IKEA's Operation Strategies - Case Study Example

Report on IKEAs Operation Strategies Introduction Headquartered in Sweden and founded by Ingvar Kamprad, IKEA Company is one of the most prominent home furniture manufacturers in the world at present. ‘The first IKEA’s store in the world was opened in 1958 in Älmhult, in Småland’ (Burt et al., 2008, p.11). The development of IKEA into a furniture retailer was took place in the 1950s. In the 60s-70s, it seized a considerable furniture market share in Sweden. In the 1980s, when globalisation started to open up global market, IKEA expanded its operations dramatically into new markets such as USA, Italy, France and the UK. As of now, IKEA has more than 292 stores in 40 countries (Sandelands, 2009). The better utilisation of opportunities in the global market helped IKEA to double its revenue in few years’ time period. Foutilizationr example, from 1997 to 2001, IKEA was able to double its revenue in America. By 2002, America was IKEA’s largest market (Moon, 2004, p.8). Moreover, IKEA did everything possible to improve its market share in American and European furniture markets. They have established a lot of stores in America and Europe. However, the unexpected 2008-09 recession caused huge problems in America and European countries. Subsequently, IKEA was forced to pay the penalties for their decisions to expand their market share in American and European continents. On the other hand, the Asian market is currently emerging as the most prosperous market in the world. The emergence of China and India as the global economic powers is forcing IKEA to make drastic changes in its operational, functional, manufacturing and market strategies. Loss of productivity, high costs, excessive inventory and poor working environments are some the major problems faced by international companies like IKEA. High cost of production seems to be a major issue facing IKEA. The manpower cost in America and Europe is extremely higher than that in India or China. As a result of that, a lot of American and European companies are currently shifting their manufacturing units to Asian countries such as India and China. In order to counter the skyrocketing manufacturing costs, lean manufacturing (A management philosophy) was developed by Toyota Production System (TPS) in the 1990s. Currently, IKEA and other international companies are trying to implement lean manufacturing principles as much as possible, to reduce production costs, improve efficiency, reduce waste, and create value for the end customers. The overall aim of lean principle is to improve the organisational efficiency and the creation of values which ultimately helps the end customers. This paper analyses the principles of lean, taking IKEA as an example. IKEA and Principles of Lean Operations ‘The lean enterprise is the one where can be found the following: lean administration, lean marketing and sales, lean manufacturing, lean design, lean development of new products, lean engineering, and lean finance’ (Ucenic, 2011, p.11). The core behind lean principle is to improve efficiency, quality and productivity using fewer resources. The available resources in the world are limited and excessive utilisation makes these resources getting vanished rapidly. It is the duty of the human to preserve as much as resources for future generation. The concept of lean is a mindset, or way of thinking, that develop customer satisfaction (Principles of Lean Thinking, 2004, p.2). According to Acharyaa (2011, p.357) ‘global competition has prompted companies to compete on the basis of Quality, Flexibility, Cost and Timely Deliveries. Lean manufacturing appears to hold considerable promise to address these competitive demands’. The following illustration provides a rough idea about the principles of lean operations. (Principles of Lean, 2009) Value identification process should ‘specify values from the standpoint to the end customer (Principles of Lean, 2009). Ultimately, the future of a company rests in the hands of the end customers. Even though an organisation has plenty of resources, end customers seem to be the most important one. In other words, customers can make or break an organisation. IKEA knows this factor very well and does everything possible to give more importance to customer relationship management. According to Meyer (2006), customer relationship management is an important business strategy which aims to build long-term business relationship with existing customers. Relationship building with the customers is accepted as one of the core business strategy by IKEA. In order to boost customer relationship management, IKEA has provided facilities such as IKEA Family card, electronic shopping, customer interaction channel, telephonic customer service, etc. IKEA uses the family card as a measure to collect customers’ information and to provide rewards to the customers. For example, IKEA provides free coffee and home decoration lectures from Monday to Friday to the family card holders. Ecommerce or electronic shopping facilities are provided by IKEA to its valued customers. E-Commerce helps IKEA to analyse customer information, enhance operating speed, and provide