amount of money in advertising to make them a much stronger competitor.

6.2 The Strategic Position and Action Evaluation (SPACE) Matrix

Financial Position (FP) Increase in turnover Increase in Net Profit after Tax Decrease in Leverage Industry Position Market growth, especially in developing countries Fashion Industry itself is a sustainable industry Very competitive

Ratings 6 5 3 Total 14 Ratings 4 3 4 Total 11

38 Stability Position Inadequate infrastructure and IT in developing countries (especially India and Indonesia) Counterfeiting in developing countries Possible increase in labor costs Total Competitive Position Increasing threats from new competitors such as Uniqlo and H&M Zara provides unique concept Zara has the largest market share Total For Financial Position and Industry Position: +1 (worst), +6 (best) For Stability Position and Competitive Position: -1 (best), -6 (worst) Average: SP : -2.67 IP : 3.67 CP : -2.33 FP : 4.67 Therefore, we get the x-axis = -2.33 + 3.67 = 1.34 the y-axis = -2.67 + 4.67 = 2 The following is the SPACE Matrix picture: Backward, forward horizontal integration Market penetration Market development Product development Diversification (related or unrelated) Ratings -4 -2 -2 -8 Ratings -3 -2 -2 -7

AGGRESSIVE STRATEGY:

Since the curve is upward sloping placed at upper-right of the quadrant, we can conclude that Zara can pursue the Aggressive strategies, by means the company is in an excellent position to use its internal strengths to: (1) take advantage of external opportunities, (2) overcome internal weaknesses, (3) avoid external threats. Therefore, market penetration, market development, product development, backward integration,

39 forward integration, horizontal integration, related and unrelated diversification, or a combination strategy all can be feasible, depending on the specific circumstances that face the firm. That is exactly what Zara is doing now, as we recall our previous analysis on the Strategies in Action (Chapter 5).

6.3 The Boston Consulting Group (BCG) Matrix The BCG Matrix portrays differences among divisions in terms of relative market share position and industry growth rate. The Question Marks have a low relative market share position, yet they compete in a high-growth industry. Companies in this group must decide whether to strengthen them by pursuing an intensive strategy, or sell them. The Stars represent the organizations best long-run opportunities for growth and profitability. They have high market share and high industry growth rate. The Cash Cows have high market share but compete in a low-growth industry. As for the Dogs, they have a relatively low market share and compete in a slow-or-no-growth industry. The following is the position of Zara and several other Inditexs brands in terms of BCG Matrix: STARS (High Market Share, High Market Growth) Question Marks (Low Market Share, High Market Growth)

Cash Cows (High Market Share, Low Market Growth)

Dogs (Low Market Share, Low Market Growth)

Zara is placed as Stars because it has high market share and compete in an industry with a high growth whereas the other Inditexs brands such as Stradivarius, Pull&Bear, and Bershka are placed at the Question Marks since they have lower market share compared to Zara. Based on the companys annual report presentation, from Inditexs

40 overall income in 2012, exactly 66.1% comes from Zara, while Stradivarius, Pull&Bear and Bershka contributed 6%, 6.8%, and 9.3% respectively. Based on the theory, companies positioned at Stars should consider the forward, backward, horizontal integration strategies, market penetration, market development, and product development strategies. Zara as a leading brand should therefore receive substantial investment to maintain or strengthen its dominant position. As a result, not only that it is expanding aggressively across the globe, Inditex as the owner of Zara has also made several investments specific to Zara in order to remain its position, those investments include: additional investment for advertising, IT improvements for better customer service, and hiring new designer teams to strive for becoming a trend-setter.

