Company Background and history IKEA is a Swedish based company, the first IKEA store was opened in Sweden in 1958 and now this is one of the most famous and largest home products and furniture retailers in the world, It is founded in 1943 by Ingvar Kamprad in Sweden, who began to start his business to sell matches to his neighborhoods when he was 17 years old.
The first IKEA store was opened in Sweden in 1958, IKEA further expanded in the 1980s, Germany, with 44 stores, is IKEA’s biggest market, followed by the United States, with 37.
Company Overview IKEA, a Sweden based household retails, being identified as the world’s biggest household retailer, which focus on stylish but comparatively low-priced furniture. Up to October 2010, the IKEA had more than 310 stores in over 38 countries, which most of the stores located at North America, Europe, Australia and Asia pacific regions.
In the year of 2010, the company has over 620 million visitors to the stores and more than 700 million visited on its websites. Meantime, 61 editions of catalogue was printed in more than 197 million copies in 29 languages. IKEA created approximately 9,500 products in its range that co-operate with approximately 1,074 suppliers in 55 countries.
The IKEA vision and mission statement drive the framework of its global procurement strategy. IKEA vision is “To create a better everyday life for the many people.
We make this possible by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them”. One of those keynotes is to create a range of low prices products that make as many customer will be able to enjoy IKEA services. To achieve this vision IKEA is keep seeking hard the best procurement environment.
Key Objective to build an efficient purchasing system to maximize the profit margin IKEA aims to develop inexpensive products doesn’t mean to sacrifice its promise to consumers – “A better everyday life”. Instead of low quality product IKEA tends to deliver its mission by better purchasing management. IKEA spread its Sweden designed furniture to manufacture in developing countries to keep the lowest production cost. With more than 1000 suppliers over 55 countries, approximately 62% of purchasing is from Europe and around 34% from Asia.
What is the definition of Purchasing Management we define global purchasing as the activity of searching and obtaining goods, services and other resources on a possible worldwide scale, to company with the needs of the company and with a view of continuing and enhancing the current competitive position of the company. (Lieven Quintens a, Pieter Pauwels a, Paul Matthyssens b,c 2006, Journal of purchasing & supply Management 12 (2006) 170-181, Global purchasing : State of the art and research directions, viewed May 30, 2011.
What is the definition of Purchasing Management in retail industry. The retail industry is generally considered to be more “culturally grounded” and therefore its foreign total assets is lower than in manufacturing sectors, with the internationalization of key logistics concepts such as Quick Response (QR) and Efficient Consumer Response (ECR), it quickly became apparent that countries were at very different stages of the adoption process of these concepts. ’
What is the Purchasing Management in IKEA. After long time development since 1976, IKEA becomes the largest furniture retailer in the world and its purchasing strategy right now is incomparable with what it was. However, a critical factor in low cost strategy is still its fundamental cause of it success in the market.
Global Sourcing As a low-cost strategic company, it is important for IKEA to choose vendors with lowest prices. In first IKEA focus sourcing among Europe. However “the consequence of a process of incremental adjustments to changing conditions of the firm and its environment” (by Johanson and Vahlne, 1977).
The company tends to extend its supplier networking since 1960. In year 2010, the company co-operate with approximately 1,074 suppliers in 55 countries. Europe is still its major sourcing place but the purchase that IKEA place on Asia is rapidly increase up to 34%. ‘Although the European market has remained a key market of IKEA throughout the years, it increasingly appears clear that other markets, for example China as well as the US, are becoming increasingly important opportunities to exploit, not only as sales markets but also as sourcing markets.
IWAY concept It is very difficult for an organization to control all activities inside the supply chain since they have more than thousands vendors among the world. Meanwhile, strong trend of Human rights and social compliance influence IKEA purchasing strategy significantly.
IKEA attempts to make all vendors work as long-term partnership with IKEA. The bigger the vendor base, the harder the controlling. From historical data, IKEA had more than 2000 suppliers in 1990s, but in 2010 its vendor base had been narrow down to approximately 1,000. It tends to increase the purchase volumes to each individual vendor that allow to enhance the bargaining power as well to benefit the Economic of scale.
