a study in value innovation - blue ocean strategy · pdf filea study in value innovation ......

Analyst: Philip Labahn Consultant: Lise Dellazizzo Editor: Cathy Stewart-Beaulieu

A Study in Value InnovationHow Canadian Companies Compete in Today's Economy

Innovation in Canada

Table of Contents

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Living in Unpredictable Times: State of the WorldEconomy

The United StatesEuropeCommonwealth of Independent States(Former Soviet Republics)AsiaLatin America and the CarribeanAfrica and the Middle East

Industry TrendsGlobal Real Estate TrendsGlobal RetailEnergy

The Canadian EconomyPresent StateKey RisksFuture Trends

Innovation in CanadaResearch and DevelopmentCapital InvestmentLabour ProductivityManagementBusiness Innovation in Canada

Value Innovation: A New Market StrategyBlue Ocean Strategy

Featured Case Review: IndochinoFrom Student Start-up to Global Brand

Historical OverviewFinancial OverviewProducts and Services

The Men’s Fashion Industry

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Table of Contents

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OverviewIndochino’s Strategic Focus

Buyer Pain Points with Formal MenswearBuyer Utility Map: Men’s SuitsBuyer Utility Map: Indochino

Major Industry PlayersOnline RetailersMid to High-Level RetailersLow-end RetailersTop Industry Brands: Formal Menswear

Indochino’s Blue Ocean StrategyKey Competitive FactorsWhat Indochino EliminatedWhat Factors were ReducedWhat Factors were RaisedWhat Indochino Created

Value PropositionAppendix

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Introduction

A multitude of shocks hit the international economy hard thispast year. Japan was struck by an earthquake while theexchange from public to private demand in the U.S. economystalled. The European Union encountered major financialturbulence and there was a major sell-off of risky assets in theglobal market. Despite this, advanced economies areexpected to continue to expand, albeit slower than expected.

Emerging economies such as Brazil and China are expected tohave strong growth, especially those that can counter theeffect on output of weaker foreign demand with less policytightening. Policy tightening is the practice of putting into placea wide range of administrative and regulatory measures thatare designed to reduce the attractiveness of short-termfinancial investments or reduce the extent of credit expansionassociated with reserve accumulation. Measures employedinclude raising interest rates and raising lenders reserverequirements.1

The International Monetary Fund’s (IMF) World EconomicOutlook (WEO) projects that global growth will be about 4%through 2012, from over 5% in 2010. Real GDP in theadvanced economies is projected to be 1.5% in 2011 and 2%in 2012. This assumes that European policymakers containthe crisis in the euro area and that volatility in the globalfinancial markets does not escalate. Emerging capacityconstraints and policy tightening is expected to lower growthrates in emerging and developing economies to about 6% in2012.2©2

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Living in Unpredictable Times: Stateof the World Economy

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Living in UnpredictableTimes: State of the World

There are two issues that could hamper economic growth. Thefirst is that policymakers in the euro area are unable to containthe crisis and that sovereign debt markets are impactednegatively. The second concern is that in the U.S. theeconomy will soften further through the risk of political impasseover fiscal consolidation, a weak housing market, rapidincreases in household saving rates, or deteriorating financialconditions. Either one of these outcomes would have severerepercussions for global growth.3

Growth in the U.S. slowed from an annual rate of 2.75% in thesecond half of 2010 to 1% in the first half of 2011. The recentdowngrade of the U.S. sovereign credit rating, rising tensionsin Europe, and the cautious recovery have deterioratedhousehold and business confidence while market volatility hasincreased. At the same time, weak job growth is holding backwages. U.S. economic growth is projected to average 1.5% to1.75% in 2011-12. Current U.S. unemployment is at 9.1% andis expected to remain high through 2012.4

Europe faces high public deficits and debt, lower potentialoutput, and growing market tensions that are hindering itsgrowth. Spreads have risen to new highs for bonds withelevated spreads even in economies that had not beenaffected thus far (Belgium, Cyprus, Italy, Spain, and to a lesserextent France). Global risk aversion, as measured by theChicago Board Options Exchange Market Volatility Index (VIX),recently surpassed levels reached at the onset of the Greek

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The United States

Europe

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debt crisis in spring 2010. Real GDP growth in the euro area isexpected to slow from an annual rate of about 2% in the firsthalf of 2011 to .25% in the second half, before rising to a bitover 1% in 2012. Real GDP growth in Central and EasternEuropean (CEE) economies will slow from 4.25% in 2011 toabout 2.75% in 2012.5

Commodity prices largely determine the economic fortunes ofmost of the large economies in the Commonwealth ofIndependent States (CIS), while foreign funding has beencrucial for growth in investment and consumption. Growth inRussia is projected to reach about 4.25% during 2011-12.Russia’s capital flows, which fueled credit, private demand,and growth before the crisis, have not yet returned because ofinvestors being wary of the political uncertainty in the run-up topresidential elections and the uninviting business climate. Inmost of the other energy exporting economies, growth isprojected to be average at 4.5% as energy prices declinesomewhat in 2012. Energy-importing economies, on average,are expected to expand at roughly the same pace as in 2010 at5%. Overall, the CIS region is vulnerable to occurrences fromthe rest of the world, as was seen during the economiccollapse during the global financial crisis.6

