IKEA: Product, Pricing, and Pass-Through - Research Paper Example

Research paper: IKEA IKEA IKEA is a company of Swedish origin that is registered in the Netherlands and is involved in the business of designing and selling furniture that is ready-to-assemble such as desks chairs, beds, home accessories and appliances .Statistics as of the beginning of 2008,IKEA was rated as the world’s biggest furniture retailer. The company was founded in 1943 by a 17-year old boy, Ingvar Kamprad in Sweden. The name of the company is an acronym that is made up of the initials of Ingvar Kamprad, Elmtayrd (the ranch in which he was raised up), and Agunnaryd (his native land Smaland, south Sweden).IKEA is known for it’s up to date architectural designs that fit various kinds of furniture and appliances, and has got interior design work that is most of the time related with an eco-friendly ease (Baxter, Landry, 2010). Apart from this IKEA is famous for its keenness to cost control, constant product development and operational details, corporate features which permitted IKEA to review its prices downwards by an average of 2 or 3 percent over the ten years to 2010 during an era of global development. As of the beginning of 2014, IKEA proudly owns and operates 349 stores in over 43 countries. In financial year 2010, IKEA sold over US$23.1 billion worth of goods, a sum that signified a 7.7% increase over 2009.IKEA’s website contains over 12,000 products and is the closest depiction of the complete IKEA range. Apart from that there were over 470 million guests to IKEA’s websites from the year September 2007 to September 2008.IKEA spends just about 1% of the world’s supply of wood, making it one of the biggest users of wood as far as retail sector is concerned(Baxter, Landry, 2010). IKEA was formed in 1943, mainly as mail-order sales company. IKEA started selling furniture about five years afterwards. The very first store opened its doors to the public in 1958 at Smaland whereas the first stores outside of Sweden opened their doors in Denmark (1969) and Norway (1963).The stores later on extended to other European parts in the 1970s with the very first store outside of Scandinavia being opened in Switzerland in 1973 and Germany branch opened later in 1974. IKEA’s current products includes furniture, decorative and linen accessories are typified by some exceptional features, for instance, IKEA’s 2013 furniture fabrics are very illustrious with its unique designs;ethnic,romantic,pop and contemporary. Thus IKEA has produced interesting designs which are bound to keep people talking for months. In 2013, IKEA offered the “Madame Reve” stimulation which is mostly a variety of embroidered linen, in print of retro patterns presenting a charming ambience. IKEA by use of Vichy cubes and light curtains that magnify the conventional country adornment for a stylish nevertheless very slight bedroom decorating approach. Since Nature is still a popular trend, IKEA had a collection for 2013 that included several inspiring Scandinavian bedroom blueprint in which is melted the clarity of white color with the nature spirit of the oak textile; an ideal arrangement that is very fashionable. Currently for just a limited time, both existing and new IKEA family members can take pleasure in buying IKEA’s MALM chest of 2 drawers in black-brown, oak veneer, white stained oak veneer and birch veneer (Baxter, Landry, 2010). Technology has played a major role in the development, growth and expansion of IKEA. Most of the technological advances at IKEA are based on having a lasting customer service experience. IKEA has been able to effectively make use of modern technology as a leveraging tool in order to be successful in the markets it operates. IKEA has employed IT system according to the needs of her business. IKEA is therefore able to leverage on technology so as to be able to sell low-priced home products and appliances which includes accessories, furniture, kitchens and bathrooms. One of the elementary innovations made by IKEA is totally the notion of self service, which simply requires a lot from the system that is constructed about it. IKEA has effectively implemented the use of RFID technology which is an aspect of the system which supports the IKEA’s use of self-service. Several observations have been recorded during many visits in IKEA’s retailing store at Espoo, Finland. RFID (Radio-frequency Identification) is a technology that is an automatic identification method. Thus RFID tags are utilised in storage and to remotely retrieve various information. The tag usually has an antenna which acts in response to the transponder or rather reader and sends back the required information. Thus the information contained in the tag is able to be read several times. There are instances where in some types of tag the information in the tag can be changed and be written. FID can be broadly divided between passive and active tags and they usually operate using distinct frequencies, whereby we have low frequency tags which have got (30-300 kHz),high