Information Systems and Operations Management - TMA

1. Information Systems encompass all aspects of an organisation in from

manufacturing to facility management, it is inextricably linked to Zara’s business
model providing core competences and Laudon (2003) states without IS there
would be no business. Resource Based View theory is based on the internal view
of the company as a collection of resources and capabilities and the concept of
economic rent generated as a result as championed by Collis and Montgomery
(1997)

Zara use Enterprise Resource Planning to govern IS processes ranging from

Electronic Data Interchange (EDI) transferring of customer shopping preference
data via store managers PDA’s to centralised database and via the intranet to
the design team, using IT to break down barriers such as costs of location of
sites, the 9 million square foot warehouse located in Spain, connected to 14
manufacturing plants. Computer Integrated Manufacturing technology
coordinates all elements of production, flow of materials ensuring quality control
allowing Zara to achieve less than 1% inefficiencies with production.

Warehouse item location and physical data stored in coded tabs linked to a
warehouse management system, controlling sorting machines capable of
handling 40,000 items per hour, manoeuvring products to staging areas ensuring
sequential delivery based on location of nearest stores reducing transport costs,
the size and sequence of deliveries is fine tuned maintaining this tight schedule.

RBV shows the capabilities and economic value added generated through using
IS, utilising core competences of a true Just in Time (JIT) pull production system
based on customer demand. ERP encompasses sales transaction processing
from Zara tills to warehouse inventory management, production, sorting and
distribution, in-house sales and marketing as word of mouth part of the value
chain as mentioned by Porter (1985) accounting for 0.3% of revenue versus
rivals 3-4%. Meticulous planning and coordination of JIT production processes
reduce wastage and prevent inventory write-offs, with many products spending
only a few hours in the warehouse. Product shortages due to Zara’s production
methods add to exclusivity causing quicker stock sales and contribute to higher
than average return visits per customer. Management information systems (MIS)
use captured data to provide tactical and operational support addressing issues
such as stock production quantities, procurement of materials and to manage
overheads.

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 Fig 2: Inventory to Sales Ratio

Zara’s IS offer improved efficiency and quality control allowing production of

mass customised products, combining job shop and continuous flow production,
but still in low volumes to obtain high margins notwithstanding Zara’s
manufacturing costs are 15-20% higher than competitors, offset with lower
advertising costs also time to market is hugely reduced to 3 weeks, about 12
times faster than some rivals, offering greater responsiveness to changing trends
focusing on one of the core capabilities that allow Zara to create competitive.

Fig 3: Product Frontier

No one system is more important, all intrinsically linked within the ERP system,
without transaction processing data; IS would not exist, tills producing sales
data, customer shopping habits, preferences sent via store managers PDA to
centralised databases for analysis, trends relayed to design team to create
products using Computer Aided Design software. Designs sent via company
wide intranet to factories for garments to be produced in quantities derived from
forecasting, targeting key demographic. Executive Information Systems use
information to make strategic usually unstructured decisions, which are usually
not easy to quantify and analyse such as fashion trends to range which change
seasonally and which stores dependent on information derived from MIS systems
and all Decision Support Systems.

Criticisms exist of RBV such as all aspects of firms considered resources and the
tautological ideologies making aspects of the model operationally invalid - Priem,

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R.L (2001a), Zara enjoys competitive advantages that could not achieved with
different resource configurations and at present are non imitable thus proving
the theory to be sound in its analysis of the economic rent achieved by such
processes incorporated at Zara. Porter (1980)argued that dependent on how a
firm positions themselves within a industry structure determines how profitable
they will be, contrasting with the RBV but perhaps offering another explanation
why in the same market differing firms with similar Information Systems and
Operations achieve differing profit margins and economic value added.

ERP is essential to coordinate the IS processes providing Zara with the backbone
for the core competencies of the company and the competitive advantages it has
over many competitors, vital for sustainable advantage is minimising
inefficiencies but maximising economic rent on inputs keeping costs low and
profit margins high. Competitive advantage stems from the strategy of Zara of
time to market, scarcity and choice achieved through balanced vertical
integration allowing synchronisation of procurement, production, distribution and
retailing, not relying on outsourcers increases gross profits due to lower costs
and creates value, although (Barney, 1991, p102) states only if it is not being
implemented by competitors, competitors such as Levi Strauss use Li & Fung to
provide supply chain management that Zara currently produces in-house.
Fundamental IS structures and processes differentiate effective competitive
advantage strategies, Zara operations produce quality garments with embedded
total quality management, emulating the right first time approach opined by
Crosby (1979) although Hill (2000) states products to be an order qualifier or an
order winner, so would quality would be an order qualifier in today’s market.

