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How Canadian Companies Can Compete in Today’s Economic Climate

A Study in Value Innovation in Canada

Presented by: Lise Dellazizzo, Managing Director, Blue Ocean Strategy Canada

A Look at the World Economic Picture

• Overview

• Europe

• Asia

• Commonwealth of

Independent States

• Africa and Middle East

• U.S.

Kim and Mauborgne © Blue Ocean

Strategy. ®UCSI Blue Ocean Strategy

Canada. All rights reserved.

Real Estate Trends

• Losing momentum in developed world

• Subpar economic growth result in restraint

• Cautious lending environment

Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy


Retail Trends

• South American retail opportunities

• Rising deposable incomes in China and India

• Promising growth in the Middle East and North Africa

• Consumer spending grew 1% in U.S.

• Modest increase in Canada

• Uncertainties slowed auto and durable goods growth



Energy

• Analysts projecting crude oil to average $106.80 a barrel in 2012, down from original forecast, a result of the deterioration in world GDP

• Fastest growth source of primary energy will be renewable energy, however fossil fuels will continue to be dominate energy source

• Worldwide energy consumption will grow 53% between 2008-2035; half of which will come from India and China



The Canadian Economy

• Canada’s output surpassed pre-recession levels in 2010, rebounding from ‘07-10 global financial crisis

• Inflation averaged 1.8% in 2010 • Solid growth in Q1, 2011;

contracted slightly in Q2 • Healthy job growth, however

consumer spending remained modest due to higher debts and rising gasoline prices

• Business spending remained strong; high commodity prices continue to generate investment in the resources sector



Canada’s Financial System

• Financial system remains healthy

• Assets at major banks continue to improve

• Corporate debt levels remain low

• Main concern is the high levels of debt carried by Canadian households relative to their disposable income



Future Trends

• Growth expected to 2% in 2012, down from 3.25% in 2010

• Unemployment rate is forecast to be 7.5%-7.75%

• Housing prices expected to decline slightly in 2012

• Interest rates may not change until summer of 2012

• Businesses have positive outlook for next year

• Strong demand for commodities will result in increased sales for companies in Western Canada

• Stable growth for rest of Canada • Sales outlook + expansion + improved

competitiveness = increased employment and investment across all regions



Key Risks to Canadian Economy

• Global sovereign debt; fiscal strains in Europe

• Current account imbalances could result in adjustments to exchange rates and other financial asset prices

• Household savings and fiscal consolidation required in deficit countries; greater domestic spending and exchange rate flexibility are required in surplus economies

• Low interest rate may trigger excessive risk taking

• Canadians could lose their ability to service their debt, if financial system was impacted



Innovation in Canada

• In innovation, Canada is “mid-level” globally being passed by China and South Korea and falling further behind U.S., Germany, Norway and Sweden in some areas

• Lack of investment in R & D, machinery, equipment and information and communications technologies have been contributors to becoming mid-level



Research & Development

• Low by international standards; ranked 15th in Gross Domestic Expenditure as a share of GDP, falling below the OECD (Organization for Economic Co-operation and Development) average

• Business R & D intensity was higher than the OECD average: Paper, lumber, information and communications technologies, manufacturing, wholesale and retail trade, finance, communications service industries, transportation and storage, utilities, real estate and business services



Capital Investment

• Key indicator of innovation is productivity growth

• Drivers of productivity growth are investments in machinery/equipment (M&E) and information and communications technologies

• Oil and gas extraction industry, finance, insurance, real estate have registered higher M&E than U.S.



Labour Productivity

• Currently, 24.5% of total population is over 55; 35.5% by 2031

• Annual growth in Canada’s labour productivity has been slowing

• Slow growth rate can be attributed to low investments in M&E and ICT capital

• Ranked 95th of 132 countries • Constraining future increase of

hours worked per capita; investments in M&E and ICT capital are critical for Canada to improve labour productivity to remain competitive



Management

• Quality of management is important contributor to innovation

• Canada’s managers are among world’s best, yet underperform compared to U.S.

• 1/3 of Canadian managers have a university degree compared to ½ in the U.S.



