The past and present strategies of IKEA
IKEA is the worlds largest furniture retailer. It was founded in 1943 by Ingvar Kamprad who used his initials I and K together with E – the name of his parents farm – and A, which stands for Agunnaryd, his hometown. He opened the first store in Almhult, Sweden in 1958. In year 2008, IKEA owns 300 stores in 35 countries (as at 2nd April 2011, source: IKEA website). It is an international retailer operating in many parts of the world. With reference to the case study, in many ways, IKEA ‘s organization and management practices reflect the personal philosophy of its founder. His informal, thriftiness, self discipline and egalitarian culture some what made him one of the richest men. As a mission driven founder, his management stlye was informal, non –hierarchical and team based created a family environment workplace.
It is the objective of this assignment to explore the current business and corporate strategy of IKEA and outline the major challenges faced by it. Without leaving the question of whether IKEA with its current competitive advantages will be able to diversify or expand its wings. The researcher is also fully aware that it is the requirement of the assignment to provide feasible recommendations so that IKEA can sustain in the future.
Current strategy at IKEA
In this section the researcher provides the current position of IKEA based on the case study. Not so much of argument presented but important development in the mile stone of IKEA is laidout here. Basically, what are the business and corporate strategies did Kamprad follow are the key issues. Besides that it is also necessary requirement to spell out the competitive advantages that IKEA had.
There are many strategies used by IKEA company, example product diversification. Kamprad at first selling matches, pens and started selling home furnishing products like assembly furniture. Besides that, IKEA also used outsourcing strategy ie. IKEA contract out manufacturing for most of its products. All product were sourced from independent suppliers. IKEA was out sourcing some goods from Eastern European manufacturers. IKEA used different strategy like market segmentation to different nations based on culture. IKEA produced products based on customisation in order to meet customers demand and increase profits. IKEA's advertising and promotion is dominated by the catalogue; a marketing instrument that is unusual for an international retailer but at the core of the marketing strategy of IKEA. It is the most important marketing tool as can be seen by the fact that in 1964, 800,000 catalogues had been mailed (based on the case)
Kamprad extended his operation to include a mail order facility by advertising in local newspaper and creating a makeshift catalogue. Kamprad for the first time included among his mail order products some basic items of furniture made by local manufacturers. To cope with delivering heavier items he negotiatied a deal with the local dairy to use the spare capacity on their delivery trucks to take his products to the local train station.
IKEA over time provided stylish functional designs with minimalist lines that be cost efficiently manufactured under sontrol by suppliers and priced low enough to allow most people to afford them. The most important strategy or key features of IKEA were it famous self assembly strategy. Their efficiency in packing the furniture have given rise to cost saving in terms of reduced transport, warehouse costs, and avoiding damage.
As IKEA expands in Sweden, it used to exhibit and sell its products at home furnishing fairs. Many of the retailers were disappointed with IKEA for cutting retailers out and using self assembly concept. This of course got IKEA to undercut the prices of furniture. Eventually resulted in prominent retailers prohibited IKEA from taking orders at the annual furniture trade in Stockholm. Thing went further when IKEA was accused of imitating their design and manufacturers were pressured not sell to IKEA. At this moment IKEA moved on with it and found a manufacturer in Poland. To his suprise Kamprad found the furniture manufacturer in Poland was as much as 50% cheaper than furniture made in Sweden. The positive partnering strategy with Poland has given rise to cutting prices even more.
With it growing number of store, IKEA was rudely claimed by it’s competitors as low quality products. A Swedish magazine concluded that IKEA’s quality as good if not better than that from other Swedish furniture manufacturers. When IKEA opened its first store in Stockholm, had an innovative circular design and the store was situated on the outskirts of the city, rather than downtown with ample space for parking and good access raods. This eventually produced large amount of traffic and was well managed by self service pick up solution ie. allowing shopers to enter the warehouse, load flat packed furniture onto trolleys and take them through the checkout. Adding restaurant is good idea for customer to rest and relax while shopping.
Many of the key features in the selling environment in the stores are: encourage interaction with customer, seeing the products in room setting, able to touch and try them. Postitive customer participation in the service like customers picking up in the store, carry and self assemble them has it value of ownership for the customers.
This well planned strategy has made IKEA succesful. In conclusion, IKEA strategy were to always find ways to alter the design of furniture to save on the manufacturing cost and to have a location where customers could come and see IKEA furniture set up. One central theme is the alleged standardised approach of IKEA: IKEA's guiding principle is to work in the same way in every country within which it operates. The main reason is that it gives operational advantages and makes it possible – it is argued – to keep the prices low and attractive for as many people as possible. Another reason is that they want to create the same image everywhere. Hence, standardisation is part of their business concept but it failed tremendously because of differnet countries has different culture, taste and preferences. In the following sub heading the researcher has provided lucid analysis and expanation on why it failed in America (USA) based on the case provided.
