IKEA Cost Leadership: The Measures Taken On Global Platform

Question

Task: Provide a short note on IKEA Cost Leadership and its analysis measure.

Answer

Introduction
It is quite possible that the term IKEA would appear to be gibberish in some foreign language. It is the acronym Ingar Kamprad Elmtaryd and Agunnaryd. The Ingvar Kamprad denotes the name of the founder of the ideology. The Agunnaryd denotes the village in which the founder had been grown up. The term Elmtaryd signifies the place where the founding personnel had gained the experience. IKEA was established by the Ingar Kampard in the country of Sweden in the year 1943 as a business of mail-order sales. At the time he was just of the age 17 years and had succeeded in developing the whole company to a mature state even at his young age. The innovative approach of providing the products with the names was adopted rather than denoting them with serial numbers or model codes. This has made it very easy to recite the model item for both the customers and the officials. The headquarters of the company is based in the Netherlands and is now is developed as a multinational company having its business extended to countries like Singapore, United States, Japan, United Kingdom, etc. The company has focussed itself to provide the customers with around the variety of 12000 products. From ranging the products kitchenware, and furniture, various home appliances are produced and supplied by the IKEA company. The company is growing at a very fast pace and as per the financial data of the year 2015, it had generated a turnover of 32.7 billion euros.

The major product of the company is the furniture and other utensils which are being used in daily household life. It is the common and basic need of a human being to take rest and thus the importance of furniture like bed, chair, tables, etc. is much high in their life. The role of a comfortable bed is now a very significant and crucial requirement to reduce fatigue in the human body. This research paper would significantly focus on the analysis of IKEA cost leadership. The market for the furniture is increasing as to suffice the need of the increasing population for home appliances and decoration. The increasing population and their augmenting standard of living are turning out to be a very positive measure for the growth of the IKEA company. Though the market for home appliances is a mature one and a lot of huge companies have secured their place on the international market. The international market for the home appliance is well controlled by developed companies like Walmart and the American Furniture Warehouse who are posing a lot of competition for the IKEA company. The quality provided by these customers on their products is posing a challenge to the sales of the IKEA products. The major target customers of the IKEA Group are from the members of the middle class and high-class families. They would be the class of population who could be well-targeted for the new and premium models of the IKEA group. The products of IKEA are well suited for the real-life homes and consecutively the realistic room settings, and since these requirements are in trend in the current global market, the customers are well-drawn towards its products. Since the products IKEA comes under the category of affordable ones, the company has been able to generate a wide number of loyal customers. The company has also focussed on providing room ware and furniture for kids and a lot of customers have been attracted to the products which are customized and designed for the underaged members of the family. With the invention of new information technology implications in the global market, the IKEA company has also tried to accommodate with and as a part of it, they had introduced IKEA store application. The application would make the buying experience for the customers very smooth and effortless. The provision of comparing and adding the products to the wish list is provided in the app and thus they would remember their preferences when the customer had made up the mind to buy the product. If the customer wants to buy the product by directly checking the quality, the app also provided the provision for giving the customer the address for the nearest IKEA outlet.

The factors which are making the products of IKEA well preferable and popular than the products of its competitors are the delivery of premium and elegant products at a very reasonable price. In the current scenario, the business for furniture is facing a lot of barriers. With the advent of the raising issues of climatic changes because of deforestation, all of the countries have banned the indiscriminate cutting down of trees. Since the availability, if timber is well restricted in the market, the companies in the global furniture market platform are continuously researching for the alternate methodology for creating furniture. If taken into account the spread of the branches of IKEA all around the world it could be noted that there are no branches or outlets in Myanmar. Let us have a detailed study of IKEA cost leadership.

Area
To ascertain the factors which are affecting the business of the IKEA company, the tool of SWOT analysis could be utilized. By this tool, the Strength, Weakness, Opportunities, and Threat could be analyzed in the operating environment of the company. The understanding of these parameters would help the company in eliminating the factors which are drawing back the performance of the company and to pace ahead by realizing the hidden opportunities. The strategies adopted by the company could also be analyzed by the SWOT analysis, thus have a detailed insight into the business processes and policies adopted by the IKEA company.

Strength
The management team and the board of directors have a piece of great knowledge about the preferences and the trend followed by the customers in the global platform and thus have notified their product models according to it. The company has appointed a very innovative team of designers to come up with very attractive designs that would lure down the customers to buy IKEA products. This is a very crucial factor for the company since it is keeping it much forward in sales from the huge competitors in the market. The delivery of the most advanced and stylish homeware is making the company unique from other challengers and the same factor could be considered one of the major strengths of the company. As per the financial data of the year 2012, the IKEA company had scored a turnover of 12.8 US dollars.