frequency tags which range from 3-30MHz and finally ultra-high frequency ranging from 300MHz-1GHz).The most suitable type of tag for IKEA is the passive HF tags(13.56MHz).Technology has been successfully used to solve the problem of long queues which had led to an increase in the number of misplaced products and at the same time decreasing customer satisfaction together with gained income(Baxter, Landry, 2010). Thus there is the problem of big products and some of the products may be difficult to handle. IKEA has been able to solve the problem of having products that are big and difficult to handle by use of RFID equipped cash desks. Another problem that IKEA has been faced with is that of customers’ need of searching for the right product from the gigantic storehouse. This may lead to IKEA’s customers getting frustrated and also the need to hire extra employees to assist customers to find the right product. IKEA has been able to employ smart shelves and Personal Shopping Assistant (PSA).The other major problem that IKEA may be faced with is that of customers coming to the store and noticing their favorite product is out of stock. Much as the showrooms may contain some interesting products, the customer may not know if the product is really available. IKEA has been able to solve this problem by having more of their stock information visible and installing Electronic Price Labels (EPC).IKEA has also been able to tighten connection between the IT system and home deliveries through the RFID technology so as to serve customers in wide area distances which can be long and distance scattered. IKEA’s product selection is made up of very small products but which could be relatively expensive. To avoid theft of the same, IKEA has been able to employ FRID tags which work as an aspect of Electronic Article Surveillance (EAS) system. Finally IKEA has been able to confront the problem of recycling. In future environmental regulations may require stricter control of waste generated by companies. Thus companies may be forced to take on the already used product back and do some recycling on it. IKEA has been able to use RFIS tags that have got recycling information in them (Hitt, Ireland, Joskisson, 2010). IKEA’s product life cycle begins at the design stage which is done by the experts. After the designs have been approved, they proceed to the manufacturing stage and after products have been made to design specifications, they are then distributed to the various stores where customers are able to view, make a choice and finally buy. The buying of the product by the customer marks the utilization of the same and finally the end life of product reaches when it can no longer be used. IKEA employs the product elasticity of demand (PED) in a very effective way, which is usually the responsiveness of the amount demanded of a particular product to a definite change in its price. IKEA has in an expert way tapped into several factors so as to make the demand for its products more inelastic. IKEA has realized that PED can be utilised in determination of price policy and elasticity varies from one place to another along a linear downward sloping demand curve (which is why it cannot be said to symbolize the slope of the demand curve).Thus the more PED inelastic that IKEA can create its products and certainly the entire shopping experience, the less (the customers) think about the cost. Theoretically, so long as we regard the demand for IKEA’s products as being inelastic, IKEA can comfortably make price increases, thus increasing the total income stream for IKEA always. This therefore is extremely brilliant for IKEA as a business and a spot on master class in the utilization of PED for all and sundry to examine. This approach of IKEA has made its customers to always get what they are shopping under one roof and therefore keep coming for more. IKEA has got furniture competitors who offer various functionalities and different styles. Thus Conrin has been targeting a new low value in regard to furniture line; Barrel and Crate do offer furniture in a box which is associated with higher prices. Ethan Allen has been aiming at a more expensive market.Wal-Mart on the other hand is equipped in a large box furniture which is classified under the general store should-have products, however do lack much of any style. Its crystal-clear therefore that IKEA has been very successful in delivering the full package for the consumers that reflects on rivalries that are weak. Substitutes for furniture will always be there but IKEA has been able to establish itself and competes with price and as things are, there aren’t any competitors who are within the same price range with IKEA. IKEA being amongst the world’s biggest retail shops in the world have managed to make their services and products more admired on the basis of not only price but also by creation of a exceptional shopping experience for its numerous customers, what is commonly referred to as the “IKEA experience.”Thus IKEA’s marketing mix is classically designed in such