By taking direct control of fabric supply, marking, cutting and final finishing Zara navigates its production throughout the entire value chain.
The capital intensive vertical integration model into manufacturing combined with a highly labor intensive one has given Zara a competitive advantage.
Moreover, due to less stores and sales in the other areas rather than in the home country, H& M is less exposed to exchange rate variations which might explain the higher market value and lower size in total liabilities when they are compared to the figures of Inditex for 2001 Equity-Market Value: Inditex: 13,433H& M: 15,564Total Liabilities: Inditex: 1,119H& M: 532 7.
One Year Change in Market Value Inditex: 47%H& M: 8% Another factor which is interesting to examine is the One Year Change in Market Value.
Once the finished merchandise reached the distribution center it will be sent out immediately via shipments or aircraft by third-party delivery.
Direct shipping from central distribution centers reduces cycle time and helps the company to be the first to market.The high number of stores may be also traced back to the increasing value of the property because Zara only buys stores in strategic areas (shopping malls, shopping arcades, pedestrian districts etc. Its strategy of investing into high quality equipment such as a just-in-time manufacturing system, a huge warehouse close to its headquarter and an highly advanced communication system has lead to a Return on Investment rate of almost 23%.This is a tribute to Inditex’s high capital efficiency. How specifically do the distinctive features of Zara’s business model affect its operating economics ?Zara’s competitive advantage is a result of an efficient production at low costs, good quality and a quick response to market demands.An examination of different parts of the strategy will help to explain what makes the company more profitable than its competitors Zara’s business model, which directly affects its operating economics, can be broken down into Sourcing and Manufacturing, Distribution and Promotion. Sourcing and Manufacturing: The most vital factor of Zara’s unique business approach is an in-house production system. It only outsourced the production of high labor intensive processes but maintained in house some other capital intensive processes protecting as well the knowledge and know-how.Exhibit 6 indicates that the financial results of Inditex and H& M seem to be very comparable. Return on Invested Capital is a key measure of a company’s profitability that focuses on the true operating performance of the company. Inditex has a higher operating income by keeping cost of goods sold and operating expenses low. This indicates that Inditex is less liquid which is probably due to the fact that the company has more fixed assets and a quick inventory turnover.However, a closer analysis reveals that Inditex has enjoyed a competitive advantage in operating metrics over H& M. For example Inditex has a lower staff to store ratio which keeps the amount of money needed to be paid as wages low. But a high liquidity does not consequently mean high efficiency. If its cash is not invested it will not generate a return. 378 The ratio of revenues by sales and operating expenses indicates the share in revenues used to cover the costs for running products, business and system.Ultimately, the reduction in lead-times does more than improve the forecasting.It also decreases the level of inventory, which refers to capital locked up in stock, reduces the costs of holding and the risk of stock going out of date. Can you elaborate the linkages among Zara’s choices about how to compete, particularly ones connected to its quick-response capability, and the ways in which they create competitive advantage?Inditex, the parent company owns a subsidiary (Comditel), which manages the dyeing, patterning, and finishing of gray fabric and supplied finished fabric to external as well as in-house manufacturers.The result is “Fast Fashion”: A short lead-time is important for Zara to be able to offer the latest fashion in store at all time (just-in-time).