Business Essays – Ikea Company Retail
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Published: Tue, 08 Mar 2016
IKEA Company Retail
IKEA’s capabilities have originated from the company’s unique resources and its core competencies that revolve around a successful retail strategy, making it the “world’s largest retailer of home furnishings.” Whilst many companies tend to continually add product lines and expand their offering, IKEA understands the importance of keeping it simple and sticking to its “core concept” of “affordable and varied home furnishings.”
The core concept has focused on high-quality products that would appeal to a large range of demographic markets in terms of the look, feel, and cost. This simplistic, yet effective, strategy enables IKEA to maintain a low-cost structure while focusing on value for its customers around the world in a way that also has sustained profitability.
Its winning strategy includes global sourcing of components, accessible suburban stores, quality products with sophisticated European design at a low cost, and in-store amenities, such as coffee shops, restaurants, and day-care facilities. IKEA’s low-cost business model allows it to offer quality furniture and home accessories at 25 per cent to 50 per cent below its competitors.
With only 5 per cent to 10 per cent of the furniture market in each of the country it operates in, IKEA has a huge opportunity to grow. In fact, the company’s brand awareness with consumers is larger than the actual company, according to the CEO of IKEA.
That is because the company’s approach to its brand and what it stands for also has set the company apart. IKEA has incredible brand equity that “stands for clean, green and attractive design and value for money.” As a pioneer in respects to good business practices, a healthy lifestyle, and an appreciation for a diverse client base, including being one of the first companies to acknowledge gay and lesbian couples and families in its advertising, IKEA has been able to build a solid organisation based on that philosophy of diversity.
This culture carries over into how the company is organised in terms of its structure—open and flat hierarchy with high levels of autonomy for faster decision-making; low-cost business model; attention to detail, knowledge building, and training; and a high level of business ethics which seems to be missing from so many of today’s organisations. To maintain this culture, the founder did something that other companies have not, which is to protect it by registering IKEA as a charitable foundation rather than a publicly traded organisation.
The founder of IKEA sees the company’s culture as a core competency that has been nurtured as the business has expanded to ensure that it continues as a distinct advantage over the other retail competition. He was once quoted as saying that “maintaining a strong IKEA culture is one of the most crucial factors behind the continued success of the IKEA concept.”
To enhance this competency, the company has spent a lot of resources on getting the “values and concepts into the right daily behaviours and actions” of its team members around the world. This includes working in the idea of sustainability as well as concern for the environment and fellow humans so that IKEA’s primary vision is about “creating a better everyday life for people.” As a core capability, this has helped the company build and develop the other capabilities that the company has to succeed in the global retail environment.
In looking at its low-cost model, this seems to be a key strategy within today’s global business environment and IKEA was one of the companies to pioneer this type of model well before airlines and other industries began to evolve their business models. Everything that IKEA does involves carefully examining the true cost involved in that particular product or process, including the design, sourcing, and operational expenses involved.
Whilst low-cost is important, IKEA believes that it has the capability to be a low-cost leader without sacrificing quality or compromise its corporate social responsibility. This is what has been termed as a lifecycle solutions approach, which “recognises all these costs and makes it easier to see the real, total cost comparisons between different systems options, as well as to exploit their advantages.”
One way in which IKEA has been able to do this is by creating a “global organisation that provides infrastructure, service and support to its various business units and suppliers and helps them to identify and implement the most cost-effective technology available.” This has led to a value-added supply chain that IKEA has capitalised on to maintain low costs whilst further growing its operations.
One researcher concluded that “IKEA is more than a link on a value chain. It is the centre of a constellation of services, goods, and design.” They have been able to do that because of their capability in “creating more value per person (customer, supplier, and employee).” In this way, the company is creating a supply chain that is “differentiating and growth-enabling” as well as flexible and has the ability to operate at peak efficiency.
In order to maintain quality and low-cost as core competencies, the company has a unique capability of integrating its vision of an efficient supply chain with its product design. IKEA understands that the process to ensure these objectives begins at the product development stage where the price is determined before the product is even created. This involves utilising cross functional teams that simultaneously look at both aesthetics and logistics measured against price point as they are developing new designs for their products.