Why IKEA failed in USA
As IKEA entered USA market it fail to meet the customer’s expectation. They fail to identify the cultural demand. The first store opened at Philadelphia in 1985. Having opened 7 stores in Canada between 1976 and 1982 (figures based on case given), more competitors like (Walmart and Costco and Office Depot) and changes in Swedish laws on furniture made expansion into the USA very difficult.
One of the difficulties faced with Walmart and other retailer is that their provided general discount and low priced goods. Besides that there were also high end retailer present such as Ethan Allen made the furniture retailing to be fragmented business in the United States. With the special or added value service provided by high end furniture retailers like staffed with knowledgable salesperson, offering home delivery service, setting up in the home, interior design for free or small charges made IKEA to learn new strategy to overcome their limitations.
IKEA has competitve advantages in overcoming the problem faced by its competitor ie. high end retailer often keep the inventories low because of its to expensive, therefore customers would have to wait and this may disatisfy them. Though they had some competitive advantages like standarditation and enough sales to open new ones but by 1990s, somewhat thing was not going the way it was suppose to. Due the concept standardtion it fail to cater to the American needs examples are the Euuropean measure bed by centimetres and not the king, queen and twin sizes with which the American are familiar. Other being the bed sheets did not fit on IKEA beds. Sofas were not big enough, wardrobe drawers not deep enough, glassess too small, curtains too short and kitchens did not fit American size appliances. Apart from that the challenges faced by IKEA, when it outsourcing from Sweden which cause the currency differences made huge impact on prices of goods sold in America.
With the local demand IKEA has faced a crucial challenge that created the company to revise the strategy on standardition. Now, its strategy is to redesign to cater with local needs ie customization. Some of the move made IKEA to aquire newer and larger store and for bringing down the price it outsources material locally. These eventually reduced the transport cost and its value of the dollars. IKEA also monitored the changes in the psycographic of customers who are more concerned with design and the value of recycling. There were notable changes in young customers who is more favorable to design elegance, willing to experiment new thing, more open to risk and quality. Since IKEA tapping on younger demographic: young married couples, college studentsand 20 to 30 something singles. It used TV commercials advertisement to tap hip people as they are more inclined to commercials.
In conclusion, having the change in strategy from standardizatin to customization, IKEA in American made considerable revenue doubled in four year period from US 600 million in 1997 to US 1.27 billion in 2001 (based on case study given). IKEA has the plan for 50 plus stores in US by 2012.
Expansion to China Market
IKEA, the Swedish home furnishing retailer, has been present in China since 1998. Entering into the Chinese market was a big step for IKEA, maybe as big as their first step abroad when they opened the store in Spreitenbac, Switzerland in 1973 (Torekull, 1998). China is potentially a huge consumer market but it is quite a different market to what they have faced before. Compared to expansion elsewhere in the world, expansion in China has been fairly slow, by IKEA standards – three stores in eight years – but the company views it as successful.
This may be an indication of the challenge ahead. After a fairly slow start, IKEA has seen substantial growth in China; between 2004 and 2005 sales grew by 50 per cent. Still, with a turnover in China of approximately $120 million, the business did not make a profit.
After learning the American market, now there is another challenge to face probabally asking the same question standardazation or customization? In many ways, China is a culturally-different market and in that sense, it is a challenge. Besides culture, price is one challenge for retailers who enter the Chinese market. For IKEA, with its emphasis on price, low prices in China are a big challenge. Past experience of entering different markets has not always been positive.
One key success factor in international retailing has been the adaptation of marketing strategies, rather than standardisation (Dawson and Mukoyama, 2006; Rundh, 2003; Samiee et al., 2004). The adaptation of marketing strategies seems to be especially true for internationalisation in Asia and in China. According to Treadgold (1991), discusses international retailers in the context of local responsiveness and benefits from integration. Global retailers – such as IKEA – are argued to achieve high benefits from local customization.
An analysis into demographic characteristic of China reveal that they are well-educated and live in the big cities in China. The typical customer in China, buys less when they visit the stores. Many Chinese people live in apartments with balconies, which is very important to them. IKEA has added model sets and special balcony sections in the stores, which show how you can furnish your balcony (Lewis, 2005). In most countries, the image of IKEA is that they have low prices, which is one of the competitive cornerstones of its business mission. But it is not the case in China where it is rather the opposite that is the perception: that IKEA is a fairly exclusive, western retailer and the store is for the higher-middle class (Lewis, 2005).
