IKEA: Cost Leadership Essay

Questions:

1. Explain how Ikea has achieved cost leadership, as outlined in the case?
2. How has Ikea achieved differentiation from its competitors?
3. Explain Ikea’s approach to global expansion. How did it vary in China?

Answers:

1. Business process excellence, manufacturing process excellence coupled with supply chain excellence enables Ikea to achieve cost leadership.

Most of the company first design the product, rollup the costs and sets the price after evaluating competitor’s prices as well as keeping its margin. However, things work differently at Ikea. Ikea started with fixing the price tag of the product first and then accordingly develops the product that can match that price. Ikea product engineers and designers collaborates directly with supplier and involve supplier in earlier project design. This strategy is called early supplier involvement (Bolton, Brun, Pero, & Piaggesi, 2013) that helps Ikea to keep the cost low. Also, Ikea focuses on efficient design (Blome, 2015) without compromising on the functionality of the product to keep the cost low.

As Ikea manufactures standard products, they also achieve economies of scale and there is no time wastage in changeovers of machines and equipment. They use raw materials very efficiently follow zero defects and zero wastage policy and apply the best technical innovation to keep the cost of their production processes low. Competitors may think that Ikea make use of cheap labors but it only has 11 manufacturing units and all of them are in Europe. They are not using cheap labor but they are using very less labor due to their high end automated production technology (Ivanov, Tsipoulanidis, & Schonberger, 2017). For keeping the logistics cost low, it has ready to assembly design and thus uses flat-pack transportation. Thus, cost of shipping incurred at Ikea is much less what is incurred normally by other players in this industry. Also, most of the shipments are done by using rail and unassembled furniture obviously costs less than as compared to assembled piece and unassembled pieces also has less risk of damage. Ikea is truly a case study for any company planning to implement a lean. It also has a very strict supplier policy not only in terms of quality but also in terms of compliance. In past, Ikea has debarred several suppliers from India and Philippines which were using child labor and providing unfavorable condition to their workers. With its agile supply chain and very good network of suppliers and distributors spread over the world, it also rarely faces stock outs. This is how Ikea has achieved the cost leadership.

2. Ikea was founded in 1943 in Sweden, 75 years ago. It begins its international expansion in 1963 by entering into Norwegian country and currently has expanded to 314 stores in 38 countries out of which 277 stores are owned by Ikea itself in 21 countries and rest 37 stores are run by franchises outside the Ikea group in 17 countries mostly of which belongs to Asian countries ( . It has been expanded readily and its products are huge hit among its customers due to differentiation. It is because of their unique marketing mix that it offers to customers. Specific to product, while this industry is mainly focuses on providing make to order products to their customers, it provides make to stock products with standard specifications in most of the countries. This make to stock helps Ikea to achieve attractive pricing which is another ‘P’ of marketing mix. As Ikea do not customize, they manufacture standard products and make use of economies of scale and thus able to pass the savings to their customers. Ikea is the leader in most attractive pricing strategy. Also, their stores are usually situated outside of the city centers due to availability of land cost at attractive prices as their stores are big in size. Their stores have cafes, Restaurants, Child care areas and thus provides a full day entertainment to people visiting stores. However, in china as most of the people use public transport, the location of their stores is at places which are easily accessible from the public transport. As far as promotion is concerned, majority of their budget is for their quarterly magazine about its catalogue and printed in 36 countries available in stores and also sent to people over their email. They also have attractive loyalty program (Gummesson, Kuusela, Narvanen, 2014). Some of the other differentiator are positioning of the Ikea. Ikea has branded the Ikea concept which is Ikea do its part focusing on product design, clever solutions and customer value. At Ikea stores, 90% of the products are same irrespective of the country and rest differs based on localization factor. Ikea branded itself has home furnishing specialist which produces highly functional products that help people to enhance their value of life.

3. Ikea started its global expansion once the Swedish markets were saturated. It started with Norway, Denmark and Switzerland and was a huge success in all of these markets. Ikea’s thought process was by increasing volumes, it can leverage economies of scale and thus passing the more discount to its customers. During 1970s end, they entered in to Japan through Joint venture. This entry was quite unplanned And Ikea has to pay the price. Its products are being sold in the malls at premium prices which is against its basic philosophy of providing furniture at low costs to people. This made them stop their operations at Japan and rethink their strategy of Globalization. However, the failed attempt in Japan was full of learnings for Ikea. Then Ikea has expanded in various other countries and also make slight changes in its policy. For example, In US, the standard bed size is different and thus it has to adapt to US sizes. Such incidents provides Ikea opportunity to introspect about its business model and products offering. It then launches in UAE, Singapore, Poland, Malaysia, and Hungary before launching its operations in China in 1998. By this time, Ikea has very good learnings and experience in expanding into local markets. In China, it faced multiple issues. First one is heavy tax and legal issues. Ikea is hit with heavy import duty and which forced company to find new suppliers in China and procure material locally. Also, Ikea stores usually have restaurants that provides Swedish food. In china, due to restriction on import of food, there are numerous issues. Some of the major changes that Ikea has to make in china are as follows:

  • Store location strategy: In other countries, Ikea stores are located at suburbs but in china, people mostly uses public transport, thus it had to locate its stores at places easily accessible from public transport.
  • Ikea changes its ready to assemble furniture to ready to use: DO it yourself concept was not very hit in China and thus it provide ready to use furniture to china people.
  • Change in size of furniture due to lower sized of Chinese apartments had forced Ikea to move away from its strategy of providing standard products to its customers.
  • Change in marketing strategy: As Chinese are very good in imitating the products and making them available to people at lower costs, Ikea has to stop publishing and distributing catalogues, Instead, it sues internet, Chinese social media and other blogging sites to promote its products (Li, & Zhang, 2016).

References

Blom?, M. (2015). Visualization and establishment of product design regulations as interactive modules: An interaction design study at IKEA. Journal of Systems and Information Technology, 17(1), 20-34.

Bolton, S., Brun, A., Pero, M., & Piaggesi, P. (2013, September). Exploiting supplier capabilities to maximise product design opportunities in the fuzzy front end activities. In Proceedings of the 11th International Conference on Manufacturing Research (ICMR2013), Cranfield University, UK, 19th (pp. 169-174).

Gummesson, E., Kuusela, H., & N?rv?nen, E. (2014). Reinventing marketing strategy by recasting supplier/customer roles. Journal of Service Management, 25(2), 228-240.

Ivanov, D., Tsipoulanidis, A., & Sch?nberger, J. (2017). Production Strategy. In Global Supply Chain and Operations Management (pp. 121-140). Springer International Publishing.

Li, J., & Zhang, Y. (2016). Chinese Consumers’ Attitudes toward Experiential Marketing: The Case of IKEA.

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