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Team 1: Melanie Luxem 311 082 203 Ishan Sane 307 174 980 Eugenia Baydikova 308 160 886 Thi My Hanh Dinh 308 008 561

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1.0 EXECUTIVE SUMMARY As a global retail success story Zaras business strategy can be analysed from both an internal and external perspective using widely accepted theoretical frameworks. However, many of these models are limited in their ability to account for dynamics. As such it is necessary to adopt an integrated view of the theoretical literature in order to gauge whether Zara is able to sustain its competitive advantage over time in an industry that is fiercely competitive, yet characterised by traditionally slow-moving inventory despite the perishable nature of fashion and the potential of reaping significant margins in a globalised economy with an abundance of cheap labour. The fundamental success of Zaras strategy lies in its complete transformation of the retail business model, rather than using a stopgap measure like outsourcing to reduce costs they have entirely redefined the fashion landscape by mastering what has been coined Fast Fashion. Most importantly, it is the consistent implementation of its strategy across its vertically integrated value chain, which positions Zara as a formidable player in the retail industry in time to come. 2.0 INTRODUCTION The first Zara store was opened in 1975 (Inditex, Annual Report, 2009, p.16). It is now one of eight commercial formats that comprise the parent company Industria de Diseo Textil, S.A. (hereafter Inditex) (Figure 1). The group consists of more than 100 companies spanning textile design, manufacturing and distribution in addition to the eight retail chains. Although Inditex is responsible for administration, logistics technology, general HR policy, legal and financial concerns and is the sole or majority shareholder of stores across the portfolio; each concept retains significant managerial autonomy (Inditex Press Kit 2010, p.13) (Figure 4b). So while they share a common business model premised on rapid innovation and flexibility, the following report will focus on Zara, as the most prolific of the Inditex brands, contributing to 63.9% of the groups total EBIT in FY2009 (Consolidated Annual Accounts 2010, p.67).

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3.0 KEY CHARACTERISTICS OF THE COMPETITIVE CONTEXT Competitive context has been widely analysed in Business Strategy to account for firms competitive positioning. It is possible to identify a number of macro and micro factors that influence the strategy and performance of a firm over time and across different markets. As an admired player in global retail, Zaras competitive advantage can be examined using exogenous frameworks such as a PEST analysis complemented with a SWOT approach, as well as Porters Five Forces and the industry Value Chain, which suggest that wider environmental factors and industry forces determine the strategic direction of a firm and its profitability. However, these models are not exhaustive, and can be supplemented with more contemporary theories of competitive analysis to develop a more comprehensive understanding of Zaras context. Zaras competitive environment is the global fashion apparel industry. As fashion is defined as a broad term that typically encompasses any product and market where there is an element of style that is likely to be short-lived (Cristopher, Lowson, 2004, p.1), it is a market in which strategic planning is made difficult due to short product life cycles, a wide product variety, high volatility and uncertain demand due to low predictability of consumer preferences based on a high degree of impulse purchases (Cristopher, Lowson, 2004, p.1). 3.1 The Macro Environment Although the PEST framework does not offer a dynamic perspective, it does provide a starting point for understanding the external characteristics of the macro environment that lead to the emergence and survival of particular business models. As can be seen in Figure 2, political, economic, social and technological factors have a joint impact on the competitive opportunities and constraints affecting Zara, consequently shaping its strategy. The first quadrant represents the surrounding political climate, culminating in the 2005 liberalisation of trade between members of the World Trade Organisation and

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leading to challenges for European Union member states from competition in the clothing sector in Asia (Lopez & Fan 2009, p.280). While close competitors like American Gap and Swedish Hennes & Mauritz, outsource their production to low cost Asian countries, around 80 per cent of Zaras production is strategically located in Europe (Dutta 2002, p.3). Despite the trade-off of higher labour costs averaging up to twenty times those of Asian countries, from a SWOT perspective (See Figure 3), Zara has translated this external threat into an internal opportunity, retaining control and flexibility over its production facilities (Dutta 2002, p.3). On the other hand, this does expose Zara to instability in the Spanish labour market whereby the modernisation of Spain may bring rising wage costs. Therefore Zara must contend with both opportunities and threats from the external perspective of a SWOT framework. How it responds to these internally will be determinative of its long-term success. Closely related to the political environment, is the economic landscape of the competitive context. In particular, the fragmented structure of the European textile and apparel industry resulted in the proliferation of a large number of small and medium-sized companies, while distribution channels were highly concentrated. However, with increasing internationalisation and the emergence of international competitors, there has been consolidation of the sector through vehicles such as mergers, acquisitions and strategic alliances, as SMEs struggled to compete with global multinational players (Lopez & Fan 2009, p.280). A core part of Zaras value proposition is that it is responsive to underlying social trends and technological developments the two lower quadrants supporting the PEST model. Accordingly, Inditex is structured as a highly vertically integrated business model, with each of their brand formats responsible for almost all of the primary activities that make up the value chain (Figure 4b) (Inditex Press Kit 2010, p.7). This enables each of the Inditex brand formats to closely control their value-creating activities from design to customer service. Rapidly changing customer preferences in a context of material consumerism and the convergence of high and low fashion are key social trends which Zara has successfully capitalised on by offering a wide variety of the latest styles in medium quality at affordable prices in what has been described as the democratisation of fashion (Lopez & Fan 2009 p.