Weakness
There have been instances when the quality of the products was being compromised to bring down the cost of the new models. This has resulted in the subsequent amount of dissatisfaction among the customers and has risked the overall extent of the annual financial turnover. The survey conducted by the independent body called Verdict’s UK Customer Insight a lot of customers on the global platform had portrayed great dissatisfaction. The drawback has been initiated because of the implementation of the low-cost strategy by the management team of the IKEA group. The inconsiderate implementation of the low-cost strategy has considerably reduced the quality of products delivered by the company outlets. Hence it could be considered as one of the major weaknesses and setbacks to the goodwill of the company.

Opportunities
The sales of IKEA products are only just limited to the markets of developed countries, though the markets of Indonesia, India, Brazil, Malaysia, etc. would turn out to be a very good opportunity for the company. The online platform should be stressed more by the management team since a lot of customers have been accessing and ordering the products of the IKEA company through online method because of its low cost.

Threats
For a company to progress smoothly and survive in the market the hindrances and threats to the business should be removed effectively. The specialty of the IKEA products is its cheapness, though the products of Tesco and Walmart also possess the same characteristics and ability to provide the customers with cheap products. If the customers would consider the products of these companies as a substitute for the products of IKEA, the revenue would get affected very negatively. The level of per capita income of the public would also impact on the sales of the company since the customers would opt for the better and more luxurious products if their income and quality of life would increase substantially. The low-cost strategy of IKEA would turn out to be disastrous in this case. The premium household furniture constitutes to be one of the major factors in upgrading the lifestyle of a person.

In the stream of management, Michael Porter had set out three tools in the category of generic strategies. The ideology has been discussed in the year 1985 in the published work of Competitive Advantage: Creating and Sustaining Superior Performance. Below are discussed these tools and let us look at it thoroughly.

Cost Leadership Strategy
With the help of this tool or strategy, the company aims to augment the position in the market or the competitive advantage among its customers. The reduction of the cost is being targeted by the company by this tool to increase the value of the market share and thereby increasing the level of financial profit. The Company IKEA has been very successful in the business of furniture and has put a parameter for its performance. Now many companies have started to follow the strategy of the IKEA company and thus have introduced similar products, This is a great challenge for the company and hence the significance of the implication of IKEA cost leadership strategy is much significant. Similar products are being mainly introduced by the local companies and it is very hard to legally bring down those companies. The company has much more upper hand since it has financial security and can acquire the targeted market with much ease. Although the gap of the exchange rate between the Euro currency and RMB is a point to ponder about for the company heads. The high rate of exchange is making it comparatively costly for the customers of China and hence making it difficult to make a mark in the domestic market of China. Though for a person from the exterior from the company environment the condition seems to be a weakness, it is the logistical strategy of the company. Deviating from the old methods and adopting an innovative one would some times lead the way for the revelation of hidden opportunities. In the category of general strategies, the IKEA cost leadership tools would be considered the most popular and significant one.

Differentiation Strategy
The tool of differentiation strategy would help the company in delivering innovative services or products that would help in attracting the competitors. The IKEA company had been a little bit late in implementing this tool since their competitors have already implemented in their systems. It is the strength of the company that they provide quality products under the cheap price tag. The task of reducing the cost of the product and at the same time deducing out the profit from it is not an easy task for the management of the company. Though the company has introduced a lot of models in the list of their products, all of them are not available in the outlets. It is upon the trend followed in the local area that the models are made available in the company showroom. A similar instance could be considered in the case of products introduced in the European countries in America. Since the demand in the American population is for bigger furniture than that if products provided in the European countries. Very innovative programs for advertisement have been implemented by the IKEA group of which the ideal example is the designing and decoration of around 15 bus stops in the city of Paris. This has turned out to be a very effective advertising campaign and has helped the company in gaining much more attention in the international platform since Paris is a very big tourist spot. The differentiative strategy should be comprised of effective plans of marketing and sales so that the whole process should be led towards a higher degree of productivity. The differentiative strategy should be taken with high significance and seriousness by the company management since it has the potential to increase the sales of the company to a substantial level.

Focus Strategy
A mentioned above the IKEA cost leadership strategy is majorly based on tracing down the differentiated characteristics. Though it should be noted that the differentiated characteristics should be of low-cost characteristics and thereby empower to deliver cheaper products. To adapt the product with the preferences of the mass population, the tool of focus strategy should be utilized by the company and the best example for this is customizing the furniture according to the Chinese tradition so that the products could get well accepted among the population. As per the IKEA cost leadership, the low-cost plan is being implied to gain abnormal success in the global market for the sales of furniture. The above-mentioned plans and tools mentioned in this report on IKEA cost leadership reports have provided a very large advantage against other challenging companies. Let us check what impact has implemented Porter's Five Forces on the factor of IKEA cost leadership.

