De La Salle University

Critique Paper: Inditex: On Horizontal Differentiation

In Partial Fulfillment of the

Course Requirements for

Managerial Economics (COBMECO)

2nd Term, AY 2019-2020

Submitted by:

Gallardo, Erin Maxine

Mamaril, Kristian Angelo

Supera, Christian Jansen

Toong, Frances Anne

Submitted to:

Mr. Joel Q. Tanchuco

 On February 26, 2020, the 4th group in our Managerial Economics class presented a new topic

which is entitled, “Inditex: On Horizontal Differentiation,” which aims to explain the possible explanations

for horizontal differentiation. Through their presentation, our group learned that horizontal differentiation

is prominent in this modern competitive industry with horizontal differentiation serving as a production and

marketing strategy which is a kind of product differentiation that distinguishes the company’s products in

terms of attributes, features, and characteristics rather than its quality or price point. This distinction in

products cannot be easily evaluated or distinguished based on its quality which is the opposite of vertical

differentiation as its distinctions are objectively measurable based on the products’ level of quality. Through

this, we were able to examine the purpose and significance of horizontal differential in serving as a catalyst

in consumer decision- making process. This horizontally differentiated products are efficient for producers

to capture as many consumers as possible with minimal costs. In-line with this, our group thinks that

horizontal differentiating also helps in strongly influencing brand loyalty and brand preferences since it

provides attributes that are highly attracting to consumers and customers. This type of differentiation is

applied in a monopolistic competitive market in which a great example given by the presenting group is the

apparel industry, more specifically on Inditex.

In constructively evaluating the presenting groups’ analysis, our group looked upon its framework

of analysis or conceptual framework which presents that the two main economic factors that can explain

horizontal differentiation further are the Economies of Scale and the Economies of Scope. Firstly, the

Economies of Scale when cost efficiency increases as more units are produced. The first kind of Economies

of Scales is the Internal in which these are firm-specific or caused inside the firm. The other kind is the

external in which economies of scale is caused by the large changes outside the firm. On the other hand,

the Economies of Scope is where cost efficiency increases as more variety is produced. In Economies of

Scope, there are two main ways that are done which is making use of the byproduct or complementary

products as well as using the same raw materials. From these two key factors presented by the group, our

group believes that both of these results in a declining marginal cost of production and the net effect is still
the same. For our group, it is true that both of these key factors are possible economic explanations for

horizontal differentiation.

In order to further deepen our knowledge to be able to test the facts and the group’s report, our

group researched further on certain facts about Inditex especially when it comes to their sales, expenses,

net profit, supply chain as well as its top company that gives it the largest market share. Based from our

research about the Inditex Group Worldwide, we’ve found out that its revenues and expenses drastically

increases throughout the years but in overall even though its expenses are drastically increasing, the drastic

increase in the revenue of Inditex helps it still earn an increasing net profit in the end. Moreover, from its

net sales worldwide from 2013 to 2018, it can be seen that Zara has the highest sales followed by Bershka

and based from the group’s presentation it can be inferred that as the net sales of Inditex increases, its

number of stores drastically increased too especially in the 20th century. From these metrics and researches

about Inditex, it can be concluded that Inditex adopts cost leadership and the synergy between cost

leadership through production management and horizontal differentiation is Inditex’s secret to success in

creating their products that would satisfy the needs of the market. An example here would be that Zara,

being the top company with the highest sale increase throughout 2013 to 2018 has its global distribution

center called “The Cube” which facilitates all transactions from fashion designers, raw material suppliers,

clothing factories and store managers to make distribution of inputs and outputs (Supply Chain) efficient

and effective. Through this, Zara holds the sustainability of Inditex in which Inditex depends on it since

66% of its total profit came from Zara. This is due to the fact that it has low labor cost with higher

unemployment rates due to efficiency in minimizing its costs. Moreover, with horizontal differentiation in

mind, it is relatively affordable despite the economic activity decline, customers still stay away from luxury

products except Zara. An example that our group thinks are numerous brands that Zara relatively imitate

with the design but differentiates it with some features and the quality and offer it at a more affordable

price. As a result, it attracts more customers with a luxurious design similar to Gucci, Balmain, Phillip Lim,

Tom Ford, and many other high-end luxurious brands. An example would be blazers that Tom Ford offers
at $ 5,250 while Zara offers a relatively similar design for $69.90 which has a significant difference in price

compared to Tom Ford’s blazer. This horizontal differentiation by Zarah becomes its edge in gaining the

loyalty of the customers in further increasing its sales and making it still profitable at the end even though

its products are cheap since there are numerous customers who are willing to buy it due to its luxurious

attribute and affordable price. This horizontal differentiation is prevalent in this clothing apparel industry

in the modern days with different industries just like H&M and FOREVER21 which also relatively imitates

some designs of high-end brands and apply to their products which are shoes, boots, as well as bags and

purses.

