Consultancy Report on ZARA PDF

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Managing Organizational Health

Consultancy Case Study on ZARA Module Code: BUSN11080

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Introduction World’s largest fashion retailer Zara is a strong brand of Spanish retail group operates in Europe, America, Africa and Asia. Inditex, a group of fashion retailers owns this fashionable brand. Zara is one of the old fashion brands who opened up its first store in 1975. This fashion retailer aims to keep its customers happy and provide them with cool, smart and latest fashion products at affordable prices. Spanish fashion marks this company as their icon. Zara’s stores are mostly located in world’s largest cities. Zara considers the environment by saving energy, recycling and using eco-friendly ways. Noticeably, this fashion retailer does not advertise its products and still manufactures heavily in Europe. Zara’s founder Amancio Ortega is the third largest richest man in the world running and operating in 88 different countries with a total of 6,500 shops.

Performance Management According to Fletcher (2001) key process known as performance management by which organizations determine standards, set goals, distribute rewards and assign and evaluate work. Whereas, Armstrong (2009) states that Performance Management is a phenomenon that cultivates performance of individuals or teams in order to improve overall performance of an organization. Zara as a fashion retailer provides corporate identity consistently which reflects its desired identity to customers with a key objective of providing its product to the market in the shortest possible time Furthermore, employees are an integral part of any organization and to measure, analyse and improve staff performance, measurement of performance is carried out. Performance measurement can be done by using tools like balanced scorecard – a tool to implement and communicate organization’s strategy and EFQM excellence model – a non-perspective framework that evaluates growth of an organization or a firm towards progression (Taticchi, 2010). Zara worked accordingly and kept its customers intact by emphasizing with its mission.

Communication with the stakeholders Any organization or person whose interests may be affected either positively or negatively by the execution of a project or are actively involved in a project is known as stakeholders (Gossy, 2008). For Zara main stakeholders includes owners, shareholders, employees, customers, investors and suppliers. Zara prioritize its customers at the top and gives rapid response to its customers’ demands. Secondly customer care is segregated with respect to country (10 languages) and services (stores and online sales) which ease Zara’s customers. Zara takes its suppliers seriously with the objective to guarantee code of conduct for suppliers on supply chain. Shareholders are also the main part of stakeholders; Zara ensures corporate transparency and try to keep them happy maintaining healthy relationship with them. Zara

keeps its employees involved and encouraged and promotes employee commitment to code of conduct while making them responsible by providing them training and promotions (Inditex.com, 2015).

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Risk Management Zara originally based in Spain can reduce its disruption risks and increase firm’s competitiveness by timebased disruption management. This time-based disruption management enable Zara to increase its competitiveness as this retailer responds to dynamic changes very quickly despite having supply-chain risks for example transportation delays, uncertain demand, theft etc. (Wu and Blackhurst, 2009). Zara is famous for time management or it can be said time reduction because this retailer is capable of manufacturing, designing, and then ship within two weeks unlike other retailers who take more than twenty four weeks. Vertically integrated supply chain is operated by Zara which means operating worldwide enabling coordination and close communication with all supply chain partners. Working closely with all partners will also aid in analysing the situation and suggesting a response to deal with that market change.

Figure 1: Time-based Disruption Management Source: (Chopra and Sodhi 2004)

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Quality Management Emphasizing and planning for quality is a main aim for Zara. For that reason it follows the idea of Total Quality Management (TQM). TQM is a philosophy which coordinates and brings together all the productions processes of the company in conjunction with all the departments affected (Tinsley and Ormsby, 2010). This program produces products consistently as demanded by customers and taking care of the quality, design and structure as well. To ensure quality Zara closely monitors all of its operations. The main purpose of this approach is to achieve improved performance in terms of productivity, quality, profitability management approach of an organization and customer satisfaction and benefit all Society and members of the organization (Moretto, 2014). Zara also follows Supply-chain quality management which is a system based approach for quality improvement that influences linkages with customers and suppliers. Globalization has left an impact on all the commodity supply chains especially in fashion industry and remain exceptionally busy for this industry. A firm’s performance and growth can be greatly influenced by Supply Chain. In industries moving towards seamless supply chains the issue of supply chain risk sharing and risk handling along the supply chain is of greatest importance. In order to find success of supply chain, methods to find ways to manage supply chain in unstable environments is critical. For Companies like Zara, supply chain risk exposures must be identified, not only the direct risks but also the potential risks to sustain quality and competitiveness, and reduce those risks (Wu and Blackhurst, 2009).

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Financial Performance By looking at the financial statements of Zara would help us analyse that how healthy the company is performing financially. No matter how strong brand image a company sustains but financial performance is also necessary.

Figure 2. Zara Income Statement Source: Source: (http://uk.investing.com, 2016).

