IKEA Value Chain Analysis

IKEA value-chain analysis is an analytical framework that assists in identifying business activities that can create value and competitive advantage to the global furniture retailer. “Each step in the manufacture of a product or the delivery of a service can be thought of as a link in a chain that adds value to the product or service. This concept of how business fulfils its mission and objectives is known as the value chain”[1]. Figure below illustrates the essence of IKEA value chain analysis.

IKEA Value Chain Analysis

IKEA value chain analysis

IKEA Primary Activities

 

IKEA Inbound logistics

Inbound logistics for IKEA is associated with purchasing raw materials from 1002 suppliers located in 51 countries globally[2] and relationships with supplier are maintained via 42 trading offices around the world. IKEA store is massive and has more than 9,500 product range[3] and about 20-25per cent of employees in each store deal with logistics[4]. Sources of value creation for IKEA in inbound logistics include the economies of scale and the presence of strategic relationships with suppliers. Moreover, Do-It-Yourself assembly principle for many IKEA products lowers the cost of packaging and makes inbound logistics easier to facilitate.

 

IKEA Operations

IKEA operations are divided into three divisions – Franchise, Property and Finance divisions, with Franchise Division being the core of the business. IKEA follows de-centralization business strategy in running its global operations. According to this strategy, regional managers are granted decision-making autonomy taking into account unique aspects of their markets, local culture, patterns of local consumer behaviour and other region-specific factors.

IKEA Group has 340 stores in 28 markets around the world.[5] The majority of IKEA products are developed by IKEA Industry, the largest producer of wooden furniture in the world. IKEA Industry consists of 40 production units in 10 countries: China, France, Hungary, Lithuania, Poland, Portugal, Russia, Slovakia, Sweden, and the USA. The furniture maker has around 19,000 employees. IKEA Industries top five production countries are Poland, Russia, Slovakia, Portugal and Sweden.[6]

The major source of value in IKEA operations relates to cost benefits. Specifically, by locating the massive chunk of its manufacturing units in Eastern Europe and China, the company saves on the cost of human resources to a significant extent. Moreover, the home improvement and furnishing chain uses the latest and sophisticated technologies in manufacturing processes with the positive implications on operational efficiency.

 

IKEA Outbound logistics

IKEA Group operates stores in 28 markets around the world.[7] Along with 340 stores in 28 markets worldwide, IKEA has 22 Pick-up and Order Points in 11 countries, 41 Shopping Centres in 15 countries and 38 Distribution sites in 18 countries.[8] Customers are responsible for costs associated with the transportation of goods purchased from IKEA stores. The company offers two types of delivery services. Parcel delivery is a service to deliver small items weighting up to 25kg and the company charges around USD 12 depending on the location of the specific store.

Truck delivery, on the other hand, is made for purchases exceeding 25kg and IKEA charges starting from approximately USD 50 for truck delivery. The delivery for goods purchased online is done free of charge.  Delivery of goods to customers directly without any intermediaries can be specified as one of the main sources of value in IKEA outbound logistics.

 

IKEA Marketing and Sales

The home improvement and furnishing chain uses print and media advertising, sales promotion, events and experiences, public relations and direct marketing techniques in an integrated manner.

IKEA is a multichannel retailer and integrates selling through stores, catalogs, website and app.  The furniture giant relies in its catalogues extensively for marketing and sales and more than 200 million catalogues are printed each year globally.

Online sales channel is also extensively utilized by the company and ikea.com website attracted 2.1 billion visits in FY2016, an increase of 9per cent compared to the previous year. Moreover, 110 million visits were made to IKEA store apps in FY2016. Out of 28 markets in total, e-commerce sales is currently available in 14 markets. Nevertheless, traditional store sales account for 95per cent of all IKEA Group sales.[9] An effective utilization of traditional, paper-based IKEA catalogue is the most noteworthy source of value creation in IKEA’s marketing and sales.

 

IKEA Service

Customer service as one of the primary activities in the value chain is addressed by IKEA via a standard set of techniques and practices such as the provision of online and telephone customer services, offering refunds and exchanges of goods whenever relevant and encouraging customers to provide feedback.

If customers find out that some parts of assembly furniture are missing, they don’t have to go back to IKEA store. Customers can find out the missing part number (listed in the assembly instructions), call their local store to ask for replacements and the replacement will be mailed to them. In FY16 alone, IKEA Group Customer Support Centres provided personal support to 20 million customers. Covering topics ranging from product advice and order changes to lost teddy bears[10]

At the same time, IKEA is not famous for the provision of a superior customer services and this situation may have resulted from the aggressive pursuit of cost-cutting initiatives according to cost leadership business strategy. An open letter addressed to IKEA CEO Peter Agnefjäll titled ‘Dear IKEA: Your Customer Service Is Terrible’ has been written by best-selling author and keynote speaker Bernard Marr on March 2014.

The letter sheds a light into a range of customer services issues the author had to deal with when purchasing white BIRKELAND bed for his eight-year old daughter. These issues include late delivery, the delivery of wrong parts, failure to collect parts that do not belong to the purchase and communication issues. The open letter has attracted 843 Facebook ‘likes’ and 441 comments, thus causing a substantial damage to the brand image.

IKEA Group Report contains a full version of IKEA value chain analysis. The report illustrates the application of the major analytical strategic frameworks in business studies such as SWOT, PESTEL, Porter’s Five Forces and McKinsey 7S Model on IKEA. Moreover, the report contains analyses of IKEA leadership, business strategy, organizational structure and organizational culture. The report also comprises discussions of IKEA marketing strategy and addresses issues of corporate social responsibility.

IKEA Group Report

[1]Needles, B.E., Powers, M. & Crosson, S.V. (2007) Principles of Accounting, Cengage Learning, p.836

[2] Yearly Summary 2014, IKEA Group

[3] Lu, C. (2014) TradeGecko, Available at: https://www.tradegecko.com/blog/ikeas-inventory-management-strategy-ikea

[4] IKEA (2015) Available at: http://www.ikea.com/ms/en_US/jobs/business_types/stores_retail/logistics.html

[5] Group Yearly Summary (2016) IKEA Group

[6] IKEA Industry (2017) Inter IKEA Group, Available at: http://www.inter.ikea.com/en/inter-ikea-group/ikea-industry/

[7] Group Yearly Summary (2016) IKEA Group

[8] Group Yearly Summary (2016) IKEA Group

[9] Group Yearly Summary (2016) IKEA Group

[10] Group Yearly Summary (2016) IKEA Group