[Nexus 7 (2013) General] sfhub:
There are zips and then there are ZIPS :)

It isn't the type of archive that is critical but the contents of the zip. Zip is just a generic archive format and can store anything.

The OTA zips include specific content. In particular they are

signed by google

include an install script to handle patching, replacing files, and setting up permissions

include an install utility to run the script

include individual patch files

include whole files if the patches would be too large

have a specific directory structure where everything is supposed to be located

The factory images are also delivered in an archive. They are first archived in a tar format, which just collects a bunch of files and doesn't compress. Then they are gzip'd which is a Gnu archiver which performs a similar job to zip, but uses a different format and algorithm. Within the original tar archive there is also a zip archive. That zip contains images of the kernel, recovery, rom, user and data partitions, but it doesn't include the aforementioned items that make a zip into an OTA-style zip.

The factory images are NOT meant to be flashed in recovery. Recovery will be expecting the stuff above that OTA-style zips have. If you try to flash the factory image, the first point of failure is the signature verification fails, because it isn't signed (and even if it were signed, it wouldn't be signed in the way recovery is expecting)

So what is the difference between flashing via Recovery and the OTA-style zip vs running flash-all and the factory image?

The OTA-style flash will go and examine each file it needs to patch to make sure it is stock JSS15R. It must do this because it doesn't have the complete KRT16O file, only a patch (difference between the JSS15R and KRT16O versions of the file) that only makes sense if applied to the original JSS15R file. Even if there is a one space difference in the file, the patch would fail.

Since the OTA-style patches files (in general) it will leave files you have added in place. In particular the files installed to keep root are left in place and so are apps, sounds, images, etc. you added to the ROM (/system) partition. So you ask why do you lose root? You don't lose the root files that were installed, they are neutered because at the end of the OTA-style install, it resets the permissions in all the directories to what they are supposed to be. This drops the special permissions you gave the root files to do their job. Also the OTA-style patch does not directly overwrite your recovery. Upon first boot, there is a script that runs which builds the new recovery using the installed kernel. This is why if you immediately (prior to reboot) run the SuperSU install script after the installation of the OTA-style update.zip, you can restore root and keep your recovery. The SuperSU install script replaces the script that builds the new recovery, with its own file. It also reinstalls and sets the permissions on the root files. So in effect, you have root and have prevented stock recovery from being installed over your custom recovery.

The Recovery that you use to run the OTA-style update.zip is just special program that boots up on the linux kernel and accepts certain actions. The source code for Recovery along with the kernel is published. People can easily replace Recovery with their own custom program and that is why you have custom recoveries.

The factory images on the other hand install through the bootloader. This is a low-level program similar to BIOS on PCs. It has more limited functions and the code is proprietary. It is harder to do custom bootloaders because the source code isn't published.

The bootloader has a more limited set of functionality and you communicate with bootloader using a different program called fastboot.

The bootloader expects the files you give it to be .img files or you can give it a zip archive full of .img files. These are not patches of files like the OTA. These are complete images to replace the existing partitions. It is like a Norton Ghost image (factory image style) of your entire hard drive vs an incremental backup (OTA-style) of just the files that changed.

Given they are full images, they will overwrite the partitions completely so anything you had on them before is wiped out and overwritten.

Also full images are always larger than OTA patch-style updates because they contain everything rather than just the changed file patches.

By default they use the -w option in the fastboot install instructions, which will wipe your user data as well, but you can remove the -w option and keep your user data, though there are always a small percentage of upgrades where it won't work to keep your user data (same with the OTA).

Anyway that is just a brief summary. There are many more details and nuances I didn't list.