In fashion, styles change often, quickness to market and flexible decision making
are key, Zara achieves this with utilising IS at all levels, using MIS, EIS to assist
on strategic decisions for the long term sustenance of Zara, the ERP system
allowing the finely tuned JIT system to provide the backbone to support the
crucial production and distribution mechanisms in place to deliver products to
store. Mahoney and Pandian (1992) state competitive advantage is a function of
industry analysis, organisational governance and firm effects in the form of
resource advantages and strategies, RBV shows how Zara used their resources
to harness their core capabilities using IS and IT systems in harmony to create
economic rents and how RBV has found use in the MIS literature (Priem ,Butler,
2001) which are key to Zara’s success.

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2. Iniditex Global Conglomerate is Europe’s largest clothing retailer as of 2010,
Zara achieves 75% of their sales, facing issues to continue to be market leader,
technological innovation allowed Zara benefits with a sophisticated ERP system
controlling all business functions to sustain competitive advantage is inherently
more difficult. Key to consolidating Zara’s position is a fully aligned effective
Business and IT strategy plan with “four domains of strategic choice” using the
Strategic Alignment Model pioneered by Henderson and Venkatraman (1993) to
analyse the business. Venkatraman (1993) points out no single IT application can
deliver a sustained competitive advantage.

Organisational Infrastructure must incorporate a new warehouse into the current

system, all IS and IT processes and strategies must be reworked to be full
integrated to include this centre and new stores opening, so not to affect
production flow strategies. JIT systems are expensive to set up and staff must be
trained to the emulate the same quality control techniques of right first time
approach with ‘zero defects’ (Crosby, 1979)

IT architecture must be considered, with multiple warehouses and stores,

transaction processing data and decision support systems have to operate
across countries, server, bandwidth issues, IT technology such as the PDAs,
intranet must be able to cope with demand, Computer Aided Design to Computer
Integrated Manufacturing are all IT functions that must be integrated with
business processes and strategy.

The USA offers a huge customer base, but for market penetration, Zara need
another warehouse/distribution centre, which is expensive for no guarantee of
profits, issues of finding staff with the right expertise, machinery costs, new
competitors situated in the US. Currently Zara has 23 stores in the US. Zara has
resisted online sales until now, the vast scope of internet sales account for a

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large percentage of sales, so has chosen to open online stores in 6 European
cities and in the US as reported by the Wall Street Journal, 2010.

Zara to become a truly global brand must conquer other continent with its
unique truly JIT system, this will not be cheap and in new markets new
competitors are potentially more established with loyal customer bases. Business
and IT Strategy alignment can be achieved and Barney (1991) indicates a firm
has competitive advantage when the value creating strategy is not used by
potential competitors. If one component fails on the process it has a knock on
effect, there is small room for error. With a larger global presence, using a
centralised database can create hold-ups in processing time, individual
managers may need more autonomy in decision making using current MIS and
EIS employed, fashions in different countries also follow different demand
patterns.

Porters Five Forces

Zara is vertically integrated along the supply chain, however its rivals enjoy
larger profit windfalls from cheap labour from the Far East, Zara produces over
half its stock with some outsourced using Li Fung reported by Business Week,
outsourcing more in traditional clothing channels would however increase time
to market affecting one of Zara’s core competences and affect its competitive
advantage. Since early 2010 Zara has also opened offices in India to monitor
supply chain activities again deviating away from the core values of the
company with a view to opening its first store in May 2010 reported in the
Financial Times, 2010.

Zara may find the laws of diminishing return become prevalent with the opening
of multiple stores, requiring more stock to be produced increasing costs and
finding the marketplace becoming saturated - The law of diminishing returns
states that the more of a product is produced, sold than the perceived marginal
benefit of utility the user gets, Zara has combated this thus far with introduced
artificial scarcity.