The Picture above shows the Income statement of Zara. By looking at sales it can be easily deduced that sales have dropped down significantly from 2012 to 2015 by almost 14%. This could be maybe because of low demand for its products or competitors giving hard time to Zara. Slight decrease in operating expenses in 2015 can be noticed. Previously since 2012 Zara was making profits and continued to make Page | 5

small profit until 2014 and made a significant loss of (2.35M). This shows that Zara is not performing well and financially stable as it made a loss 2013 also of (1.26M). It can also be seen that Zara sold out some of its non-current assets but couldn’t gain much on that.

Figure 3. Zara Income Statement chart Source: (http://uk.investing.com, 2016). This bar chart above clearly shows that Zara’ s Revenue has fallen with even a little loss in net income over the period of four years. However, return to shareholders and return on investment, equity and assets has also fallen drastically. The picture below shows that Zara is in financial difficulty and can’t get the best out of its operations to firm and to its shareholders as well. Return on investment is also negative which shows that Zara is not even able to get a minimum or satisfactory return on its investment. Return on investment is used for company’s financial decisions and compare its efficiency and performance and profitability to different investments.

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Return on Assets is also showing a negative result which clearly shows that Zara is not getting the best utilization of its assets. Return on capital simply tells how profitable a company is in terms of its total assets (Investopedia, 2003). There might be some unused assets which should be either sell out to generate cash or should be make of it in terms of producing more goods. Figure 4: Management Effectiveness Source: (http://uk.investing.com, 2016).

Customer and Client Perspectives This modern fashion retailer targets its products to kids, youth and men and women. Zara’s customers are highly sensitive to the prevailing trends and latest fashions. This retailer promises its customers to provide new and modern designs from the quality materials which its customers can afford. Products have been segmented into three categories and Women contribute the most. Zara does not limit its products to designs and styles to particular age groups which give an edge to reach a greater market. Moreover, other companies tend to predict new designs from fashion shows or use some similar sort of mediums but Zara focuses on the products and fashion items liked by its customers and deliver its customers according to their needs and wants. Customer’s feedbacks are also taken very seriously which helps them to identify the needs of its customers. Zara creates the demand for its product by limiting the stock and creating an artificial scarcity of its product. Zara has developed a strong brand name due to it remarkable quality and customer waits until the product becomes available. Zara keeps its customers satisfied by delivering the good value for their money and a person never regrets (Zara, 2013).

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Awareness is high as it could be in client community. But still Zara remains in contact with its clients via mail or telephones. Client Involves Photographers, campaigners, fashion show organizers and models, suppliers and obviously customers (Tungate, 2008). Not all the time the idea comes from the retailer itself sometimes clients also bring in reasonable ideas. Zara takes all of its clients seriously as it operates in mass market and Client-trade comes into action which includes the channels of distributions and all the intermediaries in between and stores. At times problems are also faced by Zara if Clients are located in foreign market. For example, Shipment issues of either the raw materials shipped to Zara or when Zara Ships its finished goods to its clients in some other countries. It takes days or even months to get stuff delivered and might be possible that demand finishes when season changes when the shipment arrives (Koster and Delfmann, 2005).

People Perspectives Zara adopts polycentric approach which supports the recruitment of Spanish candidates into higher position roles like managerial positions in all the stores. Moreover, Zara bridges this cultural gap between the headquarters in Spain and other chain stores in different parts of the world. Zara as owned by Inditex group has taken initiatives in developing international training and customer services plans. Manager is considered a professional and is responsible for most of the duties as he is the one who stays in contact with the clients and their demands. Inditex gives equal opportunities to men and women to compete and get assessed in terms of talent, development and dedication and commitment to their work. Each business unit including Zara in Inditex sets down their own line of action and activity for staff motivation, taking care of geographical locations which differ in policies and nature of operations (Human Resources, n.d.).

Implementation Issues Zara is fast fashion brand but still could face these implementation issues. According to Papalexandris et al. (2004) Internal Conflicts Organizational performance management gives rise to competition among employees as they know that their performance is invigilated and they are going to be rewarded on basis of the performance being recorded, but this competition can get intense due to which internal conflicts among employees are seen. Management of a company is supposed to make its employees understand profoundly regarding reward culture. Secondly, effect of technology is also an issue for effective implementation of a performance management system, use of technology is crucial but at times it is seen that management system depends entirely on technology which is also alarming. It is inferred that organizations need to make adequate use of technology but they shouldn’t let technology drive their system as the technology lapse or changes can affect system significantly. Abundant Key Performance Indicators (KPIs) can also be considered as an issue as KPIs are important constituents of any performance management system but it is seen that numerous KPIs result in vague system where employees are not clear how to prioritize and utilize the KPIs. For example, in companies employee is not evaluated only on his ability but also on his eagerness to do whatever he is asked to accomplish, though it takes hours or days (Self, 2004).

