A Study in Value Innovation
How Canadian Companies Compete in Today's Economy
Analyst: Philip Labahn Consultant: Lise Dellazizzo Editor: Cathy Stewart-Beaulieu
Innovation in Canada
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Table of Contents
Living in Unpredictable Times: State of the World
Economy
The United States
Europe
Commonwealth of Independent States
(Former Soviet Republics)
Asia
Latin America and the Carribean
Africa and the Middle East
Industry Trends
Global Real Estate Trends
Global Retail
Energy
The Canadian Economy
Present State
Key Risks
Future Trends
Innovation in Canada
Research and Development
Capital Investment
Labour Productivity
Management
Business Innovation in Canada
Value Innovation: A New Market Strategy
Blue Ocean Strategy
Featured Case Review: Indochino
From Student Start-up to Global Brand
Historical Overview
Financial Overview
Products and Services
The Men’s Fashion Industry
2
2
3
3
4
4
5
6
7
8
8
9
11
11
12
12
13
14
16
16
17
17
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Innovation in Canada
Table of Contents
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Overview
Indochino’s Strategic Focus
Buyer Pain Points with Formal Menswear
Buyer Utility Map: Men’s Suits
Buyer Utility Map: Indochino
Major Industry Players
Online Retailers
Mid to High-Level Retailers
Low-end Retailers
Top Industry Brands: Formal Menswear
Indochino’s Blue Ocean Strategy
Key Competitive Factors
What Indochino Eliminated
What Factors were Reduced
What Factors were Raised
What Indochino Created
Value Proposition
Appendix
18
18
19
20
22
23
23
24
24
25
26
26
28
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29
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31
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Innovation in Canada
Introduction
Living in Unpredictable Times: State
of the World Economy
A multitude of shocks hit the international economy hard this
past year. Japan was struck by an earthquake while the
exchange from public to private demand in the U.S. economy
stalled. The European Union encountered major financial
turbulence and there was a major sell-off of risky assets in the
global market.
Despite this, advanced economies are
expected to continue to expand, albeit slower than expected.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Emerging economies such as Brazil and China are expected to
have strong growth, especially those that can counter the
effect on output of weaker foreign demand with less policy
tightening. Policy tightening is the practice of putting into place
a wide range of administrative and regulatory measures that
are designed to reduce the attractiveness of short-term
financial investments or reduce the extent of credit expansion
associated with reserve accumulation. Measures employed
include raising interest rates and raising lenders reserve
requirements.1
The International Monetary Fund’s (IMF) World Economic
Outlook (WEO) projects that global growth will be about 4%
through 2012, from over 5% in 2010. Real GDP in the
advanced economies is projected to be 1.5% in 2011 and 2%
in 2012. This assumes that European policymakers contain
the crisis in the euro area and that volatility in the global
financial markets does not escalate.
Emerging capacity
constraints and policy tightening is expected to lower growth
rates in emerging and developing economies to about 6% in
2012.2
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Innovation in Canada
Living in Unpredictable
Times: State of the World
There are two issues that could hamper economic growth. The
first is that policymakers in the euro area are unable to contain
the crisis and that sovereign debt markets are impacted
negatively. The second concern is that in the U.S. the
economy will soften further through the risk of political impasse
over fiscal consolidation, a weak housing market, rapid
increases in household saving rates, or deteriorating financial
conditions. Either one of these outcomes would have severe
repercussions for global growth.3
The United States
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Growth in the U.S. slowed from an annual rate of 2.75% in the
second half of 2010 to 1% in the first half of 2011. The recent
downgrade of the U.S. sovereign credit rating, rising tensions
in Europe, and the cautious recovery have deteriorated
household and business confidence while market volatility has
increased. At the same time, weak job growth is holding back
wages. U.S. economic growth is projected to average 1.5% to
1.75% in 2011-12. Current U.S. unemployment is at 9.1% and
is expected to remain high through 2012.4
Europe
Europe faces high public deficits and debt, lower potential
output, and growing market tensions that are hindering its
growth. Spreads have risen to new highs for bonds with
elevated spreads even in economies that had not been
affected thus far (Belgium, Cyprus, Italy, Spain, and to a lesser
extent France). Global risk aversion, as measured by the
Chicago Board Options Exchange Market Volatility Index (VIX),
recently surpassed levels reached at the onset of the Greek
22
1
Innovation in Canada
Living in Unpredictable
Times: State of the World
debt crisis in spring 2010. Real GDP growth in the euro area is
expected to slow from an annual rate of about 2% in the first
half of 2011 to .25% in the second half, before rising to a bit
over 1% in 2012. Real GDP growth in Central and Eastern
European (CEE) economies will slow from 4.25% in 2011 to
about 2.75% in 2012.5
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Commonwealth of Independent States
(Former Soviet Republics)
Commodity prices largely determine the economic fortunes of
most of the large economies in the Commonwealth of
Independent States (CIS), while foreign funding has been
crucial for growth in investment and consumption. Growth in
Russia 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 of
investors being wary of the political uncertainty in the run-up to
presidential elections and the uninviting business climate. In
most of the other energy exporting economies, growth is
projected to be average at 4.5% as energy prices decline
somewhat in 2012. Energy-importing economies, on average,
are expected to expand at roughly the same pace as in 2010 at
5%. Overall, the CIS region is vulnerable to occurrences from
the rest of the world, as was seen during the economic
collapse during the global financial crisis.6
Asia
Growth in Asia remains strong, although it is stalling with
emerging capacity constraints and weaker external demand.