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281). Lastly, this structure and service offering would not have been possible without the rapid advancement of information communications technology enabling Zara to develop the software infrastructure that underlies its store operations and logistics system. 3.2 Industry Forces and Value-Creation While the PEST and SWOT frameworks describe factors that have given rise to Zaras strategy, they do not provide dynamic insight into the competitive forces of a context which is far from static. Porters Five Forces and an industry Value Chain can be used to assess what determines profitability in a fast-moving environment such as the fashion industry. In Porters model, there are five competitive forces that can be analysed to understand the profit potential of an industry (Figure 5). Two of these represent threats along the value chain - the bargaining power of suppliers and the bargaining power of customers - such that the firm be seen as part of a value system that includes agents on both the supply and demand sides (Rumyantseva 2011) (Figure 4a). By leveraging both upstream and downstream information from the value chain, Zara has been able to improve the value system, and indeed the entire fashion house business model. The retail fashion industry is intensely competitive. With fierce rivalry between industry incumbents, fashion brands differentiate through market segmentation and out-compete other players on either price or quality. While there are some barriers to entry such as sourcing raw materials only available in the developing world, increased global competition and high labour costs in developed countries which introduce the threat of cheaper substitutes from developing countries, barriers to international entry in terms of Foreign Direct Investment have been relaxed or overcome over time. Indeed, Zara has pursued a market-based as opposed to hierarchical approach to governance using joint ventures in markets it is unfamiliar with and where there are significant cultural differences which make wholly owned subsidiaries risky. Yet, despite potential gross margins of up to 50-60% due to an abundance of cheap global labour, many firms end up heavily discounting unsold inventory and not realising the potential profits (Dutta 2002, p.1).

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Although they cannot control the entry of new players and substitutes in an already saturated market, on the horizontal axis, Zaras approach to the vertical aspects of the Five Forces dynamic has enabled it to gain greater control over its competitive performance. Indeed one criticism of the Five Forces model is that it only captures defensible positions against competitive forces, such that it does reflect the proactive pursuit of innovation, allowing firms to extract greater profitability from the market (Teece, Pisano & Shuen 1997, p. 510). However, by adopting a rapid approach to meeting consumer demands and closely managing their supply chain through backward vertical integration, Zara has been able to command bargaining power in both directions of the industry value chain. Although the advent of e-commerce has empowered the consumer through greater price transparency and the vast number of both online and offline brands, by controlling the availability of stock, Zara effectively lowers the risk of unsuccessful product lines but also undermines the buying power of the consumer by taking them by surprise and creating a sense of urgency which places a premium on its product. Indeed Zara, is now unravelling its own online stores. Despite competing in what has traditionally been described as a buyer-driven industry, and despite the threat of new entrants or incumbents who chose to outsource their production to cheaper offshore locations, Zara can be seen as part of an industrial cluster across Southern Europe which is able to generate incremental innovation by reinforcing its excellence in the textile manufacturing domain over time (Keenan, Saritas, & Kroener, 2004, p. 317; Rumanyetseva 2011). The cluster approach can be used to supplement traditional frameworks for analysing competitive context, as it is less linear and more dynamic in its approach to innovation. As Keenen et al. have argued, shifting to India or China alone may not be the most effective strategic decision, due to the need to address demand uncertainty and product proliferation, which require time-sensitive agility, when making sourcing decisions. Therefore geographical proximity, supported by a vast network of computerised infrastructure, enable Zara to produce much of its production internally without relinquishing power to a network of disparate and slow-moving suppliers (2004, p. 317). The caveat however, is that the region and Zara as a brand, must continuously invest in technology in order to retain this competitiveness.

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4.0 THE INTERNAL CAPABILITIES More recently business strategy literature has focused on combining both an industry and firm-level analysis in order to assess the competitiveness of a firm. This is largely due to the proposition that firms competitive environments are no longer seen as the sole determinants of their performance. In addition, it has been argued that competitive advantage can be derived from the configuration of internal resources and the way these are deployed in relation to the external competitive environment (Dunford 2011). It is necessary to combine both approaches in order to determine whether Zara will be able to maintain a sustainable competitive advantage over time. 4.1 A Resource-Based View According to Barney, resources can be defined as assets such as organisational processes, firm attributes, information, knowledge (1991, p. 101.) Although some firms have similar resources, it is access to or the development of an idiosyncratic bundle of resources which determines a firms competitive position within a particular context and whether it can sustain above average returns. For a firm to earn sustained above average returns, it has been suggested that these attributes must be idiosyncratic, that is heterogeneous, and secondly they need to be imperfectly mobile or difficult to mimic or steal (Barney 1991, p. 100). Figure 6 illustrates a resource-based view of Zara, which incorporates the Valuable, Rare, Inimitable and Organisation aspects that form the VRIO framework (Barney 1991, p. 105). It is important to understand Zaras internal capabilities because they are the cornerstones of its strategy; they both inform and are shaped by Zaras strategic objectives (Davies 2000, p.2). Moreover, internal capabilities are key factors that create and maintain the firms competitive advantage in an industry over time (Grant 2008, p.125). To clarify the difference between a firms resources and its capabilities, resources are what the firm has, and dynamic capabilities refer to how the firm deploys these available resources on a continuous basis (Grant 2008, p.130). Figure 6 extends this to include core competencies which recognise the ability of a firm to

