Zara Case Analysis - Research Paper Example

?Executive summary Zara’s success in fashion apparel sector is based on rapid response to market demand. The firm has a completely centralized and vertically integrated manufacturing and distribution processes that gives it a competitive advantage over its rivals. Zara seeks to expand its business in Europe and other parts of the world and the question that its managers seek is whether the firm can do so using its current information technology infrastructure. This paper analyzes Zara’s current IT infrastructure with regards to its strategy and makes recommendations on the way to go forward. Description of the case The case details the dilemma that Mr. Xan Salgado Badas, the Head of IT for the clothing giant Inditex, is currently facing with regards to the IT infrastructure of Inditex’s flagship brand Zara. Mr. Salgado needs to decide whether to upgrade Zara’s IT infrastructure or retain the status quo. From the case we can tell that the Inditex’s Head of IT had been deliberating on this issue for quite some time; he and Mr. Bruno Sanchez Ocampo – the technical lead for Zara’s POS - had swopped roles as protagonist and antagonist several times before as they endeavored to evaluate the weight of each side of the argument. To enable us appreciate the dilemma that Salgado was facing the case describes Zara’s business model. The company derived its competitive edge from the speed of its product cycle in combination with decentralized decision making. Zara also employed a different marketing strategy that focused on its stores and the shopping experience rather than advertising like its main competitors. From the case we see that the firm’s IT infrastructure as is was able to make its operations the most effective in the industry. Also, given that it was largely developed in-house Zara’s IT infrastructure was largely proprietary and well-customized to meet its strategic goals. Furthermore, it was easy to install, use and stable. With all these advantages we see why the Head of IT had to take time to deeply consider the company’s next move with regards to IT infrastructure. To give us a balanced picture similar to that which Salgado had, the case also highlights the shortcomings of the current system. Analysis of the company’s goals/strategy Corporate strategy is about what a company wants and how the company should go about to satisfy this want. To achieve its main goal the company employs a grand strategy. Grand Strategies fall into three general categories which reflect what a company’s overall goal would be: growth, stability or retrenchment (Daft, 2000). From the context of the case we are informed that Inditex executives felt that ample room for growth existed within its current markets (Mcafee, Dessain, & Sjoman, 2007, p. 5). This could be construed to imply that Zara’s overall goal was that of growth. The grand strategy is like a framework of the whole business strategy. To achieve its goal Zara would have to focus its attention on business-level strategy. According to Porter (1998) business-level strategy includes numerous strategies, that can be classified into two, either competitive strategy or cooperative strategy. The objective of either strategy is to help the company to achieve competitive advantage against its rival. The difference between these two strategies is in the form of the action taken. There are three ways through which an organization can achieve competitive advantage namely: management, marketing and supply. Zara thrives on speed. It has to respond very quickly to the demands of its target customers who are young, fashion-conscious city dwellers (Mcafee et al., 2007). For Zara to be able to deliver styles while they are still hot, the organization realized that it had to take advantage of the intelligence and judgment of its employees throughout the company. For this reason store managers at Zara were given much more responsibility than those at rival clothing chains. Also Zara employed commercials who worked with designers and store managers to predict which kind of clothes would sell if Zara made them. By doing this Zara was able to decrease its inventory costs and fashion misses. This increased the effectiveness of Zara’s management which led to the creation of a sustainable cost leadership competitive advantage. An organization could also use its marketing strategy to achieve a sustainable competitive advantage. According to Slaster and Olson (2001) an organization can do this by differentiating decisions relating to market segmentation, targeting, and the development of a positioning strategy based on product, price, place and promotion. For product Zara made apparel that had short lifespans, normally to be worn not more than 10 times. The company also used a scarcity strategy by making only a limited number so that customers would be “forced” to buy as soon as they saw a garment that they fancied because it may not be there in their next visit. These two strategies on its product somehow “forces” Zara’s customers to keep buying. Zara also spent little on advertisement but compensated by selecting prime locations and investing heavily on the look and feel of its stores (Mcafee et al., 2007). It can be noticed that the organization utilized a range of marketing strategies to create a competitive advantage. Finally, Zara utilizes its supply chain to achieve a competitive strategy over its rivals. According to Chopra and Meindl (2007) a company’s supply chain strategy determines the procurement and transportation of raw materials, production and distribution of the product which could be used to create a sustainable competitive edge. For starters Zara has a completely centralized and vertically integrated manufacturing and distribution processes. Zara’s vertically integrated manufacturing operations ensured short lead times which enabled it to respond to what