Ikea operational startegies


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This paper discusses IKEA’s corporate and business level strategy and how these strategies are best supported by operations strategies of IKEA. It also discusses how IKEA differentiated itself from its competitors. Paper highlights various operational trade-offs done by company. Paper, on later stage focuses on how supply network contributed to achieving company’s objectives and strategies.

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Ikea operational startegies

  1. 1. Operations StrategyOperations Strategies, TheirAlignment With Corporate & BusinessLevel Strategies, Tradeoffs, Process& Technology Strategies Of IKEASubmitted By:Gagan Pardeep; Call no.102013Submitted to:Prof. Deepesh JainIndus World School of Business Greater NoidaDate: 4th March 2012
  2. 2. AbstractThis document discusses IKEA’s corporate and business level strategy and how these strategiesare best supported by operations strategies of IKEA. It also discusses how IKEA differentiateditself from its competitors. Paper highlights various operational trade-offs done by company.Paper, on later stage focuses on how supply network contributed to achieving company’sobjectives and strategies.Corporate and Business Level StrategiesVision and Business IdeaIKEA’s vision is to create a better everyday life for the many people. The business ideasupports this vision by offering a wide range of well-designed, functional homefurnishing products at prices so low that as many people as possible will be able toafford them1.By communicating the content of this framework and encouraging customers toexperience the IKEA concept, it is building the IKEA brand. The IKEA brand is the sumtotal of the emotional and rational values that consumers associate with the IKEAtrademark and the reputation of company. The brand image is the result of over 50years work by IKEA co-workers at all levels all over the world.What it does, what it says, the products it offers, the price it offers them at, thepresentation of its range and the information it provides IKEA’s customers all contributeto its image. The overall task of IKEA marketing communication is to build the IKEAbrand and inspire people to come to the stores.IKEA Operations StrategyIKEAs mission is to offer a wide range of home furnishing items of good design andfunction, excellent quality and durability, at prices so low that the majority of people canafford to buy them. Founder Ingvar Kamprads innovative strategy was to designfunctional furniture that was easy and inexpensive to build, receive it disassembled atstores, and display it on the showroom floor with detailed explanation tickets, makingsales person assistance unnecessary.1 http://franchisor.ikea.com/showContent.asp?swfId=concept92|P ag e
  3. 3. IKEA customers typically spend more time in the store - as compared to the time theyusually spend in rival furniture retailers. IKEA distinguishes itself from the rest of thecompetitors with the way it organizes its stores. Shopping in IKEA is an experience.IKEA stores double as warehouses. They are built for browsing - the furniture was laidout and showcased in the stores as it would be in a home setting. Shoppers are used toseeing everything under one roof - from the kitchen sink to the soup bowl.In that way, IKEA shoppers become Pro-sumers - half producers, and half consumers -because most products have to self-assemble. Employees were available for questionsbut the customers could choose, order, pick up, transport and assemble their ownselections.IKEA is using a different operation strategy from their competitors. The operation ofIKEA has to cope with large volume because their products are highly repeatability andspecialization. The variety of products the operation needs to create is low to mediumas they offer standardized and well-defined products. The variation with which theoperation has to cope is low as the sales of furniture are steady over the year and canbe predictable. The degree of customer contact is low. Hence the operation strategy ofIKEA is focused to low cost, while the traditional furnishings position to high cost due tolow volume, high variety (some order-to-make), low variation but high customer contact.IKEA is targeting at two groups of customers. The first target group is the young adultsfrom low to middle income family who may have or have no children. The other targetgroup is business customers and they are normally running small to medium size ofoffices.The characteristics of their target segments are composed of young, highly educated,liberal in their cultural values and hence they can accept a totally different buyingbehavior from the traditional furnishings. They are in different lifestyles and trust theirown judgment to mix and match their furniture from the stores. They view the modularand self-assembly as an extension of self. As the target groups are within the low tomiddle income class or small to medium size of offices, they are more price consciousand demand different information, support and services.The operation strategy of IKEA is compatible with its other strategies by linking with itsperformance objectives. The performance objectives refer to quality, speed,dependability, flexibility and cost, which directly or indirectly impact on the effectivenessof the other strategies.Although all furniture retailer operations may be similar in that they all transform inputresources into output products and services, they do differ in four important respects -namely the volume of their outputs, the variety of the outputs, the variation in demandfor their output, as well as the degree of visibility or customer contact that they have.3|P ag e
