Evaluation of IKEA’s strategic choices and implications

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List of figures, tables and chart

 

Table 1 Sale, purchase and stores comparison of IKEA in 2009……………………… 3

Table 2 The economy and population comparison in 2009……………………………… 3

Table 3 Summary of China Customers’ perception of IKEA…………………………… 7

 

Figure 1 The timeline of the IKEA expansion in China (www.ikea.com/cn/zh/)…. 5

 

Table of Content

 

List of figures, tables and chart…………………………………………………………………………. 1

Table of Content……………………………………………………………………………………………… 2

1.     Task 1: External Environment-PEST Analysis……………………………………………….. 3

1.1      Economical factors…………………………………………………………………………… 4

1.2      Political factors………………………………………………………………………………… 5

1.3      Social factors…………………………………………………………………………………… 6

1.4      Technology factors…………………………………………………………………………… 6

2.     Task 2: Core Competency and Resources……………………………………………………… 7

3.     Task 3: Evaluation of organization’s strategic choices and implications…………….. 9

4.     Task 4: Alternative choice: Differentiation strategy……………………………………….. 9

Reference……………………………………………………………………………………………………… 11

Appendix 1.0 Background of IKEA………………………………………………………………… 13

 

 

 

1.        Task 1: External Environment-PEST Analysis

 

The world largest furniture retailer IKEA has been in China for more than ten years however it is found the IKEA become expanded more rapidly in the recent years. According to their financial year report the sales revenue increased by 7% to 23.5 bn RMB ($33.6bn) in 2010 (IKEA, 2010). Herdianti (2010) concluded that the Chinese market was very different from the previous market the IKEA has been entered before in the both aspect culturally and economically. However, impressively IKEA now has been sustain and holding the largest market share in China’s furniture and fittings market in 2008 (Euromonitor International, 2009). According to IKEA financial report in 2009 fiscal year, IKEA (China) sales has over 3.7bn RMB ($569mn), that has been increased 23% compared with last year, which only account for 1.7% of IKEA global sale (IKEA, 2010). Table 1 showed that the comparison of Chinese market with the Germany and United Kingdom.

 Figure 2

Table 1 Sale, purchase and stores comparison of IKEA in 2009

(www.ikea.com)

 Figure 2

Table 2 The economy and population comparison in 2009

(www.CIA.gov)

 

From the table 2 above showed that Chinese people had only nearly 20% annual income compared to Germany and United Kingdom but they contribute to IKEA store in China nearly 50% of each store when compared to both countries it was the purchasing power in Chinese.

 

1.1    Economical factors

 

Purchasing power can be an indicator to estimate the profitability that can be earn from the market. In the economic perspective the savings, inflations, debt, unemployment, and current income were the factors that will influence the purchasing power in a country. According to Kolter et al. (2006) recognized that the purchasing power was closer connected with the employment situation in a country and there is an important factor for a company to analyze and identified so that they will know the market situation and market environment. The purchasing power of different consumer segments will continuers changing.

 

From the above table 2 it showed that the Gini coefficient for the countries of China, Germany, and also United Kingdom, the Gini coefficient for a country was used to measure the inequality of distribution, by using the coefficient it can measure how large the percentage of the income that goes to certain percentages of the population. From the table 2, it can be concluded that the most higher Gini coefficient will be China as 0.41 compared to both countries (0.27 and 0.34) the higher the Gini coefficient is meaning higher inequality, which mean that the more suitable the market is for the products and the lower the value is meaning more equal distribution the more suitable the market is for low and middle price goods (Ball et al. 2008, p.235).

