The IKEA Business in the UAE According to the Market Demand - Research Paper Example

The purpose of the present paper is to identify the problems involved in the successful implementation of IKEA in United Arab Emirates (UAE) by determining its current competitors and defining its strategic competitive advantage as well as identifying steps involved in the value chain that will be the key to the success of IKEA. IKEA is the world’s largest home furnishings store, established by Ingvar Kamprad in Sweden. The company has found itself in a position of prominence because of the unique strategy developed by its founders in 1943. 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. Today, IKEA’s success can be summed up by saying it “provides a one-stop sanctuary for coolness” (BusinessWeek 2005). In order to acquire the market share and to be labeled as one of the leading businesses in the world, IKEA has its control over the channels of production and distribution (BusinessWeek 2005). Due to the significance of marketing channels for market acceptance and profitability, developing a formal planning process for formulating and choosing channels is vital (Stern & El-Ansary 1982, p. 222). Much of this control is spelled out in its code of conduct that it calls “The IKEA Way on Purchasing Home Furnishing Products” (IKEA 2010). This code was launched in 2000 (IKEA 2010). It indicates what suppliers should look forward to from IKEA and suggests what IKEA should expect from its suppliers (IKEA 2010). 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 2010). These policies and guidelines will be utilized when implementing IKEA business in the UAE. As previously mentioned, IKEA’s biggest competitive advantage over other home stores is its low prices. The low prices are the single element that drives IKEA’s cost reduction strategy. This strategy provides the company with its greatest opportunity but also its greatest challenge. The firm is passionate with cutting costs and transferring the savings to the customer. This cost cutting governs the process of design. Therefore, 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. This concept will help in the development of trust in the minds of the potential customers of the UAE market. Thus, to achieve its objective of making its designs affordable, the company hires 12 full-time designers at its Almhult, Sweden, facility plus 80 free-lancers (BusinessWeek 2005). IKEA has given itself another competitive advantage by producing and distributing an enormous number of quality catalogues. It prints and distributes more catalogues each year than the world produces Bibles (Roth 2002). The IKEA catalogues are also accessible to the customers online on the company’s official website (IKEA 2010). These catalogues are not just books full of furniture; rather they have been described as a “major cultural indicator of our times” (Roth 2002). Although the catalogues only include less than half of the company’s wide ranging products, every copy is sort of a script that illustrates the role of each individual in the company (Normann & Ramírez 1993). Thus, the company’s catalogues will also help in attracting potential customers from the UAE market. Although, IKEA is very closed-mouthed about its earnings, one can make an educated guess that its pre-tax profits are at least two billion dollars a year (BusinessWeek 2005). This clearly 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. Corporate social responsibility is one of the biggest competitive advantages an organization can have in today’s world. Therefore, partly for societal reasons and partly because it is just plain good business, IKEA has become very environmentally aware (BusinessWeek 2005). For example, for decades the firm has taken appropriate measures to reduce the usage of formaldehyde in their production process (BusinessWeek 2005). 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 (BusinessWeek 2005). Similar standards will be applied in the company’s operations carried out in the UAE. IKEA’s website also informs customers the way the products are designed, manufactured and distributed (IKEA 2010). It also explains the way the products are assembled (IKEA 2010). This information that is provided by the company on its official website will make it easy for the potential customers in the UAE to judge the quality of the products and decide on types of products they want for their homes. Similarly, it will create a more intimate relationship with the customers as they will be aware of the process involved in the making of their furniture. Opening an IKEA store in UAE will be a challenge because there are a number of stores which sell furniture, appliances and home accessories; therefore, it will be difficult for IKEA to make a place for itself even though it is an international brand. One of the biggest competitors that IKEA will face in UAE is The One, which was also founded by a Swedish-born Thomas Lundgren. The One also provides its customers with a complete home experience but in a different manner. As IKEA’s repute is to provide its customers with a variety of products at a low price, The One’s products have been branded as funky and sexy. Therefore, IKEA would need to work hard to create a place in the minds of the UAE customers as it has in other countries (Kippereport 2007). Being the foremost home furnishing retail franchisee across the world IKEA outlets are not just furniture stores, they are gathering spots where families can have a social outing as the stores include restaurants and child care (Normann & Ramírez 1993). All around the world, IKEA stores provide electric carts to the customers who need them, to offer a customer friendly shopping experience. As previously mentioned, IKEA’s products are inexpensive relative to the market with the product line being very extensive. Similarly, IKEA’s products are trendy as well which would help the store compete with its major competitor, The One. 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” (IKEA 2010). 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 (IKEA 2010). IKEA with its product designs will attract different types of customers from young to old, male to female, etc. The One, on the other hand, offers trendy and sexy products which mostly attract the young generation and which ultimately limits the clientele for The One (Kippereport 2007). Furthermore, the prices at The One are slightly higher than what IKEA (Kippereport 2007) will offer which would give IKEA a competitive edge in the UAE market. 