as a way as to meet customer needs much better than the competition. IKEA thus offers an instant satisfaction and an enjoyable shopping experience to their customers. IKEA’s employs three main principles that include self-service for the consumers with catalogues that are appealing and informative, furniture that is disassembled and later on assembled by customers themselves and lastly a cash and carry idea especially for suburban shops as innovations in the retail category of furniture. IKEA has been attributed to Monopolistic Competition in the prevailing market structures. This competition is therefore imperfect; there are several producers selling the same products but however not absolutely substitutable as pertains their branding, quality and location. It is a fact that many people feel they need furniture for their homes to be comfortable. Thus whenever there is a demand for something, there must be a corresponding supply to cater for it. IKEA has also got demand and corresponding supply for its products. The first determinant for IKEA is the price of the substitute goods. Thus whenever there is a decrease in prices of substitute goods, there is a decrease corresponding decrease in demand of other goods. For instance if Bob’s discount furniture prices decreases by provision of promotions there will be a shift in demand curve such that the demand for IKEA products will decrease. Income is another determinant of demand. Presently economic depression has caused a reduction in consumer spending and also disposable income. When this takes place, consumers will choose to purchase goods that are inferior since they cannot afford IKEA. Thus when income decreases, there will be a decrease in IKEA making the demand curve to shift to the left. IKEA’s supply likewise is affected by personal skill. If there is plenty of talent at IKEA, the supply curve will automatically shift to the right. The second determinant of supply is limited resources. Even though IKEA actively executes the policy of recycling and promoting conservation of the environment, it cannot be out of the use of a vital resource such as plank. If the price of the plank increases, it means the cost of production will go up and thus leading to less supply of the furniture. Therefore the supply of the furniture will decease and the supply curve will shift to the left. IKEA expects to increase its income as much as 85% by the year 2020, in addition to doubling the number of potential customers who pass through its doors on a yearly basis. IKEA is on the record saying it intends to make between 45 billion Euros and 50 billion Euros in annual income, up from an approximated 26.9 billion Euros in the most current economic year ended 31 August. Over similar period, IKEA say that it plans to increase its store count from the current 300 to 500.IKEA’s CEO,Mikael Ohlsson said that IKEA hopes to double its speed of store openings during the coming 8 years to enhance its footprints in the US, thus capturing a larger slice of emerging and fast-growing markets like China. IKEA usually outsources and purchases its inputs from over 55 nations in the world. IKEA has furniture as its main product and therefore IKEA uses wood as its most crucial non-labor input. Presently, IKEA ranks third as far as purchasing of wood products are concerned in the world. In 2009, IKEA’s top five sources of inputs were in their order, China topped with 20%, Poland with (18 %,) Italy with (8%), Germany with (6%) and finally Sweden with (5 %.).Around the region more than 67% of inputs were sourced from Europe, 30% from Asia and only 3% in Northern America. Producing any good always involves a sequence of stages in which foremost there is extraction of raw materials, processing of intermediate products, assembled, finished and finally distributed and retailed as finished goods. Vertical integration connects two or more consecutive stages. Vertical integration aids firms try to make an extension of market control to the following levels in the value added sequence. Market control is planned to restrict or simply get rid of rivalry for a company’s products. This mostly can take place by price fixing that is compulsory for particular contracts. IKEA fully embraces this business idea and is trying to cover up all areas in the price added furniture and wood chain. And simultaneously tying in suppliers with price fixing contacts. IKEA is a corporation made up of legally independent companies mostly controlled under one management, a man known as Ingvar Kamprad. All the holding companies are chronicled in the Netherlands, and Humlebaek Denmark is the administrative headquarters for IKEA’s activities, with IKEA international A/S, which actually is the topmost organizational for almost all of IKEA companies. IKEA AB is in Almhult Sweden which is the strategic decision center from where IKEA build up their business strategies. Stichtung INGKA Foundation (NL) and INGKA Holding B.V, Amsterdam, NL. sits at the top of the hierarchy. Further 3 holding companies cover various