Strategic Management: Case Study of the IKEA Value Chain
A company creates value when it delivers valuable services or goods that meet the customers’ expectation. To this end, the company inputs pass through a chain of activities where value is added on each stage. This chain is the company’s value chain and is based on; research & development, product design, production, sales & marketing, distribution, and customer service. Started in the 1940s, IKEA has risen from a Swedish home furnishing company to a global furniture company with operations in over 36 countries. IKEA’s vision is to make everyday life better for many people by offering quality and affordable furniture. The tread in the furniture industry has been toward more sustainable and environmentally friendly manufacturing processes coupled with quality products at a reasonable price. The success of IKEA can be attributed to its robust value chain that is aimed at controlling costs and delivering high quality furniture to their clients. The unique factor in the IKEA value chain is the logic that customers can participate in value addition to save costs. This approach has redistributed the traditional value chain to an effective hybrid system with IKEA designing furniture in Sweden, global manufactures producing the furniture in the developing countries and the customers transporting IKEA products from the stores and assembling them at home. IKEA is therefore able to offer quality furniture at reasonable prices increasing its turnover.
A value chain is made up of the primary, secondary and tertiary sectors. For IKEA, the primary sector extracts raw timber and other raw materials for use in furniture. The secondary sector undertakes manufacturing of the designed furniture. This is mainly done in the developing countries such as China by contracted suppliers to reduce production costs. IKEA has the IWAY code of conduct for its supplies in the primary and secondary sector to follow to ensure that goods are produced at a low price but not at any price. The tertiary sector is handled directly by IKEA and involves distribution and retailing. IKEA uses value chain analysis to identify the salient company activities that when interlinked help meet the strategic needs of the customers and save costs. Reducing environmental impact is a threat to IKEA’s business model because sustainable forest management, production of quality furniture, and efficient distribution has a negative cost implication. To save on costs IKEA has become a tread setter in the industry. Shipping furniture as flat beds for customers to assemble them at home saves on shipping costs and packaging materials while contracted manufactures in developing countries reduce production costs.
The strategic capabilities in IKEA’s value chain that make it key player in the worlds’ home furniture industry include;
- Excellent research and development
IKEA’s research and development division produces furniture designs that use minimal resources but offer value to the customers. For example, the OGLA dining chair use hollow legs while a honey-comb filling material is used in the LACK series in place of solid wood for table tops.
- Human resource
Human resource is drawn from diverse fields of specialization ensuring that the company has a continuous pool of new ideas and products for future success. Competitive salaries and a robust orientation program into the IKEA way of doing business help to attract and retain new talent.
- Manufacturing and Logistics
Although most product design occurs in Sweden, IKEA contracts manufactures globally to produce the furniture. Most manufactures are located in the developing countries such as China which have lower costs of production. This coupled with efficient logistics ensures that the goods are transported to all IKEA stores worldwide at an almost uniform price. IKEA controls distribution costs and environmental impact by efficient packaging and avoiding use of old trucks to distribute its products.
- Reduced environmental impact
Environmental impact forms an important aspect of IKEA’s operations. Recycling and reduced emissions from the value chain have been identified as potential areas of saving costs. IKEA buildings are mainly powered by renewable energy and workers are encouraged to use bicycles to work. Harmful chemicals are avoided in the IKEA value chain form growing the raw materials such as forests ad cotton to manufacturing of the products.
Conclusion
Value chain analysis is an important management tool used in strategic planning. Companies identify steps followed by their goods or services before they reach the customers. For a global company like IKEA value chain analysis is important in managing global logistics from out-sourced suppliers and manufactures to customers who assemble their furniture at home. IKEA has set a robust code of conduct for its suppliers which cover energy and emission reduction, sustainable raw material sources, and workers welfare. A major challenge that IKEA faces in the future is sustaining its pioneering spirit in the home furniture industry and continuous delivery of quality furniture at a reasonable cost. Value chain analysis will continue being an important strategic management tool for IKEA to meet the challenges and continue its growth.
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