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National Institute of Fashion

Technology, Bangalore

Strategic Management assignment

Guided by: Dr. Sanjeev Malage

Submitted by:

Wondwossen Shiferaw

(BEN13MM35)

14 September, 2014

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External analysis of ZARA & value chain analysis of Tesco

Table of content

1. External analysis…….………………………………………………………………1

1.1 Introduction ..………………………………………………………………….1

1.2 Key external forces ..…………………………………………………………2

1.2.1 Economic forces ..…………………………………………………………3

1.2.2 Social, cultural, demographic and natural environment forces..4

1.2.3 Political, governmental and legal forces …………………………….4

1.2.4 Technological forces ……………………………………………………..5

1.2.5 Competitive forces ………………………………………………………..7

1.2.5.1 Competitive intelligence programs ……………………………7

1.2.5.2 Market commonality and resources similarity …………….7

1.3 Competitive analysis: Porter’s five – forces model …………………….8

1.4 How to conduct external strategic management analysis …………..9

2 External analysis of ZARA ……………………………………………………..10

2.1 Overview of Zara ……………………………………………………………10

2.2 Economic forces …………………………………………………………....11

2.3 Social, cultural, demographic and natural environment forces ….12

2.4 Political, governmental and legal forces ……………………………….13

2.5 Technological forces ………………………………………………………..13

2.6 Competitor analysis ………………………………………………………..14

2.7 Michael Porter’s five – forces model …………………………………….15

2.7.1 Entry barriers ……………………………………………………………15

2.7.2 New entrants …………………………………………………………….16

2.7.3 Threat of substitutes …………………………………………………..16

2.7.4 Customer’s bargaining power ………………………………………..16

2.7.5 Supplier’s negotiation power …………………………………………17

2.7.6 Rivalry among the competitor ……………………………………….17

2.8 External factor evaluation (EFE) matrix ……………………………….17

2.9 The competitive profile matrix (CPM) …………………………………..19

2.10 Conclusion ……………………………………………………………………20

3 Value chain analysis of Tesco ………………………………………………..21

3.1 Introduction ………………………………………………………………….21

3.2 Definition of value chain ………………………………………………....21

3.3 Porter’s value chain ………………………………………………………..22

3.3.1 Primary activities ……………………………………………………….23

3.3.2 Support activities of the value chain analysis ……………………24

3.4 Steps in value chain analysis ……………………………………………26

3.5 Value chain analysis of Tesco ……………………………………………27

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3.5.1 Introduction ……………………………………………………………..27

3.5.2 Primary activities ……………………………………………………….28

3.5.2.1 Inbound logistic …………………………………………………29

3.5.2.2 Operations management ………………………………………29

3.5.2.3 Outbound logistics ……………………………………………..30

3.5.2.4 Marketing & sales ………………………………………………31

3.5.2.5 Service …………………………………………………………….31

3.5.3 Support activities ……………………………………………………….32

3.5.3.1 Technology development ………………………………………32

3.5.3.2 Human resource management ………………………………32

3.5.3.3 Infrastructure ……………………………………………………33

3.5.3.4 Conclusion ……………………………………………………….33

4 Reference …………………………………………………………………………..34

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1. External analysis of ZARA

1.1 Introduction

The external environment of the company is made up of several economic, social,

demographical, management and ecologic factors. It can directly or indirectly influence the

activity and the evolution of a tourism company. The analysis of the external environment

can lead to the possible identification of future trends. The evolution analysis is based at a

company or geographical level as it can become a strategic opportunity; it can prove to boost

cost efficiency and can increase income.

Taking advantage of such opportunities can consist in a better efficiency and productivity

whilst the identification of opportunities depends on both, a close research of the environment

and the capacity of the company to give a correct meaning to the collected information ahead

of competition.

The purpose of an external audit is to develop a finite list of opportunities that could benefit a

firm and threats that should be avoided. As the term finite suggests, the external audit is not

aimed at developing an exhaustive list of every possible factor that could influence the

business; rather, it is aimed at identifying key variables that offer actionable responses. Firms

should be able to respond either offensively or defensively to the factors by formulating

strategies that take advantage of external opportunities or that minimize the impact of

potential threats.

An external strategic management analysis is part of SWOT analysis, referring to a

company’s strengths, weaknesses, opportunities and threats. The first two parts of the SWOT

analysis, strengths and weaknesses, refer to internal strategic analysis; the last two parts,

opportunities and threats, refer to conducting an external strategic management analysis. All

elements of the SWOT analysis work together. Ideally, a company tries to match its strengths

to its external opportunities. It also tries to change weaknesses into strengths and threats into

opportunities.

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1.2 Key External Forces

External forces can be divided into five broad categories:

1. Economic forces

2. Social, cultural, demographic, and natural environment forces

3. Political, governmental, and legal forces

4. Technological forces; and

5. Competitive forces.

Relationships among these forces and an organization are depicted in the below Figure

External trends and events significantly affect all products, services, markets, and

organizations in the world.

Changes in external forces translate into changes in consumer demand for both industrial and

consumer products and services. External forces affect the types of products developed, the

nature of positioning and market segmentation strategies, the types of services offered, and

the choice of businesses to acquire or sell.

External forces directly affect both suppliers and distributors. Identifying and evaluating

external opportunities and threats enables organizations to develop a clear mission, to design

strategies to achieve long-term objectives, and to develop policies to achieve annual

objectives.

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1.2.1 Economic forces

Economic factors have a direct impact on the potential attractiveness of various strategies.

For example, as interest rates rise, then funds needed for capital expansion become more

costly or unavailable. Also, as interest rates rise, discretionary income declines, and the

demand for discretionary goods falls. As stock prices increase, the desirability of equity as a

source of capital for market development increases. Also, as the market rises, consumer and

business wealth expands.

A summary of economic variables that often represent opportunities and threats for

organizations is provided in Table given below.

