Opened in August 2003, the new IKEA Malaysia store is the largest in Asia. Prior to that, the retailer has been operating in 80,000 sq ft of space at 1-Utama Shopping Centre since 1996. When IKEA Malaysia decided to open shop in I-Utama, they soon realised the need for a full-sized store to feature the full-IKEA concept. Then on November, 2000 their search of perfect site for their full-fledge store ended. Acquiring 13.1 acres of freehold land in the vicinity of Mutiara Damansara, Selangor, and IKEA thrived to become the first home furnishing retailer in Malaysia to occupy a vast retail space of 360,000 sq ft.
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1.1 Scope of Study
IKEA has positioned itself as a home furnishing specialist that provides a wide range of well-designed, functional solutions at a low price, a feature that attracts families with a combined household income of RM2,000. Currently, it offers some 8,500 products ranging from various categories of bedding, kitchen utensils, children furniture, textile, even to their infamous sought after meatball. However, for the purpose of this study, we are going to scope on the home furnishing aspect of IKEA only.
1.2 Ikano Pte. Ltd as a franchisee of IKEA
Ikano Pte. Ltd. is a franchisee of Inter IKEA Systems B.V., owning and operating two IKEA stores in Singapore, one store in Kuala Lumpur, Malaysia and one store in Thailand. Ikano Pte. Ltd. also owns and operates shopping centres, adjacent to the IKEA stores in Kuala Lumpur and Bangkok (opened in May 2012). Ikano was originally a part of the home furnishing company IKEA which was founded by Ingvar Kamprad in 1943. Today the Ikano Group owns and develops competitive and profitable niche companies in the areas of finance, real estate, asset management, insurance and retail.
Figure 1: Structure of the IKEA Group of Companies (Inter IKEA System B.V., 2012)
1.3 Target Market
IKEA is the cost leader in the furniture industry. A living room furnished with IKEA products is as much as 65% less expensive than one furnished with equivalent products from other stores. Its target market are the young married couples, college student, 20-30 something singles and middle class families who are basically price sensitive customer. So, if they can get furniture at a much lower price, of course they will opt for that.
2.0 Product and Services
IKEA offers normal, non-luxury type of good with many substitutes and complements in the market such as Harvey Norman and Courts. It also offer various services to complement its business such as delivery services, assembly service, kitchen installation even to sewing services to accommodate the demand.
IKEA does not have any direct competitor as far as the innovation is concern. The company has been in existence for so long, yet they come up with modern design to suit the changing taste and expectation of customers. Unlike any other indirect competitors of IKEA, the likes of Macy, Harvey Norman, Courts and small and medium furniture shop like Lorenzo, Rozelle, Cavenzi and so forth, IKEA has been able to develop its brand as being more than just furniture merchant or retailer by distinctive design and style. According to the report by Malaysian Furniture Association, there are currently 2,531 furniture shops across the country ranging from big to small scale.
It can be clearly defined that a perfectly competitive market has three main characteristics; there are many buyers and sellers, goods are homogenous and there is free entry and exit into and out of the market. The reason to there being many buyers and sellers is because perfectly competitive firms operate at an efficient scale, which means a high consumers surplus, and because sellers can sell as much quantity as they like at the given market price. It’s not desirable for sellers to decrease the price of their goods as this would reduce their profits, they also have no incentive to increase prices as this would lead them to have no demand, as consumers have perfect market knowledge and are able to purchase close substitute goods. Each firm operating in this market is known to be a price taker.
The price of a good is equal to average revenue which is equal to marginal revenue, as this is the market price set for each quantity of the good. A firm will maximize their profits when price is equal marginal costs .If a new firm see’s that the market is profitable then this is attractive to them and they will enter the market. However, this will have the effect of increasing supply and Quantity which will lower the price and profits for all firms operating in that market. This could inevitably lead to some firms making zero profits. If this happens and the price of a good becomes less than their average total costs of production, then a firm may take the decision to shut down.
3.0 Special Characteristic of IKEA
3.1 Mass Production
Mass production is the advantage IKEA can achieve economic of scale in order to meet the performance objective cost. On the other hand, the inventory level is high which in particular means that the products of IKEA are make-to-stock (MTS). In a make-to-stock process, individual orders are not assigned to customer during manufacture (Schroeder, 1933). IKEA has lowered their average long run cost over the year by exploiting economic of scale through increasing specialization. The division of labour has been delegates by particular products made by specialist workers and made in different locations around the world. According to Dolgui & Proth (2010) mass production diminishes human errors due to the standardization of the operations.
3.2 Integrated Supply Network
In order to avoid inefficiencies related to outsourcing activities, IKEA starts manufacturing in wholly owned subsidiaries. In order to maintain the representation of its design capabilities and its distribution and retail network, which enable IKEA to offer well-designed items at bargain prices, IKEA has taken another milestone in international procurement. Its items are designed and engineered in Sweden and produced by external subcontractors based in more than 7 countries, generally with cheap labour and close proximity to raw material and reliable access to distribution channels (Navareti, 2004). Most of production occurs at the facilities of the suppliers, this means that IKEA is ordering, for instance 10,000 hours of production rather than 10,000 wardrobes.
