IKEA: Operational Network, Growth and Competitiveness

Subject: Company Analysis
Pages: 6
Words: 1738
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Today, IKEA is considered one of the most famous international trade companies with a turnover of 35.1 billion euros, 325 stores in 41 countries, and 155 thousand of employees (“Ikea in figures”, 2020). One of the reasons for the company’s success, incorporated in Sweden in 1943, is its commitment to continuous innovation and risk-taking. IKEA began its development by creating a successful business model, the development of which had been lasting for 30 years – from 1943 to 1972 (Baxter & Landry, 2017). The company took into account the significant shortcomings of most competitors’ business models and, above all, the lack of its own brand. The company’s management understood that retail success could only be achieved by creating unique products and ensuring full control over the entire value chain – from developing and manufacturing products under its brand to delivering it to stores. IKEA can keep costs and prices low as the company systematically redefines the roles, relationships, and work organization in the furniture business. The result is a holistic business system that “invents” value by linking participants’ different capabilities more efficiently and effectively than ever before.

IKEA’s Operational Network

The implementation of this business model led the company to choose cost leadership strategies and to form innovative purchasing and sales strategies in the furniture market. So far, all of the company’s efforts have been focused on making a profit by reducing the trade margin and maximizing sales growth (Helmefalk, 2016). Another way to reduce prices is associated with the IKEA management’s conviction that “people have more time than money” (Bisland & Cucumbers, 2018, p. 139). Therefore, the sales system is based on the client’s involvement in the process of selling products. The company’s assortment ensures the uniqueness of the proposal and control over the supply chain – competitive prices and profitability.

The company found manufacturers of products in socialist Poland, and, after the fall of the Berlin Wall in 1989, reoriented the supply from Asia: China, India, Pakistan, Vietnam, Malaysia, Thailand, and Indonesia (Baraldi & Ratajczak-Mrozek, 2019). In the 90s, IKEA’s modern innovative procurement strategy was finally formed, which includes moving production to countries with low production costs, reducing the number of suppliers, and switching from functional to the process-oriented supply management system (Baraldi &Ratajczak-Mrozek, 2019). In terms of risk, time, and cost, IKEA’s strategy impacts the whole pool of activities, processes, and agents in the supply chain.

Another essential step in improving procurement activities was the growth of production localization and direct deliveries from manufacturers to its stores. To meet the ambitious strategic goal of reducing prices by 20% every ten years, IKEA has made the transition from a functional to a process-oriented supply chain (Vahlne & Johnson, 2017). Up to this point, there was disunity in the supply chain: the services of new product development, distribution, purchasing, and sales worked separately (Baxter & Landry, 2017). The new process-oriented supply chain optimized this process throughout the supply chain. The distribution service, including the warehousing, transportation, planning, and logistics departments, was merged with the purchasing service into a single supply department.

Distinctive Elements of the IKEA Strategy that Attract Customers from Many Cultures and Countries

Recognition of IKEA is the main advantage of the company’s entry into new markets. In the global market, this played into the hands of the organization: “in 2003, it was ranked 44 of all globally recognized brands” (Duke et al., 2019, p. 7). The strategy IKEA has used to expand its production in Sweden and 30 other markets in Europe, America, Africa, and Asia is to keep the overall idea and most of the products, adding small changes to make it easier for customers to dive into the world of IKEA. After all, what the American buyer is looking for is different from what the Indian wants. To identify cultural differences, the company dispatches representatives to homes worldwide to conduct interviews with local residents (Vahlne & Johnson, 2017). During the survey, their basic needs were found out, along with what they can afford and how they prefer to shop.

Respecting cultural traditions in these regions has become an important part of the strategy while the company manages to maintain its instantly recognizable brand and outstanding shopping experience. Just as people in different countries use their living space differently, cultural traditions in the bedroom and choosing beds differ significantly from one culture to another. Americans, for example, have a specific set of standard sizes for beds and mattresses. When IKEA entered the US market, the company made the mistake of specifying dimensions in centimeters, rather than using the local dimensions of king-size and queen-size (Vahlne & Johnson, 2017). However, the company has quickly noticed and fixed the error.

KPIs and Their Effect on Operations

The most critical KPIs refer to profit-making, and they are price, quality, and resources, and the related indicators are time and communication efficiency. Another essential KPI is sustainability, which can involve various sub-indicators corresponding to the company’s view on how to achieve it. The leading KPI that influences the whole business strategy and operations is the price. IKEA aims at lowering the price, whereas a standard business model presumes price increase each year (Baxter & Landry, 2017). First of all, it is a point of view on competition; the competition was fragmented and localized for many years. However, many large retailers could have changed their strategy.

