A Study On Ikeas Value Proposition Management Essay
When seeking land sites in host country nation, IKEA has developed their own search-criteria. They look for huge sites located next to busy main roads in the suburban areas of the larger cities. A part of their business strategy is that customer should be able to bring their purchased items home at once. Hence, the location near roads and massive land areas to cover both the sizes of warehouse and parking lot is needed. This strategy has turned out successive wherever it has been applied. Thus, IKEA does not have the need for locating in particular fields arranged by the host county nation governments.
Home Country Factors:
According to Hofstede’s (2001) findings on Sweden in his research on cultural dimensions, the country can be characterized as rather risk averse (high uncertainty avoidance score) and a relatively small power distance, which means emphasis on equality and informality. These results go very well along with the organization and corporate culture of IKEA.
Host and Home Factors:
The international expansion of IKEA can easily be described as slow, sequential stages. The first warehouse in Sweden opened in 1958, followed by Oslo in 1963 as the first store outside Sweden. The second store outside its home base opened in Denmark in 1969, and the first location outside Scandinavia happened in Zurich, Switzerland, in 1973, 30 years after the foundation of IKEA. The interwoven cultures and histories of the Scandinavian nations and their long diplomatic ties made the neighbouring countries natural expansion areas for IKEA. Entering into known territory constitutes a lower risk than the unknown.
Neither of the Scandinavian markets may be characterized as very advertising intense during the 1960’s – this goes in particular for Norway. However, IKEA had already in 1951 published their first furniture catalogue, which has become one of their main sources of product display, brand building and information towards its customer.
Motivations and firm type are market development and resource access, and IKEA is classified as a multinational enterprise.
Deciding on Entry Strategy:
IKEA has chosen three different modes of entry; for outsourcing production they sign long-term sourcing contracts with their suppliers; but for warehouse operation, the main entry strategy is greenfield engagement. However, 23 of the total 212 stores are run as franchisees, owned by external investors. Over half of these are found in markets regarded as difficult to get access to, and which are culturally very different from Sweden. Also, their own production-unit, Swedwood, is operated as greenfields. Swedwood has 35 factories located in 9 countries. This examination has revealed that IKEA stresses the importance of commitment and control over its subsidiaries, hence the strong aiming for greenfields start-ups. However, it has also shown how the firm concentrates on keeping cost at a minimum level, locating its property sites in suburban areas instead of the often more expensive down-town locations, and by circulating its own catalogue instead of relying heavily on external advertising channels. The famous cost-consciousness also contributes to the choice of long-term sourcing contracts with its suppliers instead of a more expensive JV-structure.
Traditionally, furniture has been regarded as very culture-specific in the sense that taste and preferences vary significantly among nations and ethnic groups. Therefore, the achievement of IKEA establishing warehouses in all major regions of the world which are selling more or less the same pieces of furniture, is overwhelming. Its founder, Ingvar Kamprad, built the business from scratch inspired by his usually strong sales-instinct and by values like simplicity, cost-consciousness, enthusiasm, renewal, responsibility and humbleness.
IKEA sells products under its own brand – IKEA of Sweden. When establishing its furniture business in the early 50’s, the Swedish furniture industry was impaired by cartels of manufacturers and retailers. Supply contracts and agreements on competitive practice among cartel members raised barriers of entry for new entrants and disciplined those who failed to follow industry norms, particularly on price. Hence, there were no chances of getting any contracts with manufacturers or established retailers in Sweden.
As discussed above in the market entry strategies IKEA had two choices – either to outsource its production or to set up production plants itself. The first alternative would be the least expensive choice, but also the most risky when it came to production and quality control and delivery reliance. The latter one needed a lot of capital as it meant building or acquiring production facilities. They chose a solution in-between. The Swedwood Group is the only production unit within the IKEA Group. Swedwood produces all the wooden furniture and wooden components (as most of the furniture is made of particleboard). But the majority of IKEA’s production is actually outsourced. IKEA builds long-term relationships with its suppliers, and binds themselves to order large volumes over a certain period of time, often 3-5 years. The suppliers oblige to deliver the ordered volume at the agreed time to the agreed price and quality.
