Global Business Case Study
HSC topic 1: Business Management and Change
The IKEA Group is one of the world's largest home furnishings companies. It operates 165 stores in Europe, North America and Asia and sources products from approximately 1,600 suppliers in 55 countries. IKEA has a strong company culture based on IKEA's fundamental values of creating a better everyday life for as many as possible. Therefore, it is a natural part of IKEA's business to ensure that all products are produced considering strong environmental and social standards.
the nature of management
•management roles
Management at Ikea would still be required to fulfill all three management roles as day to day and strategic decisions are required to be made.
•skills of management
Charismatic, down-to-earth, and a serious tightwad, Kamprad also has an amazing story -- dyslexic farm boy becomes retail genius -- that most of Ikea's 90,000 employees seem to know by heart. That's not surprising, considering that Kamprad's saga and the subsequent rise of the Ikea empire are enshrined in a small museum in the basement of Ikea's offices in Almhult, the site of the first store.
•responsibility to stakeholders; reconciling conflicts of interest
IKEA's vision is to create a better everyday life for the many people. Their business idea is to offer a wide range of well-designed, functional, home furnishing products at prices so low that as many people as possible can afford them. This is the idea at the heart of everything IKEA does, from product development and purchases to how they sell their products in IKEA stores globally. They rely on customers to share the production costs through the unique retail concept, whereby customers supply their time to collect and assemble flat packed furniture, which reduces IKEA’s storage and distribution costs. This is an example of the shareholderand the stakeholder concept working together.
understanding business organisations with reference to management theories
•behavioural
“At IKEA, we don't just want to fill vacant jobs, we want to partner with people. . Co-workers are not so restricted at IKEA; we listen and support each individual to identify his or her needs, ambitions and capabilities.”
This quote tends to show the point of view that IKEA have towards its employees, they are part of the team and valued. This approach does lend itself to a behavioural point of view.
managing change
•nature and sources of change in business
–external influences —
Sales of home furnishings and flat pack furniture are closely correlated with the buoyancy
of the housing market. A strong market for first time buyers and considerable movement
up the housing ladder amongst families will result in more sales at IKEA. Conversely, a
slowdown in the housing market will probably mean less customer activity at IKEA. .
•Home ownership – the culture of home ownership varies by country. In the UK, there is a much greater urgency for people to own their own home than there is in France or
Germany. The success of the IKEA formula will depend on home ownership and DIY culture.
•Home shopping – The growth of home shopping could lead to increased sales for IKEA.
In 1997 they launched IKEA online and their business model lends itself well to direct
delivery (albeit that they might have to charge the customer for this function given that
delivery is ‘free’ in the traditional physical model. Ikea now has its own online community
•“An ageing population with maturing tastes” – the IKEA formula is targeted
at “young people of all ages”. With an ageing population who may prefer more traditional
furniture to the flat pack formula, IKEA may come under pressure in some county
•Global warming – there is an increasing concern about saving the planet, carbon offset
schemes and pollution. This concern is now felt across all age groups from young to old,
who are all in IKEA’s target market. IKEA’s positive approach towards the environment should be a positive for IKEA.
•Political considerations - In most countries of the developed industrial world and free
trading markets, the IKEA concept can succeed. However, it would be unreasonable to
expect that this can also be the case if this concept was attempted in the countries with extreme fluctuations in currency exchange rates, hyper-inflation or with rigid importing
quotas and restrictions.
–internal influences
The company is part-way through a five year IT project to improve business processes, addressing everything from managing how much stock it holds and how accurate its packing and shipping processes are to how many of its orders ship on time and arrive undamaged.
Ikea Components is a huge part of Ikea. It supplies 600 Ikea stores, has 200 component suppliers, 800 staff and has a turnover of $800 million a year.
–structural responses to change
Ikea has not yet explored joint venture and strategic alliances strategies. Furthermore, strategic networking links only exists between suppliers and retail outlets, with the headquarters as a centralized mobilizing agent. The current centralized system suppresses creativity and freedom on the individual store level. A joint venture approach could replace Ikea's franchising concept and increase cultural sensitivity and operational controls through the establishment of strategic networks. Such alliances could also increase market coverage, without Ikea loosing its focused strategic intent on one particular market segment.
•reasons for resistance to change
–financial costs — purchasing new equipment, redundancy payouts, retraining, reorganising plant layout
–inertia of managers, owners
–cultural incompatibility in mergers/takeovers
–staffing — de-skilling, acquiring new skills, loss of career prospects/promotional opportunities
These reasons for resistance to change are relevant to IKEA. In particular cultural incompatibility – IKEA is a Swedish company and its desire is to maintain the integrity of the Swedish message. When it is established in new countries the main features of IKEA are maintained, a quick look at the menu at Homebush IKEA complete with Swedish meatballs, Swedish Open Sandwiches is a prime example.
