Strategic decision making in the market

Técnicas empresariales. Fusión. Negocios # Logical incrementalism. Development and management of strategies. Amancio Ortega. Inditex

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Amancio Ortega

The INDITEX case

Theoretical part

Introduction

Within the organization, a host of behavioural, social, and political factors influence the strategy making process. Instead of being a comprehensive, planned, and rational process, strategy making can sometimes be disjointed and incremental. Quinn (1980) used the term logical incrementalism to describe such processes. Logical incrementalism acknowledges that organizational goals are complex, changing, and unclear. It involves artfully blending formal analysis, behavioral techniques, and power politics to move organizations toward broadly conceived goals. In this process, strategy formulation and implementation are not separate; rather, they are integrated into a single-decision making process.

I have found the famous clothes firm INDITEX a very good example of the “logical incrementalism” in the global economy.

Theory

Logical incrementalism explains strategy as a process that is clarified and defined incrementally with the unfolding of events. In this strategy process paradigm, managers strategize effectively by curbing or avoiding irreversible commitments at the outset, treating newly formed problem resolutions as tentative, and making intentions concrete and tying them to particular details gradually. Such a process gives them time to improve the quality of information used in their decisions and manage the practical realities associated with their strategic goals. This theory of logical incrementalism is an extension of Lindblom's suggestion (1952) that policy makers “muddle through” their decisions, relying upon the recognition of feasible constraints, the restriction of their attention to relatively few items among numerous alternatives, and the initiation of small decision steps to find a workable solution to complex policy issues. Within the logic of Quinn's logical incrementalism, strategy is as a process that is more fluid and evolving than a formal plan, but, nevertheless, a process that has clear priorities and intentions. Conceptions of emergent and incrementalist strategies present together a management paradigm that emphasizes the bounded rationality of decision makers and how decision makers cope with uncertainty and complexity while remaining committed to their strategic objectives.

According to Quinn the logical incrementalism managed of correct form, it allows the director to combine the contributions of the rational and systematic analysis with the concepts on the organizational behaviour. Also it allows managers to obtain connexion and identity with new courses, so as to face relations of being able and to necessities of individual conduct. The logical incrementalism makes possible the use of the best reconnaissance datas and analytical, and therefore the main decisions in the company.

The ideas of Mintzberg complement the ideas of Quinn. But a difference exists that deserves to be considered. Whereas both agree in the strategic process like an instance of evolution of learning, Quinn tends to give more importance to the paper of the main executive, and the CEO, considering the main strategy. On the other hand Mintzberg tends to attribute greater importance to other elements that can introduce the hierarchy in the strategic decision making. In effect, for Mintzberg the organizations can have general managers that they down raise their visions of the strategy from the top managers to medium managers, and at the same time that the creative personnel send strategies in inverse sense.

Strategic decision making in the market

Development of Strategies

In order to be able to develop an agreed strategy to the necessities of an organization, it is fundamental to take into account some variables and factors that determine the functionality and the efficiency of these strategies with base in the structure of the company. The quantitative, qualitative, organizational factors and the relative ones to the power and the behavior are due to take into account, that are those that often determines the success of a strategy in a specific situation.

These elements have improved the understanding of which they are the multiple structures of organization goals, the policy of the strategic decisions, the executive processes of negotiation and commitments, the satisfaction in the decision making, the paper of the coalitions in the administration strategic and the practice "to confuse" in the public sphere.

In this one sense, important findings exist:

  • Neither the paradigm of "being able and behavior" nor the one of the "formal systems" of planning characterize in suitable form the way in which the successful strategic processes work.

  • The effective strategies tend to arise from a series of "strategic subsystems", each one of which approaches a specific class of strategic tasks, of disciplined way, but which they are condensed and they increased opportunely in a coherent pattern who transforms itself into the strategy of the company.

  • The logic that it sustains to each "subsystem" is so strong that, to a certain extent, it can serve like normative approach for the formulation of key elements of the strategy in great companies.