3.3 IKEA Brand Recognition
Since IKEA began in 1943, it has grown into a successful global network of stores with its unique retailing concept. According to Business Week, the retailer accounts for just 5-10% of the furniture market in each country in which it operates. According to the former CEO, ‘is that the awareness of our brand is much bigger than the size of our company.’ That’s because IKEA is far more than a furniture merchant. It sells a lifestyle that customers around the world embrace as a signal that they have arrived, that they have good taste and recognize value.
Wherever they are, customer tends to visit the store as more than a chore. According to the Harvard Business School studies states, IKEA practices a form of smart way to keep the patrons inside their store as long as possible. For example of IKEA Malaysia, right at the entrance, the patrons can drop off their kids at the playroom, an amenity that encourage more shopping. Then, the patrons proceed along a marked path through the warehouse, and because the store is design as a circle, they can see everything as long s they keep walking in one direction. Wide aisles let the patrons inspect the merchandise without holding up traffic and the furniture itself is arranged in fully accessorized displays. A whole lifelike shopping offering tangible good and intangible experience has definitely distinct IKEA from other competitors in the market.
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3.4 Cost Saving Strategies
Low prices are essential to IKEA, thus they implemented various method to thrive to become cost conscious. One of the methods to reduce the cost for storing the products, IKEA uses flat packages that do not waste unnecessary space. Using flat packages also saves transportation cost that lowers the prices for the product. In addition, the stores of IKEA have all large storing halls from where the customer picks up its chosen products (Navareti, 2004). This means that the product will be delivered right away from the suppliers to the stores. There is no between storage and logistic cost. Further, IKEA does not waste any leftovers that occurs form the mass production process. For instance, left over occur from the remnants of fabric after manufacturing the heart shape Famnig cushion is used to make small Famnig cushion.
4.0 Demand Driver
Despite the challenging market of furniture worldwide, it can observe from the below table that IKEA has a steady growth of demand spanning over 10 years. This is due to the two obvious facts that IKEA has been a leader in cost reducing and the brand itself growing massively over the years.
The IKEA Group sales turnover trend from the year 1999 to 2009 (IKEA, 2010)
4.1 Cost Leadership: Good Quality at Low Price
IKEA has operated as a model firm for using price as a strategic focus. In designing new product, IKEA would first determine the target price and market need, from which all further r decision would be made. Product attributes, such as the overall design, the use of specific laminate finishing on specific surfaces, and fastener selection, would then follow for the need to deliver the product at a cost below the target price. Their focus on reducing costs, and hence profit at lower price point, also drove IKEA to rely on customers for co-creating much of the value. In a perfectly competitive market that implies numerous competitors, it becomes prohibitively costly to monitor the pricing actions of all competitors. However, mature competitor like IKEA is better positioned to both anticipate competitors’ response to prices.
Just as IKEA removed some attributes from the value proposition, it is also created new ones. For instances, IKEA outlets were known for their well-lit retail space, large selection, and pleasant atmosphere, with complete room layout to enable and encourage customer decision making. In contrast, other low-priced retailers were known for dank warehouses with a limited selection of item strewn about the floor in seemingly random manner. While improving the shopping experience over its low-cost competitors did add some costs, it also greatly increased the attraction of IKEA to customer who otherwise would refrain shopping altogether. This has enabled IKEA to enjoy a consistent cost-advantage over competitor, leading to prices comparable to low-end furniture retailers while providing some points of differentiation that would attract some higher-end customers.
4.2 Perception of Quality
IKEA has been perceived as not so much a furniture store as it is an economic and cultural phenomenon. While other retailer have to scheme to lure shoppers, IKEA only has to plunk itself down in some remote locale and its devotees will make pilgrimages, travelling for hours, just to join the throngs. Shoppers the world complains about the quality of IKEA merchandise, the crowded parking lots, and the incomprehensible assembly instructions, and yet the global appetite for the retailer is insatiable. IKEA devotion stems as much from the constancy of the brand as anything else. Perhaps no other company has been as single-minded in its vision and as innovative in its execution.
Generally, people have an idea that price and quality are directly related as in, higher the price better is the quality and lower the price lower is the quality. However, IKEA has successfully changed this idea related to furniture.
From the discussion on this study, it can concluded that IKEA has revolutionize home furnishing industry market based on several distinctive factors such as positioning its brand as cost leader while at the same time balancing the quality of its product. In doing so, IKEA has adopted operational strategies to achieve its economies of scale, by way of specializing. From the steady growth of its brand based on the sales turnover spanning over the period of 10 years, IKEA is truly a global brand that change the world of furniture industry.
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