Running head: IKEA ANALYSIS 1

IKEA Analysis Report Robert Christopher Argosy University Professor Richard Smith Operations Management: Solutions to Business Challenges B6029 BLA

IKEA ANALYSIS Abstract The purpose of this paper is to conduct an analysis of the global IKEA furniture chain. This paper will discuss IKEAs Marketing and answer the questions How do IKEAs products, services, and related attributes satisfy the wants and needs known of its value proposition? and

How does IKEA create a well-defined market position that appeals to customer wants and needs and differentiates its offering from competitive offerings in a process known as positioning and differentiation? IKEAs Value Chain are discussed, the three sources of value (economic, social, and environmental). The sources of value are explained as they relate to the wants and needs of IKEAs core customer, how IKEAs supply chain supports its value proposition, and how IKEAs focus on customer value (economic, social, and environmental) is reflected in its supply chain. Furthermore this paper will explain the intangible products and benefits of IKEA. IKEA is compared to other firms that employ this concept of intangibles to erect barriers to entry for competitors and how the concept of intangible benefits is used to increase profits.

IKEA considers the customer to be a critical stakeholder. The IKEA message is directed to the majority of people and what they can afford. IKEA pricing is dependent on the economic values that serve the majority of its customers. The paper investigates how this approach may or may not maximize profits for IKEA and if this premise is at odds with supply and demand economics, performance measures.

IKEA ANALYSIS IKEA Analysis Report Marketing How do IKEAs products, services, and related attributes satisfy the wants and needs known as its value proposition? and How does IKEA create a well-defined market position that appeals to customer wants and needs and differentiates its offering from competitive offerings in a process known as positioning and differentiation?

When Ingvar Kamprad was 17 years old, the entrepreneur establishedIKEA was established in 1943 at a poor village in the southern Swedish country of Smaland . He believed in challenging the established views from the beginning. For instance Kemprad thought that entrepreneurs should make money first before spending or investing he refused to depend on bank loans. IKEAs original focus was to provide furniture that had function, quality and low price. These attributes along with good design remain firmly embedded in IKEAs culture. (Edvardson and Enquist 2011) IKEA is one of the largest retailers it has over 200 stores in more than 30 countries. The stores are large in order to stock a wide and deep range of products that people can home immediately and enjoy the same day. Another reason why IKEA stores are so large is that they house realistic rooms and real life home settings to inspire customers. These experience rooms create a service experience for customers. They support customer in their role as co-creators of value by making solutions customized and tangible as well as facilitating the companys communication of its core values. The experience rooms combine functionality with emotional involvement to create a favorable customer experience. (Edvardson and Enquist 2011)

IKEA ANALYSIS Studies conducted by Isaksson and Sujanovic (2006) have concluded that the factors that influence a customers decision to visit IKEA are the low prices and wide ranging product assortment, the opportunities to combine their shopping experience with social activities both with people accompanying them to the store as well as other customers, customers plan visit to IKEA weather the visit is short or long, it is easy for both potential and existing customers to acquire information on IKEA and its products through their website or extensively distributed

catalogue, that the unique delivery concept self-service at check-out and self-assembly IKEA can manage to keep their delivery-time down for its customers. In the same study Isaksson and Sujanovic (2006) also have concluded the factors that affected customers in the retail environment while shopping at IKEA are that the design of the IKEA store is very time consuming because different sections of the store is not well defined with products many times not located where customers expect them to be. However customers are willing to look to overlook the confusing product assortment in order to buy products at low prices, the fact that no store can be compared to IKEA in terms of the size of the store their wide assortment of products and the visits being considered as something that calls for advance planning, the satisfying experiences customers have at IKEA and therefore tend to re-visit, even though they would have a bad experience at IKEA customers say they would e-visit the store because they feel that there are no other retailers that can be compared to IKEA, and the willingness of customers to IKEA to others.

IKEA ANALYSIS Value Chain IKEA sources of value as they relate to the wants and needs of IKEAs core customer. According to Edvardson and Enquist (2006) a former chief executive officer (CEO) of IKEA said that IKEA is a commercial company, but there is a social side to our vision and our business. The concept of value thus has both a social dimension and an economic dimension. I can be counterproductive to attempt to control a business from a financial perspective alone. Value-based management comprises of value logic and logic of value. Edvardson and Enquist (2006) say that value logic is the economic component of value-based management. It involves

economic calculations, focus on economic utility, commercial/financial focus, quality/time/price, focus on the structural/process aspects of the formal organization, and focus on business/service production processes. Logic of values is the social component of value-based management, which includes the following: ethical/social calculations, focus on ethical/social benefits, social/human focus, ideals/trust, focus on values/meanings as cultural expressions, and focus on cultural processes/making sense out of a situation. Value-based management is based on a stakeholder perspective of leadership, responsibility and ethics incorporated with the concept of a triple bottom line. Three aspects of sustainability form a triple bottom line economic, social and environmental. IKEA has been successful at value-based management and achieving a triple bottom line culture. The following are some examples of how success has been accoplished. At the Milan Design Fair (an exhibition for the worlds elite furniture designers) IKEA posted a sign the said Democratic Design that pointed to a building the housed the IKEA exhibition outside the fair. As Ingvar Kamprad developed the theory of democratic design he asked the questions Why

