Ulb Gestd201 M Svs Zara

© INSEAD – p 1

Business Model Innovation

M&S vs ZARA

Gest D201 – Case 4Spring 2007

Prof. Ludo Van der HeydenINSEAD, Fontainebleau & Singapore

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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

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Competing in Business Models: M&S vs ZARA

The fashion industry: waste & the impossibility of perfect forecasts

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Why is profitability in textile so low, when margins are so high?

Actual Deman

d

Possibility of excess stock even with low demand

Possibility of excess demand even with high

demand

ExpectedDeman

d

Perfect forecastsdo not exist in real life!

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Classic textile Business Process:

12 month lead time

Design

Mfg Dist

SellPurchase Raw Mat

Discount

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Competing in Business Models: M&S vs ZARA

Brief introduction to fashion industry Business purpose ?

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ZARA Business Purpose (or Story)

Conquer the world of fashion Using a low cost approach Focus on the young –

that’s where fashion lives today By being a supply chain rather

than a full producer

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Competing in Business Models: M&S vs ZARA

Brief introduction to fashion industry Business purpose ? Customer segment ?

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Zara Customer Segment

Low cost fashion for the 16 to 24 year olds

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

Low cost Fashion

Respond to what customers want – create a « demand » chainCopy trendy fashion fastCreate a store experienceCreate a network/brand

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Competing in Business Models: M&S vs ZARA

Brief introduction to fashion industry Business purpose ? Customer segment ? Customer offer ?

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ZARA Customer Offer

Service company : scans and selects new fashion, designs, delivers and sells Limited variety at any time The product’s essence is : fresh looks! Does the brand help ?

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Zara Customer Offer: characteristics

Fresh/Fast « Quality »: -/+ Cost

Fast copying Of leading styles

Fast delivery in own stores

Limited editions

Raw material: medium Knit: poor

Look: grand! Customer satisfaction: fashion at low price!

Low monetary cost

Low time cost: “the Zara experience”

« Flexibility »: -/+

Limited customer variety: only what is on display –

and in limited choicesBut every customer is participating

in the process: helps determine the next batch

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Competing in Business Models: M&S vs ZARA

Brief introduction to fashion industry Business purpose ? Customer segment ? Customer offer ? Supply process ?

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Classic textile design process:

Creative

Design

Preliminary

Designs

Final

Product

Design

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ZARA design process:

Creative

Design

OUTSOURCE

and

SCAN

Preliminary

Designs

COPY

and

SIMPLIFY

Final

Product

Design

ADAPT

and

OPTIMIZE

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Step 2: Simplify « hits » &

produce library of designs

Step 1: Scan fashion shows

Purchase Raw

Mat

Step 3: Final

Design of next batch

Mfg

Shopping

experience

Dist

Step 2: Shoppers (and store mgers) « pull » next

design (shape) & designers « adapt »

Step 3: Designers « pull » next RM batch

ZARA Supply Process in full: 5 day lead time!!!

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Simplify & design new

product offer

Step 1: Dell scans market & current offer

SellPick

Comps« Mfg »

(Assembly)

Customers

Select

Dist

Step 2: Customers « pull » product &

supply chain adapts

Step 3: Customers « pull » RM resupply

CompsSupply

Comparing with Dell Supply Chain: 2 day lead time, but no on-

line design!

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Competing in Business Models: M&S vs ZARA

Brief introduction to fashion industry Business purpose ? Customer segment ? Customer offer ? Supply process ? Performance ?

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Why is profitability at ZARA so high, when margins are so low:

value???

Actual Deman

d

Excess stock and unmet demand are avoided by stopping production when market saturates

ExpectedDeman

dSmall

batches

Zara as a “Lean

Enterprise”

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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 a“process-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

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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 ?

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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

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Organizational Structure at ZARA

???

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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

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ZARA positioning:Industrialisation–Step 1:

standardisation!