  • Due to cognitive and procedural limits to each other they have to be directed and to be related by a designated approach "logical incrementalism".

  • This incrementalism is not "confusion". It is a propositive, effective and proactive approach administrative that tends as much to the improvement and the integration of the analytical aspects of the formulation of the strategies.

The critical aspects strategic to consider are the following ones:

  • Global organizational structure or its basic administrative style

  • Relations with the government or other groups of external interest

  • Practices of acquisition, reincorporation or of divisional control

  • International relations and positions

  • Capacities of innovation or personal motivations affected by the growth

  • Relations of workers and professionals reflecting changing expectations and social values and

  • Advance technological environment

Often external or internal events, on which the administration essentially does not have control some, precipitate urgent, fragmented and temporary decisions that without remedy, conform the future strategic position of the company.

The companies require a incremental process to handle the crucial psychological changes and of power that the global direction of the program and its consequences determine. These processes contribute to unify the analytical aspects of the diversification decisions. They generate a wide consensus, the attitudes of acceptance of risks, the flexibility of the organization and the resources, and the adaptive dynamism conceptual that determine, as much the sequence as the direction of the diversification strategies.

Most important of these processes are:

  • The generation of a genuine psychological commitment and the highest level with the diversification.

  • The conscious preparation to act according to the opportunity.

  • To establish a factor of comfort when assuming risks.

  • To develop new customs.

Each one of the processes interacts to each other, and among them they affect the sequences of action, the passed time, and the final results, always of unexpected way.

As far as the system of reorganization on great scale, the great organizations changes are integral part of the strategy. Sometimes, those changes constitute a strategy in themselves; in others, they precede or they precipitate the sprouting of a strategy, and other times they allow to the implementation of a strategy. Nevertheless, like it happens with many other strategic decisions, the macro organizations changes happen in incremental form and outside a formal process of planning.

The formal planning in all corporative strategy must provide a discipline that forces the administrators to visualize periodically and carefully towards ahead, to demand rigorous communications about the strategic goals, aspects and allocations of resources, to stimulate analysis of greater terms of those than they would be made in other circumstances, to produce bases to evaluate and to integrate the short term plans, to extend the time horizons and to protect the long term investments, such as the investigation and the development, as well as to generate a psychological heap and an informative frame of reference about the future with which the managers can decide in the short term.

As far as the decision making, programs of reduction of costs are due to sharpen the annual commitments, to formalize and of helping to implant strategic changes, since the planning occurs from the general position of the organization.

The strategy has to do with the stranger, more than with the uncertain thing. It implies so numerous forces and strengths that cannot be predicted the events. The logic experimentally imposes the behaviour of flexible way and, the general concepts towards the specific commitments, making specific them more soon possible with the purpose of diminishing the uncertainty margin, as well as to benefit to us from the best information than can be obtained. This process is called "logical incrementalism".

The incrementalism is a conscious, propositive form and proactive of the good management. Managed on the right way, it allows the executive to combine the contributions of the rational and systematic analyses, political theories and being able, and concepts on the organizational behaviour. It allows the executive to obtain connection and identity with new courses. It allows him to fight with relations of being able and individual necessities, and to use the best data, analytical news and, and thus to choose his main attachment lines.

In order to be able to know an organization we must know its systems and the connections that exist between the thought and the action, to obtain a good strategy. The notion of which the strategy is something that must happen in high levels, very far from the details of the daily activity of an organization, is one of the greatest deceits of the conventional strategic administration. That explains great part of the failures in the business.

In this one sense, the effective strategies can arise in the strangest places and be developed by average more unforeseen expenses. An optimal method does not exist to develop a strategy.

Some strategies feel roots in several places anywhere or in where people are able to learn. These strategies happen in organizations when they become collective, when its proliferation is translated in guide of the behaviour of the organization as a whole.