Another consideration is cost-effectiveness: in terms of economic efficiency, sales growth in existing stores is the preferred path of development. The second after it is constructing new stores in existing markets, and the most expensive option is to enter new markets. The rapid opening of many new markets in the 70s, 80s, and 90s had some of the negative consequences mentioned earlier, but now, they could be turned into benefits, and IKEA could reap the harvest from these earlier investments (Bilsland & Cumbers, 2018). Fixing a significant portion of the baseline value also meant that strong growth in existing divisions would immediately translate into massive increases in current profits.

Sustained Profitable Growth and Competitiveness

IKEA conducts various marketing research, such as Brand Capital – a study of the brand’s consumer perception, the research on the level of customer satisfaction. At the same time, both customers in the online store and directly in the retail store are interviewed, in which the customers evaluate their visit to the store (Alänge et al., 2016). Every month, department employees collect information on the most frequently asked questions from customers. This allows corrective action to be taken in a timely manner that makes the purchasing process more straightforward and easier to understand, which will better meet visitors’ expectations. Trading activity is subject to the significant influence of probabilistic factors. The development of trade requires a certain stability in increasing the turnover, which can appear only if there is a sufficient number of regular customers with the appearance of new ones. A tool that forms a layer of regular customers is a brand that guides consumers and stimulates the required product choice.

All directions and principles of the company’s activity clearly and consistently fit into the social marketing strategy. The term was coined by marketing theorist Philip Kotler, who substantiated the need to apply social marketing to sustainable company development (Lee & Kotler, 2015). Today more and more corporations are beginning to deal with societal issues and pressure. In practice, social marketing covers almost all areas of the company’s activities, including responsibility for product safety, truthfulness and reliability of advertising, and pricing objectivity.

10 Recommendations on Operations Improvement

  1. One of the recommendations would be to localize production to a greater extent. Such move will reduce the cost of logistics processes and add symbolic value to buyers. Localized manufacturing can place more emphasis on local characteristics, preferences, and tastes.
  2. Another recommendation would be to deploy blockchains in the supply chain sector. This technology enables and enhances decentralization and transparency of transaction processing (Sund et al., 2020). By combining these steps, IKEA would improve the operational network in terms of all the KPIs.
  3. To enhance innovation throughout the whole supply chain and operational network, it is essential to evaluate intellectual capital alongside merely technical aspects. Ikea would benefit from including a platform for organization’s intellectual capital assessment (Gogan et al., 2016), however the design of such platform should include cultural specificities.
  4. Since there is a powerful trend in eco-agenda worldwide, IKEA should also ensure that all its production is ecologically friendly. So far, IKEA’s operations seem to leave much to be desired. Although such step can result in the product’s price increase, it would not be an undesired detour from the IKEA’s price KPI. Customers become more aware and conscious of their consumer behavior and opt for more eco-friendly options.
  5. Although the furniture market becomes disrupted with such players as Amazon and AliBaba, IKEA should not reformulate its business strategy and dive into digital retail. Instead of investing huge money in online retail, IKEA should preserve its leadership in the offline segment. Digital solutions should still be developed in the area of supply chain operations enhancing.
  6. Another recommendation related to and induced from the previous two is to invest in biodiversity. That could result not only in such long-term benefits as an exceptional consumers’ recognition and appreciation, but also in a relocation of wood supply operations.
  7. Since IKEA is a differentiated network of subsidiaries, it creates centers of excellence (CoEs) that put further in motion knowledge functioning within the whole network. One of the recommendations here could be to pay more attention to the emergent CoEs instead of working with only formally declared and explicit ones.
  8. Procurement staff should understand and ensure optimal production conditions, productivity, quality and availability of raw materials and goods; inclusion in the scope of non-assortment procurement, that is, places in the department of materials and services of indirect use, for example, supporting suppliers to improve working conditions and minimize environmental impact.
  9. In the field of production logistics, the enterprise would benefit from reduction of human labor in production and transformation of production into a conveyor belt. A more proactive approach would involve a wide deployment of artificial intelligence technologies throughout the whole operational network.
  10. Another recommendation can be a reduction inventory by changing the production system from pushing to pulling. From the point of technological view, OKEA would benefit from the implementation of an ERP system and engineering business processes in accordance with the SCM concept.


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