Icts role in primarks operations strategy - Essay Example

?ICT’S ROLE IN PRIMARK’S OPERATIONS STRATEGY [Your full ID] [Your ial/seminar Group] email address] This paper highlights how a UK fast fashion used ICT to leverage its supply chain and convert it into a sustainable competitive advantage. An industry analysis is conducted using Porter’s five forces and then we see how Primark set up its operations strategy to remain competitive. From the operations strategy, the retailer’s core competencies are identified and we see how ICT played a critical role in making Primark’s competitive advantages sustainable. Also, how ICTs can help the company tackle its future challenges so as to compete in future is discussed. KEYWORDS Core competencies, operations-led strategy, operations strategy, supply chain excellence. 1.0. Introduction This paper discusses the operations strategy of Primark Stores Limited, a fast fashion retail company that currently operates in Ireland, United Kingdom, Portugal, Spain, Belgium, Netherlands and Germany (Primark, 2011). Primark is owned by the diversified British giant, Associated British Foods (ABF) and as at the end of 2011 had 232 stores spread in continental Europe (Associated British Foods, 2011). In 2010 Primark beat Marks & Spencer and ASDA to become was UK’s largest clothing retailer by turnover, with sales of ?3,043m (Shields, 2010). Primark sells a range of fashion items targeted at people under 35 years old who are fashion-conscious. It is identified as the retailer that offers the lowest prices on the high street. 2.0. Primark’s Industry Primark is a player in the relatively young retail apparel industry known as fast fashion. Fast fashion refers to the strategy where retailers count on speed of production and adoption to current and emerging design trends to market their merchandise (Sull & Turconi, 2008). While fast fashion may be heaven to buyers it can be disastrous to retailers who have to keep changing their inventory rapidly if they are to capture their fashion conscious target market. This however does not prevent the industry from being very profitable. Consider this: in the apparel industry, fast fashion companies have surpassed traditional rivals in growth by seizing their market share. Furthermore, “fast fashion leaders typically earn higher profit margins than their old-guard competitors, averaging 16 per cent, versus 7 per cent for the typical specialty-apparel retailer (Sull & Turconi, 2008, p.5).” However, to better comprehend Primark’s industry and resulting strategies we shall first analyse the industry using Porter’s five forces. 2.1. Five Forces Analysis of Primark’s Industry The strengths of Porter’s five competitive forces has an effect on costs, prices, investments and other factors needed to compete thus they affect the average level of profitability for a given industry (Porter, 2008). This implies that these five forces have a direct correlation with the industry participants’ profitability. Using this line of thought one can therefore state that a firm’s industry structure is a major factor that determines an organization’s competitive strategy (Laudon & Laudon, 2009). The first strong force is competitive rivalry. The UK’s retail fashion industry is according to Mintel (2005) is more consolidated than the rest of Europe with the top five UK retailers account for almost 45% of sales. Secondly, following from the effect of 2008 recession on consumer disposable incomes, the industry is not a basic need category and as such has continued to experience slow growth. All the above attributes are symptomatic of industries where intensity of competitive rivalry is great (Porter, 2008). Another strong force in Primark’s industry is the threat of substitutes largely as a result of the following three characteristics: (1) the garments sold in fast fashion are not durable; (2) Primark’s offerings are low-cost; and (3) the cost of switching from one retailer to the other is very low. These three traits make it easy for consumers to try out products from other retailers. One would expect, given the strong threat of substitutes, buyer power would to be high, which is not the case. Of all the competitive forces in the apparel retail industry, this has undergone the biggest change. The tight economic condition and high availability of substitutes would be anticipated to drive buyer power upwards; however, fast fashion retailers have deployed two strategies that have successfully prevented this from happening. The first tactic they use is to manufacture clothing that have short lives. Zara’s clothes, for example are only meant to last 10 washes. The second tactic they use is to limit the number of garments available per given fashion cycle. Having a limited supply of items ‘forces’ customers to buy as soon as they spot any apparel they fancy because they may not find the item there when they visit the store at a later time (Ghemawat & Nueno, 2003). These counter moves reduce the net buyer power to moderate. Similarly of moderate strength is the threat of entry. Incumbency advantages and supply-side economies of scale possessed by Primark and the other big fast fashion retailers make the industry appear impervious. Examples of incumbency advantages include store location in prime areas, brand power and production efficiency resulting from learning curve experience. However, new entrants could exploit attributes such as low customer switching