In a company, it must have change. The change must be continuous and the organization must be in constant adaptation. This must not to that formality at the moment does not exist for implementing a strategy, but to that the market and the industry they change constantly and like company, we must ourselves adapt to the changes that they indicate to us, or of national or international way.

What it does not manage to include the conventional vision is the knowledge how and when to promote the change. A fundamental dilemma of the development of the strategies is located in the necessity to conciliate the change and stability forces, to focus the efforts and to increase the operative efficiency on the one hand, and at the same time to adapt, and to stay to as much of an external and changing atmosphere.

What the quantitative theory suggests is that the new strategies, are conserved in revision in some corner of the organization until a strategic revolution becomes necessary. As the old established strategy is disintegrated, the seeds of the new one begin to open themselves.

In more creative organizations we see a pattern somewhat different from change and stability, a pattern more balancing. Or by means of quantitative revolutions or by cycles of convergence and divergence, the organizations seem to have will separate the time the basic forces of the change and the stability, having conciliated them by means of a subsequent attention to each one of them. Multiple strategic failures are attributable or to the mixture of these forces, or to the obsession by one of these forces to expenses of the other.

To govern a strategy is then to conform a pattern of thought and action, control and learning, as well as stability and change. The administrators must be dedicated, to count on experience, mutual understanding with the material, to have a personal touch, dominion of details and a sense of harmony and group integration. They must be sensible to his surroundings and to recognize other factors that help him in the elaboration of new strategies.

The strategic planning has to be recognized reason why it is: means, do not stop to generate strategies, but to program a created strategy previously, to determine its implications of formal way. In essence, it is of analytical nature, one is based on the decomposition: whereas the strategy creation is, in essence a synthesis process. For that reason it is that the attempt to generate strategies by means of the formal planning takes almost always to the extrapolation of the existing strategies or to the copy of those of the competition.

The administration in this context implies the creation of a climate in which grows the strategies. In more complex organizations, this means the construction of flexible structures, the creative hiring of personnel, the definition of ample strategies and the observation of emergent patterns.

The essential logic of the integral administration consists of that the administration of high level creates a vision or a dream, and the administration of the medium level creates and implants concrete concepts to solve and to surpass the contradictions that emanate of emptiness between which it exists at the moment and what the administration hopes to generate. The administration of high level creates a global theory, whereas the administration of medium level creates a theory to medium term and it on approval puts under it of empirical form in all the organizational structure.

The administration of the center upwards and downwards, is a type of information generation that concerns to the totality of the organization. He is able to give body to the essence of an organization, which survives, of spontaneous way, in the incessant generation of changes that take place in the scope of the businesses.

In the development of a strategy different variables take part that do not have to be followed like a general rule since each organization counts on a structure and a system different from others. All the elements that conform to a company handle of different way in their respective circles, from their organizational culture, the behaviour of the employees, the systems which they use, etc.

It is for that reason that before developing a strategy we must know well our organization from the roots and start off of proposing strategies there, raising objectives, and to cause that she is really successful.

Practical case

The beginning

Galicia is a region of Spain not used to the enterprise successes. It is not necessary more to throw a glance to the daily press to be convinced that those products that present/display certain competitive advantages for the companies of the region specially have been flagellated by most recent of the fatalities. For that reason, when a native company acquires remarkable dimensions in the outside, it does not let cause a certain perplexity between his natural ones. This is the case of the group (Inditex), more known by its more important branch Zara, that has also surprised academic analysts and by its fast positioning in the international market. Selling domestic preparation in the local market during the Sixties, it has happened to design, to produce and to distribute all type of articles to dress and complements for the consumption masses in more than 30 countries three —in three continent—, competing advantageously with leaders, like the American Gap or the Swedish Hennes & Mauritz, and surpassing to which until not long ago they were located between most excellent.

In fact, this has turned it the first regional company/signature in terms of consolidated net benefits, very in front of our greater company in invoicing like Citroen.


