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Due date 29. 11. 2010 Business Quality Management Strategic and Operational Performance Assessment at Inditex Group Statescu Victor ([email protected] com) Professor: Purcarea Irina Teodorescu Florian Andrei ([email protected] com) Vulpescu Victor-Emanuel ([email protected] com) Tanase Valentin-Stefan (valentin. tanase. [email protected] com) Group 137 FABIZ English 3rd year Strategic and Operational Performance Assessment at Inditex Group 1. )Introduction

The Inditex Group (Spanish: Industrias de Diseno Textil Sociedad Anonima) is a large Spanish corporation and one of the world largest fashion groups. The Inditex Group is made up of almost a hundred companies dealing with activities related to textile design, production and distribution. Amancio Ortega Gaona is the founder and current chairman of Inditex. He is also Spain’s richest man. Inditex runs over 4500 stores worlwide for different brands:

• Zara International (833 stores) • Pull and Bear (423) • Massimo Dutti (360) • Bershka (354) • Stradivarius (257) • Oysho (146) • Zara Home (105) Lefties () In Romania, Inditex is in a continuous development and has at this time 37 stores in the most important cities of Romania . Most stores are corporate-owned since franchises are only conceded in areas where corporate properties can not be bought (as in the Middle East). The group designs and manufactures almost everything by itself, and new designs are dispatched twice a week to Zara stores. History The first Zara shop opened its doors in 1975 in A Coruna (Galicia Spain), the city which saw the Group’s early beginnings and which is now home to its central offices.

Today Inditex’s shops can be seen in places like New York’s Fifth Avenue, Paris’ Champs-Elysees, London’s Regent Street or Tokyo’s Shibuya Shopping Centre. At Zara, design is conceived as a process that is closely linked to the public. Information from our stores is constantly transmitted to a design team made up of over 200 professionals, informing them of our customers’ needs and concerns. Zara has stores specialized in junior fashion called Kiddy’s Class. Theses stores are in Spain, Portugal, France, Italy and Greece. Zara is in step with society, dressing the ideas, trends and tastes that society itself has developed.

That is the key to its success among people, cultures and generations that, despite their differences, all share a special feeling for fashion. Question 1 – Zara’s Business Model and Competitive Analysis Zara, the most profitable brand of Inditex SA, the Spanish clothing retail group, opened its first store in 1975 in La Coruna, Spain; a city which eventually became the central headquarters for Zara’s global operations. Since then they have expanded operations into 45 countries with 531 stores located in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa.

Throughout this expansion Zara has remained focused on its core fashion philosophy that creativity and quality design together with a rapid response to market demands will yield profitable results. 2. )Process Management and Business Model The Inditex business model is characterized by a high degree of vertical integration compared to other models developed by our international competitors. It covers all phases of the fashion process: design, manufacture, logistics and distribution to its own managed stores. It has a flexible structure and a strong customer focus in all its business areas.

The key element in the organization is the store, a carefully designed space conceived to make customers comfortable as they discover fashion concepts. It is also where we obtain the information required to adapt the offer to meet customer demands. The key to this model is the ability to adapt the offer to customer desires in the shortest time possible. For Inditex, time is the main factor to be considered, above and beyond production costs. Vertical integration enables us to shorten turnaround times and achieve greater flexibility, reducing stock to a minimum and diminishing fashion risk to the greatest possible extent.

The business model can be broken in the following: design process, manufacturing process, logistics process, distribution process. [pic] Design Process : The success of Inditex’s collections lies in the ability to recognize and assimilate the continuous changes in fashion, constantly designing new models that respond to customer desires. Inditex uses its flexible business model to adapt to changes occurring during a season, reacting to them by bringing new products to the stores in the shortest possible time. The models for each season –over 30,000 last year- are developed in their entirety by the creative teams of the different chains.

Over 300 designers -200 for Zara alone- take their main inspiration from both the prevailing trends in the fashion market and the customers themselves, through information received from the stores. Manufacturing process: A significant proportion of production takes place in the Group’s own factories, which mainly manufacture the most fashionable garments. The Group takes direct control of fabric supply, marking and cutting and the final finishing of garments, while subcontracting the garment making stage to specialist firms located predominantly in the North-West of the Iberian peninsula.

