Business Model Innovation
M&S vs ZARA
Gest D201 Case 4
Spring 2007
Prof. Ludo Van der Heyden
INSEAD, Fontainebleau & Singapore
INSEAD p 1
Competing in Business Models:
M&S vs ZARA
Brief introduction to fashion industry
Business purpose ?
Customer segment ?
Customer offer ?
Supply process ?
Performance ?
Core competences & organizational
structure ?
ZARA in the business model matrix
Conclusions & take-aways
INSEAD p 2
Competing in Business Models:
M&S vs ZARA
The fashion industry: waste & the
impossibility of perfect forecasts
INSEAD p 3
Why is profitability in textile so low,
when margins are so high?
Perfect forecasts
do not exist in real life!
Possibility of
excess demand
even with high
demand
Possibility of
excess stock
even with low
demand
Expected
Demand
Actual
Demand
INSEAD p 4
Classic textile Business Process:
12 month lead time
Design
Purchase
Raw Mat
Mfg
Dist
Sell
Discount
INSEAD p 5
Competing in Business Models:
M&S vs ZARA
Brief introduction to fashion industry
Business purpose ?
INSEAD p 6
ZARA Business Purpose (or Story)
Conquer the world of fashion
Using a low cost approach
Focus on the young
thats where fashion lives today
By being a supply chain rather
than a full producer
INSEAD p 7
Competing in Business Models:
M&S vs ZARA
Brief introduction to fashion industry
Business purpose ?
Customer segment ?
INSEAD p 8
Zara Customer Segment
Low cost fashion for the
16 to 24 year olds
Low cost
Get it approximately right
Eliminate creative design
Define a fast-response
supply chain including design
Finalise design knowing
material supply constraint
Optimise the supply process
for speed and cost
Manage follow-up (next
batch) and customer flows
Fashion
Respond to what
customers want
create a demand
chain
Copy trendy fashion
fast
Create a store
experience
Create a
network/brand
INSEAD p 9
Competing in Business Models:
M&S vs ZARA
Brief introduction to fashion industry
Business purpose ?
Customer segment ?
Customer offer ?
INSEAD p 10
ZARA Customer Offer
Service company : scans and selects
new fashion, designs, delivers and sells
Limited variety at any time
The products essence is : fresh looks!
Does the brand help ?
INSEAD p 11
Zara Customer Offer: characteristics
Fresh/Fast
Quality: -/+
Fast copying
Of leading styles
Raw material: medium
Fast delivery
in own stores
Limited editions
Knit: poor
Look: grand!
Customer satisfaction:
fashion at low price!
Cost
Low monetary cost
Low time cost:
the Zara experience
Flexibility : -/+
Limited customer variety:
only what is on display
and in limited choices
But every customer is participating
in the process:
helps determine the next batch
INSEAD p 12
Competing in Business Models:
M&S vs ZARA
Brief introduction to fashion industry
Business purpose ?
Customer segment ?
Customer offer ?
Supply process ?
INSEAD p 13
Classic textile design process:
Creative
Preliminary
Design
Designs
Final
Product
Design
INSEAD p 14
ZARA design process:
Final
Creative
Preliminary
Design
Designs
OUTSOURCE
COPY
ADAPT
and
and
and
SCAN
SIMPLIFY
Product
Design
OPTIMIZE
INSEAD p 15
ZARA Supply Process in full:
5 day lead time!!!
Step 1:
Scan fashion
shows
Step 2: Simplify
hits &
produce library of
designs
Step 3: Designers
pull next RM batch
Step 3:
Purchase
Raw Mat Final Design
of next
batch
Mfg
Dist
Shopping
experience
Step 2: Shoppers (and store
mgers) pull next design
(shape) & designers adapt
INSEAD p 16
Comparing with Dell Supply Chain:
2 day lead time, but no on-line design!