In China, growth will average 9% to 9.5% during 2011-12, less
than the average of 10.5% during 2000-07, because of
33
Innovation in Canada
Living in Unpredictable
Times: State of the World
ongoing policy tightening and a smaller contribution from net
external demand. Also, property price inflation and credit
growth 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 expected
to 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 year
with growth forecasted to be 2.25% in 2012.
Overall, growth
is projected to slow but remain strong and self-sustained,
assuming that the global financial tensions do not escalate.7
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Latin America and the Caribbean
South America has benefited from trade and easy external
financing conditions. Credit growth is high, inflation is near or
above the upper target range, and current account deficits are
widening despite supportive commodity prices. South America
is projected to expand by 4.5% in 2011 and slow down to
about 4% in 2012, with output being above potential. The
reliance in South America on capital flows to finance current
account deficits has increased the region’s susceptibility to a
sudden turnaround in investor sentiment. Thus, it will be
important to monitor potential financial sector vulnerabilities in
order to contain the buildup of excessive leverage and avoid
boom-bust credit cycles.8
Africa and the Middle East
The African region is growing at rates close to their pre-crisis
average. In Sub-Saharan Africa Real GDP is expected to
average 5.25% to 5.75% during 2011-2012 owing to their
limited integration into global manufacturing and financial
networks. Middle-income countries, that are more integrated
44
Innovation in Canada
Industry Trends
globally, have yet to fully recover from the impact of the
financial crisis. In South Africa, the largest economy in the
region, Real GDP is projected to be 3.5% during 2011-12
where growth will be driven by private consumption and low
interest rates. Growth amongst oil exporters in the Middle East
and Northern Africa is expected to reach about 4% in 2012
while oil importers are only projected to grow 2.5%. Political
turmoil has seen risk premiums rise and private financing and
tourism receipts fall with any intensification of the political crisis
exacerbating the economic plight of the region.9
Industry Trends
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Global Real Estate Trends
Residential real estate markets in much of the developed world
are losing momentum. Uncertainty over global economic
prospects along with rising food and fuel prices and steady
levels of high unemployment are keeping potential buyers
away from the market despite accommodative monetary
policies. Also, a continuing oversupply of housing as well as
tight credit conditions is reinforcing the downward pressure on
sales and prices in a number markets globally.10
According to Scotiabank Global Economic Research, a marked
improvement in housing affordability, particularly in those
regions suffering large valuation declines in recent years, will
eventually put a firmer floor under prices and underpin a
gradual turnaround for the sector. However, with the projected
subpar economic growth among advanced economies, both
housing borrowing and spending will be restrained. Also, a
generally more cautious lending environment will hold back the
pace of recovery.11
55
Innovation in Canada
Industry Trends
Global Retail
According to A.T. Kearney’s 2011 Global Retail Development
Index (GRDI) South America has made the biggest jump in
potential retail opportunities due to a large and mostly urban
population, surging retail sales and significant investments
planned for the upcoming Olympics and World Cup. As a
result, Brazil is now one of the developing world’s most
attractive retailers.12
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
In Asia, particularly in China and India, consumers are
increasingly accepting global brands and are becoming more
discerning in their tastes, a result of rising disposable incomes
and are becoming more discerning in their tastes. However,
traffic to stores has yet to meet expectations. Prospects for
Southeast Asia remain bright, with increased domestic demand
and exports, stabilizing retail sales and improving consumer
confidence.13
The Middle East and North Africa remains a promising retail
growth opportunity despite political unrest.
The region
recovered quickly from the recession and consumer
confidence is growing. As well, disposable incomes are high,
the population is young and the middle class is growing. In
Europe, Russia is expected to become Europe’s largest
consumer market with rising disposable incomes and an
expanding middle class.14
In the U.S., real consumer spending grew only at a 1%
annualized pace in the 2011 summer. However, consumers
have been spending aggressively as their personal savings
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Innovation in Canada
Industry Trends
rate has decreased 0.8%-pt during the same time.15 In
Canada, retail sales advanced at an annualized pace of 3.2%
in the second quarter of 2011 and appear to moderate in the
third quarter. The uncertainties surrounding the economic
outlook are expected to limit the purchase of new vehicles and
durable goods more generally.16
Energy
Analysts project that Brent crude oil will average $106.80 a
barrel in 2012. Prices from September 2010 to August 2011
have averaged $97.57.17 Originally forecasts called for higher
oil prices, however, the lower forecast for oil prices is a result
of a projected deterioration in world GDP.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
According to the U.S. Energy Information Administration’s
International Energy Outlook of 2011, renewable energy is
projected to be the fasted growing source of primary energy
over the next 25 years. However, fossil fuels will still be the
dominant source of energy. According to the report, renewable
energy use will rise from 10% in 2008 to 15% in 2035.18
Overall, worldwide energy consumption is projected to grow 53
percent between 2008 and 2035, with half of the growth
coming from India and China. As mentioned, renewable
energy is the fastest growing source, projected to increase 3%
a year, while natural gas is projected to grow 2.6%, nuclear
power 2.4%, and coal 1.9%.19
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Innovation in Canada
The Canadian Economy
The Canadian Economy
Present State
In 2010, the Canadian economy’s aggregate output surpassed
pre-recession levels, signaling Canada’s ability to rebound
from the 2007-2010 global financial crisis. At the same time,
total CPI inflation averaged 1.8% in 2010, with 2% being the
target.20
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
The first quarter of 2011 saw solid growth. Canada’s economy
contracted slightly in the second quarter, partly as a result of
disruptions to auto production arising from Japan’s tragedy,
and partly because exports plunged in reaction to Alberta’s
wildfires, weak U.S. demand and the strong Canadian dollar.
