Critical Marketing: Case of IKEA - Term Paper Example

Critical Marketing: Case Study of IKEA Task 1: Global value chain of IKEA IKEA Systems BV, the Swedish home furnishing company headquartered in Almhult, was founded in 1943 as a family owned company by Ingvar Kamprad has emerged as the largest retailer of furniture and home-ware in the world. From 1 million Euros in 1954, the company’s turnover has grown to 17,658 million Euros in the year ending August 2006. The company has over 200 stores in 30 countries, ranging from Europe, North America, Asia and the Middle East. Nearly 9,500 products of the entire range of home-ware – from furniture to bed and table furnishing – are on display in the large retail formats. As a result, the number of visitors to IKEA stores has increased from 52,000 in 1954 to over 504 million in 2006 and the group has a total of 84,000 employees (IKEA web site). The IKEA concept is based on providing home furnishing at affordable prices that make better living a possibility for a wide section of people. Since the beginning, the company’s mission has been to offer low prices by keeping its costs minimum. When the company was first formed, it sold furniture through mail-order on free catalogues. Although Kamprad opened the first IKEA store in Almlut, which remains the largest store, and the company focuses on store-selling now, it continues to distribute catalogues free of charge at the stores and through mail. The catalogue is printed in 20 languages and 160 million copies distributed in 30 countries. The prices mentioned in the catalogue are valid for one month. In 1973, IKEA opened its first store outside of Sweden, in Switzerland, marking its global expansion spree. Besides, the large blue and yellow stores make the shopping experience a pleasant and collaborative venture for the customers who select, collect, transport and assemble products themselves. Customers are assisted by employees as well as the room designs on display. Customers are even provided with tape measures, shopping lists, pencils and writing pads to make notes on the products they choose. The stores are uniquely designed with one-way directions through the product range, with detailed information on price, quality and materials used, with amenities like the restaurant, ATM and even childcare. On the way out of the store, customers can pick up a Swedish meatball from the IKEA food mart. To make transport of the purchased products convenient, IKEA stores also offer car racks at a cost and mini-trucks or vans for hire (Times Square). As IKEA says, its motto is “You do your part. We do out part. Together we save money” (IKEA web site). IKEA Systems has expanded through franchises. However, IKEA chooses its franchisees carefully, selecting only those who closely fit its mission and vision. The company targets to sell quality furniture at affordable prices, keeping in mind its corporate social responsibility. The typical IKEA customer is a young, middle income family that is ready to put in a bit of effort to put together the furniture. The IKEA concept is slightly different from the Do-It-Yourself concept of the British retailer B&Q or Home Depot in that it offers furniture pieces at its stores and the customer has to simply assemble them according to the instructions. The IKEA product range focuses on customer needs that are supported by affordability rather than desires. Hence, rather than catering to local tastes in the various markets, IKEA has concentrated on selling the same product range, with minor alterations, in the different markets. Task 2: Markets, consumers and brands IKEA’s corporate identity is focused on the affordability of its prices and the collaborative nature of selling by incorporating the customer into the selection, transport and assembly of furniture products. IKEA has concentrated its corporate branding exercise towards a market-driving culture that enables values shared with its customers and suppliers to facilitate innovation and change. The corporate brand value of IKEA has been the communication engine for managerial decisions and the organization’s behavior pattern. IKEA was founded in southern Sweden where people are known to be thrifty, innovative and hard-working. The corporate identity, based on low prices enabled by low costs that do not hamper the quality of IKEA’s products, is supported by the branding process that instills “identification with the company and establishing commitment and loyalty” (Saren, 2006, p 211). IKEA was one of the three retailers among the top 40 global brands listed by Business Week in 2004 (Tarnovskaya et al, 2005). Though the company has evolved from a mail-order retailer to a multinational retailer with over 200 stores, its brand vision remains the same “creating a better everyday life for the many people”. IKEA has developed a unique corporate culture, “IKEA Way”, that captures the organization’s history, product range, management style, distribution system and human resource management. The basic idea of cost consciousness, that enables the company to sell at prices much lower than the competition, influences its sourcing strategy, product development and customer relationship. For example, IKEA sources products from the cheapest sources around the world - China and Sweden topping the list of suppliers, followed by East Europe and lastly the US. Product designs, self-service and flat packs are also centered on the concept of cost consciousness. The concept “IKEA does half and the customers do a half” guides the customer relationship process of IKEA while simplicity in its planning process and supplier relationships enable it to maintain costs. The crucial brand identity of IKEA is centered around the product, developed in Sweden, and the people. The product range is essentially Scandinavian, with minor changes in fabric and colors to