Target Customer of IKEA ‘IKEA is a global furniture retailer with locations in more than 30 countries. IKEA targets younger customers desiring style at low cost. IKEA offers furnishings with good design and function and acceptable quality at low prices to young buyers, according to IKEA’s research, aren’t wealthy, work for a living, and want to shop at hours beyond those typically available from firms serving the broad furniture market’.
Definition of Generic Competitive Strategies ‘The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them lead to three generic strategies for achieving above-average performance in an industry : cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus.
The cost leadership and differentiation strategies seek competitive advantage in a broad range of industry segments, while focus strategies aim at cost advantage (cost focus) or differentiation (differentiation focus) in a narrow segment. Cost Leadership Cost leadership that clearly mentioned to reduce the cost. However, according to IKEA’s concept, its product should meet both well-designed, functional home furnishing products at prices as low that as many people as possible will be able to afford them, which is the UNIQUE IKEA as they said. Instead of achieve low price range by sacrificed quality standard.
IKEA builds a good relationship with suppliers and purchase in huge volume attempts Economic of Scale, well communication that minimize “Bullwhip effect” (Pursuit of Economic scale), product designed in economically way, created the flat packed packaging which a key drive to cut out transportation costs. (Proprietary technology) Meanwhile, a flat packed method that makes the consumer to involve the assembly progress that helps to deduce the cost.
The second generic strategy we named differentiation. In a differentiation strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. Differentiation is based on the product itself, the delivery system by which it is sold, the marketing approach, and a broad range of other factors. ”
IKEA first attempts differentiation by its unique design concept. Different from the traditional furniture sellers, IKEA designs fixed and standardize product range that we can see in all IKEA stores over the world. It not only created differentiation, but also tends to cost leadership since the company purchase core products in huge volumes. Secondly, IKEA is providing inspiration of interior design as their value-added service to consumer. IKEA demonstrates variety of mix and match that make consumer easy to understand how and what they want to get.
At the end it might be a motive force for the consumer to spend more on purchase. Thirdly, most of the products are in stock in stores level, customer do their own transportation and assembly and consumer just have their new product the same time. This just-in-time concept makes IKEA different to other furniture retailers in the market. In this operational model, consumers contribute to cost reduction. As IKEA Marketing positioning statement : “Your partner in better living. We do our Part, you do yours. Together we save money”
In common sense, there is an extra cost come into the differentiation and this cost is the disadvantage of differentiation. However, IKEA approaches to make differentiation with minimal cost and in return the IKEA drive better sales volumes by its differentiation. 3. 2. 4. Focus The third generic strategy is focus. “This strategy is quite different from the others because it rests on the choice of a narrow competitive scope within an industry.
Conclusion
After the analysis of Generic strategy, competitor analysis, and business process, we have a better idea about IKEA’s purchasing strategy.
Cost Leadership – This is the hard-core reason that IKEA dominates the furniture industry. IKEA sources products with its stabilize and reliable vendor base, purchase in huge volumes and excellent design works which drive its cost remain in a very low level.
Differentiation – IKEA differentiate itself on both product level and unique retailing model, offering display inspiration and restaurant inside a furniture store. Also IKEA encourage consumers to transport and assemble furniture which contribute on the cost saving process is also the key that they drive sales with profit even the price level is low.
Focus – IKEA understands consumers are sensitive in cost and therefore the company put efforts on Cost-focus strategy as this is their strongest bullet to defect other competitors in the market. IKEA already proved its successful in Europe countries, however, the progress of its development in CHINA is not desirable.
IKEA cheap price strategy dominates the global furniture industry but it doesn’t work properly in China marketplace as Chinese local furniture are even selling in way more cheaper price than IKEA. The Challenge that IKEA encounters when its enter to a developing country like China is predictable, that IKEA would balance out a certain level of compromise without sacrifice the original brand value, make the brand more perceive locally is the next milestone for IKEA to encounter.
References
- “IKEA facts and Figures”. ikea. com. accessdate=April 2010. ttp://www. ikea. com/ms/en_GB/about_ikea/facts_and_figures/index. html.
- IKEA. com. 2008-03-09. http://www. ikea. com/ms/sv_SE/about_ikea/facts_and_figures/ikea_group_stores/index. html. Retrieved 2010-12-26
