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Ikea


1)

Porter (1996) has defined competitive strategy as .deliberately choosing a different set of activities to deliver a unique mix of value・ and the strategy is .creating fit among a company・s activities・.  Hence, the competitive strategy of IKEA is an integration of their product/service design, marketing and operation strategies, which leads to the overall success of the company (Warwick MBA: Operations Management, 2001).

Product/service design strategy

The product and service design strategy of IKEA is different from traditional furnishings.  Their products are designed with a very distinctive .Scandinavian・ feel and primary color patterns.  They offer modular and easy assembly products that are value for money with a wide range of choice.  Their stores are designed with a self-service concept without sales associate with the customers.  But they offer different benefits such as showroom displays, childcare, self-service restaurant and crèche.    

Marketing strategy

The marketing strategy and marketing mix of IKEA is different from their competitors.  They position themselves with low price strategy that serves the needs and wants of their target groups.  They offer value for money products with successful brand identity, which are compatible to the values and beliefs of their customers.  Their promotion programs are able to change the customers・ buying behavior to purchase self-assembled furnishings and self-service concept.  They locate their stores though not in convenience areas, they are used to open superstore for best showroom displays with parking areas for own pick-up and delivery.

Operation strategy

IKEA is using a different operation strategy from their competitors.  Operation strategy is .the total pattern of decisions and actions which set the role, objectives and activities of the operation so that they contribute to and support the organization・s business・ (Slacks et al, 1998).  The operation of IKEA has to cope with large volume because their products are highly repeatability and specialization.  The variety of products the operation needs to create is low to medium as they offer standardized and well-defined products.  The variation with which the operation has to cope is low as the sales of furniture are steady over the year and can be predictable.  The degree of customer contact is low.  Hence the operation strategy of IKEA is focused to low cost, while the traditional furnishings position to high cost due to low volume, high variety (some order-to-make), low variation but high customer contact. 

2)

Market segment is .a group of consumers who respond in a similar way to a given set of marketing stimuli・ (Kolter et al, 1999).  IKEA is targeting at two groups of customers.  The first target group is the young adults from low to middle income family who may have or have no children.  The other target group is business customers and they are normally running small to medium size of offices.

3)

The characteristics of their target segments are composed of young, highly educated, liberal in their cultural values and hence they can accept a totally different buying behavior from the traditional furnishings.  They are in different lifestyles and trust their own judgment to mix and match their furniture from the stores.  They view the modular and self-assembly as an extension of self.  As the target groups are within the low to middle income class or small to medium size of offices, they are more price conscious and demand different information, support and services.

4)

The operation strategy of IKEA is compatible with its other strategies by linking with its performance objectives.  The performance objectives refer to quality, speed, dependability, flexibility and cost, which directly or indirectly impact on the effectiveness of the other strategies.

Quality

The operation of IKEA succeeds in achieving quality advantage to the company by doing the things right.  Their products are made to conformance to specification with appropriate performance that fit for their customers・ purpose.  The stores are designed in unique, clean and tidy layout conforming to their brand identity.  The staffs are low contact with customers but they are friendly and helpful when required.  Their supporting facilities such as childcare, self-service restaurant and crèche also provide quality service to their customers.  Therefore, the customers perceive the products and services as value for money with extra benefits. 

Speed

The operation of IKEA is giving the company a speed advantage by doing things fast.  The store is designed in unique layout with warehouse and parking facilities.  The customers can locate the store fast from its bright yellow and blue identity.  They can park their cars without spending extra time on the six acres of reclaimed industrial land of parking area.  They can leave their children to the play area so that they can concentrate on their purchase.  After that, they can select their purchases fast from the unique store layout with yellow plastic shoulder bags or on trolleys.  The IKEA staffs do not bother them while they are selecting their purchase but they can ask for help from the customer-contact personnel or from the information points.  They can also use the loan catalogues to screen out their preferences.  All the stores stock about 10,000 of the 14,000+ items in the IKEA range allows immediate availability of goods.  The modular designs allow the products to be flat-packs with code number and the customers are easy to pick up whatever they want from the warehouse.  The customers can get through the checkout fast as a large steeply ramped conveyor belt helps transporting items through the cashier. 