There was healthy job growth while consumer spending
remained modest due to elevated debts and rising gasoline
prices.
Business spending remained strong, as high
commodity prices continued to generate investment in the
resources sector.21
The Canadian financial system remains healthy. The quality of
assets at Canada’s major banks has continued to improve in
recent months. Also, corporate debt levels remain at low
levels. The main source of concern domestically continues to
be the high levels of debt carried by Canadian households in
relation to their disposable income.22
Key Risks
A threat to the Canadian economy is global sovereign debt,
with the principal risk being the fiscal strains in Europe. The
problems in Europe could trigger a sharp re-pricing of credit
risk for other governments with high debt burdens. If this
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Innovation in Canada
The Canadian Economy
happens, it could cause losses at financial institutions and
increase the funding costs of banks around the world.23
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Another risk to the Canadian economy is that large current
account imbalances will be resolved in a disorderly manner.
As a result, sharp adjustments to exchange rates and other
financial asset prices could occur.
Ideally, an orderly
resolution of these imbalances would require a timely and
sustained rotation of global demand. That is, increased
household savings and fiscal consolidation are needed in
deficit countries, while greater domestic spending and more
exchange rate flexibility are required in surplus economies.24
The low interest rate environment in major advanced
economies may fuel excessive risk taking. The additional risk
could lead investors to take on exposures that they may not be
able to manage if macro-financial conditions become more
volatile. Canada also has a high level of household debt and
therefore is at risk if there were to be an impact on the financial
system as whole. Canadians could lose their ability to service
their debts.25
Future Trends
Growth is forecast to go from an average of 3.25% in 2010 to
2% during 2011-12 as a result of ongoing fiscal withdrawal and
downdrafts from the U.S. slowdown. The unemployment rate
is forecast to be between 7.5% and 7.75% during 2011-12.26
Housing prices rose sharply in the past year, but have
stabilized in recent months and are expected to decline slightly
in 2012 as demand moderates in response to tighter mortgage
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Innovation in Canada
Innovation in Canada
rules. The Bank of Canada believes that interest rates will rise
in the longer term, and, according to the Bank of Montreal,
rates will not change until summer 2012. Analysts predict that
Canada’s higher interest rates and fiscal position compared
with the U.S., alongside firm commodity prices, should keep
the Canadian dollar trading moderately above parity against
the U.S. dollar through 2012.27
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
According to the Bank of Canada’s Business Outlook Summer
2011 Survey, businesses remain positive about the outlook for
the next 12 months, despite modest expectations for U.S.
economic growth. Indicators of future sales and investment
are moderately higher, and intentions to hire have become
more widespread. The unemployment rate has improved from
a high of 8.7% in August 2009 to 7.3% in August 2011.28
Firms in Western Canada expect sales to increase over the
coming year because of strong demand for commodities.
Firms elsewhere in Canada expect stable growth. Accordingly,
this sales outlook, together with efforts to expand and to
improve competitiveness, is underpinning plans to increase
employment and investment across regions and sectors.
Inflation expectations are essentially unchanged and continue
to be concentrated in the Bank’s inflation-control range of 1 to
3 percent.29
Innovation in Canada
Canada is a mid-level country in the global innovation race
having been passed by the emerging economies of China and
South Korea in some categories and falling further behind
countries such as the United States, Germany, Norway and
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Innovation in Canada
Innovation in Canada
Sweden according to Canada’s Science, Technology and
Innovation Council. A lack of investment in research and
development, machinery and equipment, and in information
and communications technologies amongst others has
contributed to Canada becoming a mid-level innovator.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Research and Development
Canada’s research and development expenditures performed
by businesses in Canada are low by international standards.
Canada is ranked 15th in terms of Gross Domestic
Expenditure on R&D as a percentage share of GDP, falling
below the Organization for Economic Co-operation and
Development (OECD) OECD average.
However, many
Canadian industries exceeded the OECD average. Business
R&D intensity higher than the OECD average was performed
in the paper, lumber and related industry; information and
communications technologies (ICT) manufacturing industry;
wholesale and retail trade as well as finance and
communications service industries; transportation and storage
industries; utilities; real estate and business services (including
R&D and information technology (IT) services) industry.30
Capital Investment
Productivity growth is a key indicator of a country’s innovation
pursuits. Two important drivers of productivity growth are
investments in machinery and equipment (M&E), and
investments in information and communications technologies.