China is a big sourcing country for IKEA, for example, providing products to Poland. To be able to continue cutting prices in the Chinese market, IKEA China can allowed to exceed and expand its sourcing of products in China. According to (The Wall Street Journal, 2006), half of the products in a Chinese IKEA store are made in China, compared to 23 per cent in other countries' IKEA stores. IKEA, like many other companies doing business in China, is subject to copying. One observer noticed that many Chinese shoppers in IKEA were drawing pictures of the furniture and scribbling down descriptions of the products but not necessarily buying them (Lewis, 2005). Copying IKEA furniture and style is to some extent easy. The catalogue and the store even provide measurements of the furniture.
If price will not always be IKEA's main attraction in China, what will be the attraction? IKEA need to try to position itself as a company with a unique competence in relation to interior design. Helping customers with interior design is the basic message, rather than selling individual products at low prices. Focus here has also been on selected design elements, like storage. Many Chinese people live in small apartments and IKEA can help with smart solutions for storage that make life easier. The argument is very much about function while this contrasts with the traditional furniture manufacturers in China where everything is about tradition.
As an argumentative area in this assignment the research wish to pen down different varaibales to consider in order to critically assess the growth potential in China. Firstly, Brand name strategy, followed by location and store formats, advertising and promotion, and finally the selling environment. Brand strategy should work in China on the strong basis that it is well known company. IKEA stores in China are located closer to the city centre. A location a long way from the city would not be ideal in China, as consumers do not have access to cars. In China, the stores have to be where public transportation can take people. Advertising and promotion in China, is different with the rest of the world is in relation to communication with the consumer and reliance on the catalogue. In China, it is impossible to distribute the catalogue in the same way as it is distributed in other countries – at a similar cost or reaching the same audience numbers. In China, the catalogue is only distributed in the store and in some of the primary market areas. The selling environment and service levels
In China, the overall the shopping experience is different. Chinese consumers not only use a shop to purchase needed products, but also they use it as a social venue, which is a slightly different experience from shopping in Europe or the USA. Initially, Chinese people did not go to IKEA to shop but instead they went to socialise in a pleasant environment (which is unlike other furnishing shops in China, where you are not allowed to feel and touch the merchandise).
Studies by Edvardsson and Enquist (2002) and Edvardsson et al. (2006) have shown how important the service culture of IKEA is to drive service strategy and to achieve market and business success. Here, service culture is related to developing a culture around the interactive parts of marketing (service encounters). Thus, implementation of the service culture of IKEA is important to fulfil the IKEA concept. And how does this work at IKEA in China?
As indicated above, consumers in China are demanding when it comes to service. They are used to a high-quality service, where there are people to help with all kinds of tasks. The self service and DIY concepts of IKEA are hard for Chinese people to accept. So, are there other service-level issues that are difficult to accept?
IKEA has another challenge that affects service and that is the fact that many products – despite increased sourcing in China – have huge lead times, in terms of shipping from Europe and other sourcing markets, to China. This has historically made it necessary for Chinese stores to promote and sell what they have currently got in the store rather than promote products that are advertised in the catalogue. Owing to much effort to improve this situation, like increasing domestic production and building a new warehouse in China, availability in China is almost the same as for the rest of the IKEA group.
Standardisation or Customization?
The question of standardization and adaptation is a theme that dominate many literature on intenational marketing (Baek, 2004; Levitt, 1983; Lim et al., 2006). Opposing views in the standardisation and adaptation debate are those who argue from a national, cultural perspective (Hofstede, 2001; de Mooij, 2004). The researcher attempt to compare IKEA China to IKEA elsewhere in the world in relation to the four different dimensions of retailer marketing strategies that have investigated. As the comparison is done on a general level it is considered to give a good overall picture of how marketing strategies in China differ to the general IKEA marketing guidelines.
From a general retail standardisation and adaptation perspective, the IKEA case is one of implementing a standardised concept on a new and very different market. But is the marketing strategy of IKEA standardised or adapted? The actual implementation of the IKEA concept in China has meant changes in a standardised approach in almost all areas. Some of these changes are what international marketing literature would predict, for example, concerning advertising and promotion (Usunier and Lee, 2005).
Compared with earlier studies of retail internationalisation and the issue of standardisation versus adaptation, this study involved more detailed and up-to-date data concerning a true international retailer. Another interesting aspect about IKEA in China concerns consumer image. This study confirms some of the results from other studies (Burt and Carralero-Encinas, 2000; Burt and Mavromatis, 2006) that the consumer image is relative to context. In order to create the same image of IKEA in China as in the USA or Europe, standardised marketing activities will not be enough. Accordingly, the focus for marketing activities in China will focus on culture-specific aspects
IKEA should have many innovations to adapt to the China market. Their business idea is supported by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. Ikea seems to not achieve in China market yet. Firstly, IKEA should have greater cooperation with local suppliers to get more competitive advantage of cost leadership. Secondly, according to the specialty of China market, IKEA should have some more adjustment to satisfy so many China picky customers. Thirdly, IKEA should intensify propaganda work to let more customers understand and accommodate the IKEA model. As an out-comer, there is a long way to be the winner in this huge and potential market. After a long time to research the China market, IKEA already understand the China market more than before. With accelerating the speed of expand, the success of IKEA in China market is only the problem of time.
