Strategic and Financial Valuation of Inditex - Term Paper Example

Strategic Analysis of Inditex The publicly traded corporation under analysis is Inditex, which is a Spanish-based global apparel company. It has 6,200 retail stores worldwide and employs approximately 120,000 workers. The clothing giant now boasts of an annual profit of 1.932 billion Euros, as of 2013. This makes it one of the most formidable brands in the fashion business. Garnering such record profits is not an easy feat in an industry that is notorious for flippant consumer tastes, new entrants and immense competition. Zara is the flagship store that put Inditex in the map. However, other subsidiaries like Massimo Dutti, Oysho and Bershka have also contributed to the organization’s overall earnings. 1) Segments that would rank the highest in the general environment Social and technological factors are the most important segments of the general environment affecting the fashion industry. Consumer factors like lifestyles, tastes and trends are the most critical within the fashion industry. For clothes to sell, companies ought to create designs that are in tandem with society’s preferences. Therefore, they need to study and analyze demands and patterns that exist at the time. This issue has affected Zara substantially because it has had to follow fashion trends closely during its entire period in operation. In order to stay in vogue, the company often sends a team of designers to fashion shows in Milan, London and New York. It also expects its team to read through fashion magazines, blogs, and other websites that discuss the latest trends. The organization also analyses daily sales data for all products sold in its retail stores. It liaises with buyers to determine what they might like to see within the stores. Therefore, it is a leading fashion retailer owing to its high awareness of consumer tastes and preferences (Crofton and Dopico, 2007). Technological factors also affect businesses in this industry tremendously. This may affect a company’s ability to get products to consumers quickly. Technology also introduces new sales models that may reduce brick and mortar sales. The growth of online selling has affected numerous organizations positively and Inditex is not an exception. It has used this opportunity to sell its products to individuals in relatively distant countries without having to invest in brick and mortar stores in those locations. Technology also facilitates rapid communication between customers and other fashion sellers thus making individuals more aware. Inditex’s business also depends on rapid gathering of information from its consumers. This has been possible due to the dependence of the company on effective means of data tracking. Also, communication between different members of the organization representing divergent business segments like manufacture, design and retail is essential. Synchronization of all information relevant to the business is possible through the use of information technology (Egill, 2009). In the area of technology, apparel sellers are constantly looking for better methods of creating clothes. They often depend on technology to improve their production methods. Therefore, Inditex is always on the lookout for new and cheaper ways of creating new product lines. Additionally, when selecting partners who carry out some parts of production, the corporation pays attention to those who seem to use efficient methods; this often involves employment of technology. 2) 5 forces of competition Internal rivalry and supplier power are the most crucial factors affecting Inditex and other fashion retailers. Internal rivalry is quite high in the fashion industry because numerous players exist. Some brands may be global and well known such as H&M and Gap while others may be relatively young like Bebe. These organizations often utilize different strategies to attract consumer attention such as advertising and low production costs. Inditex, through its flagship brand Zara, has responded to these immense competitive pressures by offering high fashion brands at relatively moderate prices within their period of demand. While other competitors also offer high fashion brands at reasonable prices, Zara differs from its competitors because it does this relatively quickly. Through the concept of fast fashion, the company introduces new lines every two weeks. Unlike its competitors who try to predict trends and then wait for their outsourcing partners to make them, Zara simply analyses consumer preferences on a daily basis and then creates those garments within a maximum of six weeks. This just in time model has made Inditex stand out from its competitors. Customers only visit their competitors 3 times a year while their buyers come about 17 times annually. They know that they can always find something new in Inditex stores due to their fast fashion model. Supplier power is relatively low in the fashion industry. Companies that stay ahead are the ones that take advantage of this fact. The apparel industry is flooded with suppliers who may be responsible for supplying fabrics, dying, sewing, and finishing the garment. Therefore, large retail brands like Inditex have the opportunity to dictate their demands to these suppliers. It is for this reason that Inditex works with about 1237 suppliers worldwide. It selected such a large number in order to protect itself from risk which results from too much dependence on one supplier. If the supplier engages in unethical business practices or demands unrealistic prices, then Inditex may simply switch to others (Crofton and Dopico, 2007). 3) What the company might do to address these forces in the future. In order to curb internal rivalry, the company might continue with its global expansion strategy. Inditex needs to consider countries like Latin America, Asia as well as Eastern Europe. It would be advisable for the company to keep expanding because this is what has sustained its high growth rates in the past. It needs to penetrate each part of the global fashion industry and make its name known in all those areas. The reasons why the McDonalds franchise has done so well is because it is almost everywhere. Consumers simply visit these outlets because it is convenient to do so. Likewise, Inditex should continue to enter new markets in order to foster such competiveness. When expanding into new areas, the company needs to rethink its business model. Inditex has been so successful because it has chosen a centralized system of production over the outsourcing model. It did this in order to be close to its key fashion consumers. Since most Zara buyers were in Europe, it made sense to keep production so close to home. This enabled the company to respond to their consumers preferences within the shortest time possible. However, when it enters Asia and the Americas, fast response times may not be possible if production continues in Spain predominantly. For this reason, it may have to consider opening production centers in China and Mexico so as to supply consumers in those regions. The company might embrace low supplier power by leveraging on suppliers in the most economically feasible areas of the world. It may have to change the company’s distribution of some key brands. Since proximity to production areas is crucial, the organization ought to consider those that would present the least amount of logistical challenges. Furthermore, since manufacturing subsidiaries are relatively low in number, the company may want to increase them and may even consider outsourcing some elements of production. 