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In: Operations Management

Part A: Case study – IKEA Part A of this EMA will be marked out of...

Part A: Case study – IKEA

Part A of this EMA will be marked out of 60 marks. The word limit is 2400 words.

Read the case study, which you can find in the assessment area and on the study planner in Week 23, and answer the following questions:

  1. Using concepts and theories from Block 1, explain why IKEA places high importance on innovation. You should consider how the various business functions within IKEA integrate to facilitate innovation.
  1. Globalisation has created a new and dynamic relationship between the ‘global’ and the ‘local’. Based on your work during Block 2, how would you advise IKEA to balance these two competing perspectives as it continues to pursue its global expansion strategy?
  1. Applying concepts from Block 3, explain how IKEA seeks to nurture long-term value creation.

Part B: Presentation

Part B of the EMA will be marked out of 20 marks.

Drawing on your work with the IKEA case study, create a presentation showing the main opportunities and threats that IKEA face over the next five years. Make sure to address the critical areas of IKEA’s global expansion strategy and its sustainability strategy.

Your presentation should use no more than 6 slides and 300 words. Your first slide should be a title page for your presentation.

IKEA

Introduction

IKEA is an internationally known global brand and pioneering home furnishings retailer. It has grown rapidly since it was founded in Sweden in 1943. Today, it is the world’s largest furniture retailer, recognised for its Scandinavian style.

IKEA carries a range of 9500 products, including home furniture and accessories. This wide range is available in all IKEA stores, and customers can order much of the range online through IKEA’s website. As of June 2019, there are 423 IKEA stores operating in 52 countries (IKEA Group, 2019a). A staggering €38.8 billion ($44.6 billion) worth of IKEA goods were sold in 2018 with a similar projected forecast for 2019 trading (Ringstrom and Dowsett, 2018).

IKEA’s strategy is underpinned by its vision, which it believes is the foundation of its growth. The IKEA vision states they aim ‘to create a better everyday life for the many people’ and ‘to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them’ (IKEA Group, 2019b).

1 Flat-pack pioneers

IKEA is associated with products that are simple, low cost but also stylish. This has given IKEA a very broad appeal to different groups of consumers and ensured that IKEA products appealed in both the business and consumer markets. Starting as early as 1956, the company were the pioneers of flat-pack furniture. This offered a great solution for all sorts of customers who were looking for stylish high quality furniture at an affordable price. The flat-pack approach to furniture design allows IKEA to reduce costs across the supply chain, from initial design, standardised manufacturing of components, to transport costs and warehousing. Part of the approach to cost saving is in store location. IKEA stores are commonly built on the outskirts of cities where business rates and operational costs are cheaper and customers can park easily.

Due to the way IKEA produces and sells its furniture it has also ensured that it is readily available and convenient. Conventional furniture makers often only begin production once an order has been placed by a customer. This means that it can often take several weeks for delivery. By contrast, IKEA’s products are instantly available in their stores and easy to transport home in customers’ own vehicles. The flat-pack business model has continued to be beneficial for IKEA as it allows a further significant cost saving at the end of the value chain. Effectively, IKEA have outsourced the highly costly assembly part of the value chain directly to customers who are willing to trade the extra work of self-assembly for a large saving on the retail price they pay. This helps IKEA maintain high profits.

The IKEA business model is reliant on a highly effective approach to procurement. With 31 trading service offices of procurement staff in 26 countries, IKEA sources from over 1400 worldwide suppliers. With the bulk purchasing power behind IKEA and the large procurement team it is able to negotiate prices between 20% and 40% lower than any of its competitors. Over time, IKEA has demonstrated that it can successfully manage global suppliers while also maintaining the quality of its products, key to maintaining its brand reputation. The network of service offices is crucial to their global procurement activity, as each office is geographically spread out so that they can cultivate strong working relationships with all local suppliers, wherever in the world they happen to be.