The team consists of 12 full-time designers and 80 freelancers who work together to “identify the appropriate materials and least costly suppliers,” which can take up to three years to complete one piece of furniture so that it fits IKEA’s flat ship design. IKEA’s capabilities also include adapting the designs to sell within local markets that may have a different sense of style and culture where certain designs are more appealing than others. The result has been the ability to provide consumers with access to “affordable contemporary design,” which has not been possible otherwise from any other furniture maker.
Additionally, IKEA leverages its supply chain competencies through its strategically planned distribution centres for maximum “system efficiency” around a “direct, cost-effective and environmentally-friendly” route to all countries with retail stores. In generating more cost savings, IKEA uses a flat packing process that allows more merchandise to be shipped and stored between distribution centres.
The company utilises other innovative solutions as well to save the company money while, at the same time, helping salvage materials that may be wasted to better the environment and provide new products for its customers. One example is feathers from plucked chickens in China, which then were bought at heavily discounted prices to create feather duvets.
Another capability is its respect for local requirements and planning. For instance, in the UK, the large IKEA stores have been denied, so the company is experimenting with smaller store formats out of respect for UK government policy. IKEA has also learned to adapt itself to other cultures, such as the German dining clubs to help retired people socialise and save money. The company also respects these cultural differences and local regulations at the supplier level to in terms of its product development and manufacturing.
In connecting these capabilities to a theoretical framework, IKEA has focused its strategy on core competencies that have been leveraged as part of a strategy to sustain profitability. The company develops its capabilities as a global retailer by adding value to the supply chain (thoughtful product design, local sourcing and low-cost distribution hubs); constructing a low-cost business model that enables consumers to reap the benefits of high quality design furniture at some of the lowest prices available; building strong brand equity through unique promotions and pioneering advertising campaigns that recognize diversity; developing a unique business culture designed around a good lifestyle for employees and customers; and corporate social responsibility that is dedicated to environmental, labour, and ethical business practices. IKEA successfully handles all aspects of marketing, sales, employee relations, product development, and supply chain management, creating a vivid picture of how management theory can work successfully when approached with a consistent and clear strategy.
IKEA’ core competencies have helped its efforts to attain a sustainable business model in the United States (US) as it continues opening new stores throughout the region.Sales in the US continue to grow because IKEA has a strategy that leverages its unique core competencies, unique resources, and distinct capabilities over those of other US furniture and retail manufacturers.
IKEA’s sustainability comes from taking a measured approach to its expansion into the US by opening a single store at a time in a particular area to more effectively focus on getting the operations established in a manner which makes the most sense in terms of cost, training, and overall financial controls.
A specific expansion team opens each store and remains on-site until the “operations are streamlined and fully functional” at which point the local team takes over and the expansion team then moves onto its next location. Unlike other retail giants, such as Wal-Mart, IKEA is not interested in populating the US or other areas with the most stores as possible and prefers to have limited number of locations in order to maintain its capabilities.
This is not to say that IKEA’s ability to sustain itself in the US has not been challenged. For instance, its products did not have a true understanding of the size and scope of America’s culture in terms of the size of a dining table for Thanksgiving dinner or cabinets that were too small for televisions. While this was initially a misstep for IKEA, the company’s core competency of consumer intelligence enabled the company to quickly adapt to the local US culture.
This quick response was also possible because their fluid and flexible business model and philosophy allowed them to re-align with what their customers wanted. These needs and wants include free strollers, playgrounds, and restaurants that people wanted to eat at because the food was so good, opening the door to the US seeing IKEA as a family outing destination rather than just as a quick trip to the local furniture store.
This destination is not interrupted by pesky sales staff, further reducing IKEA’s costs while, at the same time, making the shopping experience a more relaxing, hassle free adventure for customers. IKEA has been able to strengthen its sustainability by offering something unique. The company is one of the first in the US to capture the idea that shopping should be an experience, illustrating their capability to be innovative and alert to the customer. As such, one researcher noted that “IKEA wants its customers to understand that their role is not to consume value but to create it.”