Supply Process

Product Offer

High fashion(Dior,

Chanel, …)

M&S

Mass merchant

s

Rigid Lineflow

Manualshop

Batch

flow

Highcustomisation

Some customisati

on

High standardisatio

n

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ZARA positioning:Industrialisation–Step 2: add

customisation!

SupplyProcess

Product Offer

High fashion(Dior,

Chanel, …)

ZARA M&S

Mass merchant

s

Rigid Lineflow

Manualshop

Batch

flow

Highcustomisation

Some customisati

on

High standardisatio

n

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Industrialisation: Step 2 – Strategic value gained from

positioning

Supply Process

Product Offer

Flexible

Process

Rigid Proces

s

High customisationLow volumeHigh unit marginHigh qualityHigh fashion:Out of price!

ZARA

M&S:Out of

Fashion!

High standardisation

High volumeLow unit margin

Low quality

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Industrialisation–Step 2: redefinition of classic industry trade-

offsSupply Process

Product Offer

Chanel

ZARA M&S

Mass merchant

sContinuo

usflow

Manual

shopBatc

h flow

High customisat

ion

Medium customisatio

n

Low customisatio

n

???

© INSEAD – p 29

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

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Take-away #1:

ZARA = lean enterprise in fashion industry

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ZARA vs M&S summarized: The «Lean» and « Focused » Entreprise

ZARA: THE LEAN ENTERPRI SE

M&S: THE “SOLUTION” SHOP

Clear FOCUS on one customer type & on one

process

MULTIPLE & SI MULTANEOUS GOALS

prohibit clear focus UNIQUE & EXPLI CI T

VALUE proposition MULTIPLE & I MPLI CI T

VALUE propositionS PREDI CTABLE & CLEAR PROCESS to be improved

UNPREDI CTABLE & FUZZY: no process to be improved

Strives for PERFECTI ON SATI SFI ED with reaching a threshold performance

Seeks to ELI MI NATE any form of WASTE

TOLERATE a certain amount of unavoidable EXCESS

Manages customer FLOWS

Reacts to customers as a sequence of events/TASKS

PULLS customers into the process

PUSHES customers through the system

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Process Focus summarized: The «Lean» Entreprise – from Toyota …

THE LEAN ENTERPRISE

Clear FOCUS re: process fits the customer segment(s)

1. CLEAR FOCUS RE: PRODUCT & PROCESS

UNIQUE & EXPLICIT VALUE proposition

And on VALUE!!!

PREDICTABLE & CLEAR PROCESS to be improved

2. IMPROVE THE PROCESS

Strives for PERFECTION & ELIMINATE Seeks to ELIMINATE any form

of WASTE WASTE!!!

Manages patient FLOWS 3. MANAGE FLOWS

PULLS patients into the process & PULL!!!

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Take-away #2:

business model life cycles (and « disruptive business

models»)

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S-curve: business model life cycles

ImprovementEffort

Bus Model Performance

①Probe & learn

② Dominant design emerges (ind

standard)

③Competition shifts to process

features:cost, quality,

speed

④Limits to improvement

appear

⑤Maturity settles in

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Disruptive business model change: setup

Time

Performance: M&S quality(RM, cut, fit, variety … )

While customers change: M&S quality as

perceived by M&S or « 50+ » ? « 16/24 » ?

① A world champion

approaching maturity …

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Disruptive business model change: disruption

Time

Performance: ZARA quality « freshness »

M&S

ZARA

M&S is overtaken by a competitor they

view as offering a product of

« inferior » quality to theirs!!!

