2017’s Top-Performing CEO on Getting Product Right

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Welcome to the HBR IdeaCast from Harvard Business Review. I'm Sarah Greene Carmichael. Back in 2012, Michelle Obama sauntered into a presidential awards ceremony wearing a pair of $50 high heels from Zara. Zara. Good enough for the First Lady of the United States and still cheap enough for the rest of us who can't afford exclusive fashion labels. Since Zara opened in 1975, the clothing and accessories chain has grown rapidly and globally. Its parent company, Inditex, has more than 7,000 stores on 5 continents. It's also led by the world's best-performing CEO. This year, Pablo Isla takes the number 1 spot in Harvard Business Review's list of the world's top 100 CEOs. Isla has been running Inditex since 2005. And as he continues to expand the company, he's thinking about how to do it in an environmentally sustainable way and how to make online and in-store shopping feel one and the same. He joined us from company headquarters in northwestern Spain, and he spoke with HBR senior editor Dan McGinn.

One of the things we notice when we look at the CEOs who make our Top 100 ranking is that a surprising number of them stay in the job for a very long time. We have a handful who've been in more than 20 years. You've been the CEO for 12 years now. What parts of the job get easier over time, and are there parts that actually get more difficult?

Being the CEO of Inditex is the most fascinating thing you can ever do, and it is always like the first day. It's impossible to say that this part of the job is easier or this part of the job is more difficult because there are, every day there are lots of things to do. Challenges, decisions to take, a lot of people to work with. So for me, much more than saying this is easier with time, this is more difficult, it is that every day is like the first day. For us also, it's important to improve always. But at the same time, the business is evolving all the time. 12 years ago, we were not even thinking about this fully integrated approach between stores and online. Or we didn't have technology so much involved in the business. Of course, we were beginning to work at that moment 10 years ago in terms of some type of artificial intelligence and algorithms, but nothing to do with what it is today. So also the business is evolving in a so significant way. Also our business model, fashion, fashion is changing all the time. Every day is like the first day, full of surprises, full of things to do in all the different areas of the company.

Let's talk a little bit about your management style. Many CEOs spend all day booked into one meeting after another. You have a reputation for avoiding that, and you prefer managing by walking around the headquarters. Tell me a little bit about why you have that style, and is it really an efficient way to get things done?

Yes, has a lot to do with the culture of the company. We have a very flat structure. We don't have many formal meetings. We don't even have a formal management committee. And we prefer much more this idea, a lot of informal conversations, a lot of informal meetings, walking around. This is something we like much more than formal meetings, than long internal presentations. It's people very focused, taking the decisions, really empowered. This is something which is essential for us. Also, internal promotion is key for us. So people who are in the relevant positions, they know quite well the business they are managing. Last year, more than 25,000 people inside the company had some type of internal promotion. So this is unbelievable because these people are more and more committed with more passion knowing that they can grow inside the company.

As CEOs go, you're considered a little bit publicity shy. You don't do a lot of interviews. You don't go to your own store openings. Why do you think it's important, or why do you prefer to avoid the limelight as a CEO?

What we want to be relevant is the company or the store opening, and everything always is the result of the work of a team of people. The strength of our company is the combination of everybody, much more than of any single person. And I can tell you that as a company, we try to be a low-profile company, being humble, of course, being very ambitious, but being humble. We have a big store opening. We want the store to be the relevant thing, not any particular person.

As a CEO whose company has been very successful early in your career, is there a risk that you become less willing to take big risks, that you don't want to imperil that track record, and that leads to, you know, maybe a little more defensive and less offensive behavior?

With our business model, this is nearly impossible. Every season we begin with the collections, with the product from zero. And at the same time, the whole culture of the company is very innovative, very creative. So I really don't see this risk. Also, what we try to have is this culture in which we establish the atmosphere in which people can innovate, people can assume risk. So I couldn't say this is something happening in our company.

Your company's founder, Amancio Ortega, controls more than half of the voting stock at Inditex. How does the presence of a controlling shareholder change the way you manage and make investment decisions and grow the company?