Business Innovation in Canada

• Canadian businesses invest less in innovation, resulting in subpar outcomes and lower productivity growth

• Expert panel on business innovation (9 CEO’s, 3 Professors, 6 high ranking executives) determined there were five criteria that influenced firms business strategies that were focused on innovation



Criteria for Focused Innovation

• Structural characteristics… company location …does the industry encourage innovation

• Competitive intensity …intense

pressure from competitors requires ongoing innovation

• Climate for new ventures…business

location and financing optimal for innovation

• Public Policies…Are they favourable? • Business Ambition….Degree of

entrepreneurship/ability to take risks within organization



How DO Canadian Companies Stay Ahead---- Create New Market Space

All industries in existence today

Market boundaries are known and accepted

Outperform the rival to grab a greater share of existing demand

Prospects for profit and growth is limited

All industries not in existence today

Market boundaries are not known and its potential not yet explored

Rules of the game are waiting to be set

Demand is created rather than fought over

Ample opportunity for growth that is profitable and rapid

RED OCEANS VS BLUE OCEANS

Competitive rules of the game are known



Impact of Creating Blue Oceans Study of business launches – 108 cases

12 (86%)

62%

39%

86% 21%

62% 38%

39% 61%

Business Launch

Revenue Impact

Profit Impact

Launches within red oceans

Launches for creating blue



RED OCEAN STRATEGY BLUE OCEAN STRATEGY

Compete in existing market space Create uncontested market space

Beat the competition Make the competition irrelevant

Exploit existing demand Create and capture new demand

Make the value-cost trade off Break the value-cost trade-off

Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost

Align the whole system of a firm’s activities with its strategic choice of differentiation and low cost

Value Innovation: The Cornerstone of Blue Ocean Strategy

A company’s strategic options are bounded by the environment.

The ideas and actions of individual players can shape the economic and industry landscape.

Value Innovation: An Alternative Strategic Logic

Value Innovation is about driving costs down while simultaneously driving value up for buyers and the company

• Cost savings thanks to the elimination or reduction of non essential value attributes

• Costs advantages due to economies of scale generated by high volumes and obtained thanks to a price which appeals to the largest market catchment

• Superior value obtained thanks to the raise and/or creation of value attributes that really matter to the mass of buyers

Costs

Value for the customer

Value Innovation

-

+

The obtainable benefits

How Do We Succeed in Blue Oceans?

Six Principles of BOS Formulation and Execution

Strategy Formulation

Principles

Strategy Execution Principles

Reconstruct

market boundaries

Focus on the big picture,

not numbers

Reach beyond existing demand

Get the strategic sequence right

Overcome key organizational hurdles

Build execution into strategy

Risk factor each principle attenuates

Search Risk

Planning Risk

Scale Risk

Business model risk

Organizational risk

Management Risk

A Canadian Blue Ocean Case Study



Background

• In 2006, Heikal Gani needed a suit for an important presentation

• Affordable suits were ill-fitting and designer suits were too expensive

• Felt there had to be a better way for men to find a great-fitting suit

• Along with his friend/classmate, Kyle Vucko, the two men created an initial business plan



Business Focus

• Business plan focused on making it easier for men to find a great-fitting suit regardless of location, body type and budget

• Shanghai, renowned for its tailoring would be manufacturing base

• 2007 launched Indochino.com



Indochino

• 2009 – one tailor had grown to fifty, requiring the need for its own manufacturing facility

• 2011 – 35 employees

• Sold over 17,000 suits in 60 countries

• Less than 4 years, grown from a student start-up to a global brand



Financial Overview

• Former president of Yahoo , Jeffrey Mallet helped fund first year

• ($700,000-$800,000) • Within two years, able to

achieve revenues in seven figures, tripling sales from previous years

• 2010 – Sales growth 245% • 2011 – A capital investment

group raised $4 million for continued operational expansion in Vancouver and Shanghai



Products and Services

• Custom-tailored apparel for men • Most suits priced under $500 • Line extensions include blazers,

shirts, outerwear and accessories • Lapels, vents, linings, pockets,

buttons are customizable • New collections released every

two weeks • Customers measure themselves

using online tutorial • Delivery of order is within three

weeks • If order is less than perfect,

Indochino will pay for local tailoring or remake the suit for free Kim and Mauborgne © Blue Ocean

Strategy. ®UCSI Blue Ocean Strategy Canada. All rights reserved.