costs and changes in the social environment to build their brands. In the UK and continental Europe, Primark’s key geographical markets, the demography is changing towards the older generation which has traditionally been largely ignored by the fashion industry. According to Sorensen (2009) new market segments for example the ‘middle youth’ market, which is described as adults between the ages 45 and 54 years who have a great interest in living healthy lifestyles, buying fashionable apparel and still love to shop. Sorensen also cites the customer sizes that are changing as populations in the developed countries get obese as another potential market that new entrants who seek to create “blue oceans” could exploit. Lastly, suppliers in this industry have little power because: firstly, they are less concentrated than the industry they are selling to; secondly, they do not provide differentiated products per se; and thirdly, Primark and other fast fashion retailers do not face costly switching costs in case they opt to buy from different suppliers. However, the biggest reason of low supplier power is that Primark operates on a low cost leadership strategy, which implies that it has to source from suppliers who assure them of supporting their minimising cost, high sales volume and lower retail margins strategy. From the above evaluation of competitive forces we can identify supplier power as the one force that Primark’s strategy should seek to optimally exploit because it is weak. With regards to increasing their positioning with regards to their competitors, buyers, threat of substitutes and threat of entry Primark should seek to create what Kim and Mauborgne (2005) refer to as blue oceans. 3.0. Primark’s Operations, Operations Strategy and Core Competencies 3.1. Operations As is expected of any other fast fashion retailer, Primark operations are centred grounded on having an efficient supply chain that is supported by economies of scale and lean production. As Cachon and Swinney (2011) stated a fast fashion system has to combine the following components: quick response techniques and quick design techniques. At Primark, the company’s operations achieves this through deploying short production and distribution lead times which enables it to closely match its supply with uncertain demand, and working with private labels for trendy product design. This processes are also achieved by other fast fashion retailers thus to distinguish itself Primark has carved a niche for selling fashion at rock-bottom prices. According to Nueno et al. (2011) this is unlike its big rivals Zara which focuses on style and H&M on general affordability. Primark achieves these rock-bottom prices by keeping costs via use of cheap production processes and use of man-made materials produced locally to the manufacturer. The cheap production process is partly because Primark manufactures its garments during offseason factory time when costs are lower since staff get work that they might not have had otherwise (The Times 100, 2010). Other cost reduction techniques deployed in Primark’s operations are: use of minimal advertising; reduced packaging and extensive of multi-park products; focus on manufacture of only key garment sizes and limited staff service – that is focused on only managing checkout lines and showroom inventory (Nueno et al., 2011). The company is now focused on setting up large shopping floors with innovative interior design that facilitate efficient and volume shopping in order for its low margin, high volume business model to work. 3.2. Operations Strategy Hayes and Wheelwright’s four stage model argues that the operations of an organization could be used as the basis of competitive advantage. Importantly, all organizations should seek to reach stage four of the model, which is the highest level possible (Barnes, 2008). That is because at stage four, an organization uses its excellence in carrying out operations as the cornerstone of its business strategy, which implies that the organization is running under an operations-based strategy. However, at this stage the proviso is that these competitive advantages be made sustainable given that competitors are quick in imitating any competitive advantages. Sustainability can only be guaranteed if the organizations persist in a continuously iterating operations development process (Barnes, 2008, p.28). The challenge begins where Slack et al. (2009) stated that there are five possible operations performance objectives that an organisation has to make trade-off as to which to excel in and which not to. These performance objectives are speed, cost, quality, flexibility and dependability. Primark has clearly given priority to cost, speed and flexibility. Considering that we have stated that Primark should aim for Hayes and Wheelwright’s stage four, it then becomes necessary for the company to figure out whether its prioritised performance objectives support the sustainability of its operation-based competitive advantages. Primark can only be able to establish this though a critical evaluation of operations strategy process. The operations study process informs us how a company should go about setting up a suitable operations strategy. There are four ways through which an operations strategy can be developed: bottom-up or top-down and market-led or operations-led. In Primark’s case, market-led or operations-led processes have greater strength. A market-led