Key Economic Variables to Be Monitored

Shift to a service economy in the

country Import/export factors

Availability of credit Demand shifts for different categories of goods and

services

Level of disposable income Income differences by region and

consumer groups

Propensity of people to spend Price fluctuations

Interest rates Export of labor and capital from the specific country

Inflation rates Monetary policies

Money market rates Fiscal policies

Federal government budget deficits Tax rates

Gross domestic product trend Consumption patterns

Unemployment trends Worker productivity levels

Value of the dollar in world markets Stock market trends

Foreign countries’ economic conditions

It is important to monitor key economic factors such as: Foreign countries' economic

conditions, Import/export factors, Demand shifts for goods/services, Income differences by

region/customer, Price fluctuations Exportation of labor & capital, monetary policies, Fiscal

policies, Tax rates and etc.

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1.2.2 Social, Cultural, Demographic, and Natural Environment Forces

Social, cultural, demographic, and environmental changes have a major impact on virtually

all products, services, markets, and customers. Small, large, for-profit, and nonprofit

organizations in all industries are being staggered and challenged by the opportunities and

threats arising from changes in social, cultural, demographic, and environmental variables.

1.2.3 Political, Governmental, and Legal Forces

Federal, state, local, and foreign governments are major regulators, deregulators, subsidizers,

employers, and customers of organizations. Political, governmental, and legal factors,

therefore, can represent key opportunities or threats for both small and large organizations.

For industries and firms that depend heavily on government contracts or subsidies, political

forecasts can be the most important part of an external audit. Changes in patent laws, antitrust

legislation, tax rates, and lobbying activities can affect firms significantly.

The increasing global interdependence among economies, markets, governments, and

organizations makes it imperative that firms consider the possible impact of political

variables on the formulation and implementation of competitive strategies.

Impact of political variables

Formulation of Strategies

Implementation of Strategies

Strategists in a global economy

Forecast political climates

Legalistic skills

Diverse world cultures

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Some Political, Governmental, and Legal Variables

Government regulations or deregulations Changes in tax laws

Special tariffs Political action committees

Voter participation rates Import–export regulations

Number, severity, and location of

government protests

Government fiscal and monetary policy

changes

Number of patents Political conditions in foreign countries

Changes in patent laws Special local, state, and federal laws

Environmental protection laws Level of defense expenditures

Lobbying activities Size of government budgets

Level of government subsidies Location and severity of terrorist activities

Antitrust legislation Location and severity of terrorist activities

1.2.4 Technological Forces

Revolutionary technological forces:

Profound impact on organizations

Internet

Semiconductors

XML (extensible markup lang.) technologies

UWB (ultra wideband wireless) communications

Revolutionary technological changes and discoveries such as superconductivity, computer

engineering, thinking computers, robotics, unemployed factories, miracle drugs, space

communications, space manufacturing, lasers, cloning, satellite networks, fiber optics,

biometrics, and electronic funds transfer are having a dramatic impact on organizations.

Superconductivity advancements alone, which increase the power of electrical products by

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lowering resistance to current, are revolutionizing business operations, especially in the

transportation, utility, health care, electrical, and computer industries.

The Internet is acting as a national and even global economic engine that is spurring

productivity, a critical factor in a country's ability to improve living standards. The Internet is

saving companies billions of dollars in distribution and transaction costs from direct sales to

self-service systems. For example, the familiar Hypertext Markup Language (HTML) is

being replaced by Extensible Markup Language (XML). XML is a programming language

based on "tags" whereby a number represents a price, an invoice, a date, a zip code, or

whatever. XML is forcing companies to make a major strategic decision in terms of whether

to open their information to the world in the form of catalogs, inventories, prices and

specifications, or attempt to hold their data closely to preserve some perceived advantage.

XML is reshaping industries, reducing prices, accelerating global trade, and revolutionizing

all commerce. Microsoft has reoriented most of its software development around XML,

replacing HTML.

Technological forces represent major opportunities and threats that must be considered in

formulating strategies. Technological advancements can dramatically affect organizations’

products, services, markets, suppliers, distributors, competitors, customers, manufacturing

processes, marketing practices, and competitive position. Technological advancements can

create new markets; result in a proliferation of new and improved products, change the

relative competitive cost positions in an industry, and render existing products and services

obsolete. Technological changes can reduce or eliminate cost barriers between businesses,

create shorter production runs, create shortages in technical skills, and result in changing

values and expectations of employees, managers, and customers.

Technological advancements can create new competitive advantages that are more powerful

than existing advantages. No company or industry today is insulated against emerging

technological developments. In high-tech industries, identification and evaluation of key

technological opportunities and threats can be the most important part of the external

strategic-management audit.

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1.2.5 Competitive Forces

Collection and evaluation of information on competitors is essential for successful strategy

formulation. Competition in virtually all industries can be described as intense.

Identifying rival firms:

Strengths

Weaknesses

Capabilities

Opportunities

Threats

Objectives

Strategies

1.2.5.1 Competitive Intelligence Programs

Competitive intelligence (CI), as formally defined by the Society of Competitive Intelligence

Professionals (SCIP), is a systematic and ethical process for gathering and analyzing

information about the competition’s activities and general business trends to further a

business’s own goals.

Good competitive intelligence in business, as in the military, is one of the keys to success.

The more information and knowledge a firm can obtain about its competitors, the more likely

it is that it can formulate and implement effective strategies. Major competitors’ weaknesses

can represent external opportunities; major competitors’ strengths may represent key threats.

1.2.5.2 Market Commonality and Resource Similarity

By definition, competitors are firms that offer similar products and services in the same

market. Markets can be geographic or product areas or segments. For example, in the

insurance industry the markets are broken down into commercial/consumer, health/life, or

Europe/Asia. Researchers use the terms market commonality and resource similarity to study

rivalry among competitors. Market commonality can be defined as the number and

significance of markets that a firm competes in with rivals. Resource similarity is the extent

to which the type and amount of a firm’s internal resources are comparable to a rival. One

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way to analyze competitiveness between two or among several firms is to investigate market

commonality and resource similarity issues while looking for areas of potential competitive

advantage along each firm’s value chain.

1.3 Competitive Analysis: Porter’s Five-Forces Model

Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing

strategies in many industries. The intensity of competition among firms varies widely across

industries.

