Business Model Innovation

1
Business Model Innovation

• MS vs ZARA
• Gest D201 Case 4
• Spring 2007
• Prof. Ludo Van der Heyden
• INSEAD, Fontainebleau Singapore

2
Competing in Business Models MS 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

3
Competing in Business Models MS vs ZARA

• The fashion industry waste the impossibility
  of perfect forecasts

4
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
ExpectedDemand
Actual Demand
5
Classic textile Business Process 12 month lead
time
Purchase Raw Mat
Design
Mfg
Dist
Sell
Discount
6
Competing in Business Models MS vs ZARA

• Brief introduction to fashion industry
• Business purpose ?

7
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

8
Competing in Business Models MS vs ZARA

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

9
Zara Customer Segment
Low cost fashion for the 16 to 24 year olds
Low cost
Fashion

• 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

• Respond to what customers want create a
   demand  chain
• Copy trendy fashion fast
• Create a store experience
• Create a network/brand

10
Competing in Business Models MS vs ZARA

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

11
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 ?

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 choices
• But every customer is participating
• in the process
• helps determine the next batch

13
Competing in Business Models MS vs ZARA

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

14
Classic textile design process
Final Product Design
Creative Design
Preliminary Designs
15
ZARA design process
Final Product Design ADAPT and OPTIMIZE
Creative Design OUTSOURCE and SCAN
Preliminary Designs COPY and SIMPLIFY
16
ZARA Supply Process in full 5 day lead time!!!
Step 1 Scan fashion shows
Step 3 Designers  pull  next RM batch
Step 2 Simplify  hits  produce library of
designs
Step 3 Final Design of next batch
Purchase Raw Mat
Mfg
Dist
Shopping experience
Step 2 Shoppers (and store mgers)  pull  next
design (shape) designers  adapt 
17
Comparing with Dell Supply Chain 2 day lead
time, but no on-line design!
Step 3 Customers  pull  RM resupply
Step 1 Dell scans market current offer
Comps Supply
Simplify design new product offer
Pick Comps
 Mfg  (Assembly)
Sell
Dist
Customers Select
Step 2 Customers  pull  product supply chain
adapts
18
Competing in Business Models MS vs ZARA

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

19
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
Zara as a Lean Enterprise
Actual Demand
ExpectedDemand
Small batches
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
  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

21
Competing in Business Models MS vs ZARA

• Brief introduction to fashion industry
• Business purpose ?
• Customer segment ?
• Customer offer ?
• Supply process ?
• Performance ?
• Core competences organizational structure ?

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

23
Organizational Structure at ZARA
???
24
Competing in Business Models MS 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

25
ZARA positioningIndustrialisationStep 1
standardisation!
Product Offer
Supply Process
High customisation
Some customisation
High standardisation
Manual shop
Batch flow
Rigid Line flow
26
ZARA positioningIndustrialisationStep 2 add
customisation!
Product Offer
Supply Process
High customisation
Some customisation
High standardisation
Manual shop
Batch flow
Rigid Line flow
27
Industrialisation Step 2 Strategic value
gained from positioning
Product Offer
High customisation Low volume High unit
margin High quality
High standardisation High volume Low unit
margin Low quality
Supply Process
Flexible Process
Rigid Process
28
IndustrialisationStep 2 redefinition of
classic industry trade-offs
Product Offer
Supply Process
High customisation
Medium customisation
Low customisation
Manual shop
Batch flow
?
??
Continuous flow
29
Competing in Business Models MS 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

30
Take-away 1 ZARA lean enterprise in fashion
industry
31
ZARA vs MS summarized The Lean and
 Focused  Entreprise
32
Process Focus summarized The Lean Entreprise
from Toyota
33
Take-away 2 business model life cycles (and
 disruptive business models)
34
S-curve business model life cycles
Bus Model Performance
?Maturity settles in
?Competition shifts to process features cost,
quality, speed
?Limits to improvement appear
?Probe learn
? Dominant design emerges (ind standard)
Improvement Effort
35
Disruptive business model change setup
Performance MS quality (RM, cut, fit, variety
)
? A world champion approaching maturity

• ? While customers change MS quality as
  perceived by
• ? MS or  50  ?
• ?  16/24  ?

Time
36
Disruptive business model change disruption
Performance ZARA quality  freshness 
ZARA
MS
? MS is overtaken by a competitor they view as
offering a product of  inferior  quality to
theirs!!!
Time
37
Other take-aways
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

39
Competing On Business Processes Models

• MS vs ZARA back-up slides
• Prof. Ludo Van der Heyden
• INSEAD

40
Competing on Business Models back-up slides

• The emerging network model of the firm

41
Classic Business Process Linear Chain view
Logistics, Dist Sales
R D
MFG

• RD 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

42
Business Model Revisited The Network view
New Product/Process Developt
Supply Chain Operations
Manufacturing Operations
Executive Committee
Partners Operations
43
Competing on Business Models back-up slides

• The emerging network model for the firm
• Mass customisation in the automobile industry

44
Auto Industry Dynamics the long road towards
mass customisation
High custom High unit margin Low volume
Low custom Low unit margin High volume
Product
Process
Flexible Shop/ Garage
Rigid flow
45
Auto Industry Dynamics standardising the
product and the process
High custom High unit margin Low volume
Low custom Low unit margin High volume
Product
Process
Flexible shop
Rigid flow
46
Auto Industry Dynamics process variety
Product
High custom High unit margin Low volume
Low custom Low unit margin High volume
Process
Flexible shop
Rigid flow
47
Auto Industry Dynamics further process
automation
Product
High custom High unit margin Low volume
Low custom Low unit margin High volume
Process
Flexible shop
Rigid flow
48
Auto Industry Dynamics introducing flexibility
into the process
High custom High unit margin Low volume
Low custom Low unit margin High volume
Product
Process
Flexible shop
Rigid flow
49
Auto Industry Dynamics the long road to mass
customisation!!!
High custom High unit margin Low volume
Low custom Low unit margin High volume
Product
Process
Flexible shop
Rigid flow
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, )

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

52
Segmentation by business models the food
industry
53
3x3 Bus Model Matrix in the Food Industry
Offer
High custom High unit margin Low volume
Some custom Avge margin Med volume
Low custom Low unit margin High volume
Process
Job shop
Batch flow
Continuous flow
54
Industry segmentation by a single company
the Accor Group in the hotel business
55
Industrialisation in the Hotel Industry ACCOR
S e r v i c e O f f e r
Yes ?
No ?
Luxury
Comfort
Minimal
Basic
Business Process
Job shop Flexible
Flow line Inflexible
56
Corporate transformation at Lufthansa
realigning around focused business units
57
Restructuring along (more) focused business units
The old Lufthansa Functional Organization
The new Lufthansa Group Service Holding
President
President
VP HR
VP Finance
VP Mktg
Technik
Passen ger
Catering
Cargo
HR
Technik
HR
HR
HR
Fin Mktg
Fin
Mktg
Cargo
Cargo
Cargo
58
Dynamics of focus planned transformation at
Lufthansa
Integration synergy
High
Old LH
Future LH ?
Low
Inter-mediate LH
New LH
Performance competitive in market segment
Low
High