Business Analysis of KEA
When he outgrew his ability to call on his customers individually, he inverted to a sort of makeshift mail order operation, hiring the local milk van to make his deliveries. Kea are rooted in a traditionally poor region in south of Sweden. And after 60 years’ development, growing up in 20th century Sweden has shaped both their products and their values. Their website side KEA is a value-driven company, they promise to deliver well designed, functional and sustainable products at the lowest possible price.
1. 3 Structure of the essay
After the introduction I would write strategic position of KEA and it include environment, capabilities and expectations and purposes. Furthermore I would like to use some models to explain this part such as SOOT, Value Chain and so on. In the next part I will write strategic choices and it includes three parts. Firstly, I would evaluate and describe the business level strategies. Secondly, I would evaluate and describe corporate level strategies.
Finally, I will evaluate the suitability of the tragic choice. In the fourth part, there would be a future development of ‘KEA. The last part is a conclusion.
2. The strategic position of KEA
2. 1 Macro-Environment of KEA
In this globalizes market, changing is a forever theme. As Henry Miniature (1994) argues that environmental change is faster than you could see. The pace of technological change and the speed of global communications mean more and faster change than ever before. I would like to use PEST framework to illustrate the macro- environment of ‘KEA. PEST analysis stands for “Political, Economic, Social, and Technological analysis” and describes a framework of macro-environmental factors used in the environmental scanning component of strategic management.
In case of ‘KEA, I would choose China to conduct the PEST analysis. Because China is a new emerging market and has the significant strategic meaning to the future development of ‘KEA, I set China as the target to do the PEST analysis. Political 1 . The Chinese government was trying to attract foreign direct investment and encourage foreign companies to open their factories in China. 2. The opening police means government support the foreign company’s development. There are a lot of special economic development zones in many provinces of China.
4. Government stability is really good and there are some taxation police to the foreign companies.
1 . The high speed development of the Chinese economy, the GAP of China usually kept above 10% growth annually, even during the financial crisis GAP could also keep above 8% growth annually.
2. 1. 3 billion Population mean huge market demand.
3. With the increase of individual income, Chinese citizens would like to pursue higher quality life.
4. The inflation of China was kept at an acceptable level.
1. The quality of the product is increasingly important in customers’ mind.
2. Chinese population demographics: more and more people moving their home from country to big cities.
3. Lifestyle change: high speed life style makes that people do not nave much tale Tort snooping. At tans time ten Drain NAS a gallants Impact on the customers’ shopping preference.
4. The income of Chinese labor is relatively low so Labor cost is lower than European countries.
1 . In the furniture industry consciousness of innovation in the Chinese furniture industry is not enough.
2. The government encourages innovations; new materials and new technology were encouraged to use in many industries.
3. Government and industry focus on technological effort is not enough. Porter’s five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It suggested that there are five basic competitive forces exist in an industry. They are the competition between current competitors; the threats from potential entrants; the threats of substitutes; the bargaining power of suppliers and the bargaining power of buyers.
The below analysis is based on Chinese market. Rivalry among existing firms
1. The Chinese furniture industry is no longer small any more. There are some strong competitors in this market. Such as B&Q.
2. Most of the competitors in the Chinese market are small and middle scale companies.
3. Increasingly international furniture companies entry Chinese market through a corporation with Chinese local company
Bargaining power of the suppliers
1. Suppliers are not very centralized in the market, so it is a good condition for KEA to reduce the bargaining power of suppliers.
2.There is no significant fertilization between suppliers, so the bargaining power of suppliers should not be very strong.
3. The switch cost is not very high.
4. KEA has 11 stores in China and its source 21% from China. So the bargain power is stronger than suppliers, because of its huge scale.
5. The buying volume of KEA is huge, because of the standardized procurement.
Bargaining power of the buyers
1. The switch cost is low, because off lot of brands in domestic of China.
2. The customers can access a large amount of information. With the popularity of computer and network, customers could search any information by clicking.
In addition, there re many websites and provide comparisons and ratings of each product. Such power makes the competition in this industry more intense. Threats from potential entrants
1 . High capital requirement: it is easy to organist a small furniture company but if the company wants to compete with ‘KEA, it should have enough capital for business.
