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 / Fall 2005 / Issue 40(originally published by Booz & Company)


Format Invasions: Surviving Business’s Least Understood Competitive Upheavals

For a not-so-famous example, take Inditex, the European apparel maker best known for its major brand, Zara. In the mid-1990s, European fashion apparel was dominated by specialty brands that put out new lines of clothing each season, hoping to catch the eye of trend-conscious consumers. These firms were on a relentless treadmill, designing, sourcing, and distributing product for each season on an eight- to 12-month cycle. Although this was highly profitable if a firm’s seasonal offering “hit the market” — selling a good proportion of product at full retail price — such good seasons were invariably interspersed with weaker ones, when much of the product sold only at heavy markdowns. Since all players had essentially identical business formats, they competed to reduce manufacturing costs by sourcing from China, India, and other low-cost locales.

Zara took a wholly different approach. Management realized that the biggest cost in fashion apparel is not in production and distribution (fabric, cutting, stitching, shipping, etc.) but in the margin forgone in marked-down sales of unpopular product. As a result, Zara created a business format capable of delivering a design from sketch to shelf in six weeks or less, allowing its designers and merchants to observe trends and respond rapidly, rather than making educated guesses about what customers might want eight months in the future. This approach has its costs: Zara’s manufacturing facilities are located in relatively high-cost Spain. However, Zara sells around 80 percent of its product at full price, twice the percentage most competitors achieve. Confident that its product portfolio is mostly “hits,” Zara can price its product profitably at about 25 percent less than competing brands. The resulting extraordinary sales volumes have generated very attractive returns, fueling rapid expansion.

New formats often migrate; they jump across categories, customer segments, and geographies. Sam Walton borrowed Wal-Mart’s supercenter concept — general merchandise plus food — from France’s hypermarkets. Toys “R” Us transported the self-serve supermarket from groceries to toys. Southwest Airlines started in 1971 as an intrastate airline in Texas. Only in the last 10 to 15 years did Southwest break out from being a short-haul regional player to become a national force — and only within the past five to 10 years have airlines such as Ryanair and JetBlue successfully carried the Southwest format into markets without a similar point-to-point competitor.

Takeover: Capturing Demand
Time and time again, intruders in a wide variety of industries around the world have used the same tactics successfully to invade and take over existing markets. Invasions typically occur in four stages:

Stage I — Equilibrium. At the outset, incumbent-format firms serve their entire market. These firms play by variations on the same business rules, using largely the same approaches to product design, production, and marketing. Of course, each has its own slight distinctions in features, amenities, and pricing, and one or another company may tweak those to gain a temporary advantage. But these aren’t decisive, since each player quickly imitates the others’ worthwhile improvements.

This period can last for decades. U.S. supermarkets replaced neighborhood stores as the main purveyors of groceries in the 1950s. They lived in quiet equilibrium until Wal-Mart and the warehouse clubs finally invaded their markets with new formats in the 1990s.

Stage II — Intrusion. Most markets have a considerable amount of price-sensitive demand hanging around — both customers willing to change suppliers for a discount (“penny switchers”) and noncustomers willing to start buying if prices fall low enough. For a new-format intruder, these customers represent a very attractive startup market. They don’t value “frills”; they prefer a bare-bones offering at a lower price, and they don’t have much loyalty to incumbent brands. So the intruder tailors its initial offering to their preferences, stripping out amenities that the new format could otherwise provide, to reduce costs still further.

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  1. Clayton M. Christensen, Scott D. Anthony, and Erik A. Roth, Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change (Harvard Business School Press, 2004): A theory of disruptive success that partly, but not completely, meshes with the format invasion concept.
  2. Jeff Ferry, “Flextronics: Staying Real in a Virtual World,” s+b, Winter 2004: A Singaporean contract manufacturer emulates Toyota’s innovations. Click here.
  3. Victoria Griffith, “Welcome to Tesco, Your Glocal Superstore,” s+b, First Quarter 2002: Of the s+b retail case studies, the most relevant format-renewal example. Click here.
  4. Tom Hansson, Jürgen Ringbeck, and Markus Franke, “Flight for Survival: A New Business Model for the Airline Industry,” s+b, Summer 2003: More detailed view of the airline format invasion and its cost consequences. Click here.
  5. Art Kleiner, “The Next Wave of Format,” Deeper News, 2001: Manifesto about Internet and media formats as socially created, not technological, innovations. Click here.
  6. William Leach, Land of Desire: Merchants, Power, and the Rise of a New American Culture (Vintage, 1993): Early 20th-century format invasions among department stores, fashion merchandisers, and investment banks.
  7. Chuck Lucier, “Herb Kelleher: The Thought Leader Interview,” s+b, Summer 2004: The cofounder of Southwest Airlines explains the strategy underlying his airline’s cost advantage. Click here.
  8. Costas Markides and Paul Geroski, “Colonizers and Consolidators: The Two Cultures of Corporate Strategy,” s+b, Fall 2003: Cultural change for enabling resilience among incumbents. Click here.
  9. James Womack and Daniel T. Jones, Lean Solutions: How Producers and Customers Achieve Mutual Value and Create Wealth (Simon & Schuster, 2005): Wholesale Toyota-inspired manufacturing and service redesign.
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