{"id":102,"date":"2018-06-14T19:04:22","date_gmt":"2018-06-14T19:04:22","guid":{"rendered":"https:\/\/pressbooks.ccconline.org\/bus3060\/chapter\/ch03\/"},"modified":"2026-02-11T23:33:11","modified_gmt":"2026-02-11T23:33:11","slug":"ch03","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ccconline.org\/bus3060\/chapter\/ch03\/","title":{"raw":"3.1 Introduction","rendered":"3.1 Introduction"},"content":{"raw":"
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Learning Objectives<\/strong><\/p>\r\n\r\n<\/header>\r\n

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After studying this section you should be able to do the following:<\/div>\r\n<\/div>\r\n<\/div>\r\n
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  1. Understand how Zara\u2019s parent company Inditex leveraged a technology-enabled strategy to become the world\u2019s largest fashion retailer.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n
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    The poor, ship-building town of La Coru\u00f1a in northern Spain seems an unlikely home to a tech-charged innovator in the decidedly ungeeky fashion industry, but that\u2019s where you\u2019ll find \u201cThe Cube,\u201d the gleaming, futuristic central command of the Inditex Corporation (Industrias de Dise\u00f1o Textil), parent of game-changing clothes giant, Zara. The blend of technology-enabled strategy that Zara has unleashed seems to break all of the rules in the fashion industry. The firm shuns advertising and rarely runs sales. Also, in an industry where nearly every major player outsources manufacturing to low-cost countries, Zara is highly vertically integrated, keeping huge swaths of its production process in-house. These counterintuitive moves are part of a recipe for success that\u2019s beating the pants off the competition, and it has turned the founder of Inditex, Amancio Ortega, into Spain\u2019s wealthiest man and the world\u2019s richest fashion executive.<\/p>\r\n\r\n

    \r\n\r\n[caption id=\"attachment_1231\" align=\"alignnone\" width=\"958\"]\"Zara Figure 3.1.<\/strong> Zara\u2019s operations are concentrated in Spain, but the company has stores around the world, including locations in Tokyo and Canada. Images: Alberto Garcia \u2013 \u201cZara\u201d \u2013 CC BY-SA 2.0; bargainmoose \u2013 \u201cZara Store Canada\u201d \u2013 CC BY 2.0.[\/caption]\r\n\r\n<\/div>\r\nThe firm tripled in size between 1996 and 2000, then its earnings skyrocketed from $2.43 billion in 2001 to $13.6 billion in 2007. By August 2008, sales edged ahead of Gap, making Inditex the world\u2019s largest fashion retailer (Hall, 2008).\r\n

    Table 3.1 \u201cGap versus Inditex at a Glance\u201d compares the two fashion retailers. While Inditex supports eight brands, Zara is unquestionably the firm\u2019s crown jewel and growth engine, accounting for roughly two-thirds of sales (Murphy, 2008).<\/p>\r\n\r\n

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    Table 3.1<\/span><\/strong> Gap versus Inditex at a Glance<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    <\/th>\r\nGap<\/th>\r\nInditex<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
    Revenue<\/strong><\/td>\r\n$14.5 billion<\/td>\r\n$14.7 billion<\/td>\r\n<\/tr>\r\n
    Net Income<\/strong><\/td>\r\n$967 million<\/td>\r\n$1.68 billion<\/td>\r\n<\/tr>\r\n
    Number of Stores<\/strong><\/td>\r\n3,149<\/td>\r\n4,359<\/td>\r\n<\/tr>\r\n
    Number of Countries<\/strong><\/td>\r\n6<\/td>\r\n73<\/td>\r\n<\/tr>\r\n
    Biggest Brand<\/strong><\/td>\r\nGap<\/td>\r\nZara<\/td>\r\n<\/tr>\r\n
    Number of Other Brads<\/strong><\/td>\r\n4<\/td>\r\n7<\/td>\r\n<\/tr>\r\n
    Based in<\/strong><\/td>\r\nSan Francisco, USA<\/td>\r\nArteixo (near La Coru\u00f1a), Spain<\/td>\r\n<\/tr>\r\n
    First Store Opened<\/strong><\/td>\r\n1969<\/td>\r\n1975<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n
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    Sources: Gap Inc.<\/a>, INDITEX<\/a>, MarketWatch;<\/a>\u00a0updated from C. Rohwedder, \u201cZara Grows as Retail Rivals Struggle,\u201d Wall Street Journal<\/em>, March 26, 2009.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n

