Innovation and Organizational Stability in IKEA - Essay Example

?ORGANIZATIONAL PERFOMANCE DEVELOPMENT: IKEA Table of Contents Table of Contents 2 3. Innovation and organizational stability 4 3 Innovation 4 3 1 Market niche innovation 6 3.2 Organizational sustainability 6 4. Operations and internal processes 8 4.1 IT capability 8 4.2 Scale and range of products and services 10 4.3 Supply chain management 10 5. Customer and marketing 11 5.1 Market segmentation 11 5.2 Branding strategy 11 5.3 Sales channels 13 6. Financial performance 13 7. PART 2: Profit and Loss statement 14 1. Introduction In the face of growing competition, firms are enhancing their competitive advantage through branding strategy, enhancing innovation and organizational stability, streamlining operations and internal processes and improving customer and marketing oriented activities. To improve their financial performance, businesses have been expanding their operations to foreign markets. One such company is IKEA, whose story is captured in a case study developed by Kippenberger (1997). In this article, Kippenberger (1997) extols the IKEA’s virtues and ethos and its business models. In a similar article, Jonathan (1988) discusses the IKEA’s pricing strategies and compares it with other flat-pack retailers based in the UK. This paper examines the IKEA’s key attributes and suggests ways through which they can be enhanced to create wealth and improve shareholder value. 2. Background IKEA is one of the privately held companies operating worldwide, and it sells flat pack furniture, and bathroom accessories.. The company is renowned for its flat-pack design furniture, which it sells at affordable prices. The IKEA’s origin can be traced to 1943 in Sweden, but it has since grown to 301 stores most of which are located in Europe, North America, Asia and Australia. The name IKEA is an acronym of the originator Ingvar Kamprad and the farm and village where he grew at. The growth of the company has been phenomenal starting in the 1950s, the company printed its first advertisements which were aired on different mass media platforms. The 1960s saw the company expand its presence in the neighbouring countries: Norway and Denmark. In 1970s, the company continued with its rapid expansion program by opening up stores in Germany, Australia, Canada, Austria and the Netherlands. In the UK, the company opened its first store in 1990s, then followed by Poland, Czech Republic, UAE, US, Spain and China. At the turn of the 21st century the company sought to increase its influence by opening retail stores in Russia and Japan. Throughout the years, the company has weathered stiff competition to emerge as one of the greatest furniture manufacturer and provider. It uses the hybrid strategy to provide its clientele with a wide variety of products and services. In order to control its costs, IKEA has embraced a standardized process and such strategy has helped the company maintain solid financial performance even after the 2008 financial turmoil. According to Ivarsson and Alvstam (2001) the company financial success can be traced to a confluence of many factors including: innovation, efficient supply chain management, ability to respond fast to the market conditions and customers’ needs. This report seeks to examine some of the key features of the IKEA’s business operations while suggesting ways through which it could be strengthened. The company’s vision is to ensure customers enjoy better life while its mission is to provide buyers with well designed furniture at affordable prices. Beside providing customers with affordable goods and services, the other objective of the company is to ensure that the customers receive standardized services in all its stores. To be able to serve its growing clientele, IKEA has a well established organizational structure headed by the CEO and its corporate structure is divided into two: operations and franchising. 3. Innovation and organizational stability 3.1 Innovation Through the one-suit model the company has been able to improve the popularity of its offerings all over the world, and this business model has increased the company’s purchasing power. Indeed, by getting preferential treatment from its suppliers, the company is able to extend these benefits the customer through lower prices. Offering customer low prices for different products and services, is one way through which the company is able to fulfil its vision of improving peoples’ lives. Using the low-cost manufacturing processes, the designers are able to create low-cost products and services. Another key feature of IKEA’s innovation is standardization of its operations hence making business operations easier to performance and creating a greater brand visibility. To reduce the operating cost, the company limits the number of services available to the customers and has employed innovative designers to help with the process. Innovation in IKEA incorporates corporate culture and the ‘IKEA way’ element. According to the available literature, having a corporate culture that stresses on innovation is one way of ensuring a company attains competitive advantage in any given industry. Beside having a rich corporate culture, the company has managed to provide the customers with a wide product portfolio to position the brand and deepen customer relationships. At the same time, the company plans to increase its online purchases, by expanding its online provisions market and improving the supply-chain focused technology According to Tarnovskaya and De Chernatony (2011) innovation is guided by two principal drivers: the organization’s technical competence and the firm’s customer base. The innovation could be