Inditex-final-project-9-04-2015_13_05h

INDITEX International Business and Management

Team project 2015Presented toPhD.MatevRakovic

Calvera, Eduardo Cuba 19136346Lauer-LEsprance, Sarah Canada - 19135761MuniategiEtxabe, Ibane Spain 19135892Konjuak, Nikola Croatia 19135721RashadMiknas, Haakon Norway 19135248Shin, Chanyong South Korea 19136681

Friday, April 10, 2015

TABLE OF CONTENTS1MANAGERIAL SUMMARY22INTRODUCTION33ANALYSIS OF THE ORGANISATION33.ABRIEF HISTORY33.BBRIEF DESCRIPTION43.CKEY RESOURCES, STRATEGIC CAPABILITIES AND SOURCES OF RELATIVE COMPETITIVE ADVANTAGE53.DANALYSIS OF ORGANIZATIONAL STRUCTURE93.ESTRATEGIC FOCUS103.FCOMPANY MENTALITY124HEADQUARTER-SUBSIDIARY RELATIONSHIPS AND SUBSIDIARY ROLE IDENTIFICATION145ANALYSIS OFINTRA-ORGANIZATIONAL KNOWLEDGE-FLOW BASED ON GUPTA & GOVINDARAJANS (1991) FRAMEWORK166IDENTIFY ISSUES, WEAKNESSES AND PROBLEMS IN THE ANALYZED CASE SETTING187ANAGERIAL SUGGESTIONS/RECOMMENDATIONS (WITH ESTIMATED TIMELINE AND RESOURCES)208CONCLUSION219APPENDIXES2210BIBLIOGRPAHY35

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MANAGERIAL SUMMARYMain purpose of this team project is to examine the Inditex Group, its resources and experiences, organizational structure, strategic orientation, headquarter subsidiary relationships, intra-organizational knowledge flow, in order to make a connection between organization transnational typology, mentality, business model and reasons of its successfulness. Analyses have shown that company has a high degree of centralization of assets (mainly around the headquarters in Spain), a high responsiveness and the large portfolio in terms of clothing concepts and the lack of adaptation in terms of size and design.The research draws attention to a specific business model of Inditex Group and analysis the key processes of its value chain, especially logistics and information systems.Inditex does not try to guess design and fashion trends but collects all information about sales each day and according to the gathered information is changing design of the clothes according to the costumers demand. They are creating instant fashion as they say.Further investigations reveal that the company is quite centralized and efficient, but also quite flexible and responsive. Each Inditexs store has a high level of autonomy and store managers are able to choose which products they want to have in their stores. However, all products are designed and produced under the strict control of the headquarters with a strong emphasis on efficiency. It takes 15 daysto the company to design and produce a piece of cloth and ship it to the stores. Modern and highly efficient distribution centers are the key points of the added value of the company.The main conclusions of this team projects are that Inditexs over-dependence on their main brand Zara which represents 65% of Groups global revenue and over-dependence on the European and domestic markets raises some important challenges for the sustainability of the company. Also Inditex Group has logistical problems with American and Asian market because of greater distance from distribution centers in Spain. In that sense, this report offers following managerial suggestions: having separate distribution centers and production facilities in each world region and stronger differentiation of Massimo Dutti as luxury brand for the customers with higher purchasing power.

INTRODUCTIONThe overall purpose of this team project is to apply and integrate the discussed theoretical concepts in class to a real-life organizational setting in order to analyze a specific organization that we chose. In this project, we will provide some solutions and recommendations to a specific organizational problem in a company.Rare are those who have never paid attention to fashion. We are surrounded by it with an infinite number of television and magazine advertisement. Moreover, store imposes on us fashion by changing their collection almost every season. In fact, what you wear is quickly outdated.Since we were all interested and affected by fashion, Inditex has seemed like the perfect choice since this company is one of the biggest fashion retail groups with eight known brands in the world. Also, not well known since Inditex lives in under the spotlight of its popular brands like Zara, this company seemed for us an interesting organization for this project.In the following text, we will do a complete analysis of the organization, we will discuss about the headquarter-subsidiary relationships and about the subsidiary role identification. Also, we will analyse the intra-organizational knowledge flow according to Gupta & Govindarajans (1991) framework. Then, we will identify the issues, weaknesses and problems in the analyzed case setting and we will finally make some managerial suggestions and recommendations.ANALYSIS OF THE ORGANISATIONBRIEF HISTORYThe founder of Inditex, Amancio Ortega Gaona started working in fashion business since he was 13 years old. After decade he became a shop manager and then he thought of selling his own design. He started to sell clothes that he designed to local shops and by 1963 he built his own factory. After 12 years, he opened first Zara store. The man who started his business with $25 has succeeded. His vision was to make instant fashion. The fashion that customer does not have to wait to get it. This led to partnership with Jose Maria Castellano who had expertise on computer. With Castellano, Ortega could grow his company up a level by controlling inventory more delicately and to react to change of fashion more quickly. The concept of instant fashion was very fresh to the market and even made a term for new arrival day in Zara, the Z-day. The success in Spain market was great enough for Zara to target foreign market starting with Portugal in 1988 and USA in 1989. Since then Zara expanded its store globally and now has 87 markets all over the world. Besides of global expansion, Inditex also thought of entering other segmentations in the market, launching Kiddys Class in 1990 which becomes Pull&Bear after a year. Ortega was always behind a veil, not revealing himself until 2001. By that time, Ortega was preparing retirement and Inditex had to find a safe insurance for impact and that was IPO (Initial Public Offering), which was very successful. Then at 2005, Ortega handpicked Pablo Isla Alvarez to be next CEO of Inditex and one of the biggest innovations that Isla did was building online commerce platform and by 2013, there are more than a hundred online stores of Inditex globally. However Ortega did not fully retire but has relinquished the CEO title but still holds 59% share of Inditex and still influences in product((Vincent et al, 2013). [footnoteRef:1] [1: See appendix I ]