2. KEA has economies of scale advantage
Threat of substitution
1 . The main substitute is Individuality home furnishing service. However its market share is relatively low and the price is too high.
2. Generally, the threat from substitute is not strong.
2. Strategic capabilities of KEA
Strategic capability can be defined as the adequacy and suitability of the resources Ana competences AT an organization Tort It to survive Ana prosper” (Johnson et al, 2005). Strategic capability is mainly composed of resources and competences. Threshold resources and competencies are the most essential requirement for a business to operate in the market. Once the firms satisfy these requirements, they would seek their own unique resources and competence to form competitive advantage. I believe value chain is really suitable to describe the strategic capabilities of ‘KEA.
The value chain describes the activities in and around an organization which together create a product or service. The value chain is a concept from business management that was first described and popularized by Michael Porter in 1985. It includes primary activities and support activities. The primary activities are directly concerned with the creation or delivery of a product or service. And support activities help to improve the effectiveness or efficiency of primary activities. Primary activities Inbound logistic 1. Designing furniture for flat packs 2.
Buying the same kind of raw material from signal one supplier, it could make sure the quality and get the lowest price. . According to the design of the product, purchasing the raw materials. 4. Purchasing the materials in same standard. It is easy for inventory management and reduces the cost.
1. A use KIT inventory method to manage the inventory
2. Collaborate with the supplier to make sure the continuity of operation.
3. Encourage manufacturing companies update their facilities
4. “No wastage” police protects the environment and they try to recycle waste.
1 . Customers have to deliver their goods by themselves.
2. Customers have to put all parts of their goods together by themselves.
3. KEA uses flat packs to reduce the deliver cost.
4. Distribution centre were located in most reasonable places.
5. Flexibility of transportation, such as some distributions were outsourced to third parties
Marketing and sale
1. KEA sells furniture on a larger scale using a catalogue in 1951 . The cost of this activity is huge but the effectiveness is also obvious.
2. The concept of “We do something, you have to do some and KEA to save you some” is the marketing strategy of KEA
1. Clear instruction in each store
2. Pencil, rule and paper are provided when customers arriving 3. In China, customers like the company deliver furniture to their home, so KEA add the delivery service but in low service price. 4. Customers could eat delicious food in the KEA restaurant near the store. Support activities
1 . Purchasing goods from suppliers all over the world and choose the lowest price with better quality
2. Firstly, make sure the price off product and then choose the material according to ten price.
3 Encouraging ten competently Detente ten
1 . New technology could help KEA use KIT and supplies could know the information about inventory and forecasting data.
2. KEA designs the products by themselves and the patents belong to ‘KEA.
3. Innovations of design could reduce the cost , such as 10 expending screws should be used to produce a table, after the innovation, just expending screws needed. Human resource management
1 . KEA listed 20 in the competition of “the world’s most attractive employers 2011”.
2. KEA provides opportunities for employees and some co-workers could gain invaluable knowledge from working aboard.
3. 131000 employees from 48 different countries and KEA believe this is their most valuable assets.
1. Excellent management information system such as MOM and ASTOR
2. In accounting aspect, they get rid of fixed budget and make the budget according to the target profit. Johnson, Schools and Whetting (1998) pointed that value chain model could help with understanding the opportunities for vertical integration or outsourcing. P. Timers (2000) said the various activities could examine in terms of the cost and value of activities of a company.
From the above analysis of the value chain we could easily find that no matter primary activities or support activities they are closely concerned with the reducing cost.
2. Purposes and Expectations of KEA 2.
3. 1 Stakeholder Mapping J. Bryon (2002) said that stakeholder mapping identifies stakeholder expectations and power and helps in understanding political priorities. It underlines two issues: how interested each stakeholder group is to impress its expectations on the organization and choice of specific strategies. And whether stakeholders have the power to do so. The stakeholder mapping of KEA would be listed in figure 3.
Figure: 3 In the short term, if a company sets the target as maximize the profit, it will be acceptable and the company can survive. However, in the long term, if the company till Just pay all its attention on the profit, it could not develop very well. After over 60 years’ development, we could tell that KEA did really well in business ethics and corporate social responsibility. W. Frederick, J. Post and K. Davis defines corporate social responsibility is concerned with the ways in which an organization exceeds the minimum obligations to stakeholders specified through regulation and corporate governance.