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    Why Study Zara?<\/h2>\r\n

    While competitors falter, Zara is undergoing one of the fastest global expansions the fashion world has ever seen, opening one store per day and entering new markets worldwide\u2014seventy-three countries so far. The chain\u2019s profitability is among the highest in the industry (Sull & Turconi, 2008). The fashion director for luxury goods maker LVMH calls Zara \u201cthe most innovative and devastating retailer in the world\u201d (Surowiecki, 2000).<\/p>\r\n

    Zara\u2019s duds look like high fashion but are comparatively inexpensive (average item price is $27, although prices vary by country)(Rohwedder, 2009). A Goldman analyst has described the chain as \u201cArmani at moderate prices,\u201d while another industry observer suggests that while fashions are more \u201cBanana Republic,\u201d prices are more \u201cOld Navy\u201d (Folpe, 2000). Legions of fans eagerly await \u201cZ-day,\u201d the twice-weekly inventory delivery to each Zara location that brings in the latest clothing lines for women, men, and children.<\/p>\r\n

    In order to understand and appreciate just how counterintuitive and successful Zara\u2019s strategy is, and how technology makes all of this possible, it\u2019s important to first examine the conventional wisdom in apparel retail. To do that we\u2019ll look at former industry leader\u2014Gap.<\/p>\r\n\r\n<\/div>\r\n

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    Gap: An Icon in Crisis<\/h2>\r\n

    Most fashion retailers place orders for a seasonal collection months before these lines make an appearance in stores. While overseas contract manufacturers may require hefty lead times, trying to guess what customers want months in advance is a tricky business. In retail in general and fashion in particular, there\u2019s a saying: inventory equals death. Have too much unwanted product on hand and you\u2019ll be forced to mark down or write off items, killing profits. For years, Gap sold most of what it carried in stores. Micky Drexler, a man with a radar-accurate sense of style and the iconic CEO who helped turn Gap\u2019s button-down shirts and khakis into America\u2019s business casual uniform, led the way. Drexler\u2019s team had spot-on tastes throughout the 1990s, but when sales declined in the early part of the following decade, Drexler was left guessing on ways to revitalize the brand, and he guessed wrong\u2014disastrously wrong. Chasing the youth market, Drexler filled Gap stores with miniskirts, low-rise jeans, and even a much-ridiculed line of purple leather pants (Boorstein, 2006). The throngs of teenagers he sought to attract never showed up, and the shift in offerings sent Gap\u2019s mainstay customers to retailers that easily copied the styles that Gap had made classic.<\/p>\r\n

    The inventory hot potato Drexler was left with crushed the firm. Gap\u2019s same-store sales declined for twenty-nine months straight. Profits vanished. Gap founder and chairman Dan Fisher lamented, \u201cIt took us thirty years to get to $1 billion in profits and two years to get to nothing\u201d (Sellers, 2003). The firm\u2019s debt was downgraded to junk status. Drexler was out and for its new head the board chose Paul Pressler, a Disney executive who ran theme parks and helped rescue the firm\u2019s once ailing retail effort.<\/p>\r\n

    Pressler shut down hundreds of stores, but the hemorrhaging continued largely due to bad bets on colors and styles (Lee, 2007). During one holiday season, Gap\u2019s clothes were deemed so off target that the firm scrapped its advertising campaign and wrote off much of the inventory. The marketing model used by Gap to draw customers in via big-budget television promotion had collapsed. Pressler\u2019s tenure saw same-store sales decline in eighteen of twenty-four months (Boorstein, 2006). A Fortune<\/em> article on Pressler\u2019s leadership was titled \u201cFashion Victim.\u201d BusinessWeek<\/em> described his time as CEO as a \u201cTotal System Failure,\u201d and Wall Street began referring to him as DMW for Dead Man Walking. In January 2007, Pressler resigned, with Gap hoping its third chief executive of the decade could right the ailing giant (Lee, 2007).<\/p>\r\n\r\n

