Case Study IKEA

HOUSSIN Alexandra GHERARDI Aurélie LEMAIRE Charlotte Strategic Management: Management: IKEA October 28th, 2011

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The IKEA Group, a Swedish company was founded in 1943 with its headquarters in Denmark, is a multinational operator of a chain of stores for home furnishing and house-wares. It is the world’s largest furniture retailer, specializing in stylish but inexpensive Scandinavian designed furniture. The IKEA group owns over 2 700 stores in 35 countries, with sales in 2007, £13,414.0 (million), and sales growth of 21.7%. It has 118 000 employees. It has been hugely successful since its origin in 1943. The IKEA vision, business idea and market positioning statement provide a framework for all IKEA marketing communication worldwide. The IKEA vision is: “To create a better everyday life for the many people." To meet this vision IKEA provides many well-designed, functional products for Home”. It prices its products low so that as many people as possible can afford to buy them. However, in creating low prices IKEA is not willing to sacrifice its principles. ‘Low price but not at any price’ is what IKEA says. Furthermore customers all over the world have responded positively to IKEA’s approach. The business idea is "To offer 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." The market positioning statement: "Your partner in better living. We do our part, you do yours, and

together we save money.”

Low Price

Function

Design

Uniquely IKEA

The IKEA brand is the sum total of the emotional and rational values that consumers associate with the IKEA trademark and the reputation of our company. The brand image is the result of over 50 years work by IKEA co-workers at all levels everywhere in the world.

1. EXPLAIN, IN DETAIL, THE ASPECTS OF IKEA STRATEGY THAT MAKE IT A HYBRID POSITIONING ON THE STRATEGY CLOCK Michael PORTER proposed three different generic strategies by which an organization could achieve competitive advantage:

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Cost leadership, Differentiation, Focus.

These are based on the principle that competitive advantage is achieved by providing customers with what they want, or need, better or more effectively than competitors. The strategy clock represents different positions in a market where customers (or potential customers) have different `requirements’ in terms of value-for-money. These positions also represent a set of generic strategies for achieving competitive advantage. Strategic clock : Bowman's Strategy Clock is a model used in marketing to analyse the competitive position of a company in comparison to the offerings of competitors. It was developed by Cliff  Bowman and David Faulkner as an elaboration of the three Porter generic strategies. As with Porter's Generic Strategies, Bowman considers competitive advantage in relation to cost advantage or

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differentiation advantage. Bowman's Strategy Clock represents eight possible strategies in four quadrants defined by the axes of price and perceived added value.

Political Economical Social Technological Environmental Legal

•"do it yourself" flat packaging • set a global cult brand

• low prices

• opportunities for everybody to have high quality and stylish furniture • high quality and system to promote shorter queues • efficient store environment to keep customer happy • use right material • corrective actions

• respectable social and working conditions

COST LEADERSHIP IKEA’s strategy is based on selling high-quality, Swedish designed, self-assembly furniture products at low price. The IKEA business idea is: ‘We shall offer 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 targets price-conscious young couples and families who are willing and able to transport and assemble furniture kits. The low-price strategy, seeks to achieve a lower price than competitors while maintaining similar perceived product or service benefits to those offered by competitors.

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Low price is not appealing unless, it represents good value for money. This is where IKEA is able to make a real difference. IKEA is committed to having a good relationship with their suppliers and so they are able to purchase good quality, economically produced designs that are bought in bulk to keep costs down. By making all their furniture’s flat packed they cut down on transportation and assembly costs as well. Besides, the packaging allowed shoppers to haul their own stuff home, another saving. Although IKEA household products and furniture are designed in Sweden, they are largely manufactured in developing countries to keep down costs. With suppliers in 50 countries, roughly 2/3 of purchasing is from Europe with about 1/3 from Asia. A small amount of products are produced in North America. Comparatively little production actually takes place in Sweden, though it still remains the fourth-largest supplier country (behind China, Poland and Italy). China accounts for about 2.5 times as much supply as Sweden. For most of its products, the final assembly is performed by the end-user IKEA’s strategy of not paying attention to local market peculiarities has worked well in Europe. The company has been able to sell its standardized products across Europe, and as a result was able to build considerable economies of scale into its operations and maintain a price advantage over its competitors. IKEA’s main forces is to make you believe that there is things you never knew you needed but at less than $2 each you load up anyway. “They have this way of making you believe nothing is expensive” . DIFFERENCIATION The next option is a broad differentiation strategy providing products that offer benefits different from those of competitors and that are widely valued by buyer. The aim is to achieve competitive advantage by offering better products or services at the same price or enhancing margins by pricing slightly higher. The IKEA product range is developed to be extensive to have something that appeals to everyone

