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IKEA of Sweden

IKEA of Sweden

1-0 BACKGROUND.

If retailers are to succeed in an overseas market, they must not only master the traditional skills of market segment cultural and economic traditions of the host country. (Ingvar Kamprad, quoted in Annual Report 1993)

Ikea Svenska AB, founded in 1943 is the world's largest furniture retailer which specializes in stylish but inexpensive Scandinavian designed furniture. It has 128 fully-owned stores in 26 countries, visited by over 108 million people yearly, and worldwide sales of about $5.4 billion in 1994 (IKEA 1994). Ikea's success in the retail industry can be attributed to its vast experience in the retail market, product differentiation, and cost leadership. The company is, perhaps, one of the World's most successful multinational retailing firms operating as a global organization based on its unique concept that the furniture is sold in kits that are assembled by the customer at home. Refer appendix 1B for corporate performance.

1-1 MISSION.

Ikea's mission is to offer a wide range of home furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them (IKEA 1994). The company targets the customer who is looking for value and is willing to do a little bit of work serving themselves, transporting the items home and assembling the furniture for a better price. The typical Ikea customer is young low to middle income family.

1-2 OPERATING STRATEGY.

Ikea does not have its own manufacturing facilities. Instead, it is using subcontracted manufacturers all over the world for supplies. All research and development activities are, however, centralized in Sweden. In order to maintain low cost, Ikea shoppers are Pro-sumers - half producers, and half consumers (Normann, 1993: 70). In other words, they have to assemble the products themselves. To facilitate shopping, Ikea provides catalogs, tape measures, shopping lists and pencils for writing notes and measurements. Car roof racks are available for purchase at cost and Ikea pick-up vans/mini trucks are available for rental (Economist, 1994: 101). Ikea's success is based on the relatively simple idea of keeping the cost between manufacturers and customers down. According to Ingvar Kamprad, the founder of Ikea; "To design a desk which may cost $1,000 is easy for a furniture designer, but to design a functional and good desk which shall cost $50 can only be done by the very best. Expensive solutions to all kinds of problems are often signs of mediocrity." (Chandler, 1993: 12) Costs are kept under control starting at the design level of the value-added chain. Ikea also keeps costs down by packing items compactly in flat standardized embalages and stacking as much as possible to reduce storage space during and after distribution in the logistics process (Economist, 1994: 101).

Effective marketing through catalogues usually attracts the customer at first, what keeps customers coming back is good service. Ikea believes that a strong in-stock position in which the most popular style and design trends are correctly anticipated is crucial to keep satisfied customers. For that, Ikea depends on leading-edge technology. According to Ikea's logistics manager, "there are a lot of Just-In-Time concepts built into how we're trying to do business" (Chandler, 1993: 12). Ikea has developed its own global distribution network. By utilizing control points in the distribution cycle, the firm is able to insure timely deliver of products to retail stores all over the world (refer appendix 1). Internationally, these stores range in size from 20,000 to 30,000 square feet in Hong Kong and in Singapore to 500,000 square feet in Stockholm, Sweden. Ikea has over 1,800 suppliers located in over 50 different nations (Retail Business, 1995: 78).

Ikea's, marketing manager believes that Consumer tastes are merging globally. In one example, Ikea, which has been importing the "streamlined and contemporary Scandinavian style" to the United States since 1985, found at least one opportunity to export an American style to Europe, as Europeans are picking up on some American furnishing concepts. In order to respond to this new demand, Ikea now market "American style" furnishings for the European market.

1-3 CULTURE.

Ingvar Kamprad, believes that: "Most things still remain to be done - a glorious future! Time is your most important asset. Split your life into10-minute units and sacrifice as few as possible to futurities" (Mclvor, Laurance, 1994: 38). The corporate culture of Ikea is built upon this philosophy all the way from design teams to suppliers and to the customer. A continuous strife for improvement in all areas of the value chain is an effective way to shape the industry to better fit Ikea's future strategies. Due to the uniqueness of Ikea's strategic positioning, being the largest competitor in its field, the firm has the advantage of setting the phase of the industry (refer appendix 2).

Bureaucracy is fought at all levels in the organization. Kamprad believes that "simplicity and common sense should characterize planning and strategic direction" (Bartlett et Al, 1993: 78). In addition, the culture emphasizes efficiency and low cost which is not to be achieved on the expense of quality or service. Symbolic policies, such as only flying economy class and stay at economical hotels, employing young executives and sponsoring university programs have made cost part of corporate culture and has further inspired the influx of entrepreneurship into the organization. For instance, all design teams enjoy complete autonomy in their work, but are expected to design new appealing products regularly.