 Figure 2

Figure 2

 Figure 1 The timeline of the IKEA expansion in China (www.ikea.com/cn/zh/)

 

1.2    Political factors

 

China is a country with high centralized political system which means that they control by one party system and an increasingly decentralized economic system (socialist market economy). Although, China has been considerable economic reform recently but their political system still remains as the Communist Part of China (CPC), therefore their political apparatus still dominates and all the major policy decision making still controls by the government at all levels of hierarchy. State level also plays an important and evolving role in administering and enforcing China’s growing body of commercial and industrial law. In China there are two key trend of economic decision making first of all at central government level the main tendency is a gradual withdrawal by the state from direct control of business to free business activity. Secondly, there is a growing willingness by central government to devolve executive powers down the administrative chain grating ever greater powers to local authorities. In 2003, the average tariff for timber, paper and paper products was only 7%; in 2005, the furniture import tariff was reduced to zero (Jiang, 2007). Owing to the increasing demand of domestic producers for wood resources, the government has eliminated the value0added tax (VAT) rebate for exported wood raw materials and primary processed wood products such as logs and wood chips. While, exporters of wooden furniture and plywood are still entitled to the VAT rebate. (Zhang et al., 2007a).

 

1.3    Social factors

 

There are some of the demographic factors that affect the demand of the furniture market in Chinese include household income, population growth, demographic trends, age, urbanization and income disparity between urban and rural areas. As the economy in the China developing graduate it influence that per capita income of the Chinese increase graduate according to the Development and Research Centre of the State Council of the China it showed that the predictable China GDP will be double between 2010 to 2020 at an annual growth rate of nearly 7.2% (Zhang et al., 2007a). Therefore, this will help the rapid growth f China’s furniture in the industry. Additional, the China population control policy (one child policy) is enforced strictly in urban thus it promotes slowing China’s population growth. Currently the China’s total fertility rate is 1.77 while it is estimate that the total Chinese fertility rate for a stable population is 2.1 (Rosenberg, 2008). The slowly decline of the Chinese Fertility rate will decrease the consumption of furniture in the long run basic.

 

1.4    Technology factors

 

Since implementing the reform policy, China has experienced rapid social and economic development the construction and interior decorating industries, especially in the interior decoration of home and public construction sectors have shown significant expansion (Jiang, 2007). The generation of purchasing the furniture becomes younger and younger, thus the demand for the design for the unique of the furniture become one of the crucial for IKEA. The requirement of the customer become more concerning for the product quality and long lasting. Therefore IKEA designer for the furniture need to be more concerning to the need and wants of the customer in order to sustain the competitive advantages. The introducing of the new design, creativity ideas for decoration will attract more market share to purchase in IKEA shop. Customize product also available in IKEA store to let the customer to customize their furniture by themselves in order to satisfy the rapid change of the consumer behavior and furthermore they deeply influenced by the Western lifestyle, products and culture (Paul & Yu, 2003).

 

2.        Task 2: Core Competency and Resources

 

According to the interviewers in China there are mainly seven kinds of reasons that give the customers shopping in IKEA and had a deep impression of IKEA products compare to other competitors.

 Figure 2

Table 3 Summary of China Customers’ perception of IKEA

 

Nowadays, the new generation is more like foreign brand just because it is an international company. IKEA’s effort to attract customers in China starts with branding, in China brand names with a nice meaning win thus IKEA make the Chinese name 宜家 (Yi Jia) means that suitable or comfortable home. The band strategy that used by IKEA was very impressive which not only the resembles the sound of IKEA but also has a nice touch of ancient Chinese culture as well. IKEA’s also adopt a product policy in China whether to standardize or adapt products for different markets. Like the Usunier (2000) argue that price is a significant element of communication and a decisive element in the social interaction between buyer and seller. With the affordable price for all customers segment IKEA become one of the largest furniture supplier in China recently. Chinese people also think that IKEA is a fashion place so that they will shop in IKEA in order to know the fashion trend of the decoration of the house. Another main reason of the customer think shopping in IKEA as a good place for leisure activity and taking the photos could make it memorable.