BRIEF DESCRIPTIONInditex is multinational brand from Spain and has multiple brands such as ZARA and Pull&Bear. It has shops and factories all over the globe. Statistics under will show how global Inditex is (Inditex Website, 2015).1. Numbers of Stores per BrandAppendix VII shows the stores of Inditex divided into Europe, America and the rest including Asia. As Zara is the most well known brand, Zara is present in87 markets and 1991 stores[footnoteRef:2]. Inditex has 43 markets and 4,589 stores in Europe (The markets of each brand is overlapping so I will state the biggest one). Following region is Asia and the rest of the world without America 26 markets and 1,203 stores. America alone has 18 markets and 548 stores. Inditex also has online sales platforms. In total, with every brand, they have 131 online sales platforms globally and in specifics Zara has 22 as top followed by Pull&Bear and Zara Home by 21 stores. Uterque has least online platform by 9 (Inditex Website, 2015). [2: See appendix I (2)]

2. Payroll distributionAccording to the regions, Europe (excluding Spain) has the most payrolls adding up as 60,336 having 47% of the whole. Then surprisingly Spain comes next with 40,184 having 31% of proportion in whole. Actually payroll in Spain is bigger than next two regions added up together as the rest of world except Europe. America has 13,559 and Asia and rest of the world has 14,234 both rating 11% of whole payroll. If we put whole Europe as one, Europe has 78% and Spain is contributing 40% of the Europe (Inditex Website, 2015).3. SuppliersSuppliers of Inditex can be one of the indications of the scope of global activities Inditex has. Asia has the most suppliers by 739 suppliers in China and Southern East Asia. In Europe there are 648 suppliers, 151 for non-EU countries and 497 for EU countries. Notably, America has least number of suppliers by 82 while Africa has 124 suppliers. But numbers of suppliers seem to be in inverse proportion with quality. America has the best proportion for A-rated suppliers by 74%. (A-rated suppliers complies with the Code of Conduct) Then EU, Africa and non-EU comes each by 60, 53 and 45 percent of A-rated suppliers. Asia has the least proportion of A-rated suppliers by 27%. Even including B-rated suppliers, the ranking will not change (Inditex Website, 2015).4. SalesSales of Inditex have been growing since 2009, growing from11,048,000,000 Euros in 2009 to 16,724,000,000 Euros in 2013. Most sales in 2013 came from Europe (without Spain) earning 46% of total sales. Meanwhile America has only 14% of proportion in sales. Spain, Asia and the rest of the world have 20% of total sales each, 20%. According to the size of the area, Spain would be most profitable market to Inditex(Inditex Website, 2015).5. WorkersInditex employs 110 000 professionals spread around the world from which 60% are outside Spain (Inditex Spain Group report, 2013).KEY RESOURCES, STRATEGIC CAPABILITIES AND SOURCES OF RELATIVE COMPETITIVE ADVANTAGEIn short, the main competitive advantage of Inditex is the unique value chain they work with.Inditex has changed the retailers way of working by prioritizing time- to- market through a vertical integrated logistic. While competitors traditionally prioritize the benefits of reducing production costs and outsourcing the manufacturing to China. Even though this strategy looks cheaper, it creates a larger value chain, which is less flexible and thus, cannot respond so fast to this fast-fashion world. Despite the higher costs in the fashion world, the ability to react quickly is essential. Other companies must predict trends, while Inditex can observe and respond. They have been able to replace the need of advertisement and massive publicity by using market observation.It takes 15 days to the company to design a piece of cloth and ship it to the stores. Inditex produces 50% of their items that come mainly from Spain, Portugal and Morocco, creating a short, flexible, and more responsive supply chain. This is why a good design of the value chain, a high digitalization, a computerized inventory system, state-of-the-art production and warehousing are vital for the firm (Inditex Website, 2015).Both Zaras and Inditex business model is characterized by a high degree of vertical integration and a JIT (Just In Time) inventory system, that means that the company carries out all the phases of the process (design, manufacturing, logistics and sales). This is what makes them reach a high degree of flexibility and a strong consumer orientation to respond in a fast way to the needs of the market and change the production depending on the sales of each store in the shortest period of time possible (Cuenca 2011). In the appendix II, we can find the value chain[footnoteRef:3]. [3: See appendix II ]