suit local conditions. The core value of ‘simplicity’ drives IKEA product range. Hence, even in a market like Russia, where traditionally home furniture are heavy, expensive, of dark colors and lacquered (Tarnovskaya et al, 2005), IKEA continued to sell its range of minimalist furniture targeting the young, mobile customers. The IKEA design, tailor-made for living in small spaces, is focused towards a global customer rather than regional ones, that has been a major driving force for the organization’s multinational expansion at ease. The people in the IKEA organization, the other cornerstone for its success, are geared towards the corporate identity, which is essentially Scandinavian. Hence, in all new markets, the employees are taken through an intensive training process to acclimatize them with the Swedish work culture, supported by photographs of Stockholm landscapes, and restaurants that offer Swedish cuisine. Each employee, who “learns by doing”, is ingrained in the Swedish work culture so that they can personify the organization’s mission and vision and communicate to the customers (Tarnovskaya, et al, 2005). The human resource focus if IKEA that supports the brand values of the organization begins with the recruitment process and continues with training, competence profiling and career planning stages. Symbolic gestures at the managerial level, like flying only economy class and staying at economy hotels, employing young people and sponsoring university programs, have supported the core value of ‘simplicity’ (Times Square). IKEA’ values of simplicity, togetherness, and “creating a better everyday life for many peoples” encompasses not only its customers but also the large number of suppliers that it sources its products from. Social marketing that bridges the gap between corporate interests and social interests, typically addresses the hidden ambiguities of the organization’s business process. Through sustainable marketing techniques, that addresses the environment process in addition to the anthropocentric individualistic consumers, is the key to success of the social marketing. In order to improve the “everyday life” of peoples in the supplier countries, IKEA has adopted social marketing principles that have specific policies on wood sourcing, child labor, worker safety, workplace standards, social security, maximum work hours, minimum wages, etc. As Konzelmann et al (2005) says, “According to Kampard, his goal is to ‘create a better everyday life for the majority of people’… We know in the future we make a valuable contribution to the democratization process at home and abroad” (quoted in inmotionmagazine.com). Therefore, IKEA develops long term relationships with suppliers, providing them technical assistance that can make them more productive and cost-effective. The IKEA Way on Purchasing Home Furnishing Products in 1998 noted that “to ensure that high social and environmental standards would be maintained throughout the company as well as within those entities with which IKEA has business relations” (quoted in inmotionmagazine, 2005). This forms the basic code of conduct for IKEA’s sourcing policy that supports the minimum standards of labor, employment and environment. Task 3: Culture and ethics IKEA entered the Chinese market in 1998, with a store in Shanghai. A larger 33,000 sq meter store replaced the Shanghai store in 2003, making it the second-largest IKEA store in Asia, after the one in Kuala Lumpur. This store stocks 7,000 products and has a 500 seater restaurant as well as a 170 sq meter children’s playground. The stores in mainland China operate as joint ventures with the IKEA group. The first Beijing store was opened in 1999. By 2010, IKEA expects to have 10 stores in China, with the largest in Beijing that will be only smaller than the one in Stockholm (Miller, 2004; Fong, 2006). IKEA had to choose a slightly different marketing strategy in China. Although catering to the young middle-class professionals, as in other countries, IKEA prices were considered high in Chinese standards, given that Chinese per capita income is lower than that in western nations and the Chinese are usually more thrifty than westerners, although price competitiveness is the focus of IKEA. Hence, the company had to slash prices by 10 percent in 2003, leading to sale increase by 35 percent. Some items sold in IKEA stores in China are nearly 70 percent cheaper than sold elsewhere (Fong, 2006). However, even now IKEA products are considered mid-range in China since there is still intense competition from local furniture sellers who sell at much lower costs, often copying IKEA designs. IKEA has now repositioned its marketing strategy so that besides young people in late 20s and 30s, even those closer to 45 years are buying IKEA products (Miller, 2004). Although the Chinese traditionally use heavy, durable furniture, more and more customers are shifting to IKEA products, lured by cheaper prices and internationalization of tastes that come with globalization and increased mobility. IKEA is increasingly sourcing more goods from Chinese suppliers for sales from Chinese stores. In 2003, 25 percent of IKEA’s stores in China were sourced from Chinese suppliers. In 2004, 31 percent goods were sourced from Asia, mainly from Vietnam. IKEA currently buys from 362 Chinese suppliers and employs hundreds of people directly and indirectly through the suppliers (Miller, 2004). By 2006, nearly half of the products are supplied by Chinese vendors (Fong, 2006). IKEA stores in China select the product range according to the national cultural tastes. Typically, Chinese spent most on the living room as this is the most visible part of the house. Also, most Chinese living rooms have a dining table. Hence, IKEA stores concentrate most on living room furniture and dining tables. On the other hand, Chinese kitchens are small