•managing change effectively
The majority of change in IKEA comes as a response to external sources. Impacts from influences such as the economy, consumer tastes, environmental issues drive IKEA’s decision making.
change and social responsibility
•ecological sustainability
Introduced by Ikea Denmark for use by their customers. They noticed from a survey that 20 percent of its customers arrived by bike so an Ikea store in Copenhagen has just introduced this trailer shown in the image.
HSC topic 2: Financial Planning and Management
the role of financial planning
•strategic role of financial management
•objectives of financial management — liquidity, profitability, efficiency, growth, return on capital
•the planning cycle — addressing present financial position, determining financial elements of the business plan, developing budgets, cash flows, financial reports, interpretation, maintaining record systems, planning financial controls, minimising financial risks and losses
financial markets relevant to business financial needs
•major participants in financial markets including banks, financial and insurance companies, merchant banks, superannuation/mutual funds, companies, government
•role of the Australian Stock Exchange as a primary market
•overseas and domestic market influences and trends in financial markets and their implications for business financial needs
management of funds
•sources of funds
–internal — owners’ equity, retained profits
–external — short-term borrowing, (overdraft, bank bills), long-term borrowing (mortgage, debentures) leasing, factoring, venture capital, grants
•financial considerations — matching the terms and source of finance to business purpose and structure
•comparison of debt and equity financing, including costs and benefits, risks, gearing/leverage
using financial information
•the accounting framework
–financial statements — revenue statement, balance sheet
–the accounting equation and relationships
•types of financial ratios
–liquidity — current ratio
–solvency — gearing debt to equity
–profitability — gross profit ratio, net profit ratio, return on owners’ equity
–efficiency — expense ratio, accounts receivable turnover ratio
•comparative ratio analysis
–over time, with similar businesses, against common standards
•limitations of financial reports
–historical costs, value of intangibles
effective working capital (liquidity) management
•the working capital ratio
•control of current assets — cash, receivables, inventories
•control of current liabilities — payables, loans, overdrafts
•strategies for managing working capital — leasing, factoring, sale and lease back
effective financial planning
•effective cash flow management
–cash flow statements
–management strategies — distribution of payments, discounts for early payments
•effective profitability management
–cost control — fixed and variable, cost centres, expense minimisation
–revenue controls — sales objectives, sales mix, pricing policy
There will be four main types of budget used:
•Group budget – showing the future surplus, revenues and costs of the whole organisation (also known as the Master Budget). For IKEA, this will ne held by Ingka Holding B.V (operations) and Inter IKEA Systems (franchising)
•Sales budget – sales revenue predictions, based on volumes and prices for a specified period. This will be generated from projected furniture sales in all the IKEA stores around the world as well as sales from the website.
•Operations budget – output costs and customer service targets normally based on sales budget requirements. This will include the costs of operating the stores, the distribution network, the stock control systems and the suppliers
•Cash flow budget – a forecast of cash in and out for the entire organisation on a projected.
The benefits of budgeting are:
•Planning – helps managers plan for the future and co-ordinates organisational actions:
o e.g. IKEA’s product development budget in Sweden
•Controlling – helps managers track performance against objectives and it gives a measure
of success and failure (using variance analysis) from which business lessons can be learnt
o e.g. measuring the sales performance of individual stores against each other
•Motivating – Gives teams and organisational departments a target to achieve and
responsibility for success o E.g. country manager targets for revenue
ethical and legal aspects
•audited accounts, inappropriate cut off periods, misuse of funds
•corporate raiders and asset stripping.
These business ethics are still relevant to IKEA there is no literature available that shows that these are areas of concern for IKEA.
HSC topic 3: Marketing
nature and role of markets and marketing
•types of markets —consumer, mass, niche
These three markets have relevance to the IKEA business. They predominately deal with consumer although there may be some sales to other businesses/government departments. There product is fairly universal to all and the nature of the flat pack product may also qualify it as a niche market. In particular the relationship between furniture and the café. A fairly unique combination.
•production–selling–marketing orientation
IKEA’s focus is the customer and making sure their needs are met. So that the selling orientation would be IKEA’s main focus.
•the marketing concept — customer orientation, relationship marketingIKEA do use relationship marketing. IKEA enables shoppers to co-design and co-construct new concepts in living and to customize their living spaces. IKEA also have a kids club, an e-newsletter. IKEA has launched a mobile loyalty program to build a database of consumers interested in receiving discounts from the home furnishings retailer.
elements of a marketing plan
•situational analysis including SWOT and product life cycle
IKEA is a mass market player. It sells 9,500 product lines across 40 countries. Its annual turnover in Euros for the last three years has been:
2005 – 14.8 billion
2006 – 17.3 billion
2007 – 19.8 billion
•establishing market objectives
IKEA’s main aims are to sell to as many as possible. There is no formal published objectives offered by IKEA.