Intensity of competition is highest in lower return industries. The collective impact of

competitive forces is so brutal in some industries that the market is clearly “unattractive”

from a profit-making standpoint. Rivalry among existing firms is severe, new rivals can enter

the industry with relative ease, and both suppliers and customers can exercise considerable

bargaining leverage.

According to Porter, the nature of competitiveness in a given industry can be viewed as a

composite of five forces:

1. Rivalry among competing firms

2. Potential entry of new competitors

3. Potential development of substitute products

4. Bargaining power of suppliers

5. Bargaining power of consumers

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The following three steps for using Porter’s Five-Forces Model can indicate whether

competition in a given industry is such that the firm can make an acceptable profit:

1. Identify key aspects or elements of each competitive force that impact the firm.

2. Evaluate how strong and important each element is for the firm.

3. Decide whether the collective strength of the elements is worth the firm entering

or staying in the industry.

1.4 How to Conduct External Strategic Management Analysis

1. Collect information. Performing an external strategic management analysis is part of

conducting a strategic management audit, which begins by collecting information.

Using the SWOT analysis for an external audit, only the opportunities and threats to

the environment are investigated. The information collected refers to political, social,

cultural, technological and environmental trends. Demographic information is also

collected. This information is collected by investigating competitors and local

information sources.

2. Analyze the information collected. All of the information collected is analyzed and

categorized.

3. Identify opportunities that exist externally. Opportunities are conditions that exist in

the environment that could benefit the company if the company accepts the

opportunities appropriately and properly. Opportunities can be many things, such as

meeting customers' unmet needs and segments in the environment that have not been

reached.

4. Identify the threats that exist in the environment. External threats are threats that exist

without regard to the business. They are conditions that could potentially harm the

company if the company does not react properly. Threats are any negative or harmful

barriers that could keep the company from reaching its goals. They could include

entry barriers and technological advances the company has not investigated.

5. Develop action plans. Strategic analyses are conducted to identify opportunities and

threats. The purpose is to turn opportunities into strengths and to turn threats into

business opportunities. Plans should be developed with time lines and delegated to

departments within the organization.

6. Continue to monitor the environment. After action plans are created, a company

continuously monitors how the plans are working and whether any additional plans

must be implemented or if any current plans must be changed.

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2. External analysis of ZARA

2.1 Overview of Zara

Zara, a Spanish clothing and accessories retailer, was founded in 1975 by Amancio Ortega

and Rosalia Mera. It is the flagship retail store of the Inditex group, a fashion group that owns

other brands such as Massimo Dutti, Pull and Bear, Uterque, Stradivarius, and Bershka.

Amancio Ortega opened the first Zara store in a central street in Galicia, Spain under the

name Zorba. Although another store a few blocks away was also named Zorba, the molds of

the letters for the sign was already created and it was rearranged, thus coming up with the

name Zara. In 1980, the company started its international expansion in Portugal. In 1989,

they penetrated the US market and in 1990, they entered the French market.

Zara is a vertically integrated retailer, controlling the supply chain, design, manufacturing

and distribution of all its products worldwide.

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Zara currently has 1,751 stores worldwide. They incur annual revenue of over $9 Billion

dollars (2009).

Zara's Mission Statement aims to contribute to "the sustainable development of society and

that of the environment with which we interact." In stores, Zara saves energy and is eco-

friendly. They also create less waste and they continue to recycle. Each and every employee

is aware of the environmental commitment of Zara. In their product, Zara uses ecological

fabrics and organic cotton. They also manufacture PVC-free footwear. In transporting

product, Zara uses biodiesel fuel, which reduces Co2 emissions by 500 tons per year.

Zara is the flagship chain store of Spanish company Inditex Group which incorporates other

brands such as Zara Home, Massimo Dutti, Pull and Bear, Oysho, Uterqüe, Stradivarius and

Bershka. Zara is present in 86 countries with a network of 1.751 stores on the premium

locations in the world's largest cities (Inditex website).

There are three key pillars Zara is running its business on. First of all, time between new

collections deliveries is very small. Stores are supplied every two weeks with new

fashionable garments and in small batches in order to achieve an effect of scarcity, which is a

second key element of the Zara business model. The third one is delivering many different

styles in all forms and shapes so that there are more chances customers will like the clothes

(Inditex website). Analysis of the Zara business model along with external and internal

factors affecting its operations is given further.

2.2 Economic forces

Economic factors can have a significant effect on company’s operations since apparel

industry is very price sensitive and in times of crisis customers will be choosing to spend less

on expensive clothes. Since Zara operates world-widely effects of regional economic crisis

could be avoided at some level. However, currency risk is the risk that will always be present

and depending on the dollar/euro rate operational costs for Zara will be increasing or

decreasing. Due to the current euro crisis the American dollar is becoming stronger compared

to euro and as a result costs of raw materials that Inditex is buying mostly in American

dollars will go up.

Zara has been dealing in a single currency since its origin. The economical conditions of

overall world have been fluctuating in last few years but Zara is successful in getting market

share and has not been affected by the recession. The main reason behind was that Zara is not

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currently dealing in dollars and is using a relatively safer currency for its dealings. Before

entering new markets, the currency rates and the economical condition of that country is

evaluated. Spain has a stable market and predictable demands in market.

2.3 Social, cultural, demographic & natural environment forces

Socio-demographic factors are important for analysis due to the specific aging structure of

customers of Zara clothes since it is mostly worn by young people looking for fashionable

garment. Cultural differences between regions Zara clothes are sold also matter as well as the

purchasing power of customers. For instance US market has a high purchasing power. On the

other hand “slim” designs of Zara do not match with the demand on that market.

Furthermore, Inditex is now supporting eight brands and Zara is regarded to be a growth

engine as it makes up one-third of group’s sales (Murphy, 2008). The strategy of Inditex is

based on the openness to the society: “Inditex makes a solid commitment to transparency and

develops different initiatives to guarantee fluid access to its different groups of stakeholders

to information on the performance of its activity.” (Inditex annual Report, 2012).

