CASE STUDY ZARA 1. Which theory is internationalization? the best representative of Zara’s (Inditex’s)

In the case of Zara, the Uppsala model can be considered as the best representative theory concerning their internationalization strategy. The Uppsala model is an organic growth model, which aims to minimize psychic distance through small incremental steps in the internationalization process. Zara opened its first store in La Coruna in 1975 and focused on the domestic market in the early stages. Gaining experience from the home country before entering a foreign market is characteristic for the Uppsala model. The expansion of Zara was first limited to Spanish cities with more than 100,000 inhabitants. Due to the maturity of the Spanish market, Zara was aiming to expand to the international market. Because of the geographic and cultural proximity to Spain they started their foreign operations by opening a store in Portugal. This enabled a gradual learning-by-doing process, concentrating first on countries close to Spain. Subsequently they preceded the internationalization process by entering different European markets. The intention was to keep a low level of psychic and cultural distance in order to internationalize step-by-step. After obtaining more knowledge and experience in foreign markets, Zara started expanding to other regions more rapidly and out of consideration for geographical or cultural proximity. In general, the internationalization strategy of Zara can be best compared to an ‘oil stain’. While entering a foreign market, Zara first concentrates on a strategic area with the intention to gain market information and then expanding to other regions in that country.

2. Please evaluate the competitive strategy of the three world market leaders. Which of the three will be the future winner with regard to global retailing in the fashion world? Inditex is a Spanish clothing retail group with eight brands: Zara, Massimo Dutti, Pull & Bear, Stradivarius, Bershka, Oysho, Zara Home and Uterqüe. The company comprises more than 5,500 stores in 85 markets. Inditex’s business model is vertically integrated. This means that they are controlling all the steps on the supply chain like design, production and distribution. Half of the products they sell are manufactured inside Spain and another 26 percent in European countries. This enables Inditex to shorten the product life cycle and to respond to customer demands more quickly. They have the ability to produce a product within two weeks, whereas competitors who outsource their production to low-cost countries need two month. Therefore Inditex’s competitive advantage is the time factor. Through continuous observation and analysis of the marketplace, they can adapt to changes more quickly and precisely.

The main difference to its competitors is that Inditex sets a high value on the feedback they get from customers in their stores. Customer demands and sales trends are communicated to the headquarters every day. The feedback is used to understand current fashion trends and to develop new products adapted from customers preferences. While key competitors produce 10,000 items annually, Inditex can offer around 30,000 items every year. The designs available in stores are replaced on a regular basis. Given that the product line changes every few weeks, customers can be attracted continuously. Gap, Inc. is the largest American fashion and accessories retailer. They operate under five different brands: Gap, Banana Republic, Old Navy, Piperlime and Athleta. Gap is partially vertical integrated, having control over design, distribution and sales and outsourcing the production. The advantage of manufacturing abroad is lower production costs. At the same time it means less flexibility and a longer product life cycle. Because the production is outsourced, Gap cannot react to changes in customer demands as quickly as Inditex. Although Gap has 3,100 stores in 45 countries, the share in international sales is only 19 percent. Thereby Gap is the least internationalized company of the three world market leaders. H&M is a Swedish retail-clothing company with more than 2,200 stores in 53 countries. H&M shows a strong pace of expansion strategy. Their objective is to increase the number of stores by 10-15 percent per year and at the same time increasing sales in comparable units. For this year they have planned to open up 375 new stores. Most of the expansion is aimed at the American and Chinese market. In 2011 the growth in sales over the past years was 1.5 percent, whereas the growth rate of Inditex was 10 percent. H&M is more internationalized than its competitors with 97 percent of international sales. This could be considered a competitive advantage because a high share of turnover is made in the international market. It implies, that H&M is competitive abroad and is able to apapt successfully its business model to foreign countries. The majority of the production is outsourced to Turkey and Bangladesh. Thus, H&M’s is a partially vertical integrated company. They have the control over design, distribution and sales, but they are manufacturing in low-cost countries. In contrast to Inditex and Gap, H&M has a single-brand retail format. Therefore only a slight differentiation in product price and quality is possible. After evaluating the strategies of the three world market leaders, it is obvious that Inditex as well as H&M has a competitive advantage. Inditex factor of success is the ability to tailor the product within a short period of time and dependent on customers changing preferences. H&M is the most internationalized and is willing to reinforce their internationalization process in the future. Nevertheless, Inditex has the highest net profit and growth rate. These operating figures are key concerning future prospects.

