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Overview of IKEA Essay

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OVERVIEW OF IKEA
I. HISTORY
Ingvar Kamprad: The founder of IKEA, Ingvar Kamprad, began his business career as a young boy selling matches purchased in bulk individually for a profit to his neighbors near Agunnaryd. As his business grew, he expanded to selling fish, seeds, Christmas decorations and eventually, pencils and ball-point pens which were a new phenomenon in 1935. He was very clever in utilizing his resources – he delivered his goods by bicycle, and later used the local milk delivery vehicle to make deliveries. IKEA: In 1943, with a gift from his father, Ingvar established his business, using his initials, Ingvar Kamprad, the name of the farm on which he was born, Elmtaryd and the village nearby, Agunnaryd for the acronym. At this time, he was selling everything from pens and wallets to watches and nylon stockings by going door to door and selling directly to his customers. By 1945, the first advertisements for IKEA began showing up in local newspapers and he had developed a rudimentary catalog. IKEA Store:

The first full IKEA store opened in Älmhult in 1958. With 6700 m2 (72,118 ft2), it was the largest furniture display in all of Scandinavia. In 1963, the first IKEA store outside Sweden opened near Oslo in Norway, followed by the flagship store in Stockholm – a whopping 45,800 m2 (492,987 ft2) circular store inspired by the Guggenheim Museum in New York City. The success of this store, and difficulties in serving customers due to an overfilled capacity led to the open warehouse concept that is key to the current structure of IKEA stores and the IKEA experience in general. In 1973, the first store outside Scandinavia was opened near Zurich, Switzerland, followed by rapid growth in Germany starting with IKEA Munich in 1974. Germany remains IKEA’s largest market today. In 1975, IKEA Australia entered the market and IKEA Canada debuted in 1976 bringing the mega furniture store to two new continents in 2 years. IKEA US opened its first store in 1985, and IKEA UK first opened in 1987. In 2008, IKEA boasts 285 stores in 36 countries, with an additional 26 stores to be opened in 2009 and is the world’s largest furniture manufacturer. II. MISSION STATEMENT

IKEA’s mission is to offer a wide range of home furnishing items of goods design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them (IKEA 1994). The company targets the customer who is looking for value and is willing to do a little bit of work serving themselves, transporting the items home and assembling the furniture for a better price. The typical IKEA customer is young and low middle income family. III. EXECUTIVE SUMMARY

Swedish Company IKEA was the world’s largest furniture retailer since the early 1990s. It sold inexpensive furniture of Scandinavian design. The company operated in 55 counties with a workforce of 76,0000. IKEA offered nearly 12,000 items to the home furnishings market worldwide. It sold a wide range of products including furniture, accessories, bathrooms and kitchens at 186 retail stores in 30 countries across Europe, North America, Southeast Asia, Middle East and Australia. IKEA is well known for its unique concept, low price, wide range of product and flat packing. IV. PRODUCT

Price: low price, low cost logistics, large quantity purchasing, flat packed method reduce transportation cost Product: offer>12,000 items; design: light and modern, many selections; multi functional V. SWOT ANALYSIS

Strengths:
Ikea have a strong internationally known brand attracting key demographic customer groups. The IKEA business model is unique in its construction and execution with little direct completion on a like for like basis. Success has been driven from the price architecture offering value to the customer in innovative but functional products Despite the large shed operations IKEA operate there is a degree of specialist knowledge within key product areas where purchases are more considered and require assistance such as kitchen installations. Weakness

While an international brand there is a level of reliance on European markets with 90% of the stores based in Europe and the balance across America, Middle East and Asia. Although the model promotes low prices it has been identified there is an associated low level of customer service which
couples this suggesting there is a need to work on service to ensure a complete shopping experience and ensure repeat business within the existing customer base. As a reaction to marketplace movement the development of E-commerce has been necessary to compete in a modern technological world. However, there is also a consideration this movement into multi-channel retailing moves away from the fundamental vision of the customer being able to see and touch the product. Opportunities

