1. What is the definition of purchasing Management 2. What is the definition of Purchasing Management in retail industry 3. What is Purchasing Strategy in IKEA a) Global Sourcing b) IWAY Concept 3. 2. 1 . Analysis of Generic competitive strategies In IKEA 3. . 2. Cost Leadership 3. 2. 3. Differentiation 3. 2. 4. Focus 3. 3 Value that IKEA creates to Customers 3. 4 Competitors Analysis 3. 4. 1. Cost Control 3. 4. 2. Quality Management 3. 4. 3. Purchasing Strategy 3. 4. 4. Comfortable shopping Environment 4. Customer impact on IKEA purchasing strategy (PEST)———————————————————— 1. Political 2. Economical 3. Social 4. Technological 5. Business progress impact on purchasing strategy——————————————————————– 5. 1. 1 Definition of Business process 5. 1. 2. Business process of IKEA .
1. 2. 1 – Set up of IKEA retail stores 5. 1. 2. 2 – Business process impact on purchasing strategy a) Retail store Level b) Purchasing level 6. Conclusion——————————————————————————————————————————— 1. EXECUTIVE SUMMARY This report is to analysis IKEA purchasing Strategy that through the study of its business model, Analyze of its Global sourcing strategy, Generic competitive Strategy, competitor analysis. It attempts to find out what are the keynotes of its successful as well the challenges that IKEA is encountering.
IKEA low-cost strategy is world-famous successful business model that makes Its become the most biggest furniture retailer in globally.
Our study is to figure out if there are any factors to drive its success other than cost issue. Meantime, Since IKEA already so success in Euro area but obviously the next step for IKEA to look at is to develop its business in some other new marketplaces especially the up-and-coming developing countries. China is one of the rapidly growing new markets but the Characteristic cultural, unique concept of spending, challenges from domestic suppliers, understanding of ts political and local law are all a new world for IKEA. Our Study through PEST that indicate some criteria that IKEA needs to encounter in order to entry this up-and-coming market successfully. 2. Introduction 2. 1 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. (1) 2. 2 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. 2) 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. (3) 2. 3 Vision and Mission 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”. (4) 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. 4. 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. (5) 3. Purchasing Strategy of IKEA 3. 1 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. (6) 3. 2 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. ’ (John Fernie, Leigh Sparks, Logistics and Retail Management, 2nd edition, London, Kogan page, 2004, viewed May 30, 2011 page 48-9)(7) 3. 3 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. a) 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)(8).
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. Marianne Jahre, Jan Stentoft Arlbjorn, Arni Halldorsson, Karen Spens, Northern lights in logistics and supply chain management, Demark, Copenhagen Business School Press, 2008, viewed May 30, 2011 page 277)(9) b) 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 started to develop its own human compliance standard and ‘launches the code of conduct (COC) for suppliers, and a special COC on child labour at the year of 2000. ’ (IKEA Sustainability Direction 2015, Page 7 – Introduction : Milestones) (10) IWAY (IKEA way on purchasing home furnishing products), is ‘about codes of conduct in their supply chains. One part of this is what it called “social and working conditions”. As an example, a supplier must have an action plan in accordance with IKEA’s way of purchasing. Amongst other concerns, this plan involves no forces/ bonded/ child labour. (Leif Enarsson, Future Logistics Challenges, Demark, Copenhagen Business School Press, 2006, viewed May 30, 2011 page 80)(11) 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. 3. 2 . 1 Analysis of Generic competitive strategies In IKEA
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’. (R. Duane Ireland, Robert E. Hoskisson, Michael A. Hitt, Understanding Business Strategy : Concepts and Cases, USA, South-western Cengage Learning, 2008 viewed May 17, 2011 page 99) (12)
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. (Michael Porter, Competitive advantage : creating and sustaining superior performance, New York, Simon & Schuster, 1985, viewed May 30, 2011 page 11)(13) 3. 2. 2. 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. 3. 2. 3. Differentiation 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. ” (Michael Porter, Competitive Advantage : creating and sustaining superior performance, New York, Simon & Schuster, 1985, viewed May 30, 2011 page 14)(15)
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”(www. IKEA. com view May 15) (16)
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. […] The focus strategy has two variants. In cost focus a firm seeks a cost advantage in its target segment, while in differentiation focus a firm seeks differentiation in its target segment. (Michael Porter, Competitive Advantage : creating and sustaining superior performance, New York, Simon & Schuster, 1985, viewed May 30, 2011 page 15)(18) IKEA realizes its target customers needs that, therefore, IKEA uses the cost focus strategy that keep deducing the cost in order to attempts its customer’s needs. As already mentioned, IKEA’s design create low-cost and functional products, make its furniture as kits set which customers can easily assemble themselves. 3. 3 Value that IKEA creates to Customers ‘Customers today want more of those things they valued. [… Companies have to responded to this expectation by increasing the value offered to customers through improving products, cutting prices, or enhancing services. By raising the level of value that customers expect, leading companies are driving the market, and driving competitors downhill. ’ (Bill Dodds, Managing customer value :Essentials of Product Quality, Customer Service and price Decisions , USA, University Press of America, INC, 2003, viewed May 30, 2011 page 2)(19) IKEA recognize customer’s expectation to their brand. IKEA successfully translate its customer’s requirements into the services and products.