Porter’s Five Forces
As per the tool of Porter's five forces, the environment of a company is being analyzed based on five factors that are listed in the below section of this report on IKEA cost leadership. It is by focussing on the factors mentioned under porter's five forces that IKEA cost leadership has developed itself to be a very successful and efficient one. We have already mentioned in this report of IKEA cost leadership that there are a lot of giant competitors in the field of the furniture market. The deviations and changes n the business process could be done rapidly in the local market, though it is not practicable in the global platform since even a small step would create a great impact on the company's turnover. More than this the company some times has to make a separate set of policies in a certain country so that a more customized and effective approach should be made to continue in the path of development.

• Bargaining Power of Suppliers: If this criterion would gain strength in an economy, the companies would find it very hard to sustain in the market. As per the data of the IKEA company available in the year 2014, there are around 1000 suppliers and franchise of the company all around the world.  The guidelines and parameters mentioned in the IWAY are made to be certainly followed by the personnel involved in the process of transport and supply.  The guidelines of IWAI majorly consists of the rules related to the working conditions, social norms, and grieve issues like child labor. As mentioned in the initial section of this report on IKEA cost leadership, the major aim of the company is to provide the customers with cheap products and sustain them as loyal customers. The major factor which makes them achieve this factor is the presence of the efficient team of the suppliers. As per the data obtained in 2010, the company had possessed around 28 warehouses around 16 countries. Among these warehouses, the one in Shanghai is the biggest in Asia. It is by these centers that the company endorses the control over the transfer of products from manufacturing units to various outlets.
• Bargaining Power of Customers: This factor is also one of the major ones which possess the potential to change the whole business scenario for the company. As mentioned in the previous section of this report on IKEA cost leadership is making the company a unique one in the global platform for furniture and household decoration sales. The same factor is making the IKEA branded furniture most popular and preferable choice among the customers. Since the customers at the global level are well aware of the local units which could provide quality products, their bargaining power should be considered pretty much high. The major factor which helps in reducing the cost of the final products is the cheap method of transportation. For the cheap transfer of the products, the company ships just the semi-assembled units and it is in the outlets that the products are assembled. Even though these measures are taken the company has found it very difficult to provide its products at cheap rates to the Chinese because of the high gaps in the exchange rate of the currency.
• Competitive Rivalry: The rivalry in the market as mentioned at the beginning of this report on IKEA cost leadership is very high since a lot of major companies have established themselves as a branded and reliable one among the customers. We have mentioned the name of potential customers even in the initial section of this report. The major competitor of the company is Walmart so it has not solely dedicated itself to the sales of furniture. The company is from the USA and has widely spread its business all over the world. The major threat to the company is actually from the country of Japan and China. Because of the invasive nature of China in all the economy, the companies from there adopting very aggressive marketing measures. If taken the global scenario the major competitors of the IKEA company are Argros, Walmart, Globally, Home Depot, etc. who can provide better and quality products at a much cheaper rate.
• The threat of new entrants: The global market for furniture is in a mature state and the threat of new entrants is very low. If taken the case of Sweden the quarter of the whole furniture market is owned by the IKEA company. Hence in the domestic market, there is a great chance of the threat of new entrants. If the market is being invested heavily and already there are huge players in the field, the new entrants would abstain from marking the entry.
• The threat of substitute products: Since the IKEA company is already providing the premium product at a very cheaper price, the risk or the threat of substitute products by the competitors would be very low. This low risk was achieved by the company by implying innovative low-cost strategies. No further companies have been succeeded in reducing the cost of their products and sustaining profitable business simultaneously. Since the customers have deemed the products of IKEA to be a very reliable chance of changing the preference or loyalty to another brand seems to very little.

Hence, as per the porter’s five force test conducted above in this report on IKEA cost leadership, the company environment holds significant bargaining power for suppliers and customers, and low risk of the new entrants or other similar products.

Area
The company should have a better understanding of the geographical features so that the customized set of plans should be devised out for particular areas. To gain a higher degree of responsiveness among the popular mass the multinational companies adopt the same set of strategies in the business processes. The demographic features like the quality of life, adaptiveness to the modern technologies, the weather of the specific areas, local laws introduced by the specific governments of the country, savings, etc. plays a lot of significance among the corporate environment.