personalized services to the customers. Another important customer relationship management strategy implemented by IKEA is the customer interaction channel. IKEA’s website provides instant chat facility so that customers can contact IKEA any time in a day. IKEA’s vision and mission statements clearly underline importance given to the customers by the company. ‘The IKEA vision is to create a better everyday life for the many people. We make this possible by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible can afford them’ (IKEA corporate website, 2013). Mapping of the value stream is the second step in implementing lean principles. It should be noted that a lot of unnecessary processes and operations were going on in IKEA in the past. It is a fact that these processes might have helped IKEA to bring enormous value in the past. However, it is illogical to keep an outdated process or strategy still, even if this process or strategy helped the company very much in the past. For example, American and European market helped IKEA Company immensely in growing rapidly in the past. At present, global wealth is shifting from American and European continents to the Asian continent. Therefore, it would be illogical for IKEA to give full attention to these markets now. At present, IKEA focusses more on Asian markets. For example, IKEA has established a lot of business units in China recently. Even then, the market share of IKEA in China is not so good. Efforts are made by IKEA to increase its market share in China. According to the retail manager of IKEA China, IKEA has to build more stores, as well as to further enhance logistics and supply chain in China (Fruit, 2012). IKEA’s current business philosophy is; ‘we do our bit, you do your bit, and together we save money’ (Kippenberger 2007, p.33). At the same time, along with the elimination of outdated strategies, it is important for a company to incorporate new strategies based on the needs of the modern customers, as part of the Mapping of the value stream. For example, IKEA is currently offering supervised childcare, playgrounds for children and wheelchairs for disabled to its customers as part of the Mapping of the value stream. Moreover, most of the IKEA stores have a restaurant which provides both Swedish and Chinese food. Moreover, some of the stores have a fast-food bar, such as hot-dogs, ice cream, cold drinks and Swedish coffee (Kippenberger, 2007). Creating flow is the third step in implementing lean principles. In other words, it is necessary to ensure the smooth flow of the value created from the top level to the bottom level. All the departments in an organisation should function in accordance with the values created at the top level. Even a single department can spoil the efforts of the management in the implementation of value creation. It should be noted that plenty of departments in a company are involved in the production and delivery of products and services. If any of these departments fail to operate properly, value created at the top level may not flow properly towards the bottom level. For example, imagine a case in which a company management plans to give more importance to sustainable development. Even if the company is able to implement sustainable business practices in all the departments, except one, that one department can cause immense harm to the reputation of the company. According to Burt et al. (2008, p.2), IKEA is keen in ensuring the smooth flow of values created at the top to the bottom level. In their opinion, IKEA operates a standardized concept, which can be observed in customer facing elements, and in the supporting ‘back office’ processes which support these elements. Establish pull is the fourth step in the implementation of lean principles. The values created at the top level may not flow smoothly to the bottom level, if a company fails to experience demand pull from the market. Value creation at the top alone may not help a company to experience pull in the market for its products. ‘Once a product priority was established, a product developer would set the product’s target retail price using what the company referred to as the matrix’ (Moon, 2004, p.3). Pricing is one of the biggest factors which affect the purchasing decisions of the customers. In developed countries, IKEA may be able to sell its products at a higher rate, whereas in developing or underdeveloped countries, the company may not be able to do so. Matrix approach is implemented by IKEA as far as the pricing strategies are concerned. The core of matrix approach is to reduce the prices of IKEA products as much as possible to compete effectively in the market. Matrix pricing approach is necessary global market since competition is getting stiffer as time goes on. Earlier, IKEA has given more importance to lowly priced furniture and less importance to designs. That is why these products were ‘functional at best, ugly at worst’ (Moon, 2004, p.4). Today IKEA gives more attention to the aesthetics or designs while manufacturing furniture and that also without going for any compromise with the pricing. The slogan ‘Low price with meaning’ (Moon, 2004, p.5) is helping IKEA to establish pull further for