Achieving sustainability also involves being able to fill gaps in the market where other companies cannot offer the same advantage. In terms of the actual furniture business, it has added a competitive dimension to the US market, which has never had a retail operation that offers build-it-yourself furniture of such high-quality. IKEA is requiring the US consumer to do change how they shop. The company “directs customers to shop in the store instead of ordering online—noting that customers’ willingness to pick up and assemble items is critical to IKEA’s ability to give customers the lowest-cost items with an element of fashion and style.”
This has led American consumers to consider something that they might not have previously been interested in due to lack of interest in building one’s own furniture. With the current price of furniture and the lack of real style and variety, IKEA has become instantly popular in the US through its offering of attractive, functional furniture that is affordable for the college student that wants to decorate their dorm room with flair as well as to the gay couple that looks for stylish offering without the big ticket price to new families who could not afford the average price of furniture in regular home design centres.
Sustainability involves getting consumers to purchase more than they may have planned on as well as create a desire for repeat business. IKEA’s model has also included the capability to present its product in a way that convinces people to buy “rooms” instead of products under the term the company calls “designs for living.”
This means that products are grouped together in a showroom effect that includes all the accessories as well as the furniture, which lists the “price of the product, the dimensions, materials and colours in which it is available, instructions for care, and the location in the shop where it can be ordered and picked up.” In this way, IKEA has been able to “mobilise them to do easily certain things they have never done before.”
IKEA is also ensuring its sustainability through continuing to build a unique brand image. The company has been able to reach cult status in terms of its brand by positioning itself as unique and quirky. This includes large voucher giveaways through essay contestants or a contest where someone had to live in the Atlanta store for three days in order to get $2,000 towards furniture. Ikea’s sense of doing something different has then captured media attention, further generating buzz and sales for the stores.
IKEA has been able to target US buying habits and convince these consumers—like those around the world—that they want to spend the day at a furniture store as well as eat there and then go home and put their own furniture together. That is a pretty amazing capability in itself in a market where Americans do not seem inclined to do that, illustrating how IKEA has developed unique methods for sustaining itself in just about any market.
Sustainability also includes creating new niches in the marketplace by appealing to demographic audiences that have proven to have increased buying power. Delving deeper in terms of how it can leverage its capabilities, IKEA has turned its sights on the Hispanic market in the US as a way to further sustain its profitability.
The company recognised that it was not making an emotional or cultural connection with its brand, so there has been a concerted effort to design showroom spaces and create multicultural marketing programmes around appealing to this demographic. Additional efforts have included bilingual signage and packing and in-store events specifically for the Hispanic market.
Since corporate social responsibility has become such an important issue to investors, customers, and employees, IKEA’s extension of its ethical business practices into the US market also is adding to its sustainability. The company focuses on offering products made from recyclable materials as well as ceasing plastic bags for free and charging for them to discourage their use while offering reusable bags for 59 cents.
IKEA is also changing its stores over to operate on completely renewable energy while focusing on the energy efficiency of its distribution network, factory conditions, and use of wood in its products. The company even sold Christmas trees during the holidays and provided consumers with vouchers if they would bring the trees back, turning them into compost and planting trees for each one that was returned.
In looking inwards, a company also builds sustainability through how effectively it can engage its employees and win their commitment and loyalty. IKEA has been rated as one of the 100 best companies in North America for working mothers due to the benefits for people who work as little as twenty hours a week plus the flexible work schedules that allow for a better work-life balance.
The result has been a decrease in the overall turnover rate throughout the North American stores. The company also regularly conducts surveys of its employees to “gauge morale and spot issues that need to be addressed.” All of these practices strengthen the company by providing a harmonious and happy workforce under a united organisational culture.
As can clearly be seen by these examples, all of IKEA’s core competencies have proved to be sustainable upon entry and establishment within the US market. Its capabilities and resources also provide a benchmark for other US companies that want to extend their sustainability through enhancements to their supply chain, employee relations, customer service, and profitability. The company works because it has become “a curator of people’s lifestyles, if not their lives….IKEA provides a one-stop sanctuary for coolness.”
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