since the least time is spent here and bedrooms are considered the most private part of the house. However, with globalization and increasing mobility of the Chinese people, people are also doing up the kitchens and bedrooms. Initially, IKEA stores sold smaller sized beds, as sold in the Hong Kong stores, but soon realized that Chinese prefer larger beds. The sizes of the beds sold from Chinese stores were increased therafter. This has led to an increase in sales of bedroom and kitchen solutions. Most Chinese houses have balconies so IKEA has introduced a balcony range in its product list (Miller, 2004). IKEA had to modify the Do-it-yourself concept as well. Typically, IKEA stores are opened in the outskirts of the cities and customers are required to transport the products themselves, although the company assists them by selling car racks or giving on rent mini trucks. However, in China, not all customers who came to the stores had cars. Therefore, the IKEA stores in China offers home delivery, taxi and assembly services for a fee. Also, culturally the Chinese are different from western people who enjoy assembling their furniture pieces. In China, labor is cheap and customers typically prefer completed furniture. Besides, IKEA educates the Chinese customers on modern home décor concepts and how to make “small changes, a refreshing new life” (as the Chinese advertisement says). While the Chinese customers usually undertake complete renovation or leave the house as it was, IKEA’s marketing strategy introduces customers in small changes in their houses that could alter their lives. IKEA’s mission of improving “everyday life” better for many people is evident in the adaptation of the marketing strategy in China which follows its professed ethical standards. China is culturally, economically and socially different from western nations, particularly the Scandinavians. Per capita income is lower, savings rate higher, people generally purchase furniture for the long term and are price conscious. However, the Chinese culture is also witnessing a change, with globalization and increased mobility of the Chinese young people. Tastes are gradually merging to a homogenous trend. IKEA has adapted its product range accordingly, following the change rather than driving it. The prices of its products are lower than elsewhere, the selling process focuses less on customer collaboration and more on providing add-on services and the product range follows the everyday life patterns of the Chinese. Thus, the marketing strategy is essentially ethical. Task 4: IKEA’s Economic presence in China China is the world’s fastest growing economy and purchasing power of the Chinese people is growing fast. The growing consuming class in China has contributed to the threefold growth in IKEA sales in China over 2000 to 2005, touching 1.2 billion yuan in 2005 (Yunyun, 2006). Although IKEA has aggressive plans for the future, its spree of opening stores in China in the past has been slower than B&Q, the other multinational Do-it-yourself furniture company operating in China. IKEA’s competition in China is made up of the British B&Q and domestic furniture retailers like QM Furniture and Orient Homes as well as the numerous local furniture makers who often keep IKEA catalogs in their stores and offer to copy the designs at half the prices. While IKEA plans to have 10 stores in China by 2009, B&Q plans 80. Despite the tough competition, however, IKEA plans to open a 43,000 square meter store in Beijing, smaller to only the Stockholm IKEA store (Yunyun, 2006). In the initial years, IKEA products were considered expensive in China although the same products were positioned as cheap in Europe and North America. As a result, IKEA had to slash prices by 10 percent as well as modify the services, offering assembly and transport services for fee. However, with the fast growth of the economy and the entry of more global retailers, the Chinese customers are also demanding more luxurious furniture than the simple IKEA designs. IKEA products are now being perceived as of low quality, because of its positioning on simplicity and affordability, even by the Chinese. On the other hand, the Chinese prefer local retailers for small household products. IKEA’s global marketing activity includes being socially responsible. The IWAY code of conduct entails strict norms on various social aspects like environment, child labor, work conditions, minimum wage, etc. imposed on its suppliers. Since a large number of Chinese suppliers are related to IKEA’s China operations, its codes have impacted the supplier base as well. IKEA representatives visit supplier factories in China announced, inspect every aspect of working conditions and stipulates correction if problems are identified (ecologia). In particular, IKEA ensures that none of its suppliers use child labor. The “IKEA Way on Preventing Child Labor” is based on the UN Convention of the Rights of the Child (1989) and International Labor Organization (ILO) Minimum Age Convention No 138 (1973) by which the minimum age of labor is stipulated at 15 below which the child is expected to go to school. In some developing countries, however, the minimum age is stipulated at 14 years. IKEA also ensures that all young workers at the suppliers are treated equally (IKEA, 2007). About 10 percent of IKEA’s requirement of solid wood comes from forests in China, mostly from the Xing An and Cang Bai mountain regions of northeast China and Mongolia (WWF China). As a socially responsible organization, IKEA has entered into a joint project with World Wildlife Fund to initiate a forest certification program. IKEA has introduced its own forest tracking system to ensure certification of its wood supply. As part of the IWAY code of conduct, the company does not accept wood from intact forests. For timber products like paper, cardboard