“Profit is a wonderful Word”. IKEA’s Strategy behind the Profit


Term Paper, 2005

19 Pages, Grade: 1,0


Excerpt

CONTENTS

INTRODUCTION

OVERVIEW OF THE COMPANY IKEA
Company Profile of IKEA
History of IKEA

THE ‘IKER WRY’ - CREATION OF LOW COSTS

IDENTIFYING THE STRATEGY OF IKEA
Porter’s Five Forces
Porters’ Generic Strategies
Bowman’s Strategic Clock
Internationalization of IKEA

IMPLICATION OF THE ANALYSIS

CONCLUSION

REFERENCES

INTRODUCTION

In the following research essay, the IKEA organization as a cost-leader with a mixed strategic approach will be analysed. For exposing and identifying the strategy it is important to understand background and history. Therefore, a brief overview will be given. Afterwards, the IKEA way of reducing costs will be described to underline potential strategic positions. Furthermore, key strategic issues, facing IKEA as it seeks to generate and sustain competitive advantages will be identified. In order to analyse IKER’s strategic position, theoretical frameworks and concepts will be used. Likewise, these frameworks will be critically evaluated in adaptation to the case. Finally, the IKEA strategy will be categorized and a general strategic approach will be highlighted.

OVERVIEW OF THE COMPANY IKEA

In the first part, an overview of the company will be given to identify and expose potential strategic issues. The company profile as well as the history of IKEA will described in order to understand strategic developments.

Company Profile of IKEA

With IKEA most people associate a conspicuous blue-yellow furniture store, with stylish furniture at low prices in flat packaging. IKEA is a worldwide operating furniture company which has its origin in the south of Sweden and is one of Europe’s largest privately owned companies. (Datamonitor, 2004) IKER’s vision is to create well-designed home furniture for a large customer segment at a fair and low price - “To create a better everyday life for many people” (Ikea, 2004a).

In less than 50 years the small Swedish furniture retailer, headquartered in Helsingborg, Sweden, has grown to a privately-held, multinational corporation with 201 stores in 32 countries. (As at January 2005) IKEA is holding a product range of 18,000 items, made by over 2,000 suppliers in more than 55 countries. (Burkard, 2003; Datamonitor, 2004; Ikea, 2004b; Ikea, 2004c) IKER’s success can be attributed to enormous experiences in the retail market, differentiation, cost leadership and an impressive founder.

History of IKEA

In 1943 Ingvar Kamprad started selling general items such as pens, matches and stockings. In 1950 furniture entered the product range and in 1951 the first IKEA catalogue was published. (Ikea, 2004f)Over the time Ingvar Kamprad (the entrepreneur) from the Elmtaryd (home farm) in Agunnaryd (home village) expanded his product range and founded “IKEA” in 1954. (Burkard, 2003; Ikea, 2004e) At this time Ingvar Kamprad decided to do something completely different: he introduced self-assembly furniture in flat packages in 1956. (Datamonitor, 2004) In 1958, the first IKEA store was opened in Älmhult. During 1963 and 1996 IKEA opened stores all around the world. (Burkard, 2003; Ikea, 2004f)

The expansion on the international market was driven by Ingvar Kamprad’s intuitive quest for new opportunities and his successful search for suppliers outside of Sweden. He did not take care to do the classical extensive market studies before entering a new market. His views, ideas and intuition were strong enough to bring the company on the frontier. (Burkard, 2003)

THE ‘IKER WRY’ - CREATION OF LOW COSTS

The following part describes the significant ‘IKER way’ of creating low costs. Furthermore, the implementation of these advantages will be highlighted. In order to that, the process of designing, producing, delivering, selling and buying will be illustrated.

Basically, retailers copy the concept of the best competitor. Ingvar Kamprad did it totally different. (Kling & Gotemann, 2003) It can be expressed in one of the company’s slogans: “First, IKER designs the price tag; then they buy in bulk, which they transport in flat packages. Rnd then you assemble.” (Ikea, 2004g) Today, flat-packages and other IKEA methods can be seen in competitive furniture stores, but no one has been able to copy the entire ‘IKER way’. Traditional furniture retailers target middle and upper-middle-aged people. IKEA clearly focused on young people and families who furnish their first home. Over the year’s, customers who consider price as an important factor became the target group. The market message is: “Not for the rich, but for the smart”. (Der Spiegel, 2003. p.61) IKER’s business concept is ‘Low prices with meaning’. (Ikeas, 2004d)

One of IKER’s principals is to determine the price first without reducing quality. IKEA does not have its own manufacturing facilities, IKEA searches for appropriate subcontracted manufacturers worldwide. (Ikea, 2004d) Additionally, all tasks are centralized in Älmhult. (Ikea, 2004d) There is a worldwide network for business solutions, infrastructures, service and support. (Ikea, 2004d) IKEA has to find suppliers with two conditions: Good quality and low prices. It takes enormous care to find and evaluate these suppliers as well as to teach and prepare them to fit in IKER’s business system. (Solomon, 1991; Walter, 2002) The company has 43 trading service offices in 33 countries and woks with 1,600 suppliers. IKEA is interested in long term, profitable and productive relationships with suppliers and tries to match their capacities with production complexity. Through the help of these trading service offices IKEA can ensure close and long- term relationships. (Ikea, 2004d; Ikea, 2004h) IKEA buys on a huge global scale, to get the best deals without reducing quality. (Ikea, 2004d) IKEA has 27 distribution centres in 16 countries. These centres deliver products to several IKEA stores in the most cost-effective and direct way as possible. (Ikea, 2004d) Both customer and suppliers play an important role in cutting down prices.