Growth in Asia remains strong, although it is stalling withemerging capacity constraints and weaker external demand.In China, growth will average 9% to 9.5% during 2011-12, lessthan the average of 10.5% during 2000-07, because of

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Commonwealth of Independent States(Former Soviet Republics)

Asia

Living in UnpredictableTimes: State of the World 3


ongoing policy tightening and a smaller contribution from netexternal demand. Also, property price inflation and creditgrowth have softened from recent record levels. In India,growth is forecast to average 7.5% to 7.75% during 2011-12.In the newly industrialized Asian economies growth is expectedto slow from almost 8.5% in 2010 to just over 4.5% in 2011-12.In Japan, the economy is expected to contract by .5% this yearwith growth forecasted to be 2.25% in 2012. Overall, growthis projected to slow but remain strong and self-sustained,assuming that the global financial tensions do not escalate.7

South America has benefited from trade and easy externalfinancing conditions. Credit growth is high, inflation is near orabove the upper target range, and current account deficits arewidening despite supportive commodity prices. South Americais projected to expand by 4.5% in 2011 and slow down toabout 4% in 2012, with output being above potential. Thereliance in South America on capital flows to finance currentaccount deficits has increased the region’s susceptibility to asudden turnaround in investor sentiment. Thus, it will beimportant to monitor potential financial sector vulnerabilities inorder to contain the buildup of excessive leverage and avoidboom-bust credit cycles.8

The African region is growing at rates close to their pre-crisisaverage. In Sub-Saharan Africa Real GDP is expected toaverage 5.25% to 5.75% during 2011-2012 owing to theirlimited integration into global manufacturing and financialnetworks. Middle-income countries, that are more integrated

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Latin America and the Caribbean

Africa and the Middle East

Living in UnpredictableTimes: State of the World 4


globally, have yet to fully recover from the impact of thefinancial crisis. In South Africa, the largest economy in theregion, Real GDP is projected to be 3.5% during 2011-12where growth will be driven by private consumption and lowinterest rates. Growth amongst oil exporters in the Middle Eastand Northern Africa is expected to reach about 4% in 2012while oil importers are only projected to grow 2.5%. Politicalturmoil has seen risk premiums rise and private financing andtourism receipts fall with any intensification of the political crisisexacerbating the economic plight of the region.9

Residential real estate markets in much of the developed worldare losing momentum. Uncertainty over global economicprospects along with rising food and fuel prices and steadylevels of high unemployment are keeping potential buyersaway from the market despite accommodative monetarypolicies. Also, a continuing oversupply of housing as well astight credit conditions is reinforcing the downward pressure onsales and prices in a number markets globally.10

According to Scotiabank Global Economic Research, a markedimprovement in housing affordability, particularly in thoseregions suffering large valuation declines in recent years, willeventually put a firmer floor under prices and underpin agradual turnaround for the sector. However, with the projectedsubpar economic growth among advanced economies, bothhousing borrowing and spending will be restrained. Also, agenerally more cautious lending environment will hold back thepace of recovery.11

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Industry TrendsGlobal Real Estate Trends

Industry Trends 5


Industry Trends

According to A.T. Kearney’s 2011 Global Retail DevelopmentIndex (GRDI) South America has made the biggest jump inpotential retail opportunities due to a large and mostly urbanpopulation, surging retail sales and significant investmentsplanned for the upcoming Olympics and World Cup. As aresult, Brazil is now one of the developing world’s mostattractive retailers.12

In Asia, particularly in China and India, consumers areincreasingly accepting global brands and are becoming morediscerning in their tastes, a result of rising disposable incomesand are becoming more discerning in their tastes. However,traffic to stores has yet to meet expectations. Prospects forSoutheast Asia remain bright, with increased domestic demandand exports, stabilizing retail sales and improving consumerconfidence.13

The Middle East and North Africa remains a promising retailgrowth opportunity despite political unrest. The regionrecovered quickly from the recession and consumerconfidence is growing. As well, disposable incomes are high,the population is young and the middle class is growing. InEurope, Russia is expected to become Europe’s largestconsumer market with rising disposable incomes and anexpanding middle class.14

In the U.S., real consumer spending grew only at a 1%annualized pace in the 2011 summer. However, consumershave been spending aggressively as their personal savings

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Global Retail

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Industry Trends

rate has decreased 0.8%-pt during the same time.15 InCanada, retail sales advanced at an annualized pace of 3.2%in the second quarter of 2011 and appear to moderate in thethird quarter. The uncertainties surrounding the economicoutlook are expected to limit the purchase of new vehicles anddurable goods more generally.16

Analysts project that Brent crude oil will average $106.80 abarrel in 2012. Prices from September 2010 to August 2011have averaged $97.57.17 Originally forecasts called for higheroil prices, however, the lower forecast for oil prices is a resultof a projected deterioration in world GDP.

