Swedish Furniture Giant IKEA Case Study The points of the Porter’s Diamond are described as four broad attributes. And these attributes promote or impede the creation of competitive advantage. These attributes are: •Factor conditions –a nation’s position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry. •Demand conditions –the nature of home demand for the industry’s product or service. •Relating and supporting industries –the presence or absence in a nation of supplier industries and related industries those are internationally competitive. Firm strategy, structure, and rivalry –the conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry. National Competitive Advantage of IKEA IKEA Group, a Swedish company founded in 1943 with its headquarters in Denmark, is a multinational operator of a chain of stores for home furnishing and furniture. It is the world’s largest furniture retailer, which specializes, in stylish but inexpensive Scandinavian designed furniture. At the end of 2002 (1 September 2001 – 31 August 2002), the IKEA Group of Companies had a total of 175 stores in 31 countries. In addition, there were 19 IKEA stores owned and run by franchisees, outside the IKEA Group, in 12 countries. During the IKEA financial year 2001-2002, 323 million people visited our IKEA stores around the world. Factor Conditions of IKEA’s National Competitive Advantage IKEA’s Heritage —- the Swedish Root It’s no accident that the IKEA logo is blue and yellow. These are the colours of the Swedish flag. In Sweden, nature and the home both play a big part in people’s lives. In fact, one of the best ways to describe the Swedish home furnishing style is to describe nature — full of light and fresh air, yet restrained and unpretentious. In the late 1800s, the artists Carl and Karin Larsson combined classical influences with warmer Swedish folk styles. They created a model of Swedish home furnishing design that today enjoys world-wide renown. In the 1950s the styles of modernism and functionalism developed at the same time as Sweden established a society founded on social equality. The IKEA product range — modern but not trendy, functional yet attractive, human-centred and child-friendly — carries on these various Swedish home furnishing traditions. Many people associate Sweden with a fresh, healthy way of life. This Swedish lifestyle is reflected in the IKEA product range. The freshness of the open air is reflected in the colours and materials used and the sense of space they create: blond woods, natural textiles and untreated surfaces. In a climate that is cold and dark for much of the year, these light, bright living spaces create the sensation of summer sunshine indoors all year round. The IKEA Concept, like its founder, was born in Smaland. This is a part of southern Sweden where the soil is thin and poor. The people are famous for working hard, living on small means and using their heads to make the best possible use of the limited resources they have. This way of doing things is at the heart of the IKEA approach to keeping prices low. But quality is not compromised for the sake of cost. Sweden has an international reputation for safety and quality you can rely on, and IKEA retailers take pride in offering the right quality in all situations. IKEA was founded when Sweden was fast becoming an example of the caring society, where rich and poor alike were well looked after. This is also a theme that fits well with the IKEA vision. In order to give the many people a better everyday life, IKEA asks the customer to work as a partner. The product range is child-friendly and covers the needs of the whole family, young and old. So together we can create a better everyday life for everyone. Demand Conditions of IKEA’s National Competitive Advantage Figures of IKEA Worldwide turnover for all IKEA storesThe turnover for the financial year 2002 (1 September 2001 – 31 August 2002) was 12 billion Euro (sales tax not included). turnover per region Middle East, Australia, Asia 4 % North America 19 % Europe 77 % purchasing per region Asia 30 % North America 4 % Europe 66 % co-workers per region Middle East, Australia, Asia 3 500 North America 10 000 Europe 62 000 IKEA employs a total of 75 500 co-workers. o- workers per function Range, purchasing/trading, wholesale and others: 8 400 The Swedwood industrial group: 9 600 Retail: 57 500 top five sales countries Germany 20 %United Kingdom 13 %USA 12 %France 9 %Sweden 8 % top five purchasing countries China 15 %Sweden 12 %Poland 10 %Germany 6 %Italy 6 % According to the chart, we can see the turnover of IKEA mainly come from Europe market. The demand is still high in Sweden where IKEA original comes from. The Sweden market still has high sales (8%) and high purchasing (12%). Relating and Supporting Industries of IKEA’s National Competitive Advantage IKEA Supply Net Worldwide In general, IKEA does not manufacture its own products, but works through a complex network of suppliers around the world. However, in the past few years, IKEA has acquired a number of its own factories, some of which function as training units and set standards for other suppliers for production economy, quality, and environmental awareness. To secure supplies and help suppliers develop, IKEA has launched partnerships as joint owners or financiers in a number of countries including Poland, Slovakia, Russia, Romania, and China… In addition to working with around 1,800 different suppliers across the world, IKEA produces many of its own products through sawmills and factories in the IKEA industrial group, Swedwood. Swedwood also has a duty to transfer knowledge to other suppliers, for example by educating them in issues such as efficiency, quality and environmental work. Swedwood has 35 industrial units in 11 countries. Purchasing IKEA has 42 trading service offices (TSO’s) in 33 countries. Proximity to their suppliers(1,800 of them in 55 countries) is the key to rational, long-term co-operation. That’s why TSO co-workers visit suppliers regularly to monitor production, test new ideas, negotiate prices and carry out quality audits and inspections. TSO staff are also