IT Strategy and Nolan’s Growth Stage Model
Current IT Strategy: Although running in a basic POS, Zara’s IT infrastructure had been working seamlessly with no problem whatsoever that its IT staff cannot fix without seeking Inditex’s technical intervention (McAfee, Dessain, and Sjoman, 2007, pp. 2-3). It has accomplished its original business model of linking customer demand to manufacturing and then manufacturing to distribution.
However, it is just that, a basic POS, with no other functionalities to boast for except for its unchallenged stability so far. Thus, in Sanchez’s opinion, if the POS is unbroken, why fix it? Of course, the overall strategy was to maintain an IT infrastructure that can respond with the highest speed possible to target customer demands, which change rapidly with low predictability characteristic of the young, fashion-conscious market. That also means that their tastes change very rapidly.
Zara’s IT infrastructure avoids selling clothes through the Web. The product return rates in that market is very high (50-60% of sales) compared to its store rates of five percent (McAfee, Dessain, and Sjoman, 2007, p. 2). Its distribution centers also are not configured to small-order deliveries and shipment. Its web presence through zara.com simply functions as a digital display window for its garments available at stores. Instead, its IT system was designed to quickly and accurately respond to shifting consumer demands through three cyclical processes: ordering, fulfilling, and design-manufacturing. Store ordering mechanism is the most precisely defined.
However, the current DOS-based POS system cannot provide inventory balance information even within the store. (However, it can report sales details to the headquarters where sales data and inventory balance are generated for replenishment referencing and sent later on as “the offer” specific for each store.) Store managers determine replenishment quantities by walking around the store counting garments inventory and consulting with salespeople (McAfee, Dessain, and Sjoman, 2007, p. 5). (Zara has no back room for inventories. Thus, all inventories are on the racks offered for sale.) They have to use a handheld computer, called a personal digital assistant (PDA), which is linked to the La Coruña IT systems through a dial-up modem to check new designs and only at night.
The ordering process, however, is more cumbersome. Store managers have to divide the offer into the specific store segments and beam each to each segment in-charge’s handheld computer using infrared tech. The segment personnel beam back their orders to the store manager who sends the complete “the order” back to La Coruña (McAfee, Dessain, and Sjoman, 2007, p. 6). Sorting out of orders for fulfillment is handled at the SKU (stock-keeping-unit) level, which are segregated by computer among all the stores sending their orders. Unordered items, which typically test designs for potential demands, are allocated based on targeted markets. Orders arrive in one to two days.
Zara’s IT infrastructure is divided into three groups (Store Solutions; Logistics Support; and Administrative Systems), which write their own software internally (McAfee, Dessain, and Sjoman, 2007, p. 8-9). In La Coruña, three separate applications are respectively used to prepare and distribute the offers to all stores; aggregate order to available inventory for each SKU while checking for supply-demand imbalances; and track the theoretical inventory for each SKU at 95 percent allowable accuracy.
Meanwhile, in factories, simple applications are used to generate optimization plans and schedules. In the distribution centers (DC), great reliance to automation and computerization exists. They track the storage location of each SKU as they enter the DC, pick them up, and transfer them to the appropriate places and then shipped to each store.
All Zara stores were assigned identical PDAs and POS systems. PDAs were used largely in ordering, handling returns, and headquarters-to-stores communications (McAfee, Dessain, and Sjoman, 2007, p. 9). Redundancy in PDA use within each store was intentionally instituted. While PDAs are regularly updated with new models and features, the POS terminals remained unchanged due to its ease of maintenance and dissemination as well as proven stability. These terminals were not connected between stores (to check other stores’ inventory, personnel have to telephone that store); neither had they shared with in-store PDAs.
In this strategic class, the current IS infrastructure is crucial to current business operation and success (Warr, 1990, pp. 19, 22). Thus, the Factory system requires careful formal management. Moreover, any developments need to be carefully analyzed and implemented, first, for its impact on the current system, and, second, to determine if upgrades are absolutely necessary.
Zara’s current objective, which is perfectly consistent with the Factory system, is to maintain its available IS because it is stable and never gave them trouble beyond simple troubleshooting that store personnel cannot handle. Its current DOS-based system, although admittedly behind the advances in IT in the industry, is superbly functioning and is crucial to its current success. Its IT budget are focused on ensuring that its current IS continues to operate reliably and efficiently; but not in terms of developing applications for future use.