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develop excellence in particular capability areas through their exploitation of unique resources (Barrie 2010). Figure 6: A Resource Based View

Heterogeneous Resources

Dynamic Capabilities Core Competencies

Susta

inable

Com

petit

ive A

dvan

tage

Trend spotting market research team - Feet on the Street (Dutta 2003, p.2).

Rapidly interpreting and reproducing current trends rather than setting them.

Large product range with 12,000 styles per year. More choice and less risk due to a greater chance of satisfying consumer tastes.

Captive production and distribution owned or closely controlled stages of the value chain (sub-contracted) instead of outsourced.

Lean production with rapid turnaround based on a low inventory rule.

Shorter lead times from design to production and sales (30 days compared to 4-12 months) (Dutta 2003, p.3).

Pre-ordered material stocks and highly automated garment assembly.

Agile response with on demand capacity.

Flexibility to adjust production throughout the season. Zara only discounts about 18% of inventory (Dutta 2002 p.4).

Centralised business functions at HQ.

Rapid and joint decision-making.

Increased control and flexibility to adjust to changing demands.

Prime real estate flagship stores located in central locations upon entry into a new market.

Marketing without the need for intensive investment in traditional advertising

Self-perpetuating brand reputation based on store atmosphere. There is a climate of scarcity and opportunity (Crawford, 2000 p. 281).

ICT staff equipped with handheld computer devices.

Store as a real-time communication tool.

Faster responsiveness and valuable feedback about actual needs rather than future forecasting.

RARE VALUABLE INIMITABLE ORGANISATION

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According to Grant, when considering a firms resources, tangible, intangible and human resources should be examined (2008, p.131). Tangible resources are physical resources, which appear on the companys balance sheet. One of Zaras most notable assets is its number of stores and their strategic location, whereby Zara has more than 1700 stores operating across 78 countries (Bridge 2011). Moreover, Zara has a relatively strong financial position which contributes to 80% of Inditex group sales (Dutta 2002, p.2). During the Global Financial Crisis, its sales revenue increased by 29% in the financial year of 2008-2009 (Barrie 2010), which is testament to the resilience of its business model such that unlike luxury fashion items they do not suffer the same degree of price elasticity and demand volatility during economic downturns. Zaras strong financial position is also revealed in Inditex latest annual report. In the report, Zaras performance is listed as a separate segment which has the highest sales revenues and amortization and depreciation expense (Inditex 2009) (Figure 7). Zara not only has the most active financial performance but also owns the greatest number of long-term assets. Furthermore, it has strategically narrowed the funding gap between when it receives payments from customers and when it pays its own suppliers, with about 10.7 days for the former and 94 days for the latter (Wharton University 2003). This demonstrates that despite concerns over the financial management of the company being closely tied to personal wealth of Chairman and founder Mr. Amancio Ortega Gaona, following its Initial Public Offering in 2001, the company has shown prudential financial management capabilities. Zaras robust financial position was demonstrated during the recent opening of its Sydney store which achieved a turnover of $2.7 million within the first two days (Barrie 2010). Additionally, it has been projected that the two stores opening in Australian this year will deliver an annual turnover of $50 million per annum (Lewington & Speranza 2011). Hence, there is no doubt that compared with its competitors in the industry, Zara has a substantial operating network as well as a strong and solid financial position. These conditions support the success of Zara not only in its home country but also worldwide.