and to cover all functions in the home. The products are modern not trendy so they are practical enough for everyday use. IKEA design means products that are attractive, practical and easy to use . They don't have

unnecessary features; they give genuine solutions for specific home furnishing needs and are made of the most suitable materials for their purpose. The most important points of differentiation for IKEA are the store features: IKEA stores are usually very large blue buildings with few windows and yellow accents. They are designed around a "oneway" layout which leads customers along "the long natural way." This layout is designed to encourage the customer to see the store in its entirety (as opposed to a traditional retail store, which allows a consumer to go right to the section where the goods and services needed are displayed) although there are often shortcuts to other parts of the showroom. The sequence first involves going through furniture showrooms making note of selected items. Then the customer collects a shopping cart and proceeds to an open-shelf warehouse for smaller items (Market Hall). Then the customer visits the furniture warehouse (SelfServe) where they collect previously noted showroom products in flat pack form. Sometimes they are directed to collect products from an external warehouse on the same site or one nearby.

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The hybrid strategy is advantageous for IKEA: -

Much greater volumes are achieved than competitors so that margins may still be better

because of a low cost base. -

Cost reductions are available outside its differentiated activities: IKEA concentrates on

building differentiation on the basis of its marketing, product range, logistics and store operations but low customer expectations on service levels allow cost reduction because customers are prepared to transport and build its products used as an entry strategy in a market with established competitors. Briefly we can conclude; a hybrid positioning is when the strategy of an enterprise is between the low price strategy and the differentiation strategy. Hybrid strategy involves both lower prices than differentiation strategies, and higher benefits than low-prices strategies. We will see that IKEA strategy make it a Hybrid positioning. First of all, IKEA has an unique retailing concept in a big shed destined to t he middle class. To differentiate the brand, they rely on the strong enthusiasm Ikea evokes. They want people to see their shopping like an outing and not like a chore. Moreover they replace a third of their product line every year. The biggest thing that make Ikea different for its competitors is that they offer beautiful products that are inexpensive and functional (The $120 Billy bookcase, $13 Lack side table, and the $40 coffee table for example) It’s on this point that Ikea join the differentiation strategy with the low price strategy. Ikea uses scale advantages to combine low prices with differentiated design. Indeed all the big items are flat-packed, which allows Ikea to save millions in shipping costs from suppliers but also enables shoppers to haul their own stuff home (it’s another big saving for the company.) Ikea aims to lower prices by an average of 2% to 3% each year. But this cost obsession goes hand in hand with the quality of the design. Production teams are seeking for the materials and least costly suppliers. Then Swedish simple design helps keep costs down and attract more and more customers. Moreover, even if Ikea is always cutting costs, they make high benefits: $1.7bn and the revenues rose 15%, to $17.7bn. It’s on this point that Ikea join higher benefits with low-prices strategies.

2. WHY IS THIS STRATEGY DIFFICULT FOR COMPETITO RS TO IMITATE? Product range is the starting point. All other marketing communication is used to amplify the product range. Furniture itself is arranged in fully accessorized displays, down to the picture frames on the nightstand, to inspire customers and get them to spend more. The store is the IKEA retailer’s primary medium for presenting and communicating the range its low prices and the IKEA concept. The IKEA catalogue is the main marketing tool with around 70% of the annual marketing budget  being spent on this. The products are presented in “situation” like in your house, to tempt to imagine their home and make them purchase.