Over the period 2000 to 2007, in comparison with the United
States (U.S.), M&E investment intensity in Canada has been
less than three quarter of U.S. levels and ICT investment
intensity was less than half of U.S. levels. However, the
11
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Innovation in Canada
Innovation in Canada
Canadian oil and gas extraction industry and finance,
insurance, real estate and management of companies industry
have registered higher M&E intensities than their U.S.
counterparts.31
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Labour Productivity
In advanced economies like Canada, the value created per
hour of work allows for a business to pay growing wages.
However, Canada’s population is aging, with individuals over
55 now constituting 24.5% of the total population; a number
that is projected to climb to over 35.5% by 2031.32 Currently,
annual growth in Canada’s labour productivity (output per hour
worked) has been slowing and has been less than 1 percent
for most of the last decade. The slow growth rate can be
attributed to low investments in areas such as M&E and ICT
capital. In terms of growth in labour productivity, the Institut
Europeen d’Administration des Affaires (INSEAD) ranked
Canada 95th of 132 countries. The International Institute for
Management Development (IMD) in Lausanne, Switzerland
ranked Canada 45th of 58 countries. Finally, among 33
advanced economies in the IMD standings, Canada’s
productivity ranks 24th.33
Because of the demographic of
Canada’s aging population constraining the future increase of
hours worked per capita, investments in M&E and ICT capital
are critical in order for Canada to improve labour productivity in
order to remain competitive.
Management
Another important contributor to innovation is the quality of
management. According to research done by the Institute for
Competitiveness & Prosperity, at the plant level, Canada’s
12
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Innovation in Canada
Innovation in Canada
managers are among the world’s best. Canada’s management
are leaders in implementing specific techniques in the area of
lean manufacturing and are solid performers in effecting good
performance management. However, compared to the United
States, Canada under performs, especially in the area of
people management.
The United States excels at the
willingness of managers to keep and promote high performers
and with their ability to deal with poor performers.
Furthermore, in Canada, just over a third of managers have a
university degree, compared to half in the U.S.34
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Business Innovation in Canada
Overall, Canadian businesses invest less in innovation inputs
than many other peer countries. As a result, Canada’s
innovation outcomes are subpar and have resulted in lower
productivity growth compared to their counterparts. Canada’s
lack of innovation stems from Canadians’ attitudes toward
growth and the risk-taking ability of its business people.
According to an expert panel (comprised of 9 CEOs, 3
Professors, and 6 high ranking executives) who prepared a
report on business innovation in Canada for the Government
of Canada, the principle influence on Canadian firms business
strategies focused on innovation are based on the following
criteria.35
Structural characteristics—In what sector of the economy is
the company located; are they in industries that
encourage/discourage innovation?
Competitive intensity—Is the pressure from competitors so
intense that innovation is needed to maintain profitability?
13
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Innovation in Canada
Value Innovation: A New
Market Strategy
Climate for new ventures—Is the business's location and
financing opportunities optimal for innovation?
Public policies—Are public policies favourable to innovation?
Business ambition—What is the extent of entrepreneurship
and drive in the organization and the ability to take the required
risks?
Although this approach to management and innovation may
appear to be the norm and in fact may produce desired results,
there are other successful management strategies focused on
growth and innovation which challenge commonly accepted
norms. Some have produced highly positive results. One of
these is Blue Ocean Strategy.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Value Innovation: A New Market
Strategy
Blue Ocean Strategy
Blue Ocean Strategy represents a significant departure from
the status quo. This approach postulates that the sector of the
economy a company is situated in has little to no basis on
whether or not that company should be encouraged to
innovate. That is, rapid growth is just as attainable through
declining and traditional markets as it is in newly innovative
industries.
Instead of focusing on beating the competition, companies that
14
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Innovation in Canada
Value Innovation: A New
Market Strategy
embrace blue ocean strategies focus on making the
competition irrelevant by creating a leap in value for buyers
and their company. The aim of BOS is not to out-perform the
competition in the existing industry, but to create new market
space or a blue ocean, thereby making the competition
irrelevant.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Blue Ocean Strategy is concerned with value innovation, which
is the simultaneous pursuit of both higher value and lower cost
for the buyer. Value without innovation tends to focus on value
creation on an incremental scale, something that improves
value but is not sufficient to make the company stand out in the
marketplace. Innovation without value tends to be technologydriven, market pioneering, or futuristic, often shooting beyond
what buyers are ready to accept and pay for. Value innovation,
on the other hand, places equal emphasis on both value and
innovation.
In this sense, value innovation is more than innovation. It is
about strategy that embraces the entire system of a company’s
activities. Value innovation requires companies to orient the
whole system toward achieving a leap in value for both buyers
and themselves. This approach, which is the cornerstone of
Blue Ocean Strategy, is what underlies our featured case study
of Indochino.