According to the U.S. Energy Information Administration’sInternational Energy Outlook of 2011, renewable energy isprojected to be the fasted growing source of primary energyover the next 25 years. However, fossil fuels will still be thedominant source of energy. According to the report, renewableenergy use will rise from 10% in 2008 to 15% in 2035.18

Overall, worldwide energy consumption is projected to grow 53percent between 2008 and 2035, with half of the growthcoming from India and China. As mentioned, renewableenergy is the fastest growing source, projected to increase 3%a year, while natural gas is projected to grow 2.6%, nuclearpower 2.4%, and coal 1.9%.19

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Energy

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In 2010, the Canadian economy’s aggregate output surpassedpre-recession levels, signaling Canada’s ability to reboundfrom the 2007-2010 global financial crisis. At the same time,total CPI inflation averaged 1.8% in 2010, with 2% being thetarget.20

The first quarter of 2011 saw solid growth. Canada’s economycontracted slightly in the second quarter, partly as a result ofdisruptions to auto production arising from Japan’s tragedy,and partly because exports plunged in reaction to Alberta’swildfires, weak U.S. demand and the strong Canadian dollar.There was healthy job growth while consumer spendingremained modest due to elevated debts and rising gasolineprices. Business spending remained strong, as highcommodity prices continued to generate investment in theresources sector.21

The Canadian financial system remains healthy. The quality ofassets at Canada’s major banks has continued to improve inrecent months. Also, corporate debt levels remain at lowlevels. The main source of concern domestically continues tobe the high levels of debt carried by Canadian households inrelation to their disposable income.22

A threat to the Canadian economy is global sovereign debt,with the principal risk being the fiscal strains in Europe. Theproblems in Europe could trigger a sharp re-pricing of creditrisk for other governments with high debt burdens. If this©2

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The Canadian EconomyPresent State

Key Risks

The Canadian Economy 8


The Canadian Economy

happens, it could cause losses at financial institutions andincrease the funding costs of banks around the world.23

Another risk to the Canadian economy is that large currentaccount imbalances will be resolved in a disorderly manner.As a result, sharp adjustments to exchange rates and otherfinancial asset prices could occur. Ideally, an orderlyresolution of these imbalances would require a timely andsustained rotation of global demand. That is, increasedhousehold savings and fiscal consolidation are needed indeficit countries, while greater domestic spending and moreexchange rate flexibility are required in surplus economies.24

The low interest rate environment in major advancedeconomies may fuel excessive risk taking. The additional riskcould lead investors to take on exposures that they may not beable to manage if macro-financial conditions become morevolatile. Canada also has a high level of household debt andtherefore is at risk if there were to be an impact on the financialsystem as whole. Canadians could lose their ability to servicetheir debts.25

Growth is forecast to go from an average of 3.25% in 2010 to2% during 2011-12 as a result of ongoing fiscal withdrawal anddowndrafts from the U.S. slowdown. The unemployment rateis forecast to be between 7.5% and 7.75% during 2011-12.26

Housing prices rose sharply in the past year, but havestabilized in recent months and are expected to decline slightlyin 2012 as demand moderates in response to tighter mortgage

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Future Trends

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rules. The Bank of Canada believes that interest rates will risein the longer term, and, according to the Bank of Montreal,rates will not change until summer 2012. Analysts predict thatCanada’s higher interest rates and fiscal position comparedwith the U.S., alongside firm commodity prices, should keepthe Canadian dollar trading moderately above parity againstthe U.S. dollar through 2012.27

According to the Bank of Canada’s Business Outlook Summer2011 Survey, businesses remain positive about the outlook forthe next 12 months, despite modest expectations for U.S.economic growth. Indicators of future sales and investmentare moderately higher, and intentions to hire have becomemore widespread. The unemployment rate has improved froma high of 8.7% in August 2009 to 7.3% in August 2011.28

Firms in Western Canada expect sales to increase over thecoming year because of strong demand for commodities.Firms elsewhere in Canada expect stable growth. Accordingly,this sales outlook, together with efforts to expand and toimprove competitiveness, is underpinning plans to increaseemployment and investment across regions and sectors.Inflation expectations are essentially unchanged and continueto be concentrated in the Bank’s inflation-control range of 1 to3 percent.29

Canada is a mid-level country in the global innovation racehaving been passed by the emerging economies of China andSouth Korea in some categories and falling further behindcountries such as the United States, Germany, Norway and

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Innovation in Canada 10


Sweden according to Canada’s Science, Technology andInnovation Council. A lack of investment in research anddevelopment, machinery and equipment, and in informationand communications technologies amongst others hascontributed to Canada becoming a mid-level innovator.

