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© INSEAD – p 1
Business Model Innovation
M&S vs ZARA
Gest D201 – Case 4Spring 2007
Prof. Ludo Van der HeydenINSEAD, Fontainebleau & Singapore
© INSEAD – p 2
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 3
Competing in Business Models: M&S vs ZARA
The fashion industry: waste & the impossibility of perfect forecasts
© INSEAD – p 4
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!
© INSEAD – p 5
Classic textile Business Process:
12 month lead time
Design
Mfg Dist
SellPurchase Raw Mat
Discount
© INSEAD – p 6
Competing in Business Models: M&S vs ZARA
Brief introduction to fashion industry Business purpose ?
© INSEAD – p 7
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
© INSEAD – p 8
Competing in Business Models: M&S vs ZARA
Brief introduction to fashion industry Business purpose ? Customer segment ?
© INSEAD – p 9
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
© INSEAD – p 10
Competing in Business Models: M&S vs ZARA
Brief introduction to fashion industry Business purpose ? Customer segment ? Customer offer ?
© INSEAD – p 11
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 ?
© INSEAD – p 12
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
© INSEAD – p 13
Competing in Business Models: M&S vs ZARA
Brief introduction to fashion industry Business purpose ? Customer segment ? Customer offer ? Supply process ?
© INSEAD – p 14
Classic textile design process:
Creative
Design
Preliminary
Designs
Final
Product
Design
© INSEAD – p 15
ZARA design process:
Creative
Design
OUTSOURCE
and
SCAN
Preliminary
Designs
COPY
and
SIMPLIFY
Final
Product
Design
ADAPT
and
OPTIMIZE
© INSEAD – p 16
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!!!
© INSEAD – p 17
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!
© INSEAD – p 18
Competing in Business Models: M&S vs ZARA
Brief introduction to fashion industry Business purpose ? Customer segment ? Customer offer ? Supply process ? Performance ?
© INSEAD – p 19
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”
© INSEAD – p 20
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
© INSEAD – p 21
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 22
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 23
Organizational Structure at ZARA
???
© INSEAD – p 24
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 25
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
© INSEAD – p 26
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
© INSEAD – p 27
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
© INSEAD – p 28
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
© INSEAD – p 30
Take-away #1:
ZARA = lean enterprise in fashion industry
© INSEAD – p 31
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
© INSEAD – p 32
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!!!
© INSEAD – p 33
Take-away #2:
business model life cycles (and « disruptive business
models»)
© INSEAD – p 34
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
© INSEAD – p 35
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 …
© INSEAD – p 36
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!!!
© INSEAD – p 37
Other take-aways:
© INSEAD – p 38
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 39
Competing On Business Processes & Models
M&S vs ZARA : back-up slides
Prof. Ludo Van der HeydenINSEAD
© INSEAD – p 40
Competing on Business Models: back-up slides
The emerging network model of the firm
© INSEAD – p 41
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]
© INSEAD – p 42
Business Model Revisited: The Network view
New Product/Process
Developt
Manufacturing Operations
Supply Chain
Operations
Partners’ Operations
Executive Committee
© INSEAD – p 43
Competing on Business Models: back-up slides
The emerging network model for the firm
Mass customisation in the automobile industry
© INSEAD – p 44
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
© INSEAD – p 50
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 51
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 52
Segmentation by business models:
the food industry
© INSEAD – p 53
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
© INSEAD – p 54
Industry segmentation by a single company :
the Accor Group in the hotel business
© INSEAD – p 55
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