Zara is currently operating in a single county and that’s why faced a social influence that was

already coped by Inditex group for its other brands. Zara luckily got a country based on

independent cultural roots. Spain has a long history, with fabulous contributions in artistic

and designing domain. This country has a calm social environment, attracting tourists on

large scales, having lots of bright cultural events. Strong tourism exchanges enables retailers

like Zara to get obtain customers and then retaining of customers is done by quality satisfying

customers’ needs. Zara’s strategy of higher turnover encourages sale of items in a single visit

and thus tourists become customers. Fashion at lower prices makes it easy to purchase for

shoppers.

Environmental factors play a significant role nowadays. Apparel industry uses water, energy

and other resources thus making it important to wisely utilize them and in line with the

environmentally friendly policies that Zara has been implementing. Business environment is

a combination of customers, competitors and internal corporate factors. Overall business

growth is favorable for new businesses but for Zara it’s time to invent new domains and to

cross boundaries.

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2.4 Political, governmental and legal forces

Government and political parties in a country are responsible for developing political

environment. Government is the major and silent factor in a business; in form of policies they

may support an industry. Zara has been in Spain till now and only one more major

distribution centre for Europe. For expansion of business in more countries, political support

provided should be evaluated critically. Zara has options to expand its business in European

countries because of their safe and predicable economic circumstances.

Legal factors may have an impact on the company’s performance in a number of cases. Since

Zara is present globally, changes in regulations of countries it performs its operations in may

influence or cause additional costs. This is related especially to health, safety and

employment laws, which will be discussed further.

Spanish government has rules that support and promote industrial development in country.

Logistics of country provide generic supportive and productive rules for safer business

transactions.

2.5 Technological forces

Technological factors are not usually crucial when it comes to the apparel industry; however

Zara due to its specific business model is an exception. High technology is essential for the

communication platform used in order to achieve fast delivery of required clothes based on

the responses received from customers. According to Carugati et al (2008), Zara is using the

advancements in technology to the great extent, since all information flow go through the

central server at La Coruna in Spain on daily basis, so managers are able to get information

on the new designs by using handheld computers or so called PDAs. In this manner, all store

managers are notified 24 hours before order deadline for the new designs. However, there is

no device in store which can be used for tracking inventories.

Spanish retailing companies have often gone through technological improvements. Many of

the competitors of Zara have brought new technological concepts in market in sales point

atmosphere and manufacturing processes. Zara has launched its technological growth in form

of eco friendly stores openings. Moreover, manufacturing processes have been made easy and

simple by breaking process into simpler tasks and then done by machines and final assembly

is done by workers.

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2.6 Competitor analysis

Three main competitors of Zara pose the biggest threats. These are Mango, the Gap and

H&M. Almost any retailer can be a threat to Zara due to its wide range of merchandise

categories. The Gap is one of Zara’s main competitors as it also sells the same merchandise

as Zara does at more affordable prices and less trendy styles. The company also has a world-

wide presence. H&M (Hennes and Mauritz) is one of Zara’s most threatening competitors.

H&M also has been quick to internationalize which allows it to gain sales in countries outside

its native Sweden. H&M also is more attentive when entering new markets and tends to enter

one country at a time, as opposed to Zara who multitasks globally. H&M builds distribution

centers in their international locations in order to cut down lead times and potential logistics

costs. Another threat to Zara is that H&M carries trendy clothing choices that they have

designed based on the melding of international apparel tastes. Mango, also a Spanish fashion

retailer is also known for its excellent business model and supply chain management. Mango

has a history comparable to Zara’s being a Spanish company with approximately the same

number of stores in the same number of countries worldwide, and a recent history of great

success. Like Zara, all the Mango stores are located in prime positions, whether in the main

shopping centers or premises located in city centers. Stores are of sufficient size to display its

collections. The products of Mango are also similar to Zara’s in style, pricing and quality.

However, Mango is very different from Zara in organizational strategy as Mango is based on

a franchising system, and in marketing strategy, relying heavily on advertising campaigns.

After PESTEL analysis Porter’s 5 forces framework is used in order to analyze competitive

advantage of the company.

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2.7 Michael Porter’s Five-Forces Model

The model identifies and analyzes 5 competitive forces that shape and help companies to

determine their industry’s degree of competitiveness and therefore helping the companies to

develop their strategies.

The following is the Five-Forces Model for Fast-Fashion with further analysis relevant to

Zara:

We can take a look at each one more specifically of their measurement:

2.7.1 Entry Barriers

Since the apparel industry is quite mature, the average growth rate is quite low due to

relatively high saturation of market participant. Entry and exit barriers are relatively law for

distributors; however manufacturers are experiencing quite high cost of entry and exit, since

huge capital investments have to be made. Since apparel does not require any special

conditions for storage due to its physical attributes, storage costs are low in comparison to

other industries e.g. food production. When it comes to quality of products, one could argue

that it does not vary too much, but it is rather brand which makes it worth, therefore high

promotion costs might deny potential participants. In addition, the fashion is changing fast,

therefore lower quantities should be produced which in turn leads to diseconomies of scale.

LOW

HIGH

MEDIUM

HIGH

LOW

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2.7.2 New Entrants

Since the local market is still not saturated and there are almost no barriers for distribution,

since only storage and store should be rented, no administrative restrictions, in addition low

initial capital is required to start operations, one could argue that there is high probability of

new entrants. However, in production, there are barriers for the existence of economies of

scale, since the initial capital required is considerably high.

2.7.3 Threat of Substitutes – (high)

Consumers are always on the lookout for more quality trendy products at more affordable

prices. The threat that other companies can offer the same quality or better quality products at

lower prices is high.

The main Zara competitors are H&M and Gap, though there are some differences between

their products. Zara is dedicated on development of trendy and at the same time low-cost

fashion, which meets the requirements of their customer. However, the low-cost does not

necessarily mean low quality and it is shown by their sales. Zara has the highest sales per

square meter of any of its competitors, as well as online, having only 10% of stock is unsold.

H&M has very competitive pricing strategy, but in terms of quality their low-priced products

suffer and way below Zara’s quality. On the other hand, Gap is competitive in terms of

quality, but not in terms of prices.