Nevertheless, they develop applications internally as need arises. It means that Zara is fully aware of its current IS needs and can react on it and develop solutions to address those needs using the basic DOS framework. However, the unknown risks associated with a system upgrade have to be weighed against the risk of operating failure, which the current system has effectively avoided.
This strategy is understandable because Zara’s business model and success has never been defined by its IT development; but by its product development and marketing strategies. To switch to high-gear IT development will be to switch focus into an aspect of the corporate infrastructure that is not strategic to its success; although maintaining dependability of that IS remained crucial to its seamless operation.
IT Issues and the Competitive 5 Forces Model
Although operationally stable and reliable so far, Zara’s DOS-based IT infrastructure is not without limitations. In fact, its three major limitations flow from the pragmatic and conservative philosophy of its current IT strategy.
First, its POS system cannot look up inventory levels and balances in their store or in their other stores (McAfee, Dessain, and Sjoman, 2007, p. 2). Store managers have to physically count display inventory in order to determine the quantity of replenishments to order (McAfee, Dessain, and Sjoman, 2007, p. 5).
Second, another complaint from store managers regarded the cumbersomeness, and the time-consuming way, with using PDAs due to the small screens and styluses in use when documenting returns (McAfee, Dessain, and Sjoman, 2007, p. 10). An upgraded POS can surely include these functionalities (e.g. large screen, keyboard, and mouse).
Third, there is an undeniable threat from its OS’s growing obsoleteness. As Zara grows in size and reach, the management started to worry if building on an obsolete OS will bring serious problems later on (McAfee, Dessain, and Sjoman, 2007, p. 10). Their hardware suppliers can always change their machines into OS and leaving behind DOS. They already made it clear to Zara that the retail chain was their only customer still on the DOS system. They assured the company that they will not abandon DOS to continue serving it. And, yet, they could not put those assurances into writing.
F1, Rivalry among Existing Competitors [Moderate]: Against its top three rivals in the industry (Gap, H&M, and Benetton), Inditex was the most profitable in 2001 at 10.49 percent, ahead of its nearest rival, H&M (9.65%)(Nolan, 1973, p. 15). Although, H&M overtook it in 2012 (12.49%), the company continued to increase its profitability (11.02%) and with smaller store area. This high-margin operation indicates a conservative financial strategy and price elasticity of its products, both of which will strengthen its long-term competitiveness. Advanced IT infrastructure is not material to this success. It may be argued that the movement of its competitor to online distribution channels will be a threat to Zara’s future success. In Zara’s perspective, however, online distribution is very costly due to high product return rates (and thus rejects and negative brand image) and demands costly direct-to-customer delivery systems.
F2, Threat of New Entrants [Low]: While the garments industry is a low barrier industry, Zara has established an effective business model that integrates low cost operation with pricing elasticity, which contributed to its position in the top two most profitable companies in the industry. That’s a strategic barrier that new entrants have to defeat before they can threaten Zara’s success. The cost of maintaining an advanced IS so far cannot justify sales from those projects can generate vis-à-vis its current success in the market based on its business model.
F3, Availability of Substitute Products [Low]: Garment products are considered commodities, which are easily substituted either with new designs or comparable products. Advanced IT cannot convert a commodity product into a dependable garment brand. Zara’s edge is its high frequency design production, which imparts its garments with distinctive characteristics uncommon among commodities and increases customer attractiveness.
F4, Bargaining Power of Buyers [Low]: Inditex’s high profit margin (50.8% in 2012 and 51.9% in 2011), compared to H&M’s 44.9 percent and 51.7 percent, respective, puts it as the most profitable player in the industry and indicates an excellent price elasticity, which can carry it through even against severe competition. Its markets are clearly not concerned with value issues and are apparently willing to pay more for its garments. High return rates in online shops can destroy Zara’s superior profitability.
F5, Bargaining Power of Suppliers [Potentially, Not Actually, High]: The high dependence of Zara to a DOS hardware supplier increased its vulnerability to high-power negotiation, which can force Zara to pay more for a DOS-based hardware than it should, without available option for alternative suppliers. The only viable option will be to improve knowledge on DOS hardware and produce them internally so that it will not be highly dependent on suppliers for this crucial technology.
McAfee, A., Dessain, V., and Sjoman, A. (2007) Zara: IT for Fast Fashion. Harvard Business
Nolan, R.L. (1973) Managing the Computer Resource: A Stage Hypothesis. Communications of
the ACM, 16 (7) pp. 399-405.
Warr, A. (1990) Strategic Opportunities and Information Systems Management. Bedford:
Cranfield Institute of Technology.