6.4 The Internal-External (IE) Matrix The IE Matrix positions an organizations various divisions in a nine-cell display, in which both EFE and IFE is again used to determine the organizations position. The strategic implications from this matrix will differ with those from the BCG Matrix. The IE Matrix for Inditexs brands is as follows: THE IFE TOTAL WEIGHTED SCORES Strong 3.0 4.0 High 3.0 4.0 THE EFE TOTAL WEIGHTED SCORES Medium 2.0 2.99 IV V VI I Average 2.0 2.99 II Weak 1.0 1.99 III

Low 1.0 1.99

VII

VIII

IX

41 The result of the IE Matrix shows that Zara is positioned as the Category II whereas Bershka, Pull & Bear, and Stradivarius are at the Category V. Zara is considered as Category because the EFE score was 3.45 (High) while its IFE score was 2.35 (Average). Consequently, the strategy that Zara should pursue is the Grow and Build Strategy. Meanwhile for the other 3 brands we assume that they have same level of IFE because they come from the same company with similar strategies in doing expansion. However, the three brands may have lower level of EFE compared to Zara since based on the number of stores available globally, especially in Asian countries, the other three brands are lagging way behind Zara. In other words, the response of these three brands to the growing market of Asian countries like China, India and Indonesia is low compared to Zara. Therefore, they should pursue the Hold and Maintain Strategies. Grow and Build strategies include the intensive strategies like market penetration, market development, and product development, or integrative strategies such as backward integration, forward integration, and horizontal integration. As for the Hold and Maintain strategy, it includes the market penetration and product development strategy. In other words, Bershka, Pull & Bear, and Stradivarius should either consider creating a whole different concept of product or increasing the level of Branding and Marketing to boost sales.

6.5 The Grand Strategy Matrix This matrix will determine the companys position based on two evaluative dimensions: competitive position and market growth. Since Zara has a very strong competitive position and it also has a rapid market growth of 16%, consequently, we can conclude that Zara is positioned in the 1st Quadrant of the matrix (Quadrant I).

42

Rapid Market Growth

QUADRANT I: 1. 2. 3. 4. 5. 6. 7.
Weak Competitive Position

Market development Market penetration Product development Forward integration Backward integration Horizontal integration Related diversification
Strong Competitive Position

Slow Market Growth

Among the suggested strategies of Quadrant I companies, specifically for Zara, Inditex has used the market development, market penetration, forward integration, and related diversification. In general however, Inditex has done twice of horizontal integrations in the form of acquisition of two brands: Massimo Dutti and Stradivarius. Market development effort for Zara includes opening new and larger stores in Asian countries such as China, India, and Indonesia with stronger visual merchandising. They also increase their product visibility in all the stores across the globe. Market penetration efforts include enhancing its online-sales expansion in Europe, America, Australia and South Africa. Moreover, they also enhance the in-store experience to increase the consumers loyalty.

43

The opening of Zaras first store in China

Zara first launched its online store in US on September 2011

As for the forward integration, Inditex has been famous for its vertical integration in which it takes the control over distributors and retailers. All policies regarding every business activities from the headquarters in Spain all the way down to the retail stores, wherever it is located, all must be approved by the headquarters first. The distribution is centralized to Inditexs 4 distribution centers which are located in 4 different cities in Spain: Madrid, Len, Tordera, and Barcelona. Even though the products are manufactured in many different countries, every single product must be exported back to Spain to be then distributed to all Zara stores around the world.

Distribution Map of Inditexs products, including Zara

44 The last strategy is the related diversification. As one of the major player in fast-fashion industry, Zara has to be able to differentiate its products and increasing the brand equity with all of its capabilities. Zara does not only sell apparel, but they also sell accessories to complement the apparel. The accessories are produced with the same quality standard as the apparel and it is available in all Zara stores worldwide.

Zara accessories in store and online

6.6 The Quantitative Strategic Planning Matrix (QSPM) The technique is to rank strategies to achieve the prioritized list, based on the relative attractiveness of feasible alternative actions. This matrix will objectively indicate which alternative strategies are best. Here we will use previous analysis from the EFE Matrix, IFE Matrix, CPM Matrix, SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and the Grand Strategy Matrix. Based on these matrices, we derived the most prominent strategies for Zara which are achievable and have strong positive impact to Inditex as the owner of Zara. There are 3 strategies that we propose: (1) Expansion in Asian-Emerging Countries, (2) Build Distribution Centers in Asian Countries, and (3) Increase Marketing Spending. Moreover, these strategies are for the long-term.