Steve Howard, Chief Sustainability Officer for KEA Group said their goal is to get 100% of our energy from renewable sources. It is an ambitious goal but we are making good progress. 1% of our energy use in 2011 was supplied through renewable sources – at ten current rate AT progress we expect to conclave 2015. In the material aspect, KEA work with WFM and the Forestry Stewardship Council (FCC) to ensure Our wood comes from responsibly managed forests. In the products aspect, KEA wants to realize sustainability.
For example, it continuously improves the price invest in next-generation, energy-efficient technologies like LED light bulbs and induction cookers.
3. The strategic choice of KEA The mission and vision of a company usually indicate the direction of a company’s strategy. The annual report of KEA (2011) writes that “Our vision is a better everyday life for the many people. What does this mean? It means thinking about home furnishing beyond form and visual appeal and designing products in a way that really does solve some of life’s daily challenges.
It means reaching out to as many people as possible and helping them achieve their dream home at the lowest possible cost. Just look at our business idea: To offer a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. “
3. 1 Corporate level strategy . 1. 1 KEA overseas expansion of strategy Business organizations may expand from their home countries to foreign countries by setting up replicas their value chains in those foreign countries.
Well-known examples of such organizations are those that expand internationally by replicating a format aimed mainly at distribution, such as McDonald’s, The Body Shop, Cataracts and ‘KEA. KEA builds global sourcing through foreign direct investment and Joint ventures. KEA had 1026 home furnishing suppliers in 53 countries. Since 1963 the first KEA store outside Sweden opens in Oslo Norway. From the below figure 4 we loud know the process of KEA overseas expansion.
J. W. Lu (1996) said the globalization usually contains two parts, the production of globalization and market globalization. In the asses, because of the highly competitive in the home country, KEA were forced to go aboard to find raw materials suppliers. This is the first step of Kike’s overseas expansion. From this perspective, when the KEA become a global procurement company. At present, KEA has 1300 suppliers in global 53 countries. With the success of global sourcing, KEA increase its speed of overseas expansion.
From 1974 to 2005, KEA developed from 10 stores to 251 stores in 34 countries, sales up to 13. 8 billion Euros. In customers’ mind KEA is not only a place for shopping, but a way of quality life. As Miller (2004) said KEA in every country has numerous customers, most of them coming to KEA stores as a leisure activity, rather than everyday family purchasing.
3. 1. 2 Diversification Johnson, Schools and Whetting (1998) define related diversification as strategy development beyond current products and markets but within the capabilities or value network of the organization.
KEA used vertical integration to realize the related diversification. Some suppliers were combined into KEA group. Such as Edgewood company. It approval raw materials Tort I use tans Klan AT strategy open ten first KEA restaurant opens in the KEA store in ?Elmhurst, Sweden in 1960. And KEA food service turnover was 1. 2 billion in 2011. (KEA welcome inside, 2011) KEA also uses unrelated diversification in the past. Unrelated diversification is the development of products or service beyond the current capacities or value network.
In 2001, it opens a train service company to distribute its own products in European Mounties. However, the performance of this train service company was not very optimistic. Therefore, KEA announced to cease the operation of train service in 2004. Obviously, it was an unsuccessful trial during this KEA history of diversification.
3. 2 Business level strategy Business level strategy is defined as “an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets” (Michael A. Hit at all. , 2009). The ‘strategy clock is based on competitive advantage, Porter pioneered thinking in this lied when he proposed that there were three different ‘generic’ strategies by which an organization could achieve competitive advantage. They were cost leadership, differentiation and market focus. All of them could be included in the strategy clock model. Therefore, I would like to use this model to explain the business strategy of ‘KEA.
3. 2. Differentiation strategy of KEA
* Product differentiation
In the past, every several years there would be some new and innovative product which was designed by ‘KEA, Such as, The MET bookcase which is a contemporary classic and will see numerous imitations over the years. SOAP chair, designed by Ole Greer¶v-Knudsen and Torrent Lind, is wonderfully simple, even if it raises a few eyebrows. SOAP is developed by a supplier that usually makes plastic buckets and bowls, creating a chair in which form and function are not compromised by an unorthodox solution.
In recent years, KEA introduce a new concept that is taking account of people’s daily lives special meaning, and strive to use an artistic taste of furniture, for the customer to create a comfortable, warm atmosphere, therefore, distinguish themselves from other companies.