2-0 STRATEGIC DIRECTION.

Ikea places great emphasis on Porters three generic strategies to improve its competitiveness in the international market place. In addition, Ikea has improved its value-chain by a co-operative focus on suppliers and customers. The firm emphasizes centralized control and standardization of the product mix (Magrath, 1990: 38).

2-1 GLOBAL STRATEGY.

In order to maintain cost leadership in the market, internal production efficiencies must be greater than that of competitors. Under Ikea's global strategy, suppliers are usually located in low-cost nations, with close proximity to raw-materials and reliable access to distribution channels. These suppliers produce highly standardized products intended for the global market, which size provides the firm with the opportunity take the advantage of economies of scale factors. Ikea's role is not only to globally integrate operations and centrally design products, but also to find an effective combination of low cost, standardization, technology, and quality.

In the case of Ikea, a standardized product strategy does not mean complete cultural insensitivity. The company is rather responding to globally emerging consumer tastes and preferences. Retail outlets all over the world carry the basic product range which is universally accepted, but also places great emphasis on the product lines that appeal to local customer preferences (Retail Business, 1994: 78).

2-2 IKEA's MODIFICATION OF THE VALUE CHAIN.

Michael Porter argues that an organization can enhance its competitive positioning by performing key internal activities in the value chain at a lower cost and better than its competitors (Bartol et al, 1993: 211). The value chain approach identifies two major activities- primary and secondary. Primary actives include production, marketing, logistics and after-sale functions. Secondary activities, on the other hand, are identified as support processes to primary activities. These include, firm infrastructure, Human Resource Management. Technology development, and procurement. The ultimate purpose of the firm is to add as much customer "value" in each of the primary activities (Pearce et. al, 1993: 184-187).

Ikea has modified the value chain approach by integrating the customer in the process and introducing a two-way value system between customers, suppliers, and Ikea's headquarters (refer appendix 3). In this global sourcing strategy, the customer is a supplier of time, labor, information, knowledge and transportation. On the other hand, the suppliers are customers, receiving technical assistance from Ikea's corporate technical headquarters through various business services. The company wants customers to understand that their role is not to consume value, but rather to create it (Norrmann et al, 1993: 67).

Ikea's role in the value chain is to mobilize suppliers and customer to help them further add value to the system. Customers are clearly informed in the catalogs of what the firm's business systems provides, and what they are expected to add to the final process.

In order to furnish the customer with good quality products at a low cost, the firm must be able to find suppliers that can deliver high quality items at low cost per unit. The headquarters provides carefully selected suppliers with technical assistance, leased equipment and the necessary skills needed to produce high quality items. This long-term supplier relationship does not only produce superior products, but also add internal value to the suppliers (Normann et al, 1993: 72). In addition, this value-chain modification differentiates Ikea from its competition.

2-3 PORTER's GENERIC STRATEGIES MODEL.

Michael Porter identifies three long-term strategies on which an organization can build its core-competencies (Bartol et al, 1993: 213). These strategies are:

  • Achieve overall low-cost leadership in the industry
  • Market products that are differentiated
  • Focus on market segments for growth in cost and/or differentiation

    A cost leadership strategy involves placing great emphasis on efficiency in all organizational activities in order to reduce the overall costs of products delivered to customers. A generic low cost leadership strategy will only work effectively when the organization can provide products and/or services at a lower cost than the competition.

    On the other hand, a differentiation strategy is aimed at delivering products and/or services that are different from the product mix of the competition. Differentiated products are often marketed at premium prices in order to cope with added costs of differentiation, leading to higher profit margins. Apart from high costs, the potential risk associated with this strategy is that consumers may not perceive product and/or services as differentiated.

    The focus strategy outlined by Michael Porter is a mix of the two earlier discussed generic strategies. It focuses on cost leadership and product differentiation simultaneously in one particular market segment, or a niche.

    As indicated in Ikea's mission statement, the company is in business to produce high quality products at a low cost. This would support a cost leadership strategy. However, the company is also applying an indirect differentiation strategy due to its unique way of incorporating the customer in the value chain. This combination indicates a focus strategy. The firm is focusing on one particular target segment- young and low-to-middle income families.

    Michael Porter further identifies the following steps to establishing cost leadership (Bartol et al, 1993: 212-213):

  • Create a good product
  • Draw advantage from many sources
  • Study the competition
  • Make cost a part of corporate culture.