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    Contract Manufacturing: Lower Costs at What Cost?<\/h4>\r\n

    Conventional wisdom suggests that leveraging cheap contract manufacturing<\/a><\/span> in developing countries can keep the cost of goods low. Firms can lower prices and sell more product or maintain higher profit margins\u2014all good for the bottom line. But many firms have also experienced the ugly downside to this practice. Global competition among contract firms has led to race-to-the-bottom cost-cutting measures. Too often, this means that in order to have the low-cost bid, contract firms skimp on safety, ignore environmental concerns, employ child labor, and engage in other ghastly practices.<\/p>\r\n

    The apparel industry in particular has been plagued by accusations of employing sweatshop labor to keep costs down. Despite the fact that Gap audits contract manufacturers and has a high standard for partner conduct, the firm has repeatedly been taken to task by watchdog groups, the media, and its consumers, who have exposed unacceptable contract manufacturing conditions that Gap failed to catch. This negative exposure includes the October 2007 video showing Gap clothes made by New Delhi children as young as ten years old in what were described as \u201cslave labor\u201d conditions (Cho, 2007).<\/p>\r\n

    Gap is not alone; Nike, Wal-Mart, and many other apparel firms have been tarnished in similar incidents. Big firms are big targets and those that fail to adequately ensure their products are made under acceptable labor conditions risk a brand-damaging backlash that may turn off customers, repel new hires, and leave current staff feeling betrayed. Today\u2019s manager needs to think deeply not only about their own firm\u2019s ethical practices, but also those of all of their suppliers and partners.<\/p>\r\n\r\n<\/div>\r\n \r\n\r\n<\/div>\r\n

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    Tech for Good: The Fair Factories Clearinghouse<\/h4>\r\n

    The problem of sweatshop labor has plagued the clothing industry for years. Managers often feel the pressure to seek ever-lower costs and all too often end up choosing suppliers with unacceptably poor practices. Even well-meaning firms can find themselves stung by corner-cutting partners that hide practices from auditors or truck products in from unmonitored off-site locations. The results can be tragic for those exploited, and can carry lasting negative effects for the firm. The sweatshop moniker continues to dog Nike years after allegations were uncovered and the firm moved aggressively to deal with its problems.<\/p>\r\n

    Nike rival Reebok (now part of Adidas) has always taken working conditions seriously. The firm even has a Vice President of Human Rights and has made human dignity a key platform for its philanthropic efforts. Reebok invested millions in developing an in-house information system to track audits of its hundreds of suppliers along dimensions such as labor, safety, and environmental practices. The goal in part was to identify any bad apples, so that one division, sporting goods, for example, wouldn\u2019t use a contractor identified as unacceptable by the sneaker line.<\/p>\r\n

    The data was valuable to Reebok, particularly given that the firm has hundreds of contract suppliers. But senior management realized the system would do even more good if the whole industry could share and contribute information. Reebok went on to donate the system and provided critical backing to help create the nonprofit organization Fair Factories Clearinghouse. With management that includes former lawyers for Amnesty International, Fair Factories (FairFactories.org) provides systems where apparel and other industries can share audit information on contract manufacturers. Launching the effort wasn\u2019t as easy as sharing the technology. The U.S. Department of Justice needed to provide a special exemption, and had to be convinced the effort wouldn\u2019t be used by buyers to collude and further squeeze prices from competitors (the system is free of pricing data).<\/p>\r\n

    Suppliers across industries now recognize that if they behave irresponsibly the Fair Factories system will carry a record of their misdeeds, notifying all members to avoid the firm. As more firms use the system, its database becomes broader and more valuable. To their credit, both Gap and Nike have joined the Fair Factories Clearinghouse.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n

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    Key Takeaways<\/span><\/p>\r\n\r\n<\/header>\r\n

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