ZARA: CASE STUDY ANALYSIS
9th, February, 2013
Table of Contents
Executive Summary. 3
1. Introduction. 4
2. Theory. 5
Information Technology. 5
Speed and Decision Making. 6
Marketing, Merchandizing, and Advertising. 7
Firm-Based Value Chain. 7
3. Application of Theory. 9
4. Results. 11
5. Conclusions. 12
6. Recommendations. 12
7. Appendices. 14
8. Works Cited. 15
Zara is a large retail company under the Inditex fashion group in Spain. Zara is a successful company, which invests in information technology to increase its productivity. This, in addition to its vertical integrated operation, has helped it achieve its objective of reduced time in decision-making. Unlike other retail companies, Zara does not invest highly in advertising, as only posters are displayed in the stores. This leads to an approximate 0.3 per cent of the company’s budget on advertisements, unlike other companies, which spend close to 4 per cent of their total budget on the same. Investing in information technology and in the stores is a strategy that has helped Zara to have a competitive advantage over the other retail companies. However, Zara has been faced with a challenge in deciding the right move, between updating the current software the company uses, or maintaining it as it is. This is a challenge, as both moves result in benefits as well as costs (Tungate 2012).
An IT strategy is paramount for all the companies, as this helps a company to adapt faster to the changes in the business requirements in the business environment. If a company lacks an IT strategy, it cannot keep up with the business changes in an effective manner, but instead will have a delayed reaction and response to important changes. If the IT strategy of a company is weak, this might have detrimental effects on the company. A weak IT strategy is therefore, a waste of time and resources for a company (Gitman & McDaniel 2008). This paper investigates the IT management and strategy of Zara, using a provided case study of the company, to realize how effective this has been to the company.
Thirty-seven years ago, Amancio Ortego and Rosalia founded Zara. This owns different brands, and has close to 1660 stores, most of which are situated in Europe. The different styles of fashion and clothes by this company serve the needs of men and women, as well as children. This is one of the most successful companies in Spain that have constantly managed to adapt fast to changes in the business environment, unlike other companies that lack this capability. Analysing the IT strategy of Zara is of interest, since this company is unique in the way it utilizes communication and information technology. While other companies rely on outsourcing to reduce costs, Zara on the other hand, has capitalized and invested in information technology, as a way of gaining a competitive advantage in the market. This company, unlike others in the same fashion industry, is known for its instant reaction and response to fashion trends. While its counterparts take a prolonged time to respond to new fashion trends, Zara restocks its shelves rapidly, to meet the new needs of customers, for fashion items that are the hits. Therefore, the success of Zara is wholly influenced by the information and technology, which the company has prioritised (“Zara”: Dutta n.d).
Zara strategizes its business processes using the he Hybrid model. The product development for the company’s brands has high capabilities and this result in increased speed for deliveries in the company. With regard to its brand differentiation, this company produces high-quality products, which it sells at low prices. Zara does not outsource, but engages in the full production and distribution processes to meet the demands of its customers. This includes design, manufacture, distribution in stores, and logistics. All these take as short as three weeks to accomplish. Therefore, this has helped the company address the instability in demands in the fashion industry. On the other hand, other retail companies will take as long as five to eight months in order to adjust to a new fashion trend. Zara uses varied strategies to achieve its goals. However, this report will focus on information technology, speed and decision-making, as well as marketing, merchandising, and advertising (“CNN Tech” 2004).
The information technology cost of Zara is less compared to that of other retail companies. Despite this, Zara still manages to make the best out of its information technology, beating the other retail companies. In addition, Zara lacks a chief information officer, as well as a formal budget making process for its information technology. Only about 0.5 per cent of the staff at Zara are involved with matters of information technology in the company. It is therefore, surprising how Zara, a successful company, operates with such few financial and labour investments in information technology. Evidence shows that Zara has managed to remain steady and operate effectively in the contemporary business world that is characterized by a high level of technological advancement. However, the hybrid model adopted by Zara is responsible for helping the company maintain its stability and fair competition in the market. The company utilizes the hybrid model of strategy, which has ensured its effective operations (Tungate 2012: (Mcafee, Dessain & Sjoman 2007).