regular, revolutionary, architectural or market niche. Regular innovation involves enhancing the existing skills while revolutionary innovation is dramatic and makes the existing technical competencies obsolete. The market niche innovation opens up new market opportunities through the use of new technological systems. Finally the architectural innovation entails improving the general configuration of the products and services. According to the Henderson and Clark model, innovation seems to have four typologies: architectural, radical, incremental and modular. In the furniture industry, it is difficult to come up with revolutionary products and services and as such firms operating in this sector can only innovate by improving the existing designs. IKEA can improve its current system by eliminating most finished good inventory and introducing customized products. All the customers will be required to do, is to visit one of the stores, and place an order. The customers can the customize product after a few days. According to Reynoso (2009) through rapid order completions strategies the company will be able to attract a great number of the customers reducing the customer churn rate. However, offering customized products is not an easy task and the company wills be forced to observe the following components: develop a design software, initiate a stock material program, embrace a common design platform, use parts standardization and allocate a limited service area. Beside offering customers customized goods and services can improve its offerings through: i) Offering delivery services ii) Focusing on service iii) Better quality of workmanships iv) Use of environmentally sustainable materials 3.1.1 Market niche innovation Social media platforms have become an alternative to using traditional media platforms in increasing sales and popularizing various products and services. Using social media platforms, IKEA should initiate ambitious social media campaigns and promotional activities. 3.2 Organizational sustainability In the face of increasing competition and fluctuating global economy, IKEA has established an efficient supply system. By being able to access cheap supplies, the company is able to maintain healthy profit margins and reduces the likely impact of the financial turmoil. One of the IKEA’s sustainability strategies is developing green and energy saving techniques in its production and production designing. By developing environmentally products, the market is able to popularize its offerings to ‘green’ oriented customers, as well as contribute to the community’s cause of preserving the environment. This aspect of social corporate responsibility improves the company’s reputation, and creates trust between the customers and the stakeholders. To further deal with the dynamic business environment, the company is constantly changing its product design systems and its ability to adapt to the economic conditions. To reduce its carbon footprint, the company has resorted to alternative product delivery systems and just to illustrate, 20% of the company’s freight is transported by rail and 20% by sea. These alternative modes of transportation also allow the company to reduce the cost of delivering products and services. To further reduce its carbon footprint, it would be advisable for the company to increase the proportion of goods transported by rail. In addition, the company should choose working with environmentally sensitive partners. Alternatively, the company should prevail on its current suppliers and business partners to develop strategies of minimizing emissions and contributing to the welfare of the society. Another key area that the company should improve on is giving financial support to community-related projects. According the company has not taken any worthwhile efforts, in improving the current state of affairs and so the company should consider improving its current contribution to the preservation of forests. IKEA has established strong relationships with charitable organizations such as the UNICEF and Save the Children Fund. The company has made commitment running into million of dollars and has also invited external partners to improve the company’s current environmental performance. Its concern for environmental preservation is evidenced by the initiation of the Environmental Action Plan. Through this plan, the company has reduced its dependence on environmentally harmful raw materials such as PVC, and plastic packaging. While this initiative will no doubt contribute to environmental preservation, the company could do more by increasing the share of products made from consumer plastic waste. In future, the company should consider introducing air-inflatable furniture products and reducing the proportion of timber-made products in its current portfolio. In addition, the company should increase its share of funding in the IKEA Green Tech initiative and this initiative should be extended to all the countries where it operates. Most importantly, the company should consider establishing a research fund aimed at improving alternative energy sources and components such as solar panels, alternative light sources and water saving equipment. 