Managerial Decision Making Research and Analysis
Introduction
The report aims to select any particular organization and presents the analysis of the managerial decisions of that firm that has been taken over time. For the attainment of this objective, “IKEA” a leader in retail furniture industry has been selected, and detailed analysis of the managerial decision making capabilities of the firm has been done. The paper has been distributed in multiple sections that elaborate the decision-making approaches of the company, competitive environment, economic and industry environment and company’s strategies in response to these situations. The paper presents the in-depth analysis of the strategies of the organization that the company adapted for the sake of responding diverse situations over time.
Company’s description, history, and financial position
IKEA is a multinational group of organizations that design and vend furniture that are ready to assemble. The company operates throughout the value change from ranging strategy to distribution and retailing. IKEA was founded in 1943 by Ingvar Kamprad. The founder expanded the product line and the first cataloged was launched in 1951. In 1953, the company had its first showroom. In 1958, the first store was opened in Sweden that was based on 6700 square feet. In 2010, the company had 3113 stores in up to 37 countries. Currently, the company has 328 stores in 28 countries; the firm has its operation in 49 countries (IKEA, 2016).
(IKEA Group, 2015)
The company has a strong financial position as the total revenue of the company is growing rapidly. In 2014, the total sales of the company were €31.9 billion that increased by 11.2 percent in 2015. However, the online sale crossed the € 1.0 billion. The total revenue of the business is growing as well. Increased in sales can be the result of the price increase. Therefore, net income is the better measure to determine the financial performance of the company. The company income in 2014 was 3329 that increased up to 3512 in 2015 (IKEA Group, 2015).
Sources of risks in IKEA operations changes in economic condition and its effects on financial outcomes
External environment (economic, political, social, and technological) is the major source of risk that causes operational uncertainties in any organization so in IKEA (Bonham, 2008). The macroeconomic situation considerably affects the consumer spending power and, therefore, sales and revenue of the companies. The financial crisis of 2008 immensely affected the performance of IKEA and sales of the company decreased from 2009 to 2012, from € 7517 million to € 4203 million respectively. The business has to face losses during that period; the losses are visible in the annual report of the firm. In 2011, the operating loss of the company before tax was euro 399, 000 that reached up to 492, 000 in 2012. Some other sources of risk include foreign exchange risk, interest rate risks, liquidity risks and credit risk. The company manages these risks through adopting hedging strategy (Fourlis Group, 2012).
Effects of government regulations on the company
The concern regarding the environment in the United States is high; the government has proposed legislations for the furniture companies that their furniture should be safe and proposed some chemical restrictions. This means that the company has to comply with the set regulations. These restrictions affected the company’s operations, and the firm started to search out for questionable substances. In result of these regulations, the business banned the utilization of PVC, lacquers, and formaldehyde emitting paints on all of the company’s products (IKEA Company, 2015). As the products that are sold by IKEA contain plant material and wood material, therefore, the Lacey Act amendments have a direct impact over IKEA. Up to 14.5 million cubic meters, wood is sourced by IKEA that is equivalent to 51 countries. The Lacey Act law includes any abroad law of illegal taking of plants and trees that badly affects the IKEA operations as it increases the complexity because every country has different laws (IKEA, n.d).
Input company uses in its production function and challenges for securing these inputs.
IKEA is a furniture retailer; the firm in its production function uses wood and plant material, timber, sheets, paint, varnish, and other several materials. However, the company is facing major challenges in securing its major inputs that it uses in its production function that include word and plan material and paint. The United States restrictions related chemicals and following the laws of all countries in importing wood and plant material or importing certified wood place significant challenges for the firm in securing the materials. The company is finding hard to comply with these laws, but making significant efforts. For example, if a company wants to source material from China because of gaining cost advantage, then only 2 percent of the area of forest is certified, and only 5 percent forests are certified on a global level (Iseal Alliance, 2011).
Determine if the company has introduced new products in existing markets or created new markets over time. What is the impact on its finances?
IKEA has been the leader in home furnishing and accessories, but over the time, the company expanded its operations through entering into new markets. The firm spread its roots to sports, fashion and electrical appliance market that was completely new segments for the corporation. The company entered in sports related goods retailing, fashion goods retail, and electrical appliances wholesales. The impact of these expansion activities is visible on the financial position of the company. As the company has been a leader in furniture segment, therefore, it has never been the cause of company loses. When the whole world was suffering from the economic losses, other segments such as electric equipment and retail fashion activities contributed to the loss of the company. The impact of these activities has been negative for the company in 2011 and 2012 as shown in the firm’s financial statement (Fourlis Group, 2012).
Price fluctuation and the reasons for price fluctuation
The pricing strategy of the business based on the demand of the product. The firm is committed to offer low price stylish furniture to its customers and secures the position of low cost leadership. The company save the cost in its furniture design and deliver the advantage to its customers so they can enjoy the benefit of lower prices as possible. However, due to the economic crisis, the ability to purchase even the low cost furniture decreased all over the world. In the result the company to pull the demand up and take it closer to the supply reduced its prices further that contributed immensely in sales and revenue increased in 2013 (Hurley, 2012; IKEA Group, 2015).
