OLI analysis

Dunning’s (1995, 1998) OLI paradigm can explain an organization’s potential for growth and mode of entry based on ownership (O), location (L) and internalization (I)

advantages. This paradigm can thus help explain the growth of e-commerce firms in emerging markets (Agarwal and Wu, 2015). Ownership specific advantages are the resources and capabilities that the company has prior to the entrance into a new country, while location specific advantages are the benefits of the country in question.

The internalization specific advantages relate to why the company should exploit their ownership specific advantages internally rather than acquire and/or sell their rights (Dunning, 2001). This analysis will seek to explain Zalora’s ownership, location and internalization specific advantages in Indonesia. It will give an explanation as to how Zalora managed to gain such a strong foothold in the Indonesian online fashion retail market, and analyze some of the company’s strengths.

Ownership specific advantages

As mentioned, Zalora is owned by the German Internet platform network Rocket Internet who owns companies in 110 countries (Rocket Internet, 2014). The advantage of this is that Rocket Internet holds competencies and experience from starting similar companies in other parts of the world that Zalora Indonesia can benefit. Their financial resources are also a huge resource for Zalora who gain a competitive advantage over other less financially strong competitors. Rocket Internet has enormous competencies in what works and what does not work in different markets. Zalora also use a lot of the systems developed by Rocket Internet for other companies, which means that they do

not have to start from scratch building their own systems like other competitors. Rocket Internet is not as involved in Zalora Indonesia’s business now as they were before, but still shares information like best practices and bench marks. (Bjordal, Interview, Appendix 1).

Zalora is also part of a group developed by Rocket Internet, called the Global Fashion Group, consisting of five leading emerging market fashion e-commerce companies: Dafiti in Latin America, Lamoda in Russia, Jabong in India, Namshi in the Middle East, as well as Zalora in Southeast Asia and Australia (Rocket Internet, 2014). As mentioned in the introduction, Rocket Internet and Kinnevik are the two biggest investors. This group shares lessons learned from fail and success stories. Zalora’s participation in the Global Fashion Group gives them a forum where they can discuss problems and take advantage of each other’s development. No other company in the online fashion retail industry in Indonesia has this kind of network, making it a competitive advantage for Zalora (Bjordal, Interview, Appendix 1).

Bjordal points out Rocket Internet’s competence and developed systems as the key ownership specific advantages for Zalora in Indonesia. The financial backing and safety provided by such a strong parent company like Rocket Internet has surely also been a big help for Zalora. The Global Fashion Group is also a huge advantage that can

contribute to faster growth as they may be able to avoid pitfalls based on other

members’ past experiences. Zalora therefore have a great ownership specific advantage in the backing of their parent company Rocket Internet and the Global Fashion Group.

Location specific advantages

Indonesia as a location for online fashion retail is not necessarily obvious, but has a lot of potential. With a population of 260 million people (Worldometers, 2016), 88.1 million Internet users, and around 15 million online shoppers, where about 6 million purchase fashion online, the potential customer base is huge (Statista dossier, 2016). As the growth rate of online retail sales further is estimated to lie around 60 percent

(Macquarie Research, 2016), Indonesia can be viewed as an up and coming e-commerce market. Bjordal also agrees with this: “People understood that when the Internet first

arrived, it was completely going to take off, so Indonesia was seen as an important market from day one. As the Internet penetration has grown and we have gotten more attention as a company, we have become more and more important for the group, and we are now clearly the biggest” (Bjordal, Interview, Appendix 1). The Indonesian e-commerce

potential and its huge population have thus made Zalora Indonesia especially important for the group, giving them the opportunity to grow.

Cheap labor is also a factor that makes Indonesia a desired foreign investment location for Zalora (Indonesia Investments, 2016c). The minimum wage in Jakarta is around 130 to 140 Euros per month, according to Bjordal. This is about three times higher than other cities in Indonesia, making Jakarta relatively expensive in comparison. One could thus consider moving parts of the organization to other places, but this will not be happening, as it is harder to attract talents outside of Jakarta, as well as Jakarta and Jabodetabek (greater Jakarta), amounts for the largest share of the market (Bjordal, Interview, Appendix 1). Although Jakarta is more expensive than other Indonesian cities, wages here are still low and Zalora Indonesia enjoy the location advantage of low labor costs.

In terms of taxation, Indonesia does not serve any advantages. Taxes on imports and income are high, which is problematic for Zalora as they import many of their products from abroad. For expats and other employees, the high taxes on income is troublesome, and other countries may seem more attractive in terms of salary, as for example

Singapore with their relatively lower taxes (Bjordal, Interview, Appendix 1). This might make it harder to attract international employees. The fact that taxes are high in

Indonesia, but they still want to start up in the country must mean that the other location specific advantages are so strong they out rule the disadvantage of high taxes.

The location specific advantages for online fashion retailer Zalora in Indonesia can thus qualify as strong.

Internalization specific advantages

The advantages of setting up a local site and having a local team, compared to selling to Indonesia from an international website using non-Indonesian workers, are great. Local

presence is very important in Indonesia, and Bjordal explains why: “The differences between the markets are so big. The differences within Southeast Asia are even huge. We would never be where we are today if we did not have an Indonesian website with both the local language and with all the local brands” (Bjordal, Interview, Appendix 1). The

advantages of internalization are thus great and important for the success of Zalora Indonesia.

The fact that Zalora has its own team on the ground in Indonesia also makes it easier for them to connect with local customers through marketing. Internalization is especially important, as Indonesians are very committed to local brands and products (Macquarie Research, 2016). Having a local presence enables Zalora’s PR in terms of local events and fashion shows, which are also shared on social media. It also enables partnerships with big phone companies who help with marketing through sending out SMSs, e-mail and other types of communication about Zalora to their customers (Bjordal, Interview, Appendix 1).

The case for internalization is strong as Zalora Indonesia would not be where they are today if it was not for the localization of their website and team. The opportunities for Zalora Indonesia are thus greater with an internalization strategy rather than with selling from a non-localized website with international employees.

Summary of the OLI analysis

A lot of factors are beneficial for Zalora’s presence in the Indonesian market. They have ownership specific advantages in terms of the competence and systems provided by their parent company, Rocket Internet and their participation in the Global Fashion Group. Indonesia is also an exciting location for Zalora because of its large population, increasing Internet access, and low labor cost, while high taxes on income and import somewhat decrease the localization benefit. For Zalora to be able to take advantage of their ownership and location specific advantages, the key is to internalize operations.

Having a localized website and local employees enable a closer bond to customers as well as events, marketing and partnerships that would not be possible without local presence.