Production of Inditex is highly centralized. A very interesting point about the procurement is the production of grey products, which enables higher flexibility since they are able to change the colour of the clothes just before selling depending on the trends of the market, the colour that is being sold the most, etc. For the same reason of gaining flexibility and supporting the JIT system, most important and most risky pieces are produced internally in small batches, and the basics are outsourced. Their factories are highly automated, specialized according to fabric, focused on prints and cutting and on finishing and control.Distribution is one of the strongest strategic capabilities of Inditex. No matter the origin of the production, it all goes to the logistics centers of each chain in Spain, from which it is distributed to all the shops. Each store places an order twice a week and the time lapse between the ordering and the arrival of the goods in the shop is, on average 24 hours for European stores and a maximum of 48 hours for stores in the Americas and Asia (Inditex Spain Group report, 2013).The distribution is made from these hubs. It is a fast process, in which clothes do not stay more than 72 hours in the DC, since they are not warehouses but just a logistical tool to have a quicker response towards the market (Rakovic 2015).The production and distribution can be the key points of the added value of the company and the core of the business model as well. These elements are vital for maintaining its distinctive competence that is to produce and distribute at all times what the market demands. Its production changes every 15 days, depending on the trend derived from sales of its stores. All departments work with a common goal and logistics becomes the bridge between all areas, with coordination from design to the point of total sales (Carramiana, 2014).Finally, when getting to the sales or the sales point, we can say that Inditex really innovated, at least compared to its most direct competitors in the role of the store.The store is the key piece in the Inditex business model. As the meeting point with the customer, it is the main source of information for the design teams and the centre around which all the companys departments revolve. Today we can find Zara shops, for example, in the main commercial arteries worldwide, and in shopping centers that fulfill the selective Inditex criteria, always in places that guarantee visibility and accessibility(Inditex Spain Group report, 2013).The stores are characterized by the followings: privileged locations, carefully designed windows, not saturated layout, unique exterior and interior architecture and customer care. Each store has a specific and different layout, based in the specific characteristics of the country, city, or neighbourhood. They adapt the style of the store to the characteristics of the consumers in the area, using it as main communication and information channel. For example, Zara store in Milan, capital of fashion, is recognized for its outstanding architecture and beautiful scenery. In fact, Zara adapts and changes its store according to the environment. Also, the merchandizing is done by frequent product line changes and store outlook changes, which give the consumer a sense of rareness and scarcity (Rakovic, 2015). That is their way of communicating to the consumer. Indeed, while Gap, H&M, spend around 4 or 5% of their revenues on advertising, Inditex only spends 0,3% (Vincent et al, 2013).The fashion items found in most of Inditexs retail formats are highly imitative of designer styles, which Inditex scouts on runways in Paris and Milan and in high-fashion catalogs. Inditex does not employ well-known designers but instead draws from a team of 300 to come up with products that mirror these trends in more affordable fabric(Vincent et al, 2013).The company has trend spotters who are constantly analyzing trends, looking at what are the most used clothes and most sold products. For the particular case of fashion, it becomes a virtuous cycle, as it is creating trend at the same time. The company has only 1% of failed creations compared to the industry average of 10% (Rakovic 2015). For example, H&M produces all the clothes of the whole season and this does not allow them to make changes in case of failure designs (EL PAIS, 2015). These are examples of how the client is the recipient of the added value of Inditex but in turn is generating this value at the same time. Therefore, as it is clearly stated in the website: In 40 years, the company has always had one goal: to listen attentively to customers to offer proposals fashion they want (Inditex Website, 2015).There is also added value in the design process. A key point is that the budget cost of each product is determined prior to its release. Inditex is characterized by selling affordable fashion and that is another value perceived by customers. They centralize the process where are not only the designers involved, but also the pattern makers, buyers of raw materials, manufacturers, logistics specialists and store, in order to have good designs with affordable prices as well. To have good design clothes Inditex is based on the aforementioned shop spotters and Media clippings. Also attends regular visits to fashion fair and shows (EL PAIS, 2015).Besides, the distinctive thing about Inditex that leads to another competitive advantage isthat it has created new concepts for different segments in existing markets, enabling it to capture a larger share. Differences between each concept (Inditex Website, 2015): ZARA: it targets both young (ZARA TRF) and more adult women (ZARA WOMAN) as well as men and kids with an mix of urban, elegant and casual style. Pull&Bear: It targets young men and women from teens to early 20s, and offers the most casual clothing of Inditexs formats targeting this age group. Massimo Dutti: Massimo Dutti offers more tailored, sophisticated clothing that targets men and women in their mid-20s and higher Bershka: targets the youngest hipsters in the market. Stradivarius: Stradivarius takes a youthful and feminine approach to fashion Oysho: provides the latest fashion trends in the lingerie segment Zara Home: specialises in the latest designs for the home Uterque: Uterqe is a sophisticated fashion accessory brand which boasts excellent quality at attractive prices.

Although every concept is managed in an independent manner and has control over its own design, manufacture and logistic process, All the chains share the same business model, the philosophy of how to do things and the groups corporate culture. (Inditex Spain Group report, 2013).In order to have such a well-designed value chain that enables higher margins thanks to the cut in advertising and the good design of the distribution and the centralization process, we have listed the key resources that make this possible, in our groups opinion: Human resources: The company policy to achieve a greater degree of local sensitivity is recruiting local managers. It is natural that nationals of that country manage the company in each country, in so far as they know best the market in which they operate, but the company does not establish any barrier to career development based on nationality; rather, on the contrary, the exchange of international experience is very valuable. At present, the company is not implanted in any market in which they think they may not have local managers to assume responsibilities delegated on the subsidiaries (Carramiana, 2014). IT :Other competitors rely just in the use of IT, but Inditex mixes with the human intelligence and they gain a better link between demand and supply and a level of inventories that reduce the costs from obsolete product. For example, managers at Zara stores use handheld devices to send standardized information regarding customer feedback and ordering needs directly to in-house designers. This not only keeps Zara's designers informed of fast-changing customer trends and demand, but also provides the company with insight on less-desirable merchandise.(Zaras business Model, Information and Communication Technologies, and Competitive Analysis, 2015). Physical assets (logistics centers): Inditex has a number of textile design, manufacturing and distribution facilities, all of which are located in Spain. Inditex has been headquartered in the Spanish coastal town of A Corua in Galicia from the outset. As well as the corporate head office, the town of Arteixo, very close to A Corua and several Group-owned textile factories and logistics platforms (Inditex Website, 2015).ANALYSIS OF ORGANIZATIONAL STRUCTUREFrom a structural point of view, we could say that Inditex has a flat organizational structure, almost with no levels between the highest management and the local sales and production points.Betting on this kind of horizontal structure makes them gain flexibility, allowing an ordinary worker in any store can access easily and very fast to the highest levels and communicate about the last trends. As the GM said, we try to avoid the hierarchy as much as we can, and that can only be achieved by giving people responsibilities, we aim to be a very flexible company that is able to adapt to changes in demand. With a very hierarchical company this flexibility is lost " (Carramiana 2014). From a corporate level, the management team is separated into three major areas. The first area is complied by one direction for each of the clothing concepts (Zara Massimo Dutti, Pull & Bear, Bershka, Oysho, Zara-Home.); On the other hand we have the management for support chains (international management, expansion, real estate, logistics, raw materials, plant and last, themanagers for corporate departments (administration and systems, human resources,fiscal, finance and control, capital markets, communications, internet). In the organizational leadership would be the president and CEO (Carramiana 2014). The main characteristic of this structure from a group perspective is the high departmentalization and a low structure in terms of level of hierarchies. The corporate structure leads to a greater efficiency. However, if we take into account the business level, and go deeper in the brand management and business units, the structure changes. The people in charge of stores respond both to the boss of each brand and the boss of the management support chains forming (Carramiana, 2014) a sort of global matrix management in which the store is the center of it, as it is one of the cores of the value chain. This global matrix allows the flexibility and the speed in terms of deliveries and supply to stores that we have already mentioned. This global matrix is key to beat the competition with the fast fashion model. From an operational perspective, the group assumes that the company is highly centralized since the operational methods to implement the tactics come directly from the headquarters[footnoteRef:4]. [4: See appendix III]