Step 1: Dell
scans market &
current offer
Simplify &
design new
product offer
Comps
Supply
Sell
Pick
Comps
Step 3:
Customers
pull RM
resupply
Mfg
(Assembly)
Step 2: Customers
pull product &
supply chain adapts
Dist
Customers
Select
INSEAD p 17
Competing in Business Models:
M&S vs ZARA
Brief introduction to fashion industry
Business purpose ?
Customer segment ?
Customer offer ?
Supply process ?
Performance ?
INSEAD p 18
Why is profitability at ZARA so high,
when margins are so low: value???
Excess stock and unmet
demand are avoided by
stopping production
when market saturates
Small
batches
Expected
Demand
Zara as a
Lean
Enterprise
Actual
Demand
INSEAD p 19
Waste elimination at ZARA:
examples
Advertising:
eliminated for not necessary in a
pull model; too slow anyway and our offer is
localised
Discount Sales: eliminated through quick response
& the strategy that we are always below demand
Design: largely out-sourced to the market and
replaced by active scanning greatly facilitates
aprocess-based organisation
Product complexity: 3 types, sizes, and colours
greatly reduces the product complexity, allows us to
operate with reduced inventories and working capital
with little loss in customer value
INSEAD p 20
Competing in Business Models:
M&S vs ZARA
Brief introduction to fashion industry
Business purpose ?
Customer segment ?
Customer offer ?
Supply process ?
Performance ?
Core competences & organizational
structure ?
INSEAD p 21
Core competences at ZARA
Scanning: fashion trends, market trends
Fast supply chain: 1 week final production
cycle, two day outbound logistics, fast
adaptation of leading trends
IT systems: library of models, CAD/CAM
Flexible production system: small and
flexible sewing shops in Galicia
INSEAD p 22
Organizational Structure at ZARA
???
INSEAD p 23
Competing in Business Models:
M&S vs ZARA
Brief introduction to fashion industry
Business purpose ?
Customer segment ?
Customer offer ?
Supply process ?
Performance ?
Core competences & organizational
structure ?
ZARA in the business model matrix
INSEAD p 24
ZARA positioning:
IndustrialisationStep 1: standardisation!
Supply
Process
Manual
shop
Batch
flow
Rigid Line
flow
Product Offer
High
customisation
Some
High
customisation standardisation
High fashion
(Dior,
Chanel, )
M&S
Mass
merchants
INSEAD p 25
ZARA positioning:
IndustrialisationStep 2: add customisation!
Product Offer
Supply
Process
Manual
shop
Batch
flow
Rigid Line
flow
High
customisation
Some
High
customisation standardisation
High fashion
(Dior,
Chanel, )
ZARA
M&S
Mass
merchants
INSEAD p 26
Industrialisation: Step 2
Strategic value gained from positioning
Product High customisation
Low volume
Offer
Supply
Process
Flexible
Process
Rigid
Process
High unit margin
High quality
High standardisation
High volume
Low unit margin
Low quality
High fashion:
Out of price!
M&S:
ZARA
Out of
Fashion!
INSEAD p 27
IndustrialisationStep 2:
redefinition of classic industry trade-offs
Supply
Process
Manual
shop
Batch
flow
Continuous
flow
Product Offer
High
customisation
Medium
customisation
Low
customisation
Chanel
ZARA
??
M&S
Mass
merchants
INSEAD p 28
Competing in Business Models:
M&S vs ZARA
Brief introduction to fashion industry
Business purpose ?
Customer segment ?
Customer offer ?
Supply process ?
Performance ?
Core competences & organizational structure
?