The Group’s external suppliers, a high percentage of which are European, generally receive the fabric and other elements necessary for making the clothing from Inditex. Logistics process: All production, regardless of its origin, is received at the logistical centres for each chain, from where it is distributed simultaneously to all the stores worldwide on a highly frequent and constant basis. The distribution takes place twice a week and each delivery always includes new models, so that the stores are constantly refreshing their offer.

The logistics system, based on software designed by the company’s own teams, means that the time between receiving an order at the distribution centre to the delivery of the goods in the store is on average 24 hours for European stores and a maximum of 48 hours for American or Asian stores. Distribution process: The point of sale is not the end of the process but rather its restart, as the stores act as market information gathering terminals, providing feedback to the design teams and reporting the trends demanded by customers.

Both the interior and exterior of the store design are given the highest priority. Here, the shop windows play a major role, acting as authentic advertising for our chains in the world’s main shopping streets. As for the interior design, the aim is to create a well-lit space where the clothes take pride of place, eliminating all barriers between the garments and the customers. The main development strategy for the Inditex sales formats is the opening of stores managed by companies in which Inditex is the sole or majority shareholder.

In smaller or culturally different markets, the Group has extended the store network through franchise agreements with leading local retail companies. At the end of the FY2009, there were 624 franchised stores out of a total of 4,607 stores. The main characteristic of the Inditex franchising model is the total integration of franchised stores with own managed stores in terms of product, human resources, training, window dressing, interior design, logistical optimization and so on. This ensures uniformity in store management criteria and a global image in the eyes of customer around the world.

Product Development Zara is the flagship of Inditex Group. Zara’s unique approach to product development is instrumental to their success. Zara gives store managers significant autonomy in both determining the products to display in their stores and which to place on sale, and relaying market research and store trends back to their headquarters in La Coruna. At headquarters there are teams of commercials who take this information into account to design and effectively plan and produce all of Zara’s products.

Zara maintains a design team of 200 people, all of which produce approximately 12,000 new styles per year for Zara. The process of obtaining market information and relaying it to design and production teams expedites product development by shortening the throughput time of a product to 3-4 weeks from design to distribution. This process is very different from its competitors Zara’s speed to market in product development exceeds the capabilities of its competitors. This in itself provides additional value to stakeholders, customers, and stores in producing quality clothing at affordable prices .

Zara’s product development capabilities are essential to Zara’s business strategy and future success. Advertising and Marketing Zara’s unique approach to advertising and marketing is an additional factor within their business model that adds to their success. Zara spends 0. 3% of total revenues on advertising and marketing. This is significantly less then their competitors who on average spend 3-4% of their total revenues on similar expenditures. Hence, Zara maintains a cost advantage to their competitors in marketing activities.

In order to effectively complete with their peers Zara uses location, store layout, and product life cycles to act as their marketing tool to consumers. For instance, Zara strategically locates all of their stores in prime retail districts for visibility marketing. Additionally, because of the product development cycles mentioned earlier, customers are trained to visit Zara stores often because new items are presented weekly and are often not restocked. This feeling of scarcity encourages customers to come to the stores and buy frequently.

Lastly, in order to keep the stores looking fresh and trendy; Zara invests heavily in their store layouts. They have a testing facility nearby their headquarters in Spain where different types of store layouts are tested. Each Zara store is remodeled every 5 years in order to keep up with current trends. Zara does not invest heavily in direct marketing, though their efforts in image/brand marketing do a great deal to attract a loyal customer base. Their cost advantage and ability to maintain brand recognition and customer loyalty are essential elements of Zara’s capabilities that build value in the company. . )Strategic and Operational Level Assesment Inditex analyses the following items in assessing performance and determining future risks: At a strategic level: Business environment, Technology and information systems, Governance and management. 1. Business environment These are risks stemming from external factors, connected with the activity of the Group. This category encompasses the risks regarding the difficulty in adjusting to the environment or market in which the Company operates.

This is inherent in the fashion retail business and consists in the eventual incapacity of the Group to follow and offer a response to the evolutions of its target market (demographic changes, changes in the consumption habit, lack of response regarding new business opportunities, etc. ,). In order to reduce the exposure to risk in this area, the Group carries out a feasibility research for each new market, business line or store, considering pessimistic scenarios, and subsequently monitors whether the expected figures are met or not.

