Operations and Supply Chain Management - IKEA Invades America - Case Study Example

Introduction IKEA is one of the models in international businesses. It is a perfect example of how a business can adopt a strategy and built a successful business based on what gives it a strategic edge against the rest in the market. From its humble beginning as a small business selling household goods, IKEA has managed to go international, transcending cultures and becoming a local success in every new market it conquers. However, this has not been without some issues. The following is an analysis of IKEA case study with regard to how its supply chain strategy aligns with its business strategy. Question 1 IKEA’s strategy is of cost leadership. Low cost strategy is important in making sure that IKEA is able to deliver high quality goods at low cost. The firm looks to provide the most affordable, yet high quality furniture to its customers. Since its inception in 1943, the firm has always sought to provide low cost furniture to its customers. This can be seen in its original business model. According to Moon (2004), IKEA was started not as a furniture retailing company, but as a business selling household goods at discount prices. Even as the firm realigned itself into a furniture retailer, the low cost strategy was not abandoned and it was kept at the heart of the strategy. To manage this low cost strategy, IKEA has always tried to manage its cost by, for instance, taking advantage of economies of scale. This can be seen in the size of all its stores which are always big in order to lower the operational cost slow per unit of sale. As Pauwel, K. et al (2004), keeping the operational costs low is a major way to maintain cost leadership strategy. This has remained as the centre of IKEA’s competitive strategy over the years. Being able to deliver high quality furniture to customers who are seeking good furniture but who are sensitive to high prices is what IKEA centers its strategy on. The firm features a children’s play ground in all it shops which means that its target customers are people with young families. This means that the firm mainly targets people of medium age who still have small children, as opposed to targeting the older people or the young people who are not yet married. As Hunt and Annet (2004) say, market segmentatison is a major source of comeptittivemnt if the firm is able to serve the market segment well. Question 2 The supply chain of IKEA The supply chain of IKEA depends on cost management. To manage the cost, IKEA has depended on two major factors in its supply chain. First, the firm has depended on having large shops so that to get economies of scale on costs. Having large IKEA stores makes it possible to keep operation costs down. At the same time, the firm uses franchising as part of its supply chain strategy. IKEA uses its long time experience and its big, well know name to franchise its business. This makes it easy for IKEA to work at low cost and thus be able to deliver the goods at a cost that is favorable to most of the customers. Franchising is a major way to reduce cost. This is for both starts up cost, as well as, operational costs. By franchising the business out to other people, IKEA is able to reduce its costs and therefore able to sustain its strategy. Question 3 Instead of going for the upscale market, IKEA goes for the middle class as the target market. IKEA focuses on this middle class market by making sure that it provides for the high quality that this market is looking for but at the same time pushing the prices of its products down. IKEA’s strategy looks at the market and tries to deliver the product that suit this middle class market by doing the following; Low prices with a meaning IKEA realizes that the market it looks for is a market composed of people who do not have much extra money in their pockets. Yet, despite not having much money, the middle class are people with a high sense of style and fashion and do not want cheap things. The market is looking for low priced goods and not cheap goods. In this case, the firm always seeks to provide the market with products which are of the best quality and at the same time still maintaining the low pricing. This strategy is geared towards meeting the needs and requirements of the customers. The customer is able to come up with a market strategy that only targets a certain market segment. IKEA uses mono segmenting in its market strategy, only looking to satisfy a specific market segment. This is very important for the any firms. However, as Wright and Esslemont (1994), there is a limit to how much a firm can benefit from this segmentation strategy. However, as Epetimehin (2011) established, this can be a way to satisfy the customers and therefore getting them to be loyal customers. Unlike other firms which try to target various markets by having products from the lowest to the highest, IKEA uses a strategy that is focused on the middle class market and dedicates all its functions and processes right from design to the supply chain. The firm also realizes that this is the largest market especially in the countries the firm operates. The firm only operates in the developed countries or in the developing countries and has avoided underdeveloped countries such as African countries. In this regard, the firm only operates in Europe, Canada, Asia pacific and the Caribbean, as well as, the USA. This strategy to focus on the middle class in these developing and developed countries has given IKEA a very good market that is able to provide enough goods Question 4 IKEA’s business strategy has been developed over time since its inception in 1943. A number of historic events in the life of the firm can be seen as having been the source of how the firm’s strategy developed. First, the firm originally dealt in household items and not furniture. Later, IKEA started dealing with furniture, which was bought from furniture manufacturers who were in a forest near where IKEA was founded. It is at this point when the current IKEA started taking shape where the firm started designing its own furniture instead of buying from outside manufacturers. The firm later discontinued all the other products and focused on its furniture. When the firm started manufacturing its own furniture, one day the inspiration to start designing furniture that was easy to assemble and disassemble came from an unexpected place. This was when an employee tried to remove the legs of furniture so as to fit it in a car for transport. From there, IKEA has always designed furniture that is disassembled and that is easy to assemble so that customers can buy the furniture, transport them easily and assemble the furniture without problems and without requiring the help of a professional to do it. This business model helped in changing the way IKEA operated and helped to further strengthen its strategy for low cost furniture. First, these kinds of furniture led to much lower costs for IKEA because they required less space to use, less labor and also reduced losses due to the fact that the furniture did not damage so easily during transport. For the customer, the advantage was the