geographical regions. They include; INGKA Holding Europe B.V, Haag, INGKA Holding Scandinavia B.V.NL, and NL INGKA Holdings Overseas B.V., NL and The above three companies also have several subsidiary companies. Procurement is exceptionally positioned to guide organizations through the current turbulent times whereby the society, economies and environment are being challenged: foremost by managing the demand inside the company, secondly by looking for sustainable sourcing sources and thirdly by encouraging suppliers to utilize fewer resources. Thus being able to rise to the environmental and ethical challenges can immensely improve the procurement profile and develop a firm’s access to future prospects. IKEA has got some of the best practices in procurement and has successfully integrated sustainability and margin concerns into innovative and impressive sourcing policies where sustainability is utilized as a basis of competitive advantage. IKEA implements best practices since they are instructive as starting point of inspiration to develop sustainable sourcing and procurement in IKEA so that they can maintain their competitive edge. Over the last ten years, the principle of purchasing power parity theories and one price have been experimentally tested for their soundness. IKEA which is popular worldwide has been found to sell its indistinguishable products in various countries with prices that are different. Thus the consumers are bound to value things more highly when they build them than when they buy them. An experiment carried out by researchers from Harvard Business School is described in Priceonomics.That researchers split participants into two equal divisions: one was to assemble a storage box bought from IKEA and the other one was basically given a preassembled storage box. Afterwards the two subdivisions were asked how much they were willing to compensate for their individual boxes. It was found out that the standard individuals were willing to buy from the group that had been given boxes that were preassembled was $0.48 whereas the other group that had built the boxes was $0.78 which was a whopping 60% increase. The researchers concluded by dubbing this peculiar observation quite appropriately; the “IKEA effect.” IKEA is the global leader in accessories and home furnishings. Despite the tumultuous prevailing external conditions, the IKEA group sales increased by 1.4% to a record 21.8 billion for the fiscal year 2009.In 2010, sales were able to grow by 7.7% to reach 23.1 billion Euros. There was an increase in net profit by 11.3% to 2.5 billion Euros in comparison to the previous year and had a turnover of 27.9 billion Euros in the financial year 2012(Philip, 2013). IKEA is in the retail industry. Conventionally the association between retailers and manufacturers has been that of high degree mutual dependence. Each participant’s ability to survive and succeed is usually dependent on each party’s ability and willingness to safeguard the relationship. Through an extension of the number of enterprises nationally, in addition to internationally, it is the aim of the retail chain to amass market shares, leading to an increased concentration in the retail trade. The world retail market structure is continuously changing and evolving as foreign retailers increase their footprints in various countries. For instance in Canada, 2011.53% or 66 out of the top 124 leading retail stores in Canada were foreign operated and owned. In Canada for instance, there has been a continued considerable level of commercial concentration at the topmost tiers of retail. Thus the retail market has a market concentration ratio of 35.2% and there are several top retailers competing with IKEA for market share. SEARS takes the lead with an impressive (10.7%), followed by the Brick (10.2%), then third place IKEA with (8.5%) and fourth placed is Leon with (5.9%).IKEA’s main competitors are Seamens,Sears and Bob Discount Furniture. Oligopoly is described as a market model of the imperfect competition kind, assuming that there are only a few companies in the industry in existence in an industry, from amongst which there are some that have got a considerable market share and thus can influence the production prices in the specific market .IKEA thus operates under an oligopolistic market model. Game theory is an aspect of applied mathematics that analyses strategic conditions where players have a choice of various activities in an attempt to maximize their proceeds. Game theory was developed as an instrument for understanding economic behavior, however nowadays it’s utilized in various academic fields such as biology, philosophy and even psychology. There are various types of games such as symmetric and asymmetric, simultaneous and sequential, zero sum and non-zero sum, perfect information and imperfect information and lastly infinitely long games (Soderman, 2013). IN 2010 EU adopted a Directive 995/2010 to avoid sales of illegitimate timber and timber products inside the EU. This directive came into effect in March 2013 