How Canadian Companies Can Compete in Today's Economic ...
Transcript of How Canadian Companies Can Compete in Today's Economic ...
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
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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.
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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.
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.
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”
Kim and Mauborgne © Blue Ocean Strategy. ®UCSI Blue Ocean Strategy
Canada. All rights reserved.