Table of Contents
- Porter’s five forces
- Porter’s value chain
- Outbound logistics
- Marketing and sales
- Drucker’s theory
- Andrew McAfree’s theory
- E-business model
- Data mining
- Customer Relational Management
- Supply Chain Management
- Enterprise Resources Planning
- Zara Issue
- Zara today
- Related Case Studies essays
Zara is a constituent branch of Inditex Company. It was started by Amancio Ortega who became the richest man in Spain having started in 1963 with clothing factories. Inditex Company was started due to his belief that manufacturing and retailing in the industry should be closely linked together, because the consumer demands were hard to forecast precisely. The IT manager who went to work for Ortega shared his belief that computers were very important in building their business. Zara was founded on the principle that the retailers should respond very fast to the changes in the fashion tastes of the young city dwellers. They also needed to be able to produce sudden changes in fashion and sell them while still hot before they became passed by other styles, without relying on marketing to make such sales. Thirdly, they needed to relay on decision making that was not informed by a small set of decision makers. This meant involving most of their employees in decision making. This paper analyzes the Zara’s market environment in relation to their policies regarding technology, management and resource allocation.
Porter’s five forces
Porte’s five forces is an analysis that helps to determine the attractiveness of a company to the consumers in a competitive environment. The forces help to determine how a company’s strategies help it to survive external environment pressure generated by competitors in the industry.
a) Threat of entry of into the market by other organisations
Porter argued that existing firms in an industry try to deter new firms from entering the market so as to reduce the pressure of protecting their share of the market (Hill & Jones, 2010) 43,3. Zara exercises entry barriers to deter new organisations from entering into the market as competitors. They do this through taking advantage of economies of scale. Being a branch of a large company, Zara is able to get finished products from the main manufacturing industry owned by the umbrella company Inditex. They are therefore able to place their prices reasonably affordable for customers. It also uses brand identity because it has streamlined manufacturing industry. It can come up with designs that are only available at their stores.
b) Rivalry among established companies
This refers t o the intensity of rivalry among existing firms in an industry. The rivalry can be fought out by use of prices, direct marketing and selling efforts, promotions and product design (Hill & Jones, 2010). Zara use the product design as a way of creating competitive advantage over its rivals in the industry. This is because the manager s have the power to decide what o sell in the firm as opposed to what is in fashion and being sold by other firms. They can order special designs for their outlet as opposed to other outlets in the area.
c) Bargaining power of buyers
Buyers are those who buy the products of a company. Buyers have more bargaining power if they are few in a certain region. Their power also increases when they can rely on other companies to provide similar gods. Thirdly the power of the buyers increases when the quality of goods by a company is low compared to other companies (Ahlstrom & Bruton, 2010). Zara exercises control over bargaining power of their customers by producing quality goods and unique designs. Their ability to produce fashionable clothing at a short notice gives them power over the consumers. They also make sure that their principles are not governed by the fashion produced by other firms but rather by the existing market demands. This makes it impossible for other firms to produce replicas of the fashion in a short while and introduce them t the market for sale.
d) Bargaining power of suppliers
Suppliers are those who provide raw materials for production of goods in the industry. Their power is high when the demand for their products is high. The quality and uniqueness of their products also contributes to adding their power over the industry because the firms cannot easily switch to their suppliers. If a firm in the industry can integrate vertically, meaning that if a firm can own their own supply chain; this can weaken the suppliers bargaining power over them (Ahlstrom & Bruton, 2010). Zara is an outlet firm which gets its products from the central manufacturing industry owned by the umbrella organisation Inditex. This is a form of vertical integration which reduces the bargaining power of other suppliers to Zara. This allows Zara to make optimal profits due to competiveness.
e) Threat of Substitute products
Substitute products serve to fulfil the same needs of the customers as the products offered by a certain company in the industry. Existence of close substitutes is a strong threat because it limits the prices charged for good in the market (Hill & Jones, 2010). The substitutes in the case of Zara are in form of the brand image. The major competitors in the fashion industry are strong brand names such as Gucci and Nike constitute the major competitors for Zara. Zara must produce unique products or sell at lower prices for competitive advantage over substitute goods.