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 No date). On the other hand, The One’s varieties of furniture and accessories are collected from different parts of the world with the purpose to provide a combination of quality, class and eccentricity (Kippereport 2007). This increases The One’s cost which ultimately results in higher prices. Despite its huge success, IKEA has not always been attuned to the needs of each individual market. For example in the United States, 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 and many of the stores were in bad locations (BusinessWeek 2005).. Furthermore, the prices of the products were, surprisingly enough, too high (BusinessWeek 2005). Thus, in order to avoid these problems when implementing IKEA business in the UAE, proper planning would be undertaken. This would be done by selecting the best possible locations for the stores, such as, top class shopping malls and proper placement of the products in the stores. A store environment that would provide the customers with a complete shopping experience will be created in the IKEA stores in the UAE. Another decision of the IKEA management that cost it customers in the United States was that the merchandise supplied was created in metric measures, something unfamiliar to American shoppers (BusinessWeek 2005). Beds were listed in centimeters instead of simply being called king, queen, or twin. Drinking glasses were too small and drapes were too short (BusinessWeek 2005). In sum, IKEA was not catering to the American taste. Similar was the case in Japan where the Japanese customers wanted high quality and sound construction, not low prices and particle board (Lane No date). 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 No date). Therefore, in order to overcome these issues, a thorough market research will be conducted by IKEA to become aware of the living styles of the people, their likes/dislikes, preferences, etc which would help in providing the customers exactly what they want and cater to their taste. Another dimension that can be extracted from the aforementioned examples of IKEA failure might have occurred 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 (Hahn 2006). “Organizational change is always difficult because behavioral patterns must be completely rearranged. This aspect will result in a tendency to resist change” (Hahn 2006). It appears that IKEA has experienced this tendency. Therefore, the management has to take appropriate measures to bring the change in the thinking patterns of the IKEA family wherever and whenever the market demands. As it is clear from IKEA’s initial dealings in Japan, not everyone appreciates inexpensive furniture made out of particle board. Therefore, instead of shying away from the challenge, IKEA became one of the first manufacturers to make furniture with patterns produced directly on fiberboard and particleboard, a technique known as print-on-board (IKEA 2010). This innovation can also help IKEA in the UAE to attract potential customers. Another problem with IKEA stores around the world is its long queues and jam-packed parking lots (BusinessWeek 2005). Moreover, the assembling of heavy furniture can be quite difficult for a lot of customers (BusinessWeek 2005). Even though, it is apparently true that the number of people who approve of IKEA’s model far outnumber the ones who do not, but one can only guess how many customers are being driven away by these policies. To avoid these issues in the UAE, a proper system would be introduced which would reduce the long lines and parking issues. Similarly, a home consultancy service will be initiated in the UAE which will not only help the customers assemble the furniture but also provide home styling services. This would not only help bring in new customers but it will also help in developing long-term relationship with the existing customers. Conclusion In conclusion, Ingvar Kamprad created a strategy that has made IKEA one of the leading businesses in today’s world. Stores are designed in a manner that offers a complete shopping experience rather than just a purchasing experience. With millions of copies of catalogues distributed every year, IKEA will establish a place in the UAE with effective business strategies. These strategies will not only be to provide the customers with wide-ranging products at a low price, they would also include steps that would be taken it gain a competitive advantage over its competitors, namely The One. Furthermore, the problems encountered by IKEA during their previous endeavors of expansion will be avoided through thorough market research and establishment of long-term relationship with the customers. Thus, to successfully implement the IKEA business in the UAE and gain a competitive edge in the market, the company should continue to work with its existing culture and make changes according to the market demand. References Hahn, M 2006, ‘Changing Organizations’, Ezine articles. Retrieved January 21, 2011, from http://ezinearticles.com/?ChangingOrganizations&id=136067 IKEA: How the Swedish Retailer became a global cult brand, 2005, BusinessWeek. Retrieved January 21, 2011, from http://www.businessweek.com/magazine/content/05 _b3959001.htm IKEA vs. The One, 2007, Kippreport. Retrieved February 1, 2011, from http://www.kippreport.com/2007/11/ikea-vs-the-one/ About IKEA: 2000s, 2010, IKEA. Retrieved January 21, 2011, from http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/history/2000.html Lane, G, No date, Failed Business in Japan – IKEA. Retrieved January 21, 2011, from http://www.japaninc.com/node/2546. Normann, R & Ramírez, R, 1993, ‘From Value Chain to Value Constellation: Designing Interactive Strategy’, Harvard Business Review, vol. 71, no. 4, pp. 1-22. Retrieved January 21, 2011, from http://www1.ximb.ac.in/users/fac/dpdash/dpdash.nsf/ pages/BP_Constellation. Owens, H, No date, ‘IKEA: A Natural Step Case Study’, The Natural Step Network. Retrieved January 21, 2011, from http://www.naturalstep.org/en/usa/ikea. Roth, M 2002, ‘Christian Commentary’, Martin Roth Christian Commentary. Retrieved January 21, 2011, from http://www.martinrothonline.com/MRCC23.htm Stern, LW & El-Ansary, AI, 1982, ‘Marketing Channels’, Prentice-Hall, Englewood Cliffs. Read More