4. Operations and internal processes 4.1 IT capability The company has adopted information technology in order to optimize its internal operations and business management. At the same time, the company uses information technology in supply chain management, human resource management and financial performance analysis. Particular instances in which IKEA uses IT includes recruitment of the employees, data mining activities, and improvement of the customer services through the CIC 4.0. The company’s enhanced IT capabilities are well illustrated in the article titled, IKEA’s 3D furniture app: first look. In this article, Fitzpatrick suggests that the company has developed the ‘augmented reality’ for access to various products and services. The IKEA’s IT capabilities are also evident in the way it adopts applications. Using these applications one can have a feel of different products and services before committing to purchase. The company has also adopted information technology by automating the storage and retrieval systems and conveyor belts. Through the automated activities, the company has been able to achieve efficiency in its warehousing operations. According to Johansson and Thelander (2009) establishing IT platforms and integrating information technology with the business’s operations is one way through which an organization can improve its various processes. Already information technology is being used in enterprise resource planning and integration of the information flows in the company. IKEA can exploit the numerous IT capabilities by offering more value-added services that are likely to lead to strong customer loyalty. It is expected that in future, the company will develop more complicated mobile apps to allow a digital test-run of brand-name products. The adoption of the vivid instruction manuals and leaflets will obviate the need to employ more staff, hence allowing the company to reduce the operating costs. According to Johansson and Thelander (2009) through the Design for Logistics (DFL) concept the company has been able to simplify the assembly functions and the significant aspect of the design. In addition, DFL promotes the flat packaging concept hence reducing the logistics costs and simplifying the management activities. However, in order to improve the quality of its operations and products and services, the company should automate other activities to improve collaboration between the company and other stakeholders. The company could learn from the IBM which has an established collaboration network that provides secure connectivity with customers and business partners. The IBM also has an effective file sharing and integration platforms to ease partner on-boarding. By adopting integrated functions, it is expected that the IKEA will be able to reduce the logistics problems while improving efficiency. 4.2 Scale and range of products and services In order to increase the existing offerings the company has expanded the volume of products available to the customers. Currently, the company has over 900 kinds of furnishing goods and hopes to increase to expand to improve the value added service to increase its current consumer base. The company offers high visibility goods and at low prices, and this could explain why its customers are highly satisfied. A customer visiting the IKEA stores can touch, feel and touch the available products and can order them through the online platforms such as the websites. However, according to Hines (2004) the long product line and its large global business make it hard for the management to control standards and quality of the products being sold. Failure to ensure the products being offered are of the right quality as legal implications and ultimately, could lead to reduced customer retention. In addition, more competitors are entering the low price household and furnishings market hence the need for the IKEA to reduce its current offerings and concentrate on providing the customers with quality products and services. 4.3 Supply chain management According to Movahedi, Lavassani and Kumar (2009) supply chain management is an important component of the IKEA’ business model. Using a buy supply chain model, the company is able to transfer the costs of building and operating plants to the supplier. Currently, the company has over1220 suppliers in over fifty five countries all over the world and 31 central distribution centre. Using this model in its supply chain, the company has been able to reduce risks, enable flexibility and maintain cost leadership. To improve the current state of its supply chain, the company should adopt the key attributes that describe a well-functioning organization. The available literature suggests that a supply chain develops in four stages, and unfortunately half of the firms are located on the second stage which is characterized by integration of logistics with outsourcing functions, and regulatory compliance. To reach the fourth stage, IKEA’s supply management should focus on three priorities: chain visibility, cost control and customer service. 5. Customer and marketing 5.1 Market segmentation The company targets young consumers and middle class consumers and by meeting the needs of customers in these two segments, the company has been able to improve its bottom-line performance. The company segmentation strategy has proved important in improving the company’s bottom-line profitability and differentiating its products and services on a global scale. However, key competitors have entered in the low-end furniture hence the need for the company to diversify its target market. In this regard, the company can decide to invest in the manufacturing of products for the high-end market. This could be achieved by establishing specialty retailer stores and by doing so the company can be able to enjoy higher profit margins, alternatively, the company can create a higher-end product line to appeal to the more suburban market. However, this satiety should be implemented with a lot of caution since IKEA has never before operated high end retail stores. Morse so, targeting the high-end market may end up diluting the existing brand and beside the new line may need its own name and promotion campaign. In addition, IKEA will be forced to invest more in adverting costs to popularize the new offerings targeted for the high-end market. 