Ikea: target costing - Research Paper Example

“Beginning with a single store in Almhult, the company now operates 186 outlets, employing 76,000 employees” (Burkemanm). After expanding close to 40 countries and generating revenues close to 25 billion Euros, IKEA has become one of the leading furniture and household products companies of the world. One of the key reason by which they are able to achieve this level of success, is effective cost management strategies. IKEA is always known for competitive as well as low prices even without compromising on the quality, and this has brought in optimum number of customers.

IKEA is able to offer low prices, and at the same time garner good profits because of its effective cost management strategies. One of its important and earliest cost management strategies is giving or outsourcing its manufacturing process to outside manufacturers. This strategy had early origins because in mid 1950’s, IKEA could not get manufactured products from local Swedish manufacturers, as other Swedish furniture retailers formed a cartel, and pressurized the manufacturers to stop selling products to IKEA.

This only initiated IKEA to take the outsourcing route, and Kamprad made contracts with number of manufacturing factories in Poland. Along with the pressure from the cartel, the other reason, why Kamprad favoured Polish manufacturers is because of their low cost manufacturing including cheap labour. This early decision turned to be the turning point, as it resulted in good profits for IKEA. That is, IKEA was able to transfer the reduction in production costs to cheaper and affordable prices to their customer, thereby bringing in some more customers.

“IKEA currently works with 1,300 suppliers in 53 countries, but Kamprad made the pioneering decision to source furniture from communist Poland as early as 1961. Since manufacturing costs were 50% lower in Poland than in Sweden, his decision looks brilliant in hindsight.” (Barthelemy). With this cost management strategy providing positive results, IKEA continued this strategy particularly in 1980’s and 1990’s, by outsourcing the manufacturing process to even more cost effective options or countries like India, China, Philippines, etc.

Apart from this effective cost management strategy, IKEA also implements cost management strategies in-house as well. IKEA always tries to offer prices, which are 30% to 50% lower than their competitors’ prices. They are able to offer such lower prices, by cutting down the excess costs even at the product conceptualization stage. That is, the product designers and developers at IKEA, along with other key personnel will come up with a feasible low cost product development plan, before starting the production itself.

For example, if they want to create and launch a new product like a couch, the product development team will survey its competitors to determine how much they charge for a similar item or couch, if offered, and then select a target price that is 30% to 50% less than the competitors' price. (Horngren 499). After setting an approximate and feasible price target for each product, the product development team will then go into the specifics and will focus on what type of raw materials can be used to keep the price within the acceptable range, even without