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posted : Thursday, October 24, 2013
title : IKEA - simplicity in behaviour.
IKEA is a worldwide furnishing company based in Sweden built on the idea to “offer 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”. IKEA was found by the entrepreneur, Ingvar Kamprad in the year 1940. IKEA started off by selling pens, wallets, picture frames, table runners, watches, jewellery and nylon stockings at a low price. Currently, IKEA is one of the leading home furnishing retailer in the world with 345 stores over 42 countries and a total number of 151000 workers. The IKEA group is solely owned by the Stiching INGKA Foundation through a holding company named INGKA Holding B.V. , which is the parent company of all companies within IKEA group.
Swedwood is a fully owned subsidiary of the IKEA group found in the year 1991.
The reason IKEA found Swedwood was due to the political and economical turmoil in Eastern Europe at the time. To secure supplier capacity and to aid IKEA suppliers in their privatization process, Swedwood was established. Swedwood applies the long run theory of production whereby all the factors of production are variables. Over the years, Swedwood has grown significantly and currently, it operates over 49 production units and has offices in 12 different countries across 3 continents. Swedwood experiences economies of scale as an increase in the scale of production leads to a lower cost per unit of output. This could be due to multi-stage production. For example, in the Swedwood production facility in Tibro, their main products are the chest of drawers and office tables. To create these products, the particle boards are first being cut into smaller pieces and subsequently, the cut particles is put on conveyers that run all through the manufacturing to the inventory. After that, veneer is applied to the particle and the particle board is cut into its final shape then the edge bands are attached. In the end, the end product is sent to a packing line where all sub-components are put into the final package. Through this multi-stage production, time and cost are saved as all process of production is completed in one factory. The unnecessary cost that might incur from moving the semi finished product from one factory to another is saved. Also, with every factory specializing on a targeted and specific product, the employees are highly specialized in what they do and generally, more efficient in their particular job. Other than that, being in the long run, Swedwood was able to move to a different location. For instance, after considering the proximity to IKEA stores, sustainable supply of raw materials and industrial infrastructure, Swedwood established it’s first manufacturing operation in Danville, VA in December, 2006 and this has significantly decrease the transportation and production cost. In addition, with the advance of technology, the introduction of robots to the manufacturing process and the use of highly automated production system, the amount of employees required is lesser.
Based on Exhibit 3 with IKEA’s ideals to produce simple, durable and well designed home products, priced to be accessible to the majority of people, it can be concluded that the majority of IKEA’s customer are newly weds that are starting to build a home together with a limited amount of budget and they turn to IKEA for it’s innovative but yet affordable designs. From this, it can be deduced that IKEA’s furniture are the complements of houses. With price being the most influential determinants of purchase for the buyers, we can arrive at the judgement that IKEA’s products are inferior goods and when the buyers grow older, income increases and moves from an apartment to a house or a condominium, the quantity demanded of the goods from IKEA falls. However, IKEA also offer a range of luxury goods called the Stockholm range with a high price tag and assembled together with high quality materials like birchwood, leather and cretonne. This could explain the rise in percentage of purchase when the income range of the buyers increase from 4000-6000SKr to 6000SKr and above. The buyers with higher buying abilities will choose the luxury range. With this range of product, IKEA caters to the needs of the customers with a higher budget and demands for better quality.
At ceteris paribus, the price of elasticity of demand is a units free measure of the responsiveness of the quantity demanded of a good to a change in its price. For IKEA’s customers, the price elasticity of demand is elastic as there are plenty of substitutes in the market for furniture and luxuries generally have an elastic demand. On the other hand, the elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same. In general, the elasticity of supply for IKEA is elastic as the resource substitution possibilities is high for furniture. The materials used to produce furniture are relatively similar. Furthermore, with each additional output, the cost of producing an additional output reduces. This further proves that the elasticity of supply is elastic.
IKEA gives the customers a wide variety of furniture to select from and the goods in IKEA are mostly complementary with another good which can also be purchased in IKEA. For example, in the LACK range, to complement the LACK table, the LACK shelves are designed. To complement beds, IKEA also sells mattress, pillow protectors, pillows, blankets and several bedroom products. In turn, this will raise the customer’s tendency to buy one product after another. Generally, this will cause an increase in sales and in demand of the goods available in IKEA as the products sold are complementary of each other.
IKEA experiences monopolistic competition as there is a large number of furniture retailers in the market. Therefore, IKEA has an insignificantly small share of the market and its decision will not have a great impact on its rivals. IKEA acts as an independent firm and it is not affected by the actions of the rivals. Despite having many competitions, IKEA is different from all the other retailers due to product differentiation. IKEA constantly designs new and innovative products and they are not afraid to be different. In a monopolistic competition, there is freedom of entry of new companies into the industry and this can be demonstrated by the ever expanding furniture industry. Due to the high competition in the market, certain measures should be taken by IKEA to stand out among the other companies and IKEA does this by using advertisements mainly in the form of catalogues, Websites and most recently, smart phone applications. These platforms are very effective ways to provide information to buyers and to manipulate people’s taste. In a way, advertising is a complementary good as advertising increases the utility a person gets from purchasing the advertised goods. Furthermore, successful advertising will increase demand and make the company’s demand curve less elastic as advertising stresses on the special qualities of the company’s products.
Generally, we could conclude that the success of IKEA is based on the customer’s behavior to obey the law of demand which states that when other things remain the same, the lower the price of a good, the larger the quantity demanded. The main reason IKEA could afford to sell at such cheap prices is due to the low prices of the factor of productions. In the future, as the demand for houses increases due to economic growth, the demand for furniture will increase as well. IKEA has the potential to expand even further than it already is and the possibility of making even more profit in the future is high. However, to be able to achieve that, IKEA would have to overcome several challenges that will arise such as, difficulty in supervising because of the large amount of employees as well as changes in the customer’s preferences, the demand of the current market and insufficient capital in expanding the company. Lastly, to maintain the continuous expansion and current success of the company, the employees of the company should constantly keep the IKEA spirit alive.
“ The true IKEA spirit is found on our enthusiasm, on our constant will to renew, on our cost consciousness, on our humbleness before the task, and on the simplicity in our behavior” - Ingvar Kamprad
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