2.7.4 Customer’s Bargaining Power

The consumer is the focal point of Zara’s business model. In spite of this, Zara has

conditioned the minds of the consumers by offering limited stocks and by quickly

replenishing its products.

In terms of bargaining power of customers, one could argue that it is very low, since

customers are individuals and there are many of them. Therefore, as non-unified body they

are not able to defend their interests, since the discounts are given only after certain period of

time, customer are rarely able to find exactly what they want on sales. Because of changes in

the lifestyle, demographic changes, cultural changes or technological changes, the demand

can easily vary and therefore be unpredictable, which leads to an inability to form correct

expectations regarding the discount sales, which ultimately forces customers to buy in

advance.

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2.7.5 Supplier’s Negotiation Power

Comditel, a wholly-owned subsidiary of Inditex is in charge of supplier’s relations and it has

portfolio of more than 200 external suppliers of raw materials, such as fabrics. Furthermore,

Comditel deals with the dyeing, patterning, and finishing of gray fabrics for all of Inditex’s

chains, including Zara, and supplies finished fabrics to external as well as internal

manufacturers. There are too many suppliers, thus they have no negotiation power.

2.7.6 Rivalry among the competitor

Competition among existing firms (High) – the competition among existing firms in the

clothing industry is very fierce. Zara does not only compete with local Spanish brands such as

Mango or Springfield, it also competes with other European brands such as H&M, Topshop

and United Colors of Benetton. Zara also competes with international brands like Gap.

2.8 External Factor Evaluation (EFE) Matrix

KEY EXTERNAL FACTORS Weights

0.0 to 1.0

Rating

1 to 4

Weighted

Score

OPPORTUNITIES

1. Expansion plans 0.10 3 0.3

2. Growing apparel retail market in China,

India, Malaysia, Taiwan and Indonesia 0.05 1 0.05

3. Growing online sales 0.10 3 0.3

4. International Expansion Especially In

Emerging Markets 0.05 4 0.2

5. International Recognition 0.20 4 0.8

THREATS

1. Vertically integrated model 0.2 4 0.8

2. Joint ventures dissolving 0.05 2 0.1

3. Difficult to manage the vertically

integrated model 0.05 2 0.1

4. Local retailers 0.2 4 0.8 +

TOTAL 1.00 3.45

Threats to Zara

Following are the threats to Zara's success:

1. Zara's vertically integrated model is a threat to Zara's success in long run. The model

will not work once Zara scales its operation. Currently, Zara's designing, production,

distribution and retails stores are tightly coupled together and operate very closely.

Expanding operations in different regions (America, Asia, Europe etc.), requires

addressing different fashion trends at a time. Also, given different sizes/ trends in

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different regions, it would not be easy to pull a new fashion cloth or appeal from one

region and put it in other region.

2. Also, scaling its operation may require joint-ventures and acquiring some smaller

chains also. In a 50:50 joint venture, it is very difficult for Zara to impose its business

model to the other partner. In this case, we have already seen Zara's joint ventures

dissolving on a couple of occasions.

3. While Zara may find it difficult to manage the vertically integrated model for its large

scales of operation, local retailers may follow Zara's formula to success and can

emerge as big threat to its success.

4. It is not easy to beat the local retailers in their home market. For example, the Local

apparel market in Italy is still owned 61% by the independent stores, 45% in Spain

(Note that this is Zara's local market too) and 15-30% in other three major European

markets. Specially, in a country with very cheap labor (mostly in Asia), it will be very

difficult for Zara to keep up its production in Spain.

5. Zara's business model is based on ever changing fashion. For countries like US, where

people are less fashion forward, it may be a challenge for Zara to sustain its presence.

6. With changing time, Advertisement is becoming an important part of the business

and it reflects directly to the sales. Zara's in-store advertisement model may not work

going forward.

Opportunities:

1. Foreign Direct Investment – As Zara continues its global expansion, strategic

business agreements will enable Zara to find greater presence abroad. Zara can pr

ovide opportunities for foreign investors and enable greater communications ad rel

ationships with foreign markets. As other companies recognize the success of the

“fast fashion” model, they may be more apt to adopt the practice offering potential

partnership or acquisitions for Zara.

2. Strategic Locations – Finding ideal locations in new countries provides the

opportunity to gain valuable real estate. By introducing stores in the most fashion

forward locations, Zara may be able to increase its assets.

3. Meeting Unfulfilled Customer Needs -

Zara must continue its market research to provide the products that its customers

want and need in the most fruitful locations.

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2.9 The Competitive Profile Matrix (CPM)

The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular

strengths and weaknesses in relation to a sample firm’s strategic position. The weights and

total weighted scores in both a CPM and an EFE have the same meaning. However, critical

success factors in a CPM include both internal and external issues; therefore, the ratings refer

to strengths and weaknesses, where 4 = major strength, 3 = minor strength, 2 = minor

weakness, and 1 = major weakness. The critical success factors in a CPM are not grouped

into opportunities and threats as they are in an EFE. In a CPM, the ratings and total weighted

scores for rival firms can be compared to the sample firm. This comparative analysis provides

important internal strategic information.

Critical Success Factors Weight Rating Score Rating Score Rating Score

Advertising 0.20 1 0.20 4 0.80 3 0.60

Product quality 0.10 4 0.40 3 0.30 2 0.20

Price competitiveness 0.10 3 0.30 2 0.20 4 0.40

Management 0.10 4 0.40 3 0.20 3 0.30

Financial position 0.15 4 0.60 2 0.30 3 0.45

Customer loyalty 0.10 4 0.40 3 0.30 2 0.20

Global expansion 0.20 4 0.80 1 0.20 2 0.40

Market share 0.05 1 0.05 4 0.20 3 0.15

Total 1.00 3.15 2.5 2.70

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2.10 Conclusion

Zara is currently enjoying competitive leadership in fast fashions. It has made its founder, the

richest man in Spain. So far, strategies implemented by Zara provided a firm base to

organization. The changing or introducing change in strategies is a difficult process to

conduct, but to excel in business and cope with current expanding markets Zara has to

introduce some new objectives and strategies. No single strategy can serve the purpose. Like

before, Zara has to decide an implementable combination for future. It is recommended that,

not to implement all the decisions in a single step, rather act and wait for response and then

decide for further actions to be taken. Detailed assessment of scenarios is to be done before

finalizing any decision because fashion market changes frequently that rough estimates may

lead to undesired results.