When searching for new suppliers, IKEA often turn to manufacturers in other industries. They may have the necessary production equipment and skills needed. IKEA then buy free production capacity, and gain a win-win situation for both parties. IKEA gets its products without major investments, and the supplier can utilize free capacity to earn some revenue. Due to the cartel activities in Sweden, IKEA were forced to go international to find suppliers and manufacturers. They have long-term contracts mainly in Europe and Asia, and often buy free capacity of production from its suppliers.
IKEA is not the only retailing business from Sweden experiencing great international success. Others are H&M, Lindex, Ãâ€¦hlens, Clas Ohlson among others. Porter (1998b) stresses the importance of domestic rivalry. As discussed above, the industry structure was not favourable for IKEA, but by outsourcing the majority of the production, Kamprad and his crew were able to turn an obvious barrier of entry and market imperfection into an advantage. By exploring new methods of doing business, although at a high risk, he and the rest of the IKEA organization could stay true to its firm strategy and vision, and at the same time compete both efficiently and effectively with its home base rivals. As Kamprad saw that he was succeeding, he kept, and still is, pushing for an ever-going creativeness and product focus so that IKEA can continue to set the agenda for casual home furniture trends.
It is quite apparent that Sweden as the home base provides competitive advantages so great that international growth could succeed. It has rather favorable business context (firm strategy, structure and rivalry), it clearly has a large home demand for IKEA’s products (demand conditions) and because of the strong corporate culture, mainly managers born within the Scandinavian area have been appointed top positions within the Foundation (factor conditions – human resources).
IKEA being unique attractiveness of customers, also in the field of marketing IKEA constitute a unique position. The catalogue is their main marketing tool.New catalogue launches are usually accompanied with large media exposure and media interests. Another important marketing channel is the internet.
The fact that IKEA have chosen contractual agreements in form of long-term sourcing agreements instead of equity based options, is because of its extreme focus on keeping costs at a minimum. By buying production capacity, they secure the production of their products at very low rates of investments. This practice also allows IKEA to choose their partners carefully, signing those who are known for their skills and reliability. The drawback is that they loose control over the production process and the daily quality inspections. At the same time, they are totally dependent upon reliable delivery. If some of these actions fail, it can severely damage IKEA’s reputation and goodwill. Still, this is a risk the company is willing to take because of the cost benefits it provides. Several arrangements have been made to prevent unpleasant surprises to take place, i.e. product inspectors travelling around on the many production sites to control that everything is done in accordance to the instructions from the IKEA management.
Human resources are one of the most important assets to IKEA. To be able to adapt quickly and properly to the values of the IKEA organization, the employees need to know Scandinavian culture and values. Further they should be able to communicate in Swedish. Although English is the business language, Swedish has remained the cultural language. To really understand the core values of the organization, the top management has stated that it is an absolute advantage that non-Scandinavian managers learn Swedish. The informality, the extreme cost-consciousness and the humbleness can only create properly commitment if the Swedish culture, in which it is rooted, is well understood. The core values are believed to be the key to the success of IKEA and to spread across the ever growing organization, IKEA has created several management and corporate culture programs, the most famous one being “the IKEA way”. Employees here are taught in the history, the strategy and the product range of the company, often guided by Kamprad himself, and is expected to pass on what they have learned in their respective home countries. As the expansion has taken IKEA to areas culturally very different from Sweden and Scandinavia, such programs are very important to make sure that the corporate values remain alive.
Physical assets are of no importance as to whether or not the home base provides any competitive advantages. Most of production is outsourced and the warehouse-buildings are owned and financed by the parent company in the Netherlands. Human resources, knowledge and infrastructure are vital factors of production to the IKEA Group. The values of simplicity and humbleness have turned out to be of significant advantage. These, as they are implemented in the IKEA system, cannot be properly understood if not born and raised in the peasant communities of Sweden, i.e. the home market has provided competitive advantage. Cultural identities cannot easily be imitated by competing firms originating from another national and cultural context.
