Business Model Competition:

M&S versus ZARA

Class slides

Professor Ludo Van der Heyden

Gest D201 : Intro to Mangement &
International Commerce
March 2006

© INSEAD, p. 1
 Classic textile Business Process:
1 2 month lead time

Purchase
Design Raw Mat Mfg Dist Sell Discount

© INSEAD, p. 2
 Why is profitability in textile so low,
when margins are so high?

Perfect forecast:
Excess stock: Does not exist
Value loss due to in real life! Excess demand:
discount sales Value loss due to
when actual unrealised sales when
demand is lower actual demand is
than expected higher than expected

Expected Actual
Waste! Demand Demand
© INSEAD, p. 3
 Zara Business Concept
“Integrated” fashion delivery:
Fashion at low cost!!!

Low cost Fashion

ü Get it approximately right üStore experience
ü Reduce creative design üCopy fashion
ü Define a fast- response üInvolve the
process incl design customers and his
ü Finalise design knowing group/cohort
material supply constraint üCreate a
ü Optimise the process network/brand
ü Manage follow- up (next
batch) and customer flows

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 Zara Customer Offer: Lean and Focused

“Fresh/Fast” “Quality” Cost

ü Fast copying ü Raw material: medium

ü Low monetary cost
of leading styles ü Knit: poor
ü Fast delivery ü Look: grand!
ü Low time cost:
in own stores ü Customer satisfaction:
“the Zara experience”
ü Limited editions fashion at low price!

Flexibility: - /+

üLimited customer variety:

only what is on display –
and in limited choices
üBut every customer is participating
in the process:
helps determine the next batch
© INSEAD, p. 5
 Waste elimination at ZARA:
examples
ü Advertising: eliminated for not necessary in a
« pull » model; too slow anyway and our offer is
localised
ü Discount Sales: eliminated through quick response
& the strategy that we are always “below” demand
ü Design: largely out-sourced to the “market” and
replaced by active scanning – greatly facilitates
a“process-based organisation”
ü 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 6
Classic textile design process:
Final
Creative Preliminary
Product
Design Designs Design

ZARA design process:

Creative Design: constant SCANNING
Preliminary Designs: COPY and SIMPLIFY
Final Product Design: ADAPT and OPTIMIZE

© INSEAD, p. 7
 ZARA Business Process in full:
One week lead time!!!
Step 1 :
Scan fashion Designers PULL next
shows RM batch

Step 2: Simplify Step 3:

Purchase
hits & produce Final Design Mfg Dist
Raw Mat of next
library of designs
batch

Shopping
experience

Shoppers (and store mgers)

PULL next design (shape) &
designers adapt

© INSEAD, p. 8
 Why is profitability at ZARA so high,
when margins are so low: value???

Excess stock and unmet

demand are avoided by
stopping production when
Zara as a
market saturates
“Lean
Enterprise”

Expected Actual
Demand Demand
Small
batches
© INSEAD, p. 9
Comparing with Dell Supply Chain:
2 day lead time
Step 1 : Dell Customers
scans market & Comps « pull » RM
current offer Supply resupply

Simplify & Pick « Mfg »

design new Sell Dist
Comps
product offer (Assembly)

Customers
Select
Customers « pull »
product & supply chain
adapts

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 ZARA positioning
Product
High Some High
Process customisation customisation standardisation
High fashion
Manual
(Dior, Chanel, )
shop

Batch M&S
flow

Rigid Line
flow Mass
merchants

© INSEAD, p. 1 1
 Industrialisation:
Strategic value gained from positioning
Product High customisation High standardisation
Offer Low volume High volume
High unit margin Low unit margin
Supply High quality Low quality
Process
High fashion:
Flexible Out of price!
Process

M&S:
Rigid
ZARA Out of
Process
Fashion!

© INSEAD, p. 1 2
 Industrialisation:
redefinition of classic industry trade- offs
Product Offer
Supply High Medium Low
Process customisation customisation customisation 

Manual Chanel
shop

Batch ZARA M&S

flow
Mass
Continuous ?? ?  merchants
flow

© INSEAD, p. 1 3
 Auto Industry Dynamics:
the long road to mass customisation!!!
High custom Low custom
High unit margin Product Low unit margin
Process Low volume High volume

All mfgers at
Flexible the beginning
shop j
GM Multi-
brand
strategy l

Toyota Ford Model T

Rigid Just- in- time River Rouge
flow m plant k

© INSEAD, p. 1 4
 ZARA vs M&S summarized:
The «Lean» Entreprise (again)

ZARA: M&S:
THE LEAN ENTERPRISE THE “SOLUTION” SHOP
Clear FOCUS on one MULTIPLE &
customer type & on one SIMULTANEOUS GOALS
process prohibit clear focus
UNIQUE & EXPLICIT MULTIPLE & IMPLICIT
VALUE proposition VALUE propositionS
PREDICTABLE & CLEAR UNPREDICTABLE & FUZZY:
PROCESS to be improved no process to be improved
Strives for PERFECTION SATISFIED with reaching a
threshold performance
Seeks to ELIMINATE any TOLERATE a certain amount
form of WASTE of unavoidable EXCESS
Manages customer FLOWS Reacts to customers as a
sequence of events/TASKS

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 Industrial Process Life Cycle

ü Phase 1 : Result of many years of experience

LEARNING and PROBING with an innovative formula

ü Phase 2: DEFINING the Zara process &

IMPROVING process performance

ü Phase 3: Process improvement becomes more

difficult & LIMITS TO IMPROVEMENT APPEAR

ü Phase 4: Innovation then continues at the

INTERFACES (shopping experience, internet, …)

ü Phase 5: Process eventually OVERTAKEN (but when?)

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Disruptive technological change 1 : setup
Performance:
M&S quality
(RM, cut, fit, variety … )

ZARA quality: as perceived by

Ø M&S or « 50+ » ?
Ø « 1 6/24 » ?
Time

© INSEAD, p. 1 7
Disruptive technological change 2: disruption
Performance:
ZARA quality ZARA
(« freshness »)

M&S

M&S is overtaken
by a technology
they consider
« inferior » to
theirs!!!

Time

© INSEAD, p. 1 8
 Key Lessons

üProcess (in contrast to product) innovation

is an enormous weapon that can disrupt the
basis of competition
üDrive to mass customization, postponement,…
üShifts the diagonal of the product-process
matrix down

üMany new business models are built around

process excellence (Zara, McDonalds, Dell,
…)
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