STRATEGIC FOCUSStrategy is essential to a company and it should be sufficient, selective, specific, sustainable and synchronized. In fact, a good strategy should answer three key questions: where are we now, where we want to be and how will we get there.The previous section focused on the first. This part about strategic focus will focus on responding to the second and third. The OGSM model of P&G will be used as methodological guide because within this model are the questions above. So, a good strategy can be setting through applying this model. Concrete examples of strategy at the level of business will be used to illustrate it. The definition of strategy by Porter also will be used as approach in this section.Porters definition of strategy deals with the following question: How the company will have a competitive advantage and sustain it over time (Porter, 2009).Inditex's competitive advantage is "to produce and distribute at all times what the market demands (Inditex Website, 2015). Its particular efficiency, flexible and fast system of logistic and production is behind of "to produce and distribute at all times". On other hand, What markets demands means well-design and trendy fashion with affordable prices. This system is well linked with the essence of the fashion industry with regard to trend. Strategic focus in a Porter understanding should deal with how Inditex can achieve and maintain this competitive advantage. Also, we have to know how they can have fashionable and trendy clothing with affordable prices and what they do in order to have that production and logistic system that allows them to produce and distribute at all times. Here are some examples in order to answer these questions.The annual reports of Inditex (Inditexs Annual Report 2013) reflects that one of the strategic commitments of the company is the continued opening of stores looking for growth. In recent years, Inditex has kept pace of openings. But they are increasing the size of the surface of new stores (EL PAIS, 2015). The question is how this fits into the strategy of the company.Previously, trendy designs of Inditex were explained as competitive advantage. It has also said that Inditex in order to get "what market demands have a system that is capable of deliver clothing to a store within 48h and this system can also complete the process: design-production-deliver in 15 days. This context of rapid production and changing trends leads the company to make 40,000 product campaigns a year (EL PAIS, 2015). More campaigns means more product and more product needs more space. The company has noticed that due to the advantages of its value chainthey may have multiple campaigns simultaneously, leading to more sales. So what to do in order to have simultaneous campaigns? The company realized they need more space in their stores. This will give them more square meters to implement different campaigns alongside in time. This answers the question of why Inditex is opening new bigger stores and how this fits with their strategy.One key point in store designs is its big store forefront, in order to have an effective communication of their products. The company needs glamour and spacious storefront. For doing this, they should have bigger stores because bigger stores lead to more spacious storefront. More spacious storefronts mean more effective product communication. This at the same time leads to reducing marketing cost which allows them to have affordable prices (competitive advantage). Now, the link is clear to see. This is another example of connection between their competitive advantage and their specific business strategy dealing with having more spacious stores. There is our OGSM model in the appendix IV[footnoteRef:5]. [5: See appendix IV ]