* Service differentiation
First, KEA takes into account of fun in shopping, KEA uses self-service shopping model with very clear and detailed instruction to guide the customers. What is more, parents could leave their children in the children’s playing area in the store.
Secondly, KEA serves the delicious low cost food in their stores. Environment protection aspect In recent years people are increasingly concerned about the environmental protection, not only some non-government organizations, but some ordinary customers are taking the aspect into consideration when they are purchasing the furniture. KEA realized this issue very early. For example, Candace Lombardi reported that Furniture retail giant plans to generate enough electricity from the wind farm to power the equivalent of 17 KEA stores in Sweden. And they revealed in the annual report said they work hard to find sustainable solutions, alternative raw materials, creating more with less.
3. 2. 2 Low cost strategy of KEA
Johnson, sconces Ana Huntington talent Tanat a low cost strategy Is to conclave a lower price than competitors whilst trying to maintain similar perceived product or service benefit to those offered by competitors.
* Pricing strategy
In order to achieve a really low price, before the design and production process, the material and service of product have to be fully considered. The production process should be in the target cost as much as possible to ensure the quality and performance.
* Streamline manufacturing In the production workflow, KEA’ low cost strategy must have three parts.
Firstly, they would find the lowest price raw materials. KEA keeps searching new materials and new technology to reduce the production cost within the required quality. It not only uses timber by some plastic and some newly man-made materials. Second, choose he production layout, production usually located in low cost area, such as China. In addition, KEA adapt the designing furniture for flat packs and self-assembly, which reduces the storing and transportation cost.
* Standardization KEA sells the same product in the global market, which means they achieve standardization in their different stores in different countries.
There is a lot benefit. Firstly, they could purchase the same raw materials from the same supplier, which means they have the economics of scale and bigger bargaining power of the suppliers. Secondly, the allocation and transportation of products would be more legible. It could solve the problem of overstock and under stock. Thirdly, the production uses the same process, therefore, it is easy for training.
* Cooperation with suppliers Cooperation enables a company to take an advantage of other business advantages and benefits of economies of scale.
This can bring high efficiency of the enterprise’s production capacity, on the other hand to promote the implantation of cost leadership strategy. As the KEA annual report (2011) written KEA has 1026 home furnishing suppliers in 53 countries. In addition most of them are long term relationship. KEA encourages competitions between suppliers, and measure the low price vendor to make sure their required quality. Though this model, KEA not only integrate their logistics system, while low cost strategy for in-depth integration into business operations into every process, to achieve the target cost.
3. 2. 3 Strategy clock
From the above analysis we could tell that KEA is using the hybrid strategy. A hybrid strategy seeks simultaneously to achieve differentiation and a price lower than that of competitors. D, Miller (1992) pointed that the success of the strategy depends on he ability to deliver enhanced benefits to customers together with low prices whilst achieving sufficient margins for reinvestment to maintain and develop the bases of differentiation. The figure 4 shows the position of ‘KEA. Evaluation of suitability Johnson, Schools and Whetting (1998) defined suitability as “it concerned with whether a strategy address the circumstances in which an organization is operating- the strategic position. “Suitability criteria concerns with whether a strategy addresses the key issues or problems relating to the strategic position of the organization. (Zimmermann, 2010) Suitability required the strategic fit with the environment of the enterprise. I will list the key issues in the macro-environment analyses, operational environment analysis Ana strategic capableness.
Key Issues In macro-environment
* Supportive police from government
* Quickly economic growth
* Huge market demand in target market
* Technology support is not enough Key issues in operational environment
* Rivalry among existing firms in increasing in Chinese market.
* The bargaining power of the suppliers is relatively lower.
* The bargaining power of the buyers is higher because of the information age. Threats from potential entrants are not very high, because of the enter barriers.
* Threat of substitution is very low.
Key issues in strategic capabilities
* Inbound logistic: Huge amount of standardized products from same suppliers with the flat pack assembly.
* Operation: High efficiency operation during the process and lower inventory
* Outbound logistic: Efficiency and flexibility of transportation
* Marketing and sale: Successful furniture furniture catalogue since 1951
* Service: Customer self service with clear instructions
* Procurement: choose lowest price with best quality in worldwide
* Technology: new technology to educe costs
* Human resource management: view employees as their most valuable assets.