15
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Innovation in Canada
Featured Case Review:
Indochino
Featured Case Review: Indochino
From Student Start-up to Global Brand
Historical Overview
In 2006, while attending university in Victoria, B.C., Heikal Gani
was in need of a suit for an important class presentation. After
an initial search, Heikal determined that the suits he was able
to afford were ill fitting and that the designer styles he preferred
were too expensive. Frustrated, he settled for a generic offthe-rack suit that required extensive (and expensive) tailoring.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Heikal determined that there must be a better way for young
men to shop for menswear and, along with his best friend and
classmate Kyle Vucko, set out to develop an initial business
plan. The business developed focused on making it easier for
men to find a great-fitting suit, regardless of location, body
type, or budget. The pair then decided that Shanghai—a city
renowned for its tailoring, would be their base for
manufacturing.
In September of 2007, Indochino.com launched with an initial
selection of about ten suits and shirts, with orders being
handled by a single tailor and with Kyle and Heikal personally
inspecting each order. By 2009, one tailor had grown to fifty
and Indochino was in need of its own manufacturing facility.
Indochino now has thirty-five employees and has sold to over
17,000 customers in 60 countries. In less than four years,
Indochino has grown from a student start-up to a global brand
focusing on making men’s lives easier.
16
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Innovation in Canada
Featured Case Review:
Indochino
Financial Overview
Jeffrey Mallet, former president of Yahoo Inc., initially helped
fund Indochino. In their first year, Indochino’s first round of
financing amounted to between $700,000-$800,000. Within
two years, and amidst an economic downturn, the company
was able to reach revenues in the seven figures for the first
time, tripling sales figures from the previous year. The next
year saw much of the same, with sales growing by another
245%. Then in January of 2011, Madrona, a Seattle-based
capital investment group, helped to raise $4 million in Series A
financing for Indochino to secure their continued expansion of
their operations in Vancouver and Shanghai.36
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Products and Services
Indochino is a provider of custom-tailored apparel for men with
most of their suits being priced under $500. Options like
lapels, vents, linings, pockets, and buttons are all fully
customizable. Their product line also consists of blazers,
shirts, outerwear, and accessories with new collections being
released every two weeks. To place an order, customers are
required to measure themselves at home with Indochino’s
easy-to-follow online tutorial.
After submitting their
measurements a customer can expect that their order will be
delivered within three weeks. Indochino offers a 100% fit
promise. If an order is anything less than perfect, Indochino
will pay for local tailoring or remake the suit for free.
17
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Innovation in Canada
Featured Case Review:
Indochino
The Men's Fashion Industry
Overview
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
The fashion industry can be divided into five segments: haute
couture, luxury, affordable luxury, mainstream, and discount.
Haute couture is the most expensive and exclusive segment.
It tends to attract customers who are extremely wealthy and
who desire custom-made clothing. Men in this group would
purchase 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 market
include Dolce & Gabbana, Prada, and Gucci. Men who wish to
dress well but cannot afford the luxury menswear will accept
the lower-priced affordable luxury brands such as Hugo Boss,
Brooks Brothers, and John Varvatos. Following that is the
mainstream brands such as American Eagle and Abercrombie
and Fitch who offer mass appeal and are affordable. Lastly,
there are the discount brands that cater to the low-income
consumer and are offered at stores like Target and Wal-Mart.
These existing customer groups can be further segmented
depending on their socio-economic status. According to
Experian, a global credit information group, and Taylor Nelson
Sofres’ Worldpanel Fashion, men can be categorized into
fifteen different segments.38 Of these fifteen segments there
are three that can be applied to Indochino’s strategic focus.
Indochino's Strategic Focus
Indochino’s co-founder spoke of initially targeting young men
who desire high fashion garments, but who do not yet have the
18
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Innovation in Canada
Featured Case Review:
Indochino
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
income to incur such an expense. According to analysis by
Experian et al. the initial target demographic for Indochino
would have been Functional Fashion Seekers, that is, fashion
conscious young men who search out style at a reasonable
price. Indochino has targeted this demographic by releasing
new styles every two weeks that are fashionable. The value in
this proposition is that the garments are relatively low-priced,
thus attracting this younger generation. These staples also
attract the next demographic referred to as Budget Image.
These are young men with a low budget and a high sense of
image.
The last demographic that Indochino would target is Brand
Boy, who are young men for whom brand and image is
everything. These young men are active fashion followers and
spend a high proportion of their income on their image.
Indochino caters to this demographic by again providing
fashion forward clothing at a low cost. However, their brand is
not yet developed enough to fully entice this type of fashion
conscious individual. Indochino will have to develop their
brand awareness further in order to selectively target and
attract these consumers.39
Buyer Pain Points with Formal Menswear
Young men in the market for a suit have traditionally had few
options other than to settle for a low-quality, unfashionable, offthe-rack garment in order to satisfy their budget. Despite their
relatively meager budget, these buyers nonetheless desire a
fashionably cut suit, however most suits available at their
desired price points are low-quality and likely not durable. In
addition, off-the-rack suits are generally ill fitting and require
19
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Innovation in Canada
Featured Case Review:
Indochino
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 than
not buyers would prefer the purchase experience to be more
streamlined and efficient.
