Running head: IKEA ANALYSIS1
IKEA Analysis Report
Robert Christopher
Argosy University
Professor Richard Smith
Operations Management: Solutions to Business Challenges B6029 BLA
Abstract
IKEA ANALYSIS 2
The purpose of this paper is to conduct an analysis of the global IKEA furniture chain. This
paper will discuss IKEA’s Marketing and answer the questions “How do IKEA’s 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?” IKEA’s 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 IKEA’s core customer, how IKEA’s supply chain supports its value proposition, and
how IKEA’s 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 Report
Marketing
IKEA ANALYSIS 3
“How do IKEA’s 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. IKEA’s original focus was to provide furniture that had function, quality and low
price. These attributes along with good design remain firmly embedded in IKEA’s 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 company’s
communication of its core values. The experience rooms combine functionality with emotional
involvement to create a favorable customer experience. (Edvardson and Enquist 2011)
Studies conducted by Isaksson and Sujanovic (2006) have concluded that the factors
that influence a customer’s decision to visit IKEA are the low prices and wide ranging product
assortment, the opportunities to combine their shopping experience with social activities both
IKEA ANALYSIS 4
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.
Value Chain
IKEA’ sources of value as they relate to the wants and needs of IKEA’s core customer.
IKEA ANALYSIS 5
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 world’s 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
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
IKEA ANALYSIS 6
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)
IKEA’s 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)
How IKEA’s supply chain supports its value proposition. How IKEA’s focus on customer
value (economic, social, and environmental) is reflected in its supply chain.
IKEA ANALYSIS 7
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. IKEA’s 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 four-
step approach to improve supplier’s 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
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
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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 IKEA’s 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
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.
IKEA ANALYSIS 9
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.
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 ANALYSIS 10
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 organization’s 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
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 IKEA’s productivity
and ability to produce quality products that are environmentally friendly.
IKEA ANALYSIS 11
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 IKEA’s 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 IKEA’s 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
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.
IKEA ANALYSIS 12
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 doesn’t sell it can be
quickly discontinued.
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References
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 IKEA’s
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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