IKEA Inc. United Kingdom (UK) operation - Essay Example

Over the last century millions of businesses have been established throughout the world, but only a small percentage of them have survived. In order for a business to succeed in the long term it must adapt to changes in the marketplace, utilize innovation and it must provide excellent customer service in order to build an active customer base. IKEA Inc. is a company that has implemented these and many other sound business practices and has accomplished a presence in the market of over 64 years. In this paper we will analyze IKEA Inc. with emphasis in its United Kingdom (UK) operation. The analysis of this company will be realized by emphasizing the following areas: political factors, economic factors, social, technological factors, strategies, tendencies and managerial implications. Executive Summary IKEA was founded in Sweden in 1943 by Ingvar Kamprad Elmtaryd Agunnaryd. The company’s name represents the initials of its founding father. Since the begging Mr. Kamprad had the vision of creating furniture products of good quality in which he applied low cost solutions to lower the prices. IKEA has grown tremendously over the years to become a global enterprise. Currently the company has 220 stores in 33 countries. In the United Kingdom the company has 15 stores. The product offering consist of over 11,000 articles. The great variety, innovative designs, and low prices are some of the reasons customers keep coming back to IKEA for their furniture needs. Exhibit A shows a graph of IKEA worldwide sales. In 2005 IKEA sales were 14.8 billion euros. IKEA utilizes low cost, green furniture and e-retailing strategies to grow its business. The United Kingdom is a country with a strong economy that the company has targeted as a location to expand its business. Designing products to meet the needs of the customers and constant market research will allow the company to expand its global empire. Political and Economic Forces The United Kingdom of Great Britain and Northern Ireland is one the world’s most powerful nations. It is a member of the Group of Eight (G8), whose inclusion means the country is one of the top eight industrialized countries in the world. The governmental structure of the UK is a parliamentary monarchy. The political environment in the United Kingdom is somewhat unstable due to the imminent resignation of Prime Minister Tony Blair. Mr. Blair will resign from his duties as Prime Minister during the summer of 2007 and it is not clear if the person who is suppose to be his successor, Gordon Brown, has the full support of the Labour Party (Economist Intelligence Unit Country Report, 3). Political uncertainty can lead to a slowdown in economic activity. The UK has been a closed allied with the USA, especially in the war on Iraq. This relationship had the consequence of the country becoming a target for terrorist attacks. These unfortunate events caused great human suffering and huge economic losses. The United Kingdom has a population of 60,609,153 people and a gross domestic product (GDP) per capita income of $30,100 (Intute). Exhibit C shows various economic indicators for the United Kingdom. The country has a very stable economy evidenced by an inflation rate that hovers around 2%. The GPD projection for the next five years is 2.4%, while its unemployment rate for 2006 was 5.43% (EIU Viewswire). Total furniture sales in the United Kingdom in 2005 were $23,708,000,000. Exhibit D shows the growth this industry has enjoyed in this country. An economic indicator that can help IKEA predict future consumption of its products is amount of construction of new homes. A new home customer is more likely to purchase new furniture. Exhibit E demonstrates the quarter by quarter change in construction in the UK from 2005 to 2006. The tendency is that the industry is growing. Social and Technological Factors The residents of the United Kingdom are traditional, family oriented people. Eating three meals a day is tradition and sitting down on the table as a family is practice as much as possible. Furniture for kitchens generates a lot revenues, thus IKEA should target this tendency. In 2005 there were a total of 160,270 new marriages in the United Kingdom, a 13% drop from 2004 (Marriage falls to record low). It is important for IKEA to keep a close eye in this social indicator since the joining of two people in matrimony has a correlation with furniture sales since the new couple wants to start a new life together. It is part of the tradition of the people of Great Britain to celebrate holidays. Celebrations among family and friends required homes to have certain furniture to accommodate guest. This custom is good for IKEA and could be utilized to create marketing campaigns to create special sales events prior to these dates. Technology plays a big role in the operation of IKEA. One of the ways the company incorporates state of the art design into their products at low prices is by optimizing its production methods. The designs are created in a way in which the products can fit into flat packs to be assembled at home by the customers. This concept lowers transportation cost and storage cost for the company. The simplicity and functionality of IKEA product designs are a key factor of the company’s success. Strategies and Tendencies Low cost A low cost differentiation strategy is a generic strategy utilized by corporation by gain a competitive advantage. Ikea has been in business since 1935, thus they have been able to optimize the learning experience curve to find savings where others can not visualize. A second important element to implement this strategy is taking advantage of economies of scale in the purchasing cycle. IKEA offers to certain extend a standardized offering across its stores worldwide; this creates the opportunity to realize bulk purchases. A lost cost strategy creates free marketing for a company in the long-term by building brand loyalty from the customers. People will remember the great deal you provide whenever they need another product or service. Over 40% of the world’s light manufacturing operations are realized in China. One of the main reasons China can lower manufacturing cost is because the country provides a cheap labor force for manufacturers. In comparison with well develop countries like the United Kingdom the compensation cost for labor in China is only 5% (People’s Daily). Creating a direct operation in China is the only way to take advantage of China’s lower costs. Another way to gain an upper hand is to import products from China. Exhibit F shows that China is the number one source in company’s purchasing cycle. IKEA is purchasing 18% of its materials from this country. Another way IKEA has been able to lower cost is by establishing close relationships with its suppliers, thus this translates in better price negotiations for the company. Green movement Green products are environmentally friendly products. Our society