its products in the market. ‘As value is specified, value streams are identified, wasted steps are removed, and flow and pull are introduced, begin the process again and continue it until a state of perfection is reached in which perfect value is created with no waste’ (Principles Of Lean, 2009). Seeking perfection is the last step in implementing lean principles. It is impossible for a furniture manufacturing company like IKEA to produce a perfect product or to eliminate 100% waste. In fact, one of the major reasons of operational inefficiency for many organisations is the accumulation of waste at the time of production of goods. Waste accumulation is not only causing financial problems for the company, but also causing immense harm to the environment. Therefore, waste reduction is necessary for all the companies to improve their operational efficiency and corporate image. According to Gerhard, et al (2012, p.92), the most important lean principle is the ‘avoidance of waste and flow. Moreover, Ucenic (2011, p.11) pointed out that the implementation of Lean principles allows an organisation to use less resources and thereby increase the productivity, decrease the costs and offer a higher added value for the consumers. With the help of new technologies, IKEA is able to improve its operational efficiency as much as possible. Waste generation is less in IKEA furniture workshops. Pan (2007) pointed out that the company always emphasizes its effort to become environmental-friendly, while producing, transporting and protecting the products. Customer focus, employee empowerment, performance management, training, continuous improvement, communication and leadership support are some of the major characteristics of lean principles (Lean Principles, 2009) According to Meiling et al. (2012, p.141), ‘State of continuous improvement is a key goal of lean management. Continuous improvements must emerge and evolve simultaneously with a focus on processes, people and long-term thinking’. IKEA provides ample importance to its customers. For example, Chinese people are usually staying in small apartments whereas Americans and Europeans prefer big apartments. Therefore, IKEA is making bigger furniture for American and European market and smaller ones, for the Chinese market. Moreover, the company is helping its customers to do their interior designs. IKEA has recently initiated a new concept of helping consumers in home decoration. It uses its ideas and skills of decorating (Burt et al., 2008). Since the trends in the furniture market change constantly, IKEA provides periodical training to its employees to make them capable of meeting new challenges. Moreover, the company has a research and development department to study the modern trends in the furniture industry and the changing consumer behaviour. The company has a well-developed performance appraisal system to measure the employee performance. Rewards and complements are given to the outstanding employees whereas punishments are given to the underperforming employees as part of the implementation of lean principles in IKEA. IKEA treats all its employees as leaders rather than workers. The company knows that each IKEA employee may have some unique capabilities and these capabilities may help the company in the long run. In other words, IKEA does everything possible to improve the creativity among the employees. Conclusions Competition gets stiffer in the global market because of globalisation, liberalization and privatization. It is difficult for companies to survive in the heavily competitive market with the help of business strategies, which brought dividends to them in the past. The needs of the modern market are extremely different from the needs of the market in the past, since the consumer behaviour changes rapidly, as a result of the rapid advancements in science and technology. IKEA is one of the leading furniture companies in the world at present. One of the critical success factors of IKEA is the lean principles. Value identification, Mapping of the value stream, Creating flow, Establish pull and Seeking perfection are the five important steps in the lean principles. The company is keen in implementing lean principles at all the functional levels, such as manufacturing, management, marketing, training, supply chain etc. The company has a strong commitment to the corporate social responsibility and the sustainable development. Therefore, they are working hard to reduce the waste generation as much as possible and also to improve the operational efficiency and the environmental protection. References Acharyaa, T.K. 2011.Material Handling And Process Improvement Using Lean Manufacturing Principles. International Journal of Industrial Engineering. 2011, Vol. 18 Issue 7, p357-368. Burt, S., Johansson, U and Thelander, A. 2008. Standardized marketing strategies in retailing? IKEA’s marketing strategies in Sweden, the UK and China. [Online] Available at: https://dspace.stir.ac.uk/bitstream/1893/2579/1/Article%20for(SB3)%20NRWA%206-7%2011%20IKEA%20m-strategies%20(SB).pdf [Accessed 11 March 2014] Fruit W. 2012. IKEA China home localization efforts. 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