•identifying target market
IKEA offers a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible can afford them.
IKEA has a strong belief in the importance of children and lots of their products are designed with this in mind.
•developing marketing strategies
IKEA use a wide variety of promotional techniques to market new stores especially. But marketing tends to occur more heavily when the new catalogue is released
market research process
•determining information needs, data collection (primary and secondary), data analysis and interpretation
Primarily done by IKEA group although individual stores would use sales reports in order to gather data about the types of customers, popular lines etc that are particular to their store.
customer and buyer behaviour
•types of customers — people, households, firms, educational institutions, government, clubs and societies, religious organizations
The bold customers would be the most dominant purchasers of IKEA products and would account for the largest percentage of their sales.
•the buying process — buyers and users
The buying process would not be different for IKEA customers but the free yearly catalogue gives purchasers time to plan a trip to IKEA as the IKEA stores are not usually located conveniently due to the large floor space required to house their product. IKEA stores are usually located outside the inner metropolitan area for this reason.
•factors influencing customer choice — psychological, sociocultural, economic, government
Psychological factors would play a part in consumer decision making at IKEA There is a perception that IKEA products are fashionable, cheap and a little fun. IKEA customers do more than purchase Ikea products, they identify with the culture and authenticity that IKEA has attached to its products.While IKEA is known for bringing low-cost products to consumers, its mission statement focuses on improving customers' lives by bringing them good quality at good value. This ties in well with sociocultural aspect too in that the cost saving, hands on experience of IKEA attracts certain groups of people to their product.
developing marketing strategies
•market segmentation and product/service differentiation
Demographic segmentation
• Global middle class customers who share buying habits
• Low and middle income families or young people
•product and service
The products are displayed in a spartan, albeit attractive, manner, and a sense of economy permeates the store. The products themselves are streamlined, uncomplicated and tailored so that the strong point is function over fashion
–Positioning
Its unique selling point is its flat pack formula which it has applied to furniture giving it a mass market appeal with functionality and quality at a very low price.
What does this tell you about how IKEA choose to position themselves in the consumer market?
–Branding
IKEA is one of the world’s best known brand names. The IKEA logo is an acronym comprising the initials of the founder's name (Ingvar Kamprad), the farm where he grew up (Elmtaryd), and his home village (Agunnaryd, in Småland, South Sweden). It is displayed prominently in Blue and Yellow colours at the stores and on all advertising.
The brand image stands for affordable, contemporary design and it is the flat pack product range that gives IKEA its identity. In Scandinavia, the range is regarded as being typically IKEA. Outside Scandinavia, IKEA is regarded as being typically ‘Swedish’.
–Packaging
The Marketing Mix at IKEA
The marketing mix comprises the 4P’s:
Product –flat pack furniture, home furnishing, restaurant meatballs, flat pack houses
Place – IKEA stores and their distribution network
Price – lowest prices on all items
Promotion – TV advertisements, free catalogue, website
All of the 4 Ps are important:
Product matters because it is the reason that customers go to IKEA in the first place. IKEA has cornered the market in flat pack furniture and the unique design attracts customers and meets their needs.
Place matters because it is how customers access the product. The IKEA experience is more than just products, it is a retail concept laid out in such a way that families, singles, couples etc can enjoy shopping for furniture. A day at IKEA has been described as more of an ‘outing’ than a shopping trip.
Price matters because it is at the heart of the IKEA concept. Flat pack furniture cannot compete on price with upmarket, fully assembled pieces, so it is essential that IKEA continues to keep its prices below the competition.
Promotion matters because it helps to drive customers into the stores in order to buy furniture.
Without promotion, fewer customers would shop at IKEA.
•price including pricing methods — cost, market and competition-based
Low price is a prerequisite for the IKEA Concept to realise the IKEA vision. As the IKEA Concept aims to serve "the many people", the IKEA product range needs extremely low price levels. IKEA aims to reduce the average price of its products by 2-3% per annum.
–pricing strategies/tactics
IKEA tends to adopt more of a penetration pricing strategy as it aims to be a low cost provider.
IKEA operates with Cost Based pricing. Products are designed with a target cost in mind and a profit margin is then added to that target cost. This approach is combined in the market place with a Price Penetration strategy - low prices, low margins (just above production costs) designed to generate market share quickly. This strategy works well
• For mass market products
• When there are economies of scale