45
Expansion in AsianDeveloping Countries AS TAS Build Distribution Center in AsianDeveloping Countries AS TAS

QSPM
Key Factors Weight

Increase Marketing Spending AS TAS

KEY EXTERNAL FACTORS

Opportunities Increasing middle class in Asia Opportunity to build distribution center developing countries to lower cost Cooperation with new designers Rising Environmental issues International Recognition Threats Fierce competition Lawsuit related to sweatshop Possible imitation of goods Dilution of brand equity Total 0.1 4 0.4 4 0.4 3 0.3

0.05 0.1 0.05 0.2 0.2 0.05 0.05 0.2 1

3 3 2 4 3 1 1 2

0.15 0.3 0.1 0.8 0.6 0.05 0.05 0.4

4 2

0.2 0.2 4 0.8 0.8

0.4

0.6

KEY INTERNAL FACTORS

Strengths Global outreach Strategic locations Distribution strategy Store image Fast changing collection Responsive employees Brand image Weaknesses Limited Stock Price Brand image tagged to competitors Lack of marketing Total 0.08 0.08 0.12 0.12 0.09 0.03 0.15 0.08 0.12 0.08 0.05 1 4 4 4 4 3 2 4 2 3 2 2 0.32 0.32 0.48 0.48 0.27 0.06 0.6 0 0.16 0.36 0.16 0.1 6.16 4 3 4 3 0.32 0.24 0.48 0.27 4 3 3 2 4 2 3 0.16 0.36 4 4 3.03 0.32 0.2 4.72 0.32 0.24 0.36 0.18 0.6

Based on the QSPM Matrix above, we conclude that the most prioritized strategy will be the Expansion in Asian-Developing Countries since it has the highest ending score. The countries include China, India, and Indonesia. Inditex is actually doing this strategy right at this very moment for Zara.

46 Chapter 7

IMPLEMENTING STRATEGIES: MARKETING, FINANCE/ACCOUNTING, R&D, AND MIS ISSUES

7.1

Marketing As the world is now becoming digital, many marketers initiate the digital marketing campaign. Many companies now engage actively to promote their products on social media like Facebook, Twitter, YouTube, or Instagram. Not wanting to be a laggard, Zara also created its own Facebook page, Twitter account, YouTube, and also Instagram accounts. More than 16 million people like Zaras FB page and more than 300 hundred people followed Zara on Twitter, thousands of people also subscribed to Zaras channel on YouTube. Unfortunately, it is not enough. Despite its availability on social media, Zara is not utilizing using these social media to do advertisements; therefore, these accounts are not really productive or useful for the company.

Zaras accounts on social media

The 4Ps of Zara: 1. Product: Inditex describes Zara as the brand for the latest fashion for women, men, and children. Product lines include: apparel, footwear and accessories. Inditex also claims that Zara is not a luxury-brand. 2. Price: Zara is originally positioned as an affordable brand, however, as it expands to developing countries where the GDP/capita is lower from its country-of-origins, Zara in developing countries then shifts its position to the lower-end.

