IKEA Business Implementation - Essay Example

? IKEA BUSINESS IMPLEMENTATION 25 January I. Introduction The purpose of this paper is to address various factors involved in the successful implementation of IKEA business by clearly defining its strategic competitive advantage and steps in the value chain as well as identifying its potential problems and competitors that must be overcome. II. Competitive Advantages IKEA’s success can be summed up by saying it “provides a one-stop sanctuary for coolness” (BusinessWeek). Specifically, IKEA outlets are not just furniture stores, they are gathering spots where families can have a social outing (Normann & Ramirez). The stores include restaurants and child care. Electric carts are provided for people who need them. IKEA’s products are trendy yet inexpensive relative to the market. The product line is very extensive. And IKEA prints and distributes more catalogues each year than the world produces Bibles (Roth). The company has found itself in a position of prominence because of the unique strategy it has developed since its inception as a small mail-order merchant in Sweden in 1943. Its founder, Ingvar Kamprad, was a man of vision who started developing this strategy from the very beginning. It took him only twelve years to develop his model. He put the final touches on it in 1965 when he opened a large store in suburban Stockholm that resembles today’s stores worldwide. A great deal of IKEA’s strategy is embedded in what it calls the IKEA Concept. According to the IKEA Web site, the IKEA Concept “is based on offering a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.” The site also suggests that IKEA’s target market is the middle class, not the upper class that has always been able to buy trendy furniture. The Web site also discusses the way its products are designed, manufactured, and distributed. There is mention of how the products are assembled. In a sense, this is a fallacy because most IKEA furniture products are sold disassembled which is one of the reasons why they can be sold as cheaply as they are. Although Kamprad initially bought the furniture he sold, he soon changed his strategy by manufacturing the furniture himself. He designed his furniture to be functional and yet easy and inexpensive to build. The furniture was sold disassembled to save on manufacturing costs. And it was displayed in the store with detailed explanation tickets to alleviate the need for salesperson assistance, thus cutting down on the cost of labor (Owens). A major competitive advantage that IKEA has is its control over the channels of production and distribution. It controls a network of 1800 suppliers in more than 50 countries (Normann and Ramirez). Because marketing channels are so critical on market acceptance and overall economic performance, creating a formal planning process for designing and selecting channels is imperative (Stern & El-Ansary: 222). Much of this control is spelled out in its code of conduct that it calls “The IKEA Way on Purchasing Home Furnishing Products.” This code was launched in 2000. It defines what suppliers can expect from IKEA and specifies what IKEA expects from its suppliers. It not only spells out its expectations in terms of legal requirements, working conditions, external environment, and forestry management, but also puts a great deal of emphasis on the active prevention of child labor (IKEA Web site). Partly for societal reasons and partly because it is just plain good business, IKEA has become very environmentally aware. For example, for decades the firm has worked to minimize the use of formaldehyde in its products. For 25 years, IKEA has applied the German formaldehyde legal requirement for all its products in all markets. The Germans have the strictest standard in the world. IKEA even applies this standard in countries where no limit exists. The German limit is such that even persons who are overly sensitive to formaldehyde should not experience any problems (Owens). By initiating its own standards on such things as formaldehyde, it avoids litigation costs and the bad publicity of selling merchandise that is not environmentally friendly. The biggest single element that drives IKEA’s strategy is cost reduction. This provides the company with its greatest opportunity but also its greatest challenge. The firm is obsessed with cutting costs and passing the savings to the customer. This cost obsession dominates the process of design. "Designing beautiful-but-expensive products is easy," says Josephine Rydberg-Dumont, president of Ikea of Sweden. "Designing beautiful products that are inexpensive and functional is a huge challenge." (BusinessWeek). Unless a design can be made affordable, it will not end up in IKEA’s showrooms or catalogues no matter how otherwise marketable the item might be. To make its designs affordable, the company hires 12 full-time designers at its Almhult, Sweden, facility plus 80 free-lancers. These designers “work hand in hand with in-house production teams to identify the appropriate materials and least costly suppliers, a trial-and-error process that can take as long as three years.” (BusinessWeek). IKEA has given itself a competitive advantage by producing and distributing an enormous number of quality catalogues. The catalogue is also available online. It is not just a book full of furniture. It has been described as a “major cultural indicator of our times.” (Roth). Although the catalogues only include 30% to 40% of the company’s roughly 10,000 products, “every copy becomes a ‘script’, explaining the roles each actor performs in the company’s business system.” (Normann and Ramirez). Although IKEA is very closed-mouthed about its earnings, we can make an educated guess that its pre-tax profits are at least two billion dollars a year. That shows that it is a tremendously successful company and that it has the wherewithal to deal with competitors. If it wishes, it can simply cut prices drastically to undercut competitors. Its sheer size and proven marketing expertise give it a huge competitive advantage. III. Competitive Disadvantages Despite its huge success, IKEA has not always been attuned to the needs of each individual market. When IKEA first started building in the United States (a place where it has always had great expansion plans), the