operations strategy is one that is developed in reflection to the prevailing market environment. This appears to be suitable for the fast fashion industry. In this process Primark will need to begin by analysing its target markets’ requirements for the product using various competitive factors for example cost, quality, reliability. Primark would then need to gauge its performance in each of the competitive criteria relative to the assessed factors before developing a strategy to match the performance level needed by its customers (Barnes, 2008). On the other hand, under the operations-led process Primark will use its operations excellence to determine its strategy. For this to happen, Primark has to first study its current operational capabilities. This is followed by a projection of how these current capabilities could be enhanced in future. Armed with these two sets of knowledge, Primark can then base its strategy development on them. According to Mills et al. (2002) this would require Primark to undertake a critical resource analysis over a three to five year period to identify its key strengths. These resources that have underpinned Primark’s success to date are what Prahalad and Hamel (1990) referred to as core competencies. 3.3. Case for Core Competence To help us understand the importance of identifying, nurturing and exploiting core competence we shall use a case study of one of Primark’s major competitors, Zara. Sull and Turconi (2008) recount the rise of Zara in spite of its unconventional strategy that went against what even experts would have expected to work against them. Firstly, whereas many fashion retail companies sought to reduce their production costs by outsourcing most of their manufacturing to either South America or Asia, Zara has maintained a greater percentage of its merchandise production near its core market. This has enabled Zara to optimise on merchandise flexibility and extremely short lead times. Secondly, while several fashion retailers have used prominent designers and endorsement by celebrities to generate sales, Zara has never appointed either. Thirdly, Zara spends less than a quarter of the fashion industry’s average on its IT expenditure. It is true that having an IT infrastructure that supports an agile and fast supply chain is vital in fast fashion; however, this is not the key differentiator of Zara from rivals like Primark or TK Maxx. What Zara has done is to focus on its core competence which according to Sull and Turconi (2008) is what they refer to as shared situation awareness (SSA). They define SSA as the company’s ability to identify a pattern in a transient situation and then to go ahead and using in anticipation of what might occur next. In a nutshell, if Primark wants to remain competitive over the long term, it has to identify, nurture and then exploit its core competencies (Prahalad & Hamel, 1990). 4.0. ICT’s Role in Primark’s Supply Chain Excellence Nueno et al. (2011) singled out efficient supply chain, limited operating costs and large stores as the three cores around which Primark has grown to be the largest apparel retailer in the United Kingdom by turnover, exceeding Marks & Spencer and ASDA (Shields, 2010). Linking these three cores is a world-class supply chain system that is driven by superior Information and Communication Technology. One way that organizations can use to identify best practices with which to benchmark from a peer company is through industry awards. At the European Supply Chain Excellence Awards 2010, Primark’s supply chain emerged as with the Overall Winner’s trophy. According to SupplyChainStandard.com (2010) the judges found Primark’s supply chain to be “lean, customer driven and with potential to redefine performance [for the fast fashion] industry (Para 6).” Its supply chain strategy is matches its overall business strategy by laying emphasis on being lean and keeping overheads at a minimum. Primark has only eight staff manning its entire ?2billion-worth supply chain. The small team with the aid of IT has been able to optimize Primark’s supply chain to support the company’s rapid store size and numbers expansion program in addition to delivering over 40 per cent more volume over the last three years (SupplyChainStandard.com, 2010). According to Nueno et al. (2011) two major future challenges that Primark will need to soon think about tackling are international expansion and model modification. Primark is too concentrated in the UK and Ireland it needs to increase its presence in continental Europe then probably cross over to other continents. With increased distance IT will definitely play a major role in the new enterprise. With regards to model modification, Nueno et al. (2011) believe that Primark will need to seriously consider online retailing as the prevalence of this channel to among its competitors is a threat to its future competitiveness. Conclusion Primark’s rapid rise in the fast fashion industry demonstrates that IT can be aligned with an organisation’s strategy to improve not only operational effectiveness but also to build a sustainable competitive advantage. All fast fashion retailers have efficient supply chains but none of the competitors is able to support the rock-bottom prices that Primark is able to partly due to its effective utility of resources. We also see that the organisation could use IT to tackle its future challenges. 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