Porter’s value chain
Porte came up with a way to measure the competitive advantage of a company using value chain. The value chain disaggregates a firm into its strategically relevant activities inorder to understand the behaviour of costs and the existing potential sources of differentiation (Porter, 1998). Value chain constitutes arious value activities and margin undertaken by a firm in a bid to achieve competitive advantage. Value activities are technological or physical activities that a firm performs while margin is the difference between total value and the collective cost of performing the activities. The value activities include; inbound logistics
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These read activities concerned with receiving, storing and disseminating products. For Zara this includes receiving of clothing products from manufactures and selling them. The management of Zara receives information from the market and produces fashionable clothing for their customers based on that information.
These are activities associated with production of finished goods for the consumers. Zara management has control over all the operation regarding their products. They have designed and committed some of their work force to unique design and sudden market requirements production.
Zara handles its own logistics and even prepares the financial layout of the outlet as an entity. The decisions of the larger company rarely affect Zara. The management also decides which clothing to sell in their outlet and which ones they should not.
Marketing and sales
Zara management does not undertake marketing of products but bear the sole responsibility as an outlet to determine what the market needs so that they can offer it. The management of Zara has the full mandate to offer promotional services so as to enhance sales.
Zara as an outlet involves the employees in decision making so as to attract customers by production of quality goods. Their services in the clothing outlet include guiding the customers and assisting them on the floor when they make their clothing choices.
Other activities are known as support activities and they include procurement, human resource and technology. Zara uses marketing technology by implementation of point of sale programmes in their system. Although they work using an outdated program, it helps them in attaining the sale targets and in serving the customers. They should however upgrade to new technologies and programs which are supported by the servers for increased efficiency.
His theory on management by objective suggests active involvement of the manager and the staff members in setting their own objectives. According to this theory, staff member align their personal goals with those of the firm to achieve a common goal of the business (n.a, 2009). The management of Zara involve its employees in decision making thus putting in them the pressure of commitment to achieve the goals they set for themselves. The management of Zara has also been given explicit responsibility to formulate their strategies at business level by the corporate level of decision making. They also conduct performance review once in awhile to determine the extent of their goals achieved.
Andrew McAfree’s theory
According to McAfree, technology is the way to go in a business so as to attain optimization of speed and precision. Zara‘s business model was based on the need for speed in its operations so as to be able to expand in most large cities around the world. The managers at Zara wrote their own applications for use in their business model because it was quite unique for commercial packages. Their applications supported their business operations for ordering, fulfilment, manufacturing and design. However this did not eliminate the need for human resource that is seen in the business.
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Zara does not sell its clothes over the internet sitting two major reasons. The distribution centres of the company were not designed to offer shipping services on small orders. They also thought that it would be difficult to handle returns for products bought over the internet. They only have a website whose sole purpose is display.
Zara does not depend on mining data for long range forecast of demand hangs. It also does not depend on the forecasts for each outlet so as to make supplies to the stores. Zara uses an approach of design; fulfilment and manufacturing where clothes manufactured and ordered by a certain store were sorted by a computer program and shipped to the store including other products the store did not order. This allowed constant upgrading of their market by introduction f new products using orders made for existing products.
Customer Relational Management
Customer relational management is a strategic plan for monitoring a company’s relations with its customers. It integrates the management systems; customer support utilities and sales force automation that can be used by all members of staff. Alongside this process, technology is applied especially in automation of various processes, organization as well as synchronization of business processes which are aimed at increasing the sales volumes. Therefore, it also incorporates marketing, customer service and technical services, which are generally grouped as sales activities. The ultimate aim of customer relational management is to seek for new customers, win them over and retain them as well as those that the organization already has. This strategy also aims at wooing earlier clients back and minimizing the cost of marketing and service to customers. The significance of customer relational management is that it results to quality and efficiency in execution of services to customers as well as helping in according more attention to customers. This move helps to develop loyalty among customers. This strategy results also to a significant reduction in overall costs and thus enhance profitability. Zara exercises customer relational management so as to achieve the above advantages in addition to others. It has embraced information technology so as to automate its operations and achieve a speedy execution of processes.