If taken into consideration each country they could be very unique. By using the factors mentioned in the PESTEL analysis the environment in the domestic market of a country could be analyzed. The potential effect of the external factors is being tested by using the tool of PESTEL analysis.

Political
This factor majorly depends on the policies and ideologies followed by the local government of a certain company. The instance could be observed in the case of Ukraine where the entrance of the IKEA company into the market was observed to be one of the major models of tackling the problem of corruption. This has made the company to revise its own decision and abstain itself from entering int the Ukrainian market. The company has abstained from operating or entering into the market of African countries since the local government and political scenarios are very unstable. If taken the expansion activities of the company, it could be noted that the IKEA company had marked its entry in the China, USA, and Canada in the years 1976, 1985, and 1998 respectively. Since the domestic economy of the company has undergone major reforms in the year of 1978, the IKEA company was allowed to mark the entry there. The company has decided to make itself established as an item of furniture in the city of Shanghai. Though there were many restrictions in front of the company since the company was required to take the land as a lease from the private party. The restrictions were also offered by the suppliers from the developing countries because of their limitations in performance. Some grieve issues were also traced under the working style of the suppliers since they were making the use of child labor. It was also forced that they have employed the workers in a very inhumane working condition. Though the provision of child labor is banned all over the world, it is being used by the suppliers to comply with the company's pressure to reduce the cost of production. The company had face a lot of criticism because of it in the media and had to deny any indulgence in such activities in front of the public. Though the company had maintained strict working rules in the domestic environment of Sweden, it had utterly failed to maintain that parameter in the foreign developing countries. The company has given the preference for opening the outlet in Singapore rather than in Hong Kong because of the heavy gap in the tax rate. The low tax rate always contributes to the parameter of ease of doing business and hence is a green signal from a giant foreign investor like IKEA.

Economic
The dynamics of the economy, the company is operating in would affect the whole turnover of the company. Various parameters contribute to the health of the financial status of an economy. The indicator of GDP would signify the magnitude of the economy, the disposable income would also provide for the strength and magnitude of the economy. The factor of the global recession should be checked on a serious note by the company since it would turn out to be a major financial barrier if kept neglected. The high standard of living followed by the citizens would indicate the better performance of the national economy. At the same time, the parameter of disposable income would elucidate the magnitude of the economy as mentioned in the earlier part of this report on IKEA cost leadership. The exchange rate of global currencies like Euro and U.S dollar also make a great impact on the global performance of the company and hence should be reviewed thoroughly. It is only in the second stage that the factors like employment rate and interest rates are taken into consideration. The cost and availability of raw materials like timber would also affect the effective commencement of the business. The company has effectively attained the lower cost of production by concentrating its manufacturing units in the country of China.

Social
A great level of goodwill is being maintained by the IKEA cost leadership in the market by keeping up the social welfare activities. The factors related to social behavior like the trend of buying, customs followed, hierarchy in the social structure, social norms, etc. would play a very crucial role in drafting a marketing strategy. In the manufacturing process of the furniture, heavy use of hazardous chemicals is being done which is raising the figure against the social responsibility of the company. Thus the sales of IKEA products are being diminished in the countries of Germany and Japan since the majority of the population consists of the aged population. As the aged persons are much more concerned about their health, they are restraining themselves from the object which is being processed by harmful chemicals. Hence the factors like the average age of the population, the structure of the family, quality of life, etc. would affect the business of the company.

Technology
With the advent of most modern technologies, a company should embrace new pieces of machinery and expertise to keep up with other competitors. IKEA company has made the use of an information technology platform to launch the software for the online sales of the product. Even before the customers would make up the mind to buy the product, they would get all the details regarding it by using the software. The features like the ability to add the products in the wish list would help the customers in retaining the preferences while buying the products. This provision would avoid the delivery of sales pitch in front of the customer. The online approach would save the time of both the sales personnel and the customers. Very unique codes are being given to each model which is making the whole process of sales and delivery very fast and accurate. The IKEA company has thus reduced a lot of production costs because of the less requirement of human resources. The installation of new technologies in the company has helped itself to increase the level of quality of the products.

Environment
As the current scenario of climatic change and environmental depletion is being taken very seriously by the citizens, the companies in the global platform have to comply with the environment protection notes. The plastic is avoided strictly while packing the products of IKEA and thus only recyclable products are used in the process of packing. The company has made ascertain that the guidelines put forward by WWF are followed in its business by shifting the business interest towards the manufacturing of cotton products along with focusing on climate change and sustainable forestry. As a part of which the company has recommended its staff to use public transportation to reduce the inconsiderate use of irreversible energy.