customers wanted to buy on the fly (Mcafee et al., 2007). The centralized system for ordering and delivery was optimized with the use of a state-of-the-art information technology infrastructure. Firm-based value chain model According to Porter (1998) a business system consists of a series of value-generating activities. These activities are referred to as a value-chain and they can be sub-divided into two major groups: primary activities and support activities. A depiction of Porter’s generic value chain is shown in Figure 1 below. Figure 1: Generic value chain adapted from Wikipedia The primary value-chain activities are: inbound logistics, operations, outbound logistics, marketing and sales, and service. The primary activities are supported by the infrastructure of the firm, its human resource, its technology and procurement. Inasmuch as these activities are common to a wide range of organizations they do vary by industry. In performing these activities a firm can be able to create a competitive advantage over its rivals either through cost leadership or differentiation. A firm may develop cost leadership through reconfiguring its value chain or lowering its cost at each of its value chain activities. There are ten cost drivers that if an organization is able to control better than its rivals it would have created competitive advantage. These ten cost drivers according to Porter (1998) are: economies of scale, institutional factors, capacity utilization, interrelationships among business units, linkages among activities, learning, organization’s policy on differentiation or cost, geographical location, degree of vertical integration, and timing of market entry. On the other hand, differentiation strategy involves increasing the uniqueness of the organization’s value proposition via its products or services. Most of the cost drivers listed above could be used to create enough uniqueness to differentiate one organization’s offering from its rival’s. One sure way for establishing uniqueness that many organizations use is through deployment of technology. Model application For the model application we shall use the three primary activities that have been discussed in greater detail in the case. They are operations, outbound logistics, and marketing and sales. We shall also analyze how Zara has utilized the support activities to further their business strategy. Operations Ordering of garments by the stores was the most regular, precisely defined and standardized around the world. This process was heavily dependent on the store managers and salespeople because inventory was not kept by an in-store computer. We also note that the accuracy and effectiveness of “offers” was dependent on the expertise and good judgment of teams of commercials. We can delineate three key support activities that made operations at Zara effective. (1) Store managers authority over what to order, (2) in cases where demand exceeded supply authority to deliver rests on the commercials that have a more global picture of the performance of the stores and (3) a robust information technology infrastructure between the stores and the stock-keeping unit (SKU), and between SKU and distribution centers (Mcafee et al., 2007). Outbound logistics There was little inventory almost anywhere in Zara’s supply chain (Mcafee et al., 2007). This is due to a high degree of vertical integration coupled with efficient information processing. The interaction between store managers, product managers and commercials was import in ensuring that the right quantity of merchandise was delivered to the right place at the right time. For Zara, the linkages between operations and outbound logistics are smooth and optimized with the aid of IT infrastructure. According to Porter and Millar (1985) such careful management of linkages – like in Zara’s case- is often a powerful source of competitive advantage because of the difficulties rivals have in perceiving them. Marketing and sales Zara owns and manages almost all its retail stores. This allows standardized layout and window displays and close communication and collaboration between store managers and headquarters. This also enables Zara to employ a different marketing strategy. Unlike its rivals that spend heavily on advertising, Zara opted to spend more on its stores than on advertising and this in some ways differentiated it from the rest. The experience of shopping at Zara would be incomparable to shopping at H&M because of the ambience, set up and location of Zara’s stores. In marketing we can also identify the effect of Zara’s organizational structure. Organizational structure determines who has the authority to make which decisions. For example store product managers to decide which store gets what quantity of the scarce item (Mcafee et al., 2007). Implementation opportunity analysis From the case, Zara seems to have exploited the use of IT in operations and outbound logistics. It is from the effective use of IT in ordering, fulfillment, manufacturing and distribution that the organization has developed a competitive advantage over its rivals. In fact Mcafee et al. (2007) informs us that Zara’s store ordering was the most precisely defined in the industry worldwide. However, there are opportunities to create more competitive advantages through IT implementation in the other value-chain activities. Inbound logistics involves receipt, storage and distribution of raw materials to manufacturing. From the case we are not given much information on Zara’s inbound logistics. As an opportunity Zara could use IT to automate its warehouse processes. Then there is the opportunity to use IT to link this process with procurement. Every value-chain activity has both a physical and information processing component (Porter & Millar, 1985). With an IT implementation Zara would be able to use information from its warehousing function such like scheduling