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.
Real Estate Trends Losing momentum in developed world Subpar economic growth result in restraint Cautious lending environment
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 prerecession 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 15 th in Gross Domestic Expenditure as a share of GDP, falling below the OECD (Organization for Economic Cooperation 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 95 th 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 RED OCEANS VS BLUE OCEANS All industries in existence today Market boundaries are known and accepted Competitive rules of the game are known 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
Impact of Creating Blue Oceans Study of business launches 108 cases Business Launch Revenue Impact 12 (86%) 86% 21% 62% 38% Profit Impact 39% 61% Launches within red oceans Launches for creating blue
Value Innovation: The Cornerstone of Blue Ocean Strategy RED OCEAN STRATEGY Compete in existing market space Beat the competition Exploit existing demand Make the value-cost trade off Align the whole system of a firm s activities with its strategic choice of differentiation or low cost BLUE OCEAN STRATEGY Create uncontested market space Make the competition irrelevant Create and capture new demand Break the value-cost trade-off Align the whole system of a firm s activities with its strategic choice of differentiation and low cost 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 Costs - The obtainable benefits Cost savings thanks to the elimination or reduction of non essential value attributes Value Innovation Costs advantages due to economies of scale generated by high volumes and obtained thanks to a price which appeals to the largest market catchment + Value for the customer Superior value obtained thanks to the raise and/or creation of value attributes that really matter to the mass of buyers Value Innovation is about driving costs down while simultaneously driving value up for buyers and the company
How Do We Succeed in Blue Oceans? Six Principles of BOS Formulation and Execution Risk factor each principle attenuates 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 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 illfitting and designer suits were too expensive Felt there had to be a better way for men to find a greatfitting 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 greatfitting 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
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 offthe-rack garments that are ill-fitting, requiring additional tailoring
Competition Indochino indirectly competes with well-known, high-end designers: Hugo Boss, Ermanegildo Zegna (pricepoint 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 fashionforward 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-therack garment to satisfy budget Ill-fitting, requiring additional tailoring Process of purchasing a suit undesirable - time consuming Location of stores
The six Utility Levers Buyer Experience Cycle/Buyer Utility Map MEN S SUITS Buyer experience from decision to disposal 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
The six Utility Levers Buyer Experience Cycle/Buyer Utility Map INDOCHINO 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
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
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