Disruptive Business Models
Disruptive innovation model, which explains why the world’s largest companies fail with the advent of new technologies, was named one of the most important for modern business. The author of this concept, Harvard Business School professor Clayton Christensen, who wrote the book “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (originally published in 1997), led Thinkers50 rating of the most notable business thinkers in 2011 and 2013 (Thinkers50, 2013). According to Christensen’s model, at the time the new technology occurs in the market, it is still very flawed, and by most of the parameters yields long-standing one, so the demand for it is small. Everything changes, when the innovation finds a buyer, who is ready to put up with the shortcomings inherent for new properties. Having such a buyer, it begins to evolve and improve, growing production volumes, and there comes a time, when it displaces the previously prevailing products or services. In other words, it becomes “disruptive” (Christensen, Raynor and McDonald, 2015). Thus, the disruptive innovation opens a new technological cycle, a new cycle of innovation business, because it is designed not to support existing and well-established core technology, and with it the strong well-established companies in this market, but is designed to completely change the technology, fundamentally undermine the market (Adner and Zemsky, 2005).
For example, the direct sales model of Dell with a completely new logistics and efficiency of business operations enabled it to displace from the market such giants as Compaq and Hewlett-Packard. The company’s strategy was a typical case of disruptive strategy focused on the lower sector of the market. It was believed that these computers were of poor quality. Even for students, who received a scholarship at Harvard University, it was necessary to obtain a special permit from authorities to spend part of the scholarship on the Dell’s computer, rather than the more respectable brand. Currently, the most of the divisions of the Harvard Business School are equipped with Dell’s computers (Habtay, 2012).
Another example is the inexpensive food and fast service at McDonald’s restaurants and expensive debt servicing. The fast food industry is an example of mixed disruptive technologies. Inexpensive food and fast service resulted in the emergence of a wave of consumption growth in the lower sectors of the food market. Recently, fast-food restaurants are steadily moving in the upper sector and begin to displace expensive restaurants (Grewal, 2014).
Wal-Mart is a great example of radical innovation business model. At some point, the company realized that a large segment of American consumers was in need of cheap products of good quality. To effectively deliver value to consumers on the motion, it was required to change the entire business model of traditional retail outlets. The traditional business model involved placing a shop in the city and selling a limited number of products with a significant premium for the service. Wal-Mart’s strategy was to apply a business model to supermarket retailers and its association with improved supply chain that dramatically reduced costs. The company opened a huge shopping area and offered a wide range of products at discounted prices (but with less maintenance) and slash prices. This new application of business model has created one of the most successful companies in the world (David, 2011).
Gap’s Approach to the Apparel Manufacturing and Retail Business
Gap (GPS) is a US company, one of the largest US retailers of clothing. The company has a chain of stores, which specializes on retail sale of clothing. Stores’ chain by magnitude is the second largest in the world. The properly structured business model is the key to success of the company. Thus, the company focuses on the satisfaction of the interests of its clients. Brand is the heart of the family and culture (Reuters, 2016).
The company launches the majority of its new apparel twice a year, namely the spring and fall fashion seasons take place. In order to make such launches, it takes about nine months of integrated development, manufacturing and marketing. After that, new stuffs are publicized to the market on fashion runways and evaluated by a group of leading fashion designers and business managers. Third World producers are involved to the process only of small batches. Then, items are transported to centralized units, evaluated again, altered and finalized. Therein, big orders are positioned with these producers for manufacturing at extra-low per unit cost. Local warehouses, being reasonably nearby retail outlets, are used to distribute and store orders. Retail point-of-sale approaches are arranged and outlet layouts planned. Stocks’ stages, defined centrally, are transported to points-of-sale. Afterward, the advertising and selling procedures start in full force to promote product offerings to potential clients (Doiron, 2015).
Zara’s Approach to the Apparel Manufacturing and Retail Business
Today, Zara stores are located in many countries around the world and enjoy incredible popularity. Zara designers develop about 18,000 new designs annually, and today, there are more than 2,000 stores of the Spanish brand in the world (Doiron, 2015). Zara boutiques have always attracted the attention of buyers with friendly sales consultants and widely represented different types and styles of clothing. Great design and excellent service make the motto of the company, which is doomed to success (Búrca, Fletcher and Brown, 2004).
Zara has a well-established mechanism of work of the strict observance of a single rhythm. Zara makes everything by itself, from modeling to sales of goods, only a small part of the work charging to contractors, while competitors have all the exact opposite process. One of the main competencies Zara has is spent time to enter the market with new lone items. The company needs approximately two weeks in order to create an idea and launch the product. That is why the company is known to be “fast fashion” giant. However, the crucial message is about the accuracy on understanding customers’ desires and needs (Inditex, 2015). The next competency concerns Zara’s system of three levels of commercials, namely the design team, regional commercials and store managers. There are four designers involved in the development of line items, who are given the decision authority, including independence in setting designs, ordering fabric, manufacturing quantities and pricing. Regional managers support design teams by coordinating store managers and clients across particular geographic paths. Store managers choose the inventory they consider will sell in retail outlets, complete through communicating with and perceiving clients (Doiron, 2015).
Zara is known to produce small runs in order to avoid inventories. The majority of its clothes are manufactured in Europe, Spain or Portugal, but not Third World countries. With almost zero marketing budgets, Zara prefers to attract customers creating friendly atmosphere in its stores. The company usually set an average of 15% lower prices in stores compared to rivals. Zara’s approach secret is that at low prices, the buyer does not have the feeling that he/she is in the second-class store. Zara prefers to invest in high-quality and expensive shop windows, which can be compared even with the storefronts of luxury brands like Dior and Prada (Sosa, 2014; Doiron, 2015).