The every single operation helps a smooth flow of customers and also reduces costs as there is less stagnation.  It is compatible with the target group who demand different information, support and service, as well as their concept of self-service and modular design to create brand identity. 

Dependability

The operation of IKEA is also giving dependability to the company by doing things in time. The operation is dependent because IKEA has predictable opening hours.  The proportion of goods out of stock is kept to minimum by the simple reorder system.  They try to accelerate the arrival of new stock if stock-outs occur or review the buffer and reorder quantities in case the sales pattern has changed.  The operation tries to keep reasonable queuing time, though it is expected to queue half-an-hour or more during weekends and bank holidays.  They also ensure that there is constant availability of parking.

Dependability is compatible with the target group as they are those working groups who require highly dependability to save their time and cost.

Flexibility

The operation of IKEA is able to change far and fast to customer requirements so they have a flexibility advantage.

The operation allows product/service flexibility as they have ability to introduce new products and services.  The global sourcing strategy makes them more responsive to the customers・ needs and wants.  Their strategy of creative sourcing leaves much of the design up to their suppliers and it is benefit to the fast introduction of new products. 

The operation allows mix flexibility and is able to provide a wide range or mix of products and services.  The range of products is wide from home furniture to office furniture and accessories, from childcare to self-service restaurant and crèche.  Although childcare, self-service restaurant and crèche are supporting facilities, the customers are satisfied for these benefits.  The idea of mix and match is successful in offering mix flexibility.  Storage units within a particular range have a range of sizes and colors, each of which can be fitted with either glass or wooden shelves and doors.  The units are also stackable so that a variety of arrangements is possible.  The office furnishings area offers different style of service and customers can pay on account and delivery is provided automatically.  There are also wheelchairs available and a lift so that disabled customers have access to the upper floor.

The operation also allows volume flexibility as they are able to change its level of output.  The global sourcing allows the operation to adjust volume significantly rapidly.  In the stores, it is up to individual store management teams to determine stock levels of each product.  That means individual store is more responsive to the change of demand in their location. 

Lastly, the operation allows delivery flexibility as they have ability to change the timing of the delivery of the products.  The management may have to try to accelerate the arrival of new stock if stock-outs occur. 

The flexibility supports IKEA to provide their products with a wide range of choice.  They can also serve to the expectations from their target groups and are likely to response to changing customers・ needs and wants.

Cost objective

Cost objective is to do things cheaply.  The effectiveness of quality, speed, dependability and flexibility directly affect the cost objective, as well as the operation strategy and low prices strategy.  High quality operation reduces cost and time to re-do things.  Fast operation reduces inventory and improve flow of customers, which can help to increase sales and reduce cost of overheads.  Dependable operation increases predictability and operational efficiency.  Flexible operation adapts to change and can adjust operations to response to the customers・ needs and wants without extra costs. 

The operation also achieves the cost objective by other approaches.  The central warehouse in Sweden is highly automation with only three employees and the self-service concept requires less employees and this can sharply reduce costs.  The global sourcing reduces costs because no heavy investments required.  The use of stock control system can be used as management information systems to monitor the sales pattern in order to react fast.  Reacting fast means saving costs in arranging resources in an unexpected circumstances.