Needless to say that without diversifying, business cannot reach greater height. Diversification is the process of entering new business markets with new products. As we know that IKEA has many previous experience in internationalization. Organization enters new markets such as strategic alliances, joint ventures, acquisition (Alexander, 1990). The question here is whether IKEA should diversify in other Asian countries using the above methods. Before IKEA adopt any one method, it is advisable to know the benefits and setback of using it. A joint venture is, a form of partnership that is limited to a particular purpose. Joint ventures have grown in popularity in recent years, despite the relatively high failure rate of such efforts for one reason or another. Creative business owners like IKEA have been able to use this business strategy to good advantage, although the practice remains one primarily associated with larger corporations. Most joint ventures are formed for the ultimate purpose of saving money. Joint ventures are attractive because they enable companies to share both risks and costs. On the other hand joint venture can fail without proper planning and strategy. Upon agreement by both parties there should be firm commitment on the part of each member.
Among the most significant benefits derived from joint ventures is that partners save money and reduce their risks through capital and resource sharing. With the above benefit of joint venture IKEA can able joint venture with Asian countries as there is always the benefit of doubt if you collobrate with the local companies to gain competitive advantages. Companies diversify either by acquiring already existing businesses or by expanding their own businesses into new markets and new areas of production or service. Acquisition is generally used more frequently by big companies than smaller ones.
Although diversification into new markets and production areas can be an exciting and profitable step for business owners, but it may be presented some questions like, will it dilute our current efforts? How will it affect our operations?" Indeed, many factors should be considered before a company launches a course of diversification. There many factors to consider before diversifying mainly financial health. In the matter of IKEA is able because of the financial status. Another factor need to consider by IKEA is the cost of entry ie. does IKEA company have the means to meet those requirements while simultaneously keeping the existing business running smoothly?
When considering diversification, companies need to analyze the ways in which such a step could impact their current employee work forces. Are you counting on some of those employees to take on added duties with little or no change in their compensation? Will you ask any of your workers to relocate their families or their place of work as a consequence of your business expansion? Does your current work force possess the skills and knowledge to handle the requirements of the new business, or will your company need to initiate a concerted effort to attract new employees? Business owners need to know the answers to such questions before diversifying.
A company engaged in introducing a new product or service into the marketplace should first ensure that it will have adequate access to distribution channels within the targeted market. "The more limited the wholesale or retail channels for a product are and the more existing competitors have these tied up, obviously the tougher entry into the industry will be," wrote Michael E. Porter in Competitive Strategy: Techniques for Analyzing Industries and Competitors. Governmental regulatory policies at the local, state, and national level can also have an impact on the diversification decision. "Government can limit or even foreclose entry into industries with such controls as licensing requirements and limits on access to raw materials," confirmed Porter, who added that regulatory controls on air and water pollution standards and product safety and efficacy should also be weighed. Many of these regulations, while enormously beneficial to society, can have a bearing on the ultimate wisdom of a diversification strategy. In conclusion, IKEA diversification into a market will have to face, general economic conditions or local problems, can result in a significant loss of income and security. So therefore, IKEA entering into Asian countries should be done cautiously.
Current innovation in Ikea and future recommendation
The current innovation is based on their marketing strategies and the advertising. As Ikea has been expanding rapidly in Europe and also in Asia thus therefore it is recommended that Ikea should just keep up their promotions, and the marketing strategies in order to maintain customer loyalty. In order recommend any thing it is important to analyze the SWOT of IKEA. Based on the SWOT analysis done by The Times 100 UK company the following conclusion were derived. IKEA is a well-known global brand with hundreds of stores across the world. In order to improve performance, it must assess its external and competitive environment. This will reveal the key opportunities it can take advantage of and the threats it must deal with. IKEA responds to both internal and external issues in a proactive and dynamic manner by using its strengths and reducing its weaknesses. Through this, IKEA is able to generate the strong growth it needs to retain a strong identity in the market. IKEA’s passion combines design, low prices, economical use of resources, and responsibility for people and the environment. In area of industrial marketing, relationship with people have been seen as the main marketing vehicle rather than manipulation of price ( Ford et al., 2003). The company’s products, processes and systems all demonstrate its environmental stance. For example, clever use of packaging and design means more items can fit into a crate, which means fewer delivery journeys. IKEA believes that there is no compromise between doing good business and being a good business. It aims to go beyond profitability and reputation. IKEA is intent on becoming a leading example in developing a sustainable business. This will create a better everyday life for its customers.
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