Global Business Case Study

HSC topic 1: Business Management and Change

The IKEA Group is one of the world's largest home furnishings companies. It operates 165 stores in Europe, North America and Asia and sources products from approximately 1,600 suppliers in 55 countries. IKEA has a strong company culture based on IKEA's fundamental values of creating a better everyday life for as many as possible. Therefore, it is a natural part of IKEA's business to ensure that all products are produced considering strong environmental and social standards.

the nature of management• management rolesManagement at Ikea would still be required to fulfill all three management roles as day to day and strategic decisions are required to be made.• skills of management

Charismatic, down-to-earth, and a serious tightwad, Kamprad also has an amazing story -- dyslexic farm boy becomes retail genius -- that most of Ikea's 90,000 employees seem to know by heart. That's not surprising, considering that Kamprad's saga and the subsequent rise of the Ikea empire are enshrined in a small museum in the basement of Ikea's offices in Almhult, the site of the first store.

• responsibility to stakeholders; reconciling conflicts of interest

IKEA's vision is to create a better everyday life for the many people. Their business idea is to offer a wide range of well-designed, functional, home furnishing products at prices so low that as many people as possible can afford them. This is the idea at the heart of everything IKEA does, from product development and purchases to how they sell their products in IKEA stores globally. They rely on customers to share the production costs through the unique retail concept, whereby customers supply their time to collect and assemble flat packed furniture, which reduces IKEA’s storage and distribution costs. This is an example of the shareholder and the stakeholder concept working together.

understanding business organisations with reference to management theories• behavioural

“At IKEA, we don't just want to fill vacant jobs, we want to partner with people. . Co-workers are not so restricted at IKEA; we listen and support each individual to identify his or her needs, ambitions and capabilities.” This quote tends to show the point of view that IKEA have towards its employees, they are part of the team and valued. This approach does lend itself to a behavioural point of view.

managing change• nature and sources of change in business

– external influences —Sales of home furnishings and flat pack furniture are closely correlated with the buoyancy of the housing market. A strong market for first time buyers and considerable movement up the housing ladder amongst families will result in more sales at IKEA. Conversely, a slowdown in the housing market will probably mean less customer activity at IKEA. .

• Home ownership – the culture of home ownership varies by country. In the UK, there is a much greater urgency for people to own their own home than there is in France or

Germany. The success of the IKEA formula will depend on home ownership and DIY culture.

• Home shopping – The growth of home shopping could lead to increased sales for IKEA. In 1997 they launched IKEA online and their business model lends itself well to direct delivery (albeit that they might have to charge the customer for this function given that delivery is ‘free’ in the traditional physical model. Ikea now has its own online community

• “An ageing population with maturing tastes” – the IKEA formula is targeted at “young people of all ages”. With an ageing population who may prefer more traditional furniture to the flat pack formula, IKEA may come under pressure in some county • Global warming – there is an increasing concern about saving the planet, carbon offset schemes and pollution. This concern is now felt across all age groups from young to old, who are all in IKEA’s target market. IKEA’s positive approach towards the environment should be a positive for IKEA.

• Political considerations - In most countries of the developed industrial world and free trading markets, the IKEA concept can succeed. However, it would be unreasonable to expect that this can also be the case if this concept was attempted in the countries with extreme fluctuations in currency exchange rates, hyper-inflation or with rigid importing quotas and restrictions.

– internal influences

The company is part-way through a five year IT project to improve business processes, addressing everything from managing how much stock it holds and how accurate its packing and shipping processes are to how many of its orders ship on time and arrive undamaged.

Ikea Components is a huge part of Ikea. It supplies 600 Ikea stores, has 200 component suppliers, 800 staff and has a turnover of $800 million a year.

– structural responses to change Ikea has not yet explored joint venture and strategic alliances strategies. Furthermore, strategic networking links only exists between suppliers and retail outlets, with the headquarters as a centralized mobilizing agent. The current centralized system suppresses creativity and freedom on the individual store level. A joint venture approach could replace Ikea's franchising concept and increase cultural sensitivity and operational controls through the establishment of strategic networks. Such alliances could also increase market coverage, without Ikea loosing its focused strategic intent on one particular market segment.

• reasons for resistance to change– financial costs — purchasing new equipment, redundancy payouts,

retraining, reorganising plant layout– inertia of managers, owners– cultural incompatibility in mergers/takeovers– staffing — de-skilling, acquiring new skills, loss of career

prospects/promotional opportunities

These reasons for resistance to change are relevant to IKEA. In particular cultural incompatibility – IKEA is a Swedish company and its desire is to maintain the integrity of the Swedish message. When it is established in new countries the main features of IKEA are maintained, a quick look at the menu at Homebush IKEA complete with Swedish meatballs, Swedish Open Sandwiches is a prime example.