    Directly linked to its mission statement, Ikea has built its cost leadership position on these steps. It is furnishing the customer with a quality product with components derived from all over the world utilizing multi-level competitive advantages, low-cost logistics, and large simple retail outlets in suburban areas. Furthermore, cost-leadership has been effectively incorporated into the organization's culture through symbols and efficient processes. In return for high sales volume, Ikea accepts low profit margins. Also, Ikea's marketing emphasis on budget prices and good value clearly communicates cost leadership to customers. Ikea's strategy clearly demonstrates that the perception that cost leadership equals poor quality in products and services is incorrect. High quality is associated with input and process variables. Cost reduction, on the other hand, does not mean reducing the quality of these variables, but rather do things better, and more efficiently. Cost leadership is a part of the management process and culture (Edge, 1994: 13).

    From this discussion, it is possible to conclude that Ikea effectively aligns its cost leadership platform, with focus on the needs of its target market segment. Differentiation, as indicated in the modification of the value-chain, also focuses on this particular segment.

    3-0 THE INTERNATIONALIZATION OF IKEA.

    Ikea has applied a conservative policy to internationalization. As a general rule, the firm never enters a new potential market by opening a retail outlet. Instead, a supplier link with the host nation is established (Chandler, 1993: 72). This is a strategic risk reducing approach in which local suppliers can provide valuable input on political and legal, cultural, financial and other issues which provides for opportunities and/or threats to the Ikea Concept. Ikea has concentrated its international expansion in Europe and in North America mainly through company-owned subsidiaries. Franchising, on the other hand, has been extensively utilized in expanding to other areas of the world (refer appendix 4).

    3-1 EXPANSION BY FULLY OWNED SUBSIDIARIES.

    Ikea, establishes subsidiaries in stable markets which are identical to the Scandinavian market. These subsidiaries are set-up by an expansion team from the central expansion group located in Sweden. This group is responsible for store location and layout, training, logistics and marketing (Magrath, 1990: 38). All capital requirements are sourced from the headquarters. The primary purpose of the expansion group is to ensure standardization, operational control and provide a smooth entry into to a new market. When everything is properly set-up and functioning, the local operational team will take over the responsibility for running the store. The expansion team, on the other hand, will move on towards new expansion projects.

    3-2 EXPANSION BY FRANCHISING.

    Ikea approaches unknown, relatively small, and high risk markets by franchising. The expansion group is active in this field as well, as it provides the same pre-opening activities as in opening firm-owned subsidiaries. Franchisees have to carry basic items, but have the freedom to design the rest of the product mix to fit local market needs. The basic core items amounts approximately 12,000, simple and functional products (Bartlett et al, 1993: 76). The centralized head office is actively involved in the selection processes and provides advice. In addition, all products have to be purchased from Ikea's product lines. In order to maintain service, quality and logistic standards, individual franchisees are periodically audited and compared to overall corporate performance. Extensive training, and operational support is provided from the headquarters. All franchisees pay franchise fees to Ikea holdings. All catalogues and promotional advertising is the responsibility of the headquarters. Franchising has been used as a vehicle to the company's generic focus strategy.

    3-3 SUPPORTING ORGANIZATIONAL STRUCTURE.

    The present organizational structure can be defined as highly functional with a global market strategy. In such a structure, Ikea is able to maintain centralized control over functional activities and at the same time take advantage of low cost and enhanced quality from international suppliers. In addition, control over strategic direction is enhanced and functional redundancies are minimized. In order to ensure efficiency in the logistics process, the organization has integrated purchasing and distribution processes under one umbrella function referred to as "Wholesale" (IKEA 1994).

    3-4 BALANCE OF AUTONOMY AND STRATEGIC DIRECTION.

    As Ikea continues to expand overseas, the significance of centralized strategic direction will increase. Naturally, rapid internationalization will trigger a range of challenges imposed on the headquarters in Sweden: Such challenges include:

  • The complexity of the logistics system will increase.
  • It will be more difficult to respond to national needs and cultural sensitivity issues.
  • Franchisees may demand more control over operations.
  • Emerging demographic trends will force the organization to broaden its focus strategy to respond to varying nation-level consumer groups.

    With all these challenges emerging, it will be very difficult to maintain a global organizational structure. The best approach to meet these challenges is to find the proper balance between country level autonomy and centralized intervention. Likewise, intensifying and responding to local rivalry (such as Freedom in Australia) requires increased subsidiary/franchisee autonomy.

    With reference to Ikea's long-term relationship and control over its suppliers in exchange for quality assurance, technology transfers and economies of scale factors may trigger potential suppliers to integrate forward and produce competitive products for Ikea's local competitors. With logistics complications and long lead times, Ikea is forced to maintain high control levels over its suppliers (Magrath, 1990: 38). For instance, if the supplier responsible for the screws component to a table cannot deliver on time, the supplier of the table-top has to adapt its production to the new scenario. Without Ikea's centralized logistics system, this example could lead to severe store shortages, leading to losses in sales.