47 3. Place: Zara is now available in 86 countries with total 1,770 stores

worldwide. The store is located in prime locations of the area with high concentration of visitors. In distributing its products, Zara practices the constant flow of updated data that mitigates the so-called bullwhip effectthe tendency of supply chains to amplify small disturbances. A small change in retail orders, for example, can result in wide fluctuations of factory orders after it's transmitted through wholesalers and distributors. In an industry that traditionally allows retailers to change a maximum of 20 percent of their orders once the season has started, Zara lets them adjust 40 to 50 percent. In this way, Zara avoids costly overproduction and the subsequent sales and discounting prevalent in the industry (Keller, 2012). 4. Promotion: In the competitive clothing industry, Zara has successfully built a worldwide famous brand by a unique management system of design, production and supply chains. The fast fashion concept and operation allow Zara to always provide the most fashionable clothes to their customers and the always renewing collections definitely help build a brand loyalty. This results a remarkable growth globally with only limited investment on advertisements, or even none. Inditex on its company report states that its business model includes no advertisement when entering a new market to avoid the main fixed costs of international expansion. Moreover, even in its home country, Zara does not rely on traditional tradition. Instead, they rely on direct communication with consumers.

Retention-based Segmentation: The customers of Zara can be classified into 3 following segments: 1. Fashion Chaser: people who are fashion trend followers and value fashion over exclusivity. They prefer well-known brands and price is of lower priority to them. They are also the most loyal customers of Zara. 2. Opinion Seeker: people who rely heavily on mass media and people around them in their purchase decision, including close friends, family, or the shop assistant.

48 3. Value Buyer: the type of customers that are more price-conscious. They compare prices and qualities between brands before finally decide which gives them the most value.

Product Positioning Since Zara is available across the globe, the positioning of Zara becomes different depending on the GDP/capita in certain countries. For countries with medium to high GDP/capita, Zara is considered as low-price product. On the other hand, for countries with medium to lower GDP/capita (mainly in Asian countries), Zara is considered as a high-price products. As for the fashion/couture, Zara is considered high level of fashion/couture regardless the geographic area.

Product Positioning of Zara in developed countries (left) vs. developing countries (right)

49 7.2 Finance

Net Income (in billions of Euros)

Net Income

2.4 1.9 1.7 1.3 1.3

2012 Source: inditex.com

2011

2010

2009

2008

The graph above shows the increase of Net Income of Inditex group as a whole. It indicates a positive trend year by year in the last 5 years. Based on this date, we can also calculate the estimated future benefit as follows: Future benefits = 5 x current annual profit = 5 x 2.4 billion euro = 12 billion euro. Therefore, Inditex is projected to have 12 billion euro worth of benefits.

7.3 Research and Development (R&D) As a leading in fast-fashion industry that promises the most up to date collection to its customers, Zara must continuously produce set of apparel that the customers currently demands, set of apparel customers will demand in near future, and also set of apparel that customers will not expect to like. Moreover, since they will produce in limited stocks for the sake of exclusivity, each product must be able to meet its owner to avoid stock piling. In consequence, Zara with its teams of designers actively attend the latest fashion shows, asking feedbacks from customers about the designs in order to portray or project the proposed designs for the next collection.

50 Furthermore, Zara designers are trained to limit the number of changes made by lowering the number of samples required, minimizing cost and turnover time. Its demand based production or Just-in-time (JIT) production reduces the amount of inventory available, lowering Zaras storage cost. Zara's outstanding lead time is unbeatable in the industry at the moment. In addition, Zara eliminated the traditional design process, where design and development overrides fabric procurement. In Zara, the design teams work with the available fabric, allowing for faster fashion, also minimizes costs.

Zaras supply chain compared to the traditional industrys supply chain

Another aspect regarding Zaras R&D will be about its environmental-friendly campaign. As stated on its mission, Zara aims to become an eco-friendly company that contributes to the sustainable development of the society. Zara is very serious in achieving this mission. Their concrete effort including building plants and distribution centers powered by natural gas (thermal energy) to supply hot water, low-pressure steam, and cooling that can optimize the building operations by improving energy performance and also reducing carbon-dioxide emissions. Further, the company has developed a Strategic Environmental Plans 2011 2015 which can be summarized as the following: Environmental Management System certified as ISO 14001 compliance in 25 of INDITEXs premises: Inditexs main building, chain headquarters, logistics (distribution) centers and own manufacturing plants. Sole multinational in the textile field with all centers certified.