  4. 4. These four areas and illustrate what made IKEA the furniture retailer with a differenceare described as below. The volume dimension As IKEA is operating just like a warehouse, it produces a high volume of furniture and products that could be self-assembled. The fact that IKEA can also be found in other countries allow for economies of scale and hence, IKEA is able to bring costs down with its high-volume production. The downside of this would be, as one customer puts it: "I have something which everyone else in the world has. This product is not unique." Despite having a high-volume business, IKEA has a lean buffering capacity, with only a limited amount of stock bought to ensure that the possibility of unwanted stock is reduced. The variety dimension IKEAs furniture is value for money with a wide range of choice. It is designed to be stored and sold as a flat pack but is capable of easy assembly by the customer. The Swedish design emphasizes bold colors, styles and functionality. The company promotes products to be modular, allowing different variations of the same basic product to be customized to produce greater variety. This allows IKEA to provide greater variety for its products without holding large amounts of stock. Instead of having to wait for a sales personnel to service them, customers have the flexibility to move around and pick up what they want. They are free to browse through the showrooms and even pick up small items directly off the display shelves if they like to purchase them. There is no need to waste any time waiting for someone else to get it for them. IKEAs philosophy is not to hassle customers but rather let them make their shopping decisions in their own time. Only if a customer wants advice will the staff offer to help and guide them around the showroom. The variation in demand IKEA has a moderate variable demand pattern. Though there may not be any significant factors (peak and off peak seasons etc) that will influence the demand4|P ag e
  5. 5. for IKEAs furniture, but there are other certain factors that will vary this demand. As IKEA stores are located away from the urban areas, it can be pretty inaccessible to customers who do not drive. There may be fewer customers during rainy seasons as customers may not feel that it is feasible to drive all the way out of town to buy furniture, especially more so if they have to transport and re-assemble them themselves. For the same reason that IKEA is located in the sub-urban areas, many customers may only patronize the stores during the weekends. Hence, the store may be relatively quiet during the weekdays and highly packed with shoppers over the weekends. One problem in this is that customers who really want to shop at IKEA may be turned off by the thought of crowding into a packed showroom with hundred other frenzied weekend shoppers. The visibility dimension The visibility dimension means how much of the operations activities its customers experience, or how much the operation is exposed to its customers. In short, it refers to the amount of customer contact that the operation has. In the case of IKEA, though it adopts the self-service concept in their stores, it actually maintains a high level of contact with their customers. To facilitate shopping, IKEA provides catalogs, tape measures, shopping lists and pencils for writing notes and measurements. Information and assistance to customers was offered through the free catalogue which highlights the available range of the stores products, with related illustrations and dimensions. In addition, IKEA stores are designed to have a ‘family shopping experience’ with customer services and facilities such as a restaurant, day care facilities and a Swedish shop. Parents can leave their kids in a supervised play area, or keep their children with them in pushchairs while they are pushing. Car roof racks are available for purchase at cost and IKEA pick-up vans/mini trucks are available for rental. Large car parks and loading areas were a feature of their huge store sites, allowing customers to load purchases easily. This desire to integrate social value into business practice is what differentiates5|P ag e
