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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
ftp://donnees.admnt.usherbrooke.ca/Mar761/Cas/IKEA.DOC
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