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3. Value Chain Analysis of Tesco

3.1 Introduction

One of the primary goals of any business is to gain an edge on their competition. One way to

do so is to conduct a value chain analysis, which examines what organizations can do to

create a competitive advantage, while at the same time provide the greatest value to their

consumers.

The value chain analysis involves identifying each part of the value chain and seeing where

improvements can be made either from a production standpoint or a cost perspective to

ensure consumers are getting the most bang for their buck. When consumers are getting the

most out of a product for the cheapest cost, businesses will benefit in the long run.

The value chain analysis looks at each of the activities in the value chain to determine what

steps are necessary and which are not in an attempt to boost the company's bottom line.

VCA is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which

activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the

firm and which ones could be improved to provide competitive advantage. In other words, by

looking into internal activities, the analysis reveals where a firm’s competitive advantages or

disadvantages are. The firm that competes through differentiation advantage will try to

perform its activities better than competitors would do. If it competes through cost advantage,

it will try to perform internal activities at lower costs than competitors would do. When a

company is capable of producing goods at lower costs than the market price or to provide

superior products, it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the

internal activities a firm engages in to produce goods and services. VC is formed of primary

activities that add value to the final product directly and support activities that add value

indirectly. Below you can see the Porter’s VC model.

3.2 Definition of value chain

To understand how to conduct a value chain analysis, a business must first know what their

value chain is. A value chain is the full range of activities — such as design, production,

marketing and distribution — businesses go through to bring a product or service from

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conception to their customers. For companies that produce goods, the value chain starts with

the raw materials used to make their products and consists of everything that is added to it

before it ends up being sold to consumers.

The process of actually organizing all of these activities so they can be properly analyzed is

called value chain management. The goal of value chain management is to ensure that those

in charge of each stage of the value chain are communicating with each other to help make

sure the product is getting in the hands of customers as seamlessly and quickly as possible.

3.3 Porter's value chain

Harvard Business School's Michael E. Porter was the first to introduce the concept of a value

chain. Porter, who also developed the five forces model that many businesses and companies

use to figure out how well they can compete in the current marketplace, first discussed the

value chain concept in his 1985 book "Competitive Advantage."

“Competitive advantage cannot be understood by looking at a firm as a whole," Porter wrote

in the book. "It stems from the many discrete activities a firm performs in designing,

producing, marketing, delivering and supporting its product. Each of these activities can

contribute to a firm's relative cost position and create a basis for differentiation”

According to Learning Market, Porter suggests in the book that activities within an

organization add value to the service and products that the company produces, and that all

these activities should be run at optimum level if the organization is to gain any real

competitive advantage.

The strength of the Value is its approach. This value chain analysis focuses on the systems

and activities with customers as the central principle rather than on departments and

accounting expense categories. This system links systems and activities to each other and

demonstrates what effect this has on costs and profit. Consequently, it (value chain analysis)

makes clear where the sources of value and loss amounts can be found in the organization.

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In his book, Porter said a business's activities could be split into two categories:

Primary activities and

Support activities.

3.3.1 Primary activities include:

Primary activities have an immediate effect on the production, maintenance, sales and

support of the products or services to be supplied. These activities consist of the following

elements:

Inbound Logistics. These are all processes that are involved in the receiving, storing,

and internal distribution of the raw materials or basic ingredients of a product or

service. The relationship with the suppliers is essential to the creation of value in this

matter.

Production. These are all the activities (for example production floor or production

line) that convert inputs of products or services into semi-finished or finished

products. Operational systems are the guiding principle for the creation of value.

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Outbound logistics. These are all activities that are related to delivering the products

and services to the customer. These include, for instance, storage, distribution

(systems) and transport.

Marketing & sales. These are all processes related to putting the products and

services in the markets including managing and generating customer relationships.

The guiding principles are setting oneself apart from the competition and creating

advantages for the customer.

Service. This includes all activities that maintain the value of the products or service

to customers as soon as a relationship has developed based on the procurement of

services and products.

Primary Activity Description

Inbound logistics All those activities concerned with receiving and storing externally

sourced materials

Operations The manufacture of products and services - the way in which resource

inputs (e.g. materials) are converted to outputs (e.g. products)

Outbound logistics All those activities associated with getting finished goods and services

to buyers

Marketing and

sales

Essentially an information activity - informing buyers and consumers

about products and services (benefits, use, price etc.)

Service All those activities associated with maintaining product performance

after the product has been sold

3.3.2 Support activities of the value chain analysis

Support activities assist the primary activities and they form the basis of any organization. In

the figure dotted lines represent linkages between a support activity and a primary activity. A

support activity such as human resource management for example is of importance within the

primary activity operation but also supports other activities such as service and outbound

logistics.

Firm infrastructure. This concerns the support activities within the organization that

enable the organization to maintain its daily operations. Line management,

administrative handling, financial management are examples of activities that create

value for the organization.

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Human resource management. This includes the support activities in which the

development of the workforce within an organization is the key element. Examples of

activities are recruiting staff, training and coaching of staff and compensating and

retaining staff.

Technology development. These activities relate to the development of the products

and services of the organization, both internally and externally. Examples are IT,

technological innovations and improvements and the development of new products

based on new technologies. These activities create value using innovation and

optimization.

Procurement. These are all the support activities related to procurement to service the

customer from the organization. Examples of activities are entering into and

managing relationships with suppliers, negotiating to arrive at the best prices, making

product purchase agreements with suppliers and outsourcing agreements.

Organizations use primary and support activities as building blocks to create valuable

products, services and distinctiveness.

Firm’s VC is a part of a larger industry VC. The more activities a company undertakes

compared to industry VC, the more vertically integrated it is. Below you can find an industry

value chain and its relation to a firm level VC.