Canada’s research and development expenditures performedby businesses in Canada are low by international standards.Canada is ranked 15th in terms of Gross DomesticExpenditure on R&D as a percentage share of GDP, fallingbelow the Organization for Economic Co-operation andDevelopment (OECD) OECD average. However, manyCanadian industries exceeded the OECD average. BusinessR&D intensity higher than the OECD average was performedin the paper, lumber and related industry; information andcommunications technologies (ICT) manufacturing industry;wholesale and retail trade as well as finance andcommunications service industries; transportation and storageindustries; utilities; real estate and business services (includingR&D and information technology (IT) services) industry.30

Productivity growth is a key indicator of a country’s innovationpursuits. Two important drivers of productivity growth areinvestments in machinery and equipment (M&E), andinvestments in information and communications technologies.Over the period 2000 to 2007, in comparison with the UnitedStates (U.S.), M&E investment intensity in Canada has beenless than three quarter of U.S. levels and ICT investmentintensity was less than half of U.S. levels. However, the

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Research and Development

Capital Investment

Innovation in Canada 11



Canadian oil and gas extraction industry and finance,insurance, real estate and management of companies industryhave registered higher M&E intensities than their U.S.counterparts.31

In advanced economies like Canada, the value created perhour of work allows for a business to pay growing wages.However, Canada’s population is aging, with individuals over55 now constituting 24.5% of the total population; a numberthat is projected to climb to over 35.5% by 2031.32 Currently,annual growth in Canada’s labour productivity (output per hourworked) has been slowing and has been less than 1 percentfor most of the last decade. The slow growth rate can beattributed to low investments in areas such as M&E and ICTcapital. In terms of growth in labour productivity, the InstitutEuropeen d’Administration des Affaires (INSEAD) rankedCanada 95th of 132 countries. The International Institute forManagement Development (IMD) in Lausanne, Switzerlandranked Canada 45th of 58 countries. Finally, among 33advanced economies in the IMD standings, Canada’sproductivity ranks 24th.33 Because of the demographic ofCanada’s aging population constraining the future increase ofhours worked per capita, investments in M&E and ICT capitalare critical in order for Canada to improve labour productivity inorder to remain competitive.

Another important contributor to innovation is the quality ofmanagement. According to research done by the Institute forCompetitiveness & Prosperity, at the plant level, Canada’s

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Labour Productivity

Management

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managers are among the world’s best. Canada’s managementare leaders in implementing specific techniques in the area oflean manufacturing and are solid performers in effecting goodperformance management. However, compared to the UnitedStates, Canada under performs, especially in the area ofpeople management. The United States excels at thewillingness of managers to keep and promote high performersand with their ability to deal with poor performers.Furthermore, in Canada, just over a third of managers have auniversity degree, compared to half in the U.S.34

Overall, Canadian businesses invest less in innovation inputsthan many other peer countries. As a result, Canada’sinnovation outcomes are subpar and have resulted in lowerproductivity growth compared to their counterparts. Canada’slack of innovation stems from Canadians’ attitudes towardgrowth and the risk-taking ability of its business people.According to an expert panel (comprised of 9 CEOs, 3Professors, and 6 high ranking executives) who prepared areport on business innovation in Canada for the Governmentof Canada, the principle influence on Canadian firms businessstrategies focused on innovation are based on the followingcriteria.35

Structural characteristics—In what sector of the economy isthe company located; are they in industries thatencourage/discourage innovation?

Competitive intensity—Is the pressure from competitors sointense that innovation is needed to maintain profitability?

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Business Innovation in Canada

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Climate for new ventures—Is the business's location andfinancing opportunities optimal for innovation?

Public policies—Are public policies favourable to innovation?

Business ambition—What is the extent of entrepreneurshipand drive in the organization and the ability to take the requiredrisks?

Although this approach to management and innovation mayappear to be the norm and in fact may produce desired results,there are other successful management strategies focused ongrowth and innovation which challenge commonly acceptednorms. Some have produced highly positive results. One ofthese is Blue Ocean Strategy.

Blue Ocean Strategy represents a significant departure fromthe status quo. This approach postulates that the sector of theeconomy a company is situated in has little to no basis onwhether or not that company should be encouraged toinnovate. That is, rapid growth is just as attainable throughdeclining and traditional markets as it is in newly innovativeindustries.

Instead of focusing on beating the competition, companies that

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Value Innovation: A New MarketStrategyBlue Ocean Strategy

Value Innovation: A NewMarket Strategy 14


embrace blue ocean strategies focus on making thecompetition irrelevant by creating a leap in value for buyersand their company. The aim of BOS is not to out-perform thecompetition in the existing industry, but to create new marketspace or a blue ocean, thereby making the competitionirrelevant.

Blue Ocean Strategy is concerned with value innovation, whichis the simultaneous pursuit of both higher value and lower costfor the buyer. Value without innovation tends to focus on valuecreation on an incremental scale, something that improvesvalue but is not sufficient to make the company stand out in themarketplace. Innovation without value tends to be technology-driven, market pioneering, or futuristic, often shooting beyondwhat buyers are ready to accept and pay for. Value innovation,on the other hand, places equal emphasis on both value andinnovation.

In this sense, value innovation is more than innovation. It isabout strategy that embraces the entire system of a company’sactivities. Value innovation requires companies to orient thewhole system toward achieving a leap in value for both buyersand themselves. This approach, which is the cornerstone ofBlue Ocean Strategy, is what underlies our featured case studyof Indochino.

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15Value Innovation: A NewMarket Strategy 15


In 2006, while attending university in Victoria, B.C., Heikal Ganiwas in need of a suit for an important class presentation. Afteran initial search, Heikal determined that the suits he was ableto afford were ill fitting and that the designer styles he preferredwere too expensive. Frustrated, he settled for a generic off-the-rack suit that required extensive (and expensive) tailoring.