IKEA ANALYSIS must well-designed furniture always be so expensive? and Why do the most famous companies always fail to reach the majority of people with their ideas? In his view people with less money were excluded. The three dimensions of democratic design are form, functionality and low price. No other furniture manufacturer featured these all these three elements. IKEA asks designers to design to decrease prices not increase them. At IKEA the price is designed according to what the majority can afford. Designers work on the factory floor with production staff to produce furnishings that satisfy the other two dimensions. In this example democratic

design was driven by a combination of social values (reaching out to the majority of people) and economic values (low price in relation to good functional quality). (Edvardson & Enquist 2006) IKEAs LACK range was initially a door produced by a manufacture in Poland. The door was placed horizontally on framework to become a table. Then it was cut into pieces to produce shelves. These were then subdivided in to coffee tables. The pieces were place horizontally and vertically to become book shelves. This board-on-frame construction used only 30 percent of the energy and materials required to produce tables. Also it could be packed flat, was light, and saved space in transport. These combinations of qualities were considered environmentally friendly and the product was placed in IKEA stores. This is evidence that IKEA is driven by a combination of economic values (low price relative to good quality) and environmental value (saving resources). (Edvardson & Enquist 2006)

IKEA ANALYSIS How IKEAs supply chain supports its value proposition. How IKEAs focus on customer value (economic, social, and environmental) is reflected in its supply chain. IKEA works with its suppliers to achieve cost savings and help them create optimal conditions to produce efficiency. Furthermore IKEA works with suppliers on quality, environmental and issues. IKEAs suppliers are selected basis of a best buy policy. This process involves a set of requirements that a company must satisfy to be a potential supplier. The

requirement include such aspects as management style and attitude, financial situation, access to source raw materials, nature of production equipment, ability to support IKEA in production development, quality performance, and entry-level requirements regarding social working and environmental conditions. The selection is made through competitive bidding between suppliers. (Andersen & Skjoett-Larsen 2009) IKEA management released by the end of nineties that they needed relate actively to the environmental and social conditions of its suppliers. Thus, the company decided to develop a code of conduct. In 2000 IKEA presented its requirements of its code of conduct. The code was called The IKEA Way (IWAY) on Purchasing Home Furniture Products. IWAY defines a fourstep approach to improve suppliers performance in the three following ways: outside environment, social and working conditions, and wood merchandise. Step 1 requirements include no force or bonded labor, no child labor and no wood from intact natural forests or high conservation value forests. Moreover, suppliers delivering IKEA products that are solid wood, veneer, plywood and layer-glued wood must complete a Forest Tracing System document. To reach step 2 suppliers must satisfy the IWAY requirements relating to the outside environment, social and working conditions and for the suppliers of wood products forestry. Once the IWAY requirements are met suppliers may advance to step 3. In step 3 suppliers must obtain a

IKEA ANALYSIS certification defined by IKEA itself. The IKEA certification requires suppliers to be able to maintain IWAY standards at their factories and set up goals and plans for how to improve their conditions further within the three critical areas mentioned above. For suppliers to advance to step 4 they have to be certified in the three critical areas to IKEAs official standards in each area. IKEA may help in obtaining these certifications. (Andersen & Skjoett-Larsen 2009) Intangible products Intangible products and benefits of IKEA Kling and Goteman (2003) interviewed former chief executive officer (CEO) of IKEA Anders Dahvig. In the interview he spoke on how for the first 20 years IKEA did everything the opposite of how things stood in the furniture retail world. By doing this they developed a competitive advantage and a distinct difference from everybody else. During that time the concepts of IKEA were developed. After that they copied the concept worldwide. Dahvig goes on to say one of the components of the IKEA concept that helps them sustain an advantage is they do not own the means of production themselves they just have a normal purchasing agreement this means when the economy goes up and down they have full flexibility. He said

with this method suppliers face total competition so that when someone is more competitive they can move their production to them. Dahvig claims IKEA has an organizational culture based on informality, cost consciousness, and a very humble and down to earth approach. He states IKEA sees diversity as a tool to create a more challenging business atmosphere and that expands the recruitment base. Also he says that leadership at IKEA reflects their values the IKEA culture and there is a connection between the values and the image the person gives. They do not try to move

IKEA ANALYSIS a person into a specific type of leadership. The framework is the core values, and we allow a lot of freedom depending on who you are and what your specific skills are.

How other firms employ this concept of intangibles to erect barriers to entry for competitors. How the concept of intangible benefits is used to increase profits.

Kaplinsky (2004) explains the concept of rent is used to describe a world where companies who control a certain set of resources are able to insulate themselves from competition by taking advantage of or by creating barriers to the entry of competitors. Technology rents arise when producers command scarce capabilities with regard to process or products. Kaplinsky (2004) gives the example of Pinkerton. In 1960 they invented a process of cooling molten glass on a bed of molten tin thus producing a superior product while removing the high cost of the grinding process being used at that time to create flat glass. The float glass process was protected by patens.