According to IKEA’s research, its target customers ‘aren’t wealthy, work for a living’, in other word its customers are quite cost sensitive. IKEA’s mission is to “offering a wide range of well-designed, functional furniture, at prices so low that as many people as possible will be able to afford them” and as a result of its statement IKEA is creating a better everyday life for many people and the ultimate goal of customer value is to offer good quality product that in competitively cheaper cost. 4. Competitors Analysis 1. Cost Control IKEA dominates the world-wide furniture market by strong cost control ability Keep lowering down the cost by Economics of Scale – IKEA built a long-term and exclusive partnership with its local vendors all over the world. As a result, IKEA offers a low-cost product in fast and on time delivery as well to maintain good quality of products. – Vast acknowledge of IKEA product design team. They work with vendor in long-term and seek for the way to simplify the process to save product cost. – Flat-packed invention and its super logistic supports resulted in a huge saving on Logistic and its operational cost in long run. 2. Quality Management IKEA pioneered the Quality Management among the furniture industry.
Ensure its quality level to reach the standard in high ground that makes other competitors scarcely comparable to that of IKEA. – According to its Sustainability Report 2010, IKEA has more than 1,000 vendors in over 55 countries. IKEA attempts to control its quality aspects more systematically. – This is not only about the quality of merchandises, but also about the sources of products and materials are all ECO friendly and accept for customer’s health perspective. – Meantime, IKEA also concern about the social and human conditions that happen in its production sources. As a Pioneer of its industry, IKEA works on its exclusive code of conduct, that IKEA named it as IWAY. IWAY is a standard that all IKEA suppliers to follow. – In term of IKEA controls on product safety/ health issue, IKEA built its Test laboratory and managed all products which are selling on the floor are tested in the test, that to ensure all products could comply with both customer expectations and Mandatory standards in regards safety concerns. 3. 4. 3. Purchasing Strategy Different from other furniture companies in the market, IKEA didn’t develop any of its own workshop out of Sweden.
Rather than that IKEA aims to go outsourced globally since the company had developed more than thousand suppliers in the world. As the purchase scale of IKEA, its eventually become the core customer to most of its vendors that create a huge bargaining power to obtain advantage of cost, delivery, capacity when dealing with vendors. 3. 4. 4. Comfortable shopping Environment If compare IKEA with other competitors, it offers a comprehensive and comfortable shopping environment to its consumers, which includes a mini playground for kids and a restaurant inside the shopping mall.
Its retail business model is not just selling but to provide a leisure place to consumers, in result to enhance traffic and awareness in the market. Through the above study, IKEA accomplish an overall advantage over its competitors in the market. As a result, IKEA will continuously maintain its difference with those competitors in term of cost reduction, design and unique business model and keep its leader position in the industry. 4. Customer impact on IKEA purchasing strategy (PEST) The PEST analysis focuses on the impact of political, economic, social and technological to the business perspective.
As a Global company, IKEA deal with PEST issues on different location and defeat it by its own strengths. However, China market place is unique in term of cultural, Government policy, Economical and back end supports. It is essential to analyze how IKEA to use its strengthen to get into China market 4. 1 Political Aspects China market was not wholly open to international investor prior to China accession to World Trade Organization since 2002. Any Foreign Enterprise that aimed to establish business in China through a joint venture base.
However, China has been more open up to free market completion society nowadays, improved it transparencies in term of new business policy and all Foreign Company can open up its own wholly-owned company in China. IKEA is in the good shape to entry this market under a comparatively health political environment. 4. 2 Economical Aspects China’s economic growth rapidly increased and it has become the top five largest economies in the world. Export-orientated manufacturing is the core contribution to China’s economic growth over the past 20 years, that makes a big room in develop the retail business locally.
Meantime, the growth of population and urbanization in last decade created a huge demand on property as well the related industries such as householder retailers. 4. 3 Social Aspects Social and cultural issue is always the great difficulty for a company to get in to China market. In General, Mainland Chinese do believe in “Save money for future” concept, that represent they are very price sensitive, practical and seeks for a purchasing that could last in long run. It will be the biggest challenge for IKEA to find out how it’s going to make a Swedish company fit with the special cultural and local market needs in China. 4. Technological Aspects China has unprecedented improvement on technology. Nowadays the technology in China is obviously closer to the world’s advanced countries. This is an advantage for international company to entry as the back-end functional supports is a must to build business in a new market successfully. Supplies of internet, developed logistic system, comprehensive media tools to introduce the brand to market and promote the product by marketing event. As the situation in China right now, this is quite ready to welcome foreign investment to get in the market, in term of both Political, economical, social and technological.
