Value Chain – IKEA Essay

IKEA, the famous Swedish company, is the one of the largest furniture retailers in the world, which specializes in modern but inexpensive Scandinavian designed furniture. According to Echeat (2006), the IKEA had more than 175 stores spread over 31 countries at the end of 2002 and worldwide sales of about 12. 8 billion euros in 2004. During the IKEA financial year 2001-2002, a total of 60,000 people are employed by IKEA worldwide and there are 323 million people visited IKEA stores around the world (Kronos, 2006).

IKEA? mission is to offer consumers good value for their money. The typical IKEA customer is young low to middle income family. IKEA? success in the retail industry can be attributed to its vast experience in the retail market, product differentiation, and cost leadership (Echeat, 2006). As a global organization, the company is the world? most successful retailing firms based on its unique concept that the furniture is sold in kits that are assembled by the customers at home. 1. Operating strategyIKEA dose not manufacture its own products, but works through a complex network of suppliers around the world to help company maintain its low-cost position. Actually, it has 1,800 suppliers in 55 countries.

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By providing the manufacturers with technical and financial assistance, IKEA establishes durable partnerships with furniture producers and suppliers. To secure suppliers and help suppliers develop, IKEA also has launched partnerships as joint owners in several countries including Poland, Russia, and China. Due to ?ypically Swedish? tyle, all research and development activities are centralized in Sweden where determined what materials should be used and what manufacturers would do the assembly work. In addition to using high volume runs to cut costs, IKEA always believed that costs are kept under control starting at the design level of the value-added chain. IKEA designers work closely with suppliers to build savings into the products by designing products that can be produced at a low cost. It sells most of its furniture as kits for customers to take home and assemble themselves.

Those knock-down kits are packed in flat boxes, which can eliminate wasted space and transport and store goods more efficiently in the logistics process (Economist, 1994:101). With the fierce competition increasingly, IKEA is attempting not only to globally integrate operations and centrally design products, but also to find an effective combination of low cost, technology, and quality. IKEA realized strong in-stock position in which the most popular style and design trends were correctly anticipated is crucial to keep satisfied customers (Geocities, 1996).

For that reason, Just-in-time concepts are applied to decision making. Apart from that, IKEA has developed its own global distribution network to make sure the firm is able to insure timely deliver of products to retail stores all over the world. In order to cater for customer tastes and preferences, IKEA stores 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. Insights and Reflection of Ikea2. 1 Ikea? Modification of the Value ChainAccording to Porter (1980), an organization can enhance its competitive positioning by performing key internal activities in the value chain at a lower cost and do better than its competitors. The value chain approach identifies two major activities, primary activities include production, marketing, logistics and after-sale function, and secondary activities include firm infrastructure, human resource management, technology development and procurement.

The ultimate purpose of the firms is to add as much customer value in each of the primary activities. See appendix 1However, 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. 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). Ikea’s role in the value chain is to mobilize suppliers and customers to help them further add value to the system. Customers are clearly informed in the catalogs of what the firm’s business systems provide, and what they are expected to add to the final process. 2. 2 New Product Life CycleProduct Life Cycle is a well-known framework in marketing products typically goes through four stages: introduction, growth, maturity and decline. At each stage, marketing strategy varies.

Nevertheless, Ikea challenges the conventional Product Life Cycle through reverse positioning, according to Vedpuriswar (2005); it can strip away product attributes which are traditionally considered important while adding new ones. A key factor in the success of the Swedish furniture retailer Ikea has been reverse positioning. Furniture companies have over the years steadily augmented their offerings. They typically carry a wide product range. Sales consultants pamper customers, presenting them various options including package deals that involve delivery of new furniture and disposing the old.

Ikea? approach has been different. A typical Ikea store does not provide in-store sales assistance. The variety is limited. Most of the furniture requires assembly. Ikea does not guarantee durability. It even attempts to convince buyers that furniture should be replaced often. Ikea? operations strategy mainly matches the slack? approach. Firstly, as Ikea? belief states that they offer good quality with low enough price and there are no delays in delivery, which fit for the order winning objectives: low price, speed, quality.

Ikea also offer ranges of products, flexibility and dependability, these are qualifying objectives. Secondly, a useful way of representing the relative importance of performance objectives for a product or service is called the polar representation because the scales which represent the importance of each performance objective have the same origin (Slack, 2004). A line describes the relative importance of each performance objective. The closer the line is to the common origin, the less important is the performance objective to the operation. Slack, 2004), so Zara? cost, quality and speed are the most important performance objectives, which shown in Appendix 2. Thirdly, according to the Zara? order winning objectives, they excel at the cost; their low cost is much less than its competitors. 2. 3 Comparisons between Ikea? and Zara? Business ModelIkea? Business ModelIkea? business model or concept make it successful in the sector, is essentially based on three factors:Self service facilitated by the wide-scale distribution of an information catalogue and the role of explanatory notice on the products.

Kit enabling the storage of all the products offered in the warehouse of the store and presented in flat packages. Parking lots corresponding to the introduction of the cash and carry concept in the field of furniture delivery. Each of these practices reflects in economies that strengthen the Ikea? low price leader positioning in furniture sector, and achieve Ikea? order winning objectives: low price, speed and quality as well. Zara? Business ModelZara, a Spanish retailing iant has one of the sweetest success stories in the fashion business. While its rivals start planning their lines on average nine months before they hit the shelves, Zara has a reputation for instant reaction to fashion trends and rapid restocking of stores to meet demand on items that are hits. Therefore, Zara? competitive advantages are shorter lead time, smaller quantities per style, and more styles during a year. Zara? business model supports it to achieve its success, these elements are great interlinked and interdependent.

