IKEA's Innovation Process, Difficulties for Competitors, and Measures to Maximize Profits - Case Study Example

Business innovation Name Institution affiliation Date Table of Contents Introduction 3 Innovation process 4 Lesson Learnt 5 Difficulties for competitors 7 Recommendations…………………………………………………..………………………8 Summary ……………………………………………………………...………………...….9 Reference lists………………………………………………………………..……………10 Introduction Globalization has made it possible for businesses to compete not only on a local market but on a global scale. As business aims at gaining the competitive advantage, there has been an increased demand for improvement of operations of the business so as to appeal the customers to choose the business instead of the competitors. In an effort to improve business operations thus profit, business managers have invested a lot in innovation strategies. This paper will use IKEA business as a case study discussing the innovative process and lessons learnt. The lessons learnt will also be used to discuss why the business has been more successful and why it would be challenging for competitors to adopt the factors. IKEA is a privately held multinational group of companies that retails home products. The company sells and design flat pack furniture, accessories, and bathroom and kitchen items (Bilton, 2010). IKEA has opened retail branches around the world operating in 5 continents namely Europe, North and South America, Africa and Asia. Founded in the year 1993 by a 17 year old Ingvar Kamprad, the company is owned by Stichting INGKA Foundation (Baraldi, 2008). The company was regarded as the world’s largest furniture retailer in the year 2008 and it generated revenue of 29.293 billion euros in the year 2014 (Henderson et al, 2014). More than 147,000 employees have been employed in the retail stores that the company operates in the five continents (Bilton, 2010). While starting the company, Ingvar innovative idea was to offer high quality products at prices lower than that of competitors. This was through applying simple cost cutting tools that would ensure that the quality he had branded his company was not affected. He knew his target population was mostly hardworking but poor people who lived in Smaland. The vision of IKEA is to create a better everyday life for many people (Rodenberg, 2007). Innovation process The ownership of IKEA is quite complicated where it is owned and operated by array of non-profit organization and other profitable organizations. The corporate structure of IKEA is divided into two divisions, the operations and the franchising. Most of the stores operated by IKEA in the over 36 countries it operates in are owned and operated by INGKA holding, a non-profit organization whereas the other stores are run by franchisee (Baraldi, 2008). INGKA holding is fully owned by Stitching Ingka Foundation also a non-profit foundation that Kamprad established as a way to exempt tax. To further complicate the corporate structure of IKEA, every of its store pays a 3% franchise fee to IKEA Systems, a company that owns IKEA trademark and concept (Baraldi, 2008). Kamprad based the idea of starting IKEA by creating a demand for those practical products that solve essential human needs. The products IKEA produces are meant to be used in activities essential for human survival such as sleeping, eating and storage purposes (Strecker, 2009). The organisation innovation can be also be analysed by discussing the various factors that makes IKEA unique from its competitors. The designing of products by IKEA is different from the one competitors use in that it is meant to guarantee the cheapest price possible. While other producers justify the price tag of an item by emphasizing on the design, IKEA make sure the design fits into the budget of low income earners (Henderson et al, 2014). For a model to be approved for production, great consideration is paid on the ability of the product to meet the need of the buyer. It makes sure that the low prices do not affect the competitiveness of their products as compared to other highly priced products that are justified by the product design (Morabito, 2014). IKEA also adopts an appealing style in presenting their products where most of them are transported in flat packs and can be assemble at the customer’s home (Schermerhon, 2010). The design not only appeals in style but also minimize the transportation costs associated with transporting fully assembled goods. The cheap cost of goods and other related costs make the products affordable to many people increasing the customer base. Innovativeness by IKEA can also be shown by observing the functionality of the goods produced. The production processes not only makes sure that the products are able to meet the demand of the customer but are also affordable to all customers (Bowonder et al, 2010). Many of the customers have little cash to spend on shopping as well as renting space. They therefore have only small space to be used by the whole family. The products are designed in a way that they can fit into some small space without compromising the style they are supposed to present and the purpose they play (Kumar, 2004). IKEA has branded its image as an affordable retail store for customers at all levels thus has made low pricing a mandatory. The vision also states that it aims at creating a better life for many people. To attain its concept, that is to serve as many people, IKEA recognize that many people are not capable of affording expensive goods. To reach a large customer base, the products by IKEA have been set at low prices. The company has used innovation to come up with low cost manufacturing processes that reduce the final cost of goods. An example is by using the by-products of one process to create another good (Bowonder et al, 2010). Many of the IKEA stores have play area for children commonly known as Smaland featuring slides, seesaws, cartoons and even ball pit (Henderson et al, 2014). They target parents with children between 3 to 10 years where they offer the service free of charge. By doing this, parents are given time to shop freely as the children are dropped at the gate and picked at another entrance although the company has implemented use of pagers in case the child need the parent earlier than estimated. In an effort to maximize the profits, IKEA manufacture most of its products in developing countries where there is cheap labour and low cost of raw materials. IKEA has suppliers in 54 countries with China, Poland and Italy being the