Legal
The legal approach of the local government towards foreign companies and other normal laws have a great potential to impact the business processes of the company. The same issues have been faced by the IKEA company since it has faced legal problems in some countries though it has the potential to make a mark in any market. It is quite obvious that all countries have a biased interest in its citizens and thus intervenes in the economy by regulating the prices to sustain the environment of fair trade and eliminate any emergence of the monopoly. Wherever the company had to start its business, it had to comply with the laws enforced by the local authority. These regulations pertained to the minimum labor wages, rights allocated to the writers, availability if credit cards, rate of interests, laws about labors, etc. Most of the countries have strong laws against the practice of child labor. Mr. Kamprad, the establisher of the company was majorly accused by the global media platform to employ minor-aged employees in the manufacturing units of his company. The animal rights activists have also accused him of using feathers in his products which are plucked out of living geese. The controversy had only subdued when Mr. Kamprad had made a public apology to everybody.

The CAGE framework constitutes the major part of the IKEA cost leadership and aids the company in eliminating the restrictions in the border. The factors of Cultural, Administrative, Geographic, and Economics are being analyzed in the CAGE framework. The framework would help the company revealing out the hidden opportunities in the operating market. The weakness could be revealed and thus it could be stressed upon to eliminate to increase the productivity and the rate of success.

Cultural gap
If the company comes under the category of a multinational company then most obviously there is a great chance of altercations because of the cultural differences. The heavy understanding of the multiple cultures should be retained to lead the business process in the official environment very smoothly. The company should make the initial effort to eliminate the flaws existing in the internal environment and only after it the flaws in the external environment should be focused upon. The awareness regarding the different cultures would help the human resources in understanding the actual intent of the employee behind any action. The management board of the company has tried to imply required measures to develop awareness regarding the cultural differences among the employees and the same was followed in the units opened by IKEA in the country of IKEA. He employee of the company had faced a wide gap between the cultures of the western world and eastern world companies. It should be understood that apart from weakness, the presence of cultural diversity would provide the company with some evident strengths. The understanding of various languages and customs followed in the different parts of the world could be retained by the company from cultural diversity, which could help them in penetrating any potential market. Let us take the trend followed in Asian countries. In every Asian country, it could be observed that most of the constructions possess balconies and there are a large scope and market for the decoration material for balconies. The population of china spends there majority of time in the balconies and hence the actual significance of it could be understood by the company.

Administrative Gap
We have mentioned in the previous section of this report on IKEA cost leadership that the company management had face a lot of legal restrictions and barriers when it was trying to enter in the furniture market of China. It was in the year of 1963 that the business of IKEA started to enter into the foreign markets of which the first one was of Norway. Subsequently, the products of IKEA became popular in the countries of Denmark, Switzerland, Germany respectively. Though the company had to face some legal issues in 1974 when they tried to enter into the market of Japan. It was in 2002 that the company has marked its entry again in the soil of Japan.

Geographical gap
The concept of globalization makes the companies well prepared to enter any country in search of the market, the physical distance between them stand as a barrier between them. If taken the case of India, the mode of transportation is very poor and it takes a lot of effort to make available the products of IKEA company in the soil of India. If taken the human resource power of the company, it could be noted that it has around 6800 workers. It is from the warehouses of the company that various models are transported to various official outlets.

Economic gap
The major focus of the IKEA company in the financial year of 2020 is to reach the target of 50 billion U.S dollar turnover. As mentioned in the previous section of this report on IKEA cost leadership the company has marked its entry in the soil of China in the year of 1988. The products have become much more costly because of the high contribution of the exchange rates and import tax rates to the cost of production. Though the prices should be perceived as a reasonable one if compared with international prices. The per capita income of a normal Chinese citizen per month is 399 US dollars and shows the tendency of spending the 36 US dollars per visit to the market. The market of India could not be considered by the company since it is observed that the per capita income is very low though the magnitude of the economy is very big.

Proposal
This report on the IKEA cost leadership provides the reader with thorough knowledge of the IKEA company's financial recording. The report has referred to a lot of reports, academic economic journals, financial data, etc. so that the readers should be provided with relevant data. The products of IKEA cover all the necessities of the household. In the modern era, furniture is not just a piece of luxury, but also the basic necessity for human beings. It is impossible to get proper rest without furniture. If the strategy of IKEA company could be studied and analyzed thoroughly by the entrepreneur or the management team, then the way to lead the company on the global platform could be devised out. The internal environment of the company is analyzed in this report on IKEA's cost leadership by using the tool of SWOT analysis.