Indochino’s Focus

• Delivers a high quality/high fashionable menswear line

• Lower end of the pricing spectrum

• Provides an alternative to the usual quality/designs available but at lower price points

• Customer made retailer vs. lower price point competition based on off-the-rack garments that are ill-fitting, requiring additional tailoring



Competition

• Indochino indirectly competes with well-known, high-end designers: Hugo Boss, Ermanegildo Zegna (price-point starts at $1000.)

• Indochino’s highest priced suit is $799

• Directly competes with labels such as Calvin Klein, Tommy Hilfiger, Ralph Lauren

• Their mid-range suits are comparable to Indochino’s highest priced suit ($799)

• Lower-end competitors include H&M and Zara (“fast-fashion retailers”) compete with Indochino’s lower priced suits, but these retailers suits of poorer quality



The Brand

• Brand’s reputation can be most critical key competitive factor in men’s apparel industry

• However, styles shape whether a brand is traditional or fashion-forward

• Price is intertwined with quality of fabric

• Location of retailer’s store/number of stores also shape a brand’s reputation



Margins

• As cost fluctuates with market conditions, margins can rise/fall depending on inventory levels

• Successful brands understand how the markets operate and insures that value to the buyer remains constant while reducing overall production costs



Fashion Industry’s Customer Groups

Fashion industry is divided into five segments:

• Haute Couture - Giorgio Armani Privé, Givenchy, Christian Dior

• Luxury - Dolce & Gabbana, Prada, Gucci

• Affordable Luxury - Hugo Boss, Brooks Brothers, John Varvatos

• Mainstream - American Eagle, Abercrombie & Fitch

• Discount – Target, Wal-Mart



Existing Customer Groups

• Socioeconomic status allows these five existing customer groups to be further segmented into fifteen segments

• Three of these can be applied to Indochino’s strategic focus:

1. Function Fashion Seekers - Indochino initially targeted young men who desire high fashion garments, but who do not yet have the income

2. Budget Image – Young men with a low budget, but high sense of image

3. Brand Boy – Young men whom brand and image is very important



Strategy Canvas: Formal Menswear Eliminate Reduce Raise Create

Pain Points

• Young men had to settle for a low-quality, unfashionable, off-the-rack garment to satisfy budget

• Ill-fitting, requiring additional tailoring

• Process of purchasing a suit undesirable - time consuming

• Location of stores



Choosing a store

Choosing a suit

Purchase Tailor Return Policy

Productivity X X X X

Simplicity X X X X

Convenience X X X X

Risk X X X X

Fun & Image X

Environmental Friendliness

Buyer Experience Cycle/Buyer Utility Map MEN’S SUITS

The

six

Uti

lity

Leve

rs

Buyer experience from decision to disposal

Choosing a store

Choosing a suit

Purchase Tailor Return Policy

Productivity

Simplicity

Convenience X

Risk X X

Fun & Image

Environmental Friendliness

Buyer Experience Cycle/Buyer Utility Map INDOCHINO

The

six

Uti

lity

Leve

rs

Buyer experience from decision to disposal

Indochino ERCC Grid

1. Eliminate 3. Raise

Stores

Locations

Inventory

Need for tailor

Quality

Ease of Shopping

Profile

2. Reduce 4. Create

Retail Price

Time to Customize

Delivery Time

Marketing

Fully Customized Virtual Store

100% Return Policy

Self Service Men’s Customized

Apparel Store

Indochino’s Value Innovation

• Indochino is an inclusive apparel company vs. being an exclusive brand retailer who are not readily available or affordable for young men

• Website focused on customized clothing, accessible no matter where one lived

• Customer could outfit themselves with the latest, high quality fashions affordably

• Achieved buyer utility at a lower cost

• Created an ingenious solution by responding to needs and captured a underserved non-customer market through value innovation



Canadian Innovation

• A number of other outstanding Canadian business success stories that demonstrate a true spirit of innovation and understanding of value innovation

• Companies who have done so embody the underlying principles of sustainable innovation, achieved by delivering exceptional buyer value and utility, by creating new solutions that reconstruct market boundaries and unlock a blue ocean of market opportunity



Visit Our Website

Go to:

blueoceanstrategycanada.comfor a downloadable copy

of the full report:

“A Study in Value Innovation - How Canadian Companies

Can Compete in Today’s Economy”



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