4)

The financial performance of IKEA is compared with Liberty, John Lewis and MFI as shown in Figure 1:

 

IKEA

1990

Liberty

1991

John Lewis

1991

MFI

1991

Sales per store (£・000)

22,590

5,781

16,622

3,563

Trading profit per store (£・000)

1,047

460

894

231

Sales/employee (£・000)

127

68

65

75

Trading profit/sales (%)

4.6

8

5.4

6.5

ROA (%)

14

16

6

12.5

Growth rate (%)

31

8.6

5

4.3

Cost/sales (%)

68

61

70

42

Administrative expense/sales (%)

27

31

25

51

Stock/cost of sales (%)

12.4

35

13

27

Days of stock

45

128

46

99

Remarks:

Other income of Liberty and MFI is excluded from trading profit for easy comparison 

The sales of IKEA are significantly better than its competitors.  The sales per store is 22,590 (£・000) and trading profits is 1,047 (£・000), which is £5,968-£19,027 (£・000) and £153 to £816 (£・000) more than the other competitors.  It should be noted that the number of stores for John Lewis includes 79 Waitrose supermarkets so the figures are for general comparison purpose.  Also the growth rate of IKEA is 31 percent, which is an outstanding performance from the other competitors by 22.4 to 26.7 percent.  These figures show that the strategies of IKEA are effective to gain market share in the market.

Sales per employee for IKEA is 127 (£・000), which is  £52-62 more than their competitors.  The figure implicates that the operation of IKEA is efficient as they are using less employees for the business.  It is also the result of their self-service concept that enhanced by their performance objectives.

However, the percentage of trading profit to sales is only 4.6 percent, which is the lowest from their competitors by 0.8 to 3.4 percent.  The percentage of cost to sales and administrative expense to sales of IKEA are within the middle range.  The low profit margin is most probably because of their low price strategy in order to penetrate to the market.

The return on asset is 14 percent and is the second highest from the competitors.  It means that the investors can get a high return on the total investment they have made to the company.

The percentage of cost to sales is the second highest, that is 68 percent while the lowest is 42 percent from MFI.  It indicates that IKEA is still unable to reduce costs of products although this has been improved by 5 percent from year 1988.  Another reason is probably the huge costs of transportation of the products from central warehouse in Sweden to UK.

IKEA is doing well in keeping their stock to sales and days of stock to the lowest from their competitors.  It is likely that their re-order system is effective in achieving the performance objectives.

5)

IKEA might change their strategy as following in respond to the market penetration from other UK furnishing retailers.

Product/service design strategy

IKEA might introduce a new line in addition to their .Scandinavian・ line.  This might help to attract customers from other segments who do not like the original line.  Or they might introduce an extended line from the original line but provide a superior quality and service to attract the segments in higher class.

Marketing strategy

For the original line, they should continue to use low price strategy and try to lower prices further to increase their penetration.  They should use intensive promotion tools to stimulate the customers・ purchase intention.  They should not only promote their products but also the services they provided, for example, .the children would love to visit IKEA as there is play area・ or .spend time in IKEA in your family day as you could enjoy lunch or dinner at IKEA self-service restaurant and crèche while shopping・.  It also points out that their advertisement should address to the whole family from kids to older.  They should also open few more stores to increase their market penetration.  For the new line, a separate marketing strategy is required to success.

Operation strategy

The operation might need to review their global sourcing strategies.  They should be more focus and reduce the number of suppliers around the world.  By doing this, the company should be benefited for a further lower cost due to bulk buying.  They are also able to monitor and improve the quality and performance of their suppliers.  The relationship with their suppliers would be better than previous and allow speedy work and flexibility due to the focusing.

They should also consider opening a warehouse in UK instead of relying the central warehouse.  It can reduce a significant transportation costs.  They should also increase their number of stores to increase penetration.


Reference List

Kotler, Philip; Armstrong, Gary; Saunders, John and Wong, Veronica (1999), Principles of Marketing, Second European Edition, Prentice Hall, New Jersey

Porter, Michael E (1996), .What is Strategy?・, Harvard Business Review, [Online, accessed 22 January 2001]
URL:http://www.angelfire.com/ct/BUSAD2/what.html

Slack, Nigel; Chambers, Stuart; Harrison, Alan and Johnston, Robert (1998), Operations Management, Second Edition, FT Prentice Hall, Essex

.Warwick MBA: Operations Management・ (2001), University of Warwick, UK


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