Comparison of Gap’s and Zara’s Approaches
The similarity between two approaches is in low dependence on the production in Third World countries. In other aspects, companies are different. For example, Zara needs only two weeks to develop and idea and present new line items to the public, while creation process in Gap lasts up to nine months. Secondly, Zara’s designers have independence, while Gap has centralized subordination. Third, Zara has low levels of inventories, while Gap stores its product in warehouses before they will be placed in outlets. One more difference is in the advertising expenses, which vary between 3-5% for Gap and comprise only 0.3% for Zara (Doiron, 2015).
It is worth mentioning that fashion industry has faced different risks, namely changes in global transport expenses, which relate to oil prices, aging population and fashion misses. Due to the production in Spain and Portugal, Zara has low transportation costs to its local stores and spends money only to deliver clothes to international stores, while Gap produces its apparel worldwide and spends significant amounts for shipping. Due to the fast launch of new line items into the market, Zara follows upcoming fashion tendencies and offers its customers new products within very short period of time. At the time, when Gap has gross profit margin of 37.33% (YACHARTS, 2015) and this value is a little higher than average, Zara’s gross profit margin makes up 60.08% (YACHARTS, 2015). It means Zara is very effective in managing its business process. As for aging population trends, both companies should work on this issue.
Why Zara’s Approach Is Disruptive to the Other Industry Competitors?
Disruptive innovation concept focuses on target innovations, namely, the destruction of the competitive landscape, unlike the gradual, half radical and radical innovations, which describe the relative change in technologies and business models. Disruptive innovation can be a key source of growth and therefore the executive directors often seek to it (McGrath, 2010). However, for effective management of innovation, it is necessary to focus on internal sources of changes – in technologies and business models – and their relationships. The essence of regulation and binding changes in technology and business models comes down to how to create destruction, as well as the range of innovations that will ensure the company’s growth (Al-Debei and Avison, 2010).
Zara’s approach is disruptive, because it has invented the new business concept of fast fashion by making from scratch the idea and launching it into the market within only maximum two weeks. It has opened the new technological business cycle.
Moreover, today, a wide range of innovative fabrics is produced in the market for women’s clothing, which improves and facilitates our lives. The use of new technological materials provides a variety of materials structures with improved and new properties. The only predictions that are made in Zara refer to fabrics, purchased for sewing collections. Fabric, not color and style, is important. Another secret is that the company buys undyed fabric – colors and prints are invented in the process (Sosa, 2014).
In conclusion, it is worth noting that the development of innovation sphere is of particular importance that contributes to the transformation of scientific-technological developments, based on the results of basic and applied research to market goods with new consumer properties. Accordingly, innovations in the modern world are becoming more interesting and are considered not just desirable, but essential. In addition, the innovation in the production of goods and services is essential to the success of any enterprise, improvement of the quality of production, admiration and satisfaction of customer needs. Therefore, the organization of innovative activity is more general in nature and as a rule is applicable to the implementation of modern scientific and industrial activity (Hisrich, 2010).
Zara’s Business Model
Zara is in trend chasing business. Its concept of fast fashion involves reducing the time between the birth of the trend and its demonstration on the podium and the emergence of highly-stylish items in store. Zara is disruptive innovated company. Its business model is presented in Appendix A.
Adner, R. and Zemsky, P. (2005). Disruptive Technologies and the Emergence of Competition, The RAND Journal of Economics, 36(2), p. 229-254.
Al-Debei, M. M. and Avison, D. (2010). Developing a unified framework of the business model concept, European Journal of Information Systems, 19, p. 359-376.
Búrca, S., Fletcher, R. and Brown, L. (2004). International Marketing: An SME Perspective. New York: Pearson Education.
Christensen, Ch. M., Raynor, M. E. and McDonald, R. (2015). What Is Disruptive Innovation? Retrieved from https://hbr.org/2015/12/what-is-disruptive-innovation [Accessed: 5 February 2016]
David, F. R. (2011). Strategic management: Concepts and cases. New Jersey: Prentice Hall / Pearson.
Doiron, D. J. (2015). What Business Is Zara In? Richard Ivey School of Business Foundation.
Grewal, D. (2014). M: Marketing. New York: McGraw-Hill/Irwin.
Habtay, S. R. (2012). A Firm-Level Analysis on the Relative Difference between Technology-Driven and Market-Driven Disruptive Business Model Innovations, Creativity and Innovation Management, 21(3), p. 290-303.
Hisrich, R. D. (2010). International Entrepreneurship: Starting, Developing, and Managing a Global Venture. New York: SAGE Publications Inc.
Inditex (2015). Annual Report 2014. Retrieved from https://www.inditex.com/documents/10279/18789/Inditex_Annual_Report_2014_web.pdf/a8323597-3932-4357-9f36-6458f55ac099 [Accessed: 5 February 2016]
McGrath, R. G. (2010). Business Models: A Discovery Driven Approach, Long Range Planning, 43(2-3), p. 247-261.
Reuters (2016). Gap Inc. (GPS). Retrieved from http://www.reuters.com/finance/stocks/companyProfile?symbol=GPS [Accessed: 5 February 2016]
Sosa, R. (2014). Zara 87 Success Secrets – 87 Most Asked Questions On Zara – What You Need To Know. Aspley: Emereo Publishing.
Thinkers50 (2015). The Thinkers50 Ranking 2013. Retrieved from http://thinkers50.com/t50-ranking/2013-2/ [Accessed: 5 February 2016]
YACHARTS (2015). Gap (GPS). Retrieved from https://ycharts.com/companies/GPS/gross_profit_margin [Accessed: 5 February 2016]
YACHARTS (2015). INDITEX (IDEXF). Retrieved from https://ycharts.com/companies/IDEXF/gross_profit_margin [Accessed: 5 February 2016]
Test time Small batch
Time to market