and requires operators introducing timber products and timber to the EU marketplace to exercise due diligence systems so as to effectively avoid illegitimate harvested wood .IKEA came out in support of the new directive and claimed that IKEA has had a due diligence system for over a decade.This,IKEA explained is an advantage to them since they will be able to adopt easily as they have got essential processes already put in place(Hitt,Ireland,Joskisson,2010). IKEA having over 300 stores and operating in about 40 nations IKEA has got a major international presence in retail furnishings and housewares.IKEA thus customizes its business in a specific country by publishing state specific catalogs with their respective local currency prices with a guarantee to hold for 12 months. IKEA received up to $18 million in financial incentives due to the fact that it constructed a new store in Centennial. This incentive was structured in a way that it was a partial reimbursement on city taxes that IKEA will compensate on sales derived from the 415,000 square foot shop. This incentive makes sense since high-traffic stores such as IKEA usually stimulate close by development of extra home-furnishing shops or other kinds of retailers. IKEA runs special programs such as recycling worn out furniture for such things as vouchers to purchase new furniture. Other programs include free loyalty program for families and several IKEA family offers. IKEA made a decision to start selling solar panels after the British government offered subsidies. Britain lacks the biggest of solar market in comparison with other European states such as Spain and Germany, however thanks to government subsidies; it has developed steadily, with annual installations growing by 25%.IKEA decided that due to the bighearted subsidies from the government, to join with Chinese solar manufacturer and energy utility Hanergy Holding Group Ltd.Currently IKEA has not been able to procure any major government procurement. However IKEA has been trying to negotiate with governments like that of India. Business organizations venture abroad for different reasons and there is big international interest in this topic. IKEA has gone international so that it can leverage on profit-making opportunities, grow its business, establish itself as an international brand and also increase its competitive edge. Going international is also influenced by changing international environment such as international peace and stability, reduction of trade barriers, developments in technology and skills, emerging markets and global economic growth. There are also country-specific factors such as economic and political stability, institutions and culture, government policies that are supportive and absence of “nuisance costs.” The Globalized marketplace means that many historically separate and distinct markets are coming together into one big global market whereby the preferences and tastes of customers in various countries are starting to connect upon some global normality. IKEA has immensely benefited from this trend by implementing a strategy which is mostly standardized. IKEA’s basic strategy is to offer Swedish-inspired house hold goods and fittings to the middle class customers worldwide at relatively low prices. IKEA has benefited from globalization by improving its efficiency. IKEA depends on around 1300 suppliers situated in over 53 countries. IKEA’s objective is to lower its prices by margins of 2 -3% annually and locating the right suppliers is very important to the firm’s success. Thus IKEA tries as much as possible to avoid extremely high costs of shipping by partnering with suppliers in every large market. IKEA has got factors that are dominant affecting the location of its stores. The first one is proximity to target customers; the firm therefore bears in mind how well customers can conduct business with the organization. Thus IKEA locate its stores at commercial centers in major global cities. Another factor that affects location of IKEA store is convenient transportation. This is a factor that does a lot of good especially to a service firm. It attracts more consumers and also leads to the reduction of shipping costs of a company. The other main factor is peripheral support. IKEA has a propensity to make a consideration of whether there are any peripheral facilities about the store are readily available enough to gather consumers, and includes ample parking space, huge shopping mall entertainment joints and nice restaurants. Prices that are low are the bedrock of the IKEA vision, concept and business idea. The primary reasoning behind IKEA’s products is the fact that prices that are low make it possible for everyone to have well designed home furnishings that are functional. IKEA’s vision is to create better everyday living for several people. IKEA is continuously trying to do everything a little simpler, a little better, cost effectively and more efficiently. Every IKEA unit plays a very important role in creation of low prices which are later on offered