From the macro-environment analysis we know that Chinese market is really attractive to ‘KEA. Therefore, Kike’s international strategy is quite suitable from the aspect. However, KEA should take some difficulties into consideration, because the culture’s difference. From the operation environment analysis we know that KEA takes a strong position among the related parties. This is a big advantage of its diversification strategy and it will provide strong support to the diversifies process of ‘KEA.
From the strategic capability analysis we find that KEA has the high efficiency and low cost operation in the whole value chain and the supportive give strong support in innovation, which is quite suitable with the business level strategy-reduce cost and differentiation. 4. Future development and challenges In this fast changing environment, KEA is facing increased challenges than ever. There is only one way in front of KEA that is being better than the competitors.
Just as Kike’s new chief executive Mikhail Johnson (2009) said: we know that many of our customers have less money to spend and our low-price concept is therefore more elevate than ever.
4. 1 Changing of corporate level strategy
Generally, the history of KEA is the history of expansion. It is easy to summaries that from 1943 to 1963 KEA Just operate their business in Sweden. And from 1963 to 1973 KEA bring the business to other countries in northern Europe. Then from 1973 to 1985 KEA open its stores all over the Europe and Australia.
In 1985 it arrives North American. In 1998 and 2000 KEA arrive China and Russia that are new emerging markets and developing countries. From the above description we could find overseas expansion is still the corporate strategy of ‘KEA. Furthermore, the new merging market will be the profit growth of KEA in the near future. However, there are a lot of uncertainties in these new emerging markets, because they are still in the high speed developing process, which means the challenge and opportunities exalters together.
In Elaborations strategy we could Know Tanat ten related diversification of KEA did very well, however the unrelated diversification did not very successful in history, such as in 2001 The KEA Group trials running its own rail operations through KEA Rail ABA. The train runs five round trips a week between ?Elmhurst, in Sweden, and Disturb, in Germany. In 2004 the operation was not successful rail operations are taken over by an external company. Therefore, the related diversification is more suitable for the future development of ‘KEA.
4. Changing of business level strategy
After the analysis of ‘KEA, I would like to divide the changing of business level strategy into three stages. The first stage is the beginning part, in this part KEA only pay their attention on the reducing cost. Second stage is innovation. At this time, KEA did not only care about the cost, but the innovation of the product and tries to be differentiated with their competitors. Some classical products were produced at this time, such as Marina Grabbing’s designs the MET bookcase, SOAP chair raises eyebrows and BILLY bookcase.
In the third stage of ‘KEA, it begins to realize the importance of environment protection and corporate social responsibility. For example, in 1990 The KEA Group develops an environmental policy to ensure that the company and its co-workers take environmental responsibility for all activities conducted within its business. In 2000, The KEA Group, in co-operation with EUNICE, initiates a broad community programmer in northern India to address the root causes of child labor. In 2002, the global conservation organization WFM and the KEA Group Join forces to promote responsible forestry in priority regions around the world.
From the above analysis we could know KEA should not only itself as a furniture production and selling company. It is also selling a way of living and way of quality living style. KEA had better do more charity work and donation in developing and underdeveloped countries, because these countries will be their development direction in the long term.
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Finally, I want to quote the words from the Former KEA CEO Enders Dahlia, he said the biggest threat to KEA is KEA it. I mean, we’re still in the first generation of owners, and we haven’t seen the transformation of the next generation yet.
And what the effects of that will be, in terms of dilution or not, are the vision and values, and how that makes the company tick is, I think, at least a potential I’m not saying it will be, but it is a potential problem. It happens in many companies. ‘ With over 60 years development, it is obviously that KEA did best in the furniture industry in the worldwide. I believe the successes come from three aspects. The first key point is the product. Although the products may not be the best quality and the best design, the customers could be inspired by the products and the products could combine with your living environment harmoniously.
In addition, the price is really attractive to the customers. The second key point is the suitable strategy. There is no best strategy in this changing world, but there is the most suitable strategy for individual companies. The success of KEA could be attributing to the suitability of strategy. KEA uses a hybrid strategy which is combining the low cost with differentiation harmoniously. The third key point is Kike’s organizational culture. The culture supports the co-