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One of the most important intangible resources that Zara has is its brand equity, the brand image that is associated with the premium consumers are willing to pay for a product over other alternatives (Grant (2008, p.132). Zaras trusted brand image was reflected in the rapid depletion of 80% of store stock within three minutes of the store opening in Sydney in April, despite other fashion retailers facing dampened demand (Lewington & Speranza 2011). Indeed the seasonally adjusted figures for March indicate that retail spending fell 0.5% (ABS, 2011). This example also reflects Zaras competency in creating a distinct sense of anticipation among customers, many of whom have viewed the opening of the store in Australia as long overdue, responding eagerly when it finally opened its Pitt Street Mall flagship store. Another of Zaras major strengths is its rapid responsiveness systems. The company has developed information technology across its value chain which allows for the effective flow of information between store managers, designers and producers, fostering a short fashion cycle. Indeed as Barney confirms, an information processing system that is deeply embedded in a firms informal and formal management decision-making process may hold the potential of sustained competitive advantage (Barney 1991, p. 114). Zaras concept of rapidly responding to market has been made possible by their custom made software and logistics centre, which provides all stores on a global scale with new merchandise on a twice-weekly basis (Inditex, Annual Report, 2009, p. 17). Human resources can be analysed using a competency model which examines employees skills and attributes (Grant 2008, p.134). Zaras management team which is entirely based in Spain, is largely responsible for the brands strategic development worldwide. Moreover, Zara has skillful in-store sales assistants internationally, who must complete a two-week training program and meet certain socialisation requirements (Ghemwawat and Nueno 2006, p.18). The performance of employees is largely shaped by the structure and culture of the organisation (Grant 2008, p.134). In one case, 75% of Zaras staff were given opportunities to work in different chains across operating stores in seven European markets in September 2001 (Ghemwawat and Nueno 2006, p.8). This approach can be said to enhance the capabilities of the employees and enabling the firm strategy to have greater cohesion across market boundaries.

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4.2 Integrating the VRIO Framework Barneys VRIO framework has been widely used to assess firms internal capabilities. It queries four aspects of the resources resources, including how valuable, rare and inimitable they within the organisation (Self, Weiner and Dunlop, p.3). These were combined with the resource-based view in order to develop an integrated understanding of whether Zara is able to sustain its competitive advantage over time. Valuable resources support the creation and implementation of the firm strategies. According to Hill, Jones and Galvin (2004, p.131), a resources value can improve the firms efficiency which can be shown in the improvement of its value/cost ratio. Moreover, valuable resources allows firm to utilize its competitive advantage and counteract to the change of external environment (Hill, Jones and Galvin 2004, p.131). Resources derive value from their heterogeneity, when a resource such as its ICT system, its roaming research design team and its premium real estate differ from that of their competitors, this adds to their value. Recalling the resources mentioned above, it can be said that both Zaras tangible and intangible resources bring value to the company. The number and centrality of stores, combined with the skill of staff members creates value in terms of increased annual sales revenue. Other resources such as its captive production and distribution system or its assemblage infrastructure save costs. Therefore when deployed as part of the discrete aspects of the firm value chain, across a sequence of activities (as shown in Figure 4), these different resources cumulatively create greater added value than the sum of value from each individual activity (Rumyantseva 2011). According to Hill, Jones and Galvin (2004, p.131), resources are rare if they are owned by a small number of competitors or only by one company. Resource rarity is essential because if those resources are owned by many companies, their value and ability to develop a sustainable competitive advantage are diminished. While Zara has a number of competitors, its main rivals are Gap, H&M and Benetton. Even though the three main competitors have a comparable numbers of stores across countries, their ability to control their supply chains can be said to be far less efficient than

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Zaras. According to Ghemwawat and Nueno (2006, p.4), all three of these have a narrower vertical scope. Indeed, although Gap operates fewer stores than Zara, it is has experienced greater challenges in pricing pressures, market diffusion and the lack of a distinctive brand image (Ghemwawat and Nueno 2006, p.5). Even though its entry mode and product range may differ from market to market, through its ability to develop tightly controlled economies of scale using robust supply chain logistics worldwide, it has been able to retain a distinct brand equity on the basis of its flexibility and responsiveness to consumer demands. Importantly, it is not enough to merely have valuable and scarce resourcee if those resources are easy to imitate (Hill, Jones and Galvin 2004, p.131). Hill et al. note that inimitability is the degree of how difficult and expensive it is for other firms to copy resources. Although Zara may share some common tangible and intangible resources with its competitors it is the configuration and mutual interconnectedness of these across its entire value chain which set Zara apart. While it may be difficult for incumbents to catch up due to causal ambiguity and path dependency (Lippman, and Rumelt 1982, p.420) of developing a VRIO-consistent set of resources and capabilities as core competencies, this does not rule out the threat of future entrants who can reproduce a similar business model given the rapid pace of technological change and the vast volume of business literature analysing Zara business model. Certainly a vital aspect that is difficult to imitate is the reputation that Zara has developed over the last few decades; its capability to excite and surprise consumers by creating a climate of scarcity and opportunity (Crawford, 2000 p. 281). According to ORiordan (2006), the organization factor in VRIO framework refers to the skill of management team in creating a culture that allow all of the above valuable resources and capabilities to be developed and exploited. The ability to create the climate of scarcity and opportunity at the front end, derives from the back-end proximity of the managerial team. By centralising its primary business functions at its headquarters in Spain it has developed the capability of rapid and joint decision-making which ensures increased control and flexibility to adjust to changing demands, thus completing a fluid value chain. The Activity System shown in Figure 8 is another way of representing the value created through Zaras exploitation of internal capabilities, demonstrating the strongly interconnected nature of its internal

