Business Environment Analysis and Risk Management

This report provides an evaluation of the business environment in which Zara operates, including internal and external environment analysis, risk assessment, and mitigation strategies. The report includes SWOT, VRIO, PESETEL, and Porter's Five Forces analysis. The risk factors identified include competition, logistic and supply chain issues, inventory issues, compliance risk, operational risks, financial risk, and IT security-related risks.

Business Environment
Analysis and Risk
Management
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Internal environment analysis......................................................................................................3
Analysis of external business environment.................................................................................5
Risk assessment and management...............................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
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INTRODUCTION
Business environment consist of all the factors either controllable or uncontrollable which
can affect the business decisions or process. Thus the sustainability and growth of business is
dependent on business environment and so its analysis is an important part of the business
operations and process (Hamilton and Webster, 2018). For sustainable performance and
competitive benefits organisations are required to conduct and consider both internal and
external environment audits.
Zara is one of the most successful brand in fast fashion product range which include beauty
products, accessories, clothing as well as shoes. Instead of following the conventional patterns of
advertisements and low cost production organisation choses to spend minimum on promotion
instead focus on making appropriate market decisions to achieve success. This report will
provide theoretical evaluation of business environment in which Zara operates. It will also
provide a risk assessment and mitigation strategies to manage the business risk factors.
MAIN BODY
Internal environment analysis
Internal business environment helps organisation to assess its own capabilities and
resources so that better decisions can be taken and resources can be utilised in required direction.
For this purpose, Zara can use SWOT and VRIO analysis through which organisation will have
awareness regarding its existing resources, potential and expected threats. This awareness will
help organisation to plan its strategies in more precise way.
SWOT analysis:
Strength: The key strength of Zara is its product quality and high brand value. This is the reason
that despite minimum efforts on marketing or advertisements organisation hold strongest
position among its competitors. The global presence of organisation also makes it accessible at
every place so that its customers can be accessed and retained to a higher extent.
Weakness: The unique approach of Zara to establish brand on basis of quality only without
focusing on marketing was effective approach. However, with emerging new brands and intense
social marketing the brand seems to be at weakened position (Verno, 2019). Thus
comparatively limited presence on digital platforms act as weakness of organisation which can
lead to strategic failure in long term.
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Opportunity: Zara has vast opportunities to expand its services to regions which do not have
Zara stores. The digital platforms and social media tools can help organisation to outreach larger
and new market segments so that its profitability can be increased (Tomczak and Staszkiewicz,
2020).
Threats: With the intensive use of technology based services the biggest threat for the
organisation is fierce level of competition in retail industry. The increasing risk factors of cyber
security is also creating challenges for Zara to maintain the integrity and privacy for its
customers as well as organisational data.
VRIO analysis: This model is used to analyse the resources available within organisation so that
they can be used to optimise the profitability and performance. The different types of resources
and their capabilities within Zara are discussed as follows:
Valuable: For competitive advantage organisations must have resources which provides greater
value as compare to other service providers. The aspects such as talented human resources,
financial resources, intellectual property rights, creative product designs and quality are valuable
for Zara because its competitors cannot compete on these considerations (Lindblom, 2021).
Rare: Certain resources such as product quality, creativity, highly talented designers and
development team is rare resource for Zara. These resources are not easily accessible to other
organisations and thus allow Zara to dominate the fast fashion retailing.
Imitable: For other industry players it is not easily possible to copy the strategies or products of
Zara. Thus imitation is challenging as well as costly. Even if they are imitated then also product
duplication or replacement will come with higher switching cost and disturbance in market
structure.
Organised: Greater profitability can be achieved only when resources are organised and used
correctly (Kozubikova and et.al.,2019). Zara has been effective enough to manage its technical,
human and finance resources properly so that they can address the situational challenges.
The consideration of these resources and swot analysis guides Zara to understand the
improvement areas and its strengths which must be used to achieve success over other
competitors.
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Analysis of external business environment
Similar to internal environment it is also equally important that Zara must analyse the
threats and opportunities available in external environment. This can be done by using following
analysis:
PESETEL analysis:
It is used to identify the factors which are uncontrollable but affect business decisions.
Any changes in these factors must be appropriately responded by organisation for long term
success.
Political: Zara operates in different countries and thus their different political situations and
relations can influence the trade aspect of organisation. Any kind of changes in trade policies,
import-export duties or trade barriers can influence the organisational operations. Thus it is
required that before entering into any market Zara must assess the political stability and relations
of country with other regions of world so that it does not face any operational challenges.
Economic: The recession in economy after pandemic situations has lower the buying capabilities
of customers as well as wages and other cost considerations. Thus Zara has to monitor and
modify its pricing and finance related strategies which can change profitability as well as
expansion plans.
Social: The changing social trends such as higher dependency on technology, need for home
delivery within day and personalised products has also forced Zara to respond accordingly. In
response to different cultural and social preferences organisation used to introduce creative and
socially acceptable designs in different countries (Kozubikova and Kotaskova, 2019). This
brings innovation as well as diversity in the product and services of the organisation.