51 Selective waste management and recycling at all Inditex facilities. Environmental training given to all staff in manufacturing plants and logistics centers. Environmental information and awareness-raising campaigns aimed at all store staff. Move towards renewable sources of energy and cogeneration plants (850 kW wind turbine, 1,500 m2 of solar thermal collectors and 3 CHPs).

Natural Gas generators at the heart of Inditexs plant and distribution center in Tordera, Spain.

Trucks to ship Inditexs products from the logistics centers daily

7.4 Management Information System Zara is highly vertical-integrated and also centralized. As mentioned earlier, Zara relies more on direct communication with its consumers rather than spending for advertisings. Therefore, flow of information system must be excellent. Zara gathers data from consumers daily, even several times in a day. The headquarters gather consumers data from its stores across the globe. They use the Personal Digital Assistants (PDA) to gather immediate customer input and feedback and directly send it to the headquarters. Types of information gathered by PDA for example why a customer does not like the clothes and what would make it better. Moreover, in its day to day operation, Zara also uses the Point of Sale System (POS) which includes the transaction processing system that captures customer purchase intentions. The examples will be asking customers what they like and what they do not like in fitting rooms, etc. The POS system show how garments rank in sales in different

52 areas, Therefore, the headquarters can identify their customers purchase behavior and preferences more accurately, based on their geographic area. The following picture is a real example from our research in one of Zaras stores located in Plaza Indonesia. In the picture we can see the store manager of Zara Plaza Indonesia using a PDA to send information to the headquarters about a complaint from a customer that is being handled by the saleswoman (on his right). We could not get a better angle because we took the photo tacitly at the cashier.

Store Manager and his PDA

53 Chapter 8

STRATEGY EVALUATION AND GLOBALIZATION CULTURE

8.1 The Balanced Scorecard This method of analysis will allow firms to evaluate strategies from four perspectives: financial performance, customer knowledge, internal business processes, and learning and growth. The following table is Zaras Balanced Scorecard:
Area of Objectives Customers Measure or Target Time Expectation 2015 Primary Responsibility

1. Satisfactory shopping experience

EBIT increased by 35% (from 24% in 2012)

2. Local Variation

40,000 new designs per year (from 36,000 designs in 2012)

2015

Improve the customer service through employee trainings Aggressive expansion Utilize the POS through customer feedback reported by the store manager through PDA Enhance good communication between managers and employees Utilize the purchase office to project the trend in Asian market Outsource more types of clothing to be produced in Asia Through major outsourcing,

Managers/Employees

1. Employee welfare

Employee Turnover decreased by 20%

10 years

Operations/Processes

1. Hong Kong Purchasing Office utilization

Asian sales percentage increased to 30% (currently 20%) Marginal Cost decreased by 5%

2015

2. Lowering the Production Cost

2015

Community/Social Responsibility

1. Provide jobs through its outsourcing

Unemployment Rate in host country (India)

Annually

54
decreased by 3%

ZARA (Inditex) has been able to provide jobs for more than 5 million people in India
2014

Business Ethics/Natural Environment

1. Eco friendly company

Number of ecological clothing items increased to 20 million

Environmental Management System pursuant to the ISO 14001 standard Emission control dumping and waste Plans Admission to Dow Jones Sustainability Index TQM practice Inditex sustainability model Optimization of global expansion

Financial

1. Financial sustainability

Net Income increased to 30% (currently 22%)

2015

*Inditex Sustainability Plan

Analysis: Since Zara is practicing both market penetration and market development strategies; therefore, it is important to improve the level of consumer shopping

experience while at the same entering many new and potential markets. Further, Zara is currently expanding aggressively in Asian

