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Zara – What did we learn? Essay Sample

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Zara – What did we learn? Essay Sample

The case examines Zara, or its parent Inditex, that has established a super quick response value chain system. Traditional apparel value chains take months before a fashion season begins, but Zara is able to observe what is hot (and what is not selling) and responds quickly on the up-to-date fashion trends. As a result of Zara’s outstanding results, Inditex has expanded into 40 countries by 2001.

• A quick comparison (see Class PowerPoints for financial comparison) between Inditex and its other main competitors in the world indicates the following: o excellent operating margin
o excellent working capital efficiency
o high fixed capital intensity

• Note: The large drop in net margin from operating margin is mainly due to tax and depreciation. The main reason, therefore, for the big drop in Inditex’s net margin is depreciation expense, reflecting its high PPE/sales. This is an issue we should analyze (its potential concern). Another issue is its low working capital/sales (reminder: working capital=current assets-current liabilities). As an analyst, we also should analyze (its potential advantage). Understanding these issues will help understand the strategy of Inditex.

• Zara’s value chain is a classic example of a downstream (buyer) driven value chain, instead of an upstream (production) driven value chain. It is much less concerned with production efficiency than with customer responsiveness. By fully, tightly integrating its upstream and downstream value chains, Zara pushes “quick response” to the maximum. We can safely conclude that Zara’s core competence is “fast” response. This should be understood as respond fast and respond correctly.

• By analyzing Zara’s value chain, we can see that its use of fixed capital in upstream value chain, though increasing its PPE and hence depreciation, drives down substantially its working capital (plus lower markdown, advertising, lower inventory, etc.). As such, its cost structure is not as high as it seems, but at the same time gives them tremendous advantages in fast response.

• When we analyze a company’s core competence, we should understand both what it can do and what it cannot do. Its core competence may not travel easily internationally given its concentration in one location for fast response. Inditex’s upstream localization downstream globalization may present problems for them down the road. Although a firm may change its core competence overseas, but would it have a competitive advantage when compared to other players that are stronger in those aspects (e.g., global outsourcing)?

• Inditex possibly have three strategic alternatives (that I can think of…) in terms of its strategy down the road.

o More extensive sourcing from overseas. But changing a company’s competitive advantage is easier said than done; remember, we always have to remember we are referring to “competitive” – “Relative to our competitors, do you have an advantage in that aspect?” o Replicate its integrated value chain systems in multiple regions. This is a good strategy, but the downside is too costly, especially its PPE is fairly high (and high risk as it will take quite some time to reach critical mass to justify that level of capital investment. It is not Spain several decades ago when there is no GAP, H&M, etc. Also, the tying up fixed capital may not be the best use of assets. If the stores are not in book value but in current market value, PPE/sales will increase sky-high and ROA will deteriorate dramatically. o I prefer the last strategic alternative: deepening market penetration in regional (Europe) internationalization. There are ample opportunities to grow their business using their existing models. When Italy only has three Inditex stores (and no Zara store), Inditex may not need to travel too far.

In closing, I think this is a fabulous case to learn firm analysis. It is not an easy case but it is rich one. I hope you enjoyed it (I did).

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