5.2 Branding strategy The company’s products have a high perceived quality due to the company’s innovative branding strategy. At the moment, the company has also adopted brand extensions and this strategy seems to have worked well as IKEA is a well known brand worldwide. In the emerging countries, such as China and African countries, the company offerings enjoy huge popularity. Combining the integrated communication mix with low prices, the company is able to appeal to a high proportion of customers and differentiate its brands. To promote its offerings the company uses the traditional advertisement channels such as advertisement campaigns, catalogues, and online advertisements. To improve the current promotional strategy, Ketchen and Hult (2006) recommend the company to consider engaging in creative marketing and advertising campaigns. Use of creative advertising strategy has also proved successful with companies such as Vodafone through the Zoozoo campaign, and is considered an innovative way of inducing viral purchases. The creative advertising strategy should be complemented by the ‘pull’ strategy to improve the company’s brand awareness and create the right brand attitude. To improve its current brand image, the company should consider using celebrity endorsements. Use of celebrity endorsements has become a growing trend in China and other emerging markets. However, such a strategy can be negatively impacted by the lack of endorser credibility. Indeed, a study by David and Benedikte (2004) observe that the success of the celebrity endorsement depends on the customers’ attitudes towards the endorser. While the company’s branding strategy has been successful, the company has fared badly when it comes to the provision of quality customer services. This occurrence can be attributed to the low price strategy which emphasizes on keeping the costs of different products and services down. To ensure products are affordable, the customers required to carry their and assemble their purchases. To improve the shopping experience the company should consider: i) Providing the home delivery services. Providing home delivery services make the stores friendlier and creates a stronger bond with the customers. ii) Employing interior design consultants. The consultants will work with customers to ensure they are happy with their purchase and the furniture blends well with their homes. iii) Implement a customer relationship management system and enlist past customers’ sin loyalty programs. Implementing the CRM will allow the company to shift from being a minimalist company to being more responsive to the customers’ well being and needs. 5.3 Sales channels IKEA has a differentiated distribution channel through which customers can access various products and services. The company uses the in-store sales and online sales platforms to provide customers with various products and services. To serve the growing customer population, the company has increased the number of physical stores. The company’s stores are highly visible are mostly located outside city centres, primarily due to land cost and traffic access. At the same time, the company has dedicated child care centres where parents can leave their children and pick them later after they are through with the shopping. To improve the shopping experience in its stores, the smaller store formats. According to the available literature review, smaller store formats provide firms with an opportunity to respond to changing customer preferences (Turban, 2002). Already companies such as Wal-Mart and Tesco have adopted this strategy which has a potential of improving the incremental sales. 6. Financial performance In the year 2009, the company posted a net profit of €2.5 billion which represents a 3% increase in profitability compared to the previous year. Most of the profit was re-invested in the existing stores and factories. Since then, the company’s profits have been on the upward trend, an event that is attributed to higher economic growth rate in Russia and China. To improve the current financial performance, the company should strengthen the supply chain management. This recommendation is based on a study conducted by Min and Wei (2013) which shows that accounting and market-based financial performance is closely related to the effectiveness of the SCM. Through supply chain integration, maintaining strong external relationships and adoption of the IT, the company will be able to reduce the operating costs. 7. PART 2: Profit and Loss statement Sighthill Ltd Merchiston Ltd Income statements for the year ended 31 May 2013 2013 ?000 ?000 Continuing operations Revenue 36,000 28,000 Cost of sales (15,840) (13,300) Gross profit 20,160 14,700 Distribution costs (8,280) (6,440) Administrative expenses (7,200) (5,040) Profit from operations 4,680 3,220 Finance costs (1,280) (280) Profit before tax 3,400 2,940 Tax (2,094) (633) Profit for the period from continuing operations attributable to equity holders 1,306 2,307 Sighthill Ltd Merchiston Ltd Statements of financial position as at 31 May 2013 2013 ?000 ?000 ASSETS Non-current assets Property, plant and equipment 26,908 21,346 Current assets Inventories 1,901 798 Trade and other receivables 3,960 1,960 Cash and cash equivalents 787 0 6,648 2,758 Total assets 33,556 24,104 EQUITY AND LIABILITIES Equity Share capital 12,000 6,000 Retained earnings 2,036 11,109 Total equity 14,036 17,109 Non-current liabilities Bank loans 16,000 4,000 16,000 4,000 Current liabilities Trade payables 1,426 2,128 Tax liabilities 2,094 633 Bank overdraft 0 234 3,520 2,995 