IKEA staff also visit all of the suppliers on a regular basis, not only to continue to build relationships with their suppliers but also to build on their quality control processes. As part of this, IKEA is a strong believer that it should only work with ethical suppliers and as such it inspects the working conditions and the social conditions surrounding the factories, ensuring it adds value to the local communities it works with. Some 66 per cent of IKEAs products are sourced from Europe. However, to keep costs down IKEA’s largest supplier is China, which provides 18% of all IKEA products. Production of a single product is spread across multiple suppliers and optimised in order to reduce prices. IKEA also purchases raw materials and hardware in bulk, which is sold to its suppliers to help them keep the final cost down.

IKEA’s supply chain is supported by cutting-edge IT infrastructure. The complexity of the supplier network and the large range of products has meant that over time IKEA has found it necessary to develop its own systems. This is more expensive than buying standard IT systems to manage its stocks. However, this does mean it can manage the demands of stores and ensure effective distribution of its stock between them. Ensuring that nothing stays in storage for long is key to keeping IKEAs inventory costs low as everything is built to shelf rather than built to order like most other furniture manufacturers.

2 Global expansion

IKEA has a long history of expansion beyond its natural markets in Western Europe.

IKEA has always adopted an ethnocentric strategy for internationalisation, weighing up the effect of the local culture against IKEA’s own to select relevant products. In the early days IKEA often ignored local tastes and preferences in favour of keeping costs low, but learned the hard way in the US that this wasn’t appropriate and adapted to the way furniture is purchased there. To do this greater control was handed over to the US subsidiary, allowing them to customise products for the local market. This led to increased costs, but this localisation approach was essential in order to see market growth in the US. This strategy has been repeated in other markets to help IKEA adapt to local culture and purchasing behaviour.

Over recent years, IKEA has been looking for growth by expanding into emerging markets with a growing middle class, such as China and India. In August 2018, the company opened its first Indian store in Hyderabad and saw around 40,000 customers on its first day (TNN, 2018). Further stores are to be opened in Mumbai and Delhi.

In order to remain successful IKEA needs to further adapt its product lines to local demand and ensure that pricing strategy is correct. “We are selling many products from our global portfolio at a lesser cost in India and working on lower margins, but we know the volumes will make up for this,” Amitabh Pande, Strategic Planner at IKEA India said (Das, 2018). On IKEA’s India website, the leading corner sofa-bed is tagged at about 37,500 Indian Rupees, while the same item is sold in the UK for about 43,000 Indian Rupees, representing a significant price difference between the two markets. Average income is still much lower in emerging markets, meaning prices have to be lower, and with many people still only using public transport central city locations are essential. Consequently, IKEA is having to change a traditional part of its business model. In developed markets, customers assemble the furniture themselves. In India this is not common practice, so IKEA has partnered with home services company, UrbanClap, to help customers put together their furniture after purchase (Das, 2018).

The company says it realised localisation of products to suit the needs of Indian families and customers was the key ingredient to win over a market that is extremely sensitive to price. In adapting to the Indian market IKEA undertook more than 1000 home surveys to see how Indians lived (Goel, 2018). “There is nothing more powerful than watching and talking to those people in their natural environment. We watched how they cooked, slept, and sat, and then we thought how we could tweak our existing products to suit them,” an IKEA India spokesman said (Das, 2018). Indian families tend to spend a lot of time together, far higher than global averages. So IKEA added more folding chairs and stools that could serve as flexible seating. Indians are also known to prefer hard mattresses for sleeping, a complete opposite to the global norm, which made IKEA work with its local suppliers to launch such mattresses just for Indian consumers (Goel, 2018).

Sustainable vision

Since it was founded IKEA has always had concern for people and the environment. The IKEA vision ‘to create a better everyday life for the many people’ puts this concern at the heart of the business. IKEA has responded to the public’s rising concern for sustainability in its choice of product range, suppliers, stores and communication. It has also spotted business potential in providing sustainable solutions. IKEA’s concern for people and the environment encourages it to make better use of both raw materials and energy. This keeps costs down and helps the company to reach its green targets and have an overall positive impact on the environment.

To meet its vision IKEA provides many well-designed, functional products for the home. It prices its products low so that as many people as possible can afford to buy them. However, in creating low prices IKEA is not willing to sacrifice its principles. ‘Low price but not at any price’ is what IKEA says. This means it wants its business to be sustainable. IKEA supplies goods and services to individuals in a way that has an overall beneficial effect on people and the environment.

