Case:

Spanish fashion retailer 10-15% return on sales 5 times the typical level in the sector Described as possibly the most innovative and devastating retailer in the world Unparallel speed (2-3 weeks) to get massive number (11, 000) of new designs to market the norm in the sector being 2,000 4000 designs each takes 5-10 months

Zara Business Concept

Integrated fashion system: Fashion at low cost Low cost
Focus on getting it approximately correct Define a fast process Offer massive amount of design Offer follow-up (next batch) and create customer flows

Fashion
Copy fashion Involve the customers and her group/cohort Store experience Create a network/brand

Zara Customer Experience

Fresh
Fast copying Of leading styles Fast delivery in own stores Limited editions

Quality
Look: fashionable! Raw material: poor/OK Knit: poor Limited variety: only what is on display

Cost
Low monetary cost Low time cost:

Difference 1 & 2. Faster, and More Products

Information
Every customer is participating in the process Collect information from every store Customer defines next batch

ZARA Business Process:

Classic Apparel Business Process

2-3 weeks!!!
Step 1:

Design

Purchase Raw Mat

Mfg

Dist

Retail Sales

Discount Sales

Scan fashion shows

Step 5: Designers pull next RM batch

9 months

Step 2: Simplify hits & produce many designs

Purchase Raw Mat

Step 3: Final Design of next batch

Mfg

Dist

Shopping experience

Step 4: Shoppers (and store mgers) pull next design (shape) & designers adapt

Demand is Difficult to Forecast

Predictions are usually difficult, especially about the future. Yogi Berra

Why is profitability in apparel so low, when margins are so high? Conventional Zara

actual

actual

forecast 1 year ahead of demand

Typical a few offering

forecast 1 month ahead of demand

Tons of offering

Where to Aim your darts?

Tech Trajectories: Capacity Demanded vs. Capacity Supplied

10,000

Industrial Process Life Cycle or Technology S-curve

Phase 1: LEARNING and PROBING with an innovative formula

1,000

Phase 2: DEFINING the process & IMPROVING process performance

Hard Disk Capacity (MB)
100

Phase 3: Process improvement becomes more difficult & LIMITS TO IMPROVEMENT APPEAR
B D C E

10

Phase 4: Innovation then continues at the INTERFACES (shopping experience, internet, ) Phase 5: Process eventually OVERTAKEN (but when?)

1 1975 1980 1985 1990

Year

Technology S-curve

Disruptive Technological Change 1: setup

Performance

Performance: (quality, cut, fit, variety

Time
Fashion show A few months later

Time

Disruptive Technological Change 2: disruption

Disruptive and Sustaining Technologies

Sustaining Technology Improves the performance of a product/service as judged by current metrics that evaluate satisfaction of mainstream customers Disruptive Technology Product/service actually perceived as worse, initially, as judged by current metrics that evaluate satisfaction of mainstream customers but actually perceived as better according to nonmainstream customers

Performance: ZARA

Industry standard
Premier companies are overtaken by a product they consider inferior to theirs!!!

Fashion show

A few months later

Time

Difference 3. User Innovation

Step 1: Scan fashion shows

User Innovation
Latest trend of innovation: user-centric innovation

Step 5: Designers pull next RM batch

Step 2: Simplify hits & produce library of designs

Purchase Raw Mat

Step 3: Final Design of next batch

Mfg

Dist

Users generally freely reveal their preferences Their preferences are a major feedstock for products developed E.g. many of the best innovation ideas in software are from Open source As Lerner and Tirole (2002) put it: Why should thousands of top-notch programmers contribute freely?

Shopping experience

Step 4: Shoppers (and store mgers) pull next design (shape) & designers adapt

They tend to be lead users: their experiences are ahead of others and they want improvement Why don`t use the sense of the most fashionable community? User-innovation communities can supplant in-house innovation

Summary
A great challenge to innovate in fashion: what is fashionable tomorrow is extremely uncertain By doing it faster, Zara reduces the risk of fashion has changed. By experimenting more and offering more varieties, Zara increases the chance of getting it right. By tapping both user innovation and in-house innovation for designers, Zara makes sure it leads innovation in all front. What is necessary: Innovation requires a culture that fosters risk taking, and a system that absorbs ideas within as well as outside the company and put them into products real fast.