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organisation. With its main business system centred around Design, Sourcing and Manufacturing, Distribution and Retailing, these activities interact in a circular system, reinforced by supporting activities denoted by the lighter circles. By examining the resource-based view of the firm and supplementing it with the VRIO framework it is possible to construct a sustainable advantage scorecard. As we can see from the matrix in Figure 9, Zara appears to fulfil the VRIO requirements, at least in the short-to-medium term. Whether this can be maintained in the long-term will depend on the sustainability of its strategy over time in response to a changing environment. 5.0 ZARAS STRATEGY The most fundamental question surrounding firm strategy is whether the separate elements are internally consistent (Hambrick and Fredrickson 2001, p. 54) (Figure 10). The diamond developed by Hambrick and Fredrickson serves as a valuable tool for envisioning Zaras strategy as an integrated, mutually reinforcing set of choices, that is, it is more than simply choices on each of the five fronts identified (Arenas, Staging, Vehicles, Differentiators and Economic Logic), but rather the greater value produced by their cohesive combination. Although it appeals to customers of varied gender and age groups, generally speaking, Zaras arena is the savvy, middle-class consumer. A consumer that cannot afford luxury fashion items, but is still image-conscious. Geographically, the scope of Zaras arena is global, however the staging of its internationalisation has meant that it has taken a gradual approach to global market entry. It has also adopted a different approach in markets outside of Spain where it typically positions itself as a higher cost brand, whereas within Spain it is perceived as being at the lower cost range. Pricing strategies have predominantly been market based, where prices in Spain are generally 40% higher in Northern European, 70% higher in American and 100% higher in Japan (Ghemwawat and Nueno 2006, p.18). Indeed Zara, budgets for the cost of the material, production and supplies by fixing these to the target price and the profit margin being pursued by the management department (Lopez & Fan 2009, p 281).

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Throughout its internationalisation process Zara has used different vehicles for entry to different markets. As a whole, Inditex has pursued a multi-brand strategy by developing a portfolio through acquisition (Lopez & Fan 2009 p. 283). Whereas Zara, the brand, typically uses wholly owned subsidiaries in markets that are high growth and low risk, joint ventures where there are local market idiosyncracies, and lastly franchising in arenas that are high-risk and culturally different (2009 p.286). The franchise model is integrated with own-managed stores in terms of activities such as human resources, training, window- dressing, interior design and logistical optimisation to ensure uniformity in management criteria and a global image in the eyes of the customer around the world (Inditex Press Kit 2010, p.6). Therefore ensuring internal and external consistency of the Zara brand. Although Zara uses different vehicles to enter markets depending on their risk, there are certain elements of the firm value chain which are replicated across markets which allows for a robust economic logic on the basis of efficiencies. Economies of scale occur on both global and individual-store levels in terms of primary and supporting value-chain activities as we saw with Figure 4. The staging of the firm can be described as an initailly cautious expasion (1989-1996) followed later by a more aggressive roll-out as the brand gains recognition worldwide (1997-2011). Overall this stage model has been used by Zara to mitigate the risks associated with internationalisation (Lopez & Fan 2009, p 28), as it has been able to enter geographically or culturally close markets first before exploiting opportunities in more distant markets. Within markets, Zara has used an oil stain approach, opening one flagship store in a prime location of the market at a time to gauge information (Castellano 2002). Zaras appeal is inter-generational. Dutta observed that at while the middle aged mother buys clothes at the Zara chain because they are cheap while her daughter aged in the mid-20s buys Zara clothing because it is fashionable (2002, p.1). Very few firms can simultaneously appeal to two target customers within their arena, which have such a wide variance in tastes. Indeed, its dual strategy of producing fashion at a medium quality at affordable prices (Lopez & Fan 2009 p. 281) almost seems counter intuitive, given warnings about companies who try to simultaneously

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outdistance competitors on too broad an array of differentiators - lower price, better service, superior styling (2001, p.52). However it is this ambidexterity, which lies at the heart of Zaras strategic intent and differentiates it. The balance of reasonable quality, affordable and savvy designs is combined with the thrill of scarcity which allows Zara shoppers to differentiate themselves from other consumers as the brands product line constantly changes. In terms of the diamond developed by Hambrick and Fredrickson, Zaras other differentiators can be thought of as its core competencies, coinciding with the Resource-Based Firm View and the VRIO framework, and reaffirming the interrelated nature of business strategy frameworks and the need to adopt an integrated view. 6.0 THE SUCCESS OF THE STRATEGY The success of Zaras strategy depends heavily on extracting the most out of its internal capabilities as an organisation. However strategy, without successful implementation is of little value. Even a winning strategy on paper, may fail to produce a sustainable competitive advantage over time in practice. 6.1 Strategic Advantages and Benefits Zara has successfully managed to sustain its growth, even as it grew rapidly over the last decade. This is due to its policy of investing an adequate amount of resources in IT infrastructure. Its success will depend on continuinig investment in this ciritical resource. The ownership and control of its production facilities has furthermore given Zara its record lead times and has contributed to increased revenues. This has given Zara significantly more flexibility and control than its competitors. The human resources strategy of Zara has also been to an extent highly successful, extracting the most productive output from its labour force, consisting of designers, sales managers and factory workers. The design and product development has a very productive output with over 1,000 new styles managed monthly. This is an extraordinary amount for a fashion business and has played a large part in ensuring