COMPANY MENTALITYFirst of all, as we already explained, the group achieves a great level of efficiency thanks to a well-designed and vertically integrated production process. Having a centralized logistics and headquarter enables a JIT way of working, reducing costs and inventories. Besides, Inditex factories are highly automated and even specialized depending on the fabric, focused on prints and cutting and on finishing and control. With this specialization the group gains major efficiency, as well as thanks to a very developed IT for better procurement and communication. Furthermore, the relationship with suppliers is also a source of efficiency because they have a wide variety of suppliers with long-term relationships and minimal formal obligations, taking advantage of their size (Rakovic 2015).All these are examples of characteristics that would much part of the mentality of global multinational companies. However, Inditex is also characterized by a good flexibility since the industry dynamics is in constant movement. It is a flexible firm in terms of customer response since they adapt their supply according to the trends and sales data in each geographical area and in each store. As we already explained in the value chain, the autonomy of stores management leads to a high local responsiveness, which is only possible thanks to a flat organizational structure with few hierarchical levels as explained before and well designed communication tools which make the information flow from each store to the headquarter every day, being these characteristics of the transnational company. In this sense, the store manager has complete freedom to choose products which he believes will be more successful in his store according to its characteristics, especially the situation of the store and the culture and country conditions (Carramiana, 2014).Besides, the production is another source of flexibility since they outsource 50% of it, achieving the perfect balance of controlling some items and the efficiency and flexibility of having specialized suppliers (Inditexs Annual Report 2013).These examples would match more with the multinational type of company, that together with balancing the global efficiency already mentioned, it could also be argued the transnational type of company. Regarding the worldwide knowledge and the relation with the subsidiaries, the Inditex culture is very involved in building a sustainable knowhow both from suppliers and subsidiaries. Amancio Ortega (Inditexs founder) believes in these values: individual talent, hard work, personal responsibility and commitment to fellow faith in the possibilities of human beings. These values permeate the functioning of the organization and they work as a common culture within the company. The company has three training schools that teach this philosophy to employees. Inditex brings together professionals from over 40 countries that share an entrepreneurial culture for which there is no borders. There is also a committee of subsidiaries that holds regular meetings with all managers of subsidiaries in order to exchange experiences and know-how, and strengthen the culture of the company (Carramiana, 2014).Although they have created tools for staff training and knowledge flow and they learn from the experiences in certain geographical markets as will we see later, the stores and subsidiaries do not take so much part in the design of clothes which is highly centralized and reliant in European market. In other words, the stores and subsidiaries inform about the trends, but do not highly contribute as center of excellence, for example. So some examples could match with the third goal of the transnational type of company, but also to the multinational type. The company balances the integration and the local responsiveness thanks to their business model, which is their main competitive advantage. Also the organizational structure is a true source of efficiency and flexibility at the same time, since they have centralized the organizational departments (fiscal, financial, legal...) to save resources and they have one headquarter per clothing concept. The tools that gear this structure are both the stores and the logistic department.Another idea to discuss about when trying to understand the company mentality is the diversification of the group. As a corporate strategy, the group has just presence in the fashion market, and in that sense, we could say it is not well diversified, even though Zara Home is more unrelated, but still enjoying high synergies (Cuenca, 2011). The main diversification source for the group is carried out at a business level through the development of eight different brands that although belonging to the same industry, cover a wide variety of styles and ages of final consumers. Besides, as seen in the international presence of the company Inditex has located its stores in more than 88 different geographical markets and is still growing in terms of stores opening and e-business platforms trying to geographically diversify (Spain still has a huge stake in sales). The businesses being highly related is also a proof of the company not being so transnational (Inditex Website, 2015).In conclusion, the high degree of centralization of assets (mainly around the headquarter in Spain) and value chain would be characteristics of global MNC companies even though the high responsiveness and the large portfolio in terms of clothing concepts would be feature of multinational type of company. The design of clothes and the lack of adaptation in terms of size can be considered as a characteristic of an international type of company. In that mixed, could be approaching the transnational type, but still remaining closer to the global though. In the following sections of the paper we will address the issues of the headquarters and subsidiaries relationship and the knowledge flows of the company and link it to their mentality. HEADQUARTER-SUBSIDIARY RELATIONSHIPS AND SUBSIDIARY ROLE IDENTIFICATIONAccording to the website of Inditex, there is 9 headquarters; Inditex headquarter, located in Spain and there is a headquarter for each brands of Inditex; Zara, Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home, Uterqe and Tempe. They are all independent from each other, indeed, each head office is equipped with its own unique design facilities and logistics centers from which merchandise is shipped to the Group's stores worldwide twice weekly (Inditex Website, 2015).The only information we can find on Inditexs website about subsidiaries is a list of different countries so we can assume that in those countries there is a group of local managers in charge of recruiting local staff and adapting the marketing to the geographical area. Some marketing issues (merchandising, window dressing, customer service, decor, etc.) have been decentralized to the subsidiaries. Today the subsidiaries are responsible for maintaining the identity of the chain and communicate it through the product, the store and customer service. Each branch can vary the above commercial aspects while maintaining the identity consistent over time. Conversely, for those elements that are vital to maintaining its distinctive competence,the company establishes a strict control that limits the autonomy of local managers (Carramiana, 2014). Therefore, product and raw material policies are centralized at headquarters. Products and campaigns are the responsibility of the design department based on the information received from different countries and markets. As mentioned before, the price is determined by the headquarters before launching the product and is usually homogeneous by geographical areas, depending on the value of the currencies. Thus, for example, Scandinavian and British markets have a spread upward from the rest of Europe (Carramiana, 2014).We assume that the subsidiaries have an Implementer role. Zara headquarter has many subsidiaries[footnoteRef:6] for example, Zara UK and Zara Germany. The headquarter subsequently charges royalty fees for each subsidiaries. If a subsidiary is not profitable, it affects the performance of the headquarters, as subsidiaries are seen as deliverers of MNC value-added(Rakovic 2015). Indeed, subsidiaries are taking decisions about which clothes are going to be sold in the stores. However, we think that all the subsidiaries will probably not have the same role because it will depend on which market they are. [6: See appendix V]

Linking this with their mentality, we could say that the control upon the subsidiaries is high even though the stores and country managers have gained autonomy. The subsidiaries role does not contribute that much to the main source of the competitive advantage of the group (business model), even though it is very important to success in the store layout to gain local responsiveness and communicate to the consumer, so we can say that the subsidiaries are gaining autonomy, moving the mentality from a centralized and global type to a bit more decentralized towards the transnational type.ANALYSIS OFINTRA-ORGANIZATIONAL KNOWLEDGE-FLOW BASED ON GUPTA & GOVINDARAJANS (1991) FRAMEWORKAccording to the Gupta and Govindarajan (1991) subsidiary roles can be divided in four groups based on outflow of knowledge from local subsidiary and inflow of knowledge to local subsidiary. This framework can be seen in table scheme in the appendix VI[footnoteRef:7]. Inditex has a very specific organizational model based on very fast transaction of key information. Information about purchasing is automatically sent to headquarters and then is being used for creating a better product supply based on customers demand. [7: See appendix VI]