Heikal determined that there must be a better way for youngmen to shop for menswear and, along with his best friend andclassmate Kyle Vucko, set out to develop an initial businessplan. The business developed focused on making it easier formen to find a great-fitting suit, regardless of location, bodytype, or budget. The pair then decided that Shanghai—a cityrenowned for its tailoring, would be their base formanufacturing.

In September of 2007, Indochino.com launched with an initialselection of about ten suits and shirts, with orders beinghandled by a single tailor and with Kyle and Heikal personallyinspecting each order. By 2009, one tailor had grown to fiftyand Indochino was in need of its own manufacturing facility.

Indochino now has thirty-five employees and has sold to over17,000 customers in 60 countries. In less than four years,Indochino has grown from a student start-up to a global brandfocusing on making men’s lives easier.

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Featured Case Review: IndochinoFrom Student Start-up to Global BrandHistorical Overview

Featured Case Review:Indochino 16


Featured Case Review:Indochino

Jeffrey Mallet, former president of Yahoo Inc., initially helpedfund Indochino. In their first year, Indochino’s first round offinancing amounted to between $700,000-$800,000. Withintwo years, and amidst an economic downturn, the companywas able to reach revenues in the seven figures for the firsttime, tripling sales figures from the previous year. The nextyear saw much of the same, with sales growing by another245%. Then in January of 2011, Madrona, a Seattle-basedcapital investment group, helped to raise $4 million in Series Afinancing for Indochino to secure their continued expansion oftheir operations in Vancouver and Shanghai.36

Indochino is a provider of custom-tailored apparel for men withmost of their suits being priced under $500. Options likelapels, vents, linings, pockets, and buttons are all fullycustomizable. Their product line also consists of blazers,shirts, outerwear, and accessories with new collections beingreleased every two weeks. To place an order, customers arerequired to measure themselves at home with Indochino’seasy-to-follow online tutorial. After submitting theirmeasurements a customer can expect that their order will bedelivered within three weeks. Indochino offers a 100% fitpromise. If an order is anything less than perfect, Indochinowill pay for local tailoring or remake the suit for free.

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Financial Overview

Products and Services

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The fashion industry can be divided into five segments: hautecouture, luxury, affordable luxury, mainstream, and discount.Haute couture is the most expensive and exclusive segment.It tends to attract customers who are extremely wealthy andwho desire custom-made clothing. Men in this group wouldpurchase designer such as Giorgio Armani Privé, Givenchy,and Christian Dior. Luxury brands are a step down in quality,but still serve wealthy men. Designers catering to this marketinclude Dolce & Gabbana, Prada, and Gucci. Men who wish todress well but cannot afford the luxury menswear will acceptthe lower-priced affordable luxury brands such as Hugo Boss,Brooks Brothers, and John Varvatos. Following that is themainstream brands such as American Eagle and Abercrombieand Fitch who offer mass appeal and are affordable. Lastly,there are the discount brands that cater to the low-incomeconsumer and are offered at stores like Target and Wal-Mart.

These existing customer groups can be further segmenteddepending on their socio-economic status. According toExperian, a global credit information group, and Taylor NelsonSofres’ Worldpanel Fashion, men can be categorized intofifteen different segments.38 Of these fifteen segments thereare three that can be applied to Indochino’s strategic focus.

Indochino’s co-founder spoke of initially targeting young menwho desire high fashion garments, but who do not yet have the

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The Men's Fashion IndustryOverview

Indochino's Strategic Focus



income to incur such an expense. According to analysis byExperian et al. the initial target demographic for Indochinowould have been Functional Fashion Seekers, that is, fashionconscious young men who search out style at a reasonableprice. Indochino has targeted this demographic by releasingnew styles every two weeks that are fashionable. The value inthis proposition is that the garments are relatively low-priced,thus attracting this younger generation. These staples alsoattract the next demographic referred to as Budget Image.These are young men with a low budget and a high sense ofimage.

The last demographic that Indochino would target is BrandBoy, who are young men for whom brand and image iseverything. These young men are active fashion followers andspend a high proportion of their income on their image.Indochino caters to this demographic by again providingfashion forward clothing at a low cost. However, their brand isnot yet developed enough to fully entice this type of fashionconscious individual. Indochino will have to develop theirbrand awareness further in order to selectively target andattract these consumers.39

Young men in the market for a suit have traditionally had fewoptions other than to settle for a low-quality, unfashionable, off-the-rack garment in order to satisfy their budget. Despite theirrelatively meager budget, these buyers nonetheless desire afashionably cut suit, however most suits available at theirdesired price points are low-quality and likely not durable. Inaddition, off-the-rack suits are generally ill fitting and require

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Buyer Pain Points with Formal Menswear



tailoring which incurs another expense.

Many buyers find the process of purchasing a suit undesirable.The initial search and multiple fittings are time consuming.While some young men enjoy the experience, more often thannot buyers would prefer the purchase experience to be morestreamlined and efficient.