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Other take-aways:

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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

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Competing On Business Processes & Models

M&S vs ZARA : back-up slides

Prof. Ludo Van der HeydenINSEAD

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Competing on Business Models: back-up slides

The emerging network model of the firm

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Classic Business Process: Linear Chain view

R & D MFGLogistics,

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 – let’s outsource! [clockspeed in years]

Logistics: « shipping boxes » is not our competence either, let’s outsource this function as well;

Dist & Sales: insufficient attention to channel issues, unresponsive to customer, insufficient customer feeback … [clockspeed in days & weeks]

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Business Model Revisited: The Network view

New Product/Process

Developt

Manufacturing Operations

Supply Chain

Operations

Partners’ Operations

Executive Committee

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Competing on Business Models: back-up slides

The emerging network model for the firm

Mass customisation in the automobile industry

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Auto Industry Dynamics: the long road towards mass customisation

Process

Product

Rigidflow

Flexible

Shop/Garag

e

High customHigh unit margin

Low volume

Low customLow unit margin

High volume

All mfgers at the

beginning

© INSEAD – p 45

Auto Industry Dynamics: standardising the product and the

process

Process

Product

Rigidflow

Flexible

shop

High customHigh unit margin

Low volume

Low customLow unit margin

High volume

All mfgers at the

beginning

Ford Model T Baton

Rouge plant

© INSEAD – p 46

Auto Industry Dynamics: process & variety

Process

Product

Rigidflow

Flexible

shop

High customHigh unit margin

Low volume

Low customLow unit margin

High volume

All mfgers at the

beginning

GM Multi-brand

strategy

Ford Model T Baton

Rouge plant

© INSEAD – p 47

Auto Industry Dynamics: further process automation

Process

Product

Rigidflow

Flexible

shop

High customHigh unit margin

Low volume

Low customLow unit margin

High volume

All mfgers at the

beginning

GM Multi-brand

strategy

Ford Model T Baton

Rouge plant

VW’s Halle 54

© INSEAD – p 48

Auto Industry Dynamics: introducing flexibility into the

process

ProcessProduct

Rigidflow

Flexible shop

High customHigh unit margin

Low volume

Low customLow unit margin

High volume

All mfgers at the

beginning

GM Multi-brand

strategy

Toyota Just-in-time

Ford Model T Baton

Rouge plant

VW’s Halle 54

© INSEAD – p 49

Auto Industry Dynamics: the long road to mass

customisation!!!

Process

Product

Rigidflow

Flexible shop

High customHigh unit margin

Low volume

Low customLow unit margin

High volume

All mfgers at the

beginning

GM Multi-brand

strategy

Renault, Toyota, GM

… « New dist »

Toyota Just-in-time

Ford Model T Baton

Rouge plantVW’s

Halle 54

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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, …)

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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

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Segmentation by business models:

the food industry

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3x3 Bus Model Matrix in the Food Industry

Process

Offer

La Tour d’Argent

INSEAD cafetaria

McDonalds

Continuous

flow

Job shop

Batch

flow

High customHigh unit margin

Low volume

Some customAvge

marginMed

volume

Low customLow unit margin

High volume

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Industry segmentation by a single company :

the Accor Group in the hotel business

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Industrialisation in the Hotel Industry: ACCOR

Business Process

S e r v i c e O f f e r

Flow line: Inflexible

Job shop: Flexible

Luxury Comfort

Minimal

Sofitel

Novotel

Ibis

F1

BasicYes No

© INSEAD – p 56

Corporate transformation at Lufthansa :

realigning around focused business units

© INSEAD – p 57

Restructuring along (more) focused business units

The old Lufthansa:Functional Organization

The new Lufthansa Group:Service Holding

President

VPHR

VPFinance

VPMktg

Technik

Passenger

Catering

Passenger

Catering

Technik

Passenger

Catering

Technik

President

TechnikPassen

gerCatering

HR

Fin

Mktg

Fin

Mktg

HR

Fin

Mktg

HR

Cargo

Cargo

Cargo

Cargo

HR

Fin

Mktg

© INSEAD – p 58

Dynamics of focus: planned transformation at LufthansaIntegration & synergy

Performance &

competitive in market segment

Low

Low

High

High Old LH

New LH

Future LH ?

Inter-mediat

e LH