The location of the desired store is often a pain point with
potential buyers. For example, to purchase the latest fashion,
a buyer typically has to travel to a first tier city in order to have
an appropriate selection of menswear. While malls in smaller
cities offer brand names they are often lacking in the amount of
choices that a large city would offer. Often times, a suit is a
large expense that requires careful consideration and so it is
not uncommon for the consumer to travel to a larger city that
offers a better selection.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Buyer Utility Map: Men's Suits
Blue Ocean Strategy uses a tool referred to as the Buyer Utility
Map to understand the different experiences buyers have with
a product or service, from purchase to disposal. This tool
outlines six levers which have a profound impact on buyers’
purchase experience. The map helps companies determine
whether their business, product or service offers a leap in
value to buyers. It identifies areas of the business, product or
service where buyer utility is blocked across the totality of the
buyer's experience.
The following chart illustrates the typical buyer experience
when purchasing a suit. In order to purchase a men’s suit, one
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Indochino
must follow a process that has remained unchanged for the
last 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 the
necessary adjustments. If, after these steps, the customer is
left unsatisfied with his purchase he will have to return the suit.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Figure 1: Buyer Utility Map: Men's Suits
Each of these steps shown in Figure 1 brings its own unique
set of pain points that detract from the buyer experience. In
choosing a suit for example, a buyer may waste considerable
time 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, or
may have to return the suit. Each of these steps takes up a
buyer’s valuable time. These encumbrances are inconvenient
and make the purchase experience overly complex.
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Indochino
There is also an element of risk involved when purchasing a
suit. The buyer may not like the suit that he decides on after
all and there will always be an associated risk when bringing
the suit to a tailor. There is also the inherent risk of
encountering resistance when attempting to return a suit,
especially once alterations have been made. All this adds up
to a less than optimum buyer experience.
Buyer Utility Map: Indochino
When looking at Indochino’s buyer utility map, it is apparent
that the company managed to address and alleviate many of
the pain points shown in Figure 1.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Figure 2: Indochino's Buyer Utility Map
Indochino realized that purchasing a suit online is faster and
more convenient than having to locate a store then physically
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getting out to select and purchase a suit. The buyer gains
economies of scale and loses less productivity when shopping
online. For the most part, the customization of Indochino’s
apparel saves a buyer from a trip to the tailor. The process is
made simple as Indochino provides a ten-minute
demonstration video on how to properly measure oneself in
order to ensure a proper fit. Once completed, the buyer simply
enters his measurements and selects the available options on
his purchase.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Indochino also offers a 100% perfect fit promise in terms of
their return policy. If a buyer receives a suit that requires
adjustments Indochino will offer a $75 alteration credit. If a
tailor deems the order unalterable, Indochino will remake it free
of charge. Finally, if the buyer is not 100% satisfied with their
order, they may return it for a full refund. This all adds up to a
far easier, simpler, faster and more convenient shopping
experience for the buyer, in addition to the added benefits of a
tailored suit at a lesser price than comparable big-brand
fashion names.
Major Industry Players
Overall, the retail fashion industry can be categorized into
three major groups:
Online Retailers
Online retailers tend to tread around the average for the most
part as the segment of online retailers covers most arrays of
men and women’s clothing. They offer a superior online
shopping experience and a high-level of ease when shopping,
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Indochino
as their online presence is their specialty. It should be noted
however, that many online retailers also offer brick and mortar
stores, which may in fact detract their focus from continuously
innovating their online retail environment. Not surprising,
customization is also not part of their services mix and it is very
difficult for an online retailer to custom fit clothing.
Mid to High-Level
Mid to high-level stores are typically higher priced, place
considerable emphasis on location, marketing, and overall
quality of fabric and craftsmanship. Their cost tends to be
higher to compensate for the better materials used in
manufacturing the garments.
The location of stores is
considered important based on access to high foot traffic and
access to desired clientele. Marketing and publicity are also
essential components deigned to attract the desired clientele.
All these factors contribute to a higher cost model.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Low-end Retailers
Retailers that fall into the low-level of the apparel industry tend
to have many locations that are easily accessible. They are
marketed fairly well in order to attempt to cast a net over a
larger potential client base. For the most part, their online
presence is sparse. The quality of materials and craftsmanship
tends to be on the lower end, and customization is nonexistent. Retailers in this group opt for generic brands or
miscellaneous brand name garments staged for fast sales.
Their costs are comparatively lower and their strategy is based
on large volume sales.
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Indochino
Top Industry Brands: Formal Menswear
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Indochino’s strategy is a play in the formal menswear industry.
The company is focused on delivering high quality and highly
fashionable menswear line at the lower end of the pricing
spectrum. The company is successful in that they are
providing young men with an alternative to the usual quality
and designs available at the lower price points. Indochino’s
main competitive advantage is that they are a custom made
retailer without the custom tailoring price tag. Lower priced
competition revolves around off-the-rack garments that are
often ill fitting and require additional tailoring. Indochino on the
other hand, provides young men with the ability to purchase a
higher quality suit at an affordable price.