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3.4 Steps in Value Chain Analysis

Value chain analysis: There are four basic steps that have to be followed if you wish to use

the Value Chain as an analysis model. By following these basic steps the organization can be

analyzed using the Value Chain.

Step 1: identify sub activities for each primary activity

For each primary activity, sub-activities can be determined that create a specific value for an

organization. There are three categories of sub activities, namely:

Direct activities (for instance online sales from Marketing& sales)

Indirect activities (for instance keeping the het CRM up-to-date from Marketing&

sales or organizing a golf tournament for customers)

Quality assurance (Proofreading and editing advertisements from Marketing& sales).

Step 2: identify sub activities for each support activity

Here it concerns the idea how value support activities such as firm infrastructure, human

resource management, technology development and procurement can create value within the

primary activities. Use the same distinction as in step 1 for direct and indirect activities and

quality assurance. For example, consider how human resource management can create value

to inbound logistics, marketing & sales and service. This will also have to be done for the

other support activities.

Step 3: identify links

This is a crucial and time-consuming step because this is about finding the links between the

added value you have identified. This part is of importance for an organization when it

concerns increasing competitive advantage from the value chain. For example, a development

within a CRM solution can have a link with increasing production and sales volumes through

certain investments. Another example is the link between the complaints that have been

recorded within the primary activity and the increase of unfilled vacancies (human resource

management) within the primary activity outbound logistics.

Step 4: look for opportunities/ solutions to optimize and create value

After you have completed the value chain analysis it is important to determine what activities

are to be optimized in order to create added value. This is about quantitative and qualitative

investments that can eventually contribute to increasing your customer base, competitive

advantage and profitability. Creating business cases will help you give priority and return on

investment (ROI) to the possibly required added value creation of a primary or support

activity.

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3.5 Value Chain Analysis of Tesco

3.5.1 Introduction

Tesco was founded in 1919 by Jack Cohen from a market stall in London’s East End. Over

the years our business has grown and we now operate in 12 countries around the world,

employ over 530,000 people and serve tens of millions of customers every week. We have

always been committed to providing the best shopping experience. Today we continue to

focus on doing the right thing for our customers, colleagues and the communities we serve.

Tesco Corporation is a global leader in the design, manufacture and service of technology-

based solutions for the upstream energy industry. With a strong commitment to an in-house

research and development program, TESCO is able to take innovative solutions from concept

to commerciality. TESCO delivers solutions that add real value by reducing the cost of

drilling for and producing oil and gas.

TESCO operates around the world, with experience in every major petroleum-producing

region. As the largest supplier of rental Top Drive Drilling Systems, TESCO also provides

top drive sales and after-market sales for parts and services. TESCO is the acknowledged

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leader in Casing Running services. Additionally, TESCO designs and manufactures a variety

of drilling rigs, drilling machinery and related equipment.

TESCO's mandate is to change the way people drill wells, making operations safer and more

efficient. With a history of technical innovation, a track record of superior customer service

and a future of leading-edge solutions, TESCO will continue to set new standards and

demonstrate leadership in the upstream petroleum industry.

Tesco’s general cost leadership strategic management is evident in its both lean and agile

inbound logistics activity. Drawing upon Walker (2012), Tesco deploys its economies of

scope and its leading market position as the major bargaining powers in order to attain low

costs from its raw material suppliers. Silverthorne (2010) and Walker (2012), in their

analysis, have mentioned that Tesco regularly upgrades its ordering system, and approves its

vendor lists and in-store activities in order to induce efficiency and effectiveness into its

inbound logistic operations.

3.5.2 Primary activities

According to Lynch (2003), value chain is defined as the links between key value adding

activities and their interface with the support activities. Value chain has been implied as a

strategic evaluation tool used for distinguishing the strengths and weaknesses in value adding

processes (Audrestsch, 1995). The value chain of Tesco has been demonstrated in the

following diagram:

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3.5.2.1 Inbound logistics:

Inbound logistics is one of the most importance activities in Tesco’s value chain. According

to Abeysinghe (2012), Tesco used its leading market position to gain low price and cost from

suppliers. Also, Tesco need to make sure all the product is delivered at the right time, right

place and right price. Because of balance of these elements, buyers can get what they want at

the end. Hence, inbound logistics is the key for Tesco to gain the competitive advantage and

deals with reception of product, staff, stock and storing.

This mainly referred to strong bond between Tesco and suppliers, after negation suppliers are

capable of providing high quality products, suitable amounts and lowest costs, and then

Tesco enables to put goods in right stores in time. Therefore Tesco can meet customers’

demands greatly. The inbound logistics is one of Tesco’s competitive advantages and deals

with selection of products, staff scheduling, and facilities planning to keep leading market

position.

The overall cost leadership strategic management of Tesco is exhibited in its lean and agile

inbound logistics function. Drawing upon Abeysinghe (2012), the company uses its leading

market position and economies of scope as key bargaining powers to achieve low costs from

its suppliers. The analysts have also highlighted the constant upgrading of their ordering

system, approved vendor lists, and in-store processes to induce effectiveness and efficiency

into the company’s inbound logistics operations.

3.5.2.2 Operations Management

The operation within Tesco before 8 April 2013 was in fact only had one way that products

sent to local stores and customers buy it in store, however after that day, Tesco has launched

its online grocery shopping service for all customers in Bangkok (Tesco2013). “With our

wide product range and great service proposition we are confident that Tesco Lotus online

shopping will receive an overwhelming response from customers”, said Tesco Lotus CEO

John Christie. By increasing another shopping approach, increase the supply to meet demand;

what's more, Tesco can achieve economic-scale in the future, which can lower the costs.

Keeping the price unchanged, lower costs can get higher profit margin, which is a

competitive advantage. In order to obtain more future competitive advantage, Tesco has an

attempt to grow by exploring outside Britain. For instance, Tesco had eyes on China as

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world's biggest grocery market, by acquisition and investment that make Tesco paid less

attention to food, and thus had a huge failure in expansion in China.

In order to gain the competitive advantage of economies of scale, Tesco buy a large amount

of product such as food, clothes, electronics, groceries etc and placed in the store. After the

process of testing, machining, packing; they will sell those products to the market with higher

price to achieve positive margin.

