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Zara Business Analysis
Fundamental business philosophy of Zara
The fundamental business strategy of Zara is very simple which is linking customer demand to manufacturing, and liking manufacturing to distribution. Zara has been running their business in fashion industry which is susceptible to seasons and quick changing customer tastes. Zara has been approached to and considered their business as a perishable commodity business just like a fresh baked cake or bread to be consumed quickly.
Thus, the main business tactics of the company in context of this business philosophy is ;
< Zara’s Business Concept >
Fashion at Low Cost
Low Cost Fashion
Reduce Creative Design ( Copy of leading styles )
Define a fast response process
Optimize the process ( lean organization)
Advertising only for new arrivals
No discounted sales
Specialized network for production Interdependent between design and product team
Low product complexity : 3 types, size and colors
More choices ( approximately 11,000 new items in a year)
No classics ( Design for clothes to be worn 10 times )
The principles for Zara’s business operation
Based on the business strategy and tactics, Zara has been trying to optimize its business operation largely in three cyclical processes – ordering, fulfillment, and design and manufacturing. Much of the process are standardized and simplified under the excellent control and employee’s intuitive decision making latitude. In short, the principle of Zara’s business operation is optimization of all business process and get rids of all redundancies and unnecessary things. More extended or peripherals of the principles can be summarized as follow;
Keeping up with fashion ; short lead time and quick response to the market
Reducing risk ; reducing the quantity of manufactured so that reducing burden of stock and burden of frequent discount sales
Ownership and control of production ; vertically integrated manufacturing operation to enable its constant introducing of new items and also ensure short lead time
Highly people intensive process ; place great autonomy on employees
React rather than predict
2) What is the essence of Zara’s IT strategy?
Zara runs an information-intensive business with remarkably little information technology. Since it has established such a standardized operational process, one might be assume that the company adopted significant and substantial IT packages. Zara, however, relies on people to make many crucial activities, without much help of computers. IT seems like an investment without returns which was described in the article of Mr. Nicholas G. Carr, “IT Doesn’t Matter” In IT system, Zara positioned itself more likely as a laggard, but sophisticated and clever buyer of the commodity product, IT.
Many others who do spend on IT may leave the business process definition to IT vendor, and buying to an IT developing manager who has very little understanding of the business as it is and also do not know exactly where it could go. Zara has a perfect IT team with low turn over ratio last ten years and develops most of the system or writes the applications they need by themselves, sometimes with a little help of their vendor. It means that they perfectly understand what IT system is needed in when and where.
The reason we described IT technology as a commodity product in the first paragraph is partially because Zara sees it this way and they value their process and see this as their proprietary asset. Thus, the essence of Zara’s IT strategy can be described as follow;
IT is an ancillary tool for helping people’s activities, not a substitute for it.
Zara is a highly people oriented organization and also an information oriented organization. Many crucial activities and decisions made by employee without much help from IT technology itself. Therefore, product mangers travel tremendously around the world to collect first hand experience and information on the market.
Maintain the system knowledge within the company
Around 50 some of its IT people monitor and write the application and they know exactly which area they have to adopt a new application. So they can invest the right software and hardware. If there is any problem occur then people within the company can solve it, sometimes with help of the vendor.
Process oriented IT system
They see it is not a matter of IT technology but a matter of process. Thus, the IT technology must support its process, not the other way around.
Several years of consistent and constant investment on IT system
Zara has not built its IT system in a year or two. They regularly attend trade shows to identify the latest “must have” technologies. They always begin by looking inside the business to identify needs and challenges that are best met with IT and only then scan the technology to find solutions
Maintain the application and system simple and necessary
To keep the process optimization, standardized computerization is a must be condition. They maintain its process so does its IT system.
Not like other companies, Zara resisted the temptation to make its IT system more complex than it needed to be. And when they think something is needed like Dell handheld, they became one of the largest users of the then-new technology. This is a self-supportive factor that Zara invests only for the area they needed and tries to align its IT system with its process.
3) Do you recommend Zara to upgrade its current DOS system into window? Would you also like to recommend Zara to develop additional applications? Why or why not?
We would not recommend Zara to upgrade its current system at this moment.
First of all, we would like to summarize pros and cons on upgrade issue as follow;
< IT System Upgrade pros and cons >
Pros Cons
Business Need Need inventory management
Add networking capability
New store installation No problem with current system
Upgrade mess up in the process
Technological aspect Stay current
Hardware vendor upgraded – DOS not compatible anymore Lifetime of IT system is too short so wait for the right one
System simply managed by store
Many of the pros side are just to catch up with ever developing IT technology and try to enjoy the auxiliary benefit of the new technology which many not relevant to the necessary for maintaining its crucial business process.
The industry in where Zara plays is a labor intensive and cost-driven industry and if you look at the current ratio of Zare it is only 113% in 2002 which is way below of its competitors like GAP, H&M, Benetton – their ratio are 210%, 352%, and 299% respectively. Even though Zara was generating sufficient margin, around 11%, investing tremendous amount in unnecessary IT system is not the one shareholder would agree.
As we understood in the business case, the Dos system is perfectly working well under the current business process which Zara value the most and also this system is easy to be fixed at the store and easy to install without any help form technicians. This is a valuable aspect for the company which has over 45 countries in its operation.
And adding up the ancillary functions like inventory management and networking capability is not in line with the company’s philosophy, maintaining IT system simple and align only with its process. And the managers are well aware of the cost of 100% accurate inventory management and think the current process is sufficient enough to make the right decision. Thus, creating more process at store level, we believe, will harm its current efficacy of the optimized process since the new process is not needed at the moment. To justify the IT investment, the following conditions are required to be considered;
Invest area that is hugely important in terms of improving sales or saving costs
Put something in place that gets you some return quickly
Try not to fall into trap of re-inventing the wheel ( Buy just as commodity product )
Zara itself is a very informational technology oriented company due to the process knowledge of its business, not because of IT technology. IT technology is becoming more and more a commodity product which means you can buy it whenever you want through your sophisticated screening process. Because of IT’s this attribution, the lifetime of one technology is shortened drastically.
Thus, we would like to recommend Zara not jumping on the bandwagon and wait until the time the latest technology arrives and solve more critical and process relevant issue for them.
We would like to suggest, however, to make a constant effort to keep abreast with the times so that analyzing inside of the need and screening technological landscape which will meet the need of Zara. The wireless networking in the future will make more sense in the context of short IT life span when only the process innovation is accompanied.