Indirectly, Indochino is competing with well-known, high-end
designers like Hugo Boss and Ermanegildo Zegna. Typically
suits for these retailers begin at $1,000, whereas Indochino’s
highest priced suit is $799. The advantage of retailers like
these is that their brand spans across the globe, as does their
network. For example, Hugo Boss has approximately 1,500
mono-brand stores in more than 80 countries and reported net
sales of $2.36 billion in 2010.40
Indochino is directly competing with well-known fashion labels
Calvin Klein, Tommy Hilfiger, and Ralph Lauren who all offer
mid-range suits that are comparable to Indochino’s higher price
point of $799. Again, these suits are off the rack and will most
likely require tailoring for a proper fit. These designers also
offer a worldwide presence and can be found at many name
brand department stores.
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On the lower end of the spectrum in terms of price are lowprice, fast-fashion retailers. H & M and Zara are two examples
of such retailers. Their advantage lies in their ability to quickly
turn out fashionable clothing at a low price. It is claimed that
Zara is able to develop a new product and get it to stores in as
little as two weeks, compared to the six-month industry
average.41 Zara’s fast-fashion strategy has led them to having
operations in 78 countries with a network of 1,723 stores and
posting sales of $11.1 billion in 2010.42 According to Louis
Vuitton Fashion Director Daniel Piette, Zara is “possibly the
most innovative and devastating retailer in the world."43 Both
Zara and H & M offer fashionable men’s suits that compete
with Indochino’s lower priced garments. The main difference
between the fast-fashion retailers and Indochino is that the fast
fashion retail suits are of poor quality.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Indochino's Blue Ocean Strategy
Indochino is an online retailer first and foremost. As such, they
have no physical stores and only offer their own brand. Their
price is on the low-end when compared to other retailers
offering formal menswear and their marketing budget is small,
relying instead on word of mouth. As a result, they have
created a business model that differentiates from the other
types of apparel retailers in order to satisfy a select customer
base (fashion conscious young men) while managing to lower
their costs but increase buyer value.
Key Competitive Factors
A brand’s reputation is often the most influential factor in the
men’s apparel industry. With that said, there are many factors
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Indochino
that go into developing a brand’s reputation. The styles offered
by the brand can help shape their reputation, whether they are
a traditional brand or a fashion forward-looking brand. Price is
another important component in men’s fashion, often times
separating the buying classes from one another, and is often
intertwined 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 brand
worldwide. Both these factors help shape a brand’s reputation.
A brand’s influence may be more limited if, for example, it is
only visible and available in a few select locations, as opposed
to most retail outlets worldwide.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
An increasingly significant competitive advantage in the
industry is whether or not a designer brand has an online
presence. Having an online presence can also help with
another key competitive factor—ease of shopping and greater
access.
Marketing plays an important role in brand awareness. A firm
needs a successful marketing team to create the brand
awareness necessary to launch new clothing lines.
A
successful marketing team ensures that all of the other key
success factors are clearly conveyed to potential buyers.
The margin that a designer is able to get on their materials is
critical to their profitability. As the cost fluctuates with market
conditions, margins can rise and fall depending on inventory
levels. Successful brands understand how these markets
operate and are able to ensure that their costs do not get out of
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Indochino
hand. This insures that value to the buyer is able to remain
constant while reducing overall production costs.
What Indochino Eliminated
Indochino first had to select factors in the traditional business
model that could be eliminated. Indochino decided to eliminate
the traditional brick and mortar store and focus primarily as an
online retailer. By eliminating the number of stores and
conversely the location of those stores Indochino was able to
eliminate regular staffing costs as well as other costs inherent
to the traditional business model. By custom making every
item in China, Indochino was able to eliminate the high cost of
inventory. In doing so, Indochino was able to alleviate cash
flow problems that occur in the apparel industry as a result of
an inventory requirement.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
What Factors were Reduced
The factors that Indochino chose to reduce include marketing
and the number of clothing lines offered. This enabled the
company to provide a lower price point. Indochino’s marketing
budget is below the industry average, yet word of mouth and
product referrals are driving demand. Another strong point is
Indochino’s decision to focus solely on men’s formal wear.
The company offers a select few clothing lines but deliver top
quality for value. However, it should be noted that Indochino
rolls out new product lines every couple of weeks to satisfy
their customers’ appetite for the latest fashions.
As previously mentioned, price is an important competing
factor in the fashion industry. Inodochino’s model allows the
company to offer high quality garments at prices usually
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Indochino
reserved for inferior goods. They achieved this by deviating
from the traditional business model and eliminating traditional
fixed costs.
What Factors were Raised
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Indochino chose to focus on raising the overall quality of their
menswear, their online presence, and ability to customize their
products at a lower price than industry average. The company
was able to raise the quality of their fabrics and craftsmanship
while still managing to keep costs relatively low by eliminating
a traditional storefront. The savings achieved from removing
this fixed cost allowed Indochino to purchase higher quality
fabrics usually reserved for higher priced lines.
Indochino was also able to raise their online presence through
an easy-to-use website that teaches buyers how to properly
measure themselves. The ability to order custom tailored
clothing is not traditionally available through online retailers. A
buyer typically has to go to a tailor and have the clothing
measured and made on site. Traditionally, this type of clothing
is the most expensive and is usually reserved for the higher
end designer lines. By raising this factor, Indochino was able
to attract buyers who would not normally be able to afford tailor
made clothing.