  6. 6. IKEA from many traditional furniture retailers. IKEAs success in the retail industry can be attributed to its vast experience in the retail market, product differentiation and cost leadership. The company is perhaps, one of the worlds most successful multinational retailing firms operating as a global organization based on its unique concept and operations strategy as illustrated above. The key point about IKEA is that it is different to the rest of its industry. Traditionally furniture retailing is highly fragmented and split between large department stores and small independent outlets. It is generally held that aesthetic tastes vary between regions, so what may sell well in Spain is different from what sells well in Germany. Because furniture is heavy and bulky, it is expensive to transport between manufacturers and retailers. Also in typical furniture stores similar products are grouped together, one area will have all tables, while another will have sofas and so on. In fact these items which are displayed will represent only a fraction of what is available to the customer. Variations in size and fabric coverings etc. will need to be ordered. The final delivery of products to the customer may take several weeks. In some countries there are large furniture retailers who are similar to IKEA but these rarely have the strength of brand or the type of layout adopted by IKEA.Trade offs and challenges  IKEAs corporate philosophy is to provide goods at a reasonable price. However, in providing products at a lower price than expected, then profit maximization is reduced. This would be a possible threat on profit and the resulting growth for IKEA. Thus IKEA compromised on that in order to achieve the vision of providing wide range of well-designed, functional home furnishing products at prices so low that as many people as possible.  In a market where consumers view expensive goods as of a higher quality, IKEAs low-cost operation strategy would backfire. If IKEA goods are seen as cheaper than other furniture retailers, they may be seen as inferior quality. So here IKEA is compromising on not serving the premium furniture buyers.  To prevent their stock from becoming obsolete and to reduce costs, IKEA only order items when they are low in stock. Such a lean buffering capacity and may lead to IKEA encountering stock-outs where popular items have sold out quickly. The distribution of products from a warehouse may also lead to increased difficulty supplying the demand for more popular items. So it reduces the price for customer by compromising on waiting time/lead time for customer. Customers6|P ag e
  7. 7. who visit the shop based on what they have seen in the catalogue may be disappointed if they have driven all the way to the IKEA store, only to realize that it is out of stock.  Because of IKEAs "anti-service" approach, it may give rise to many customer- related problems. As customers are responsible for selecting, transporting and assembling the furniture themselves, they may feel a great sense of frustration and dissatisfaction should they fail to assemble the furniture correctly. IKEA is compromising on the customers who want end to end solutions.  As the IKEA brand becomes more established and is seen as a family shopping experience, there may be the temptation to increase the level of services available to the customers, continually improving on the Swedish shop and restaurant concepts. However, these value-added services may add to operating costs. The opportunity costs of using the resources for such added value services may be re-deployed in providing lower priced goods or increasing the image of the IKEA brand through advertising and marketing.  A new competitor may emerge with the same strategic objectives as IKEA - offering low cost goods yet without the added frills of family services such as restaurant. The new me-too company may gain market share from being cheaper, yet, offering the same level of quality with the apparent unnecessary family services.Performance ObjectivesThere are various performance objectives (quality, speed, dependability, flexibility andcost) which are prioritized by firm on the bases of customer’s requirements andcompactor’s strategies and thus lead to achieve a competitive edge for firm. For IKEAthese performance objectives can be described in following way -7|P ag e
  8. 8. Quality •Meet the specifications •Supplementary Services Speed •Unique store layout Performance Objectives •Automation Market Competitiveness (conveyor belts) Dependabilit •Hub & Spoke y model to ensure availability Flexibility •Global Sourcing to •Mix And Match to avail adjust for volume large variation in offerings changes Cost •Tight inventory •Automation (less re-work) •Self-Service (low OH cost) •Flat-packs (less space) Capacity Supply Network Process & Technology Operations Decisions Shape Competencies And Constraints1. QualityThe operation of IKEA succeeds in achieving quality advantage to the company bydoing the things right. Their products are made to conformance to specification withappropriate performance that fit for their customers’ purpose. The stores are designedin unique, clean and tidy layout conforming to their brand identity. The staffs are lowcontact with customers but they are friendly and helpful when required. Their supportingfacilities such as childcare, self-service restaurant