responsible for the important tasks of developing and checking working and social conditions, and environmental work among IKEA suppliers. Distribution The route from supplier to customer must be as direct, cost-effective and environmentally friendly as possible. Flat packs are an important aspect of this work: eliminating wasted space means we can transport and store goods more efficiently. Since efficient distribution plays a key role in the work of creating the low price, goods routing and logistics are a focus for constant development. Now 25 regional distribution centers in 14 countries are responsible for supplying goods to IKEA stores Firm Strategy, Structure, and Rivalry of IKEA’s National Competitive Advantage The Business Idea of IKEA The IKEA business idea is to offer a wide range of home furnishings with good design and function at prices so low that as many people as possible will be able to afford them. And still have money left! 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 low to middle income family. The Competition Advantage Strategy of Ikea’s product IKEA’s success in the retail industry can be attributed to its vast experience in the retail market, product differentiation, and cost leadership. Over all IKEA is doing differentiation and cost leadership. Differentiated because their products are different compared to the conventional ones already in the market. They defy the norms in terms of furniture style. They go with furniture with simple design. And they are a cost leader in terms of the price of their products are cheaper compared to other retailers. It is also shown by their company being cost conscious in everything that they do. IKEA Product Differentiation —- A Wide Product Range The IKEA product range is wide and versatile in several ways. First, it’s versatile in function. Because IKRA think customers shouldn’t have to run from one small specialty shop to another to furnish their home, IKEA gather plants, living room furnishings, toys, frying pans, whole kitchens – i. e. , everything which in a functional way helps to build a home – in one place, at IKEA stores. Second, it’s wide in style. The romantic at heart will find choices just as many as the minimalist at IKEA. But there is one thing IKEA don’t have, and that is, the far-out or the over-decorated. They only have what helps build a home that has room for good living. Third, by being coordinated, the range is wide in function and style at the same time. No matter which style you prefer, there’s an armchair that goes with the bookcase that goes with the new extending table that goes with the armchair. So their range is wide in a variety of ways. Cost Leadership —- Low Prices Strategy A wide range with good form and function is only half the story. Affordability has a part to play – the largest part. A wide range with good form and function is only half the story. Affordability has a part to play — the largest part. A low price is linked to the happiness of inding just what you need for your home. And the joy of being able to own it without having to forsake everything else. That’s why IKEA designers, manufacturers and purchasers spend most of their days finding solutions that result in a low price, then, buy big volumes to make it even lower. And the customers help, too, by choosing the furniture, getting it at the warehouse, transporting it home and assembling it themselves, to keep the price low. IKEA’s Global Expansion Strategy Originally established in the 1940s in Sweden by Ingvar Kamprad, IKEA has grown rapidly in recent years to become one of the world’s largest retailers of home furnishing. In its initial push to expand globally, IKEA largely ignored the retailing rule that international success involves tailoring product lines closely to national tastes and preferences. Instead, IKEA stuck with the vision, articulated by founder Kamprad, that the company should sell a basic product range that is “typically Swedish” wherever it ventures in the world. The company also remained primarily production oriented; that is, the Swedish management and design group decided what it was going to sell and then presented it to the worldwide public–often with very little research as to what the public actually wanted. Moreover, the company emphasized its Swedish roots in its international advertising, even going as far to insist on a “Swedish” blue and while color scheme for its stores. And from the chart above, we can see the top purchasing country of IKEA is China. It is the new big potential market for IKEA expanding globally. National Competitive Advantage of IKEA China Factor Conditions in Developing China As living standards improve in China and the government opens up the property market so interior decoration, design and DIY are becoming popular pastimes in certain key markets. In line with the interest in home decoration and improvement has come a desire for better quality materials. In the 1990s with the emergence of better public housing, improved incomes and raised expectations of households, the market has moved beyond the provision of shelter to the quest to provide pleasant homes tailored to the households needs. The result of this trend has been for the Chinese government to begin to sell-off state housing and create a class of homeowners, primarily in the larger cities but gradually throughout the country. With the future development of a secondary housing market, eventually it is envisaged that the Chinese housing market will come to resemble that seen in mature private property markets. Key Facts • Home ownership has been the catalyst behind the home improvements market and has encouraged consumers to engage in DIY and home improvement/ decorating activities. Additionally, this growth in private housing is attracting domestic and foreign retailers such as B&Q and IKEA to China. • The market had grown by 106. % since 1994, with the opening up of the housing market, continuing rapid increases in average salaries and consumer spending power and the improved retail supply of goods all contributing to the strong growth. As the market opens, so China is