3. What are the advantages and disadvantages of Zara’s (Inditex’s) multi-brand store strategy? The Inditex group encompasses the brands Zara, Zara Home, Pull & Bear, Massimo Dutti, Stradivarius, Bershka, Oysho and Uterqüe. Given that they are marketing several similar products under different brand names, they pursue a multi-brand store strategy.

The main advantage of a multi-brand portfolio is to target different customer segments more effectively. The strategy aims to saturate a market, providing different price and quality categories. By offering various brands, they are able to respond to the variety-buying behavior of customers. Thus they can keep customers, who otherwise would switch to another brand. Doing so, a company can obtain greater market coverage. Apart from that a multi-brand store strategy is triggering internal competition and therefore can increase sales in the different brands and profitability. Another advantage is to yield economies of scale due to the size and output of the company. The major disadvantage of this kind of strategy is the risk of cannibalization. This is the case if sales volume and market share of one product decrease due to the introduction of a new product by the same firm. Another disadvantage is the cost of maintaining several brands. Each brand has to generate a certain return on investment in order to be profitable.

4. How successful do you think Zara has been in meeting the ‘risk of cannibalization’ as a consequence of the multi-brand strategy? In order to minimize the risk of cannibalization, a precise differentiation among the brands is key. Inditex attempts to tackle the problem through creating differing retail images, targeting different markets and using product differentiation. The brand Zara is targeted to a wide range of customers, offering clothes for woman, man and children. It encompasses many different styles at a medium-low costperformance ratio. Massimo Dutti is more expensive and designs are more classic and elegant. In contrast, Pull&Bear, Stradivarius and Bershka focus on youth fashion at a medium-low price level. Oysho sells lingerie, while Uterqüe basically offers accessories. This highlights that all brands are differentiated with respect to price, products, target groups and image. Although Inditex encompasses 8 brands, they keep the risk of cannibalization low by differentiating them properly.

5. What are the advantages and disadvantages of going into a joint venture with Tata in India? For Inditex, the entry into the Indian market is strategically important. India is the second most populated country in the world with an annual GDP growth rate of 6 per cent. The country encompasses more than 1.1 billion people and there are ten metropolitan areas, which are populated by more than 3 million inhabitants. In India, Tata is one of the largest conglomerates. Hence, Inditex can benefit from their know-how and experience in the domestic market. Because of the long-lasting experience in different industries, Tata disposes of sales and service expertise in India. This can increase the speed of market entry and facilitate market penetration. Apart from that, they can make use of facilities and infrastructure of Tata. Particularly in large markets it is complicated to acquire property. In some cases less developed countries may restrict foreign ownership. Therefore cooperation with a local company is advantageous. Moreover in a joint venture the costs for R&D and production can be shared. In general, the financial risk is lower as both parties have a holding in the company.

Although there are several advantages of going into a joint venture with Tata, some difficulties may arise. The cultural and psychic distance between Spain and India is a source of potential conflict. The two cultures are dissimilar and norms and values are diverging. It takes time and effort to build an efficient joint venture and cultural inequalities make the integration and cooperation of the two countries more difficult. Given that Zara will control 51 percent of the joint venture and Tata 49 percent, both parties have almost equal share. The double management may lead to diverging goals. Another problem is the develpment of trust. If Zara shares its business secret with them, Tata may take advantage of it.