I would say in a very positive way. I think something which is very relevant for us as a company, for me as chairman and CEO of the company, is to have the full support of our founder, and I would say of the whole board, in terms of thinking always in the long term, having a long-term approach, investing in the business, paying a lot of attention to everything which has to do with sustainability of the business from every different point of view.

The way we do our ranking system here at HBR, you reach the number 1 spot not based only on your financial performance, but also on the company's ranking in environmental, social, and governance, what we call ESG scores. Why and how did these areas become important to you as a manager?

It has to do with everything, all the decisions, everything which has to do with the quality of our products, our standards, clear to wear, safe to wear, everything which has to do with the fabrics, organic cotton. Now everything which has to do with circular economy and closing the loop, recycling, reutilization of garments, a public commitment, and it is that all our stores will be eco-efficient to use 40% less water consumption, 20% less energy consumption, all the materials environmentally certified. Then everything which has to do with labor standards, everything which has to do with our people, with the working values, and also with community investments. We have different programs, internal programs, programs with different organizations. More than 1 million people are benefiting every year about these community investments that we are developing. For us, it's absolutely essential in all our decisions, in the way we manage our business. People are very committed, thinking a lot about the planet, thinking a lot about contributing in a positive way to the society. Of course, the board is also fully committed. This is something essential for us from every point of view.

Do you consider yourself a merchant who's really deeply interested in fashion on a personal basis, or is this just an industry that you happen to get into and be successful without that personal inclination?

Personally, I am totally interested in business and totally involved in all the different aspects of the business, and of course, fashion is a key element of that. It could be impossible other way, so totally fascinated with Everything that has to do with fashion, of course.

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Let's talk a little bit about your industry. Many observers would classify Zara, your flagship brand, as a fast fashion company, one that competes with H&M out of Sweden and Uniqlo out of Japan. Do you agree with that label and that set of competitors, or do you see it differently?

Well, I don't like labels in general. You know that our business model is based on the ability to react during the season. We have a big part of our sourcing in what we call proximity sourcing, mainly in Spain, Portugal, and Morocco, and this is what allows us to try to satisfy the demands of our customers. For us, we pay a lot of attention to every single product, every single design. It is not just a question of being fast. It's this concept of trying to know what our customer wants and then having a very integrated supply chain between manufacturing, logistics, of course design, which is at the beginning of the whole process. This is the essence of our business model. Also this concept of twice per week deliveries to all the stores in the world, the store manager playing a very relevant role for each of these deliveries. The systems provide the store manager with a proposal of what to order for that delivery, and the store manager is able to change this proposal because we want the store manager to feel the owner of the product that we have in that store. And this is applicable also to our online business. For us, what is key is what we call this fully integrated approach between stores and online in terms of the possibility of in-store delivery, returns, ordering online from the stores, to consider the stock as a single stock.

So it sounds like your store managers and your middle management are really a key to the success of choosing the right products for the right locations.

Absolutely. They are absolutely key. And I would say 95% of our store managers are coming from internal promotion.

You make it sound easy to integrate the online component with the physical stores. We're seeing many retailers that have these legacy brick-and-mortar stores really struggle to develop their web presence and to get people to shop in both channels. What are you doing that other people aren't, and why do you think other companies seem to be struggling with this?

Well, for us, from the very first moment when we began our online operations, it was key, this fully integrated approach between stores and online, because we were seeing that our customers, sometimes they are seeing the product online and buying in the store, sometimes they are buying online, Sometimes they are buying online from the stores or they are buying online and wanting to pick the garment in the store or returning in the store. So for us, this was essential. And then if we talk about specifically about our webs, our apps, what we are trying to do is to replicate the same experience that we always try to have in our stores. This idea of being attractive from the point of view of how do we show our product well and we are seeing more than 6 million people every day visiting our webs and apps all over the world. Sometimes for the pure online retailers, it's difficult to manage their returns. For us, it's easy because a big part of their returns, our customers bring the garment to the store and they return in store. So the online business is adapting quite well to our business model. I think it has to do with this flexibility of our business model that I was mentioning before.

When you think about the actual clothing items you're selling in your stores, what's surprised you lately in terms of popularity in men's or women's fashion? Where do you think fashion is going, and how do you think the merchandise you're selling will look different 5 years from now than it does today?