In the hybrid model strategy, the company passes important information from its various stores to company headquarters through information technology, and a combined human intelligence input. Some elements of the information technology used in this case include the PDA devices. The managers of various stores send the orders of their stores, while another group is responsible for making decisions whether the orders should be served or whether priority should be given to different stores, where products are fast selling. This decision is made by use of calculations from an application that records and tracks the “theoretical inventory”
of every SKU. Information technology is also highly employed inside the company’s factories, in the production process. Computers control the large cutting equipment in the factories. These cut fabric into the different desired patterns, and these make use of all or most of the fabric, therefore avoiding waste of resources. Apart from the company factories, its distribution centres equally make use of information technology, mainly through computerization and automation. In this case, computers are responsible for the processing and supplying of any orders that are received in the distribution centres. In addition, the company’s department of information technology exclusively developed the applications used by Zara in its distribution centres, to be solely used in Zara (Mcafee, Dessain & Sjoman 2007).
Speed and Decision Making
Zara values its customers; therefore, the company aims at meeting their demands as fast as possible. This is because the fashion industry is characterized by unstable customer demands over a short period. To achieve this, Zara utilises its employees to analyse the market by getting information from the consumers about the most preferred fashion items at a particular time. A group of commercials in the company will then use the gathered information to decide on the type of design for the different fashion items, and their selling price. This therefore, makes the company spend little time on decision making, with regard to consumer demands. Since the company has various groups of experts, another group is assigned to the supervision of all the stores in the world. This group also comes with information about what fashion items the company should produce, including the type of designs, based on their observations in the different stores across the world. This strategy also saves a considerable amount of time the company uses in decision making, considering it is a large company (Mcafee, Dessain & Sjoman 2007).
Marketing, Merchandizing, and Advertising
A look at Zara’s advertisings and marketing shows that the company uses only a small fraction of its revenues in advertising its fashion products. Most retail companies use about 4 per cent of their revenues on advertising, while Zara uses only about 0.3 per cent. Zara prioritizes information technology, therefore, invests in this. The company’s stores are strategically placed in popular locations in cities, and these have similar architectural designs. The management style of each store in one country is similar, as similar factors affect businesses in the same country (Mcafee, Dessain & Sjoman 2007).
Firm-Based Value Chain
The vertically integrated business model adopted by Zara links the demands of customers to manufacturing, then link manufacturing process to the distribution, and general retailing process. In order to analyse the effectiveness and challenges of this business strategy, Michael Potter’s value chain model will be used to test all the business activities of this company, with regard to information technology, and identify loopholes or strengths of each. This will also show whether the approaches this company use with regard to information technology are effective and if these can be applied in other retail companies in the fashion industry (Sekhar 2009).
The value chain model is instrumental in the identification of the aspects that can boost competition of a company, and it can also propose appropriate strategies, which a business can adopt in its processes. This model also highlights different processes and activities in the business, which can be linked with competitive strategies, and which can have good results for the company, when applied with information system. In this model, specific points where a company can successfully apply information technology to boost its productivity are identified (Laudon & Laudon 2012).
In the value chain model, business is viewed as a series of activities, which help boost the performance of a company, with regard to the production of high-quality gods and services. This model categorizes these activities into two major categories, including the primary activities and the support activities. The primary activities include all the activities directly related to processes of production and distribution of goods and services, which determine quality for customers (Laudon & Laudon 2012).
On the other hand, the support activities are those that help in the facilitation of primary activities. These are mainly in the form of human resources management, including recruitment, training, and motivation of employees, among others. Additionally, these also comprise the company infrastructure, including quality, finance, administration, and legal management, among others. Support activities also include procurement, which involves the buying of materials for the production and other processes in the company; and technology development of a company, which involves research and development of technology and the automation of processes in the company among any other technology a company adopts to boost its productivity. However, for a company to adopt these support activities appropriately, it relies on the success of the company in achieving a competitive advantage in the market, with regard to its information systems. Companies can therefore, adopt the value chain model to guide them in each of their value chain activities. This might help a company learn about ways to utilize their information systems in making company operations and customer satisfaction effective. The company will also be in a position to understand how information technology can strengthen its relationship with customers, as well as the suppliers, even though these are not directly linked to the company’s internal value chain (Laudon & Laudon 2012).
3. Application of Theory
With regard to information technology and its effectiveness, the value chain model can be used to evaluate the business processes of Zara. As seen before, this model divides company activities into two categories, including the primary activities and secondary activities. The primary activities in Zara include those involved with designing, production, and responding to orders, by supplying all stores with fashion products, in accordance to decisions from the distribution centre. The vertically integrated operations of the company has been instrumental in ensuring that designing and production processes take the least time, mostly a maximum of three weeks (Laudon & Laudon 2012)
On the other hand, support activities in this company include sourcing, and information technology and infrastructure development. With regard to development of infrastructure, the company (Zara) uses the system of mobile tracking, and its sales personnel utilize organizers, which are hand held. On the other hand, infrastructure of the company is highly influenced by the store managers, who constantly work to keep up with the fashion trends in the industry. These store managers, like the sales personnel, also utilize hand held organizers. With these, they are able to collect and keep information collected on fashion, the orders made by customers, and the views, opinions, and recommendations of customers. All this information by store managers is then combined with results from the company’s market research, and together, these are incorporated into the production process of new trends. On the other hand, sourcing in this company mainly has to do with supplies. Zara uses external suppliers to obtain some material and equipment for its production process. The company’s purchasing offices in different regions are responsible for linking up with external suppliers, mainly from Spain and other regions in the East (Mcafee, Dessain & Sjoman 2007).