IKEA does not produce its own raw materials, but it needs these to develop its products. Consequently, it works closely with primary sector suppliers to ensure a sustainable impact on the people and the environment in which it operates. IKEA designs its own products. At the design stage, IKEA checks that products meet strict requirements for function, efficient distribution, quality and impact on the environment.

IKEA uses a tool – the ‘e-Wheel’ – to evaluate the environmental impact of its products. The ‘e-wheel’ has several checkpoints, which are divided into five phases: raw material, manufacturing, distribution, use and end of life (IKEA Group, 2019c). This also helps suppliers improve their understanding of the environmental impact of the products they are supplying (see Figure 1).

Figure 1: The e-Wheel

Around 50 per cent of IKEA’s products are made from wood or wood fibres. IKEA ensures that the wood it uses comes from sustainable sources. It also works to ensure that at the end of a product’s life the wood can be recycled. IKEA creates many design solutions to minimise the use of materials. For example:

  • some furniture is made from recycled plastics
  • some rugs are made of material clippings that would otherwise be wasted
  • products such as water cans are designed to be stacked. This means that more can be transported in each load, reducing the number of lorry journeys and therefore lowering fuel costs.

Since 2015 IKEA has reached its goal of phasing out wooden pallets from its global transport network; it now uses only paper pallets and loading ledges. Cotton is used in many of IKEA’s products. Because conventional cotton farming is often harmful to the environment and the people who grow it, IKEA works with the cotton farmers so that 100 per cent of the cotton used is from more sustainable sources certified by the Better Cotton Initiative, of which IKEA is a founding member (IKEA Group, 2015).

Each of these ideas helps IKEA’s products to be more sustainable and reduce the impact on the environment.

A close working relationship with all suppliers is fundamental to IKEA’s sustainability vision. During manufacturing IKEA specifies to its producers that waste should be avoided. Where waste does occur IKEA encourages suppliers to try to use it in the manufacture of other products. IKEA has a code of conduct called the IKEA Way of Purchasing Home Furnishing Products (IWAY). This contains minimum rules and guidelines that help manufacturers to reduce the impact of their activities on the environment. The IWAY code of practice expects suppliers to:

  • follow national and international laws
  • not use child labour
  • not use woods and glues from non-sustainable forests
  • reduce their waste and emissions
  • contribute to recycling
  • follow health and safety requirements
  • care for the environment
  • take care of their employees.

A product in use should not have a harmful effect upon consumers or their environment. For example, it should not cause allergies. If it uses energy, it should do so efficiently. When a product comes to the end of its useful life, it should be possible to reclaim or recycle the materials that make up the product. Such materials can then be re-used for making other products. To monitor suppliers, IKEA regularly carries out an IWAY audit. This involves talking to employees and inspecting documents and records. IKEA visits suppliers on-site on a number of occasions to ensure that they are following the code of conduct.

By the end of 2020, IKEA aims to be running on 100 per cent renewable energy. So far, the company has installed more than 700,000 solar panels at IKEA locations around the world and owns approximately 157 wind turbines in Europe and Canada. A further 104 wind turbines are being constructed in the US. Last year, the company committed to rolling out solar across all its Australian east coast stores and warehouses. To date, IKEA has invested €2.5 billion in renewable energy and assisting communities most impacted by climate change (Energy Monitor Worldwide, 2015).

As a global organisation IKEA has chosen to undertake a leadership role in creating a sustainable way of working. IKEA has formed partnerships with UNICEF and other global agencies to combat child labour by raising awareness and addressing the root causes. It has educated suppliers to understand how and why sustainable production is vital. This has helped IKEA differentiate itself from its competitors.