and crèche also provide qualityservice to their customers. Therefore, the customers perceive the products and servicesas value for money with extra benefits.2. SpeedThe operation of IKEA is giving the company a speed advantage by doing things fast.The store is designed in unique layout with warehouse and parking facilities. Thecustomers can locate the store fast from its bright yellow and blue identity. They canpark their cars without spending extra time on the six acres of reclaimed industrial landof parking area. They can leave their children to the play area so that they canconcentrate on their purchase. After that, they can select their purchases fast from theunique store layout with yellow plastic shoulder bags or on trolleys. The IKEA staffs do8|P ag e
  9. 9. not bother them while they are selecting their purchase but they can ask for help fromthe customer-contact personnel or from the information points. They can also use theloan catalogues to screen out their preferences. All the stores stock about 10,000 of the14,000+ items in the IKEA range allows immediate availability of goods. The modulardesigns allow the products to be flat-packs with code number and the customers areeasy to pick up whatever they want from the warehouse. The customers can getthrough the checkout fast as a large steeply ramped conveyor belt helps transportingitems through the cashier.The every single operation helps a smooth flow of customers and also reduces costs asthere is less stagnation. It is compatible with the target group who demand differentinformation, support and service, as well as their concept of self-service and modulardesign to create brand identity.3. DependabilityThe operation of IKEA is also giving dependability to the company by doing things intime. The operation is dependent because IKEA has predictable opening hours. Theproportion of goods out of stock is kept to minimum by the simple reorder system. Theytry to accelerate the arrival of new stock if stock-outs occur or review the buffer andreorder quantities in case the sales pattern has changed. The operation tries to keepreasonable queuing time, though it is expected to queue half-an-hour or more duringweekends and bank holidays. They also ensure that there is constant availability ofparking.Dependability is compatible with the target group as they are those working groups whorequire highly dependability to save their time and cost.4. FlexibilityThe operation of IKEA is able to change far and fast to customer requirements so theyhave a flexibility advantage.The operation allows product/service flexibility as they have ability to introduce newproducts and services. The global sourcing strategy makes them more responsive tothe customers’ needs and wants. Their strategy of creative sourcing leaves much of thedesign up to their suppliers and it is benefit to the fast introduction of new products.The operation allows mix flexibility and is able to provide a wide range or mix ofproducts and services. The range of products is wide from home furniture to officefurniture and accessories, from childcare to self-service restaurant and crèche. Althoughchildcare, self-service restaurant and crèche are supporting facilities, the customers aresatisfied for these benefits. The idea of mix and match is successful in offering mixflexibility. Storage units within a particular range have a range of sizes and colors, eachof which can be fitted with either glass or wooden shelves and doors. The units are alsostackable so that a variety of arrangements is possible. The office furnishings area9|P ag e
  10. 10. offers different style of service and customers can pay on account and delivery isprovided automatically. There are also wheelchairs available and a lift so that disabledcustomers have access to the upper floor.The operation also allows volume flexibility as they are able to change its level ofoutput. The global sourcing allows the operation to adjust volume significantly rapidly. Inthe stores, it is up to individual store management teams to determine stock levels ofeach product. That means individual store is more responsive to the change of demandin their location.Lastly, the operation allows delivery flexibility as they have ability to change the timingof the delivery of the products. The management may have to try to accelerate thearrival of new stock if stock-outs occur.The flexibility supports IKEA to provide their products with a wide range of choice. Theycan also serve to the expectations from their target groups and are likely to response tochanging customers’ needs and wants.5. Cost objectiveCost objective is to do things cheaply. The effectiveness of quality, speed, dependabilityand flexibility directly affect the cost objective, as well as the operation strategy and lowprices strategy. High quality operation reduces cost and time to re-do things. Fastoperation reduces inventory and improve flow of customers, which can help to increasesales and reduce cost of overheads. Dependable operation increases predictability andoperational efficiency. Flexible operation adapts to change and