Rami Haidar – rfh19

201803721
October 6 2022

1a. What is financial position of company: is it making a profit and is it an upward

trend? Provide your answer based on last two years trends in the case?

At the end of 2002 Inditex operated 1558(531 Zara) stores around the world compared to
1284 in 2001(507 Zara) and 1080 in 2000. In addition, the net income increased from 259
million Euro (9.91% Net Margin) in 2000 to 340.4 million (10.47% Net Margin) in 2001,
reaching 438.1 million (11.02% Net Margin) in 2002. These numbers reflect the companies’
increased profit margins and upward trend followed associated with the increase in stores
across the world.

1b. What is the concrete problem facing Zara executives?

The concrete problem facing Zara executives is whether they should keep progressing
forward with the companies’ upward trend using the obsolete operating system (DOS), that
hasn’t been supported by Microsoft since 1994 with no assurances from the terminal
vendors’ future support to DOS. Or switch to a new modern OS with added features at the
risk of jeopardizing the robust and scalable infrastructure built so far.

1c. What is significance of this problem for Zara’s strategic alignment (e.g., POS
terminals seem like a mundane issue for the CEO)?

The significance of this problem of this problem for Zara’s strategic alignment can be
discussed with three key decisions:
• Keep using the same sustainable and efficient OS and POS terminals at the risk of
being cut out of convenient hardware and hence inability to open new stores
(temporarily protect their structure by purchasing extra Terminals).
• Upgrade to a modern OS capable of protecting/preserving Zara’s infrastructure and
further expansion.
• Upgrade the OS and enhance the POS application to include further capabilities
(Networks within and between stores - Permanent connection between stores and La
Coruna)

2. Do you agree (disagree) that the below statement uniquely characterizes how Zara
aligns its strategy with is operations to provide it with competitive advantage versus its
competitors? Why? (Is it accurate, why do (not) you think so—PLEASE DO NOT TAKE
IT AT FACE VALUE!)

Yes. Having a decentralized decision-making system that links weekly customer demand
directly to the manufacturer can:
• Reduce cost by eliminating the risk of oversupply, hence, reduce losses.
• Eliminate the cost of managing and setting up back-room store inventories.
• Enhance customer satisfaction by being the first to release newly discovered trends.
3a. (i) What is Zara’s general competitive positioning strategy? (i) Explain why you
think this is the right competitive positioning? [I suggest you use who are its direct
competitors to suggest its competitive positioning (e.g., H&M vs. Armani).]

Zara’s competitive positioning strategy revolves around:

• Focus operations on a global broad market by targeting different customer segments
(Men-Women-Children) in different countries.
• Exceptional production process through the vertically integrated manufacturing
operations (running capital-intensive initial fabrication stages in owed factories).
• Minimizing marketing costs (0.3%) compared to its’ competitors (3-4%), allocating
the extra funds to traditionally market itself through eye-catching store designs and
trendy progressive fashions.
• Quick turnaround time since customers new that by their next visit most of the
available garments would be gone, which led to frequent visits by customers.
• Offering wide range of designs and trendy fashion which are not durable relative to
the relatively durable products of competitors like H&M.

3b. Zara is an embodiment of Fast Fashion. But what are the KEY differentiators of Zara
for this fast fashion (list no more than 2-3, be selective, a la Zook/Allen)? Provide a
short description of each, and why you think these are differentiators?

KEY differentiators of Zara:

• Wide range of collection designs (casual, sport, formal) targeting different customer
segments (Men, Women, Children) which enables them to meet different customers’
needs.
• Fast trendy fashion that leads to quick turnaround time (75% of merchandise change
within 3-4 weeks). Hence creating artificial scarcity keeping customers engaged and
frequently visiting stores.
• Maintaining low costs by using a highly responsive vertically integrated demand-
based supply chain and highly effective distribution centers that require minimal
human intervention.

4. Describe the two important roles of Zara “commercials” as key decision makers? Is
there a potential connection here with a (robust) “learning system” if so how? Why do
(not) you think so?