• managing change effectivelyThe majority of change in IKEA comes as a response to external sources. Impacts from influences such as the economy, consumer tastes, environmental issues drive IKEA’s decision making.

change and social responsibility• ecological sustainability

Introduced by Ikea Denmark for use by their customers. They noticed from a survey that 20 percent of its customers arrived by bike so an Ikea store in Copenhagen has just introduced this trailer shown in the image.

HSC topic 2: Financial Planning and Management

the role of financial planning• strategic role of financial management• objectives of financial management — liquidity, profitability, efficiency,

growth, return on capital

• the planning cycle — addressing present financial position, determining financial elements of the business plan, developing budgets, cash flows, financial reports, interpretation, maintaining record systems, planning financial controls, minimising financial risks and losses

financial markets relevant to business financial needs• major participants in financial markets including banks, financial and

insurance companies, merchant banks, superannuation/mutual funds, companies, government

• role of the Australian Stock Exchange as a primary market• overseas and domestic market influences and trends in financial markets

and their implications for business financial needs

management of funds• sources of funds

– internal — owners’ equity, retained profits – external — short-term borrowing, (overdraft, bank bills), long-term

borrowing (mortgage, debentures) leasing, factoring, venture capital, grants

• financial considerations — matching the terms and source of finance to business purpose and structure

• comparison of debt and equity financing, including costs and benefits, risks, gearing/leverage

using financial information• the accounting framework

– financial statements — revenue statement, balance sheet– the accounting equation and relationships

• types of financial ratios– liquidity — current ratio– solvency — gearing debt to equity– profitability — gross profit ratio, net profit ratio, return on owners’

equity– efficiency — expense ratio, accounts receivable turnover ratio

• comparative ratio analysis– over time, with similar businesses, against common standards

• limitations of financial reports– historical costs, value of intangibles

effective working capital (liquidity) management• the working capital ratio • control of current assets — cash, receivables, inventories• control of current liabilities — payables, loans, overdrafts• strategies for managing working capital — leasing, factoring, sale and

lease back

effective financial planning

• effective cash flow management– cash flow statements– management strategies — distribution of payments, discounts for

early payments• effective profitability management

– cost control — fixed and variable, cost centres, expense minimisation– revenue controls — sales objectives, sales mix, pricing policy

There will be four main types of budget used: • Group budget – showing the future surplus, revenues and costs of the whole organisation (also known as the Master Budget). For IKEA, this will ne held by Ingka Holding B.V (operations) and Inter IKEA Systems (franchising) • Sales budget – sales revenue predictions, based on volumes and prices for a specified period. This will be generated from projected furniture sales in all the IKEA stores around the world as well as sales from the website. • Operations budget – output costs and customer service targets normally based on sales budget requirements. This will include the costs of operating the stores, the distribution network, the stock control systems and the suppliers

• Cash flow budget – a forecast of cash in and out for the entire organisation on a projected. The benefits of budgeting are: • Planning – helps managers plan for the future and co-ordinates organisational actions: o e.g. IKEA’s product development budget in Sweden • Controlling – helps managers track performance against objectives and it gives a measure of success and failure (using variance analysis) from which business lessons can be learnt o e.g. measuring the sales performance of individual stores against each other • Motivating – Gives teams and organisational departments a target to achieve and responsibility for success o E.g. country manager targets for revenue

ethical and legal aspects• audited accounts, inappropriate cut off periods, misuse of funds• corporate raiders and asset stripping.

These business ethics are still relevant to IKEA there is no literature available that shows that these are areas of concern for IKEA.

HSC topic 3: Marketing

nature and role of markets and marketing• types of markets —consumer, mass, niche These three markets have relevance to the IKEA business. They predominately deal with consumer although there may be some sales to other businesses/government departments. There product is fairly universal to all and the nature of the flat pack product may also qualify it as a niche market. In particular the relationship between furniture and the café. A fairly unique combination.

• production–selling–marketing orientationIKEA’s focus is the customer and making sure their needs are met. So that the selling orientation would be IKEA’s main focus.