As process and production technologies become more complex so has skill and training content in production become increasingly demanding. Kaplinsky (2004) states that skills which are specific to a particular firm such as determining the accuracy of production or speed of a machine changeover tend to be the responsibility of the firm itself or of sectorial associations such as industry training boards. The higher the level of skills and training in the labor force the higher the productivity with which resources are converted into final products. The Coca Cola brand is an example of a marketing rent. Unlike patents that only can last up to 12 to 18 years a brand name lasts for the life time of the creator plus 50 to 75 years.

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These are just a few types of rents that can impede competitors from entering an industry. Rents like these make profits for these companies because it discourages entrants and keeps a limited amount of companies on the playing field. Customers IKEA considers the customer to be a critical stakeholder. The IKEA message is directed to the majority of people and what they can afford, and its pricing is dependent on the economic values that serve a majority of its customers. How does this approach affect profits for IKEA? Is this premise is at odds with supply and demand economics? According to Patrizia (2011) IKEA is classified as an economic social actor. It interfaces and interacts with a set of external and institutional interlocutors, or stakeholders in an ethical, social and political environment which influence the organizations structure and process through a system of corporate governance. In the social environment which they belong IKEA interacts not only through a system of monetary and financial exchanges but also through physical, human and communication flows that produce knowledge, trust and reputation. Patriza (2011) states to maintain an effective process for creation of economic and financial values is necessary to create also social value for a company. The responsibility of IKEA to make profits cannot be separated from that of protecting the health and safety of their employees, satisfying the wants and need of their customers and protecting the surrounding social and environmental context. The company as a social agent must base its growth on ethical behavior. This approach maximizes profits because IKEA practices social and environmental awareness whereas studies its environment and the customers within the vicinity then launches

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an appropriate project for that particular area. This increases customer satisfaction and satisfied customers re-visit the store which in turn leads to higher profits. Also more suppliers want to work with or for an environmentally conscience company. This increases IKEAs productivity and ability to produce quality products that are environmentally friendly. This premise is correlated with supply and demand economics. IKEA can offer quality home furniture for a low price. It supplies its customer base (which is the majority) with what they need, furniture. Customers desire the furniture that IKEA has to offer not just because of the low price but also the good quality of their merchandise. IKEA keep their prices within reasonable range so that the correlation between price and how much furniture is supplied stays at a constant. This satisfies the market need. Performance Measures Performance measures quantitatively tell us something about our products, services, and the process that produce them. They help us understand, manage, and improve what our organizations do. Performance measures let us know how well we are doing, if we are meeting goals, if our customers are satisfied, if our processes are in statistical control, and if and where improvements are necessary. Four performance measures that incorporate IKEAs economic, environmental, and social values are percent of variation from the budget, percent of pollution produced by suppliers, number of mangers active in community activities and return on investment. Suppliers and manufactures of IKEAs product will be expected to internalize these performance measures also. For the measure of percentage of variation from the budget IKEA will evaluate each project plan before it is under taken and decide if they can afford to go over budget or not. This will be recorded as controlled over expenses. To measure the percent of

IKEA ANALYSIS pollution produced by suppliers each one will have an emissions test every year in order to record the percentage of pollution produced and take steps to reduce their environmental footprint. For measuring the number of managers active in community activities each manager will disclose though a memo if they are involved in the community and if so what do they do.

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Finally return on investment will measure through post evaluation of each project and product a year after launch. In order to develop a workforce that will live these values IKEA will ask potential employees environmental and socially undertone questions in interviews to get an idea of their environmental and social values before hiring them. Training will be held on cost cutting practices for mangers so they may go and teach it to their respective departments. IKEA will reduce the number of iterations of strategic planning by trying out a plan regionally before it is adopted for global use. This will save money in the long run if a product doesnt sell it can be quickly discontinued.

IKEA ANALYSIS References

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Andersen, M., Skjoett-Larsen, T. (2009) Corporate social responsibility in global supply chains Supply Chain Management: An International Journal Vol 14 No. 2 2006 75-85 Edvardsson, B.,Enquist, B. (2006) Value-based service brands: narratives from IKEA Managing Service Quality Vol 16 No.3 2006 Edvardsson, B.,Enquist, B. (2011) The service excellence and innovation model: lessons from IKEA and other service frontiers Total Quality Management Vol. 22 No. 5 2011, 535-551 Isaksson, R., Sujianovic, M. (2006) The IKEA Experience: A case study on how different factors in the retail environment affect customer experience Kaplinsky, R. (2004) Sustaining income growth in a globalizing world: the search for the nth rent Kling, K., Goteman, I. (2003) IKEA CEO Anders Dahlivig on international growth and IKEAs unique corporate culture and brand identity Academy of Management Executive Vol. 17 No. 1 2003 Patrizia, G. Social performance enhances financial performance benefits from corporate social responsibility (CSR)

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