ZARA in the business model matrix
Conclusions & take-aways
INSEAD p 29
Take-away #1:
ZARA = lean enterprise in fashion industry
INSEAD p 30
ZARA vs M&S summarized:
The Lean and Focused Entreprise
ZARA:
THE LEAN ENTERPRISE
Clear FOCUS on one
customer type & on one
process
UNIQUE & EXPLICIT
VALUE proposition
PREDICTABLE & CLEAR
PROCESS to be improved
Strives for PERFECTION
M&S:
THE SOLUTION SHOP
MULTIPLE &
SIMULTANEOUS GOALS
prohibit clear focus
MULTIPLE & IMPLICIT
VALUE propositionS
UNPREDICTABLE & FUZZY:
no process to be improved
SATISFIED with reaching a
threshold performance
Seeks to ELIMINATE any TOLERATE a certain amount
form of WASTE
of unavoidable EXCESS
Manages customer
Reacts to customers as a
FLOWS
sequence of events/TASKS
PULLS customers into the PUSHES customers through
process
the system
INSEAD p 31
Process Focus summarized:
The Lean Entreprise from Toyota
THE LEAN ENTERPRISE
Clear FOCUS re: process fits
the customer segment(s)
UNIQUE & EXPLICIT VALUE
proposition
PREDICTABLE & CLEAR
PROCESS to be improved
Strives for PERFECTION
Seeks to ELIMINATE any form
of WASTE
Manages patient FLOWS
PULLS patients into the process
1. CLEAR FOCUS RE:
PRODUCT & PROCESS
And on VALUE!!!
2. IMPROVE THE
PROCESS
& ELIMINATE
WASTE!!!
3. MANAGE FLOWS
& PULL!!!
INSEAD p 32
Take-away #2:
business model life cycles
(and disruptive business models)
INSEAD p 33
S-curve: business model life cycles
Bus Model Performance
Competition shifts
to process features:
cost, quality, speed
Maturity settles in
Limits to
improvement appear
Probe & learn
Dominant design
emerges (ind standard)
Improvement
Effort
INSEAD p 34
Disruptive business model change: setup
Performance: M&S quality
(RM, cut, fit, variety )
A world champion
approaching maturity
While customers change:
M&S quality as perceived by
M&S or 50+ ?
16/24 ?
Time
INSEAD p 35
Disruptive business model change: disruption
Performance:ZARA quality
freshness
ZARA
M&S
M&S is overtaken by
a competitor they view
as offering a product
of inferior quality
to theirs!!!
Time
INSEAD p 36
Other take-aways:
INSEAD p 37
Other take-aways
The benefits of a focused & lean business
model: story, segment, offer, supply chain
process, performance, competences
Business models and processes include
customers and their mindsets
The danger of disruptive business models
The curse of winners: increasingly rigid
commitments to once winning business models
Qualify such words as quality & flexibility
The search for lean mass customisation
Go for simple organisational structures
A key innovative skill for general managers:
designing new business models
INSEAD p 38
Competing On Business Processes &
Models
M&S vs ZARA : back-up slides
Prof. Ludo Van der Heyden
INSEAD
INSEAD p 39
Competing on Business Models:
back-up slides
The emerging network model of the
firm
INSEAD p 40
Classic Business Process:
Linear Chain view
R & D
MFG
Logistics, Dist
& Sales
R&D: too slow, too expensive, insufficiently customer focused, does
not pay enough attention to current manufacturing capabilities
[clockspeed in months]
MFG: a permanent bottleneck, always late and reactive, not a
distinctive competence lets outsource! [clockspeed in years]
Logistics: shipping boxes is not our competence either, lets
outsource this function as well;
Dist & Sales: insufficient attention to channel issues, unresponsive to
customer, insufficient customer feeback [clockspeed in days & weeks]
INSEAD p 41
Business Model Revisited: The
Network view
New
Product/Pr
ocess
Developt
Manufacturing
Operations
Executive
Committee
Supply Chain
Operations
Partners
Operations
INSEAD p 42
Competing on Business Models:
back-up slides
The emerging network model for the
firm
Mass customisation in the automobile
industry
INSEAD p 43
Auto Industry Dynamics: the long road
towards mass customisation
Process
Flexible
Shop/
Garage
High custom
High unit margin
Low volume
Product
Low custom
Low unit margin
High volume
All mfgers at
the beginning
Rigid
flow
INSEAD p 44
Auto Industry Dynamics:
standardising the product and the process
Process
Flexible
shop
Rigid
flow
High custom
High unit margin
Low volume
Product
Low custom
Low unit margin
High volume
All mfgers at
the beginning
Ford Model T
Baton Rouge
plant
INSEAD p 45
Auto Industry Dynamics:
process & variety
Process
Flexible
shop
High custom
High unit margin
Low volume
Product
Low custom
Low unit margin
High volume
All mfgers at
the beginning
GM Multibrand
strategy
Rigid
flow
Ford Model T
Baton Rouge
plant
INSEAD p 46
Auto Industry Dynamics:
further process automation
Process
Flexible
shop
High custom
High unit margin
Low volume
Product
Low custom
Low unit margin
High volume
All mfgers at
the beginning
GM Multibrand
strategy
Rigid
flow
Ford Model T
Baton Rouge
plant
VWs
Halle 54
INSEAD p 47
Auto Industry Dynamics:
introducing flexibility into the process
Process
Flexible
shop
High custom
High unit margin
Low volume
Product
Low custom
Low unit margin
High volume
All mfgers at
the beginning
GM Multibrand
strategy
Rigid
flow
Toyota
Just-in-time
Ford Model T
Baton Rouge
plant
VWs
Halle 54
INSEAD p 48
Auto Industry Dynamics:
the long road to mass customisation!!!