Case study written by Matthew Hinton

Solutions

Expert Solution

1. Explain why IKEA places high importance on innovation:

IKEA's products are low cost, simple and stylish. This has given IKEA a very broad appeal to different groups of customers and ensured that IKEA products appeal in both the business and consumer markets. The company was the pioneer of the flat-pack furniture. This offered a great solution for all sorts of customers who were looking for stylish high quality furniture at an affordable price. The flat-pack approach to furniture design allowed IKEA to reduce cost across the supply chain, from initial design, standardised manufacturing of components to transport costs and warehousing. Part of this cost saving approach is in IKEA's store location. IKEA stores are commonly built in the outskirts of cities where business rates and operational costs are cheaper and customers can park easily. IKEA's furniture are readily available in their stores and can easily be transported home in the customer's vehicle. Effectively, IKEA has outsourced the highly costly assembly part of the value chain directly to customers who are willing to trade the extra work of self-assembly for a large saving on the retail price they pay. This helps IKEA maintain high profits. The network of service offices is crucial to their global procurement activity, as each office is geographically spread out so that they can cultivate strong working relationships with all local suppliers, wherever in the world they happen to be.The IKEA business model is reliant on a highly effective approach to procurement. With 31 trading service offices of procurement staff in 26 countries, IKEA sources from over 1400 worldwide suppliers. With the bulk purchasing power behind IKEA and the large procurement team it is able to negotiate prices between 20% and 40% lower than any of its competitors. IKEA staff also visit all of the suppliers on a regular basis, not only to continue to build relationships with their suppliers but also to build on their quality control processes. In developed markets, customers assemble the furniture themselves. In developing countries IKEA has partnered with home services companies to help customers put together their furniture after purchase which is working very well. IKEA prices its products low so that as many people as possible can afford to buy them and makes profit through the volumes generated by the low cost.

2. Globalisation has created a new and dynamic relationship between the ‘global’ and the ‘local’. How would you advise IKEA to balance these two competing perspectives as it continues to pursue its global expansion strategy?

IKEA has a long history of expansion beyond its natural markets in Western Europe. IKEA has always adopted an ethnocentric strategy for internationalisation, weighing up the effect of the local culture against IKEA’s own to select relevant product. In the early days IKEA often ignored local tastes and preferences in favour of keeping costs low, but learned the hard way in the US that this wasn’t appropriate and adapted to the way furniture is purchased there. IKEA definitely needs to keep the prices of the products to match a countries economy. Especially in developing countries like India and China where there is a growing middle class population they need to have a volume based approach. Keep their costs low in those areas by outsourcing the assembly to local home service companies rather than their own empoyees doing it. Study intensly the customer's needs and buying habits and make their products more suitable to the local population. Employee local sales staff who will handle the competition with other companies better and focus on a great after sales customer service which should be the main focus. Come with loyalty programs for their frequent buyers. A very good system of customer referral reward or discount program can also work very well in their newer markets. A close working relationship with all suppliers is fundamental to IKEA’s sustainability vision. However, in creating low prices IKEA should not be willing to sacrifice its principles. IKEA should continue working on its sustainble product manufacturing processes to reduce the impact to the environment. Also they can allow used furnitures to be refurbished, redesigned and resold into the market which is very popular in developing countries.

3. Explain how IKEA seeks to nurture long-term value creation:

The IKEA vision ‘to create a better everyday life for the many people’ puts this concern at the heart of the business. IKEA has responded to the public’s rising concern for sustainability in its choice of product range, suppliers, stores and communication. It has also spotted business potential in providing sustainable solutions. IKEA’s concern for people and the environment encourages it to make better use of both raw materials and energy. This keeps costs down and helps the company to reach its green targets and have an overall positive impact on the environment.

To meet its vision IKEA provides many well-designed, functional products for the home. It prices its products low so that as many people as possible can afford to buy them. However, in creating low prices IKEA is not willing to sacrifice its principles. ‘Low price but not at any price’ is what IKEA says. This means it wants its business to be sustainable. IKEA supplies goods and services to individuals in a way that has an overall beneficial effect on people and the environment.

IKEA does not produce its own raw materials, but it needs these to develop its products. Consequently, it works closely with primary sector suppliers to ensure a sustainable impact on the people and the environment in which it operates. IKEA designs its own products. At the design stage, IKEA checks that products meet strict requirements for function, efficient distribution, quality and impact on the environment. IKEA uses a tool – the ‘e-Wheel’ – to evaluate the environmental impact of its products. The ‘e-wheel’ has several checkpoints, which are divided into five phases: raw material, manufacturing, distribution, use and end of life. This also helps suppliers improve their understanding of the environmental impact of the products they are supplying.

Presentation On Opportunities and Threats:


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