    4-0 RECOMMENDATIONS.

    Ikea is a very successful multinational corporation, which indicates that earlier discussed focused generic, or long-term strategy of cost leadership and product differentiation has served it well. The Ikea concept is unique and over twenty years of international operations have not triggered any direct international rivalry. The recommendations in this section are designed as to explore possible avenues of further developing Ikea's competitive base and prepare the firm for possible demographic shifts that may reduce the size of its target market segment.

    4-1 EXPLORE JOINT VENTURES AND STRATEGIC ALLIANCES.

    Ikea has not yet explored joint venture and strategic alliances strategies. Furthermore, strategic networking links only exists between suppliers and retail outlets, with the headquarters as a centralized mobilizing agent. The current centralized system suppresses creativity and freedom on the individual store level. A joint venture approach could replace Ikea's franchising concept and increase cultural sensitivity and operational controls through the establishment of strategic networks. Such alliances could also increase market coverage, without Ikea loosing its focused strategic intent on one particular market segment. Kenichi. Ohmae explores this concept in his strategic three C's triangle consisting of the Corporation, Customers and Competitors. By finding an appropriate partner, Ikea can further expand into other market segments in which the competitor has established itself well. In return, Ikea, on the other hand could provide the partner with the access to reliable suppliers.

    In particular, Ikea's insensitivity to individual market needs represents another obstacle to increasing market share. It is highly questionable whether the current centralized design and research development department is able to understand global customer needs and satisfy all of them better than the local competition. For instance, Scandinavian customers like furniture in light pastel colors. Americans, on the other hand, prefer darker and more classic designs. Presently, Ikea ignores this issue and pushes its Scandinavian designed furniture into the American market. Opposite to this, local joint venture partners could develop products within their core-competencies for the local market, and thus, more effectively respond to customer needs. Also, successful, products developed in North America, produced with parts from all over the world, could be marketed in the Europe. Ikea is presently attempting to be the best designer in all fields simultaneously, is reluctant to import new designs from overseas, and is successfully pushing Scandinavian concepts overseas without adoption to local preferences (Mclvor, 1994: 37). Joint venture design and product development partners would perhaps ensure continuous success, especially if industry rivalry intensifies.

    4-2 EXPLORE A NEW ORGANIZATIONAL STRUCTURE.

    A new organizational structure will be necessary as a result of moving the organization from a global towards a transnational perspective. Whereas the global organization is designed as to increase production efficiencies using global economies of scale and scope concepts, the transnational organization combines efficiency, local responsiveness and organizational learning (Beamish et al, 1994: 161). In order to facilitate the transition process towards such an organization, Ikea has to radically change its mindset on the role of its subsidiaries. Currently, Ikea's subsidiaries are hardly no more than extensions of the corporate head office in Sweden. The role of the subsidiaries is not to influence parent company strategies, but rather follow instruction provided from Sweden. High localization pressures emerging due to demographic and cultural differences will force subsidiaries to take strategic initiatives to respond to local market needs. The new organization would be flatter and delegate more responsibility to subsidiaries. The centralized Research and development department would have form internal strategic networks with these subsidiaries and, in a collaborative manner, develop products which are adopted to match country level needs. Corporate strategic direction has to be maintained, since Ikea has to preserve its market niche.

    The changes proposed in the organizational structure will have possible impacts on the corporate culture, which is presently built on the Ikea Spirit. Less control from Sweden will trigger the influx of new ideals, values, and procedures into the Ikea system. This will increase the complexity of the operational culture, but will enhance decision making based on a true international dimension. Today, Ikea limits itself to knowledge and values developed in Scandinavia rather than attempt to understand and incorporate international thoughts and dimensions.

    5-0 CONCLUSION

    Together with innovative changes in the value chain, where consumers become Pro-sumers and suppliers are turned into consumers, the concept of marketing high quality products at low cost through a focused generic strategy, intended for the globally emerging middle-class has served Ikea well. Centralized control and product standardization are two necessary components of the firm's long-term strategy. In addition, the company has facilitated its international expansion through owned subsidiaries and franchises. Future localization pressures will force Ikea to change its global strategy in order to become more sensitive to local demands. Greater emphasis on joint ventures and strategic alliances represent possible vehicles to further build on Ikea's focus strategy. A new transnational oriented organizational structure would further provide the necessary infrastructure needed to support such vehicles towards true internationalization. This in turn, would impact on the present homogenous Scandinavian culture and introduce new values, ideas and, perhaps, broaden Ikea's core competencies.

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