IKEA Strategy: a global strategy
The main competitive strengths of the company can be identified to be the low priced product range of furniture, which possess high value in terms of quality and innovative characteristics at given price. In other words, IKEA’s business model provides consumers with home and office interior quality and affordable prices.
Furthermore, IKEA has developed and has been continuously developing a network of stores to increase the organization’s brand recognition, proximity to consumers and product availability. The well-developed store environment is accompanied by high quality of customer service, physical evidence of quality and purchasing processes to enhance the pleasure of the IKEA experience.
Moreover, IKEA’s success is reinforced by the well-developed pricing structure of the company. The company has set its supply-chain operations to minimize cost and enhance profitability by the implementation of a number of competitive tactics, such as: unification of product range; flat packing; distribution channels, etc.
However, IKEA would not have been the successful company as it is today if the managerial towards the human resources of the organisation are not adequately customized to stimulate the successful conduction of the company’s supply-chain operations. In this respect, the company relies on personnel equality, team work and horizontal hierarchy which would stimulate information flow and knowledge-sharing (ikea.com, 2009).
There are a number of weaknesses, which can be recognised in the operations of the company. First, the unification of product ranges, which is applied globally, is often failing in identifying the local preferences of consumers. Second, IKEA finds an obstacle in its expansion ambitions because of recognised bottlenecks in the production processes. Moreover, the company appears to be unable in withstanding with the pace of network store development. Third, despite its brand recognition the company still has relatively small market share in comparison to its competitors in a number of international markets (ikea.com, 2009).
IKEA has a great number of opportunities for expansion and further product development. The company has excellent prospects of expanding in emerging markets in terms of new consumer needs and purchasing behaviour, such as USA and Japan. Apart from the emerging international opportunities the company can still acquire greater market share in the present countries of operation.
Furthermore, IKEA has a wide scope of opportunities in terms of product range. The company can enhance its innovative product lines and thus respond to the preferences of different segment groups. This would not only increase the company’s market share but would also enhance the brand recognition of IKEA among diverse segment groups (ikea.com, 2009).
Some of the threats, which IKEA is likely to experience, can be divided into external and internal threats. One of the greatest internal threats for IKEA is the change of the organisational culture and operational philosophy of the company. In other words, it often very challenging for companies to sustain the same environmental culture endlessly. This may have significant impact on the competitive advantages of the company.
In the context of IKEA’s macroeconomic threats it can be suggested that as the company is interdependent with the construction and real estate industries, a global economic downturn is likely to impede the company’s competitiveness and would specifically have impacts on IKEA’s pricing structure. This can be also observed in cases when the price of raw materials fluctuate, which would increase the production costs of the company and thus impact IKEA’s profitability (ikea.com, 2009).
IKEA’s VALUE CHAIN
A value chain can be described as a web of interdependent operations, which contribute to a particular amount of value to each business process. The fundamental force which stimulates the dynamics of a value chain is the consumer (Krajewski et al., 2007). In the present examination, the value chain is IKEA’s supply chain of processes.
The supply chain of the company can be explained as a framework of task and processes, which are focused on collecting and converting raw materials into finished products. These processes are executed in order to provide value to the end-consumers in exchange of financial reward.
On the one hand IKEA’s supply chain can be recognised as simply constructed by the processes of collection, conversion and distribution of raw materials and final products. However, on the other hand, IKEA’s supply chain possesses numerous complex characteristics and responsibilities, which contribute to the continuous management and distribution of value across the supply chain of the company (van Hoek and Harrison, 2008).
A supply-chain can be identified to be divided into two distinctive areas, such as: back-end and front-end. The back-end is responsible for the manufacturing of products, whereas the front-end is concentrated on the distribution of the manufactured final goods (Ballou, 2004). In this respect, IKEA’s back-end operations can be characterised with the processes of purchasing of raw materials and warehouse storage, product design, manufacturing, packaging and transportation. On the other hand, the front-end of the supply chain is responsible for selling the products, which includes customer service, order processing, sales forecast, etc (Hill, 2000). However, it should be identified that the back-end and front-end of a supply chain are interdependent parts of an organisation. In other words, if they lack operationally synchronization this would cause significant damages to the successful performance the company (Simchi-Levi et al., 2003).
