IKEA's Low Price Strategy

IKEA’s current business practices may seem to have been working for them. However, further exploration of the company’s culture and guiding principles would expose IKEA’s weaknesses. For the purposes of this analysis, four main areas will be studied: a) production; b) pricing and selling; c) quality control and d) expansion. Production Issues The frugal corporate culture espoused by the Product Development Unit along with other IKEA’s business units enables the company to sell low-priced and functional items.

However, this Cost-reduction Orientation may pose limitations to the creativity of the Product Development unit. Since cost-reduction is the top-most priority, quality of design and materials can be compromised.

Recommended Action Plan For the Product Development Unit, it may help the company to, at times, be more lenient in its frugality. Allowing the Product Development Team to design and develop products which are not bounded by cost-constraints may enable the team to come up with pricier yet unconventional products. This may be the key for IKEA to tap the segment of the market that is willing to pay more for their products’ design over functionality.

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In addition, investment in the production of high cost product line, in the long run, may help sustain the company’s operation as it continuously expands its business around the globe.

Pricing and Selling Issue The Cost-reduction Orientation prevailing in all levels of production translating to lower production cost and eventually cheaper/continuous decrease in price of products seems to be a come-on for the market since the company can offer more competitive prices.

However, considering that efficiency in production only covers the “controllable” part of the production cost; the other part is composed of items which are “uncontrollable” which includes unprecedented increase in the price of oil and other raw materials.

As production efficiency (controllable) contributes to lower production costs and eventually cheaper/continuous decrease in price of products, the uncontrollable may present equal increase in the price of products. If the increase in production cost brought by increase in costs of the uncontrollable exceeds the decrease in production cost of the controllable, this would compel IKEA to increase its selling price. If the said scenario is realized, it would be difficult for IKEA to increase the price of its products since the market that it caters has already been used in low-priced products. IKEA has been used to reflect improvements in efficiency (decreased production cost) to lower-priced items. This enables the company to work with competitive prices but once the market gets accustomed

to such practice, it may be difficult for the company to increase the price of their products once they are compelled to (increase in uncontrollable components of it production cost). Recommended Action Plan For the sales and marketing team, it may help not to reflect improvements in efficiency (decreased production cost) to lower-priced items. The idea is not to keep IKEA’s customers accustomed to low-priced/decreasing price of items.

This can lead to higher margins should the company be consistent and further making its operations more efficient. This strategy can also make IKEA more resilient should there be unprecedented price increases in the future, especially for the uncontrollable components of their production. This may also help the company in introducing pricier products in future. With this, and with the presence of pricier products, IKEA can now tap markets which have not been explored in the past.

Quality Control Issue Shipping disassembled products enables the company to reduce costs related to logistics however; this poses a valid concern to quality control. Looking at the case of Poang Chair where parts hail from two locations (Poland and China), each location performs quality control functions but once the parts arrive at the store/shop and put together for the first time, there is always the chance of defects and misfits hence, the store/shop essentially performs a 2nd level quality control. Multi-level quality control is preferred for most cases since this would ensure products with higher quality but in the case of the Poang Chair where the 2-level quality control happens in two (or three) separate locations, detection of defects or misfits may be too late to be addressed and incurring losses may be inevitable.

Recommended Action Plan IKEA may want to look into producing products like the Poang Chair in just one location. Multi-level quality control can still be performed but since defect and/or misfits can already be detected in just one location (earlier), these can already be addressed prior to shipment. Hence, the probability of defects or misfits is minimized and losses avoided. Expansion Issues Market saturation in Europe and in US paves way in the exploration of untapped locations for business expansion most of which are in the Asia Pacific Region (China, Malaysia, etc.). However, the products that are introduced in new locations are not fit with the needs of the newly taped market.

Recommended Action Plan IKEA should customize, innovate and improve their offered products and introduce new goods depending on the needs of the market based on its geographical location, market segment and culture. Understanding various markets all over the world for better strategy will keep them in a competitive advantage.