Inditex Case Study Solution
External Analysis:
External analysis has been done to examine the environment of the industry. The purpose of external analysis is know the opportunities and threats present in the industry that Inditex can use for expansion, growth and profitability.
Industry Analysis:
Industry analysis provides the understanding of economic fluctuations, information about the industry growth patterns and current business environment. The industry analysis is conducting through porter’s five forces analysis(Bruijl, 2018).
Porter’s Five Forces Analysis:
Threat of New Entrants:
Threat of New Entrants in fashion industry is considered to be moderate to low. As the growing demand attract the different companies to enter in the fashion industry while the high brand perception and customer loyalty is require to make its position in the market which reduce the threat of new entrance. However, government policies for entrance in the market,efficient distribution channels to ensure that the product is available at right time, at right place in order to satisfy the needs of customer and the higher startup cost lower the threat of new entrance in the market.
Bargaining Power of Buyer:
Bargaining Power of Buyer in fashion industry is considered to be high to moderate. As the various local and global players exists in the market which strengthen the bargaining power of buyer. Additionally, the switching cost is considered to be zero which is another reason behind the high bargaining power. However, the strong brand perception and the loyalty of the buyers moderate the bargaining power in the fashion industry. Additionally, the different brands have little differentiation in its products and the quality of the products are vary from brand to brand or company to company which moderate the bargaining power of buyer.
Bargaining Power of Supplier:
The bargaining power of supplier in fashion industry is considered to be moderate to low. As the various domestic and foreign players (suppliers) exists in the market which make the intense competition in the market and make the lower bargaining power of supplier.Additionally, the switching cost is considered to be zero and the products are little differentiated which tends to reduce that bargaining power.However, the prices and the quality of the products for which the suppliers’offers tend to moderate the bargaining power.
Rivalry among Competitors:
The rivalry among the competitors in the fashion industry is considered to be high to moderate. As the various global and domestic competitors exists in the market which intense the competition. Additionally, the various competitors use different tactic in order to attract and maintain its consumer base which is another reason to make the intense rivalry among the competitors. However, the brand perception and the customer loyalty also plays an important role in making the rivalry among the competitors. The growing demand of unique fashion products attracts new entrance to enter in the market which also improves the power of rivalry among competitors.
Threat of Substitute:
The threat of substitute in fashion industry is considered to be low because no substitute of the fashion products is exists in the market. However, various competitors or brands who offers variety of products in the market could be considered as the substitutes of the fashion products. No perfect substitute of fashion products is exists in the industry.
Analysis of Accounting Information
Assessment of Accounting Quality:
In each company the biggest information flow comes from the accounting area. The globalization of process and the business environment needs to assess the quality of accounting standards use by the company. The quality of the accounting standards shows that how effectively the company follows the standards and the accounting principles. The company is using IFRS accounting standard which is considered to be globally acceptable. Inditex attempts to embrace the best and latest reporting practices, as is evident in its application of the principles and recommendations set down in the GRI Standards since they were created. The company is fulfilling all the legal and quality standards and the auditors issued an unqualified opinion which shows that the company has transparent in all of his reporting standards. The revenue recognition policy is when the company deliver its goods to the end consumers and the commitment to the customers are fulfilled. Additionally, the company is using the hedge accounting rules in order to mitigate the volatility in consolidated income statement resulting of existence of significant foreign exchange currency. By using hedge accounting no significant amount would be recognized in profit and loss. However, the company is ensuring all the accounting standards in its transactions which reflects the quality of reporting and transparency in transactions.
Financial Data Assembling
Financial data, including balance sheet and consolidate income statement for the analysis has been gathered from the financial report of fiscal year 2018 of the company. Beta, risk free rate and market risk premium has been taken from Yahoo finance, Reuters and Bloomberg because it was not available in the financial reports of the company neither on the company’s website. EBITDA multiple has been taken from market watch website.
Reformulation of Income Statement and Balance Sheet
The reason behind reformulating the income statement and balance sheet is to separate each activity such as operating, financing and other activities. Operating activities include the operating assets and liabilities which helps to generate the operating income and expenses to which business manages cash flows and by using it, they expand their business for future growth. Financial activities include the financial assets and liabilities that helps to generate the financial income and expenses (other than the operating income and expenses). Financial activities include those activities to whom business raises and stores cash. These resources do not add any value to the business until and unless they will be utilized wisely in profitable activities such as investing and generating interest income from them or to expand globally.
The criteria to define and classify each head and accounts are different among different industries such as the reformulating method for an industrial company like retailer, manufacturer, service provider, mining company, technological business, agricultural activists are opposite to the method of classification that financial firms like banks, investment companies, insurance companies, portfolio makers and much more. Industrial companies classify bank loans, deposits, lending, borrowing as financial items but the bank classify all of these as their operating items because the lending, funding, and deposits are their core business functions which surely classify in its operating activities.
Financial statements include the income statements, balance sheets, statement of changes in stock holder’s equity, cash flow statement, and notes to the financial statements. These financial statements provide information about business operations and their financing options. The company uses these financing options to make many effective operational decisions. Against it, investors use this information to examine the businesses and industries for determining its future growth and opportunities.
Reformulation used to make the financial statements for a particular period by changing and reorganizing the items through classification in order to better and accurately depict the company’s financial position to its stock holders from different aspects of a business.
Apart from it, another main reason for the reformulation of financial statements is to depict the clear and concise information about the company to its inside and outside readers of financial statements. Normal financial statements developed by using the general accounting principles which are widely acceptable in all economies but still, these normal financial statements do not depict the most accurate picture of financial analysis. That is why the company uses a reformulation technique to find the most accurate picture of financial analysis that investors found easier and highlight its important information…………..
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