As it was already recognised the back-end of a supply chain encompasses mainly the processes of raw materials acquisition and conversion into final products. However, these two main back-end activities are accompanied by a number of other supply chain operations. In this respect, the processes, which can be identified as having a significant impact on IKEA’s back-end, are: purchasing; capacity management and inventory management (Hill, 2000).
As IKEA is one of the most popular global brands in furniture manufacturing and retailing, the dynamic operations of the organisation and the continuously growing ambitions to entering in new markets can be suggested to result in pressure on IKEA’s present capabilities of efficient capacity management. In this respect, inventory control, capacity management and cost-efficient transportation can be identified to be one of the most challenging areas within a supply-chain (Beech, 1998).
IKEA’s supply chain reveals a number of operational approaches, which significantly contribute to enhancing the company’s ability to perform cost efficiently. For example, IKEA’s items are provided to consumer in a flat-packed form. This can be recognised to result in a wide range of supply chain contributions. On the one hand, flat-package reduces transportation costs because of its compact size which allows great transportation capacity. Moreover, flat-packed items minimize construction costs and do not involve labour force costs. Furthermore, the small package size enhances the storage capacity of the company, this allows greater warehouse space for storage, which can be suggested to reduce a great number of storing costs); finally, the compact size of the flat-packages decreases inventory damage, such as: shrinkage, theft and loss) (van Hoek and Harrison, 2008).
Another highly competitive feature of the supply-chain of IKEA and in particular to the back-end can be suggested to be the supply-chain partnerships, which the company has been establishing for years. In other words, the company possesses a big network of suppliers, which enhances IKEA’s ability to continuously gain and generate industrial knowledge and know-how. Furthermore, the company has attracted its suppliers closely to supply-chain processes. This has created greater information flow facilitation and operational efficiency (Ragatza et al., 1997).
IKEA’s operational efficiency in the back-end provides contributes to the efficient performance in the front-end of the company. It is important to be outline that these two supply-chain areas are significantly interdependent and that often the emergence of back-end constraints can result in front-end lack of efficiency and inability to continuously sustain high levels of profitability (Johnston and Clark, 2005).
In the present examination, IKEA’s back-end efficiency appears to be one of the many competitive advantages of the company. In other words, the company arranges its in-store environment and purchasing processes, to promote greater consumer interest and facilitate the buying behaviour of customers. Moreover, IKEA is specifically concentrated to several essential components of the extended marketing mix of 7Ps, such as: physical evidence for quality; processes; people; products; and price (Groucutt et al., 2004).
Furthermore, IKEA’s front-end operations benefit from the company’s continuous communication with end-consumers. IKEA focuses on extracting customer insight by market research, observations and ongoing communication. These processes of insight extraction contribute to IKEA’s creative design solutions, product promotion and anticipation of consumer preferences. Furthermore, the close relationship with consumers, which result in front-end efficiency, has a positive effect on the back-end operations of the company. This is not only a beneficial stratify for IKEA’s production design and marketing promotion but provide valuable know-how to IKEA’s suppliers. In other words, IKEA is capable of supplying suppliers with information which serves as a source of valuable knowledge of types and amounts of production material which would be needed. This increases coordination and can be recognised to decrease procurement costs associated with purchasing and transportation of raw materials (Mason-Jones et al., 1999).
In conclusion it can be said that IKEA’s great current success predetermines its future strategy. IKEA is a company, which is an example of internal efficiency which predisposes to external competitiveness and operational agility. The company’s successful performance is the product of a symbiosis between its innovative product design, cost-efficient strategy, pricing structures, unique selling proposition, human resource management and winning business philosophy.
The future of the company is challenging – the environmental threats, which question the social and environmental responsibility of companies, which operate with raw materials as wood and plastic. This is likely to increase the prices of the raw materials and affect the pricing structure of IKEA. This is the reason why it can be suggested that the most important future capability of IKEA is the capability to develop and adopt innovation. Innovation would be the key to success for IKEA as the company should sustain its cost efficiency and high quality of design and materials in order to keep its successful global performance.
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