• the marketing concept — customer orientation, relationship marketing IKEA do use relationship marketing. IKEA enables shoppers to co-design and co-construct new concepts in living and to customize their living spaces. IKEA also have a kids club, an e-newsletter. IKEA has launched a mobile loyalty program to build a database of consumers interested in receiving discounts from the home furnishings retailer.

elements of a marketing plan• situational analysis including SWOT and product life cycle

IKEA is a mass market player. It sells 9,500 product lines across 40

countries. Its annual turnover in Euros for the last three years has been: 2005 – 14.8 billion 2006 – 17.3 billion 2007 – 19.8 billion

• establishing market objectivesIKEA’s main aims are to sell to as many as possible. There is no formal published objectives offered by IKEA.

• identifying target marketIKEA offers a wide range of well-designed, functional home

furnishing products at prices so low that as many people as possible can afford them.

IKEA has a strong belief in the importance of children and lots of their products are designed with this in mind.

• developing marketing strategiesIKEA use a wide variety of promotional techniques to market new stores especially. But marketing tends to occur more heavily when the new catalogue is released

market research process• determining information needs, data collection (primary and secondary),

data analysis and interpretationPrimarily done by IKEA group although individual stores would use sales reports in order to gather data about the types of customers, popular lines etc that are particular to their store.

customer and buyer behaviour• types of customers — people, households, firms, educational

institutions, government, clubs and societies, religious organizationsThe bold customers would be the most dominant purchasers of IKEA products and would account for the largest percentage of their sales.

• the buying process — buyers and usersThe buying process would not be different for IKEA customers but the free yearly catalogue gives purchasers time to plan a trip to IKEA as the IKEA stores are not usually located conveniently due to the large floor space required to house their product. IKEA stores

are usually located outside the inner metropolitan area for this reason.

• factors influencing customer choice — psychological, sociocultural, economic, government

Psychological factors would play a part in consumer decision making at IKEA There is a perception that IKEA products are fashionable, cheap and a little fun. IKEA customers do more than purchase Ikea products, they identify with the culture and authenticity that IKEA has attached to its products. While IKEA is known for bringing low-cost products to consumers, its mission statement focuses on improving customers' lives by bringing them good quality at good value. This ties in well with sociocultural aspect too in that the cost saving, hands on experience of IKEA attracts certain groups of people to their product.

developing marketing strategies • market segmentation and product/service differentiationDemographic segmentation • Global middle class customers who share buying habits • Low and middle income families or young people

• product and serviceThe products are displayed in a spartan, albeit attractive, manner, and a sense of economy permeates the store. The products themselves are streamlined, uncomplicated and tailored so that the strong point is function over fashion

– PositioningIts unique selling point is its flat pack formula which it has applied to furniture giving it a mass market appeal with functionality and quality at a very low price.

What does this tell you about how IKEA choose to position themselves in the consumer market?

– BrandingIKEA is one of the world’s best known brand names. The IKEA logo is an acronym comprising the initials of the founder's name (Ingvar Kamprad), the farm where he grew up (Elmtaryd), and his home village (Agunnaryd, in Småland, South Sweden). It is displayed prominently in Blue and Yellow colours at the stores and on all advertising.

The brand image stands for affordable, contemporary design and it is the flat pack product range that gives IKEA its identity. In Scandinavia, the range is regarded as being typically IKEA. Outside Scandinavia, IKEA is regarded as being typically ‘Swedish’.

– Packaging

The Marketing Mix at IKEAThe marketing mix comprises the 4P’s: Product – flat pack furniture, home furnishing, restaurant meatballs, flat pack houses Place – IKEA stores and their distribution network Price – lowest prices on all items Promotion – TV advertisements, free catalogue, website

All of the 4 Ps are important: Product matters because it is the reason that customers go to IKEA in the first place. IKEA has cornered the market in flat pack furniture and the unique design attracts customers and meets their needs. Place matters because it is how customers access the product. The IKEA experience is more than just products, it is a retail concept laid out in such a way that families, singles, couples etc can enjoy shopping for

furniture. A day at IKEA has been described as more of an ‘outing’ than a shopping trip. Price matters because it is at the heart of the IKEA concept. Flat pack furniture cannot compete on price with upmarket, fully assembled pieces, so it is essential that IKEA continues to keep its prices below the competition. Promotion matters because it helps to drive customers into the stores in order to buy furniture. Without promotion, fewer customers would shop at IKEA.

• price including pricing methods — cost, market and competition-basedLow price is a prerequisite for the IKEA Concept to realise the IKEA vision. As the IKEA Concept aims to serve "the many people", the IKEA product range needs extremely low price levels. IKEA aims to reduce the average price of its products by 2-3% per annum.