The origins of the group it is necessary to name the figure of his president, who, in the strictest American tradition, was a perfect stranger. Without no familiar precedent in the business of the textile, Amancio Ortega Gaona parked in him of a very circumstantial way, something that remembers the biographies of the company men which they recreated the factories of Hollywood: by the end of the 50 —he was a simple sales assistant— of some of the first stores of preparation, like Gallic Shirt shop, the Foam or the emblematic establishment the Smart one. In this surpassed platform it acquired a valuable professional experience, from the contact
with the tendencies of the recent fashion of masses until the direct access to the manufacturers of weaves and the networks of distribution. There it learned to know first hand the preferences of the consumers and to value what meant its fast satisfaction in opportunity terms. It thus had some of the keys of the success that in the future would mark the character of their activities, but also, of the indispensable formation in all businessman.

His first attempts as entrepreneur began of very modest way, first in the familiar house —with the only aid of his wage—, arranging the work for others with the own one; soon in the rented commercial premises, experiencing in designs of dressing gowns and lingerie. Their contacts with Catalan and Valencian weave manufacturers gave access him to prices of wholesaler. To obtain a perfect advantage of those fabrics on which the thousand of times patterns re-design themselves to optimize their use eliminating remnant, to make them and to distribute them without intermediation between their old clients they allowed him to sell to prices without competition.

With the benefits of the familiar activity, Ortega gave the jump in 1963 to a production of greater scale and thinking about the consumption of masses. He started with about 125 employees until reaching the 380, and it commercialized lingerie and feminine clothes of his seal between retailers, wholesalers, power stations of purchase, some of foreign them, and more ahead between the great distribution centers as Simago, Carrefour, Auchan that at that time they began to emerge in the Spanish market. Its business already integrated the activities of design and preparation (the societies Goa and Noite for lingerie and Samlor for other feminine articles), whereas the weave supplying and the distribution depended basically on outer operators. The development of a primitive vertical integration data of 1975, after the creation of the first Zara store in A Coruña to commercialize articles of woman, man and boy, a segment of the market that covered an emergent demand of clothes with acceptable design and quality to reasonable prices. One was a segment that already satisfied Gap and The Limited in America and C&A in Germany. This way the distribution to the productive cycle was gotten up. It was the first time that was made something similar in the sector of the fashion.

The establishments of Ortega, nevertheless, had reunited in a single company/signature both functions, reason why it had margins greater than his competitors and could, therefore, sell to lower prices. The initial advantage with which it concurred allowed Ortega to establish the Goasam society the following year, in Arteixo (A Coruña), like proprietor of Zara, that already conformed a small commercial chain in the city. Great part of the success achieved about its stores in the regional market derived from an suitable election of the location place: since it did not emit publicity by saving of costs, they had to be located in centric places, very concurred by the type of public to whom it went directed the product, and to have the reclamation of and obtained attractive, very conceptual powerful a showcase of with means economy.

But it was not tried so single to approach the supply the consumers, but also to know its preferences and, mainly, to give a fast answer them in form of the wished merchandise. And next to this, stock zero. Ortega was well-known, by the contact and the experience acquired with its old businessmen, the disadvantage who supposed the not selled ones in terms of immobilization of operating capital: or the warehouse was eliminated quickly or had left the condemned for always. This way, most of the elements that were going to define the future character of their societies was already in embryonic form in the management of Goasam: on the one hand, the procedure just in Time that made possible the fast satisfaction of the preferences of the consumers, a Japanese invention that Ortega had discovered of intuitive way; on the other hand, the vertical integration of the design processes, production and distribution.

With this powerful armament, the local and regional market appeared already small to the height of the first eighty. It was, then, necessary to initiate the expansion in the Spanish market, for which it counted on the collaboration of a first group of managers (partly, coming from the staff of the School of Enterprise Studies of A Coruña). This aid was fundamental, because in the jump of the familiar company/signature to the one of greater scale it was where many tannings failed businessmen. Ortega, however, knew to make it of reasonable way, delegating functions in those activities that did not dominate.

