`CASE 2. IKEA: DESIGN AND PRICING BA 240 ( ) Group10: Ancuna, Joyce. Burkley, Andrea. del Pilar, Karlo.

Ranada, Maria Kristina COMPETITIVE PRIORITIES Offering low price products with meaning is the top competitive priority of IKEA. This signifies that their products are cost-efficient but remain to have quality, style, relevance and value both to the company and their customers. They are affordable but NOT cheap. This mantra rooted from an integrated design process, which continually seeks to reduce costs from selection of raw materials, production, distribution and logistics, up to its retail set-up. PRODUCT DEVELOPMENT Like any other company, whether initiated by top management, market-research, or R&D, product development starts with conceptualization. What sets IKEA apart is that it begins with the end in mind. Their product development process starts with their mantra: low-price with meaning. They do not only determine the needs and wants of their market, its feature, benefit, and attributes like a typical entrepreneur but they also integrate their designs with the cost of each product development cycles stage which enables them to calculate immediately its impact to the retail product cost. A multi-functional product development team is formed, composed of developers, creative designers, researchers, including suppliers and purchasers, to cover all possible products cost reductions. We shall use the latest chair design from IKEAs PS Collection to illustrate the product developmental process. Like any other chair, its function remains to be for sitting. However the following features considered by the product development team gave them the edge in terms of price and relevance. Stackable Product Features IKEAs Mantra: Start with the End BambooDevelopment Low-price Meaning Plastic Chair Contributor Suppliers/ Materials Cheaper cost of wood Environment friendly Purchasing are made fast growing grass which from Cheaper cost of yellow, entails more stable bamboo blue, black, white color supply for Ikea, Strong plastic pigments Stylish Different colors Logistics Team Stackable Less handling and Less storage place at feature transport cost home Less storage space at the retail store Production Made in Cheaper production Ensured quality coordination cost due to cheaper with a long- electricity cost due to time faster moulding time of supplier design

1. What are additional features of the IKEA concept (beyond their design process) that contribute to creating exceptional value for the customer? IKEA made it a point to make these cost efficiencies relevant and well-communicated to the customers. As for the chair example, beyond its functionality and stylish design, the materials used are

environment friendly adding more value to the product. Besides its stackable feature to reduce transport cost, it also aims to provide minimal storage space when not in use by the customers. Secondly, IKEA retail stores displayed and sold products more effectively. They use the same pallets used to transport their products. The product development team also made sure that their products are easily assembled by their customers with their easy-to-read instructions materials. The stores followed a clean and simple theme but at the same time exude an industrial pallet-filled, spacious ambience conducive for DIY assemblies. With this, IKEA was able to transfer assembly cost to the customers and save up on handling cost allowing them to lower retail prices and in turn make their customers satisfied. Lastly, IKEA boasts of its code of conduct. They were able to lower their prices without compromising the workers health and safety and the use of child labor. This creates value for the customers knowing that IKEA chair was made legally and out of good manufacturing practices. 2. What would be important criteria for selecting a site for an IKEA store? a. Environment-friendly and clean location in line with the sustainability concept of IKEA b. Large parking spaces and accessible roads for trucks c. Large areas where DIY assemblies can be done. d. Near retail furniture stores in urban areas where they can highlight their low-priced products. RECOMMENDATIONS In addition to the companys strengths, the group was able to identify some areas for improvement: Increase online presence through Strategic Partnerships Though IKEA has already created a relatively high level of brand awareness with its affordable, well1 design products, it only accounts to no more than 10 percent market share . Hence, a need for continuous effort in marketing techniques is essential. While IKEA has its own website which is a good venue to service a wide range of customers, they could still increase their online presence by strategically partnering with known e-retailers such as Amazon to advertise their products and encourage more customer traffic. Leverage Suppliers Performance Measures Now that IKEA has considered international expansion, leveraging with a network of suppliers is extremely important. Key metrics such as associated costs, delivery lead time, product quality, logistics and distributions must be used in evaluating various vendors for continuous optimization of its supply chain. Improve Sales to newly-tapped markets Targeting new markets calls for an extensive market research on consumer behaviour. Following a successful business venture in Europe and other parts in America, IKEAs aggressive expansion in Asia and the Pacific has broadened their sales opportunities. IKEAs Sales per region: Europe got the largest 2 percentage at 79%, followed by North America at 14%, and Russia, Asia, Australasia at 7% . As competition intensifies among furniture retailers, IKEA must continue investing in technology and content of its product to encourage more purchases. A pull marketing strategy such as offering discounts and other promos might also be effective to stimulate customer demand from its Asian market. Pull marketing is where you develop advertising and promotional strategies that are meant to entice the prospect to buy 3 your product or service.

Nylander, Johan. IKEA ranked 28 Most Valuable Brand. September 2010. Retrieved from: http://www.swedishwire.com/business/6208-ikea-ranked-28th-most-valuable-brand 2 http://www.ikea.com/ms/en_US/pdf/yearly_summary/Welcome_inside_2011.pdf 3 http://www.morebusiness.com/running_your_business/marketing/ah_pushpull.brc

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Assess transportation process IKEA came up with 18 distribution centers globally and strategically located near ports and transport routes. Whether or not maintaining these distribution centers provide benefits to IKEA will have to be determined in terms of location, shipping costs from source to destination, warehouse capacity, and 4 quantity demanded per location. Transportation techniques can be used to assess the optimum delivery pathways. Despite of its best efforts to save space and maximize quantity of products to be transported, IKEAs product variety may also be compromising the benefits out of their space saving techniques. Instead of distributing the transport capacity to accommodate the shipment of the different variety of products, we suggest IKEA to use a product-by-value technique. This is done by enumerating the products and 2 arranging the items based on the contribution margin , the product with highest contribution or productby-value can be the focus of their shipment and distribution resources. Furthermore, IKEA can .5 concentrate on these products to further reduce their costs, and increase market share CONCLUSION Product development and strategic production process affects pricing significantly. In IKEAs case, the company had focused on the products raw materials and its innovative designs to cope with its transportation and space consumption. These helped reduce production costs. Conceptualizing products wisely can lead to lower costs, and with higher sales revenue higher profit can be generated.

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J. Heizer and B. Render (1988). Production and Operations Management. Allyn and Bacon, Inc: Massachusettes. B. Render and J. Heizer (1997). Principles of Operations Management. Prentice Hall: New Jersey