IKEA are moving from international to global status through the development of Asia and Eastern European models Traditional product for IKEA has been within value, low price high volume product. However, the movement into mid and higher price points will see an opportunity to move the demographic base and increase the average basket value with less reliance on a limited demographic group Although there are negative associations within the development of the IKEA E-commerce site, there is an associated opportunity to achieve growth and increase level of customer service as the additional transactional capability will reduce pressure from stores to a certain degree Threats

Within growing competitive retail markets mainstream retailers are beginning to mirror the model of low cost value flat packed furniture which will impact on the buoyancy of IKEA. With economic concerns over rising living costs and depleting disposable income, there is an overall threat to the performance of the business in UK and American markets specifically. VI. KEYS FACTORS TO GO GLOBAL

KIEA already has successful operations in the US, Canada, Europe and Asia. The South Korean economy has a growth rate that can result in a profitable market to penetrate The European Union, the US and China are the main sources of FDI. EU countries invested a combined 3.1 billion USD in South Korea in 2003, according do MOCIE South Korea offers a more open and capitalistic philosophy, offers significant benefits to a company such as IKEA. With a population of almost 49 million, IKEA would have easy to access to shoppers. The emerging low, middle class and trend toward privatization offer a target market that would definitely be interested in IKEA furniture.
To enter this market, IKEA has several options available and needs to evaluate the pros and cons of foreign direct investment through joint venture franchising VII. MARKETING MIX

Product
IKEA’s value chain is unique in that customers area also suppliers and suppliers are also customers. The transactions between the supplier and IKEA and on to the customer have a value adding step in each stage. Product differentiation exists in the value-added dimension. IKEA’s consumers are treated as prosumers with most of its products requiring assembly after purchase. But although assistance in this aspect is limited. IEKA offers options for choosing, transporting and assembling furniture. While this is well accepted in areas where IEKA now operates, it may be a point of considereation when entering new markets. Should IKEA encounter a market where DIY is not favored, IKEA may include the cost of service to the product’s price. Price

IKEA’s strategy is based on cost leadership. Across markets where it current has a presence, products has a presence, products are sold at low prices. Prices are 30 to 50% lower than completing products. Price variations are only a result of fluctuations in exchange rates. This penetration pricing enables IKEA to gain significant market share. Low prices are a result of large quantity purchasing, low-cost logistics. IKEA also benefits from economies of scale and healthy supplier-firm relationships. IKEA enters into long-term contracts, provides leased equipment and technical support in exchange for exclusive, low-cost manufacturing from suppliers in exchange for exclusive, low-cost manufacturing from suppliers. For new markets, IKEA should retain its price-image to maintain the brand’s positioning. Position and promotion

Position and Place IKEA stores are located in suburban areas. This is a factor in the achievement of IKEA’s low pricing. While it may appear as a disadvantage, this fits IKEA’s target market of customers willing to transport their own purchases and requiring less assistance in assembly. Promotion Catalog , TV advertisement, Blog, and Web site. Advertisement is
needed to make potential customers aware of store location. It was thought that lower prices and selection would do the rest-positive word-of-mouth had proven the best advertising in the most other market.

NH?NG Q&A V? IKEA:
1. What WERE THE SOURCES OF IKEA’S SUCCESSFUL entry in furniture retail business in Sweden? The sources of IKEA’s successful entry into the furniture retail business were IKEA’s low prices and resilience. First, Ingvar Kamprad, the founder of IKEA, began selling furniture in his mail order company. Then he was faced with a social problem and turned it into a business opportunity. Since 1935, furniture prices rose faster than any other retail good at 41%. Kamprad responded by creating a line of furniture priced so that all could afford it. The present furniture cartel attempted to stifle Kamprad’s growth and success. The cartel banned Kamprad from selling directly to the consumer at shows, then managed to persuade the manufacturing cartel to stop supplying Kamprad with furniture. Kamprad responded by supplying elsewhere and now could charge even lower prices. IKEA’s success was due largely to low pricesand Kamprad’s ability to capitalize on bad situations. 2. What forces are driving changes in the industry?