The location of the desired store is often a pain point withpotential buyers. For example, to purchase the latest fashion,a buyer typically has to travel to a first tier city in order to havean appropriate selection of menswear. While malls in smallercities offer brand names they are often lacking in the amount ofchoices that a large city would offer. Often times, a suit is alarge expense that requires careful consideration and so it isnot uncommon for the consumer to travel to a larger city thatoffers a better selection.

Blue Ocean Strategy uses a tool referred to as the Buyer UtilityMap to understand the different experiences buyers have witha product or service, from purchase to disposal. This tooloutlines six levers which have a profound impact on buyers’purchase experience. The map helps companies determinewhether their business, product or service offers a leap invalue to buyers. It identifies areas of the business, product orservice where buyer utility is blocked across the totality of thebuyer's experience.

The following chart illustrates the typical buyer experiencewhen purchasing a suit. In order to purchase a men’s suit, one

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Buyer Utility Map: Men's Suits



must follow a process that has remained unchanged for thelast couple of centuries. An individual will first select a store,followed by selecting a suit, and then purchasing said suit.Following this, the suit will be brought to a tailor for thenecessary adjustments. If, after these steps, the customer isleft unsatisfied with his purchase he will have to return the suit.

Each of these steps shown in Figure 1 brings its own uniqueset of pain points that detract from the buyer experience. Inchoosing a suit for example, a buyer may waste considerabletime first locating and choosing a store. Once a suit is chosen,the buyer may need to take it to a tailor to have it altered, ormay have to return the suit. Each of these steps takes up abuyer’s valuable time. These encumbrances are inconvenientand make the purchase experience overly complex.

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Figure 1: Buyer Utility Map: Men's Suits



There is also an element of risk involved when purchasing asuit. The buyer may not like the suit that he decides on afterall and there will always be an associated risk when bringingthe suit to a tailor. There is also the inherent risk ofencountering resistance when attempting to return a suit,especially once alterations have been made. All this adds upto a less than optimum buyer experience.

When looking at Indochino’s buyer utility map, it is apparentthat the company managed to address and alleviate many ofthe pain points shown in Figure 1.

Indochino realized that purchasing a suit online is faster andmore convenient than having to locate a store then physically

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Buyer Utility Map: Indochino

Figure 2: Indochino's Buyer Utility Map



getting out to select and purchase a suit. The buyer gainseconomies of scale and loses less productivity when shoppingonline. For the most part, the customization of Indochino’sapparel saves a buyer from a trip to the tailor. The process ismade simple as Indochino provides a ten-minutedemonstration video on how to properly measure oneself inorder to ensure a proper fit. Once completed, the buyer simplyenters his measurements and selects the available options onhis purchase.

Indochino also offers a 100% perfect fit promise in terms oftheir return policy. If a buyer receives a suit that requiresadjustments Indochino will offer a $75 alteration credit. If atailor deems the order unalterable, Indochino will remake it freeof charge. Finally, if the buyer is not 100% satisfied with theirorder, they may return it for a full refund. This all adds up to afar easier, simpler, faster and more convenient shoppingexperience for the buyer, in addition to the added benefits of atailored suit at a lesser price than comparable big-brandfashion names.

Overall, the retail fashion industry can be categorized intothree major groups:

Online retailers tend to tread around the average for the mostpart as the segment of online retailers covers most arrays ofmen and women’s clothing. They offer a superior onlineshopping experience and a high-level of ease when shopping,

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Online Retailers

Major Industry Players



as their online presence is their specialty. It should be notedhowever, that many online retailers also offer brick and mortarstores, which may in fact detract their focus from continuouslyinnovating their online retail environment. Not surprising,customization is also not part of their services mix and it is verydifficult for an online retailer to custom fit clothing.

Mid to high-level stores are typically higher priced, placeconsiderable emphasis on location, marketing, and overallquality of fabric and craftsmanship. Their cost tends to behigher to compensate for the better materials used inmanufacturing the garments. The location of stores isconsidered important based on access to high foot traffic andaccess to desired clientele. Marketing and publicity are alsoessential components deigned to attract the desired clientele.All these factors contribute to a higher cost model.

Retailers that fall into the low-level of the apparel industry tendto have many locations that are easily accessible. They aremarketed fairly well in order to attempt to cast a net over alarger potential client base. For the most part, their onlinepresence is sparse. The quality of materials and craftsmanshiptends to be on the lower end, and customization is non-existent. Retailers in this group opt for generic brands ormiscellaneous brand name garments staged for fast sales.Their costs are comparatively lower and their strategy is basedon large volume sales.

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Mid to High-Level

Low-end Retailers



Indochino’s strategy is a play in the formal menswear industry.The company is focused on delivering high quality and highlyfashionable menswear line at the lower end of the pricingspectrum. The company is successful in that they areproviding young men with an alternative to the usual qualityand designs available at the lower price points. Indochino’smain competitive advantage is that they are a custom maderetailer without the custom tailoring price tag. Lower pricedcompetition revolves around off-the-rack garments that areoften ill fitting and require additional tailoring. Indochino on theother hand, provides young men with the ability to purchase ahigher quality suit at an affordable price.