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that the products in the store are different every few weeks. The team employs over 200 staff with each person producing 60 styles per year on average. Though it spends 17-20 times more on workers relative to factories in Asia, it has still managed to stay cost-effective, (Dutta, 2002). Zaras market research strategy has leveraged itself in many ways to allow itself to receive daily feedback and sales reports. The head office is well informed as a result of the market dynamics and any trends. Following this, orders are placed by sales and store managers in store via handheld computers to the headquarters. Ideas for fabrics, cuts and products can also be communicated to the headquarters from stores. This system of reporting when compared with traditional sales reports give a more accurate and dynamic picture of the market. Zaras industry standard supply chain management has also played a crucial role in its success and is considered to be leading in terms of agility. The idea of an agile supply-chain is that, instead of trying to improve the quality of the forecast, the focus is on concentrating on the management of the Time-to-market, Time-to-serve and Time-to-react lead-times (Cristopher, Lowson, 2004, p.2). Time-to-market describes the length of time it take a business to translate a recognized trend into a product. Time-to-serve describes the delivery-time of a product and Time-to-react is the time it takes to adjust to the demand of a product. (Cristopher, Lowson, 2004, p. 2). An agile supply chain has certain characteristics, which ensure that it can react rapidly to change. In Zaras case, due to its vertical intergration and supply-chain management those lead-times are very short (Inditex, Annual Report, 2009, p. 16) which enables them to rapidly react to changes. The table below shows Zaras business strategy in comparison with its competitors as evidence of the success of its strategy.

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Business function Zara Gap H&M

Global expansion Stores in 59 countries Stores in 5 countries

22 countries

Business model High level of vertical integration

Partial vertical integration

Partial vertical integration

Production Self-owned Outsourced Outsourced

Marketing Uses its stores as the only source of marketing

3-3.5% of annual turnover spent

4% spent in advertising tools

Another indicator of the success of Zaras strategy is its corporate social responsibility approach (Inditex Annual Report, 2009, p. 27). According to the UGT Business Social Responsibility Observatory, of the companies quoted on the Ibex 35 Index, Inditex along with Red Electrica have the best practices with regard to corporate social responsibility. For the fourth year running, Inditex appears on the world-wide list of companies showing most concern for the environment. This, according to the Global 100 Most Sustainable Corporations in the World prepared by the Canadian Corporate Knights magazine. 6.2 Strategic Drawbacks and limitations The cost of maintaining several brands and the risk of cannibalisation are the major drawbacks of the groups strategy. Inditex has tackled cannibalisation by differentiating the brands mainly through the product, target market, presentation and retail image (Fabrega, 2004; Lopez & Fan 2009 p. 283). However as all Inditex Chains have a similar target market, there is a remaining threat of other Inditex stores cannibalising Zaras sales (Craig, Jones, 2004, p.7). Looking at Inditex as an entity, its success largely depends on Zaras performance, as its sales contribution is 63.8 % (Inditex, Annual report, 2009, p.21). Taking into account the fact that Inditex consists of eight chains, this seems to indicate that

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Inditex is putting all of their eggs into one basket (Craig, Jones, 2004, p.6). This can be seen as a problem, as the cost of having so many different chains is not reflected in its profit. Zaras vertical integration, which is an important part of its business model has the drawback of making it difficult to acquire economies of scale, which leads to higher production costs than its competitors (Craig, Jones, 2004, p.6). Furthermore Zara incurs higher costs than its competitors in research, development and general production costs (Craig, Jones, 2004, p.6) due to its rapid product changeover. This is a drawback that has to be accepted, as it can only be prevented by changing the - otherwise highly competitive - business model. Zara focuses on Spain as its centralised distribution centre has many advantages in terms of rapidly responding to market demand. However, if Zara wishes to pursue its strategy of focussing on Asia as a geographical area for growth (Inditex, Annual Report, 2009, p.50), being solely located in Spain might prove to be a disadvantage in terms of managing their supply-chain. Furthermore, as Asia is growing to be the biggest supplier of fashion products after Europe (Inditex, Annual Report, 2009, p.74), part of the stock actually travels the distance Asia-Europe twice. In several studies (Ghemwawat, Nueno, 2006: Craig, Jones, 2004) H&M and Gap were defined as key competitors of Zara on a global scale. Especially H&M, which has a similar concept as Zara, as its business concept is to offer fashion and quality at the best price(H&M, Annual Report, 2009, p. 11) but offers its styles on a cheaper rate while incurring lower costs (Craig, Jones, 2004, p. 6) can be seen as a major threat. Furthermore, like Inditex, H&M is expanding globally on a fast rate and has invested heavily into a rapid expansion. Zara, with a number of net openings of 343, compared to H&Ms 250 and a percentage of sales of 22.5 % in Non-European countries, compared to .H&Ms 12.5 %, seems to have a more aggressive execution of this strategy but this can also have draw-backs in the long-run. In contrast to that Gap has decreased its total number of stores by 54 and concentrates mainly on the US market. This means that as of now, H&M seems to be Inditexs main competitor.