 

Another good strategy that used by IKEA will be there are wide range of products, IKEA has been criticized for selling the extract same products on the global market (Bjork, 2000, Lewis, 2005). But in China there have wide range and more products like chopsticks and cleavers which introduced by IKEA China to attract the market share. With the quite unique with well design furniture, the China people will more concern in the traditional furniture style and the utility of the furniture therefore in order to satisfy the need and wants of the customer, China IKEA is more localize the furniture design to meet the requirement of the customers. Another attracting and most famous in IKEA will be the experience room as nearly every respondents feel that it giving the inspiration is no doubt. Freedom to touch will induce the purchasing power through the products. Chinese customer more likely to go to IKEA compare to others is because it freedom to touch, take photo, and also experience the products. s an international branded company, most Chinese believe that the IKEA’s product will more quality and environmental friendly products. As recently the China has happened some poisoning events which were related to the furniture products thus some of the customer willing to spend a premium price in order to protect the health.

 

IKEA provides cozy shopping atmosphere and typical Swedish restaurant, which has reconstructed the traditional market boundaries. And IKEA settles well-collected experience room together with wide range of well-designed furniture and give customer opportunity to test tem freely, which beyond consumers‟ demand and brings more value to customers. Moreover, based on the non-hierarchy culture, IKEA makes co-workers feel engagement, be trusted and willing to “lend a hand” to each other, which makes the execution into the strategy.

 

3.        Task 3: Evaluation of organization’s strategic choices and implications

 

Furniture industry is one of the most basic industries not only in advanced industrialized countries but also in newly industrialized countries. In the global manufacturing industries, the contribution of furniture industry is around 4% in the total production. Because of the globalization and improvement in the economic situation of consumers, social values and living standard of people has been changed. This change has given a drastic impact on the performance of Furniture industry (Xu, 2010, pp. 92). Therefore, the rapid changes of the business environment make IKEA choose the cost leadership which means that low cost price to gain the market share. Due to the changes in the preference of the consumers and rapid growth of the newly industrialized countries such as China, this low cost strategy is not working well in two major dimensions: in term of the customer side, as mentioned above, many customers tend to consider the IKEA as a high price brand; in term of the business the company, low cost leadership tend to come with large volume of sale and a large market in the industry, but both of these two are not achieved perfectly by the IKEA in China as it has only 8 stores in China.

 

4.        Task 4: Alternative choice: Differentiation strategy

 

There are more strategic choices that the company could turn to and the one seemingly most viable strategic alternative is the adoption of differentiation rather cost leadership. Differentiation refers to the unique value created by the company that differs from other industrial competitors (Miller 1997, p. 24). The differentiation strategy is supported by the following features of IKEA’s products, operations, the features of the market in China and behaviors of the consumers: Firstly, the company is producing eco friendly designed products would also provide a safe and secure working environment for labor. Manufacturing of eco friendly furniture would avoid the use of hazardous machine, gas, oils, and other chemicals, which ultimately provide a secure working environment to the labor (Klinpikul & Srichandr, 2010). Secondly, in 2009, IKEA launched a customer’s survey in China. The result shows the customers still think IKEA is for the middle or high-end market segment.  And it shows IKEA‟s main customers in China is the people under 33-year old and average month  income over 3500 (Ifeng, 2009).  There may have several reasons. One is that IKEA set price globally, while the average income of Chinese public is quite lower than in European countries, if considering the exchange rate.  Also, in the European countries, young people could get subsidize from government while most Chinese young people need support from their family.  So Chinese customers still feel the price is a litter higher. While Ian Duffy (2007), the CEO of IKEA in Asian-Pacific region, said the price would continue reduce in China. And as IKEA Shanghai logistic distribution, the largest one in Asia (IKEA, 2009), started to use from 2009, it will greatly increase the IKEA‟s logistic capacity and reduce the cost from import and store in China. While the price is not very low, cost leadership could not working fine, hence a strategic change from low cost leadership to differentiation is not only viable but also necessary.

