Implementing Business Strategy by IKEA - Essay Example

IKEA Introduction: IKEA is a do-it-yourself, low cost, furniture retailer. The company offers a wide range of products of good quality at affordableprices and 90% of its furniture can be assembled at home by the buyer. The Company has been referred to as the “Macdonalds” of furniture, due to the large number of its retail outlets and the millions of visitors at these outlets. IKEA has about 12,000 product designs, with 2400 suppliers in 65 countries. This research study will examine IKEA’s business strategy in implementing stores in different countries. IKEA retains its distinctive Swedish identity in that all stores are painted in the Swedish national colors of yellow and blue, with small food stores inside where Swedish food can be purchased. Supervised play areas and baby care rooms make it an attractive store for families to visit. IKEA has an economic impact on the economy of every host country in which it opens its stores, because it provides a large number of jobs. It also operates in a socially responsible manner. Its policy towards its suppliers and its focus on the development of low cost products through excellent integration of its design, supplier network, production and customer service has contributed to its economic success, making Kamprad the richest man in the world. History and background of the Swedish Company IKEA: IKEA came into being in 1943, when its founder Ingvar Kamprad was 17 years old and received a gift from his father for performing well in his studies. The young Kamprad used this gift to found a business and named it IKEA using his initials, Elmtaryd and Agunnaryd – the names of the farm and the village where he grew up (Solomon, 1991). The business started off by selling matches, because Ingvar discovered that he could buy matches in bulk from Stockholm and sell them individually at a low price to customers while still making a profit. He also sold a variety of miscellaneous items such as pens, watches, jewellery and other products which he was able to procure and sell at a reduced price. He made these sales initially to neighbors by moving around on his bicycle. Later, he advertised in local papers and brought his products to the attention of his customers through a mail order catalog. For distribution of his products throughout the country, he used the county milk van to deliver the products to the nearby train station.(www.ikea.com). Kamprad introduced furniture into his line of products in 1947. The furniture was manufactured by local manufacturers, using the wood growing close to Kamprad’s home, and the product sold well. Since he was able to see the potential in the low priced furniture products, he decided to stop manufacture of all other products and became a provider of furniture on a large scale. The Company’s first furniture showroom was opened in Almhult in 1953. The reason behind this lay in the fierce competition from another seller who also offered furniture at low prices. In order to counteract the competition, Kamprad decided to open a showroom where the customers could see and handle the furnishings before they purchased them. Through its showroom, IKEA was able to present its products with function, quality and low price. (www.ikea.com). Despite this however, competitor pressure continued and customers began to boycott IKEA stores. To counteract this problem, IKEA began to design its own furniture, so that innovative design aspects became a big selling point that promoted IKEA products. IKEA stores were completely self service. Customers walked around the stores and selected items for themselves and collected their selected products at the delivery docks, with no home delivery service offered although car racks could be purchased or self drive vans rented. (Jeffreys 1992). One of the unique qualities of IKEA furniture was the design of flat products, which the customer could assemble at home. This was a revolutionary concept, because the furniture could be stored on trucks in less space, there was less damage during transportation and the products in general were priced lower.(www.ikea.com). In 1958, IKEA opened its first furniture department store, which was another unique concept in Sweden. From 1959 onwards, the company began offering its own products – Tore, Klippen sofa, Olga chair and other products which became very popular. IKEA International Strategy: The expansion of IKEA on the whole, has been organic so that it retains full control over the business. However, in some countries such as Iceland, Hong Kong, Singapore, Saudi Arabia and Spain, the Company functions as a franchise, with capital investment and management being the responsibility of the local companies and IKEA providing the merchandise, education, training, administrative, support and marketing services.( Worrall and Littler, 1995). Global sales of IKEA products now totals over $17.7 billion annually and one of the key elements underlining IKEA’s success is the fact that it does not tailor its furniture to suit local tastes, but sells the same basic products in all its stores, thereby addressing universal needs in home furnishings.(Solomon, 1991). As opposed to this, retailers like J.C. Penney and Carrefour were unable to adapt their products to the local markets in countries like Chile and did not source their supplies from local producers, making it difficult for them to survive.