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7.0 RECOMMENDATIONS There is no doubt that Zara has certainly been successful in establishing itself as a leading global retailer. However, there are still certain areas in which the company can improve and make the brand formidable against any changes in the business environment. In order for Zara to sustain its success, it has to constantly look at pursuing new opportunities just like it did by entering the US market. Zaras focus on Spain as its centralised distribution centre has many advantages in terms of rapidly responding to market demand. However, if Inditex wishes to pursue its strategy of focusing on Asia or the US as a geographical area for growth (Inditex, Annual Report, 2009, p.50), being solely located in Spain might prove to be a disadvantage in terms of managing their supply-chain. Furthermore, as Asia is growing to be its biggest supplier of fashion products after Europe (Inditex, Annual Report, 2009, p.74), part of the stock actually travels the distance Asia-Europe twice. One recommendation would therefore be to assess the possibilities of reducing its over dependence on its centralized distribution centre in Spain by developing a secondary distribution centre. This would not only decrease costs of shipping and logistics, but also ensure that goods are delivered at the fastest pace. Apart from the possibility of developing such a centre in Asia, they could also possibly expand one of their already existing distribution facilities in South America. This could allow the company to enhance its interpretation of the American market. The additional investment would also channel funds into advertisement in the American market. E-commerce is also another avenue in which Zara could exploit the market demand for fashionable apparel. Zara could spend more of its resources on developing a sophisticated online store. There are impediments to this due to the ever-changing nature of its inventory. Zara also needs to diversity its stock geographically to a greater extent so that shopper traffic is increased and cannibalization of its other stores does not occur. Furthermore Inditex reliance on Zara might prove to be a problem as its success as an entity largely depends on Zaras performance. Using Zaras brand image and

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performance to grow the other chains on a national and international scale, would add diversification, thus making Inditex less dependent on Zara. Or, if that proves to be impossible, reducing the number of chains would free capital to invest in the remaining chains and ensure their financial success. Even though Zaras business model is not the most cost-effective model possible in the global fashion apparel industry, a change of it is not recommended as it would impede other competitive advantages. Instead it would be recommended to invest in constant innovation of its production techniques to make them more cost-effective. Zara should also be wary of its competitors springing into the market and their strategy. This is because, as Zaras business model and success has become increasingly popular that there might be chances that there would be rival firms that might enter with an identical business model and products. Zara would have challenges in meeting its fast timings for the delivery of new trends into its stores if the expansion of stores occurs at a fast pace, so the growth rate has to be carefully planned so that it can be supported. In conclusion, Zara still has room to exploit its competitive advantage further by the above-mentioned recommendations. This will also enhance its ability to face future challenges of the clothing industry.

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REFERENCES 8.0 Australian Bureau of Statistics (2011), March Key Figures, 8501.0 - Retail Trade, Australia, Mar 2011 References, accessed 4th May 2011, available: Barney, J.B., (1991) Firm Resources and Sustained Competitive Advantage, Journal of Management: 17 (1), pp.99-120, accessed 24th April 2011, available: Barrie, L. (12 October 2010), Is fast fashion killing fashion?, just-style, accessed 24th April 2011, available: Bridge, C. (19 April, 2011), First peek at Zara, accessed 24th April 2011, Octomedia, available: Castellano, J.M. (2002), El proceso de internacionalizacion de Inditex, Informacion Comercial Espan ola, Vol. 799, pp. 209-17. Craig, A., Jones, C, and Nieto, M. (2004), Zara: Fashion Follower, Industry Leader, accessed 19th April 2011, available: Crawford, L. (2000), Management fashion retailing, Financial Times, 26 September. Davies, P. (April, 2000), Accessing Internal Capabilities, Management Quarterly: Part 7. Dutta D. 2002, Retail @ the Speed of Fashion Part I, Third Eyesight, accessed 5th April 2011, available: Dutta D. 2003, Retail @ the Speed of Fashion Part II, Third Eyesight, accessed 5th April 2011, available: Dunford, R. 2011, Strategising on the basis of internal capabilities, Strategy and Entrepreneurship at The University of Sydney, 14 March 2011 Ghemwawat, P. and Nueno, J. L. (21 December, 2006), Zara: Fast Fashion, Harvard Business School. Girotra, K, and Netessine, S 2011, How to build Risk into Your Business Model: Smart Companies design their innovations around managing risk, Harvard Business Review: pp.101-104. Grant, R. M. (2008), Analysing resources and capabilities, Contemporary Strategy Analysis, Malden, MA: Blackwell, Ch 5. Grupo Inditex, Annual Report 2009, accessed 20th April 2011, available: Grupo Inditex, Financial data, accessed 02nd of May 2011, available: http://www.inditex.com/en/shareholders_and_investors/investor_relations/financial_data Hambrick, D.C. and Frederickson, J.W. 2001, Are you sure you have a strategy? Academy of Management Executive: 15(4), pp.48-59.