4) External threats and opportunities One of the threats facing the organization is imitation of their unique business model by new entrants. Inditex has been quite successful so far because most companies cannot reorient their businesses to be like them. A key competitor’s CEO once said that they would love to use a just in time model like Inditex but this would require them to break down all their existing structures and build from scratch. Therefore, Inditex has a head start over such companies because it started with this approach from the beginning; it thus has a first mover advantage. On the other hand, new entrants may not be restricted by too much investment in older models. As a result, they may easily enter the market and capture Inditex’s competitive advantage. Nonetheless, it may take some time before the new entrants displace the corporation under analysis because one needs time to become a leading brand (Vincent et. al., 2013). Regardless of these logistical difficulties, some organizations are already imitating elements of Inditex’ s Just in Time model. For instance, an organization like H&M is a formidable competitor. It has started introducing newer products more often. In fact, its managers and executive leaders believe that consumers ought to find new things in their stores all the time. This sort of reasoning is what drives the fast fashion model taken on by Inditex. Additionally, an organization such as Charlotte Russ is working towards reduction of inventory within its premises. Traditional fashion retailers often find themselves trapped with unwanted styles when their predictions go wrong. Companies like Gap have hit a slump for 29 months due to misfired fashion forecasts. The organization was stuck with enormous amounts of stock after customers failed to show interest in their skinny jeans and certain types of skirts. Excessive supply at the end of each season is also common in the fashion industry and causes many organizations to do clearance sales, which drains profits (Vincent et. al., 2013). Some Inditex competitors have found ways of overcoming these challenges. Charlotte Russ and Bebe are now introducing new lines several times in the year. This means that they have worked on shortening their lead times. Additionally, some of them are improving their inventory models in order to accommodate consumer preferences. Other matters that may threaten Inditex’s profitability include the possibility of replacement of fast fashion with another trend. It is a given fact that consumers within the apparel industry have flippant tastes. Therefore, while most of them keep supporting Zara stores today, another trend may emerge that is no longer reliant on the fast fashion model. The issue of increased online sales may also make assessment of customer demand easy for most players in the fashion industry. Through this model, different competitors will easily avail designs and communicate with buyers whenever the need arises. Saturation of key fashion markets may also threaten Inditex’s profitability. As more fashion traders enter the market, it is likely that traditional fashion capitals may become saturated by retailers. This may be quite problematic for Inditex because the company has an aggressive expansion strategy. Saturation may occur in key target markets like the UK and other parts of Europe. Therefore, this could reduce the company’s profitability (Egill, 2009). The internet provides immense opportunities for accessing business information. Inditex will find that it is relatively easier to collect data from online purchasers. Therefore, it needs to augment its online business strategy. Currently, the organization is only in 21 out of its 62 countries. It needs to consider entering these markets and then collect information on consumers’ tastes and preferences. These findings ought to be combined with their traditional sales data from brick and mortar stores. Essentially, they will be better able to meet their buyers’ needs. China, India and other Asian markets are key target markets for global companies that want to expand internationally. Since traditional fashion markets like the US may not always yield substantial outcomes, it may be critical to consider these developing nations. The US has a huge plus-size population, which would distort Inditex’s brand image and complicate production processes. Therefore, emerging Asian markets may produce lucrative outcomes 5) The greatest strength and most significant weakness The organizations’ greatest strength is it’s just in time model. Its short lead cycle is what makes it a pioneer in fast fashion and a resilient player even during economic downturns. In order to maximize this advantage, it may need to strengthen how it applies fast fashion to its different brands. This will minimize overreliance on its flagship brand which only caters to a certain demographic (Vincent et. al., 2013). Inditex’s most significant weakness is centralized manufacture. In order to overcome its greatest weakness, it needs to consider creating design centers as well as logistic and distribution centers in new fashion capitals in the world. With times, it will no longer be tenable to make everything from Spain. Therefore, the company ought to think about getting closer to its new source markets. 6) The company’s resources, capabilities and core competence The organization’s most significant resource is its strong financial base. Since it is highly profitable, it can finance its own expansion strategies. Additionally, the company has a team of designers whose role is to keep tabs on current fashion trends. The company manufactures most of its products and sources from within if possible. Subsidiaries often deal with dying, printing, marking and cutting fabrics. Presence of manufacturing capabilities also allows the company to work on quality control within its premises. This causes the company to assure clients of high quality garments each time. It also manages most of stores; approximately 85% of the stores are owned by Inditex. However, in restrictive regions like the Middle East, the organization prefers to utilize franchise models. 7) Value chain Inditex has a vertically integrated supply chain. This implies that communication occurs very rapidly across different parts of production. Furthermore, the organization does not have to spend a lot of time and resources in order to coordinate the production process from different parts of the world. However, it does externalize some elements of production depending on the costs, returns being obtained as well as the set deadline for the merchandise (Vincent et. al., 2013). This corporation has used its diverse supplier network in Italy, Germany and Morocco to contract its production processes. It works with independent sewing cooperatives in Portugal to complete its fabrics. Value adding activities can make or break an organization. Inditex understands the importance of these elements and thus carries them out itself. It would have been unable to achieve this if it lacked manufacturing resources and was not vertically integrated. References Crofton, S. and Dopico, L. (2007). Zara-Inditex and the growth of fast fashion. Essays in Economic and Business History, 25, 41-54. Egill, A. (2009). Strategic and financial valuation of Inditex. Retrieved from http://studenttheses.cbs.dk/bitstream/handle/10417/383/egill_arnarsson.pdf?sequence=1 Vincent, J., Kantor, P. & Geller, D. (2013). Inditex strategy report. Retrieved from http://economics-files.pomona.edu/jlikens/SeniorSeminars/Likens2013/reports/inditex.pdf Read More