– pricing strategies/tactics IKEA tends to adopt more of a penetration pricing strategy as it aims to be a low cost provider.

IKEA operates with Cost Based pricing. Products are designed with a target cost in mind and a profit margin is then added to that target cost. This approach is combined in the market place with a Price Penetration strategy - low prices, low margins (just above production costs) designed to generate market share quickly. This strategy works well

• For mass market products • When there are economies of scale • When prices are elastic (price sensitive) • During Growth and Mature stages of the Product Life Cycle

However, the strategy carries some risks: • low margins can become losses very quickly if market share is not achieved • it can lead to price wars with competitors which reduces the profits of everyone in the product market • it may become difficult to raise prices and the brand image in the future if customers associate the product with being low priced.

– price and quality interactionBest possible quality at the lowest possible price. The self assembly of IKEA products enables them to keep prices low and try to maximize the quality of the materials

• promotionIKEA has many promotional techniques. Three important ones to consider are: Catalogue This is printed in 24 languages and 160 million copies are printed and distributed free of charge. It has been a vital part of IKEA retailing since the first edition was published in Sweden in 1951. It is a valuable source of product information throughout the year and also contains details on how to get to the nearest IKEA store and its opening hours.

However, 160 million free copies represents a significant annual cost to IKEA (design, printing, distribution). Some organisations are showcasing their wares free of charge on their websites.

TV Advertising IKEA uses TV advertising to increase awareness of its brand. The current TV advertisement emphasises the difference between a ‘House’ and a ‘Home’. The message is that a home is about love, not money and it is about everlasting memories, not profit.

TV advertising seems to be an appropriate promotional technique for IKEA to employ because of it global, mass market ‘reach’, although this is the most expensive form of advertising.

Direct Marketing • Vouchers – IKEA uses promotional vouchers, especially to promote the opening of new stores although these sometimes prove ‘too popular’ leading to over crowding • Loyalty card and magazine – this is an orange card marketed under the name ‘IKEA Family’ entitling the holder to a discount of up to 25% on products bought in the stores.

An IKEA decorated train carriage.

To promote the new store that just opened in NYC Brooklyn, Ikea decided to place a giant Ikea box in the middle of the city. Inside the box was a studio apartment of 20ft x 20ft decorated with IKEA products. To make it even more fun they wrote what the box includes on the side.

• place/distribution– distribution channels and reasons for intermediaries– channel choice exclusive - IKEA is only available through designated IKEA outlets– physical distribution issues including transport, warehousing, inventory

The IKEA warehouse.

ethical and legal aspects• environmentally responsible products IKEA has a strong

responsibility to promoting ecological sustainability

• other issues including creation of needs, impacts of retail developments, sugging (selling under the guise of research) Not really a direct concern for IKEA

• role of consumer laws in dealing with– deceptive and misleading advertising– price discrimination– implied conditions– warranties– resale price maintenance.

IKEA would need to ensure that it complies with the differing laws in the countries that the operate in. As there would be vast differences between each different location.

HSC topic 4: Employment Relations

the nature of employment relations• stakeholders in the employment relations process — employers,

employees, employer associations, unions, government organisations• managing the employment relations function

– line management and specialist

key influences on employment relations• social influences — changing work patterns, population shifts• legal influences — overview of major employment legislation• new organisational behavioural influences — flat management and team

structures• economic influences — economic cycle, globalisation

effective employment relations• communications systems — grievance procedures, worker participation,

team briefings • rewards — financial, non-financial IKEA offers family-friendly initiatives and diverse workplace benefits including: • full medical/dental insurance to co-workers who work 20 hours or more per week with eligibility for domestic partners and children • paid maternity/paternity leave and paid time off for child adoption• a discount on IKEA purchases /tuition assistance.

• training and development — induction• flexible working conditions — family-friendly programs see above

• measures of effectiveness — levels of staff turnover, absenteeism, disputation, quality, benchmarking

legal framework of employment• the employment contract — common law (rights and obligations of

employers and employees), statutes, awards, agreements• types of employment contract — casual/part-time/flexible, permanent,

casual

ethical and legal aspects• issues in the workplace

– working conditions– Occupational Health and Safety (OH&S)– workers’ compensation — state and/or federal agencies and common

law redress– anti-discrimination– Equal Employment Opportunities (EEO)– unfair dismissal.

Again these are relevant to each particular type of market that IKEA operates in. Rules and legislation differ from place to place and IKEA needs to ensure that they comply.

