Zara External Environment Analysis
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Published: Wed, 12 Jul 2017
Zara has several specific capabilities that allow the company to have a solid competitive advantage:
The ability to quickly respond to the market needs has given a distinctive competitive advantage to the company but other companies tried to copy the model but failed. That lead us to another distinctive capability which is a mix between human resources and Zara IT’s, in my opinion this is something very hard to imitate: a strong company culture by employees that are in a continuous learning process (trainings, workshops) matched with simple to use software.
Time leadership: the production of the collections is done in maximum 3 weeks; this measure makes Zara come much sooner on the market with new collections than the normal average retailer which needs around 9 months to present a new collection on the market.
Global Brand: Zara is beneficiating of a worldwide recognition that was achieved by an innovative design and a constant quality that must provide the stimuli needed in order to create a similar brand meaning for the customers all over the world.Â
Differentiation: Zara has a creative design team who give differentiation.
Cost leadership (which is also a strategy pursued by the company): Zara manufactures 60% of its own products. By owning its in-house production, Zara is able to be flexible in the variety, amount, and frequency of the new styles they produce. Also, 50% of the production is done on client demand, which allows the chain to constantly provide its costumer with updated products. The supply chain permits the rotation of the products that aren’t sold in other countries in order to reach one of the main principles adopted by the company: 0 Inventories. Also the new products are tested first in certain stores before they entered full-run production keeping failures rate at 1 %( in comparison with the industry’s typical 10%).Â
But Zara is offering fashionable clothes at affordable prices and that isn’t a pure differentiation and neither a pure cost leadership because Zara doesn’t have the objective to become the lowest-cost producer but Zara did come up with a combination between these two and end up with a successful formula. Â
Â Â Â Besides its specific capabilities Zara is facing some issues also:
Â Because of an incorrect study the entrance on Argentina market was a failure because when analyzing the market the managers didn’t consider all the political and the economical factors.
The lack of advertising: There is made only twice a year advertises and that is at the end of seasons for the sales. If Zara wants to continue the expansion on other continents where they don’t beneficiate of brand awareness it will be really difficult to be successful without an advertising campaign
The Vertical Integration which is a distinctive feature of Zara’s business model start to become more and more difficult to handle as long as the distance from the 0t is getting bigger. Â
3.2 External Environment
To have a better understanding of the company’s business model it is necessary to take a look to the external factors.
Once with the expansion of U.E the customs will disappear and also the liberalization of markets (e.g. Germany) will facilitate the further expansion of Zara
Zara entered new markets that normally were riskier to approach by partnerships: franchises in Cyprus, joint-ventures with Benetton in Italy and Otto-Versand in Germany.
If Zara will expand in Asia it will need to replicate its business model because of distance and differences
A treat that become significant for several companies (e.g. Swatch) is the exchange currency rate, as Zara is having activities in other continents (other than Europe) the company could register losses because of the exchange rate. Swatch is a company that is really aware of this treat and it started to use several financial tools in order to stop the losses caused by the exchange rate but it is not an easy thing to do and even the measures putted in place can backfire. Â
The biggest treat for Zara is represented by the competition: H&M and C&A. H&M for example has lower prices uses top models(Naomi Campbell, Linda Evangelista) in order to advertise the brand and also is doing annual events with top designers( Cavalli in 2008)
Another treat for Zara is the cannibalization. Because of the stores that are located so close one of each other we could assist to the cannibalization of sales between Zara and the other brands managed by Inditex.Â Â Â
Historically, Zara has been able to keep software development in-house and successfully meet requirements of the Zara Empire. Using POS terminals based on an highly developed operating system would open doors for more sophisticated software needs and opportunities. This could make Zara reconsider maintain an in-house software development department. Alternatively, Zara could also use standard applications or even outsource entirely.
There are a number of reasons why Zara can consider outsourcing software development, which conversely represents the disadvantages for in-house application development. Firstly, outsourcing IT could provide opportunities for cost reduction as it allows Zara to select the least expensive and most efficient software vendors. Through a process known as reverse auction, Zara can post its purchasing requirements and select suppliers based on the lowest bid offered. The main argument here would be . This would mean that Zara would not have to worry about the in-house staff with specific experience and skills for certain software pieces and could find the latest software suitable for it operations. The result would be less coordinating costs, since Zara would not have to monitor activities in-house as this would be included in the service through a Service Level Agreement (SLA). By using responsibility matrices the duties and rights can be mapped under different circumstances. This would entail certain service level goals for the supplier to adhere to and penalties in case of failure to meet these. If there were a problem with the IT system, the supplier would therefore be legally obliged to solve it immediately. Zara’s core competence, its speed to market, however, would not be allowed to suffer under an outsourcing arrangement, and considering Zara’s global presence, this raises the question as to whether outsourcing forfeits flexibility. The issues of transaction and coordinating costs are the main drivers in the trend of companies taking their IT activities elsewhere. For Zara, this could entail less heavy investment in extensive projects for keeping the IT system up-to-date, provided this is part of the contract or switching costs are low enough. Moreover, outside suppliers might be more specialized and be able to achieve greater economies of scale over in-house production, provided the service is standardized. Recently, application software providers even offer companies the possibility to store information remotely. If a problem occurs with the connection however, this would entail a crash in the entire supply. There are also security issues that cannot be overlooked. Even if a company signs a confidentiality agreement, it does not ensure that sensitive information will not be passed on to other parties. The risk of competitors getting hold of this information and imitating essential processes such as Zara swift inventory management is real and must be taken into consideration.
Being a part of the key instrument in the value chain, it considered best for Zara to retain software development in-house. The IT department of Zara has a unique culture of a relatively small and highly motivated group of people (only 1 person left the department over the last 10 years!) based in La Coruña, who are responsible for the entire Inditex group of companies. Empowerment of employees adopted in Zara gives a sense of ownership to the software developers with regards to the produced applications, which increases productivity and job satisfaction. Software developers are involved in a creative process as opposed to the IT staff needed to only monitor outsourced activities. The benefits from outsourcing may not be sufficient to cover the costs that would be incurred as a result of the complexity of the product and asset specificity, despite the coordination costs that are involved in internalizing IT suppliers. Zara’s core competence is at stake, and it is believed that by retaining a internal designer would be the best way to preserve it, provided the supplier can meet Zara’s global needs. Similarly for its POS terminals, although Zara has slipped into to a hold up position it could prevent this in future by maintaining a more stringent company IT program. Although the chance of a hold up exists, the downside to having multiple suppliers could potentially threaten its speed. Having a single supplier for the POS terminals will lead to an accumulated knowledge in customization of equipment and services, and result in closer match to Zara’s preferences. Zara needs to ensure a continuous link between overall corporate strategy and the IT strategy. For that reason it is deemed important that Zara retain bilateral agreements with its POS suppliers.
Zara and its IT partner have in the past opted to use DOS as their operating system for all the applications of the company. DOS is considered to be an outdated system and few companies are still using it. The question of changing the OS has therefore been raised. It has been already acknowledged that staying so far behind in terms of technology can be risky but changing an OS in 531 shops would not be without risks either. From a strategic perspective, although Zara’s advantage over its competitors is not so mush a result of its IT leverage, the sustainability of its competitive edge might be at risk due to a lack in IT investment. This is the foremost problem with its current IT situation. Other competitors could in due time develop automated solutions in their operations to such an extent that Zara’s original speed to market might be outdone. Coming back to a more resource-based view, a new OS would enable the installation of modern software applications which could allow Zara to develop its capabilities.
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