• Commercials had the power to extend and modify the created collections in order to
align with future customer demand.
• Initiate store to store transfers of garments based on their demand in different areas.
In addition, they tried to identify future trends by keeping a close watch over what’s
trending/demanded and communicated them to design teams.
Having the power to exercise such decisions is an essential factor in creating a robust
learning system. Since the rate of ordering and modifying garments was high compared to
other competitors, the rate of feedback loops gained by Zara’s store managers and
commercial groups was relatively high, hence, leading to a fast robust learning system of
what should/should not be produced.

5. (i) What is the role of “collections” in Zara’s strategy and (ii) how different it is (not)
with respect to its competitors?

Zara was able to outperform rivals thanks to its strategic capacity for quickly introducing
new collections based on the newest trends. In addition to having a wide range of segments
(Men, Women, Children), Zara outperformed competitors with its’ wider range of
collections (casual, sport, formal..) that have the capacity of targeting all groups of people.
Moreover, in contrast to its’ competitors, Zara focused on introducing lower quantities of
more styles (collections), rather than introducing more quantities per style.

6a. (i) What constitutes the offer? (ii) What is role offer in overall (robust) “learning
system”?

The offer is a digital order form (unique to each store) transmitted to each stores’ handhelds
less than 24 hours before the order deadline. The offer includes all replenishment goods that
were still accessible to that store, along with descriptions and images of the freshly released
merchandise. The offer enables commercials to test new designs and gain feedback based on
daily sale forecasting hence aids in refining future designs and supports the overall learning
system.

6b. (ii) What constitutes the order? (ii) What is role order in overall (robust) “learning
system”?

The order constitutes of a combination of different segments assembled and reviewed by the
store manager in order to send back to La Coruna. Each segment is transmitted to different
handhelds by the store manager and filled by different personnel. The order allows
commercials to constantly gain insights of what is being demanded for this specific store and
hence further customize the offer and gain new design ideas.

6c. (i) What constitutes the theoretical inventory? (ii) What is role theoretical inventory
in overall (robust) “learning system”?

Theoretical inventory is the difference between shipments to stores and sales which are
transmitted at the end of each day for all SKUs back to La Coruna. The returned daily
feedback provides commercials with the necessary info required in order to allocate
resources to different stores based on their sale patterns. In addition, it enables them to gain
insights of what’s being demanded, hence predict future trends.
6d. (i) Link offer-order/theoretical inventory in terms of information requirements and
the associated infrastructure? (ii) What role does this linkage play in strategy alignment?
[HINT: Think like the Bike Rental (e.g., slide 51 of the lecture notes) example for low
end and high end link of customer experience + value chain + info infrastructure to
understand the role in alignment, especially role of POS for Zara strategy]

The theoretical inventory and offer\order are linked through the modem-connected POS
terminals available across Zara stores all over the world. This linkage is at the heart of the
information infrastructure that directly supports and effects the “organizational strategy”
(manufacturing, operation process, value chain structure) and the “business strategy”
implemented\followed by Zara.

7. Now based on what you have answered to questions 3 (differentiators), 4 (collections),

5 (commercials) and 6 (information), identify in a few sentences on what you regard to
be: (i) non-negotiables for Zara to be able to align its strategy (fulfillment will fail if
certain information/infrastructure is not there? What is information/ infrastructure and
why); and (ii) robust learning system for Zara to be able to align its strategy with its
operations (what is it that closes the loop for Zara to be able to link its differentiators to
non-negotiables – you can refer to my extra lecture slides on this on moodle)

The unified POS system across all Zara stores that links stores to La Coruna via modem is a
key non-negotiable for Zara to maintain its’ strategic alignment. The present POS enables
receiving offers and sending orders and recording daily sales, hence, providing the curtail
theoretical inventory. In addition, the group of commercials in La Coruna constitute
another important non-negotiable. Commercials preserve the key connection\interface
between Zara stores around the world and La Coruna. They help in predicting future trend
and further emphasize the decentralized decision system (initiating store-to-store transfers
based on regional demand), hence, preserving the Zara brand. Furthermore, commercials
serve as the key in linking non-negotiables to differentiators. Commercials had the power to
decide what each store would get based on the robust learning system supported by the POS
(orders-offers-theoretical inventory), set garment prices and communicate fashion trends to
design teams.