The process of chain management in Zara is highly facilitated by information technology. These include inbound logistics, customer service, operations, sales and marketing, administration and management, and human resources management. In procurement, the company utilizes ordering systems, which are computerized. On the other hand, the overall technology use in this company’s production process, involves use of design systems that are aided by computers. Each process in the company is under distinct leadership, which ensures overseeing of the processes. In addition, these are aimed at ensuring cost reduction to produce high quality products using appropriate technology. However, since Zara lacks a chief information officer, the company’s department of information technology might lack proper decision-making aimed at developing strategies of improving the department. Currently, a high level of automation is evident only in the company’s distribution centres. Individual stores use fax and telephone to place their orders. In addition, the PDA, which managers use lack a connection to individual stores for information sharing, especially, with regard to inventory (Tungate 2012: Mcafee, Dessain & Sjoman 2007).
Zara invests in its own software and does not buy new technology. This is because of company operations, which are considered unique; therefore, new technology would still have to be adjusted to fit company operations. Additionally, being a global company, Zara utilizes a variety of currencies; therefore, buying an accounting package would still require customization and adjustments. The operating system used by Zara cannot keep data for future forecasting. Therefore, company sales, plans, profits and loses, among other factors cannot be predicted with this operating system. Additionally, the use of fax machines by stores is unreliable and causes a breakdown in communication at some points. This is also costly, considering the cost of fax machine order forms. Reliance on the telephone could also result in miscommunication or mishearing, which is detrimental and frustrating to the involved process. The company utilizes applications that are not suitable for its value chain. Since these applications are internally developed, upgrading them might be impossible. In addition, their compatibility with other applications is impossible. The company stores are in need of an effective POS, which will shield them against all problems in infrastructure, as the current POS terminals are out of date. Finally, Zara is a bi g company with few IT personnel. This reduces the effectiveness of the company, with regard to IT, since the workload is not proportional to the workforce.
Analysing the current information technology system shows that the firm saves considerable finances while using the current system. This is through the low operational costs the system presents, small IT workforce; meaning little money is spent on their salaries, and low computer expenses. Since the information technology system is simple, managers do not require special training in order to manipulate the system. However, on the negative, this system is slow in data collection and requires more time to execute commands. This therefore, gives the company a negative image, with regard to technology upgrading. Upgrading the current system will cost the company a considerable amount of finances. However, the company could consider adopting Linux, which is cheaper than other operating systems. The company will have to incur costs for the new applications, as well as employee trainings on use of the new application. However, this will be beneficial, as the company productivity will rise.
Zara is a highly competitive company, and this draws from its use of information technology to run its different operations. Although information technology strategy of the company is commendable, there exists a variety of flaws in the system. These flaws bar the company from reaching its optimal performance in the market. The main drawback of this company is its information technology strategy, and specifically the use of its current POS, which is limiting to the company, although it has propelled it to great heights in the market. The company has a commendable information technology strategy, though with a few flaws, which can be corrected. If these are improved, the company will be able to increase its productivity and profits further.
For effective business operations, Zara should consider upgrading its operating system. A system that will increase efficiency between stores, consumers, and store manager should be adopted. The current system is restrictive and has had negative implications for the company, even though it runs on low cost of operation. The company could consider a HP POS, which is equally cheap to operate and simple. Additionally, this is flexible and can manage a variety of operations, compared to the current POS of the company, which is limiting. Therefore, the company can still have a small number of IT personnel, as the application has a high capacity for tasks. This change of software for the company should be done gradually, allowing employees time to adapt to the new system, in addition to them being trained. If successfully adopted, Zara will have a new experience with IT and a positive impact on its productivity.
Figure 1. The Value Chain Model. Source: Think Fast Solutions, http://www.thinkfastsolutions.com/valuechain.html, accessed February 9, 2013.
“CNN Tech” July 24 2004, Zara: A Model Fashion Retailer, Viewed 9 February 2013
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