From these, our group was able to come to the fact that the economy of scope and economy of scale

concept was able to help the leading brand of Inditex, Zara, to minimize or cut its additional costs in

horizontally differentiating its products. This concept helps Zara minimize its average total cost of

production but in the same way offer these products in an effective and faster way through an efficient

supply chain. It utilizes a supply chain that is fast and numerous that it outsources many of its products

from several factories all around the globe which makes distribution and manufacturing of inputs and

outputs more faster making communication better. Moreover, our group also found out that the marketing

strategy of Zara if very timely and efficient in which it is always updated and aggressive in searching for

the clothing trend that allows the flexibility to change as market demand changes as well which adds a

variety of new horizontally differentiated products on its current product line. This scope of products helps

the company offer a high barrier to entry for new startup firms as well as a competitive synergy for the

company itself. All of these product line resources make use of similar raw materials, similar manufacturing

processes and similar distribution and logistics channel as well which further helps in integrating its supply

chain to be cost efficient and increase the firm’s value that further leads to increase in its performance and

net profit at the end.

 Upon critical evaluation of the topic and the presenting group’s discussion, our group was able t

formulate alternatives in order to maximize the opportunity given by horizontal differentiation. Just like the

strategy of Zara, many firms may also opt to sell its products at a much affordable price. Given this, the

firm must also achieve low costs but still maintain a high product competitive value or high fashion in the

clothing apparel industry. Through this alternative, it may grant a firm a unique competitive advantage by

providing products at lower prices compared to the competitors with the value of offering high-end

luxurious fashion features that are affordable to the mass. It may not be at the highest quality; however, the

modern generation’s demand is a trendy fashion with lower prices. This alternative may significantly help

firms attain popularity and brand loyalty through innovation and gradually building competitive advantage.

Another proposed alternative of our group is innovating technology and the supply chain management of

firms which is similar to Zara. Compared to other fashion brands, Zara is one of the most efficient and

fastest in supplying its products to the market having a fast fashion cycle within a period of weeks. These

core competencies of firms may include its fast and powerful design team, fast fashion brand image, quick

production process, frequent new products, as well as low costs. This becomes very much effective not just

to retain the customers of the firm but also to engage them with more innovative and unique ideas coming

every period making the brand interactive and fast-paced. Since the firm’s prices are affordable, customers

always get back within weeks to check out new styles and designs thanks to the fast and effective supply

chain management and innovative fashion trends that the firm adapts to. This simple means that firms must

be aggressive and alert in taking every opportunity and trend to make things effective and fast to engage

customers and to catch their demand before other competitors do. Another alternative the group thinks of

would be market penetration and market development in selling more to the existing customers and entering

new markets of geographic regions just like Zara which expanded globally being able to cater to foreign

markets. This strategy along with the horizontal differentiated products helps spread to a larger market and

be able to cope up with luxurious fashion trends from different regions into its inspirational designs and

features making it more innovative, thus, gaining a larger power and share in the market. Moreover, we

think that horizontal differentiation must not be too complacent in just differentiating its products but also
planning ahead of managing inventories and managing upcoming fashion trend designs to compromise

inventories on hand. We think that the strategy of Zara which is increasing the available styles and

decreasing the quantities of the same product in the inventory is effective. Producing small quantities of

these similar designs helps a firm obtain differentiated products with minimal costs mainly in saving

inventory costs. This differentiation makes an attractive price with updated designs and exclusivity.

Overall, the group was able to weigh the pros and cons of horizontal differentiation as well as

alternatives to make use of this opportunity of differentiating its products. The pros of these alternative

would be in terms of creating friendly prices, brand loyalty, fashion trend designs, exclusivity, promotion

of stronger trademark, minimize costs, fast delivery of new products and trends, and one of the most

significant of all which is the efficient supply chain management. However, there would also be some cons

which is the lower quality compared to luxurious high-end brands, minimal advertisements, as well as the

low in store inventory. At the end, it still boils down to the fact that these alternatives and effective

horizontal differentiation gives firms the opportunity to grow and innovate its features to gain a unique

competitive advantage and a fast supply chain internally and externally affecting the market in terms of

decision making, engagement, loyalty, reputation, productivity and net income to regulate and improve the

business. This leads our group to the conclusion that effective horizontal differentiation helps businesses

minimize its cost with the proper understanding of the economies of scale and economies of scope and be

able to be update with the trend and how the demand and price elasticity of the market fluctuates each

period. Furthermore, this critical and productive learning insights and analyses from our group wouldn’t be

possible without the proper and clear discussion of the presenting group about the horizontal differentiation

topic. With this in mind, the presenting group’s overall performance was productive and insightful having

to utilize a strong model brand to represent the topic and make each idea relevant and applicable. At the

end, our group and the presenting group’s idea merged and concluded a single similar bottom line about

horizontal differentiation and this we think is what we call a collaborative effective learning system.