Process
Flexible
shop
High custom
High unit margin
Low volume
Product
Low custom
Low unit margin
High volume
All mfgers at
the beginning
GM Multibrand
strategy
Rigid
flow
Renault,
Toyota, GM
New dist
Toyota
Just-in-time
Ford Model T
Baton Rouge
plant
VWs
Halle 54
INSEAD p 49
Auto Industry Dynamics:
the long road toward mass customisation
Long-term trend is clear: mass customisation
Short-term movements are rather chaotic and unpredictable :
sometimes classical standardisation, then disruptive innovations, then
again lots of classical innovations
and also take a long time: Mass customisation (as practiced in
the computer industry) in automobile industry is finally becoming a
reality, but slowly : Renault had to postpone the introduction of new
distribution project
In such environments industrial holding structures are more
flexible: Toyota (with the Lexus), VAG (with VW, Skoda, SEAT, Audi ),
Daimler-Chrysler (Mercedes, Chrysler, Smart, )
INSEAD p 50
Competing on Business Models:
back-up slides
The emerging network model for the
firm
Mass customisation in the automobile
industry
Examples of business model (re-)design
INSEAD p 51
Segmentation by business models:
the food industry
INSEAD p 52
3x3 Bus Model Matrix in the Food Industry
Offer
Process
Job
shop
Batch
flow
Continuous
flow
High custom
Some custom
High unit margin Avge margin
Low volume
Med volume
Low custom
Low unit margin
High volume
La Tour
dArgent
INSEAD
cafetaria
McDonalds
INSEAD p 53
Industry segmentation by a single
company :
the Accor Group in the hotel business
INSEAD p 54
Industrialisation in the Hotel Industry: ACCOR
S e r v i c e
B
u
s
i
n
e
s
s
P
r
o
c
e
s
s
Yes
Luxury
Job shop:
Flexible
Comfort
O f f e r
Basic
No
Minimal
Sofitel
Novotel
Ibis
Flow line:
Inflexible
F1
INSEAD p 55
Corporate transformation at Lufthansa :
realigning around focused business units
INSEAD p 56
Restructuring along (more) focused business units
The old Lufthansa:
Functional Organization
The new Lufthansa Group:
Service Holding
President
VP
HR
VP
Finance
Technik
Passenger
Catering
Cargo
President
VP
Mktg
Technik
Passenger
Catering
Cargo
Technik
Passenger
Catering
Cargo
Technik
Passen
ger
HR
HR
Fin
Mktg
Fin
Mktg
Catering
HR
Fin
Mktg
Cargo
HR
Fin
Mktg
INSEAD p 57
Dynamics of focus:
planned transformation at Lufthansa
Integration &
synergy
High
Old LH
Future
LH ?
Low
Intermediate
LH
New
LH
Low
High
Performance
& competitive
in market
segment
INSEAD p 58