Well, but fashion changes constantly. What I can tell you is that what is growing globally is the appetite for fashion. And this has a lot to do with social networks, with online. So people are more and more knowledgeable about fashion in all the different countries in the world. And at the same time, fashion trends are becoming more and more global. Of course, there are sometimes specificities in some markets. For example, if there is very strong fashion trend regarding denim, This tends to be a global trend. Then perhaps in Asia, the type of denim could be slightly different than it could be in the US, but the global fashion trend is there for all the different markets.

So you referred to social networks. Are you saying that Instagram and sites like that are changing the kinds and quantity of clothing people want and it is driving your business?

Globally, everything which has to do with online, with social networks, that, yes, of course, of course. And this is very relevant also in terms of fashion trends and in terms of the appetite for fashion. Everybody knowing everything about what is going on in all the different areas of the world is something very, very relevant. Yes, of course. And it's something that you need to pay a lot of attention to. And also, it's an incredible way of being in touch with our customers, combining all the different social networks We have around 100 million fans all over the world.

In the United States, we're seeing a lot of stories about what they call zombie malls, of malls that have essentially gone defunct. What do you think about the future of malls as a shopping destination? And more generally, do you see physical stores as continuing to grow and be an important part of what your brands do, or do you see a time when they'll be much less important than they are now?

High-quality mall and high-quality high-street locations will continue playing a very relevant part in terms of retailing. And that is our approach. In the US, there are many, many, many malls and we don't want to be in every mall in the US. We are very selective regarding the malls in which we want to be with Zara. And this is the same approach that we have in every country in the world. And it is also the same approach that we have regarding high street locations. So we began in the year 2012 what we call a store optimization plan to enlarge existing stores in good locations, to open new stores in relevant locations, and to absorb smaller stores in not so high quality, I would say, or first-class locations. So within that, the physical store will continue playing a very relevant role, but always having a lot to do with quality— quality of the location, quality of the mall, quality of the street if it is a high street location.

When might we see more of your brands in the United States, and what kind of growth potential do you see for your companies in America?

Well, we have around 80 Zara in the United States and, of course, a very strong online business. And we see, for us, a strong growth potential. When you think about the size of the market and also appetite for fashion, because in the United States and as in most markets in the world, the appetite for fashion is growing and growing. So we see a strong growth potential for us, mainly with Zara, much more than thinking about introducing other brands at this stage. And from now until the end of the year, we will open relevant stores in the US. For example, we are opening 2 relevant stores in Miami. Also, our approach to stores is always a combination between opening new stores and also enlarging existing stores.

We last spoke with you a year ago when we were doing this ranking, and it's striking how much has changed since then in terms of global politics. We're seeing a lot of rethinking about globalization. We're seeing rising nationalism, and we're seeing a lot more awareness about income inequality and class inequality around the world. How have those things changed the way you think about leading a global company?

For us as a company, what is key is to take care of all the different aspects involved in our activity. We have a concept which is Right to Wear. It's a philosophy which summarizes 5 key aspects of sustainability. It has to do with the quality of our products, it has to do with the labor standards, with the environment, with our working values, with our employees, and with the communities. We need to get used to this world in which we operate. We need to to be very transparent, very serious as a company in all the countries in which we have activities, being very focused in what we do. Finally, trying to execute our business model to satisfy the demands of our customers in all the different geographies in which we operate.

You're 53 years old, so you could continue in this job for many years if you choose to do so. Have you thought much about how long you'll remain at the company and what you might do after you leave?

This is the most fascinating job, and with the people that we have in the company, the incredible teams that we have around, so I see myself and my whole career in the company.

Mr. Isla, congratulations again on finishing at the top of our ranking, and thank you very much for this time.

Thank you very much.

That's Pablo Isla. He's the chairman and CEO of the Spanish retailer Inditex. He also tops our list of the best-performing CEOs in the world 2017. Read more about him and meet the other 99 great business leaders in the November-December 2017 issue of Harvard Business Review or on hbr.org. Also, as a heads up, from now on, we will be releasing new episodes of the HBR IdeaCast on Tuesdays. Thanks so much for listening. I'm Sarah Green Carmichael.