Indirectly, Indochino is competing with well-known, high-enddesigners like Hugo Boss and Ermanegildo Zegna. Typicallysuits for these retailers begin at $1,000, whereas Indochino’shighest priced suit is $799. The advantage of retailers likethese is that their brand spans across the globe, as does theirnetwork. For example, Hugo Boss has approximately 1,500mono-brand stores in more than 80 countries and reported netsales of $2.36 billion in 2010.40

Indochino is directly competing with well-known fashion labelsCalvin Klein, Tommy Hilfiger, and Ralph Lauren who all offermid-range suits that are comparable to Indochino’s higher pricepoint of $799. Again, these suits are off the rack and will mostlikely require tailoring for a proper fit. These designers alsooffer a worldwide presence and can be found at many namebrand department stores.

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Top Industry Brands: Formal Menswear



On the lower end of the spectrum in terms of price are low-price, fast-fashion retailers. H & M and Zara are two examplesof such retailers. Their advantage lies in their ability to quicklyturn out fashionable clothing at a low price. It is claimed thatZara is able to develop a new product and get it to stores in aslittle as two weeks, compared to the six-month industryaverage.41 Zara’s fast-fashion strategy has led them to havingoperations in 78 countries with a network of 1,723 stores andposting sales of $11.1 billion in 2010.42 According to LouisVuitton Fashion Director Daniel Piette, Zara is “possibly themost innovative and devastating retailer in the world."43 BothZara and H & M offer fashionable men’s suits that competewith Indochino’s lower priced garments. The main differencebetween the fast-fashion retailers and Indochino is that the fastfashion retail suits are of poor quality.

Indochino is an online retailer first and foremost. As such, theyhave no physical stores and only offer their own brand. Theirprice is on the low-end when compared to other retailersoffering formal menswear and their marketing budget is small,relying instead on word of mouth. As a result, they havecreated a business model that differentiates from the othertypes of apparel retailers in order to satisfy a select customerbase (fashion conscious young men) while managing to lowertheir costs but increase buyer value.

A brand’s reputation is often the most influential factor in themen’s apparel industry. With that said, there are many factors

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Indochino's Blue Ocean Strategy

Key Competitive Factors



that go into developing a brand’s reputation. The styles offeredby the brand can help shape their reputation, whether they area traditional brand or a fashion forward-looking brand. Price isanother important component in men’s fashion, often timesseparating the buying classes from one another, and is oftenintertwined with the quality of materials used.

Another important factor is the location of the retailer’s store,as well as the number of stores which carry this brandworldwide. Both these factors help shape a brand’s reputation.A brand’s influence may be more limited if, for example, it isonly visible and available in a few select locations, as opposedto most retail outlets worldwide.

An increasingly significant competitive advantage in theindustry is whether or not a designer brand has an onlinepresence. Having an online presence can also help withanother key competitive factor—ease of shopping and greateraccess.

Marketing plays an important role in brand awareness. A firmneeds a successful marketing team to create the brandawareness necessary to launch new clothing lines. Asuccessful marketing team ensures that all of the other keysuccess factors are clearly conveyed to potential buyers.

The margin that a designer is able to get on their materials iscritical to their profitability. As the cost fluctuates with marketconditions, margins can rise and fall depending on inventorylevels. Successful brands understand how these marketsoperate and are able to ensure that their costs do not get out of

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27Featured Case Review:Indochino 27


hand. This insures that value to the buyer is able to remainconstant while reducing overall production costs.

Indochino first had to select factors in the traditional businessmodel that could be eliminated. Indochino decided to eliminatethe traditional brick and mortar store and focus primarily as anonline retailer. By eliminating the number of stores andconversely the location of those stores Indochino was able toeliminate regular staffing costs as well as other costs inherentto the traditional business model. By custom making everyitem in China, Indochino was able to eliminate the high cost ofinventory. In doing so, Indochino was able to alleviate cashflow problems that occur in the apparel industry as a result ofan inventory requirement.

The factors that Indochino chose to reduce include marketingand the number of clothing lines offered. This enabled thecompany to provide a lower price point. Indochino’s marketingbudget is below the industry average, yet word of mouth andproduct referrals are driving demand. Another strong point isIndochino’s decision to focus solely on men’s formal wear.The company offers a select few clothing lines but deliver topquality for value. However, it should be noted that Indochinorolls out new product lines every couple of weeks to satisfytheir customers’ appetite for the latest fashions.

As previously mentioned, price is an important competingfactor in the fashion industry. Inodochino’s model allows thecompany to offer high quality garments at prices usually

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What Indochino Eliminated

What Factors were Reduced



reserved for inferior goods. They achieved this by deviatingfrom the traditional business model and eliminating traditionalfixed costs.

Indochino chose to focus on raising the overall quality of theirmenswear, their online presence, and ability to customize theirproducts at a lower price than industry average. The companywas able to raise the quality of their fabrics and craftsmanshipwhile still managing to keep costs relatively low by eliminatinga traditional storefront. The savings achieved from removingthis fixed cost allowed Indochino to purchase higher qualityfabrics usually reserved for higher priced lines.