and particle board, however, IKEA does not yet have a certification program. IKEA has a very strict forest policy with respect to suppliers who have to be able to identify the country of origin of the wood, certify that the wood is not from any intact forest and if the wood is sourced from a tropical forest, it has to be certified by the Forest Stewardship Council (Ikea-group). The IKEA social responsibility code of conduct also captures environmental safeguards in working conditions regarding products and materials uses, transport fuel and paints (IKEA, 2005). IKEA’s marketing activity is based on the core principle of low costs and simplicity of products. However, low costs do not necessarily mean that social responsibility in economic activities is not met. IKEA takes particular care to uphold its social responsibility codes of conduct across all its suppliers. This is evident even in China, where the company has to sell at prices even lower than in other regions. Task 5: Global marketing activities of IKEA IKEA’s goal, as expressed in its brand identity, is to “improve everyday life for many peoples”. To do this, IKEA follows the prescription of Prahlad and Ramaswamy (2004, cited in Edverson, 2005) that “value is not centered around the experience of the consumers” and not even embedded in the products and services. Rather, value has to be co-created along with the customers. According to Edverson (2005), customers need to experience service encounters through the emotional, cognitive and behavioral processes. Shopping at a IKEA store is a memorable experience from the beginning to end for the customer, according to Edverson (2005). The first encounter with the store is its unique design and layout and the last experience is the low cost of the products, along with that of the hotdogs. To achieve its goal, IKEA incorporates the customer in the process of making his life better, through the selection, transportation and assembly of the products. The entire process involves an emotional experience, reinforced by the IKEA stores’ design, catalogues and expert help. The focus is not really on furniture products but on total home solutions that would make “everyday life better”. The service culture of IKEA is based on that of the majority of people, essentially Scandinavian. IKEA makes it a point to study the response behavior of its customers. For example, IKEA designers study the behavior of families with small children on a slushy winter and make sure that the living room solutions incorporate the appropriate carpets, storage furniture, hangers and textiles. IKEA has been able to meet it goal of keeping prices affordable by low costs of global sourcing, efficient inventory management and effective cost saving techniques like incorporating the customers into the transportation and assembling. Every aspect of the business has been redefined and the IKEA customer has taken up a role very different from the traditional buyers of furniture. IKEA makes sure that the customer understands that his role is not simply that of the receiver of value but that of its creator. Right from the time that the customer enters the store, he is offered various tools (tape measure, pencil, notepad, etc.) and services (interior design guidance, product and safety information, insurance, ATM) to make his task of selection and purchase easy. Although the customer is required to transport and assemble the products himself, he can also avail of rent service of mini-trucks or the services of handymen for a fee. These services are not just add-ons but a strategic intent of IKEA for product differentiation (Norman and Ramirez, 1993). Besides incorporating customers in the process of value creation, IKEA has focused on cost consciousness. For this, IKEA chooses its suppliers very carefully, taking care at the same time to see that the suppliers meet its norms of social responsibility. The other cornerstone of IKEA’s low costs is the efficient warehousing processes. In order to maintain prices, IKEA is stringent on its costs. As Kamprad said, "To design a desk which may cost $1,000 is easy for a furniture designer, but to design a functional and good desk which shall cost $50 can only be done by the very best. Expensive solutions to all kinds of problems are often signs of mediocrity" (quoted in Times Square). Costs are minimized through global sourcing of products (IKEA does not have any manufacturing facility of its own) and efficient inventory management, for example by packing products in flat standardized boxes that requires the least storage space. Hence, 29 percent of IKEA’s products are sourced from low-cost countries in Asia, 67 percent from Europe (of which 14 percent is from Eastern Europe) and 4 percent from the United States (inmotionmagazine, 2005). IKEA’s social responsibility code of conduct is laid out in the IKEA WAY (IWAY) document. According to this document, suppliers have to provide safe and healthy work conditions, may the minimum wages as per the laws of the countries and compensate for overtime; they cannot use child labor or bonded labor, cannot have discriminatory labor practices, prevent unions or engage in disciplinary action that amounts to mental or physical pressure; reduce waste and emission, handle chemicals and waste matter in a safe manner, recycle and reuse materials and use wood from known sources and preferably certified; suppliers are specifically barred from using wood from intact forests and chemicals that are banned by the company (inmotionmagazine). Since the introduction of the IWAY in 2000, IKEA has termination 352 contracts with suppliers on account of violation of the norms. As a result, IKEA has been able to transport the high quality of social responsibility despite the cost pressures because of the detailed stipulations. 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