Inditex is using very good information system, but it is again more efficient that ones that are being used by other retailers. In Inditex they are not guessing what customers would like, they just see what products have a good demand and then just produce more of it. According to the John Gallaugher (2011), store managers and staff are using modern technology to gather and analyse customer performance data, rather than make future plans based on hunches and guesswork. Inditex is also targeting technology investments at the point in their value chain where it will have most significant impact. Every spent dollar needs to have a payoff. Although this information system works very good and this business model is pretty efficient (Flat World Education Website, 2015). Information about sales is automatically sent to headquarters that means that there is not real outflow of knowledge. Every piece of information goes through headquarters. In that sense, outflow of knowledge from the local subsidiary or stores to the rest of the corporation is basically very low. However, we found out that there is also a committee of subsidiaries that holds regular meetings with all managers of subsidiaries in order to exchange experiences and know-how, and strengthen the culture of the company. Once a year there is a general meeting at which the strategic plans for the entire company in a consensual set. Each subsidiary sends a business proposal that reflects their intentions for the year in terms of new products, sales incentives, window dressing, investment opportunities, and then the committee conducts a study of them and determines which could be applicable to all subsidiaries and what would be country specific and finally determine the strategic decisions. The committee subsidiaries also develop internal audit function to check periodically that agreed at the meeting is being held. The auditors, who usually belong to the design department of the headquarters must be able to work with professionals from other cultures, learning from each contact not only to exercise control, but also to integrate, coordinate and pass on what they learned over network in order to increase organizational learning. We learn from each of the markets in which we operate and this learning facilitates our growth. In the case of Mexico, the experience has been very important at all levels. Not only with respect to subsequent expansion into other Latin American markets, but in general business knowledge of another culture (Carramiana, 2014).In any case, even though there is actually a knowledge outflow from local subsidiaries, it can be argued that it does not have a continuous character on daily basis and that the subsidiaries do not contribute in terms of high specialization, research or certain knowledge. We assume that inflow of knowledge is higher that outflow, this knowledge flow is the one giving the international character to the company.Moreover, inflow of knowledge from the rest of the corporation to the local subsidiary or stores is quite high. All new items are sent form distribution centre to the stores based on their demand. Local subsidiaries do not participate in creating new items, but stores are able to order the most appropriate items (Carramiana, 2014). This could be considered as an inflow of knowledge to the local subsidiaries based on clothes design and production. Furthermore, headquarters are having pretty strict controls of stores and employees. One of the most common methods is false customer report (Carramiana, 2014). This all implicates that level of inflow knowledge is much higher than the outflow. Moreover, Inditex has a specialized team of technicians for educating sellers on proper distribution and display of products. It is very easy to notice that Inditex is quite centralized in information sense and that most of the decisions are actually made at headquarters.Considering everything mentioned, one can conclude that Inditexs local subsidiary role is likely an implementer. According to the Gupta and Govindarajan (1991) that means that local subsidiary engages in little knowledge creation of its own and relies heavily on knowledge inflow from headquarters. This is linked with the relationships analyzed in the previous section.Information and logistics system is the same for all Inditex. Each brand stores are sending all sales information to headquarters and headquarter designers is designing new products based on customers demand.On the Inditex group headquarters level it seems that there is not much cooperation and knowledge transactions between brands. Each headquarter has a different location and their own teams of designers. However, based on the fact that they have the same information and logistics systems it is obvious that they do cooperate and share some experiences. It is hard to say if they are local innovators because they are not local, but it is also hard to say that they are integrated players because they do not share a lot of information. IDENTIFY ISSUES, WEAKNESSES AND PROBLEMS IN THE ANALYZED CASE SETTINGKnown in the fashion industry as the leading and fastest growing fashion producer and retailer in the world, The Inditex Group is noted to have a unique business model that controls the entire fashion process. Fast-Fashion as its called, Inditex has established itself by pioneering shortened supply chain and centralized distribution in order to respond quicker to the fashion trends. Having such a competitive advantage had certainly aided Inditex Groups growth over the past years through its flagship brand, Zara, accounting about 66% of sales in 2012 also Inditex experienced a surge in stores from 3,000 to 6,000 from 2007 to 2012. However, with the underdeveloped brands compared to Zara such as Pull&Bear and Berksha and the over-dependence on the European and domestic markets raises some important challenges towards Inditexs increasing influence (Inditex Website, 2015).Zara is responsible for 65% of global revenue for the Inditex Group and the other 7 brands make up for the rest of the revenue. Relying so much on one brand leaves Inditex vulnerable to consumer trends shifting away from fast fashion trends. Brands such as Massimo Dutti offers a complete different product offering to the consumer and its expansion will lead to the company broadening their portfolio and hedging against consumer trends (Vincent et al 2013).In order to diversify their portfolio, this is an issue that regardless has to be addressed by Inditex.Europe reported around 66% on Inditex sales and 25% of that came from the Spanish domestic market, so with both Europe and the domestic market being in a recession such dependence on one region leaves Inditex exposed to economic fluctuations (Vincent et al, 2013). As a result of this, Inditex has sought to expand outwards towards Asia and the US. Given the internal structure that Inditex has championed, the expansion towards other markets that the company so desperately needs has already shown signs of stretch marks. With the shortened supply chain and centralized distribution, Inditex faces different cultural preferences towards fashion that are unlike those in Europe. After opening Zara in New York and Asia, Inditex has struggled in America and has had marginal success in Asia. The European fashion of trendy cut and slim fits does not fit the American classic, roomier fits (The Economist, 2012). Zara was mentioned in many articles of Fat-Shaming the American consumer due to their unwillingness of to resize their clothes for the American market (Lutz, 2012). Nonetheless in China, Zaras sizes are fitting Chinese women but come at a higher price than its competitors. Due to the long distance from Inditexs headquarters in La Corua, the prices in China are much higher than the prices in Europe for Zaras products. Also, Zara was again mentioned in many articles for lacking in quality compared to competitors (The Economist, 2012). By having centralized distribution, it begs the question whether Inditexs business model can survive by expanding outwards to other regions and still retaining their competitive advantage. It seems that Inditex requires an update of their business model in order to become responsive to important markets that has made Inditex such as success in Europe by keeping their finger on the fashion pulse of the region.With inevitable expansion to different regions due to their over reliance on Zara and the Spanish and European market, regionalization of Inditexs business model is certainly a long term issue that the company faces. Inditex employs fashion scouts that track designer ideas that are displayed on runway in Paris and Milan that then imitate their designer clothes in more affordable fabric. The manufacturing all happens within close proximity of Inditexs headquarters. This strategy has served well in European markets where they have developed a supply chain to accompany it designed to keep costs at a minimum. While keeping to the status quo and expanding to other regions, Inditex will find it difficult to offer the same product offering and also keeping up to date with local fashion trends and designer outfits. Therefore, a long term project that will require Inditex evolve their business model to fit the regions that they operate in by establishing production facilities that functions as a central regional hub, fashion scouts that attend regional fashion runway shows and creating fast and short supply chains. In order to retaining Inditexs competitive advantage and expanding to other regions at the same time it would only be logical that Inditex to address this problem sooner rather than later. ANAGERIAL SUGGESTIONS/RECOMMENDATIONS (WITH ESTIMATED TIMELINE AND RESOURCES)Issues have emerged during Inditexs expansion into other regions such as America and Asia whilst also being overly dependent on Zara, the company can seek to minimize growth problems by regionalizing their business model and diversifying their portfolio. Inditex, as documented, is experiencing growing pains and it is impacting on their main brand Zaras image. In America, European sizes just dont fit the American waistline while Zara is suffering from high prices and poor quality clothes in Asia. By replicating their successful business model in Europe in regions America and Asia, Inditex can recover from the troubles that have plagued their need to be more present in other markets than Europe.Managing a bank account of 3.8 billion euros in cash, Inditex has sufficient funds to fund a long-term project of regionalizing their business model. This means to become more responsive and cost-effective in the American and Asian market by establishing production facilities, distribution centers that functions as a central regional hub, fashion scouts that attend regional fashion runway shows and creating fast and short supply chains. Basically replicating their successful methods of designing, producing, distribution and arrival to the shops in such swift manner in Europe to American and Asian markets. As demonstrated, Inditex has shown great responsiveness in the European market but has had suffered from cultural mistakes due to not understanding the American and Asian fashion market. Therefore to become more effective in those markets, Inditex will have to better comprehend regional consumer behaviour because in the over-competitive market of fashion, yesterdays luxuries are todays necessaries (Prakash, 2010), highlighting the need to address consumer wants and preferences. Employing regional fashion scouts are significant to become aware of the consumer behaviours in those markets in order to gain back the competitive advantage Inditex enjoyed in Europe. Being too reliant on European styles in other markets has proven not to work and being more observant of culture and fashion will lead to regional consumers accepting Inditex. With Asias increasing influence in the global market and the established American market, Inditex has to look in the long run to establish a centralized distribution center in Asia and America responsible for both markets much like Inditex has its headquarters in Arteixo, Spain. Every piece of garment be it procured from Hong Kong, sewn near by in Spain or produced in Turkey, they all have to pass through the centeralized distribution center in Spain that in turn sends the garment further on to all their stores around the world. Multinational companies have to realize Asias growth potential due to its high-growth markets (Guild, 2009), therefore Inditex should look to replicate its Arteixo model in Asia and America by investing towards a distribution center like the one in Arteixo (Butler, 2013). Inevitability this will reduce the distribution cost and subsequently increase the profit margin while also retaining the competitive advantage of imitating regional designers instead of only European ones.Zara accounts for 66% of sales from the portfolio of brands that Inditex has, which leaves the company vulnerable to swaying consumer demand. By diversifying Inditexs portfolio by expanding Massimo Dutti brand, minimizes the risk and dependence on Inditex on the Zara brand. Analyzing Inditexs portfolio shows that the segmentation of the brands is overlapping each other that inevitably mean that these brands are competing against each other and overall their portfolio targets a wide range of the population. For example, Pull&Bear, Stradivarius and Bershka to the regular consumer seems all the same even though their stated segmentation outlines different target groups. A solution to this is to differentiate the Massimo Dutti brand more towards high end consumers through a trail product line which if successful can form the basis of launching a new brand that caters to those consumers. Due to the economic crisis and the widening gap between the rich and poor, Inditex can capitalize on this by marketing Massimo Dutti for more luxury-seeking consumers. Through this, Inditex can accommodate for more segments of the population and diversifying their portfolio because their dependence on Zara might be a crippling stance. Following is timeline for Asian and American market. The main point is having separate DC and production facilities in each market. Plus, having market research and correct differences from Europe to Asia and America.