can adjust operations toresponse to the customers’ needs and wants without extra costs.The operation also achieves the cost objective by other approaches. The centralwarehouse in Sweden is highly automation with only three employees and the self-service concept requires less employees and this can sharply reduce costs. The globalsourcing reduces costs because no heavy investments required. The use of stockcontrol system can be used as management information systems to monitor the salespattern in order to react fast. Reacting fast means saving costs in arranging resourcesin an unexpected circumstances.Supply Network StrategyIKEA has 46 trading service offices in 32 countries. IKEA also has 28 distributioncentres in 16 countries that supply goods to IKEA stores. In addition to having suppliersof IKEA products all over the world, IKEA buys products from Swedwood. TheSwedwood Group is an industrial group owned by IKEA. Swedwood produces wood-based furniture and wooden components and employs 13,000 people in 35 industrial10 | P a g e
  11. 11. units in nine countries2. Among the top five purchasing countries are China, Poland,Sweden, Italy and Germany, China having top share of 20%.It buys products from 1,300 suppliers in 53 countries. Co-workers in the trading serviceoffices monitor the production of IKEA products. This enables them to test new ideas,negotiate prices and check quality while observing social and working conditions amongsuppliers.The rationale of IKEA’s relation with suppliers lies in the company’s business idea ofproviding low price products in the socially responsible and environment friendly way.All IKEA products are manufactured in accordance with a specially designed code ofconduct “The IKEA Way on Purchasing Home Furnishing Products” (IWAY), which alsoprovides a basic of the company’s relationship with its global suppliers. Prior to doingbusiness with IKEA suppliers have to fulfil IWAY standards. Representatives fromIKEA’s trading office continuously look after and mange relationship with suppliers asstated in the corporate material of company “being close to our suppliers is the key torational, long term cooperation.”3In many ways, this question gets at the heart of IKEA’s competitiveness and its ability tobe innovative. IKEA makes very few products internally and relies almost totally on itsnetwork of hundreds of suppliers. These collaborative long-term partnerships withsuppliers are rooted deeply in IKEA’s corporate history, and the character of these tieshas become part of the culture. It is through the suppliers that IKEA has been able tomake innovative designs featuring environmentally responsible materials and anefficient use of resources and translate them into bottom-line results. The key suppliers,in turn, use links with IKEA as vehicles to stay innovative, because innovation is theonly choice if the supplier wants to retain this powerful buyer; IKEA is powerful enoughto be coercive, and “the giant” is not to be dismissed easily.Another aspect to consider in this case is a process that starts with regulation, whichhas prompted IKEA to work with key suppliers to meet the new requirements (pushingthem to do so at equivalent or minimally increased costs). They develop a higher-qualityproduct, which motivates IKEA’s competitors to match the design and materialsinnovations as well as the economic efficiencies. Meanwhile, the supplier’s improvedskills and capacities make it more competitive, enabling it to expand its business withold and new buyers. Consequently, the industry is stimulated to match and exceed theIKEA example, the natural environment wins because waste or pollution is reduced oreliminated, and the customer benefits by being able to purchase a better-qualityproduct.2 http://franchisor.ikea.com/showContent.asp?swfId=facts33 IKEA Group Social and Environmental Report 200511 | P a g e
  12. 12. ACTIVATES •Exchange norms, values, Supplier A IKEA •Education (management, technology, logistics, etc.) •Corporate •Evaluation (monitoring of behavior, control cost etc.) •Personal bonding Supplier B Purchasing mangers on •Linking with other actors in n/w (new supplier contacts, local market new customers) Supplier C •Local RESOURCES employees Supplier: •Financial – Knowledge – technology – contacts Supplier D interacting with IKEA: suppliers •Reliable production process- consistent quality – speed- cultural understanding- contacts Supplier EConclusionIKEA has earned the name because of its unique business idea and serving to aparticular segment, its corporate and business level strategies which are different fromits competitors and are well supported by its operations strategies. Among variousperformance objectives (quality, speed, dependability, flexibility and cost) which areprioritized by the firms on the bases of customer’s requirements and compactor’sstrategies and thus try to achieve a competitive edge for firm, IKEA has chosen costand flexibility as its competitive edge. It has achieved edge on these parameters bydeveloping a strong supply network and investing in process and technology.12 | P a g e