Indochino was also able to raise their online presence throughan easy-to-use website that teaches buyers how to properlymeasure themselves. The ability to order custom tailoredclothing is not traditionally available through online retailers. Abuyer typically has to go to a tailor and have the clothingmeasured and made on site. Traditionally, this type of clothingis the most expensive and is usually reserved for the higherend designer lines. By raising this factor, Indochino was ableto attract buyers who would not normally be able to afford tailormade clothing.

Indochino created two factors that were, for the most part, non-existent in the formal menswear market. First, they created aself-service online men’s retailer. That is, they created a self-service line where a customer could order a tailor made suitand have it delivered to him, unwrinkled, in three weeks time.

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What Factors were Raised

What Indochino Created



Second, Indochino created a 100% guaranteed return policy.As an online retailer focusing on custom made apparel this is akey success factor that is establishing Indochino as the go-toonline retailer for tailor made clothing. Implementing this policyhelped reduce first time buyer anxiety and establishedIndochino as a retailer that can be trusted.

In order to create a blue ocean in the apparel industry, andmore specifically, the formal menswear industry, Indochino hadto eliminate, reduce, raise, and create key competitive factorsto open up uncontested market space. Figure 3 illustratesIndochino’s ERRC (Eliminate, Reduce, Raise, Create) Gridbased on Blue Ocean Strategy’s Four Actions Framework.

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Figure 3: Indochino's ERCC Grid



According to Kyle Vucko, co-founder and CEO of Indochino,what really sets them apart is that they are an inclusive apparelcompany. Indochino found that many retailers of menswearwere exclusive brands that were neither readily available noraffordable for young men. In order to address this issue theydecided to develop a website focused on customized clothingso that, no matter where a person lived, they would be able toproperly outfit themselves in the latest fashions. To furthersatisfy this goal, Indochino developed their company byproviding high quality, high style, and low priced garments thatcater to young men tired of the traditional norm. Indochinoachieved buyer utility at a lower cost by addressing many ofthe prevalent pain points in the men’s apparel industry. Theycreated an ingenious solution that responds to these needsand captured a previously underserved non-costumer marketthrough value innovation.

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Value Proposition

Figure 4: Indochino's Strategy Canvas: Formal Menswear



1 IMF World Economic Outlook page 162http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/EXTGBLPROSPECTSAPRIL/0,,contentMDK:22932054~menuPK:659172~pagePK:2470434~piPK:4977459~theSitePK:659149,00.html3 IMF World Economic Outlook page 164 IMF World Economic Outlook page 16175 IMF World Economic Outlook page 73766 IMF World Economic Outlook page 76807 IMF World Economic Outlook page 80828 IMF World Economic Outlook page 83889 IMF World Economic Outlook page 889210 IMF World Economic Outlook page 929611 Scotiabank Global Real Estate Trends June 201112 Scotiabank Global Real Estate Trends June 201113 The 2011 A.T. Kearney Global Retail Development Index page 314 The 2011 A.T. Kearney Global Retail Development Index page 915 The 2011 A.T. Kearney Global Retail Development Index page 121316 J.P. Morgan Economic Research Global Data Watch September 30, 201117 TD Economics: Canadian Retail Sales in July, September 22, 201118http://www.indexmundi.com/commodities/?commodity=crudeoil&months=1219 U.S. Energy Information Administration International Energy Outlook 201120 U.S. Energy Information Administration International Energy Outlook 201121 Bank of Canada Annual Report 2010 page 822 BMO Research North American Outlook September 20, 201123 Bank of Canada Financial System Review June 2011 page 124 IMF World Economic Outlook page 929325 BMO Research North American Outlook September 20, 201126 Bank of Canada Business Outlook Survey Summer 2011 Survey27 Bank of Canada Business Outlook Survey Summer 2011 Survey

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28 Bank of Canada Financial System Review June 2011 page 229 Bank of Canada Financial System Review June 2011 page 231 Bank of Canada Financial System Review June 2011 page 232 Innovation and Imagination in Canada page 133 Innovation and Imagination in Canada page 134 Canadian Food Retail February 2011 page 2135 Innovation and Imagination in Canada page 336 Canada’s Innovation Imperative page 1337 Innovation and Business Strategy—Why Canada Falls Short page 8338 Innovation and Business Strategy—Why Canada Falls Short page 8439 Douglas Magazine – Indochino Sews Up $4 million in Investment40 Hugo Boss Annual Report 2010, pages 100, 15041http://www.businessweek.com/globalbiz/content/apr2006/gb20060404_167078.htm?chan=innovation_branding_brand+profiles42 Inditex Consolidated Annual Accounts January 31, 2011 page 1443http://edition.cnn.com/BUSINESS/programs/yourbusiness/stories2001/zara/44 UK Fashion Segments – Fashion Market Research Data & Analysis45 UK Fashion Segments – Fashion Market Research Data & Analysis

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3333Appendix

www.blueoceanstrategycanada.comOther product and/or company names ued herein are trademarks oftheir respective owners. Reproduction prohibited without expresswritten permission of Blue Ocean Strategy Canada.

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