Business
IKEA’s Value Chain Analysis
The revolutionary idea of studying the value chain embedded in an entity was postulated by Michael Porter as part of which he tried to depict how the entity accumulates customer value along with the chain of activities that it performs. Stated otherwise, the value-chain analysis is an analytical framework that identifies business activities or process inputs that eventually create value for the customers of the company or/and provides competitive advantage to the entity.
Owned by Stichting INGKA Foundation, IKEA is the world’s largest furniture retailer with the presence in more than 40 countries and store count of 361. The company follows the vision of ‘’ “to create a better everyday life for the many people” and adheres to the low-cost business strategy to achieve its vision. By the end of 2015, the company employed 164000 individuals and had more than 9500 products in its portfolio
In order to analyze how IKEA, which grew from a small Swedish furniture manufacturer to present day industry behemoth, the study of value chain related to the company’s process will help us in achieving a comprehensive view as how the business gained competitive advantage. In order to study the value chain of the company, we will be using the authentic model suggested by Michael Porter where he bifurcated the business activities in two categories, namely, Primary Activities and Support Activities. Highlighted below is the essence of value chain analysis followed by discussion related to IKEA:
a) Inbound logistics:
IKEA is able to reduce its logistic cost by 35% by increasing direct delivery share to the store by 75%. Such efficiency is achieved by maintaining a good relationship with a force of more than 1000 suppliers located around the world in 42 distribution centers. It is these suppliers who ensures direct delivery to company’s stores. Additionally, the business of IKEA is based on ‘’Do-it-Yourself’’ lowers the packaging costs and thus assist the company in attaining competitive advantage in supply chain management and handling inbound logistics.
b) Operations
Even though IKEA is a household name around the world owing to its wide-scale presence in 40 countries with store count of 315, the company does not manufacture its own products and follow a decentralized strategy to run its operations. As part of this strategy, the regional managers are given full autonomy for taking decisions relating to customers and other aspects of the target market. This policy eliminates any wasteful time and costs involved with centralized decision making process.
c) Outbound Logistics
IKEA’s customers are responsible for outbound transport of the products they choose and the company offers two options in the form of parcel delivery for products weighing up to 25 kgs and truck delivery for products weighing above 25 kgs.
d) Marketing and Sales
While IKEA as a brand, focus on low cost structure to attract the customers, its marketing and sales strategy relies extensively on print media with more than 200 million catalogues used by the company. Moreover, in order to reach younger customers, the company has now started to focus on online sales channel and is offering its catalogue on the APP store also. By the end of 2014, the company had established its sales channel in the majority of its target markets and its official website, IKEA.com received 1.5 billion hits.
e) Service
Compared to other industry rivals, the company has low number of sales assistant in stores, however, it addresses all the services related queries through standard techniques of online and phone based service assistance. Since the products of the company are extensively displayed through catalogues and are based on ‘’Assemble-it-Yourself’’ method, such process for providing services to the customers is both suitable and aligns with the low-cost business model.
Supporting Activities:
a) Infrastructure
The company sells its product through its stores set up around the globe, and each store is having enough display area to entice the customer and assist them in taking purchase decisions without any hassle. The focus of each store is to focus on display, and not pieces, to enhance the product value amongst the customers while ensuring a family-friendly store environment. By the end of 2015, the total area covered by the company’s store was 10.5 million square meters.
b) Technology Development
The core reason for the company’s success right from the days of its establishment was its focus on research and development. Even today, the company relies on best available resources of information technology for its warehouse storage and taking inbound deliveries from the suppliers.
c) Human Resource Management
The company endows a high level of commitment for HR practices and utilize development programs for training its employees. For instance, Next Generation Program organized by IKEA UK and Ireland is targeted towards developing leadership skills amongst its employees.
d) Procurement
Even though IKEA do not manufacture any of its products, but follows an intensive screening policy for its suppliers and ensures that every product in their stores adheres to the quality parameters of IKEA.
Considering all the aspects related to the value chain of IKEA, it is very much evident that even though the company openly disclose that it follows low-cost leadership strategy and thrives on doing business in terms of volume, however, still, each of the business processes in its value chain is contributing in either enhancing its competitive advantage. For instance, even though the company do not manufacture any of its products, however, it still enjoys an influential bargaining power with the suppliers, which are spread around the world. At the same time, despite of its multi-national presence, the company is ensuring unique parameter around its stores and maintains a high level of commitment for its employees by putting them through training programs on timely intervals.
This and all the other steps in the process chain,have allowed the company to focus on its vision of “To create a better everyday life for the many people’’. No wonder the company has actually revolutionalized the furniture retail business.
Acquisition of Cadbury by Kraft Foods
The year 2010 marked one of the most iconic acquisition in the food industry with the American food manufacturer, Kraft Foods Inc. acquiring UK based Cadbury for $19 billion. By the time Cadbury received a takeover bid from Kraft Foods, it was the second largest food conglomerate in the world with seven brands in its portfolio and each generating $1 billion. Ironically, Cadbury was never for sale and it frequently rejected the hostile takeover bids offered by Kraft. For instance, the first offer of 745 pence per share was declined by the company’s chairman, Sir Roger Carr, who himself was atakeover defense expert. However, apart from the valuation part, Cadbury resisted the takeoveor because of other reasons. First, tt did not wanted to be absorbed into Kraft’s low growth conglomerate business model as this was totally against the company’s strategy. Secondly, the company was also under the federal pressure that even if it wanted to succumb, it should prefer any other confectionery company such as Nestle or Hershey. However, things changed when Kraft disclosed their plan to Cadbury’s management to split in two businesses as it wanted to eliminate its conglomerate nature and focus on its core business and thus create more value for the shareholders. Post this revelation and agreement over Kraft’s investment in UK, Cabdury finally agreed to takeover by Kraft.
Kraft had profoundly cited that the reason for acquiring Cadbury is to expand its presence in emerging markets as owing to stagnant business growth in the Americas, the company now wanted to expand to overseas market while it expects to generate synergies and operational efficiency from the acquisition. According to a private research, the transaction will create 25% synergy for Kraft and will result in operational efficiency in manufacturing and supply chain for a total amount of $675 million. On the other hand, the acquisition of Cadbury will allow Kraft foods to make its imprints in the European Market and other emerging markets such as India,China,Brazil and Russia, where Cadbury was already having strong brand equity compared to Kraft Foods. Overall, for Krafts it was the synergy in the form of operational efficiency, portfolio transformation and highly attractive returns that motivated them to takeover Cadbury.
On the other hand, for Cadbury, it was the possible increase in its shareholder value, attractive premium over the market price and benefits of supply chain of a large food company like Kraft, were the source of benefit because of which they agreed for acquisition.
On January 19th, 2010, Cadbury management accepted the takeover bid that was 5 percent above the company’s previous day closing price of 807.50 pence. Krafts Foods paid each shareholder with 500 pence in cash and offered 0.1874 new shares of Kraft for every one share they owned of Cadbury. Additionally,Cadbury also paid a special dividend of 10 pence per share to its shareholders post the acquisition approval.
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