CONCLUSION Inditex has positioned itself as the worlds leading fashion company by developing a revolutionary supply chain and distribution channels whilst remaining very customer centric. Detailing the information flow through Inditex, placing the store and the fashion scouts at the forefront of their information gathering to their short supply chains summarizes the value adding activities which contribute to their competitive advantage. However as Inditex realizes the need to diversify their portfolio and expanding presence in different markets, this competitive advantage will become stretched if not threatened if the status quo remains. Strengthening Inditexs position within the fashion world can be done through regionalizing their business model and differentiating Massimo Dutti for consumers with a stronger purchasing power. With this, Inditex can look in the future to reap the benefits of a strong market share. APPENDIXES

APPENDIX I : Inditexs history and main strategic movements

2013Inditex rolls out its new brand images at its flagship stores. High-profile store openings in cities such as Paris (Massimo Dutti at Rue de la Paix and Zara on the Champs Elysees), Shanghai (Oysho and Zara Home), St Petersburg (Pull&Bear) and Brussels (Bershka), among others. Meanwhile the Group continues to expand its brands online, going live in new markets such as Canada and Russia.

2012Inditex opens its first stores in Armenia and the former yugoslav Republic of Macedonia. The inauguration of the new eco-efficient store on London's Oxford Street brings the Group's store count to 6,000. Inditex presents Zara's new image at its Fifth Avenue store in New York. Massimo Dutti enters the US and Canadian markets. The Group builds a cutting-edge logistics centre in Tordera (Catalonia, Spain).

2011Stores opened for the first time in Taiwan, Azerbaijan, Australia, South Africa and Peru, bringing Inditex Group's commercial presence to five continents. Inditex thus passed the 5,500-store mark, with shops in 82 markets. Building on its multi-channel retail strategy, the company launched online stores for all of the Group's brands and opened online Zara stores in the United States and Japan. At the company's General Shareholders Meeting, Pablo Isla was appointed Inditex Chairman and CEO.