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Recommendations The Spanish fashion retailer, Zara is undoubtedly successful in the eyes of customers. In fact it’s the most liked brand by its customers need to focus a bit on its internal operations which might help prosper more this fast changing fashion company in all phases of its business operations. As it’s mentioned above that Zara creates artificial scarcity of its product. If someone wants to buy any product online quickly and save their time, it happens at times that product is not available readily and customer has to wait for some days until the product becomes available again. Although it follows some strategy for the product to remain in demand but this might lead to losing of customers. So what I would suggest that it should be available in lead stock so that customer shouldn’t wait. Moreover, as far as performance measurement is concerned performance appraisal should be carried out at the end of the year to assess the effectiveness of their employees. Either they require more training, still worthy for the company, should be retained or lay off if not productive. The problem with this system is that too much is expected from one appraisal program. But carefully designed appraisal program would help Zara achieve its organizational goals and improve its staff performance. Potentially this performance appraisal program is useful in almost majority of human resource areas. Staff might be hesitant in getting themselves evaluated because they fear losing job if not productive. Effectively, peers could be used to carry out performance appraisal for their team members. Peers work closely with the staff and they know the performance of their team members better than anyone else in an organization. In addition to that staff members would be comfortable enough to disclose their weaknesses to their peers and then relevant training should be given. Peer reviews are based on numerous opinions not based on any one individual. If we discuss about Zara’s production line then the staff performance should be measured in terms of number of goods produced. Customer appraisal would also be essential to reduce the number of displeased customers if they are unhappy maybe because of delivery service. So it is important to involve employees in setting goals and include the relevant factors which employees can control. On a financial side Zara is not performing well. Sales are declining; not making any profits but loses. This shows the very weak financial position of Zara. New marketing strategies are needed or need to look out which factors are hindering its sales growth. Assumingly, this could be because of major competitors like H&M, Gap Inc., Next etc. these competitors might be giving hard time to Zara in terms of better price deals. Or might be people are saving more as recession is going on, having less disposable income. But on a very serious note Zara is not getting any return on its investments and this should be improved essentially as this is portraying a bad picture in the eyes of stakeholders. Shareholders are not going to buy shares as they can see that the return is not satisfactory and won’t receive any dividends in future.

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References Armstrong, M. and Baron, A. (2009) Managing Performance: Performance management in action Chartered institute of personnel and development: London. Fletcher, C. (2001) Performance Appraisal and management: the developing research agenda: Journal of occupational and organizational psychology. pp 473-87. Gossy, G. (2008). A stakeholder Rationale for Risk Management. Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler/ GWV Fachverlage. Human Resources. (n.d.). Inditex commitment. Available at: http://www.bollettinoadapt.it/old/files/document/5284REPORT_09.pdf [Accessed 16 September 2016]. Inditex.com. (2015). Stakeholder engagement – inditex.com. Available at: https://www.inditex.com/sustainability/managing_sustainability/stakeholder_engagement#panel_3 [Accessed 16 September 2016]. Internal, Connected and External Stakeholders. (2014). CIPS Knowledge. Available at: https://www.cips.org/Documents/Knowledge/Procurement-Topics-and-Skills/2-ProcurementOrganisation/Stakeholders/Stakeholders.pdf [Accessed 15 September 2016]. Investopedia. (2003). Return on Assets – ROA. Available at: http://www.investopedia.com/terms/r/returnonassets.asp [Accessed 16 September 2016]. Koster, M. and Delfmann, W. (2005). Supply chain management. Koge: Copenhagen Business School Press. Moretto, A. (2014). Organization and supply chain for quality control in luxury companies: Journal of Fashion Marketing and Management, Vol 18, No 2 pp. 206-230Available at: http://www.emeraldinsight.com/doi/pdfplus/10.1108/JFMM-11-2012-0070 [Accessed 15 September 2016]. Papalexandris, A., Ioannou, G. and G.P. Prastacos (2004). Implementing the balanced scorecard in Greece: a software firm’s experience: Long Range Planning. Self, J. (2004). Metrics and management: applying the results of the balanced scorecard, Performance Measurement and Metrics, pp 101-105. Taticchi, P. (2010). Business performance measurement and management. Berlin: Springer. Tinsley, D. and Ormsby, J. (2010). How Coach, H-P, Zara and Ford profited from a comprehensive application of market orientation: Graziadio Business Review. Available at: https://gbr.pepperdine.edu/2010/08/how-coach-h-p-zara-and-ford-profited-from-a-comprehensiveapplication-of-market-orientation/ [Accessed 15 September 2016]. Tungate, M. (2008). Fashion Brands. London: Kogan page Page | 10

Wu, T. and Blackhurst, J. (2009). Managing supply chain risk and vulnerability. New York: Springer. Zara (2016). Zara Investments Financial Ratios - Investing.com UK. Available at: http://uk.investing.com/equities/zara-investmen-ratios [Accessed 15 September 2016]. Zara. (2013). Available at: http://zarafashion2013.wixsite.com/zara/background [Accessed 15 September 2016].

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