Tuesday, February 5, 2013

Ikea's Low Price Strategy


                                Ikea’s Low Price Strategy


"To design a desk which may cost $1,000 is easy for a furniture designer, but to design a functional and good desk which shall cost $50 can only be done by the very best. Expensive solutions to all kinds of problems are often signs of mediocrity." - (Ingvar Kamprad)
  
Ikea, the world’s largest furniture retailer8, is known for providing high value in terms of creative designs, multiple functionalities and quality at a low price. It has been able to stake out a unique and a valuable strategic position for itself by carrying out some of the following activities differently from its rivals.

Innovative Designs

Ikea focuses on generating design creativity by internal competition among a huge network of freelancer and 9 staff designers. Freelance designing provides a great degree of flexibility and a valuable source of creativity. The network of free lance designers and the team work of people from a wide range of professional and personal backgrounds provides some of the most significant design creativity which Ikea demonstrates in it’s furniture1. Ikea’s designers provide innovative designs and multiple functionalities to the user. They also focus on using material as efficiently as possible without comprising on sturdiness and quality of the product7.

                              
Cost Reduction

Ikea mainly targets people who want value at a low price but are willing to do a bit of work. It can provide quality furniture at low price to its customers by making some trade offs.  
  •  Instead of having sales people attending customers, Ikea uses a self-service model based on clear in store displays.
  • Rather than relying on third party manufacturers, Ikea designs its own low-cost, modular, ready-to-assemble furniture. 2
  • Items are provided to customers in flat-packed form, which results in a wide range of supply chain contributions. The Flat package reduces the cost of shipping, storing, construction and assembling. It also provides greater transportation capacity and warehouse space.1

Global Strategy

Ikea has developed its distribution network worldwide. It is able to ensure timely delivery of products to retail stores all over the world by utilizing control points in the distribution cycle3. It has over 1800 suppliers located in over 50 different nations7. Ikea’s suppliers are mostly located in low cost nations with close proximity to raw materials and distribution channels. The company possesses a big network of suppliers closely attracted to supply chain processes that helps in gaining industrial knowledge continuously and enhances information flow facilitation and operational efficiency.

These suppliers provide highly standardized products intended for the global market. However a standardized product strategy does not mean complete cultural insensitivity. The company responds to globally emerging consumer tastes and preferences by placing great emphasis on the product lines that appeal to local customer preferences apart from basic product range that is universally acceptable3.

Close relationship with consumers

Ikea focuses on extracting customer insight by market research, observations and ongoing communication1. This strategy is not only beneficial to Ikea’s production design but also servers as a source of valuable knowledge of types and amount of production material that would be needed. This enables Ikea to coordinate better with its suppliers by providing them information and ultimately decreases procurement cost associated with purchasing and transportation of raw materials.

Close relationship with suppliers

The company operates 43 local trading offices in 33 countries to manage relationship with suppliers7. Although Ikea fosters competition among suppliers to ensure best price and material, it believes in making long-term business relationships with its suppliers and ensures Volume Business.

Unique Services

Ikea offers a number of extra services that its competitors do not. Ikea in-store environment and purchasing processes promote greater consumer interest and facilitate the buying behavior of customers. Ikea displays every product and sells in room-like settings that help customers to imagine how to put the pieces together. They also provide in-store childcare and extended hours facilities. These services are mainly designed for the customers who are young, not rich, likely to have children, or work for a living and need to shop at odd hours. 4

                                              Challenges for Ikea

For the past years, Ikea's has stood out from other competitors because it blended value into its fashionably designed furniture at an affordable price. However, increasing cost of raw material and land transportation has forced Ikea’s first price hike in five years. 6 Would Ikea be able to maintain its differentiation from competitors such as Wal-Mart, Carrefour and Tesco, which are expanding into furniture and furnishings, and following Ikea’s similar approach of low-priced strategy?

Furthermore, Ikea is heavily dependent on raw material such as wood and plastic.This year it used 13.56 million cubic meters of solid wood and wood-based board materials, not including paper and packaging, meaning Ikea alone uses almost 1% of all wood used commercially around the world.” 5 It is a challenge for Ikea to maintain or improve its corporate image through social and environmental responsibility. Although the company says it will become ‘forest positive’ by 2020, will it be able to make this vision a reality?


References
  1. http://www.ukessays.com/essays/business-strategy/strategic-operations-management-in-ikea.php
  2. http://www.cbpp.uaa.alaska.edu/afef/what_is_strategy.htm
  3. http://reocities.com/TimesSquare/1848/ikea.html
  4. http://www.cbpp.uaa.alaska.edu/afef/what_is_strategy.htm
  5. http://www.guardian.co.uk/sustainable-business/ikea-sustainability-forest-positive-karelia
  6. http://www.studymode.com/essays/Key-Challenges-Facing-Brand-Ikea-646692.html
  7. Article: How Ikea Designs Its Sexy Price Tags (Business 2.0, October 2002)
  8. http://en.wikipedia.org/wiki/IKEA

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