Tesco has been praised by a number of supply chain management critics for its effective use

of IT systems that facilitate the company’s low cost leadership strategy. According to Tesco

(2010), the company has invested over £76 million in streamlining its operations through

their Tesco Digital program, which is a third generation ERP solution for the company. The

company has achieved £550 million in increased profitability during 2009 alone due to the

introduction of this system. This company -wide ERP system has also facilitated the

minimization of stock holdings within the company.

3.5.2.3 Outbound Logistics

For Tesco on-line service, customers can purchase necessaries on line so that the goods can

be distributed directly from warehouse, don’t need to distribute to local store, customer buy it

from store, which saved al lot of time and money of distribution. Not only provide

convenience for customers but also improve efficiency of updating stock.

Outbound Logistics is a small area in the organization because Tesco do not have to send

things out of their stores; customers come to Tesco to buy products, pay the price and go out

again. However, manager the queue when customer checks out is very important, so

customers do not have to wait in a long queue and get out quickly. Moreover, location of

store and car park are important factor as well. Tesco’s car parks are always in the centre

outside of the store and linked closely to the entrance. Customer management is essential

because the company will need all the information of customer to develop the strategy to

satisfy them.

Tesco holds leadership position in online and offline food retail segments, which is due to its

efficient and effective outbound logistics. Drawing upon Mintel (2010), the company has

developed a range of store formats and types, which are strategically placed to achieve

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maximum customer exposure. These formats include Express, Metro, Superstores, Extra and

Homeplus, which are segmented according to the target population.

3.5.2.4 Marketing & sales:

Tesco focus on proving lowest price and same quality goods that attract customers, therefore

Tesco had launched several ‘price campaign’ to boost demands. For example, Tesco

conveyed the new message about a value for money in 1993. At the same year, Tesco

introduced “the price is dropping on your weekly shopping” campaign (Tesco 1993).

Customers got price-oriented message at once, by launching this campaign; Tesco had an

image for lower price supermarkets, and became a competitive retailer. In 1998, Tesco

replaced the ‘Unbeatable Value’ campaign with its ‘Unbeatable offer’ and ‘Low Price’

campaigns (Tesco 1998). It represented that customers were really interested in those kind of

campaign and also indicated that Tesco was capable of proving lower price groceries. What’s

more, in order to reduce costs of living, Tesco is committed to helping families in these tough

times and the Big Price Drop into 2012 in September (Tesco 2012), but this time, all the

attention went on them being about price, which accentuated the negative perceptions of the

quality of products, whereas Tesco didn't convince people it was cheaper but drummed in a

message that it was not about quality but about cheapness. By using ‘price campaign’ this

approach to catch customers’ attention, in fact, Tesco accomplished not successful this time

compared with past.

3.5.2.5 Service:

Tesco is the first retail in the UK to start on-line shopping service (Tesco 2013), where

people can buy groceries, clothes and electronics online that are a timesaving and

environmental method to develop domestic markets.

Tesco has been pursuing a dual strategy of cost leadership and differentiation, which has led

to an increased importance placed on customer service. Drawing upon Keynote (2010), this

dual strategy is exhibited through the development of self-service kiosks, financial services,

focused direct marketing and promotions.

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3.5.3 Support Activities:

3.5.3.1 Technology development:

Technology development plays an essential role in an organization’s development. Firstly, it

can be used at launching new produces and improving services to satisfy customers and keep

the leader position in retail industry. For instance, Tesco has opened online shopping channel,

customers can order at home then products are delivered to them. Secondly it can hence

relationship between company and suppliers, with the rapid development of technology,

Tesco is capable of selling more products, as a result, suppliers need to provide more goods,

they can lower costs, and build a strong relationship.

Technology development can have a great effect on an organization. The ability to new

product and service that satisfy customer needs remains a key competitive advantage. For

instance, Tesco provides an online service and deliver products. Technology developments

can also strengthen the relationship between supplier and organization, for instance, Tesco

adopts some advanced computer systems to manager its ordering channel so that it builds a

close relationship with suppliers. Tesco brings a new solution with the exact and fast supply

network. Finally technology developments are resolving many delivering and supplying

issues. For instance, online service is eventually accessed from homes. The delivery time is

shortened by the store’s computer system. The systems enhance Tesco’s competitive

advantage.

3.5.3.2 Human resource management:

Tesco is aware that if company wants a huge process, cannot without excellent staff, as result,

company paid a lot of attention to attracting talents people to join in and training them to be a

qualified staff. They know their roles in management level and operational level in a wide

range of departments.

Human resource management is regarded as a very important role. It covers recruitment,

training, management development and the reward structures. When Tesco faces the rapid

international business development, it’s one of the main task is management of human

resources. Tesco realizes attracting excellent staff and retaining them is a key success factor.

To achieve the goal, Tesco had replaced its dependence on expatriate staffs with training

local managers in international business.

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3.5.3.3 Infrastructure:

Tesco has introduced single vehicle and warehouse system and changed distribution centers

into just-in-time system, which contribute to a time-saving and cost-saving situation. In

addition, Tesco has developed many stores as warehouses; customers can order online and

collect at nearest store, which means that the infrastructure cost has been reduced

dramatically. During the development Tesco, a lot of stores are viewed as warehouse to

distribute the products which ordered by the customers. Such infrastructure saves a lot of

cost.

3.5.4 Conclusion

Value chain refers to the relationship between major value-adding activities and their

interface with the support activities. The primary competitive advantages of Tesco include

inbound logistics, operations, outbound logistics, marketing and sales, and service. Tesco

deploys its economies of scope and its leading market position as the major bargaining

powers in order to attain low costs from its raw material suppliers.

The company’s leadership position is due to its effective and efficient outbound logistics. In

relation to marketing and sales processes, loyalty programs such as Tesco Clubcard are being

integrated into the company operations via advances in information technology. Tesco, like

other successful international companies, enjoys leadership from one of the best leaders in the

retail world. The company’s good strategy presents another competency that seems to drive

the organization to international heights.

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