ease in which to transport the furniture after buying it from IKEA and the ease of reassembling it without needing the help of another person a professional. It also provided the customer with a kind of furniture that was easy to move with if one is moving houses. The furniture was also of high quality. IKEA managed to reduce costs a lot by keeping the external manufacturers from the supply chain and designing and manufacturing its own furniture. This made it possible for IKEA to not only reduce the cost of the furniture which made it possible for IKEA to sell the goods to the customers at a lower price, but also made it possible for IKEA to deliver the kind of furniture the customers wanted. Focusing on furniture was another important step that the firm took with regard to sustaining its strategy. The firm at an early stage realized the importance of focusing on one product in order to increase its competencies in this one field. Although IKEA has since started to diversify its products and now sells more than just furniture, its other products are all in line with the main product and are seen as complementing products. This strategy of focusing on one product is able to help the firm in two main ways. First, because of this focus, it gives the customer the idea that the firm is most likely to be good in the products it offers. This gives the firm more customers and being able to have more customers is very important for a firm whose main strategy is cost leadership. For a firm what depends on cost leadership as its main strategy, selling to as many people as possible is important because the firm depends on small but multiplied profits as opposed to the firms that depend on big profits from just a few customers. Having a focus on one product category is mainly helpful for the firm in terms of attracting as many furniture buyers as possible. Question 5 It would be necessary for IKEA to consider opening smaller satellite shops which allow those who don’t live near the big IKEA shops to access the products that IKEA sells. These shops would serve two main purposes which would be important for IKEA in the long run; The first purpose would be to make sure that all IKEA loyal customers would not need to have to travel for long distances even when they want to buy small products. These satellite outlets would be useful in making sure that the customers can do light shopping but without having to go to the main IKEA stores. Taking care of the customers in this way can benefit the firm in a very important way with regard to strategy development (Kraus & Kauranen, 2009). The second purpose would be to attract more customers. For those people who are not yet IKEA’s loyal customers, these satellite shops would be important to aid as most have a taste of the IKEA experience. Once these new customers have tasted the IKEA experience by buying smaller products from the satellite shops, they can now be willing to travel the far distances when they want to make a bigger purchase. In this regard the satellite shops in places where the big IKEA shops are not available would be necessary to make sure that the IKEA brand is spreading further and it is becoming more intent. IKEA could use this strategy to establish its presence in places where it has not been able to open the supersized stores. Since opening these supersized stores would require a lot of resources, opening the smaller ships would be a better way to go since even if they fail, there would be no big impact on the firm’s finances or operations. With regard to how this aligns with the firm’s strategy, the main issue would be with regard to the cost leadership issues. Operating smaller shops may require more costs per unit of sales and this may not align well with the strategy of the firm. However, this can be overcome by using the franchising of the business, as the firm already does. IKEA can franchise to smaller business and individuals. If it does this, it will manage to keep its costs of operation low and at the same time, giving the customer the quality service and products. Smaller shops may also not align well with the firm’s strategy of offering the customers self service options where the customers selects the goods they want for themselves. However, in these smaller shops, the issue of the self service will not be a big deal because the customers are only willing to make a small purchase. Self service in the context of the furniture sales would be more useful when the customers are buying larger pieces of furniture as opposed to when the customer is making smaller purchases. In this case, although the shops will not be able to offer the self service model of the business, they will appreciate the fact that the firm has made the effort of making the products closer to them. The consumers will also differentiate between the major IKEA shops and the satellite ones because this business model is used by so many big and international firms which open smaller shops in areas where their service is not available. This means that opening these smaller shops will not affect the image or even the strategy of IKEA. The firm can have a way of making these satellite shops easy to differentiate from its main shops by for instance giving them special name such as IKEA Satellite. Conclusion With regard to the supply chain strategy, IKEA has managed to align itself well enough with the corporate strategy, and this has made it possible for the firm to enjoy a strategic fit. However, there are still opportunities for more improvements and the firm can benefit a lot by looking at how it can improve its supply chain to have a deeper rooted supply chain. This, although not entirely in line with its current strategy will be important for the future of the business as it will help the firm have deeper roots that can be used for business expansion in the future. References Epetimehin, F. (2011 ). Market Segmentation: A Tool for Improving Customer Satisfaction and Retention in Insurance Service Delivery. Journal of Emerging Trends in Economics and Management Sciences (JETEMS), 2 (1), 62-67. http://jetems.scholarlinkresearch.org/articles/Market%20Segmentation.pdf Hunt, S.D. & Annet, S.B. (2004). Market Segmentation Strategy, Competitive Advantage, and Public Policy: Grounding Segmentation Strategy in Resource-Advantage Theory. Australasian Marketing Journal, 12 (1), 7-25. http://wwwdocs.fce.unsw.edu.au/marketing/12_01_hunt.pdf Kraus, S. & Kauranen, I. (2009). Strategic management and entrepreneurship. International Journal of Business Science and Applied Management, 4 (1), 38-50. http://www.business-and-management.org/download.php?file=2009/4_1--37-50-Kraus,Kauranen.pdf Pauwel, K. et al. (2004). Modeling Marketing Dynamics by Time Series. Marketing Letters, 15 (4), 167–183. https://lirias.kuleuven.be/bitstream/123456789/121335/1/modeling Wright, M. & Esslemont, D. (1994). The Logical Limitations of Target Marketing. Marketing Bulletin, 5 (2), 13-20. http://marketing-bulletin.massey.ac.nz/V5/MB_V5_A2_Wright.pdf Moon, Y. (2004). IKEA Invades America . Harvard Business Review , PP. 3-27. http://hbr.org/product/ikea-invades-america/an/504094-PDF-ENG?referral=01597 Read More