(Aladin). Economic impact: demand and supply: IKEA’s first supplier outside Sweden was in Oslo, Norway where it also opened its first store in 1963. The Company is able to deliver cost cutting strategies because it controls every aspect of the furniture production process. It uses its own designers for the furniture and is also able to get its goods manufactured relatively cheaply because it buys in global quantities.(Solomon, 1991). Its foldable designs also mean that the Company is able to pack its goods compactly to reduce shipping charges. According to Jeffries (1992) the range of IKEA’s suppliers are very broad. In 1900, there were 1500 suppliers in 45 different countries. The Company its own global suppliers who are best able to manufacture the products at the most economical prices, even if they may not be conventional suppliers.(Solomon 1991). During the process of launch of a new product, IKEA invites suppliers to submit their bids so that it can select the one most economical for its purpose. Once IKEA has identified such suppliers, it seeks to achieve economies of scale by also providing finance to the suppliers in the event external financing sources are too expensive. (IKEA, 2004). In return for offering finance at lower interest rates, IKEA lays out some contractual conditions for suppliers to follow, such as specifying a lower price per unit, as well as the facility to buy the products from the supplier for a specific price. In this way, it is able to establish links with suppliers who are able to promote the goals of low prices, quality products. The business policy of IKEA is to build up long term relationships with suppliers, who are prepared to share their commitment to promote good practices. Suppliers are expected to treat their workforce fairly, to respect human rights and to minimize adverse environmental impact from their activities. The Company has started the ECIS, which is an e-commerce IT tool which aims to integrate suppliers for purposes of transparency, transparency and real time information. (www.ficci.com). This online tool provides suppliers with readily available online information on receiving, changing or splitting orders, booking, dispatching and creating invoices, Suppliers are also provided access to IKEA’s intranet, which provides information such as article specifications, customs, forecast and transport information. The global needs for IKEA are sent as one common order to suppliers through one system and one tool has been provided for suppliers to submit quotations in a standardized format. IKEA’s corporate, social and environmental responsibility: The Company has prioritized certain environmental issues for the 2000-2003 period. It has achieved this by adapting the range of its products so that they are environmentally safe. Most of its products are made of wood which is renewable, recyclable and biodegradable (www.forest-trends.org). Suppliers are also obliged to adhere to IKEA’s requirement of environmental safety, while it is IKEA’s policy to promote a more sustainable use of forest resources and communicate what it is doing to customers. It believes customers have the right to know where the wood comes from and what tree species is used. IKEA’s policy is to source all its wood from verified, well managed forests, with the verification being carried out by a third party according to a standard that takes into account social, economical and environmental interests. (www.forest-trends.org). IKEA also has regulations against the use of child labor, as well as regulations regarding social and working conditions, environment and forestry, which are set out in its document titled “The IKEA way on purchasing Home Furnishing Products” (www.ikea.com/history). Moreover, designers, product developers and technicians are required to consider safety, security and environmental aspects from the initial design stage through the product’s life cycle.(www.ikea-group.ikea-com). The Company has introduced environmentally acceptable solutions in every phase of product development, including transportation. IKEA transports furniture using biodiesel trucks, hydrogen cars and environmental rent vans. Products are manufactured according to strict safety standards and must meet requirements for environmental sustainability. IKEA also maintains a responsibility position towards its employees and requires them to adhere to the strict standards that are set out in IKEA’s IWAY document which reflects the Company’s position on environmental safety and sustainability. IKEA has also helped its host countries to benefit not only economically, by providing employment but also socially by refusing to accept child labor and working to improve conditions in the host countries through the development of sustainable environment solutions. The Company also uses specialized processes in order to preserve electricity and economize on the use of power. IKEA Sales and purchases: The top five countries from which IKEA purchases its materials are China, accounting for 18% of materials purchased, Poland with 12%, Sweden with 9%, Italy with 7% and Germany with 6%.(IKEA, 2004). IKEA’s total sales for the year 2006 totaled 17.3 billion Euros. The top five sales countries were Germany at 17%, USA at 12%, UK and France at 9% and Sweden at 8%. By region, 80% of IKEA sales for 2006 were in Europe, 17% in North America and 3% in Asia and Australia. The top five purchasing countries in 2006 were China at 18%, Poland at 14%, Italy at 8%, Sweden at 7% and Germany at 6%.