Moreover, the business model of the Group is not only based upon the management of new openings, but also on improvements in the efficiency and effectiveness of the markets, business lines and stores already existing, so that the growth achieved via expansion and diversification, be complemented by the organic growth of the current business. In line with the foregoing, the expansion policy and the multi-brand format of the Group represent a way to diversify this risk, which downplays the global exposure to this risk of the market. 2. Technology and information systems

The risks hereunder covered are those linked to the technical infrastructure and the efficient management of information and of the computing and robotic networks. The risks connected with the physical and logical safety of the systems are also included. To reduce exposure to this type of risks, the Systems Department permanently monitors the streamlining and coherence of the systems, directed at minimizing the number of software packages, maximising training of all users involved in handling these and guaranteeing the security and stability required for the continuous development of the activities of the Group.

Moreover, there are contingency systems in the event of computer stoppage, with double equipment and data storage in a different location to the main Centre, which would reduce the consequences of a breakdown or stoppage. 3. Governance and management This category includes the risk of not having the appropriate management of the Group which might entail a breach of the Corporate Governance and transparency standards.

At the present time, transparency and good governance obligations for listed companies are duly governed by the recommendations of several institutions and by a specific legal framework (Financial Act, Transparency Act, Order ECO/3722/2003 and Circular 1/2004 of CNMV. ) Lack of information or wrong information on sensitive issues, such as transactions with related parties or the remuneration of officials would harm the good image or the reputation of the Group, being therefore those issues subject to the control of the Audit and Control Committee and of the Nomination and Remuneration Committee, exclusively comprised of independent directors.

There are also Internal Regulations of Conduct regarding Transactions in Securities and a body designated as the Code Compliance Supervisory Board which, according to Article 10. 2. 2 of said Regulations, is charged with observing and enforcing the rules of conduct of the Securities Markets and the rules of the IRC itself (Internal Regulations of Conduct), its procedures and further additional regulations, whether present or future.

At an operational level: Regulations, Financial, Information for the decision making. 1. Regulations Those are risks regarding the enforcement of the various laws and regulations to which the Group is exposed in the different countries where it is present In order to provide a better management of the risks included in this category, they have been classified in accordance with their nature, in: risks regarding the commercial, tax, custom, labor regulations and others.

In order to reduce the exposure to risk in this area and secure the appropriate enforcement of the prevailing local legislation in force, the corporate Legal, Tax and Labor Departments work in coordination with the various people responsible in each country or geographic zone and with the legal external advisors in same.

Additionally, the Corporate Social Responsibility Department regularly carries out social audits together with teams of independent professionals, with a great command of the language as well as of the local labor and environmental legislation, to ensure the appropriate respect for both the labor requirements covered by the International Labor Organization (ILO) Treaties and for the Human Rights covered in the major Treaties that govern this subject. 2. Financial The activities of the Group are subject to various financial risks.

Included in this category are risks regarding the improper management of exchange rates, cash management and sundry, such as credit or interest rates risks. The Group operates globally and as a result of using currencies other than the euro in its business transactions, in recognized assets and liabilities and net investment in ventures outside the European Monetary Union, the Group faces an exchange rate risk which must be covered in a sufficient and systematic manner by seeking to minimize the economic losses and the volatility of financial statements.

In case of specific needs for funding, whether in euros or in other currencies, the Group may resort to loan agreements, or any other financial instrument. Interest rate fluctuations affect the fair value of assets and liabilities which accrue a fixed rate of interest, as well as future cash flows from assets and liabilities indexed to a variable interest rate. The Group does not have any financial assets or liabilities at fair value through profit or loss or interest-rate financial derivatives.

Nor are there any interest rate derivatives. Consequently, any changes in interest rates at year end will not significantly affect consolidated profits. Although in relative terms none of those risks are critical for the Organization, all of them are systematically managed by the Financial Department. 3. Information for the decision making The risks hereunder included are those linked to the appropriate information at all levels: transactional and operative, financing-accounting, management, budgeting and control.