HSC topic 5: Global Business

globalisation• nature and trends — growth of the global economy and changes in

markets (financial/capital, labour, consumer)• trends in global trade since World War II• drivers of globalisation

– role of transnational corporations– global consumers– impact of technology– role of government– deregulation of financial markets

• interaction between global business and Australian domestic business

All the trends that are listed above have enabled IKEA to develop n a strong global company. The changes across time have enabled IKEA to grow, expand and take advantage of regulatory changes.

global business strategy• methods of international expansion Ikea has applied a conservative policy to internationalization. As a general rule, the firm never enters a new potential market by opening a retail outlet. Instead, a supplier link with the host nation is established (Chandler, 1993: 72). This is a strategic risk reducing approach in which local suppliers can provide valuable input on political and legal, cultural, financial and other issues which provides for opportunities and/or threats to the Ikea Concept. Ikea has concentrated its international expansion in Europe and in North America mainly through company-owned subsidiaries. Franchising, on the other hand, has been extensively utilized in expanding to other areas of the worldWhile most IKEA stores operate under the direct purview of Ingka Holding B.V. and the Ingka Foundation, the IKEA trademark and concept is owned by an entirely separate Dutch company, Inter IKEA Systems. Every IKEA store, including those run by Ingka Holding, pays a 3% franchising fee to Inter IKEA Systems. New franchises are available only for countries where there is no current IKEA store. To become an IKEA franchisee, an organisation needs:

• considerable initial and ongoing financial investment • ability to secure a strong market position and market penetration in a given territory • thorough retail experience and local market knowledge.

• reasons for expansion– increase sales/find new markets– acquire resources and have access to technology

A country that has co-workers who are far cheaper, will normally be used to produce the less sophisticated end of the product, with lower levels of value added. IKEA’s two biggest supply bases are China and Poland, both of which have low cost labour and materials.

– diversificationThe massive increase in global trade is reducing this effect but it is still powerful enough to mean that IKEA can divert its products to whichever country happens to be doing well at that moment.

– minimise competitive risk– economies of scale– cushioning economic cycle– regulatory differences

IKEA can also make use of differing legislation in different countries. Some countries have less constraining laws than the UK. For example China has been criticized for its poor attitude towards protecting the environment and for human rights issues/labour laws, yet it is IKEA’s biggest manufacturing territory

– tax minimisation

specific influences on global business• financial

– currency fluctuations– interest rates– overseas borrowing

• political– tensions between protectionism and free trade– international organisations and treaties (World Trade Organisation)– trade agreements– regionalism– war and civil unrest

• legal– contracts– dispute resolution– intellectual property

• social/cultural– languages– tastes– religion– varying business practices and ethics

managing global business• financial

– methods of payment– credit risks– hedging– derivatives– insurance– obtaining finance

• marketing– research of market– global branding

– standardisation and differentiationWardrobes have deeper drawers in America than in Italy because US customers prefer to store their clothes folded while Italians prefer to hang theirs up.• operations

– sourcing (vertical integration, make or buy)– global web (components produced in different countries)–

• employment relationsIKEA has 118,000 co-workers of whom 90,000 work in the 273 stores around the globe. Some of the challenges that they must overcome include:

• Multiple languages – the IKEA catalogue is translated into 24 different languages so the Head Office needs to be capable of managing a multi-lingual workforce dealing with many different customer groups • Different time-zones – IKEA operates all around the world, such that co-workers will never all be working at the same time. Therefore electronic communication methods will be useful in addition to more traditional face to face methods • Vertical forms of communication will occur from Head Office out to the regions • Horizontal communication will occur, for example, between co-workers in IKEA stores

– organisational structure– staffing– shortage of skilled labour– labour law variations– minimum standards of labour– ethnocentric/polycentric/geocentric staffing system

management responsibility in a global environment• ethical practice — tax havens and transfer pricingThe Berne Declaration, a non-profit organization in Switzerland that promotes corporate responsibility, has formally criticized IKEA for its tax avoidance strategies. In 2007, the Berne Declaration nominated IKEA for one of its Public Eye “awards,” which highlight corporate irresponsibility and are announced during the World Economic Forum in Davos, Switzerland.

– minimum standards of labour– dumping illegal products– ecological sustainability.

IKEA plans to invest in clean-technology within the next five years introducing green goods such as solar panels.

Ikea started supporting sustainability selling energy saving bulbs, eliminating checkout plastic bags, creating pre-fab homes etc and now they want to commercialize new and affordable green technologies.