Demand elasticity of IKEA’s products and its effects on pricing decision
The demand curve of the company is downward sloping. IKEA is in monopolistic competition as the market is full of furniture stores and the company has to battle with many. Customers may not find an exact product as the company’s furniture has unique design and quality. However, several substitutes are available in the market; therefore, if the price will increase they will switch to rival that will affect the demand for its products negatively. Therefore, the low cost has always been the priority of the company and the organization rather increasing prices for the profitability, considers cost saving techniques in its production processes.
Profitability analysis of the company
This is the fact that despite increased in sales at the global level, the company is constantly reporting flat profits. The reason behind the flat profitability includes spending on employee bonus and loyalty programs and reduction in prices. The sales of the company are expected to grow more and will reach up to € 50 billion by the end of 2020 (BBC News, 2015). The global economic situation and industry situation has an immense impact on the cost, profitability, and operations of the firm. The improved economic situation allows the organization to gain economic of scale that contributes to cost reduction, allow spending more on technology that contributes to operational efficiency, and therefore, profitability. The furniture industry is expected to grow up to $27.01 billion by the year 2020 with expected CAGR of 4.1 percent. Therefore, the chances of profitability growth are clear for the business. However, due to increased cost of material and lack of skilled labor, reducing the cost further and making the operations more cost effective will be a challenge for the company (Allied Market Research, 2015).
Competitive environment in which the firm operates, the distribution of market power, and the strategic behavior of the firm and its competitors
The global furniture industry is expanding with furniture manufacturers and designers going online. Multiple companies offer made to order furniture services with creative design. Companies are offering both office and homeowners fresh choices with their innovative ideas. These features have created the immense competition in the furniture industry. The bargaining power of customers of the company is strong due to multiple low cost substitutes. The bargaining power of suppliers is low (Allied Market Research, 2015). In response to the competition, IKEA is constantly focusing on its cost effective operations to offer lower prices to its customers as compared to competitors. IKEA is deploying cost leadership and differentiation strategy simultaneously. However, other organizations have major focus on cost leadership strategy (Samson & Singh, 2008).
Pricing and production decision of the company based on the theory of market structure
The company operates in the monopolistic market environment because there are several furniture suppliers in the market, but all of them have little differentiation. The market structure affects the company pricing and production decision in this way that the firm to differentiate itself from rivals uses unique furniture designs (such as leg free tables, chairs, and beds). The firm’s products are designed in parts (not preassembled), and require assembling when customers take them to their home. The competition also affects the pricing decision of the company as the Corporation due to the competition always prefer to keep their prices low. Customers prefer IKEA products because of its quality, unique designs, and low cost.
Non-pricing strategies used by the firm
Other than price, there are also some other strategies that firms use for shifting their demand curve out to the right. The focus of the non-price competition is on differentiating the products from competitors based on product design, quality, promotion, and different place of sale. IKEA differentiate itself from competitors through its product designs, such as the company offers furniture to its customers in disband form, most of its furniture is flat and does not have legs. The company sets the retail store in a way that it presents the look of room and people can observe that how the furniture will look after placement at home. The company uses quality material that differentiates it from rivals and due to flat parts; it is convenient for customers to pick the furniture.
Evaluation of mistakes in making decision and recommendations
Through the financial statement of the company, it has been determined that the electric appliances and fashion market of the company are not profitable segments and from 2011 to 2014, constantly reporting losses at the individual level. Therefore, it is considered that the decision of the company to enter in these segments was a mistake. Now, it is recommended to the company that the firm either should close the operations of these segments or should design appropriate strategies to run these segments towards profitability. For example, the business can use its expertise in the distribution of electrical appliance; the store like its retail furniture store can do the presentation of these appliances that will attract the customers and encourage them to buy the products (Fourlis group of companies, 2014; Fourlis group of companies, 2012).
Conclusion
IKEA is an international group of companies that design and retail ready to assemble furniture. The company has a strong financial position that is visible from the increased revenue and net income of the firm. There are multiple sources of risk that can influence the operations of the company and effects of these are visible on the financial position of the company. The most common source of risk is an economic environment that affected the operation negatively due to 2008 crisis. Government regulation also puts some restriction that affected the organization and its operations, but the company managed it efficiently. The company for the expansion of its business entered into new markets with new products, but these initiatives proved as a mistake of the company because the company had to face losses in these segments. IKEA has been the low cost provider of furniture products; the company to cope up with the financial and economic crisis of 2008 and enhance the demand for its product reduced the prices that led the company to increased sales but lower returns to equity. The demand curve of the organization is downward sloping as fluctuation in price can significantly affect the demand for the company’s products because due to being in a monopolistic market structure, the company has multiple competitors and customers can easily find the substitute for the product. It has been expected that the furniture industry will make considerable profits, and the profitability will increase by 2020. Therefore, the chances of growth for the company is high, but it is recommended to the company that is rather opening more stores or diversifying in other segments the company should work on its core (furniture) segment as it will allow the company to gain maximum profit.
References
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