What Indochino Created
Indochino created two factors that were, for the most part, nonexistent in the formal menswear market. First, they created a
self-service online men’s retailer. That is, they created a selfservice line where a customer could order a tailor made suit
and have it delivered to him, unwrinkled, in three weeks time.
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Indochino
Second, Indochino created a 100% guaranteed return policy.
As an online retailer focusing on custom made apparel this is a
key success factor that is establishing Indochino as the go-to
online retailer for tailor made clothing. Implementing this policy
helped reduce first time buyer anxiety and established
Indochino as a retailer that can be trusted.
In order to create a blue ocean in the apparel industry, and
more specifically, the formal menswear industry, Indochino had
to eliminate, reduce, raise, and create key competitive factors
to open up uncontested market space. Figure 3 illustrates
Indochino’s ERRC (Eliminate, Reduce, Raise, Create) Grid
based on Blue Ocean Strategy’s Four Actions Framework.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Figure 3: Indochino's ERCC Grid
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Value Proposition
According to Kyle Vucko, co-founder and CEO of Indochino,
what really sets them apart is that they are an inclusive apparel
company. Indochino found that many retailers of menswear
were exclusive brands that were neither readily available nor
affordable for young men. In order to address this issue they
decided to develop a website focused on customized clothing
so that, no matter where a person lived, they would be able to
properly outfit themselves in the latest fashions. To further
satisfy this goal, Indochino developed their company by
providing high quality, high style, and low priced garments that
cater to young men tired of the traditional norm. Indochino
achieved buyer utility at a lower cost by addressing many of
the prevalent pain points in the men’s apparel industry. They
created an ingenious solution that responds to these needs
and captured a previously underserved non-costumer market
through value innovation.
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
Figure 4: Indochino's Strategy Canvas: Formal Menswear
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Appendix
1 IMF World Economic Outlook page 16
2
http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECT
S/EXTGBLPROSPECTSAPRIL/0,,contentMDK:22932054~menuPK:659172~p
agePK:2470434~piPK:4977459~theSitePK:659149,00.html
3 IMF World Economic Outlook page 16
4 IMF World Economic Outlook page 16­17
5 IMF World Economic Outlook page 73­76
6 IMF World Economic Outlook page 76­80
7 IMF World Economic Outlook page 80­82
8 IMF World Economic Outlook page 83­88
9 IMF World Economic Outlook page 88­92
10 IMF World Economic Outlook page 92­96
11 Scotiabank Global Real Estate Trends June 2011
12 Scotiabank Global Real Estate Trends June 2011
13 The 2011 A.T. Kearney Global Retail Development Index page 3
14 The 2011 A.T. Kearney Global Retail Development Index page 9
15 The 2011 A.T. Kearney Global Retail Development Index page 12­13
16 J.P. Morgan Economic Research Global Data Watch September 30, 2011
17 TD Economics: Canadian Retail Sales in July, September 22, 2011
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
18
http://www.indexmundi.com/commodities/?commodity=crude­oil&months=12
19 U.S. Energy Information Administration International Energy Outlook 2011
20 U.S. Energy Information Administration International Energy Outlook 2011
21 Bank of Canada Annual Report 2010 page 8
22 BMO Research North American Outlook September 20, 2011
23 Bank of Canada Financial System Review June 2011 page 1
24 IMF World Economic Outlook page 92­93
25 BMO Research North American Outlook September 20, 2011
26 Bank of Canada Business Outlook Survey Summer 2011 Survey
27 Bank of Canada Business Outlook Survey Summer 2011 Survey
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Appendix
28 Bank of Canada Financial System Review June 2011 page 2
29 Bank of Canada Financial System Review June 2011 page 2
31 Bank of Canada Financial System Review June 2011 page 2
32 Innovation and Imagination in Canada page 1
33 Innovation and Imagination in Canada page 1
34 Canadian Food Retail February 2011 page 21
35 Innovation and Imagination in Canada page 3
36 Canada’s Innovation Imperative page 13
37 Innovation and Business Strategy—Why Canada Falls Short page 83
38 Innovation and Business Strategy—Why Canada Falls Short page 84
39 Douglas Magazine – Indochino Sews Up $4 million in Investment
40 Hugo Boss Annual Report 2010, pages 100, 150
41
http://www.businessweek.com/globalbiz/content/apr2006/gb20060404_167078
.htm?chan=innovation_branding_brand+profiles
42 Inditex Consolidated Annual Accounts January 31, 2011 page 14
43
http://edition.cnn.com/BUSINESS/programs/yourbusiness/stories2001/zara/
44 UK Fashion Segments – Fashion Market Research Data & Analysis
©2011, Blue Ocean Strategy Canada Inc. All rights reserved.
45 UK Fashion Segments – Fashion Market Research Data & Analysis
www.blueoceanstrategycanada.com
Other product and/or company names ued herein are trademarks of
their respective owners. Reproduction prohibited without express
written permission of Blue Ocean Strategy Canada.
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