This is a good sight for IKEA to develop its business in this up-and-coming huge market place. 5. Business progress impact on purchasing strategy 5. 1. 1 Definition of Business process ‘ A business progress is a set of activities that are executed in order to achieve a business objective; this objective is usually to offer the right project or service to a customer with a high degree of performance measured against cost, longevity, service and quality’ (Asuman DOgac, M. Tamer Ozsu, Ozgur Ulusoy, Current Trends in Data Management Technology, USA, Idea Group Publishing, viewed May 26, 2011 page 60)(21) . 1. 2. Business process of IKEA 5. 1. 2. 1 – Set up of IKEA retail stores IKEA stores are all in huge size, whether in a big Yellow/ blue building or located at big local shopping mall. All stores are designed in a single way layout which leads customers to walk along each and every of the corner. Customers pencil down what they want from this showroom section and then to pick it at warehouse later on. The first part customers go furniture showroom, IKEA display its product range in individual set, that encourage consumer to feel how it look like to fix the same in their own household.
Customers then go all way along the retail stores, in between there is a play area that besides the kids furniture section. Kids will play there around while their parents are shopping in the mall, pick kids up once parents arrive at another exit. Meanwhile, this is always a restaurant in the middle of the store, which serving European food with refillable coffee or tea. Right prior to the cashiers, there is a self-served warehouse area, customers just collect what they noted to buy at display section, which the product in flat-packed cover, aims to create an easy way to transport by consumers themselves.
There is a discount corner at the end of the warehouse, which selling previously display products or products with slightly defect. 5. 1. 2. 2 – Business process impact on purchasing strategy a) Retail store level – IKEA concept is to introduce the whole product range by display when customers are being lead to walk along the whole store. Designers work on “collection base” with simple items that easy to visualize and mix in retail store. – Play area inside the retail store offer a convenience shopping environment to those young parents with kids.
Purchasing function inside IKEA is no longer focus on household but also to look at Kids products and toys. – As mentioned, IKEA target customers are low-middle income segment, young, looking for stylish in low-cost and working for their living. IKEA not just offer services related to furniture, it also offers affordable life style to young customers. – To keep high traffic to generate sales and profits, IKEA aim to launch its new products all the time, with seasonal changeover. It affects the design direction since the beginning of development stage. ) Purchasing level – IKEA aim to purchase product in large amount and fast turnover that drive the low cost with reasonable quality standard in general. – Customers concern about the Health and safety which it is a big trend in the new world. IKEA would look at the Green and health issue inside its sourcing circle as a pioneer in the industry. – To accomplish the low-cost structure, IKEA pack its product in flat-packed that save huge cost on logistic. Moreover, the packing method creates feasibility to consumers to transport the product to home by themselves. 7.
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 1) ^ “IKEA facts and Figures”. ikea. com. accessdate=April 2010. ttp://www. ikea. com/ms/en_GB/about_ikea/facts_and_figures/index. html. 2) (Swedish)”. 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 3) IKEA Sustainability Report 2010 4) http://franchisor. ikea. com/ 5) IKEA Sustainability Report 2010 6) 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. ) John Fernie, Leigh Sparks, (2004) Logistics and Retail Management, 2nd edition, London : Kogan page, viewed May 30, 2011 page 48-9 8) Johanson and Vahlne, 1977 9) Marianne Jahre, Jan Stentoft Arlbjorn, Arni Halldorsson, Karen Spens, (2008) Northern lights in logistics and supply chain management, Demark : Copenhagen Business School Press, viewed May 30, 2011 page 277 10) IKEA Sustainability Direction 2015, Page 7 – Introduction : Milestones 11) Leif Enarsson, (2006) Future Logistics Challenges, Demark : Copenhagen Business School Press, viewed May 30, 2011 page 80 12) R.
Duane Ireland, Robert E. Hoskisson, Michael A. Hitt, (2008) Understanding Business Strategy : Concepts and Cases, USA : South-western Cengage Learning, viewed May 17, 2011 page 99 13) Michael Porter, (1985) Competitive advantage : creating and sustaining superior performance, New York: Simon & Schuster, viewed May 30, 2011 page 11 14) Michael Porter, (1985) Competitive Advantage : creating and sustaining superior performance, New York : Simon & Schuster, viewed May 30, 2011 page 14 15) www. IKEA. com view May 15 6) Michael Porter, (1985) Competitive Advantage : creating and sustaining superior performance, New York : Simon & Schuster, viewed May 30, 2011 page 15 17) Bill Dodds, (2003)Managing customer value :Essentials of Product Quality, Customer Service and price Decisions , USA : University Press of America, INC, viewed May 30, 2011 page 2 18) Frank Buytendijk,(1976) Performance leadership : The Next Practices to Motive Your People, Align Stakeholders, and Lead Your Industry, USA : The McGraw-Hill Companies, viewed May 20, 2011 page 158
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