55 countries; consequently, to increase sales they need to be able to adapt its designs with the local preferences to generate more profit from Asians pocket. What the company can do is to enhance customer service through employee trainings, especially those who face the customers directly everyday in the store. Moreover, Zara can optimizing the use of its PDA and POS technology to obtain information regarding the customers preferred designs and feedbacks. Inditex, including Zara, unfortunately is famous for having a high employee turnover due to its working environment which is stressful and subjective. Not many younger employees get promoted, and according to many reviews of Inditexs employees, managers in Inditex do not get along with the sub-ordinates; therefore, creating a gap between the employee and the managers. Clearly Inditex must be able to overcome this problem so that the company will not have to pay extra costs for training new employees every once in a while and also considering the company image. As for its business operations/processes, since the company has just bought a purchasing office located in Hong Kong, they can now use this facility to increase the sales in Asian countries, especially China as the largest developing market today. By combining the PDA and POS as well as the Purchasing Office, Inditex can now project the Asian market easily and more accurately. Another option for the company is to lower the production cost by outsourcing more types of clothing to be produced in Asia. Currently, Inditex only outsources about 30% of its total products (Ghemawat & Nueno, 2012). Through its outsourcing program, Inditex has been able to provide jobs for more than 5 million people in India. The company acknowledges the situation and claims it as one of their corporate social responsibility. Inditex does not really concern about developing an extensive CSR initiatives. On the other hand, they put more consideration to the operations in their outsourced companies, including strict regulations banning child labor, also improvement of labor education, as well as the quality of product that will be produced. Each Inditex outsourcing partner must have a quality of A or B while in this industry, the outsourcing company quality is usually B or C or even D. As for the environmental objective, Zara puts more emphasis since this is their mission. Therefore, the responsibilities are many including the ISO 14001 compliance,

56 the emission control through the use of thermal energy, and finally the Dow Jones Sustainability Index. Last but not least, as a public company, Inditex must be able to ensure its stakeholders that the company can last a long time. Inditex needs to show how can the company sustain itself and maintain its profitability in the long-term. Therefore, the company should practice the TQM or the Total Quality Management continuously. By means, the company should continuously improve the customer service, quality, accessibility, and all other key critical success factors in the industry. Furthermore, since the Asian market is booming nowadays, then the company should optimize this situation to generate as much profit as possible.

8.2 Globalization Culture As mentioned in the previous sections, Zara is a highly vertical-integrated company. Even though Inditex enters many markets through another retailer, however the concept, decision-making, and business operations and standards are always centralized and standardized universally. For example in Indonesia, Zara is brought-in by PT Mitra Adi Perkasa which comply all Inditexs regulations from the importing process down to the post-purchase customer service. PT Mitra Adi Perkasa is not able to make any decision regarding the brand without the permission from the headquarters. Moreover, they need to report to the headquarters daily about activities in the store. As a result, we can find that the culture of Zara, or the concept of Zara, or pretty much everything about Zara will be the same regardless the location of the store. This includes the store layout, the store design, lighting, window displays, and other physical resources, as well as the management of the store. The following pictures will show how Inditex as the owner also the headquarters of Zara controls all of its retailers in order to vertically-integrate Zaras overall business operation. Moreover, Inditex actually applies this policy to all of its brands sold by other retailers worldwide.

57

PT Mitra Adi Perkasa Company Logo

Zara store Cape Town, Africa

Zara store South Coast, California, USA

58

Zara store in Spain

Zara store in Jakarta, Indonesia (Senayan City)