The following three factors stand out:Extensive market research providing a constant stream of inputs into the product development process, rather than in batches or discrete season. Locating various business functions in close proximity of the headquarters, and tight control, allows the various functions to coordinate and take joint-decision vary quicklyCommunication and Information Technology are absolutely vital to managing the constant interface of various functions and management of the huge variety of product information (Dutta, 2003).

From the above the analysis, it can be concluded that Ikea and Zara has totally different business model, Ikea? operations strategy focused on low cost, but that of Zara paid more attention to shorter lead time. However, Zara and Ikea has identical concept, which is innovation. 3. Conceptual and situational analysis of IkeaAccording to the CEO of the company, in order to expand sales, get recourses, it is inevitable for the company to go international at some point. When doing business internationally, both external and internal factors which will have impact on the operation of the company.

Basically external factors can be divided into three catalogues. Firstly, social factor which caused some problems for the company. For example, when Ikea expanded their business into German market, emission standard in German is quite strict. German law pointed out that the emission from fiberboard must not exceed the E-1 (Ikea group 2005). Because of this, Ikea Company decided to follow the E-1 standard for every kind of their furniture which will help them to avoid re-tooling costs. Secondly, currently customization is another important factor which considered by some international companies.

For the Ikea Company, when expanding sales into US market, the company found out the big different customization in the US market. For instance, most America customers furnished their master bedrooms with King-size beds whereas Ikea? largest beds were five inches narrower (Ikea group 2005). Besides, some US customers also found out the Ikea? sofa and armchair are too lightly dimensioned. In order to solve this problem cased by different customization, the Ikea adopted floor plans and make furniture suitable for America dimensions. By doing this, Ikea succeeded in increasing the sales significantly in US market.

Finally, dynamic competition worldwide will lead to some issues for the company to some ways. For example, in order to maintain its competitive position globally, the company has to maintain its low cost and high quality of its products. To achieve this, the firm must be able to find suppliers that can deliver high quality items at low cost per unit. At this stage, the firm modified its value chain by integrating the customer in the process and introducing a two-way value system between customers, suppliers and the company (Wikipedia Website 2006).

Accordingly, this value chain modification does help the company differentiate from its competitors,Except external factors, internal factors which also play a key role in company? strategy should also kept in mind. For the Ikea Company, culture has a big impact on the management style. For instance, from an American perspective, Swedish managers don? show emotion in the workplace and they don? feel comfortable in a conflict situation. According to the Swedish manager of the Ikea, ?he biggest conflicts here stem from the Americans who need to know who? in charge. People expect their managers to tell them what to do here.?

However, at Ikea, the manager? role is more subtle. The best approach to solve this problem seems to develop young local managers who can play a bigger role in the organization than at present. However, there is still a question whether this is critical need to develop this strategy. 4. Recommendations and proposed futureFrom above description and analysis, IKEA in general is a very successful multinational corporation. Cost leadership, unique design, innovative business concept, availability and product differentiation are all key factors that promote IKEA? business success.

However, there are also problems that appear while its expansion and globalization, such as the product is not very adapted to local markets, especially when IKEA was entering the USA and China. Hence, in order to further develop IKEA? competitive base and prepare the firm for future development, some recommendations will be made in this section:Firstly, IKEA should limit its strong Swedish presence in its different market internationally, especially in more traditional market. The ulture actually plays a crucial role in determining whether the retailer? international business success or not. According to KPMG? Consumer Markets Group (2003), it stated that international culture spread is linked to financial performance. As Figure1 shows below, the retailers with the multivariate cultural dimension to more traditional market entry and management considerations will potentially enable greater success both operationally and financially, especially in trans-national business. Sources: Templeton Research, Datastream, 2003.

Portfolio PerformanceSecondly, IKEA need to pass more responsibilities to its subsidiaries and its local management team. As doing business internationally, it does require a better balance between the IKEA way and different local market management. For instance, there were complains from American market that there were not enough American managers in senior positions in IKEA USA, different way of managing business had made a lot of staff left IKEA. Therefore, there is a need for IKEA to pass more responsibility to subsidiaries and local management.

Moreover, IKEA? centralized research and development department would also form internal strategic networks with these subsidiaries and local management teams in order to develop products which are adapted to local customers? needs. Thirdly, joint ventures strategy could also be utilized by IKEA. Actually, IKEA? insensitivity to individual market needs represents one problem to its operations management in international context. And its centralized design and research system may not able to understand international customers? needs. For instance, Swedish customers like furniture in light colors.

American customers, conversely, prefer darker and more classic designs. When the time IKEA entered American market, they ignored this issue and pushed its Scandinavian designed furniture into the American market. And this obviously will not satisfy customers? needs in American market. Therefore, if IKEA can develop local joint venture partner and develop products within core-competencies for the local market, this will be more effectively respond to local customer needs. Moreover, joint venture design and product development partners may also ensure continuous success in the different market context. . Group Learning PointsOrganisation culture is one of the key issues in international business. Value chain is one kind of useful approach to measure organisation? performance. Innovation plays a vital role in service design operation so that the company can be different from other competitors and gain the competitive advantageImportance of building close relationship with suppliers and developing local joint venture partners in order to develop products that are adapted to local customers? needs and wants. Importance of learning from the mistake.

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