 

 

 

Reference

 

Dess, G. G., Limpkin, G. T. & Taylor, M. (2005). Strategic Management (2nd ed.). New York: McGraw- Hill Irwin.

 

Euromonitor International. (2009). Company watch: IKEA not recession proof but retains ambitious expansion plans. [Online] Available from:

HTTP://www.portal.euromonitor.com.ezproxy.lib.rmit.edu.au/passport/ResultsList.aspx [2011-Jun. 18th]. 

 

Herdianti Wisesaputri (2010). International Business Strategy & Success Factors in an Emerging Economy: A study of IKEA‟s Expansion to China (GBC Individual Assignment edn.). 

 

Klinpikul, N. & Srichandr, P. (2010). Status of Eco-Design in Thai Furniture Industry, Key Engineering Materials, 419-420 (1), 769-772. 

 

Ian Duffy. (2007). “Reducing price is the best strategy in China”. [Online] Available from:http://www.diyifanwen.com/zhichangzhinan/mingqijujiao/065602533652891.htm [2011-Jun. 3th]. 

 

Ifeng. (2009). Survey shows IKEA is medium high-grade product, low price strategy in an awkward situation. [Online] Available from:

http://home.fashion.ifeng.com/info/news/200908/0831_6574_1327163.shtml[2011-Jun. 3th]. 

 

IKEA (2009). Social and Environmental Responsibility report. 

 

IKEA. (2010). 2010 financial year summary report. [Online] Available from:

http://www.ikea.com/ms/zh_CN/pdf/yearly_summary/Welcome_inside_2010_update.pdf [2011-Jun. 18th]. 

Jiang, Z. 2007. Current Situation and Future Development: The Forest Products Industry in China. Forest Products Journal. July0August, 2007. Available online at:

http://www.entrepreneur.com/tradejournals/article/168359931_1.html;

http://www.entrepreneur.com/tradejournals/article/168359931_2.html; 

http://www.entrepreneur.com/tradejournals/article/168359931_3.html;

http://www.entrepreneur.com/tradejournals/article/168359931_4.html;

http://www.entrepreneur.com/tradejournals/article/168359931_5.html.

 

Leibold, M., Probst, G. & Gibbert, M. (2002). Strategic management in the Knowledge Economy. Erlangen: Publicis KommunikationsAgentur.

 

Miller, L. K. 1997, Sport business management. Gaithersburg: Aspen Publishers, Inc. p. 24

 

Rosenberg, M. 2008. The Population Growth of the World’s Largest Country. July 30, 2008. Available online at: http://geography.about.com/od/populationgeography/a/chinapopulation.htm

 

Usunier, J.-C. (2000) Marketing Across Cultures, 3rd ed. Europe: Prentice Hall.

 

Xu, L. (2010). Business incubation in China Effectiveness and perceived contributions to tenant enterprises. Management Research Review, 33(1), 90-99.

 

Zhang, K., Lu, W. and Hashiramoto, O. 2007a. Demand and Supply of Wood Products in China. Forest Products Working Paper 1. Food and Agriculture Organization of the United Nations (FAO) 2007. Rome. 62 pp. Available online at: ftp://ftp.fao.org/docrep/fao/010/k1978e/k1978e00.pdf

Appendix 1.0 Background of IKEA

 

The IKEA Concept that is they offering a wide range of well designed, functional home furnishing products at a lowest price which all the people can afford to buy them rather than like Lorenzo selling expensive home furnishings that only a few can buy. The IKEA Concept is to make the possible to serve more and more people to live in a better life at home (http://franchisor.ikea.com/showContent.asp?swfId=concept 2). As the founder of the IKEA Ingvar Kamprad, says that IKEA does not just want to win your brain but IKEA also wants to win your heart. Therefore, no matter whom you are, come from educational based or non-education, a manager or a worker, you also can find IKEA is a place which is full of opportunities (Salzer, 1994).

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