Technology: The improvements such as artificial intelligence and data analytics have made it
possible for Zara to understand its competitors as well as customers with more precision and
detail. It helps to improve product dimensions and to meet the needs of stakeholders. The
negligence to technology factor can have adverse impact upon brand perception and data privacy
issues.
Environmental: Sustainability and corporate social responsibility has been emerging as crucial
aspect for evaluation of brand performance. The legislations related to carbon footprint and CSR
initiatives are included in the strategies and operational decisions of the organisation. Good CSR
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reports and outcomes build positive public perception and also improve the customer response
and experience towards the brand.
Legal: It is one of the most important aspect which regulates the operational as well as
functioning. Zara must ensure that it has compliance with all business regulations, employment
laws and other trade related regulations (Gogokhia and Berulava, 2021). If organisation fails to
meet these aspects, then it can cause operational restrictions as well as negative brand perception
which is not good for the success and growth aspects.
Porter five force model:
Organisational success also depends upon the completion available in industry. The biggest
competition faced by Zara is from the organisations like H&M, Benetton, Gap and IKEA. The
most effective and modest pricing strategies have helped Zara to maintain its success even in
fierce rivalry business environment. The level of competitive threats faced by organisation
regulates and affects the extent of challenges and success experienced by the organisation. For its
analysis purpose porter 5 force theory can be used.
Threat of substitution: The existing competitors in retail clothing industry may vary in terms of
price and quality but they do not have any substitute as clothing is fundamental need of
customers (Duca and Gherghina, 2018). Thus substitution threat is low for Zara and does not
impose much threat upon organisational functions.
Competitive rivalry: It is quite high in fashion industry because Zara used to face extreme
competition in terms of both product designs, quality and price. Competitors like Gap and H&M
are compatible in terms of product design and their pricing. However, Zara has been able to
survive the competition because of its modest pricing strategies and unique sense of marketing
and customer experience.
Threat of new entrants: In fast fashion goods people are in constant search of economical as
well as stylish and good quality products. The product differentiation, economies of scale and
brand establishment are key barriers for the new entrants. Thus it is quite difficult for the new
entrants to enter the industry and to make a distinguish position as compare to existing players
like Zara. Thus organisation does not face much threats from emerging competition. Zara is also
adopting vertical integration to incorporate trendy fashion sense so that its targeted customers
can receive satisfactory services and products.
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Supplier power: Suppliers in fashion industry have low power to bargain because Zara used to
outsource its production from the countries which have low cost labour and resource availability.
Thus prices are mainly controlled by organisations and suppliers have limited portion in
profitability (Hamilton and Webster, 2018). Due to higher need of capital suppliers does not have
choices of forward integration. Higher availability of choices for suppliers make it possible for
the organisation to easily switch between different choices. In addition to this Zara also has
facility of in house production thus it has a very limited dependency upon suppliers.
Customer power of bargaining: The customers of Zara have medium level of bargaining power
which forces organisations to differentiate their products. As customer switching cost is low the
organisation is forced to give priority to customer choices by keeping competitive pricing at the
same time.
The competitive analysis is important to taken into consideration as organisational
growth strategies and action within industry are guided mainly by these evaluations. For
achieving success organisations must be able to successfully handle the competitive threats.
Risk assessment and management
Despite having strong positioning the clothing retail segment Zara is also vulnerable to
several types of risk factors. For competitive success it is important that these risk factors must
be identified on time and addressed properly (Cherunilam, 2021). The risk assessment and action
plan for managing the potential threats or risk for Zara are as follows:
Risk assessment:
Risk factor Description Risk
probability
Risk
impact
Impact on organisation
Competition There is vast growth in
terms of competition
from both local as well
as global service
providers. Thus
competitive threats are
emerging as strong risk
for Zara.
High High If competitive risk is not
managed, then Zara may
not be able to achieve its
business goals and
gradually it may lose its
market capture.
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Logistic and
supply chain
failure
After Covid 19 entire
global supply chain is
suffering from the
shortage of shipping
containers and logistic.
Thus it is causing risk
of supply delay and
failure which can
disturb the global
network of Zara.
Medium High Logistic risks can cause
delay in the product
delivery and thus it can
have adverse impact upon
brand perception and
customer experience. In
long term it can result in
poor customer retention
(Hans, 2018).
Labour and
inventory
issues
The shortage of skilled
labour as well as
inventory challenges
can act as risk factor to
ensure operational
continuity.
Medium Medium Labour shortages can lead
to failure of meeting
operational needs and thus
customer experience can be
negative when desired
quality products are not
delivered. Inventory risk
can cause threat to product
quality and their safe
supply to end users. If they
are not managed, then
organisation may suffer
from financial loss as well
as competitive threats.
Compliance
risk
As Zara is active and
successful in
international market it
is expected to follow
regional as well as
international trade laws
(Meyer and Meyer,
Low High Failure to meet
compliances can cause
legal penalties as well as
restriction to operational
continuity. It can also be
damaging to brand value of
Zara.
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2016). However, the
dynamic and
differentiated nature of
compliance standards is
risk factor because
failure to compliance
can create issues for the
organisation.