largest supplier countries (Griffin, 2011). From the manufacturers, the company has established distribution centres in over 16 countries to ensure goods reach the customer in shortest time possible. By transporting the products as flat packages, large volumes are transported. This not only reduces the transportation costs per unit but also increases filling rate. The marketing mix applied by IKEA show their commitment to attracting more customers to their stores. Although use of catalogue is the main marketing strategy that consumed 70% of the marketing budget as of the year 2010, other methods that s have been applied. Such include use of social networks, Television adverts. Some of the creative marketing includes street marketing where use of pop-up rooms, moving showrooms, bus terminals, storage balconies and pop-up lounges are used to appeal more potential customers to visit their stores (Johnston & Bate, 2013). Lessons learnt The company has implemented strategies to ensure that design do not affect the price of the goods. Every aspect of their operations also is meant to reduce the cost while presenting style (Griffin, 2011). Other companies can emulate this by making sure they do not lose the image that they present to their customers. IKEA has also guarantees continued production of quality products (Strecker, 2009). Even though they sell good at a cheaper price than their competitors, they do not produce low quality products in an effort to increase the profit. Other companies should learn to look for ways that increase profit without affecting the quality of their products. The right choice of marketing mix has also helped IKEA to achieve its success. By using demonstration in the street marketing in bus terminals, pop-up lounges, moving showrooms, more customers have been enticed to visit their stores (Rasheed, 2012). Other companies should emulate this making sure that the marketing mix applied has a potential of reaching more customers, communicating the company business idea and appealing them to visit the company (Morabito, 2016). IKEA services are customer based and the company has implemented other actions that attract more customers. Such include Smaland, a play area for children aged between 3 to 10 years in many of its stores (Griffin, 2011). The play area shows the company had parents in mind when they designed the store. Customer centred services make the customers feel more valued thus more attractive to them. Difficulties for competitors IKEA faces many competitors of diverse nature depending on the market of operation. The competitors faced in Europe vary from those in China and the United States of America. This means that different type of difficulty is experienced by the different competitors. In China, the competitors produce products at a cheaper price due to the availability of labour and raw materials at a cheap price (Martin, 2016). The cost of the products sold by IKEA is seen to be high for Chinese nationals and the firm is seen as a luxurious company bringing the western lifestyle into China (Griffin, 2011). This is difficult for competitors who portray a Chinese lifestyle to the nationals when trying to compete with IKEA. In the United States, competitors include Wal-Mart, Costco, Home Depot and Office Depot who are well established offering functional furniture (Johnston & Bate, 2013). These companies offer products at cheap prices competing with IKEA. IKEA has been able to adapt to much cheaper pricing since it has a well-established relation with many suppliers all over the world. In the year 2008, IKEA had 1380 suppliers in 54 countries with 21% of the suppliers located in China (Ireland et al, 2012). This has enabled the company guarantee continued supply of cheap but quality products. In Europe, the major competitors are Kika, Harvey, Cargo, and Tesco. The main difficulty for these companies is that they deal with high end goods justified by the designing of the products (Johnston & Bate, 2013). IKEA gains a competitive advantage due to its low pricing yet quality products with outstanding design. Recommendations In order to maximize profits, IKEA need to address its weaknesses and threats to its operations and market dominance. The first challenge that IKEA need to solve is the effect of currency fluctuation on the price of the products (Kumar, 2004). The challenge is common for the multinational company as it has suppliers in over 54 countries thus the supplies are subject to currency fluctuation. IKEA should also consider other opportunities in the market such as expanding its product line by producing high end product. In the United States, IKEA need to establish itself as a quality producer rather than just cheap products that are associated with low quality. Another opportunity for IKEA is getting into interior designing and produce crockery products thus maximizing income. Summary IKEA has been able to target many consumers by selling high quality goods at a cheap price. To achieve this, the company has used innovation in manufacturing and design of the product to facilitate low cost of production. This has resulted in the company producing assembled at home products making it cheap and convenient for customers to transport the products. The Company has also integrated the right marketing mix to ensure that advertising reaches the targeted audience (Ireland et al, 2012). The use of innovation process to ensure business success amid competition brought about by globalisation is perfectly applied by IKEA. Reference list Baraldi, E. (2008). Strategy in industrial networks: Experiences from IKEA. California management review, 50(4), 99-126. Bilton, C., & Cummings, S. (2010). Creative strategy: Reconnecting business and innovation. Chichester, West Sussex [England: Wiley. Bowonder, B., Dambal, A., Kumar, S., & Shirodkar, A. (2010). Innovation strategies for creating competitive advantage. Research-technology management, 53(3), 19-32. Griffin, R. W. (2011). Management. Mason, OH: South-Western Cengage Learning. Henderson, R., Gulati, R., & Tushman, M. (2014). Leading sustainable change. An organizational perspective. Corby: Oxford University Press. Ireland, R. D., Hoskisson, R. E., & Hitt, M. A. (2012). Understanding business strategy: Concepts plus. Mason, OH: South-Western Cengage Learning. Johnston, R. E., & Bate, J. D. (2013). 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Innovation strategy and firm performance: An empirical study of publicly listed firms. Wiesbaden: Gabler. Read More