In order to give cover to this transition it arose in 1985 Inditex, that happened to be the first society and supposed a flexion point. It for the first time increased his capacity productive of excellent way, something in which had much to do the reformulation of the own design, that had held fast and purified of progressive way, and the deflection from the production, and dislocation towards particular factories and the cooperative premises, created to the margin of holding. But also it was the moment at which Zara expanded by the peninsular territory in search of a market of masses, installing points of sale in the main capitals of province. In 1985 the group already had seven companies of preparation, almost 1,100 employees and 41 establishments in all Spain. This domestic expansion demanded of an investing effort for which rarely outer resources looked for, reason why it was come from one double way. On the one hand, one gave up to distribute dividends, something that was not complicated since the number of its shareholders agreed the familiar nucleus. The other base of the financing came from the high level of liquidity that reported the numerous points of sale of Zara and which they allowed, together with the part of the benefit non distributed between the shareholders, to finance its growth in the Spanish market.

Expansion

At the end of the Eighties, the vertical concentration of the companies of Ortega advanced with safe and determined step and included own design, preparation, commercialization and distribution. Nevertheless, the increasing saturation and maturity of the Spanish market induced to modify the growth strategy. The group already was prepared to initiate his first outer expansion with Zara Holding B.V. with seat in Holland by tributary reasons was created from its natural exit, Portugal (1988), and shortly after the U.S.A. and France (1989). Nevertheless, the necessity to supply to an increasing number of points of sale in all Spain, as well as the first attempts to arrive at the international market had created some strangling in the productive chain, that were solved with the incorporation of several sequences of robots which they made flexible in greater measurement the manufacture processes. The system, that had been designed by the engineers of one Japanese factory of Toyota, added sensible innovations to the classic chain, created in the change of century for the factory of Henry Ford. To the servants of Toyota it was demanded to them to work of foot, which can seem tired, but turned out basic to develop a multifunctional activity. In fact all of them rotated in their positions and finished dominating the set of the cycle, without always conducting the same operation, something that in the classic chain caused serious personal pathologies. Instead of fomenting the competition, the system stimulated the cooperation and the creativity between the workers, reinforcing the equipment spirit, so that they replaced to others when it was pronounced necessary. And of the sector of the automobile for which they were created, Toyota adapted to other activities, among them the textile preparation. In 1991 they were incorporated to the production of Inditex, although only in some of the phases of the process, the cut of fabrics previously designed and the assembly of determined articles that demanded a greater rapidity from access to the market.

The rest of the most intensive operations in use were made, by independent societies and cooperatives, that little by little expanded by Galicia and north of Portugal. The incorporation of robots allowed to eliminate the stranglings in the cycle and to apply in greater degree the procedure of the JIT, but also to increase the scale of the production. That way, the expansion of the group in the outside was started again with force. In 1992 the first stores in Mexico were opened; in 1993 in Greece; in 1994 in Belgium and Sweden; in 1995 in Malta; in 1996 in Cyprus; in 1997 in Norway, Turkey, Japan and Israel; in 1998 in Argentina, United Kingdom, Venezuela, Lebanon, Dubai, Kuwait and China; in 1999 in Holland, Germany, Poland, Saudi Arabia, Bahrein, Canada, Brazil, Chile and Uruguay and, finally, in 2000 in Austria Denmark, Andorra and Qatar, until entering something more than 1,000 establishments to end of year. Inditex operates in three continent countries and has managed to penetrate in 4 of the European markets nails: France, Germany and United Kingdom. This year also did it in Italy, an area of highest barriers of entrance.

In this graphic we can observe the evolution of Inditex in the past four years.