2010Inditex opened its first stores in Bulgaria, India and Kazakhstan, bringing its presence to 77 countries. The Group reached the 5,000-store mark with the launch of a cutting-edge, eco-efficient Zara store in the heart of downtown Rome (Italy). In September, Zara began selling its products online and by years end the online store was available in 16 European countries. At the Annual General Meeting of Shareholders, Mr Pablo Isla, CEO and Deputy Chairman of Inditex, presented the Group's new Strategic Environmental Plan: "Sustainable Inditex 2011-2015".

2009Inditex signs a joint venture with the Tata Group to open stores in India beginning in 2010. The Group debuts its first stores in Syria, while the concepts Stradivarius, Bershka and Pull & Bear open its first stores in China. A new distribution centre begins operating in Palafolls (Barcelona), next to the existing logistics platform in Tordera.

2008Launch of Uterqe, a retailer specialising in accessories and other fashion extras. Inditex reaches the 4,000-store milestone with an opening in Tokyo. The number of countries on its global store map rises to 73, following openings in Korea, Ukraine, Montenegro, Honduras and Egypt.

2007Zara Home introduces Inditexs first on-line store. Two new Spanish distribution hubs begin operating in Meco (Madrid) and Onzonilla (Len). Zara celebrates the launch in Florence (Italy) of Zara shop number 1,000, while Bershka and Pull & Bear each pass the 500-store mark. The Group opens establishments in four new markets: Croatia, Colombia, Guatemala and Oman.

2006Serbia, mainland China and Tunisia join the Inditex global store map.

2005Inditex opens its first stores in Monaco, Indonesia, Thailand, the Philippines and Costa Rica.

2004The Group unveils store number 2,000 (in Hong Kong), expanding its global footprint to 56 countries in Europe, the Americas, Asia and Africa. It celebrates the launch of its first stores in Morocco, Estonia, Latvia, Romania, Hungary, Lithuania and Panama.

2003The first Zara Home outlets open, marking the launch of Inditex retailer No. 7. The Group opens Zaras second distribution hub, Plataforma Europa, in Zaragoza, Spain, to complement the distribution centre in Arteixo (A Corua, Spain). The Group celebrates its first store openings in Slovenia, Slovakia, Russia and Malaysia.

2002Zara breaks ground on its new distribution hub in Zaragoza, Spain. The Group opens its first outlets in Finland, Switzerland, El Salvador, the Dominican Republic and Singapore.

2001Launch of lingerie retailer Oysho. Inditex begins trading on the stock market on 23 May 2001. The Group opens its first shops in Ireland, Iceland, Italy, Luxembourg, the Czech Republic, Puerto Rico and Jordan.

2000Inditex headquarters moves to a new building in Arteixo (A Corua, Spain). The Group debuts in four new markets: Andorra, Austria, Denmark and Qatar.

1999Inditex acquires Stradivarius, the Group's fifth retailer. Stores open in several new markets: the Netherlands, Germany, Poland, Saudi Arabia, Bahrain, Canada, Brazil, Chile and Uruguay.

1998

This year marks the launch of Bershka, a retailer aimed at young women and teen girls, and store openings in new markets: United Kingdom, Turkey, Argentina, Venezuela, United Arab Emirates, Japan, Kuwait and Lebanon.

1997The Inditex store map expands to Norway and Israel.

1995-1996Inditex acquires 100% of Massimo Dutti. The Group launches its first shop in Malta in 1995, and its first Cyprus establishment opens the following year.

1992/1994

Inditex continues to disembark in new international markets: Mexico in 1992, Greece in 1993, Belgium and Sweden in 1994.

1991Retailer Pull & Bear is founded, and Inditex buys 65% of the Massimo Dutti Group.

1989-1990The Group begins welcoming shoppers in the United States and France with stores in New York (1989) and Paris (1990).

1988Zara opens its first store outside of Spain in December 1988 in Oporto, Portugal.

1986-1987

The Groups manufacturers devote their entire output to Zara. The Group lays the foundations for a distribution system that can meet the needs of its expected rapid pace of growth.

1985

Inditex is founded as the holding company of the group of businesses operating at the time.

1976-1984Zaras approach to fashion is well received by the public, which prompts the retailer to extend its network of stores to major Spanish cities.

1975

Zara traces its roots to this years opening of the first Zara store on a street in downtown A Corua, Spain.

1963-1974

Amancio Ortega Gaona, chairman and founder of Inditex, begins his career as a clothing manufacturer. The business grows steadily over the decade until Ortega owns several factories, which distribute their merchandise to other European countries.

Source: Macarena Cuenca, Deusto Business School, 2011 ; Inditex website, 2015

Appendix I (2) : Number of stores per brand

Source: Inditex website, 2015

APPENDIX II : Inditex value chain

Source: Inditexs Annual Report 2013

APPENDIX III : Organizational structure

Source: own creation with information from Carramiana, 2014.

APPENDIX IV : Strategy example using OGSM model

Objectives Increase the number of clothing campaigns by 8% in 2015 Due to the prior increase the sales by 5% in 2015 Reduce by 5% marketing costs

Goals Increase by 4% clothing campaigns in first semester 2015 Reduce by 2% marketing cost in first quarter 2015

Strategies What are our marketing costs now? Ex: $4.000.000How many clothing campaigns can we afford per year? 40.000How much we sale? Ex: $100.000.000 Where we want to be?: Objectives How to get there?Increase the total space in square meters of our storesClose stores with less of 100m2Open new stores with more than 150m2Increase the ratio of numbers of campaigns/m2

Measures Number of new stores with more than 150m2 Number of closed stores with less than 100m2 Ratio of campaigns/m2

Source: own creation

APPENDIX V : List of countries where there are subsidiaries

Source : Inditex website, 2015

APPENDIX VI : Gupta & Govindarajans framework

Source: Gupta &Govindarajans(1991) framework

Appendix VII : Timeline suggestion

Source: own creation

Appendix VIII : Timeline suggestion

Source: own creation

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