Operational
risks
The shortage of
resources or
management can also
cause operational
challenges and risk
factors such as
production delay or
quality issues in
product
Medium Low Operational risk may cause
organisation to not meet the
operational goals and thus
it can directly affect the
profitability and
competitive position of
Zara in the market.
Financial risk It is also possible that
organisation may not
have sufficient budget
or capital to execute its
growth strategies and
then lack of finance can
act as risk factor.
Low Low Financial risk factors can
influence the growth
strategies and it can also
cause resource scarcity
which is threat for the
operational continuity
(Lima, McMahon and
Costa, 2021).
IT security
related risk
Technology is changing
rapidly and thus privacy
and security threats
related to it can
constantly act as major
risk factor for the firm.
High High IT threats can cause a
damage and breach issues
to sensitive organisational
information of
organisation. The privacy
threat on customer data can
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also cause legal and
competitive consequences
for the organisation.
Action plan for managing risks:
Risk factor Risk mitigation strategy Resources required
Competition To manage competitive risk Zara must
improve its marketing and operational
strategies (Hudakova and et.al., 2018). The
regular innovation in product with high
quality as well as equal emphasis upon
price or competitive envi9ronment can help
organisation to mitigate the risk.
Effective business strategies and
resources
Logistic and
supply chain
failure
Zara must maintain good relationship with
its suppliers so that supply and logistic
network remains effective.
Sufficient number of suppliers and
logistic networks
Labour and
inventory
issues
Zara must use advanced technology and
operational models to optimise the
inventory solutions. For labour related
risks organisation must follow all
necessary legislations related to labours
and must provide safe working
environment to them.
Proper inventory layouts and
effective recruitment agencies
Compliance
risk
To manage the compliance risks Zara must
follow the ethical and standard operational
procedure. There must be audits as well to
ensure that only ethical and legal practices
are followed.
Legal experts
Operational
risks
Operational risks can be minimised by
using modern production and distribution
methods and procedures (Mufudza, 2018).
Good quality equipment’s and
expertise operational management
personnel
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Strict quality assurance procedures can also
be used to mitigate the operational risks.
Financial risk Regular financial audits as well as effective
communication with the stakeholders,
specifically investors can help to minimise
the financial risks.
Skilled human resources and
multiple financing sources
Technology
risk
Zara must conduct regular audits for its IT
resources so that necessary updates can be
made and privacy concerns can be ensured.
Technical professionals and
updated hardware and software
CONCLUSION
It can be concluded that effective business strategies can be developed only when
organisations consider the environmental factors and their impact on the operations or decisions.
The correct analysis and evaluation of the business environment is essential for making correct
choices as well as to enhance the efficiency of operations. If business environment is not taken
into account, then organisations may not be able to withstand the competitive threats and they
may not be able to use the available opportunities. It can also be concluded that risk factors must
be identified and managed with appropriate action plan otherwise they may impose a
considerable threat for the organisation. The risk management minimises the potential risks so
that organisations can perform better.
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REFERENCES
Books and Journals
Cherunilam, F., 2021. Business environment. Himalaya Publishing House Pvt. Ltd.
Duca, I. and Gherghina, R., 2018. CSR initiatives: An opportunity for the business environment.
In Ethics and Decision-Making for Sustainable Business Practices (pp. 187-202).
IGI Global.
Gogokhia, T. and Berulava, G., 2021. Business environment reforms, innovation and firm
productivity in transition economies. Eurasian Business Review. 11(2). pp.221-245.
Hamilton, L. and Webster, P., 2018. The international business environment. Oxford University
Press.
Hans, V.B., 2018. Business environment–conceptual framework and polices. International
Educational Scientific Research Journal. 4(3). pp.67-74.
Hudakova, M. and et.al., 2018. The dependence of perceived business risks on the size of
SMEs. Journal of Competitiveness. 10(4). pp.54-69.
Kozubikova, L. and et.al.,2019. The impact of political factors' perception on suitability of
international business environment: The case of startups. Economics & Sociology.
Kozubikova, L. and Kotaskova, A., 2019. The impact of technological factors on the quality of
the business environment. Transformations in Business & Economics. 18(1).
Lima, E.S., McMahon, P. and Costa, A.P.C.S., 2021. Establishing the relationship between asset
management and business performance. International Journal of Production
Economics. 232. p.107937.
Lindblom, E., 2021. Insurance broker contributing to business and risk management, a client ́ s
perspective.
Meyer, N. and Meyer, D.F., 2016. The relationship between the creation of an enabling
environment and economic development: A comparative analysis of management at
local government sphere. Polish Journal of Management Studies, 14(2), pp.150-160.
Mufudza, T., 2018. Dynamic strategy in a turbulent business environment. Strategic
Management-a Dynamic View.
Tomczak, S.K. and Staszkiewicz, P., 2020. Cross-country application of manufacturing failure
models. Journal of Risk and Financial Management. 13(2). p.34.
Verno, J., 2019. Risk management in corporates; can digitalization help improve risk
management in cash management?.
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