Originally, the postwar boom helped drive the furniture industry’s change. World War II drained the life out of many households, and newer innovative changes were sought by many. The tradition of handing down furniture from generation to generation was quickly disappearing in most households. IKEA helped shape the postwar household by offering new furniture styles at a very reasonable price. With low costs came a new innovative style and a comfortable atmosphere to shop in. 4. What factors do you see as critical to competitive success in the furniture industry? Ingvar Kamprad believes that a company’s “identity”, company guidelines, profile, selection, quantity, quality and price are critical to the success a company will have in the furniture business. Another factor that could add to the success of a company in the furniture business is internet marketing and selling along with catalogs of the company’s merchandise. The range of products should cover the total home area, indoors as well as outdoors, with fixed furniture
or loose furniture. The profile a company will want to bring to the table will give competitors and buyers a direct image of the company. There should be a wide selection of products along with the quantity of stock to sell to all customers. Quality and price are also an important factor but should be left up to the consumer to decide what they are looking to do in the long run. With the use growing popularity and use of the internet, online marketing should be one of the critical aspects of a successful furniture business and the always popular catalogs that are available by mail or in the store.

Another key factor in the furniture business would be to acquire the ability to purchase low-priced materials and to check if there are less expensive quality alternative materials available. Developing long-term relationships with suppliers is another factor that would increase the probability of being successful in the furniture industry. 5. How important was internationalization to IKEA? What challenges did IKEA face while expanding internationally, and how did they overcome them? Internationalization of IKEA was extremely important because it propelled many of IKEA’s top managers to positions of responsibility, broadens the area for sales, increase profit and brought IKEA into many new market places. It was very important for IKEA to go international because the Swedish furniture market is very saturated. One of the challenges that IKEA faced was the fact the median age and income level in most developed countries were expected to rise while IKEA’s target market segment of young low-to-middle income families would be shrinking. To overcome this problem IKEA decided to expand to other areas of furniture like office furniture and more traditional furniture designs for the older richer people. IKEA also had to deal with exchange rates and adversity in the economy. One of the biggest concerns was whether IKEA would be able to retain the company’s cultural values with its rapid growth and increasing graphic spread. The company over came this with good management, a strong work force and very strong company values. But perhaps the biggest concern was how the company would fair without Ingvar Kamprad. Kamprad responded to this concern by saying “The IKEA ideology is not the work of one man but the sum of many impulses from all the IKEA leadership. Its supporting framework is massive”. 6. What were the
management processes by which IKEA coordinated and controlled its Europe-wide operations?

Following the orders of the owner Ingvar Kamprad, management was there to direct the employees, but overall motivate them as well. It was supposed to be a very comfortable environment to work in, while being very cost effective. Management processes also stressed simplicity and attention to detail; they coined the phrase “Retail is Detail.” Kamprad was known for being frugal and made it known with such comments as “waste of resources is a mortal sin at IKEA. Expensive solutions are often signs of mediocrity. An idea without a price tag is never acceptable.” Another highly used tactic was to hire young recruits because of their lower costs, and reserved enthusiasm for the company.

7. What was Ingvar Kamprad’s role in the development in IKEA? Ingvar Kamprad played a significant role in the early development of IKEA. He founded the company just after the end of World War II. During this time period, furniture prices rose 41% faster than the prices of other household goods. Kamprad commented “We shall offer a wide range of home furnishing items of good design and function at prices so low that the majority of people can afford to buy them.” It was this strategy that catapulted his business. Kamprad opened a second outlet in Stockholm, Sweden in 1965. Between 1965 and 1973, Kamprad opened seven new stores in Scandinavia. With this move, he captured 15% of the market share. Kamprad then expanded into Europe in 1974 in Munich. Kamprad fought opposition to his growth from competition successfully. By the end of the 1970’s, IKEA had 50% of the German market with 10 stores in West Germany. The reason behind Kamprad’s success is his philosophy. His focus is not on profit alone, but improving the quality of life of the people. He is seen as a visionary – someone that has forever changed consumer needs and caused a structural shift in the furniture retailing industry altogether. During all of his expansion, Kamprad remained in control of the company. He appointed expansion executives in charge of expansion into certain regions, but he remained in control of them. Kamprad always remained an integral part of the company’s development. He then appointed a new president, Anders Moberg.