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Harac, O. (20 January 2011), What has Zara done to become so successful?, Scribd, accessed 25th April 2011, available: Hill, C.W.L; Jones, G. R. and Galvin, P. (2004), Internal Analysis: resources, capabilities, competencies and competitive advantage, Brisbane: John Wiley & Sons Australia, pp.108-145. [chapter four] H&M, Annual Report, 2009, accessed 24th of April, 2001, available: Inditex 2010, Press Kit, accessed 15th April 2011, available: Lewington, P. & Speranza, L. (24 April, 2011), Zara fever: Never seen anything like this, news.com.au, accessed 25th April 2011, available: Lippman, S.A. and Rumelt, D.P. (1982), Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency Under Competition, The Bell Journal of Economics; 13, (2), pp. 418438, accessed 20 April 2011, available: Lopez C. and Fan Y. 2009, Internationalisation of the Spanish fashion brand Zara, Journal of Fashion Marketing and Management: 13(2) pp. 279-296, accessed 9th April 2011, available: Keenan, M., Saritas, O., & Kroener, I. (2004), A dying industry - or not? the future of the European textiles and clothing industry, Emerald Group Publishing, Limited, accessed 3rd May 2011, available: Martin, C., Lowson, R. and Peck, H. 2004, Creating agile supply chains in the fashion industry, International Journal of Retail&Distribution Management, 8(9), p.367. ORiordan, C. (2006), Using the VRIO framework in practicing firms taking the resource-based view (RBV), Accountancy Ireland, Jun2006, Vol. 38 Issue 3, p42-43, 2p Rumyantseva, M. 2011, The environmental context of strategy, distributed in Strategy and Entrepreneurship at The University of Sydney, 21 March 2011. Self, D. R.; Weiner, E. J. and Dunlop, K. W., Predicting Relative Competitive Position of an Organisation, Auburn University Montgomery. Teece, D., G. Pisano and A. Shuen, 1997, Dynamic Capabilities and Strategic Management, Strategic Management Journal: 18(7), pp.509-533, accessed 24th April 2011, available:

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The Gap, Annual report, 2009, Acessed 2nd of May 2011, available: http://investors.gapinc.com/phoenix.zhtml?c=111302&p=irol-reportsAnnual Wharton School 2003,Fashion Chain Zara Reclaims the Glory of Spain, accessed 4th May 2011, available: can> BIBLIOGRAPHY 9.0 Barney, J. & Hesterley, (2006) Strategic Management and Sustaining Competitive Advantage, Upper Saddle River, NJ: Pearson. Grant, R. M. (2008) Contemporary Strategy Analysis, 6th ed., Malden, MA: Blackwell. Hill, W. L. & Jones, G. R. (2007) Strategic Management: An Integrated Approach, 7th ed., Boston: Houghton Miflin. Zander, U. and B. Kogut (1995), 'Knowledge and the speed of the transfer and imitation of organizational capabilities: An empirical test', Organization Science, 6(1). Prahalad, C. K. and G. Hamel (1990). 'The core competence of the corporation', Harvard Business Review, 68(3), pp. 79-91. Williamson, 0. E. (1996), The Mechanisms of Governance, Oxford University Press, New York.

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APPENDIX 10.0 Figure 1: Organisational Structure of Inditex

Figure 2: PEST Analysis of Zara

Inditex

Zara Pull&Bear Massimo Dutti Bershka Oysho Zara Home Uterque Stradivarius

Political

Liberalisation of world trade

Threat of low labour costs in Asia

Economy

Fragmented textiles industry: large

number of small and medium-size companies and highly concentrated

distribution channels

Increasing internalisation and

consolidation

Technology

Rapid advancement of information communications technology in gloabl tracking and logistics software and personal copmuting hardware

Social

Rapidly changing consumers preferences

Convergence of high and low fashion: "democratisation" of fashion

Zara

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Figure 3: SWOT Framework

Figure 4) a. Extended Industry Value Chain (Rumyantseva 2011)

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Figure 4) b: Porters Firm Value (Grant 2008, p.136)

Figure 5: Porters Five Forces Figure 5: Porters Five Forces

Susta

inable

Co

mpeti

tive

Adva

ntag

e

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Figure 7: Annual Report Extract

Figure 8: The Activity Stream

Figure 11: Five major elements of strategy (Hambrick and Fredrickson 2001, p.51)

Figure 9: The VRIO matrix (Self, Weiner and Dunlop, p.3)

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Figure 9: (Self, Weiner and Dunlop, p.3)

Figure 10: The Hambrick and Fredrickson Diamond (2001)