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14 September, 2014
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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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Import/export factors
Demand shifts for different categories of goods and
services
Income differences by region and
consumer groups
Price fluctuations
Interest rates
Export of labor and capital from the specific country
Inflation rates
Money market rates
Federal government budget deficits
Gross domestic product trend
Monetary policies
Fiscal policies
Tax rates
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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Formulation of Strategies
Implementation of Strategies
Legalistic skills
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Importexport regulations
Number of patents
Lobbying activities
Antitrust legislation
Internet
Semiconductors
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Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies
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 firms value chain.
1.3 Competitive Analysis: Porters Five-Forces Model
Porters 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 Porters 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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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 ecofriendly. 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, Uterqe, 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 companys 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.
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HIGH
LOW
HIGH
MEDIUM
LOW
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Weights
0.0 to 1.0
Rating
1 to 4
Weighted
Score
0.10
0.3
0.05
0.05
0.10
0.3
0.05
0.2
0.20
0.8
0.2
0.05
4
2
0.8
0.1
0.05
0.1
0.2
1.00
0.8 +
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
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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Weight
Rating
Score
Rating
Score
Rating
Score
Advertising
0.20
0.20
0.80
0.60
Product quality
0.10
0.40
0.30
0.20
Price competitiveness
0.10
0.30
0.20
0.40
Management
0.10
0.40
0.20
0.30
Financial position
0.15
0.60
0.30
0.45
Customer loyalty
0.10
0.40
0.30
0.20
Global expansion
0.20
0.80
0.20
0.40
Market share
0.05
0.05
0.20
0.15
Total
1.00
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3.15
2.5
2.70
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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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:
Support activities.
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
Inbound logistics
Description
All those activities concerned with receiving and storing externally
sourced materials
Operations
Outbound logistics All those activities associated with getting finished goods and services
to buyers
Marketing
sales
Service
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.
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.
Firms 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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3.5.1 Introduction
Tesco was founded in 1919 by Jack Cohen from a market stall in Londons 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 technologybased 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.
Tescos 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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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 companys 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, dont 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. Tescos 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. Whats
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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3.5.3.3 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 companys 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 companys good strategy presents another competency that seems to drive
the organization to international heights.
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4. Reference
1. Jennifer VanBaren How to Conduct External Strategic Management Analysis ,
September 04, 2014 available at http://www.ehow.com/how_7610610_conductexternal-strategic-management-analysis.html (accessed 9/14/2014)
2. Thinking made easy essay writing assistance, October 22,2010 available at
http://ivythesis.typepad.com/term_paper_topics/2010/10/strategic-management-ofzara.html#ixzz3DDWLmL9K (accessed 08/14/2014)
3. Zara strategic planning for competitive advantage, February 10/2014 available at
http://newzarablog.blogspot.in/2013/02/chapter-2-strategic-planning-for.html
(accessed 08/14/2014)
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birthrate,
Herald
Scotland,
November
11,
2005.
Available
at