stores were too small to handle the assortment of merchandise. Many of the stores were in bad locations. And surprisingly enough, prices were too high (BusinessWeek). One of the poorest decisions IKEA made in the U.S. was in supplying merchandise created in metric measures, something unfamiliar to American shoppers. Beds were listed in centimeters instead of simply being called king, queen, or twin. Drinking glasses were too small and drapes were too short. In sum, IKEA was not catering to the American taste. A worse situation happened when IKEA opened its first store in Japan. Japanese customers wanted high quality and sound construction, not low prices and particle board. The decision to move into Japan was such a fiasco that the company pulled out completely in 1986 and did not re-enter the Japanese market until 2006 (Lane). The aforementioned examples of IKEA failure may have come in part because the company was founded with a particular strategy in mind and it was slow to change that strategy, even when the market demanded it. There is a basic premise of organizational theory that says that once an organization has been founded, it resists change. “Organizational change is always difficult because behavioral patterns must be completely rearranged. This aspect will result in a tendency to resist change.” (Hahn). It appears that IKEA has experienced this tendency. As of this writing, Ingvar Kamprad is alive and well and his influence is still felt in the company. As long as he is around, the culture will not likely change. He even went so far as to keep his ideas alive past his death by donating the company to a charitable foundation in The Netherlands called Ingka Holding B.V. He did this to prevent the firm from being taken over or split up after he died. This will prevent the company from being traded publicly far into the future. The downside to this decision is that the company may have difficulty in finding other methods of financing as it continues to expand and attempts to keep ahead of the growing number of direct competitors. (IKEA Int’l). As can be seen with IKEA’s initial dealings in Japan, not everyone appreciates inexpensive furniture made out of particle board. Instead of shying away from it, IKEA became one of the first manufacturers to make furniture with patterns produced directly on fiberboard and particleboard. The technique is called print-on-board and is produced in a factory in Poland. (IKEA Web site). Some customers are unhappy with IKEA for its long lines and crowded parking lots. And assembling heavy furniture can be quite difficult for a lot of customers. It is apparently true that the number of people who approve of IKEA’s model far outnumber the ones who don’t, but one can only guess how many customers are being driven away by these policies. Fixing these problems would require a major change in strategy, and it is not likely that these changes are forthcoming. Another premise of organizational theory states that the innovator tends not to reap the greatest benefits of the innovation. “There is less risk in adopting the innovation, and less work to do to develop the innovation into a viable commercial offering or useful business improvement.” (Mackinnon). As of this point, IKEA is still reaping the bulk of the benefits of its innovations. But as the world market changes and if IKEA doesn’t change its policies accordingly, competitors could start taking over the markets. In the United States, Target is also considered a trendy place to shop and is beginning to steal some of IKEA’s innovations. Five years ago the Target Corporation recruited Thomas O’Brien, a top-rank designer, to create a line of inexpensive furnishings. Target has a much bigger presence in the U.S. than IKEA with roughly 1700 stores located in every state but Vermont. (CNN). As a point of comparison, IKEA has fewer than 50 stores in the U.S. Other companies are also taking on IKEA. Kmart is developing its own line of furnishings in conjunction with Martha Stewart. A 30-year-old French chain named Fry is expanding its furniture line. And the Nitori Company is competing very well in Japan in the area of low-priced furniture. (BusinessWeek). IV. Conclusion Ingvar Kamprad created a strategy that has made IKEA a very profitable company. Stores are designed so that shopping there is a social experience, not just a purchasing experience. Well over a hundred million copies of the catalogue are distributed each year. The company has sometimes been slow to react to the needs of specific markets, but it ultimately has made the needed changes. Just because it is so successful, IKEA has imitators. These imitators already have their own strategies, but they are copying the best parts of the IKEA model that work for them. Even with these competitors, the IKEA culture should continue to work well into the future. WORKS CITED (All Web sites were accessed on 21-24 January 2011) CNN.com. http://articles.cnn.com/2009-03-04/us/target.stores_1_same-store-sales-supertarget-stores-new-stores?_s=PM:US Hahn, Martin. Changing Organizations. http://ezinearticles.com/?Changing-Organizations&id=136067 “IKEA: How the Swedish Retailer became a global cult brand.” BusinessWeek 14 Nov. 2005: http://www.businessweek.com/magazine/content/05_b3959001.htm IKEA International A/S. http://www.fundinguniverse.com/company-histories/IKEA-International-AS-Company-History.html IKEA Web sites: http://franchisorikea.com/showContent.asp?swfId=concept2; http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/history/2000.html. Lane, Greg. Failed Business in Japan – IKEA. http://www.japaninc.com/node/2546 Mackinnon, Lauchlan. “What Type of Innovator Are You?” 9 Sept. 2010; http://www.ideamanagementsystems.com/2010/09/what-type-of-innovator-is-your.html) Normann, Richard & Rafael Ramirez. “From Value Chain to Value Constellation: Designing Interactive Strategy.” Harvard Business Review 71.4 (1993): 1-22. http://www1.ximb.ac.in/users/fac/dpdash/dpdash.nsf/pages/BP_Constellation Owens, Heidi. “IKEA: A Natural Step Case Study,” The Natural Step Network. http://www.naturalstep.org/en/usa/ikea Roth, Martin, Christian Commentary. http://www.martinrothonline.com/MRCC23.htm Stern, Louis W. & Adel I. El-Ansary. Marketing Channels. 2nd Ed. Englewood Cliffs: Prentice-Hall, 1982. Print. Read More