Zara sales assistants across the world, all dressed formally

59 Chapter 9

CONCLUSION

9.1

Zaras Competitive Advantage After analyzing the success factors both internally and externally, in this section, we will derive the core of this analysis, which is the reason why Zara can become such a strong player in the industry or in other words, the competitive advantage of Zara. In our opinion, according to what we found during our analysis, one of the competitive advantage that Zara has and its competitor lacking is the customerresponsiveness. Even though Zara does not have many investments in Marketing, but Zara relies on the most important aspect of the business, the customer. They focus on their customer, listen to what their customers have to say, obtain their comments and feedbacks, and then use those information to evaluate the next production, meaning on the next production, they will produce based on the information given. Consequently, the results will be gratifying for the consumers. Next competitive advantage that Zara has will be its business operation. Zaras overall business operations, including the design process, production process, and the distribution process, all are so sophisticated that it enables Zara becomes the forefront in the industry. Especially because it is combined with their customerresponsiveness, imagine how impressive it is. Zara is the only brand that has the capacity to produce the latest design that the consumers demanded, and make it available at the stores in just 14 days. Because Zara will be the first one to place a certain design in the store, hence the customers will tend to make Zara their first choice in shopping or browsing for clothes. Finally, the excellent business operation together with customerresponsiveness will lead to customer loyalty, creating a cycle of growth; the secret success of Zara.

60

Customer responsiveness

Business Operation

Customer Loyalty

9.2

Vision, Mission, and Strategies Throughout the chapters, we have seen the analysis of Zaras strategies that they currently have and the ones they should have. Now lets recall the vision and mission that underlies the whole strategies and see whether the strategies that Zara has now are sufficient in order to achieve the stated vision and mission. Zara in its vision stated that it aims to satisfy the desires of its customers . They pledge to continuously innovate their business to improve customer experience. Up to this point, we think that Zaras strategies are already aligned and so far effective enough to drive the company closer to achieving the vision. Think of Zaras effort in obtaining feedback from consumers in order to understand the consumers and therefore able to produce the designs that the consumers love. Moreover, Zara also never stops improving its in-store customer experience through employee trainings and direct communication with the consumers. Further, in the vision statement Zara also promises to provide new designs made from good materials and also affordable. With the information Zara gets from customers, Zara is able to provide good designs with available materials and therefore can lower the production cost as well as the production time. As a result, a more affordable outcome of products can be distributed to end consumers. In addition, in its mission statement, Zara states that it aims to contribute to sustainable development of society and environment it interacts with. In this case, Zara proves that its decision to outsource its manufacturing process to other countries

61 has brought a positive impact for the host country, as we recall the example of India. Moreover, especially for environmental issues, Zara has committed to help reduce the emission and create an eco-friendly business and the commitment is still strongly upheld until today. Even now there are more and more concrete moves that the company is doing in order that this mission can be achieved, including investing more money on creating a eco-friendly business operation starting from the headquarters, the manufacturing plants, and all the way down to the stores across the globe. In conclusion, looking from the strategies that Zara is doing now, we can say that these strategies are aligned with the visionmission and that these strategies are effective and sufficient enough for the company to achieve the stated vision and mission.

62 BIBLIOGRAPHY

David, F. (2013). Strategic Management: Concepts and Cases. New Jersey: Pearson International Edition. Ghemawat, P., & Nueno, J. L. (2012). ZARA: Fast Fashion. Harvard Business Journal , 135. Inditex. (2013, September 18). Inditexs net sales rise 6% to 7.7 billion euros. Retrieved November 28, 2013, from Inditex:

http://www.inditex.com/en/press/press_releases/extend/00001019 Inditex. (2013, November 28). Our Team. Retrieved November 28, 2013, from Inditex: http://www.inditex.com/en/who_we_are/our_team Inditex. (2013, November 28). Timeline. Retrieved November 28, 2013, from Inditex: http://www.inditex.com/en/who_we_are/timeline Keller, A. A. (2012, October 26). Zara Strategic Marketing Plan. Retrieved December 1, 2013, from Oeconomicae:

http://www.oeconomicae.com/documents/Author/Strategic%20Marketing%20Plan,%20Za ra,%20Arteixo,%20Spain.pdf Sandoval, B. (n.d.). Zara: IT for Fast Fashion. Retrieved November 28, 2013, from UHV: http://www2.uhv.edu/luj/MGT6352/Samples/Student%20Sample%203.pdf Wikipedia. (2013, November 19). Fast Fashion. Retrieved November 28, 2013, from Wikipedia: http://en.wikipedia.org/wiki/Fast_fashion