These are not significant risks in relative terms, although the various departments of the Group and especially the Planning and Management Control Department and the Financial Administration Department, which report to the Financial Division, are directly responsible for producing and supervising the quality of such information. Moreover, in order to reduce exposure to this kind of risks, the Group regularly reviews the management information disclosed to the relevant officials and invests in IT, follow-up and budgeting systems, among others.

In addition, the consolidated Annual Accounts and those of each and every relevant company are subject to review by the independent auditors who are also in charge of carrying out certain audit works regarding the financial information. Likewise, as regards the most significant companies of the Group, independent auditors are requested to issue recommendations on internal control. At both levels: Image and reputation, Human resources, Operations. . Image and reputation Those are the risks which have a direct impact on the way the Group is perceived by its stakeholders (customers, employees, shareholders and suppliers) and by the society, in general. These risks arise out of a potential improper management of the aspects regarding the social responsibility and sustainability, the responsibility on account of the composition of products, as well as of the corporate image of the Group.

The Group has developed a Social Audit Programme, based on the external and independent verification of the degree of implantation and compliance with the Code of Conduct for External Workshops and Manufacturers in order to minimize the potential risks of harming the image due to improper behaviors by third parties. 2. Human Resources The main risks in the human resources area are those arising out of the likelihood of inappropriate positioning, qualifications and flexibility of the human resources, of an inappropriate labour environment and of a potential dependence on key personnel.

This section also includes the risks connected with the recruitment and turnover of the personnel. To minimize said risk, the Human Resources Department carries out continuous recruitment and hiring processes of new personnel. It has also developed a regular training programme for its staff and has implemented specific systems: – to combine quality in the performance of their duties by the employees and the satisfaction they may obtain at their workplace; – to facilitate the exchange of jobs among those employees wishing to broaden their experience in the different areas of the Organisation 3. Operations

The main operational risks the Group has to face up to arise out of a potential difficulty in recognizing and taking in the ongoing changes in fashion trends, manufacturing, supplying and putting on the market new models meeting customers? expectation. The Group reduces the exposure to this risk through a manufacturing and procurement system that ensures a reasonable flexibility to answer to the unforeseen changes in the demand by our customers. Stores are permanently in touch with the designer team, through the Product Management Department, and this allows perceiving the changes of taste of the customers.

Meanwhile, the vertical integration of the transactions allows cutting the manufacturing and delivery terms as well as reducing the stock volume, while the reaction capacity that allows the introduction of new products throughout the season, is kept. Given the relevance that an efficient logistics management has on the appearance of such risks, the Group conducts a review of all the factors which may have a negative impact on the target of achieving the maximum efficiency of the logistics management, to actively monitor such factors under the supervision of the Logistics Committee.

Future of Inditex Group Inditex group is in continuous expansion , every month ,new stores are opening all over the world, they take in consideration to expand in USA and also to penetrate the Asian market ( China and India). They want to focus as a group on their most powerful brand: Zara. [pic] Personal suggestions regarding the following processes • Design processes Cooperate with vary range of designers so Inditex can maintain its competitive advantage to be “the fast fashion” but remain more and more creative. Production processes Cooperate with any channel of production all over the world so new improvements in operation technology can be applied into Inditex instead of keep using the old ones. • Distribution processes Making more distribution centres so they will enable Inditex to be more faster, effective, and efficient in distributing their products to the retailers. • Advertising processes Advertising might be important in the future when competitors are becoming more competitive and demands are declining Conclusions

In conclusion, Inditex group has the potential for sustainable growth due to its competitive advantage and its ability to face the challenges of the apparel industry. The company keeps its operating income elevated, has a strong and unique business model, and has various opportunities for expansion in the retail industry. To many Europeans, Inditex Group is a familiar face with consistently trendy, well-priced new apparel every week. To Americans, it is a company that is just getting its feet wet in the American market.

Though, the Inditex branch is researching and developing new methods for expansion, the company must continue to re-invent and innovate themselves in order to stay fresh in the apparel industry. Today, many companies are looking to Inditex as the new industry standard for how to run a retail business, which shows that Inditex ’s business model is becoming the wave of the future. References : www. inditex. com www. inditex. es www. zara. com Inditex Group Annual Report 2008. pdf



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