promises, transportation rates and production plans to increase the effectiveness of its procurement function. Through the linkage of warehousing with procurement Zara could be in a better position to create stronger and more effective relationships with its raw materials suppliers. On the other hand when looking at procurement as a function on its own, IT could be used to set up an online procurement process. The advantage of online procurement is that it gives Zara increased leverage because it increases its reach to a greater number of suppliers. Online procurement could also be used to coordinate the aggregation of several small suppliers. The underlying question in the case is about whether Zara should take up the challenge to upgrade and update its current technology or not. Zara’s store managers need a system that would enable them know their in-store inventory at any given time. They also wanted an IT system that would enable them know whether a neighboring Zara store had a particular SKU in stock. These are also opportunities for IT implementation. Implementation effectiveness Zara’s success is based on a system that achieves a speed of response to market demand that is without precedent in the fast-moving fashion clothing sector. Zara’s competitive advantage is to be found in its cycles of design, production, and distribution that are considerably faster than any of its rivals. This implies that for any IT implementation to be considered effective it has to be enable Zara sustain its competitive strategy. The advantages of Zara’s current IT infrastructure to its differentiation strategy with regards to management, marketing and supply chain are: (1) it supports Zara’s speed and decentralized decision making; (2) it is easy to deploy to newly opened stores, all that the store manager will require are two diskettes; (3) it is proprietary to Zara which means that the organization can customize it to perfectly match the organization’s needs; The current IT infrastructure also enables Zara to manage its costs through: (1) it requiring a very small IT support staff to maintain it which translates to lower administrative costs; (2) it is very stable thus there is limited expenditure on repairs. Conclusion and recommendations Sanchez is of the opinion that Zara’s current IT infrastructure is good and does not need to be tampered with. We agree with Sanchez only with regards to the front end of Zara’s business. Insofar as the store managers’ request for better inventory figures is concerned, the marginal benefit of increasing inventory accuracy with the cost of development of a new system and maintaining it does not warrant the move. At the front end, the core task is sales, and it is difficult to see how an updated POS system would increase turnover. However on the back-end, in activities such as inbound logistics and procurement, the marginal benefit of implementing a new system may be justified. For example creating an online procurement system would increase Zara’s bargaining power over its supplies. Also the same platform could be used to sell unused raw materials. Nevertheless for Zara to make the best decision with regards to whether and/or where to implement changes to its IT infrastructure we make the following recommendations. 1. According to Porter and Millar (1985) IT tends to be most effective where there is high information intensity in the value-chain. Zara will have to consider which parts of its value-chain have a greater need for information processing and whether the current system is sufficient or not. IT needs to improve end-user productivity while simultaneously reducing the technology-driven overheads (Vouk, 2008). 2. IT has become accessible and affordable to all and this ubiquity inexorably diminishes the strategic potential for IT to differentiate one company from others (Carr, 2003). Procuring the latest technological innovation with the hope of gaining sustainable competitive advantage therefore would be an ill-advised move. Zara would have to seek to achieve the necessary levels of IT capability at the lowest possible cost and risk. 3. Zara’s current IT system will be obsolete whichever way one looks at it especially considering that many rivals have begun to copy its competitive strategy. Other than solely focus on IT infrastructure, Zara needs to explore other ways to create new competitive advantages while it also upgrades its current system. In conclusion, we would support Sanchez that Zara has no immediate need for an IT system upgrade. What Zara needs to do instead is develop new competitive advantages and then build an IT system that should support that new strategy. As Carr (2003) puts it, the ubiquity of IT has inexorably lessened its strategic potential to the extent that IT may have to be handled like any other commodity in a business, with an eye on minimizing overall cost and risk. References Carr, N. G. (2003, May 1). IT doesn’t matter. Harvard Business Review Online. Chopra, S., & Meindl, P. (2007). Supply chain management: strategy, planning, and operation (4th ed.). New Jersey: Prentice Hall. Daft, R. (2000). Management. Orlando: Harcourt College Publishers. Mcafee, A., Dessain, V., & Sjoman, A. (2007, September 6). Zara: IT for fashion. Harvard Business School Publishing. Porter, M. E. (1998). Competitive strategy: Techniques for analyzing industries and competitors (2nd ed.). New York: Free Press. Porter, M. E., & Millar, V. E. (1985). How information gives you competitive advantage. Harvard Business Review, (July-August), 149-174. Slaster, S. F., & Olson, E. M. (2001). Marketing’s contribution to the implementation of business strategy: An empirical analysis. Strategic Management Journal, 22, 1055-1067. Vouk, M. A. (2008). Cloud computing - Issues, research and implementations. Information Technology Interfaces, 2008. ITI 2008. 30th International Conference on (p. 31–40). Read More