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Supply Chain Management
Supply chain management refers to the active supervision of supply chain activities that are aimed at maximising the worthiness of a customer and at the same time attain sustainable economical benefit. This management plan signifies the contributions made by supply chain companies to run their supply chains in the most valuable and competent ways possible. Some of the activities in the supply chain process include product growth, sourcing of materials, manufacture and logistics in addition to automated systems that are needed to harmonize these activities (Handfield, 2011). Supply chain also involves transportation and storage of products, collectively known as physical flows. Additionally, there are information flows which ensure that there is effective coordination of the different departments and organizations that are involved in the supply chain.
Zara had an elaborate supply chain network. It had many distribution centres in addition to stores. It had established itself in almost all countries in Europe, Asia, the Middle East and North America. Furthermore, it had incorporated automation in its supply chains in order to reduce costs and time delays that occur before processing crucial information. Use of Personal Digital Assistants is a common occurrence at the distribution centres and stores.
Enterprise Resources Planning
Enterprise Resources Planning is a move that aims at unifying all the departments and functions of an organization into a single automated system in order to address every department’s particular needs. Although this can easy to say in theory, it is usually a very hard thing to implement. Most of the time, institutions employ different computer systems and processes in their activities. The central aim of this strategy is to attain a single system that incorporates the activities of different departments into one unit. This helps in sharing information needed for decision making across different sections of the company. At Zara, ERP had gained roots especially due to the fact that most of its operations had been automated with a centralized centre for monitoring all the processes in the various departments.
The major issue in Zara is on information technology. Though it worked in the past when Zara was started, and helped to increase their expansion rate, it has come to a stagnation point where the technology is outdated and is no longer supported by most servers. The technology was designed specifically for the needs of Zara and the issue is whether it is necessary to upgrade it or to remain the way it is because it is serving its purpose. The other issue connected to technology involves expansion plans which are thwarted by the fact that the technology is not up to dated and this makes opening of new outlets hard. Use of technology also raises the question of whether it is used optimally by the company because of the large number of employees that Zara requires to maintain its operations. The issue is whether technology should serve to reduce the physical labour therefore saving the company on expenses used as labour payments. The management of Zara has control over the operations of the outlets or distribution centres. They do not however exercise the freedom to decide on the location of the stores and their physical design to attract customers. Their decisions are made at the corporate level and may not translate to the desired results on the ground. The issue here is whether the managers should be given full control over the stores including their designs, arrangement and locations.
Currently, Zara boosts as one of the best and most successful international fashion organizations. It has branches in almost all countries in the world, having established its dominance in Europe, Asia, Australia, America and African continents. The stores belonging to Zara are company owned with exceptions in regions that have legal frameworks that restricts businesses owned by foreigners. In such situations, Zara usually franchises the stores so as to stay in business (CNN, 2001). The company’s secret to success is founded on its full control of every part of its business. As already discussed, the company invents, manufactures and distributes its own products.
Zara’s most focus is on technology and especially on making certain the online inventory works well. This is because the inventory forms the backbone of the company because it supports the operations of vertical integration of Zara. Zara has accomplished vertical integration which gives it advantage in competing with other major players in the industry. The company has also done well as shown by its sale figures in financial position. However, the company does not do well in increasing their market share over a period of one year as shown by the market capitalization figures.
To achieve optimization of business opportunity and expansion, Zara should embrace new technology supported by existing and up to date servers. This would help in capturing market opportunities. They should also make full use of technology in making more sales. Ordering using technology should not be limited to the stores, but the stores should be allowed to handle sales through the internet. The managers of each store should be given the resources to make decisions pertaining to the stores layout and appearance based on the market trends and the competitors available.
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The management of Zara should also allow the managers at the outlets level to conduct marketing so as to increase the sales through informing the people of their products, without necessarily having to reduce their prices.
There are untapped market opportunities available for Zara. The management of Zara should focus their efforts on attaining the opportunities which would give them competitive advantage over the other firms in the industry. Zara has done quite well in their expansion strategies and in use of technology towards customer fulfilment which allows them to be able to retain customers. Their strategy of vertical integration allows them to gain competitive advantage due to economies of scale thus reaping huge profits.