has caused great damage to the environment over the last 50 years. The processes and materials utilized in the manufacturing of durable goods led to great deal of pollution. Global warming is one of the consequences of society’s irresponsible behavior. IKEA is a company that prides itself in protecting the environment. The way they accomplished this is by utilizing wood as its main raw material in the products they sell. Wood has the advantages of being renewable, recyclable and biodegradable (IKEA). The company created an internal quality control system to ensure that the wood they utilized meets the highest possible standard. The quality system is a 4 level wood standard in which level one material is rejected. The 4wood system is recognized by the Forestry Stewardship Council. The standard is imposed to both its internal production of wood and the suppliers they purchased the material from. Online retail tendency The retail industry is starting to realize that e-commerce is starting to gain a market share of overall sales. Exhibit G shows an example that demonstrates how this tendency has emerged in the United States. Online retail sales have increased in the USA in a five year period starting in 2001 by 294% (Retail Industry Statistics, 8). In the United Kingdom the online revolution is moving at a torrid pace. There is a lot of activity of online sales. UK has over 26 million online shoppers (EIU Viewswire). The number means that 43.33% of the population is shopping online. IKEA is doing a good job of adapting to the online sales tendency. In the United Kingdom all 15 IKEA stores have a customized web page. In 2005 the corporate website attracted over 125 million visitors (IKEA). Receiving traffic into a website is not only about direct online sales. More traffic brings more exposure to all facets of the operation of the business. UK Strategy IKEA has 15 stores in the United Kingdom in the following cities: Bristol, Cardiff, Croydon (London), Edinburgh, Edmonton (London), Gateshead (Newcastle-Upon-Tyne), Glasgow, Lakeside (Thurrock), Leeds, Manchester (Ashton-under-Lyne), Milton Keynes (Bletchley), Nottingham, Warrington (Manchester), Wednesbury (Birgmingham), Wembley (Brent Park-London). The company’s success in this region has prompted company officials to pursue an expansion of its UK operations. In 2007 IKEA plans to open two new stores in Belfast and in Coventry. Each store’s website provide the customers information about the store’s working hours, maps & directions and events and promotions in the store and surrounding community. Each website also provides the exact amount of IKEA products that particular stores offers and job opportunities for with the company in the United Kingdom. IKEA took advantage of the UK consumer tendency of shopping online and for the first time in its history it launched its e-retailing business in a country without previously running a home shopping or telephone ordering service. Currently the company is running a pilot project from in the UK from its Nottingham store to allow customers to place orders online and product be delivered to their homes. The company plans to expand the service to all the United Kingdom store locations. Furniture market trends Green Furniture is one of the hottest trends in the market. Studies demonstrated that the customer is willing to pay a 10% premium if a piece of furniture is produce in an environmentally friendly manner (Albert). Another trend in the marketplace is the need for customer to buy complimentary products for technological advances. Plasma and flat screen TV’s which are usually placed in the wall of the living room leave an empty space in the room where the televisions used to be. This creates the need for a piece of furniture to fill in the space. Managerial Implications IKEA is a company with a proven long-term strategy. The company’s great product variety, low prices and logistics has helped them become a global player in the furniture business. They have focused in the European market, which generates 81% of their corporate revenues. A glaring weakness is the fact the company has not entered the South American market. In South America there are many developing economies such as Brazil and Chile should be targeted in future expansion plans. The US market is another region which has a lot of potential for growth. Currently only 11% of their sales are generated in the United States. The company should study what has worked in their US stores and apply that knowledge to increase their market share. Multiply viability studies must be underway to scout new locations for establishments in this region. IKEA has utilized catalogs and the internet as marketing tools to generate sales. The United Kingdom is a great place to test new technologies and realize market research. The business e-commerce strategy would be enhanced if the company developed or acquire a technology to identify the entry of new users into the internet. The company’s corporate website utilizes a lot flash technology and animations which require users to have a high-speed internet connection. Refinements and web site optimization techniques could help the company increase its online traffic. Conclusion IKEA has followed its founder’s innovative vision of creating efficient designs at low prices to revolutionize the furniture industry. The company has adapted well to the information age enabling them to penetrate the e-retailing market. IKEA plans to expand its United Kingdom operation in 2007 with the inauguration of two new stores. The company followed the green furniture trend to gain a competitive advantage. IKEA has a bright future for year to come. Works cited Albert, F. “Highlights from High Point Spring 2007.” May 1, 2007. . About:Furniture. Economist Intelligence Unit Country Report - United Kingdom (2007): 1-33. Economist Intelligence Unit Database. University of Phoenix library. May 1, 2007. EIU Viewswire Database. University of Phoenix library. May 1, 2007. Ikea.com. (2007) IKEA Inc. April 30, 2007 . Facts & Figures Intute.com. 2006. May 1, 2006. . World Guide “Marriage falls to record low”. Metro.co.uk. February 21, 2007. May 1, 2007. People’s Daily Online. 2006. May 1, 2007. Retail Industry Statistics. (2007): 1-20. Plunkett Research Database. University of Phoenix library. May 1, 2007. Exhibit A (IKEA) Exhibit B (IKEA) Exhibit C Key UK economic indicators 2007 2008 2009 2010 2011 Real GDP growth (%) 2.5 2.2 2.6 2.3 2.4 Consumer price inflation 2.2 1.7 2 1.9 1.9 Budget balance (% of GDP) -2.6 -2.5 -2.4 -2.1 -1.9 Current-account balance (% of GDP) -3.2 -3 -2.2 -1.9 -2 3-month Treasury rate (av; %) 5.4 4.9 4.7 4.9 5 Exchange rate US$: (av) 1.95 1.93 1.89 1.88 1.85 Exchange rate :€ (av) 0.68 0.7 0.68 0.68 0.68 Exchange rate US$:€ (av) 1.33 1.35 1.3 1.27 1.26 (Economist Intelligence Unit) Exhibit D (Economist Intelligence Unit) Exhibit E (Economist Intelligence Unit) Exhibit F (IKEA) Exhibit G (Retail Industry Statistics, 8) Read More