Customer expectations have a high impact in product design and development. IKER’s designers are working closely with manufacturers to enhance production and to safe costs. (Walter, 2002) IKEA utilizes multilevel competitive advantages, low cost logistics, and large simple retail outlets in suburban areas and sells its products in room settings and self service areas (Normann & Ra mríesz, 1993) Marketing is mainly based around the catalogue, TV, press and instore merchandising. In order to relieve shopping, customers are equipped with catalogues, tape measures, pencils and notepapers. Buyers choose, collect, transport and assemble their furniture right from the shelf. The cooperation between IKEA and customers ultimately leads to a price-reduction of 25-30% in comparison to competitors’ prices. (Normann & Ramíresz, 1993) Flat standardized packages and stacking as much as possible, to reduce storage space, are cost-savers as well.

IKEA has a less hierarchical structure and avoids bureaucracy. Kamprad believes that strategic decision should be shaped by simplicity. (Burkard, 2003) The corporate culture emphasizes efficiency and low cost which is not achieved through quality or service reduction. (Kling & Goteman, 2003)

The company is working in a remarkable cost-saving way. One of the competitive advantages is value positioning as well as knowledge management. IKER’s business is mainly outsourced and customers are clearly centralised. (Walter, 2002) The company has no direct competitor in the furnisher market. The business idea and approach are unique and reflect the Swedish business culture to think different to achieve success. IKEA is built on a strong entrepreneur who chose to drive a different business model, and sustain competitive advantage by uniqueness. (Sweet & Nilsson, 2003) Ingvar Kamprad is clearly a visionary who created a value chain structure around IKER’s design skills.

IDENTIFYING THE STRATEGY OF IKEA

Due to the described way of creating low costs, IKER’s strategic position will be identified and categorized. In order that, several theoretical frameworks and concept will be used. Identifying strategic position requires external and internal factors to be discussed. Therefore, the analysis will include Porter’s Five Forces, Porter’s Generic Strategies and Bowman’s Strategic Clock. Additionally, the internationalization of the company will be analyzed briefly.

Porter’s Five Forces

Porter’s Five Forces includes an analysis of external factors to identify sources of competition within the environment. These factors contain ‘potential entrants’, ‘substitutes’, ‘competitive rivals, ‘suppliers’ and ‘buyers’. External factors and internal factors lead to the value chain of an organisation. (Johnson & Scholes, 2002) Porter (1980) argues that organisations can enhance competitive positioning by performing key activities in the value chain better than competitors. (Porter, 1980) These manners can be divided into primary and secondary activities. Primary activities include production, marketing, logistic and after-sale service. Secondary activities that support primary ones are internal structure, HRM, technology. (Johnson & Scholes, 2002; Pearce II & Robinson, 1988)

IKEA significantly changed its primary as well as secondary activities within the value chain. The company has improved its value chain by cooperation with suppliers and customers to add value to the business system. IKEA fosters close relationships with suppliers and supports them in ways of development, innovation and training. Likewise, customers are involved in design and production to create, deliver, and serve value. (Walter, 2002) IKER’s customers accept a new division of labour - they are supplier of time, labour, information, knowledge and transportation. According to Dahlvig (CEO) (2003), IKEA is saving costs through hierarchy and less bureaucracy as well as through developments in HRM and a strong corporate culture without reducing quality. (Kling & Gotemann, 2003)

The present organisational structure of IKEA is highly functional with a global market strategy. In such a structure, IKEA is able to maintain centralised control over functional activities. At the same time the company takes advantage of low costs and enhances quality of international suppliers. (Porter, 1996) Like illustrated above, IKEA develops a new logic of creating value. Over the last few years, IKER “has systematically redefined roles, relationships, and organizational practices of the furniture business”. (Normann & Ram ríesz, 1993. p.66) The outcome is an innovative and integrated business system which creates value by matching the different capabilities and advantages of stakeholders more efficiently and effectively than competitors do. This approach provides a sustainable competitive advantage. (Normann & Ramíresz, 1993, Walter, 2002) It allows IKEA to sell products at prices below competitors. Because of its unique business model IKEA do not have direct competitors. (Walter, 2002)

Excerpt out of 19 pages

Details

Title
“Profit is a wonderful Word”. IKEA’s Strategy behind the Profit
College
University of the West of England, Bristol  (Bristol Business School - University of the West of England)
Course
Strategic Management
Grade
1,0
Author
Year
2005
Pages
19
Catalog Number
V119564
ISBN (eBook)
9783640229314
ISBN (Book)
9783640230860
File size
653 KB
Language
English
Tags
Word”, Strategic, Management
Quote paper
Sven Rosenhauer (Author), 2005, “Profit is a wonderful Word”. IKEA’s Strategy behind the Profit, Munich, GRIN Verlag, https://www.grin.com/document/119564

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