to customers. IKEA may apply a few marketing ethic principles which include keeping off predatory pricing, variable pricing and price discrimination. Throughout its history, the founders of the company have always avoided predatory pricing (Soderman, 2013). IKEA has got a very innovative human resource management practices that have helped create a nurturing and strong culture that promotes creativity and diversity not only in managers but also in all of the employees. Thus their employee friendly and innovative policy has endeared IKEA to many job seekers and it has become an employer of choice. There is a one year development adventure programme that is open to any co-worker with potential and is applied at the start of one’s career. After the 6 months exposure in two different countries, the co-workers are then absorbed into leadership responsibilities. IKEA has got a culture of diverse, down to earth, simple individuals with a passion for home furnishing. They come from all corners of the globe sharing an inspiring vision of:”creating a better everyday life for many people.”These values form the foundations of their work, inclusive, empathising, honest and open culture. IKEA’s culture is thus based on the spirit of enthusiasm, fun and togetherness. IKEA is a privately owned home supplies retailing business. IKEA has got an autocratic management style whereby the line, manager sets goals, allocates employees staff with roles and strongly insists on obedience. Due to this, decisions usually reflect the personality and opinion of manager, which in turn projects the image of a business that is confident and well managed. IKEA can also be said to employ democracy in its leadership, thus, employees are allowed to participate in democratic management and thus are always in consultation with mangers and enquiring of their suggestions before the final decision is reached. IKEA is clearly an entrepreneurial firm and has demonstrated innovation and risk taking which are two characteristics of an entrepreneur. IKEA has demonstrated risk-taking characteristics in many ways by for instance opening stores worldwide, including developing nations. This was taking a big risk. The accomplishments of IKEA’s products in particular countries, was not very promising and therefore, there was no guarantee of the same level of success in other parts of the world due to there being varied styles amongst cultures. In addition there is always an inherent risk anytime an innovative or new product is introduced in the market since there is no prior prediction whatsoever of its success. IKEA by the virtue of it being the pioneer in selling ready-to-assemble furniture, did not have any indication at all of the triumph of this innovative new idea, since there was nobody else who had tested this idea before and its consequent profit-making abilities(Dyer, Gregersen, Christensen, 2011). One of the major headaches of the 21st century is how we can handle the expected scarcity of resources and change in climate, while at the same providing and maintaining good quality of living for everyone around the globe. IKEA’s sustainability strategy focuses on people and planet positive, is based on IKEA’s several years of working social and environmental issues and gives an explanation of how IKEA will play their part in conquering those challenges. IKEA therefore is focused towards working being better and reducing any bad practices. To get where they need to be, IKEA requires transformational change which simply means a change in the old ways and embracing the all new, bold, innovative and commitment to take action. IKEA believes their strong values of enthusiasm, continuous desire for renewal and their commitment to realize their goals, will support them in boldly taking the several steps, both small and big.IKEA’s plans are boldly described in People and Planet Positive. Sustainability therefore is one of the four major cornerstones of Growing IKEA Together in the business direction. IKEA’s People and Planet will help the firm grow within the limits of a singular planet (Dyer, Gregersen, Christensen, 2011). References Baxter M, Landry. A. (2010). IKEA:Product,Pricing,and Pass-Through. New York: Boston University Press. Dyer. J, Gregersen. H.Christensen.C. (2011). The Innovators DNA:Mastering the Five Skills of Disruptive Innovators. Massachusetts: Harvard Business School Publishing. Hitt M, Ireland D,Joskisson R. (2010). Strategic Management:Competitiveness and Globalization ,Concepts. New York: South-Western Cengage Learning. Philip, A. (2013). How IKEA keeps us shopping:Applying price elasticity of demand. Economic Review , pages 1-4. Soderman,S. (2013). Football and Mangement. New York: Palgrave MAcmillan. http://www.batkartellet.dk/pictures_org/IKEA_maj1996.pdf http://www.dallasfed.org/assets/documents/institute/events/2010/10micro_landry.pdf http://online.wsj.com/news/articles/SB10001424052970203406404578074282274988680 http://www.slideshare.net/FenellaAndrade/ikea-9167089 http://ngwanping0308580.blogspot.com/ Read More