The paper will be discussing the industry of furniture and how the people in America have responded to the various furniture retailers that were introduced in the industry. The paper will also discuss the previous market dynamics before IKEA, one of the world’s largest furniture retailer walked into America and the reaction it received from the same.
The justification of choosing IKEA as a furniture retailer for discussion is because IKEA has been existent for a long period of time and since it has a presence in many countries; it has a portfolio of experience as to how to cater to different markets and what the basic idea is behind catering to specific market. The furniture retailer would also be analyzed on the basis of the strategy that it employs and the secret behind its success. This paper would consider the analytical side more than the narrative because there is a need to understand whether the strategy that it did employ was desirable or not.
Before the strengths and weaknesses of the company are discussed, the macro environment must be analyzed so that there is a vivid understanding as to the constraints that the company faces and how it has overcome
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Nature of demand
The customers have been subdivided into two different age groups. One is that of the teenagers who have decided to move ahead in life away from their family and settle into their own homes. These individuals would look for furniture which would fall in their budget and how they plan to purchase it.
Such teenagers would face a difficult time in deciding the furniture item they require the most and this would mean that they would be confused when determining the final purchase because if a teenager buys a chair for himself, there is a chance that he would also want to buy himself a bed.
Another kind of customer group is that of individuals who have reached the maturity stage and are either working or have retired from their jobs. In any case, these individuals would be assumed to having a larger budget than the above described market because they would have had the opportunity to earn and save for themselves. In such a case, these customers would look for more furniture items in the budget of low quality, or less items of higher quality. This is assuming that the price increases as quality increases.
Extend of demand
Furniture is an item that would have a lot of demand once an individual moves into a new location. Of course, furniture is usually a once in ten years shopping where the individual would buy an item for a longer period of time and this is also due to the non perish characteristic that is placed in this product.
However, every year there are a large number of people who would be moving out into their own places and this would mean that there can be a large amount of demand to cater to if the company is strong enough. Of course, in a highly competitive market, there is a need for the company to conduct heavy marketing campaigns because an individual would normally be attracted to a company that he is familiar with or has a relationship with the existing owner of the company.
Nature of competition
The competition for IKEA was divided into two portions where there were the larger retailers who focused on quality and the product line that they delivered to the customer. These high level retailers had a long term existence in the market and recognized that without a large product line, the customers would not be attracted and able to make decisions for purchase.
Then there were also the smaller retailers who focused on low quality and smaller product lines because they would concentrate on lower prices for individuals who cannot afford furniture in their tight budget. “These general merchandise retailers tended to aggressively promote their furniture products on the basis of price; this cut-rate pricing meant that margins were extremely low in these channels. The low end also consisted of smaller shops that offered cheap furniture to price-sensitive customers; many of these shops targeted college students and others on a tight budget.”
The competition was also divided in terms of the delivery services that were provided to the customers. Unlike IKEA, many of the retailers offered delivery and set up services to the customer. The customer would not need to go through the hassle of taking the furniture in the car, setting it up and then displaying it in his own home, as this would be embedded into the price of buying the item. However, this was not followed by IKEA.
Considering the factors of the environment other than competition and customers, there could also be the factors of taste as well as the idea of assembling products themselves. When a customer considers buying a furniture item, there is a chance that he would assume that the company would deliver the item for him and then help him in setting up the item in the house with a little professional advice from the company movers itself. Since the company would itself deliver the item, there is a chance that the customer would receive professional advice on the remaining interior decoration of the house as well.
Then there is also the factor of taste that is embedded into the environment where there could be customers who would prefer to buy wooden furniture items in comparison to leather furniture items because this would mean that the company would need to analyze the preferences of the customers before going into production. Despite the fact that the houses in America are well air conditioned, there is a chance that the lower budget individuals would prefer wooden chairs that would provide them comfort at a lower price as compared to any leather good.
Stage of product life cycle
Currently, the furniture market is at its maturity stage where a number of retailers have walked into the industry and only those survived who had the capabilities and the abilities to cater to the customers efficiently and effectively. Despite the fact that there are a large number of retailers, however, each retailer has a small market share because now there is a large portfolio and variation in the products offered to the customers.
With the large variation, a customer would choose ay one vendor for purchasing products and of course, only those vendors would be chosen who had a good reputation, high quality marketing campaigns or exhibited good experience for the customer. All these factors matter when choosing the company.
Cost structure of the industry
Since the market consists of large number of furniture raw material buyers and sellers, none of them have a bargaining power, as stated by the Porter’s Five Forces Model. Each of them would bargain at their own price where they would want the highest profits transferred towards themselves. When there a large number of suppliers and small number of buyers, the bargaining power moves to the buyers because now they have the opportunity of paying the cost they wish as they have a choice from many.
However, for any large retailer, there is a chance that it would keep a large variation in its suppliers. This means that it would maintain relationships with a number of retailers where it would consider each supplier for its competency. However, along with competency, the retailer must also look at the quality it is providing and whether the work is being done in the manner that the retailer requires.
This would only be done if the relationship between the two is strong and clear and that there are no differences or confusions. Such a model where each retailer would keep a large number of suppliers in its bag, the bargaining power would transfer to the retailer because now the retailer may move from one supplier to the next if the appropriate price level during negotiation is not reached.
Skills of the firm
Considering the skills of the company, i.e. IKEA, it encompasses all the required skills for producing furniture. IKEA believes in internal development in terms of the concept and the design that is to be implemented and depicted from the furniture. Since the company has direct contact with the customer, IKEA would look into the trends and preferences of the customers and how what they demand in the future.
Once the preferences have been carefully analyzed, the company designers can consider these in their work and this is why the responsibility of creating the furniture bounces from the suppliers to the company and back. IKEA keeps with itself, the analyzing and designing capabilities and these are the major skills that could be identified for the firm.
Financial resources of the firm
The article does not state much of the financial resources available to the firm, however, from a general perspective, it can be seen that since the company has been doing exceptionally well ever since its inception, there is a chance that the profits of the company would be injected into it for further growth.
The company, IKEA has a large and renowned presence in the market. Hence, it would not be difficult and cumbersome for the company to consider applying for an advance from banks or even raising capital from its owners. The company has done well at its time and continues to do so, which means that profit keeps sweeping in and injecting into the firm.
IKEA has created its own distribution structure where it deals with the customers directly and does not require employing distribution centers from outside vendors. All the company does is communicating with its suppliers in developing the products and once they have been created, they are delivered to the existing infrastructure of IKEA where the customers visit, choose an item and purchase it.
IKEA has several stores in different areas of the world where it continues to cater to them with the establishment of stores in different locations. Since IKEA is based on a large area display, it cannot be located in smaller towns. IKEA is one of the leaders in low priced furniture, however, IKEA prefers giving its customers the look an feel of the furniture before it is bought and hence, it believes in allowing customers to experience furniture shopping as it were grocery shopping.
IKEA continues to grow on the basis of location; however, since it wants to cater to its customers on a one on one basis, there is a need for the company to establish its own distribution centers and this would mean looking for areas that would cater to the company’s large set up as well as give back large profits. When investing into a specific location, there is a need for the company to analyze whether it is worth moving into or not because IKEA does not have money to take risks with.