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 Ansoff Matrix

Zara is using lateral diversification with new products into new markets, Zara
Home being an area they currently have no expertise in, a risk in terms of
investment and potential loss of economic rents, also ranging larger garments,
product positioning of Zara’s clothes are viewed as trendy high fashion for young
people, and diversification may serve to dilute the brand image affecting
customer loyalty. It is the riskiest of the four strategies in the recognised by
(Ansoff, 1957). The danger is they move away from core competences in fashion
market, knock on effect of reduced quality in production processes and time to
market. Seeking to outsource more to steal a march on rivals can result in
product quality issues such as the impounding of Zara clothing in China as
quoted in (Business Week, 2010).

The Resource Based View states the internal environment of a firm is more
critical to the determination of strategic action than the external environment,
however Porter (enter quote from 5 forces) regards the external environment as
being fundamental to the ability of a firm to create and sustain competitive
advantage, which is fundamental if they wish to expand and crack the US,
however taking account of micro and macro economic conditions such as the
gap between the US dollar for countries with manufacturing operations in the Far
East and Zara’s products produced in Europe this widen the price gap between
competitors products and Zaras, affect profit margins and costs, pricing
strategies from competitors also which have to be considered. As Hammer
points out “operational innovation” is a basis for sustained competitive
advantage

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Although the European market is not saturated and represents the highest profit
margins of 10% with net sales growth rates of 20% year on year, Zara needs to
expand to survive competition from the new markets. Hint et al say the business
strategy should allow the firm to best exploit its core competencies relative to
opportunities in the external environment as shown in the SAM and Porters
models, Zara presently does this but as the company expands it inherently
becomes harder to govern all areas, Luftman says how half of a firms profit can
be explained from alignment with IT, Zara owes perhaps more to this relationship
and divergence from core competences can result in loss of its sustained
competitive advantage.

References:
Ansoff, I., Strategies for Diversification, Harvard Business Review, Vol. 35 Issue 5,
Sep-Oct 1957, pp.113-124

Barney, J. B. (1991) ‘Firm Resources and Sustained Competitive Advantage’,

Journal of Management, Vol. 17, No. 1, pp. 99-120.

Barney (2001) - Barney J. B. 2001. Is the resource-based "view" a useful

perspective for strategic management research? Yes. Strategic Management
Journal 26(1): 41-56

Collis, D.J., and C.A. Montgomery, Corporate Strategy: A Resource Based

Approach. McGraw-Hill/Irwin, 1997.

Crosby, Phillip B. (1979) “Quality Is Free”. McGraw-Hill Books

Grant, R.M. (1991). The resource-based theory of competitive advantage:

implications for strategy formulation. California Management Review, 33(Spring),
114-35.

Hammer, M. “Deep Change: How Operational Innovation can transform your

company.” Harvard Business Review, April 2004: 85-93

Hill, Terry (1985) Competitive Advantage: Creating and Sustaining Superior

Performance
. Manufacturing Strategy: Text and Cases. 3rd ed. Boston: Irwin McGraw-Hill,
2000.

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Hint M.A, Ireland R.D, Hoskisson R.E. (2001) “Strategic Management –
Competitive and Globalisation”

Lado, A., and Zhang, M. J. (1998) “Expert Systems, Knowledge Development and
Utilization, and Sustained Competitive Advantage: A Resource-Based Model”,
Journal of Management, Vol. 24, No. 4, pp. 489-503.

Laudon, K.C and J.P. Laudon, Management Information Systems: Managing the
digital firm. Eleventh Edition, Global Edition, 2007

Luftman, J., Competing in the Information Age: Align In The Sand, Oxford
University Press, 2003

Mahoney , J. T., and Pandian, J. R. (1992) “The Resource-Based View Within The
Conversation of Strategic Management”, Strategic Management Journal, Vol. 13,
pp. 363-380.

Meso, P., and Smith, R. (2000) “A Resource-Based View of Organizational

Knowledge Management Systems”, Journal of Knowledge Management, Vol. 4,
No. 3, pp. 224-231.

Porter, M. (1999) “Creating Advantage”, Executive Excellence, 11, pp. 13-14.

Porter, M. E. (1985). “Competitive Advantage”, The Free Press, New York, NY.

Priem, R. L., and Butler, J. E. (2001) “Is The Resource-Based View A Useful
Perspective For Strategic Management Research?” Academy of Management
Review, Vol. 26, No. 1, pp. 22-40.

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