becoming increasingly ‘house-proud’ while the home improvements industry is becoming an increasingly established part of the Chinese retailing and consumerist landscape. Relating and Supporting Industries in China The Chinese translation of IKEA pronounces “Yijia”, which literally means “suits home. IKEA has a 4 prong strategy for China: setting up commercial offices, opening stores, establishing procurement centres and investing in setting up factories. It is reported that IKEA has invested US$60 million to build Asia’s biggest furniture market in Shanghai (area 36 000 square metres). The company president is on record as saying the company also plans to set up 2 new stores every year in China. The coastal cities and developed inland cities will be its main focus. Currently the company’s commercial office in Chengdu City, Sichuan Province plans to procure furniture valued at yuan 4 million every year. The company also invested US$180 million to build an industrial area in Shanghai’s Song Jiang and establish IKEA’s production base in China. Today furniture companies in China have become IKEA’s biggest trading partners and 30% of IKEA’s products are made in China. Most of the raw materials also come from China so that product prices are competitive. Demand Conditions of IKEA China The Growing Demand and Strong Sales for IKEA China IKEA has sold US$86 million in products through its own retail outlets by August 26, 2003 in China. This is a new record for the company, and represents 24 percent growth over the same period last year. IKEA has been expanding its retail network, and sourcing more production in China. IKEA won the hearts of Chinese consumers, and the government, by announcing its expansion plans for China in May, during the SARS crisis, when many international businesses were re-examining what they would do. Just as China Business Strategy predicted at the time, China’s economy and consumers have quickly bounced back from the SARS crisis. IKEA’s new Shanghai store has set a record number of shoppers for one day, with 80,000 visitors in one day. Current estimates are that IKEA sources 15 percent of the products sold in its stores from China. It is estimated that by 2005, IKEA will source more than US$1 billion of products from China. IKEA’s products have struck a chord with Chinese consumers who like European style furniture at prices they can afford. Firm Strategy, Structure, and Rivalry in China There are many furnishing stores in China, take OBI, ChengWaiCheng as example. These furnishing stores are always good design and function, or low prices. For the most of middle class, they trend to choose the reasonable price and good quality. ChengWaiChen’s business idea is honest and have the low price meanwhile have good quality. According to the expenditure level of middle class, common people build their home will consider ChengWaiCheng furnishing store firstly. OBI furnishing store is tend to be market niche, only the upper class can afford that price. Build a comfortable home is harder than a luxury one. Some of the product are not pratical and short service life. IKEA’s Competition Advantage —- low-price strategy Swedish home furnishing producer IKEA said it will maintain its low-price strategy and planned to open new stores in China in the new financial year. Prices decreased by about 12 per cent in the past financial year,” said IKEA China manager Ian Duffy. “Low prices will remain in the coming year to make our products more affordable for IKEA’s 8 million customers. ” Duffy gave an example, a sofa priced at 2,999 yuan (US$363) in 1999 is now sold at 995 yuan (US$121). With more local purchases, lower prices are becoming more possible. China is IKEA’s main purchasing market and 15 per cent of all home furniture sold by IKEA is made from materials purchased in China, according to Duffy. Our low price strategy is also a result of a survey conducted among local residents,” said Jerome Deloix, IKEA China sales manager. “After the survey, we decided we should aim at local families with monthly income of 3,350 yuan (US$405) instead of people in higher income brackets. ” IKEA will also maintain its aggressive growth strategy in the new financial year. The firm plans to open two new stores, one in Beijing and the other one possibly in South China’s Guangdong Province. Linda Xu, public relations manager of IKEA China, said this could lead to a 50 per cent growth in the company’s customer base. Our targeted consumers are those with lower incomes. ” IKEA China Expanding Strategy —- open 10 new stores by 2010 IKEA said it plans to spend $600 million to open 10 new stores in China by 2010, a six fold increase of its China investments. It will expand beyond its current two outlets in Beijing and Shanghai, with a new store in the southeast, most likely in Guangdong, and a second store in the capital to open this year. The expansion is driven by its robust growth in its mainland operations. IKEA’s sales in China between September 1, 2002 and August 26, 2003 were 713 million yuan (US$86. million), 24 per cent more than the previous year. The opening of the firm’s Shanghai store, its biggest in Asia, attracted a record 80,000 visitors within one day. Ikea China manager Ian Duffy said that the company had achieved double-digit growth in sales every year since opening in China in 1999. At the same time, the average price of Ikea’s products will be reduced by 10 percent starting Wednesday as the company continues its aggressive strategy of targeting families with 3,350 yuan (408 dollars) income per month. And the number of people who visited IKEA’s two stores over the last fiscal year grew by 1. 8 million to 6. 5 million. In conclusion, the world’s largest home-furnishing retailer, Sweden’s IKEA has been expanding sales all over the world by they national competitive advantage, especial in the increasingly wealthy China. IKEA China main to attract sales as the proportion of China’s middle class grows. In the not so distant future the size of China’s domestic furniture market will be as big as the whole Europe’s.
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