(www.ikea-group.ikea.com), By region, the highest percentage of purchases were from Europe – 69%, Asia – 28% and North America – 3%. Conclusions: On the basis of the above, it may be noted that IKEA is an outstanding organization that has been able to function exceptionally well in a challenging international environment. One of the reasons for its economic success is the innovative designs of its products, which are in a flat packaging mode and can be assembled by the customers at their own homes. IKEA’s self service model is also less expensive to operate and provides the customers with a higher level of satisfaction in the products. Another aspect that has contributed to IKEA’s success is its focus on the development of low cost products. The design of flat furniture that can be assembled helps to lower costs by allowing the furniture to be packed into flat boxes that save storage space on trucks and also prevent damages along the way. This also reduces the prices for the customer. Another way by which IKEA maintains its low prices is through its supplier management and bidding system. The Company tries to achieve economies of scale in production of its goods by placing its order and inviting suppliers to bid. The supplier who offers the lowest price is selected by IKEA to produce the products. IKEA also offers its suppliers financing, in the event that external financing is expensive. This is the method by which IKEA is also able to control its costs from the supplier end, because in return for supplying financing for supplying the materials, IKEA also enters into a contract wherein the prices per unit are specified at low levels and IKEA also has the option to purchase the product from the supplier at special low prices. In this way, IKEA has set up excellent relationships with a few suppliers and acquires most of its products from them. While focusing on lowering prices form the supply side, IKEA also increases demand from the customer side. This is achieved by offering customers the option to examine the furniture in IKEA showrooms. They can see and touch the furniture prior to buying it. The Company provides free loading, rent vans, etc to facilitate the shopping experience of the customers. IKEA also attracts the family shoppers by providing supervised child care areas and small stores within its furniture complex with Swedish food items, thereby enhancing the shopping experience. IKEA’s commitment to quality and environmental sustainability also promotes its products among customers and makes them popular. For instance IKEA is careful about the kind of wood it uses for its furniture and acquires them only from verified, sources. It has tried to incorporate environmentally safe solutions at every stage of its product production, distribution and sales processes. One example of this is the use of biodiesel and hydrogen powered vehicles to transport the goods. The kinds of materials used for packaging are recyclable, as is the wood that is used for making the furniture. Conservation of electricity at its plants, quality checks on its products and working with suppliers after first working out the final price of the product all help the company to adhere to its policy of low priced, quality furniture products which are also environmentally safe. The company has a generous policy towards its employees, referring to them as co-workers and encouraging them to develop innovative solutions in designing, production, distribution and transportation of goods. Region wise, its highest percentage of employees is from Europe, as also its percentages of sales and purchases, with Germany ranking as one of the highest purchasers of IKEA products in Europe. However, IKEA has made substantial inroads into the United States as well, learning from its initial mistakes in producing non standard sizes of products. It is now expanding its purchases and production into the Asian regions as well and introducing sales in Japan and other Asian countries. IKEA is a truly global furniture store, with a universal range of products which do not need to be adapted much to suit local tastes. The Company has made tremendous progress so far in achieving cost effective solutions and integrating supply, distribution and customer service to produce low priced products. However the continued success of IKEA in the global marketplace will depend upon its continuing ability to provide the customer with a satisfying retail experience and to maintain its differentiation in a highly competitive global market. References: * Aladin. “Globalization’s losers and winners.” * IKEA Timeline. Retrieved October 31, 2007 from: http://www.ikea.com/ms/en_GB/about_ikea/timeline/full_story.html * “Integrating IKEA suppliers with EDI Solutions” Retrieved November 2, 2007 from: http://www.ficci.com/media-room/speeches-presentations/2004/sep/wisc/ficcipres_backup2.pdf * IKEA, 2004. “Global Sourcing Strategy” Retrieved Nov 3, 2007 from: http://www.silf.se/kurser/seminarier/presentationer/IKEA__sven-olof_kulldorf_-_st_inkopardagen_2004.pdf * IKEA, 2006. “Facts and Figures: The IKEA group” Retrieved November 3, 2007 from: http://www.ikea-group.ikea.com/corporate/PDF/FF2006english.pdf * Jefferys, J.B, 1992. "The IKEA Group", IN Hast, A. (Ed.), International Directory of Company Histories, Vol. 5, MI: St. James Press. * “Prioritized environmental issues: 200-2003” retrieved November 2, 2007 from: http://www.forest-trends.org/documents/meetings/shanghai_2001/3_Lofmark_Sh.ppt#5 * Social and Environmental responsibility, 2006. Retrieved November 3, 2006 from: http://www.ikea-group.ikea.com/corporate/PDF/IKEA_SER_2006.pdf * Solomon, Barbara, 1991. “A Swedish Company corners the business worldwide”, Management Review, 80(4): 10 * Worrall, S and Littler, D, 1995. “IKEA”, Management Case Quarterly, 1(4): 3-14 Read More