8. POS is a tiny part of the overall value chain. (i) What does POS enable Zara do
strategically? (ii) Try to construct 2-3 sentences that explain the connection between POS
and Zara strategic alignment?

The modem connected POS enables Zara stores to view new available garment, place
weekly orders, communicate daily sales to La Coruna and link customer demand directly to
manufacturing through the offer/order features. These POS functionality enables Zara to
fulfill its’ strategic alignment since it enables it to weekly communicate the stores’ demands
and provide La Coruna with daily feedback that emphasizes the robust learning loop.
9. There are a number of distinctive aspects of Zara as a company that enable its strategic
alignment. (i) Please list up to 3 KEY one in addition to the above (e.g., IT budget). (ii)
Provide a short description, why they help.

• Decentralized decision system, centered around commercials and store managers’

decisions, hence preserving the speed focused strategic alignment.
• Minimizing marketing costs (0.3%) allocating the extra funds to traditionally market
itself through eye-catching store designs located in prime city areas.
• Exceptional production process through the vertically integrated manufacturing
operations (running capital-intensive initial fabrication stages in owed factories).

10. Context: POS Terminals appear to have “oversize” importance in this case. What would
you advise the management team in the case to proceed on the issue of upgrading the
POS terminals without disturbing or destabilizing alignment (please limit yourself to the
situation at the time of decision/case writeup linking it to: alignment, strategic
differentiators, value chain design, tech/info infrastructure, non-negotiables, robust
learning system):
10a. Which Option & Why you chose this option?
(i): Upgrade the whole IT environment because a modern company needs to do it…?
(ii): Minimalist upgrade just so the POS can function as previously for the information
collection to work but nothing more Pick either (i) or (ii) (NOT both) and explain! You
cannot choose another option of your own. You are limited to these.

Zara should follow the minimalist approach. Since Zara is a leading company in the
clothing industry it must sustain its’ competitive advantage. To do so it must protect itself
from the risk of running out of DOS supported hardware specially knowing that the
terminal vendor refused to include any assurances in the contract. So, instead of enduring
the set-back of suddenly losing compatible hardware and inability to open new stores, they
should strive to include minimalistic upgrade at their own pace. In addition, upgrading the
whole IT infrastructure at once could prove risky, especially since Zara constituted 73% of
Inditexs’ sales and the present terminals can already support Zara’s strategy well.

10b. For either option explain (i) if it maintains alignment or not and (ii) how (You must
be brief and explain consistency or lack of it in terms of your answers, vis-à-vis Zara’s
current situation at the time).

Since the current POS supports all the functionality that Zara needs to maintain alignment,
such as, recording daily sales, transmitting them to La Coruna and receiving\sending offers
and orders respectively, a minimalist upgrade would provide the same benefits and
eliminate the risk of putting all Zara’s operations on hold. In addition to that, it would
similarly require minimal IT maintenance and support, hence, no drastic changes to the IT
department would be necessary.
11. (i) Can other organizations easily copy Zara’s POS+strategy as well as alignment? (ii)
Why/Why Not? [HINT: most have not!] Please note the emphasis on easily!

No. The POS application is specifically written by Zara in-order to support its unique
speedy production of new fashion by aiding in design\manufacturing through the robust
learning system attained from using the offer\order system and linking customer demand
directly to manufacturing. This specific capability is directly linked to the Zara’s strategy,
hence copying it requires a whole infrastructure (manufacturing process | i.e. vertically
integrated in Zara’s case) and value chain upgrade which proves to be not easy.