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The IKEA advertising, Public Relation and other types of communication are complements to the IKEA range, store and catalogue such as ludicrous commercials. The swot analysis Forces - Low costs - Ludicrous commercials - Social and ethical responsibility (charitable giving) - Unique brand identity (blue and yellow buildings) - Large inventory and parking spaces - Impulsive shopping experience - Family experience (timing, restaurants) - Run by managers trained by Kamprad himself  Opportunities

Emerging markets eg. China

Weaknesses - As the direct links with Kamprad disappear, the culture may start to fade - No implantation in small and midsize cities with smaller stores

Threat  - In the U.S., Target Corp. (TGT) - A similar brand called Fly is popular in France. - In Japan Nitori Co. has a lock on low-cost furniture.

Porter 5 forces analysis

Power of the Buyers

Little power because of the exiting low-price options Low price strategy is another way of the company to response in buyer’s needs.

Power of Supplier

1300 suppliers have a little bargaining power that set standards in delivering the materials Contracts with multiple companies to craft the same products The group managed to work closely with their suppliers to ensure that all are set to produce a quality and strong environmental and social standards of products.

Rivalry

The IKEA’s furniture competitors’ offers different styles and functionality. Other stores sell must-have-items, but don’t have much of a style. IKEA is the most successful in delivering the complete package for the customers that reflects on weak rivalries.

Substitutes

There is no specific product that can be a substitute for the furniture.

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New Entrants

IKEA stores do not reach many small towns and this is an opportunity for the new competitors to move into small and midsize cities with smaller stores and less selection.

The business strategy

The IKEA concept is based on 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 works in various ways not only to rationalise and simplify distribution, but also to minimise the impact on the environment. The secret is to calculate as exactly as possible how many products will be needed to satisfy demand. By minimising “wasted space”, it is possible to transport and store more packages at a time. To sum up, large volumes + flat packs = low costs. IKEA products are designed, manufactured, transported, sold and assembled. IKEA creates concept into reality, it sales a lifestyle. There is no one else who offers this concept. The business strategy is built around some key words and deep concepts. IKEA is focused on segmentation of its target: the middle-class population of all age groups. IKEA exists in all advanced economies such as Europe, USA, Australia; and also in emerging markets like China. IKEA holds the entire supply chain, from the fabrication to the sales. Indeed, there is an obsession of  cost leadership. This cost obsession fuses with the design culture. 'Designing beautiful products that are inexpensive and functional is a huge challenge.' says Josephine Rydberg-Dumont, president of  Ikea of Sweden. IKEA uses differentiation for local responsiveness, it consists in an adaptation to suit individual countries, for examples: Americans prefer to store most of their clothes folded, and Italians like to hang, large Hispanic families need dining tables and sofas that fit more than two people, the Swedish norm. IKEA concentrates on building differentiation on the basis of its marketing, product range, logistics and store operations but low customer expectations on service levels allow cost reduction because customers are prepared to transport and build its products used as an entry strategy in a market with established competitors. IKEA should increase sourcing its supply from emerging markets to sustain its competitive advantage.

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Economies of  scales

Strengh of  bandname

Diversity

Competitive advantage Large wharehouse showrooms

Shopping experience: restaurants, features Network of  suppy: 1300 suppliers in 53 countries

3. WHAT ARE THE DANGERS OF A HYBRID STRATEGY AND HOW CAN MANAGERS GUARD AGAINST THEM? A hybrid strategy seeks simultaneously to achieve differentiation and low price relative to competitors. The success of this strategy depends on the ability to deliver enhanced benefits to customers together with low prices whilst achieving sufficient margins for reinvestment to maintain and develop bases of differentiation. Its expansion into the US market. It adopted an ethnocentric strategy for going international - where it had standardized products and standardized operations. This helped to keep costs low, but ignored the different tastes and preferences of the US market and the way they purchased furniture. IKEA had to change the model of operating; giving greater ownership to its US subsidiary, to become polycentric - stores in the US had the ability to adapt furniture and customize to suit the local market. Costs increased as a result, but this localization approach was necessary for sales. IKEA has looked towards emerging markets e.g. China for growth. Further adaptation to products

has been necessary - including pricing strategy. Income levels of consumers are lower and stores needed to be located within the cities as car ownership is lower. IKEA has experienced greater competition from national brands. IKEA’s management realized that a standardized product strategy should be flexible enough to respond to local markets. The company has recently adopted a more balanced strategic focus (giving

weight to global and domestic concerns). The current approach puts greater emphasis on global market coordination to limit duplication of activities and capture synergies or economies of scale and scope.

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