Total liabilities 19,520 6,995 Total equity and liabilities 33,556 24,104 Profitability ratio Gross profit margin Gross profit margin is calculated using the following components: gross profit and sales revenue. The gross profit margin is a reliable indicator of the company’s financial health and shows how the company is efficiently using its materials and labor in the production process. Sighthill Ltd ?100%= 56% Merchiston Ltd ?100%= 52.5% The net profit margin The components used in the calculation of the net profit margin include the net profit and the sales revenue. This ratio should be high as possible and is a reliable indicator of the company’s financial health. Sighthill Ltd ?100%= 3.6% Merchiston Ltd ?100%= 8.2% Return on capital employed This measure relates the profit to the size of the business and is calculated using the net profit and capital employed components. R.O.C.E should be as high as possible. Sighthill Ltd Capital employed = 33,556 – 3,520= 30036 R.O.C.E = ?100%= 4.3% Merchiston Ltd Capital employed = 24,104 – 2,995= 21109 R.O.C.E = ?100%= 10.9% From above narration, Merchiston Ltd has a higher R.O.C.E. and net profit margin ratios than Sighthill Ltd. Based on these findings, the investor should invest in Merchiston Ltd rather than Sighthill Ltd. Return on Assets It shows the profitability of a company relative to its total assets. It is calculated using the net income and the total assets. From the analysis, Merchiston seems to be using its assets more efficiently that Sighthill Ltd. Sighthill Ltd 1,306/33,556= 0.039 Merchiston Ltd 2,307/24,104= 0.095 Liquidity Ratio Current ratio It indicates a firm’s ability to meet short-term obligations and it measures a company’s current assets against current liabilities. A higher ratio indicates the company has a higher amount of current assets compared to the current liabilities. Using the current ratio measure, Sighthill seems to be performing better than the Merchiston Ltd. Current ratio= current assets/current liabilities Sighthill ltd 6,648 / 3,520 = 2 Merchiston Ltd 2,758 / 2,995 = 1 Quick ratio Also known as the acid-test ratio is more refined than the current ratio and rather than using current assets it focuses on cash, short-term investments and accounts receivable. To calculate the acid test ration the following components will be used in trade and other receivables, cash and cash equivalents. Using the acid-test ratio Sighthill Ltd seems to be performing better than the Merchiston Ltd. Sighthill Ltd (3,960+ 787) / 3,520= 1.3 Merchiston Ltd 1,960 / 2,995= 0.7 Cash ratio It is a conservative measure which uses only two components: cash and equivalents and current liabilities. Merchiston Ltd has a cash ratio of 0, and on this basis that it can be said to be performing worse than Sighthill Ltd. Sighthill Ltd 787/3,520= 0.2. Debt ratio It is used to indicate the level of the financial risk in the company or the extent of the consumer’s leverage. It is calculated using total debt and total assets. From this analysis, Sighthill Ltd is doing better than Merchiston Ltd. Sighthill Ltd 19,520/33,556= 0.6 Merchiston Ltd 6, 995/24,104= 0.3 8. Conclusion IKEA’s has a healthy financial performance as evidenced by increasing net profit and annual sales. However, due to the increasing competition in the furniture industry, the company should open up high-end specialty stores and invest more in online marketing platforms. The company should also consider expanding its operations in the developing countries, where the costs of production are relatively low. From the analysis, Sighthill Ltd seems to be more stable but less profitable than Merchiston Ltd. Consequently, if the investor wants to make short-term investment then he should go for Merchiston, while for long-term investment he should choose Sighthill Ltd. References David, H. and Benedikte, A., 2004. Factors predicting the effectiveness of celebrity endorsement advertisements. European Journal of Marketing, Vol. 38 Iss: 11/12, pp.1509 – 1526 Hines, T., 2004. Supply Chain Strategies: Customer-driven and Customer-Focused. Elsevier Butterworth-Heinemann, Burlington. Ivarsson, I., and Alvstam, C. G., 2011. Upgrading in global value-chains: a case study of technology-learning among IKEA-suppliers in China and Southeast Asia. Journal of Economic Geography, 11(4), 731-752. Johansson, U., and Thelander, A., 2009. A standardised approach to the world? IKEA in China. International Journal of Quality and Service Sciences, 1(2), 199 – 219. Jonathan, R., 1988. IKEA: International Journal of Retail & Distribution Management, Vol. 16 Iss: 3, pp.32 – 34 Ketchen, J.r., and Hult, T.M., 2006. Bridging organization theory and supply chain management: The case of best value supply chains. Journal of Operations Management, 25(2) 573-580. Kippenberger, T., 1997. The story of IKEA. Antidote, 2 Iss: 5, pp.33 – 34 Min, S. and Wei, Yu., 2013. Supply chain management and financial performance: literature review and future directions. International Journal of Operations & Production Management, Vol. 33 Iss: 10, pp.1283 – 1317 Movahedi, B., Lavassani, K., and Kumar, V., 2009. Transition to B2B e-Marketplace Enabled Supply Chain: Readiness Assessment and Success Factors. The International Journal of Technology, Knowledge and Society, Volume 5, Issue 3, pp. 75–88. Reynoso, J.,2009. Values-based service for sustainable business – lessons from IKEA. Journal of Service Management, 20(4), 473 – 475. Tarnovskaya, V. V., and De Chernatony, L., 2011. Internalising a brand across cultures: the case of IKEA. International Journal of Retail & Distribution Management, 39(8), 598 – 618. Turban, E.,2002. Electronic Commerce: A Managerial Perspective. Prentice Hall. Read More