Ikea Case Study
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Introduction
IKEA states in their business idea: “We shall offer a wide range of home furnishing items of good design and function, at prices so low, that the majority of people can afford to buy them”(IKEA 2005). IKEA manage to keep costs low by their superior relationship with their suppliers were they buy low-cost components in huge quantities. Together with efficient warehousing and customer selling service it passes on to customers resulting in lower prices, anywhere from 25 – 50 % lower than its competitors. However, at the same time they manage to operate with 8 – 10 % profit margins, much higher than the industry average (Norman and Ramirez.1993).
We have made a short and simple SWOT analysis to get an overview their capabilities.
Strengths
Weaknesses
High variety offering – right range of products
Higher margins than competitors
Economies of Scale
Logistics – inventory management
Long term relations with suppliers
The business culture
Organisational capabilities – adapting change
Market leader – Category killer
High service level – few stock outs
Low lead time
Good product information
Too big – may increase bureaucracy
Franchising – higher control cost
Mass marketing -expensive
Charismatic leader – hard to replace
Search cost – for cheaper components
Market surveillance – keep up with trends
Opportunities
Threats
Expanding Asian market
New technology – may lower marketing cost
More focus on environmental issues
New trends -individualism
Time is money – people do not have the time to put products together
Too dominate – defence position man hamper innovation
The key elements to IKEAs winning formula are well known: simple, affordable, functional, high quality, Scandinavian design, an extensive product line, knock-down furniture kits that customers transport and assemble themselves, low cost, unique logistics, huge stores located in suburban areas with plenty of parking space, day-care facilities and restaurants. To focus only on low cost and low price is to miss the true significance of the companies business innovation capabilities. IKEA has systematically redefined the roles, relationships and organizational practices of the furniture business, so they can offer lower prices and the right variety of products. IKEA has been able to grow globally in an industry that traditionally was a fragmented and dominated by local actors.
In Theodore Levitts famous article Marketing Myopia (1960), he stresses that it is important to define and to know what need to fulfill. The founder of IKEA Ingvar Kamprad had interest in the home furniture industry primarily because of social reasons. He wanted to respond to increasing prices of home furniture. Prices grew 41 % faster than other household goods from 1935 to 1946. He commented that:” IKEAs aim is to change this situation. We shall offer a wide range of home furnishing items of good design and function at prices so low that the majority of people can afford to buy them….” IKEAs vision “To create a better everyday life for the majority of people” reflects which needs IKEA tries to fulfill. The main purpose is to make the customers life easier and better, and not to sell furniture as a main goal.
Customer value
IKEAs revenue for 2003 was 11.300 million Euros and with an annual growth of more then 20 %, an achievement they managed every year since 1997. To understand how IKEA still manage to keep their annual growth over 20 % it is important to see what value they are creating for their customers. First, they maintain to involve the customers in their business concept. It offers a brand new division of labor; if customers agree to take on certain key tasks traditionally done by manufacturers and retailers — the assembly of products and their delivery to customers homes then IKEA promises to deliver well-designed products at substantially lower prices. This kind of distribution and logistics make the margins better and a consequence is lower prices for the customers. Because most items are packed flat they do not have to store finish products, which enables them to store more of the same products. This leads to both fever stock-outs and that customers can leave with their products resulting in a high service level for the customers
A part of IKEAs strategy is to ease the life of the majority of people. The term “majority of people” are not a very homogeny segment. IKEA offer a wide range of products, approximately 20.000, which makes it a one stop shop. This is both time saving for the customers and makes them able to choose within a variety of the same products group. Barbara Kahn (1998) discusses that a high-variety strategy can frustrate the customer. IKEA may well run the risk of a negative perception of their high-variety strategy by its customer. However, over years they have managed to develop a concept of high variety and a system that makes it easy for customers to handle this extensive product range. Kahn notes when customers value the variety and are willing to pay for it this can lead to a significant competitive advantage. Alongside with other facilities such as free parking, childcare and an affordable restaurant makes the shopping experience more comfortable and shopping at IKEA should be a nice experience for all members of the family.
Peter Dicksons model (1992) “Dynamic Model of Competition”, he suggests that if heterogeneity in demand is constantly changing the organization must meet buyers preferences to survive. The trends within home furniture are constantly changing and a recent trend the last decades is that the concept of family is almost none existing. The shift has been that single households are becoming more prevalent. Fashion trends also influence