The complexity of the distribution system arrived at such levels of answer that was precise to create a logistic center totally computerized (1995), and a system of telecommunications integrated, to unite the central seat of Inditex in Arteixo with the supply centers, production and sale anywhere in the world. The costs of the international expansion of first half of the 90 were remarkable and they were pronounced in a greater indebtedness and a smaller growth of the benefits between 1992 and 1995. In order to free itself of the dependency of the short term credit to that they had resorted, it was able to contract credits multidescries in the long term with JP Morgan. With regards to the benefits before taxes, they managed to go back as of 1996 by the route of the greater invoicing than it provided the international expansion to him. The competitive advantages a modest business arisen in the Sixties in a small capital of province without hardly textile tradition has managed to reach to the multinationals that lead the sector of the preparation in a global economy.

Conclusions

Up to here one is a history that has precedents. Nevertheless, its endurance and growth in which they seem to be the beginnings of a recession cycle, that has lowered to some of its competitors and fact to back down to many others, are what surprises academic analysts and who ask themselves for the keys of this situation. In synthesis, these keys can be detected as much from the supply as from the demand. It is clear that a flexible production, when assuring at every moment the exact finished product, provision, amount and variety that the market demand, avoiding the storage cost and obsolescence that in the textile is unbearable, constitutes one of the factors of its success. Nevertheless, it is also a practice that uses their competitors. The advantage of Inditex resides here in the high levels of flexibility that can reach, which obtains by means of a multiple strategy. In the first place, through the vertical integration of its companies, that include the production processes, but single partly, the one that supplies to the more dynamic commercial operator (Zara). Secondly, the introduction of the procedure JIT, that allows to modify “Just in Time” the own production based on the changes observed in the behaviour of the consumers.

The creation of a computerized logistic center, that communicates with each the points of sale in the world, conforms a third element that makes flexible the production makes possible to replace the consumed product, colours, patterns, the modifications are introduced in factory that each specific market dictates and it is known, in addition, in real time the invoicing of each one point.

Finally, Inditex has the advantage that to him the decentralization provides and autonomy of each one of its commercial seals to which the economies generated by the centralization of common services are added. The perfect knowledge of the preferences of the consumers constitutes the first competitive advantage. To know that Inditex had to add a very well-taken care of study of the peculiarities of the markets (that vary with the age, sex, culture or buying capacity, etc), based on which the different commercial seals have been designed. The fidelity of the consumers, obtained from a heterodox marketing research and of low cost, without hardly apparent publicity, finishes drawing the picture of the competitive advantages.

References

  • 'Amancio Ortega. De cero a Zara'. Jesús Salgado y Xavier R. Blanco.La esfera de los libros. 17-02-2004

  • Zara: El modelo de negocio de Inditex: Fernando Fábrega. Morandi. 06/2004

  • Strategies for change: logical incrementalism. James Brian Quinn Homewood, Ill. : R.D. Irwin, 1980.

http://sw-mos.insead.edu.sg/workshop3/Papers/JettGeorge.pdf.

http://www.esocrates.com/content/paul/SFPA.html

http://www.inditex.com/es

http://www.winred.com

http://www.esocrates.com/content/paul/SFPA.html

http://sw-mos.insead.edu.sg/workshop3/Papers/JettGeorge.pdf.

Strategies for change: logical incrementalism. James Brian Quinn Homewood, Ill. : R.D. Irwin, 1980.

Strategies for change: logical incrementalism. James Brian Quinn Homewood, Ill. : R.D. Irwin, 1980.

http://www.winred.com

'Amancio Ortega. De cero a Zara'. Jesús Salgado y Xavier R. Blanco.La esfera de los libros. 17-02-2004

'Amancio Ortega. De cero a Zara'. Jesús Salgado y Xavier R. Blanco.La esfera de los libros. 17-02-2004

http://www.inditex.com/es

Zara: El modelo de negocio de Inditex: Fernando Fábrega. Morandi. 06/2004