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1) Introduction.................................................................................................
1.1) Company Background..............................................................................
2) Strategies For Change Management.......................................................
2.1) Threat of New Entrants............................................................................
2.2)Suppliers Bargaining Power.......................................................................
2.3) Buyers Bargaining Power.........................................................................
2.4)Threat of Substitutes...............................................................................
2.5)The Nature of Rivalry in the Industry......................................................
3) Conclusion.................................................................................................
4) References.................................................................................................
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1. Introduction
Change management is a methodical approach to dealing with change, either on the
standpoint of an organization and on the individual level. For an organization, change
management means determining and implementing methods to deal with changes in
the business environment and to gain advantages from changing prospects. Three
models of competitive advantages are highlighted this report, namely Porters
Competitive Forces Model, Resource Based View (RBV) and Strategic Conflict
Model.
Michael Porters Competitive Five forces model, illustrates level of competition of the
industry. He contends, The collective strength of these forces, determines the
ultimate profit potential in the industry, where profit is measured in terms of long-run
return on invested capital. With each of the forces carefully interlinking together,
strong threat outcomes will result decrease in profitability. The analysis result
provides prescriptive approaches for the organisation to stay competitive within its
industries. According to , this model is a market approach.
The resource based view framework highlights the internal perspectives of a
company's resources and capabilities in determining the appropriateness of strategic
actions. Proper usage of these resources are the principles of RBV. It is regarded as
the company approach.
The four empirical indicators for sustained competitive advantage from RBV are
valuable, rare, inimitable and Non substitutable. Assuming resources are
heterogeneous in nature and not perfectly mobile. .
The Strategic Conflict Model is a external approach that uses game theory tools to
influence actions and behaviour of its competitors. By tipping the market off balance
with pricing strasfasfasfafas fasdfasfasfasategies, strategic investments and the control
of information to gain competitive edge and profits back to the organisation. This
approach is pertinent to stable markets when strategic options can be known easily
and when competitors are analogous.
The model used in this report is Porters competitive forces and IKEA Singapore and
its owners are companies that could utilize this model.
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1.1 Company background
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Ikano Group
Ikano Group
Ikano Ltd.
IKEA Malaysia
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IKEA Singapore
Ikano Pte Ltd
IKEA Thailand
Ikano Ltd.
IKEA Malaysia
IKEA Singapore
IKEA Thailand
Figure 1: Simplified Organization chart for IKEA retail stores in Southeast Asia
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Entry Barriers
Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Proprietary learning curve
Access to necessary inputs
Proprietary low-cost product design
Government policy
Expected retaliation
Suppliers
New Entrants
Threat of
New Entrants
Industry
Competitors
Bargaining Power
of Suppliers
Intensity
of Rivalry
Determinants of Supplier Power
Differentiation of inputs
Switching costs of suppliers and firms in the industry
Presence of substitute inputs
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases in the industry
Impact of inputs on cost or differentiation
Threat of forward integration relative to threat of
backward integration by firms in the industry
Threat of
Substitutes
Substitutes
Rivalry Determinants
Industry growth
Fixed (or storage) costs / value added
Intermittent overcapacity
Product differences
Brand identity
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Bargaining Power
of Buyers
Buyers
Price Sensitivity
Price/total purchases
Product differences
Brand identity
Impact on quality/
performance
Buyer profits
Decision makers
incentives
Figure 2:
Porter's 5 Forces - Elements of Industry Structure
source: Porter, M. E. (1985) p6, Competitive Advantage: Creating and Sustaining Superior Performance : with a New
Introduction,
Lorenzo and Mondi Lifestyle. In the Singapore market, IKEA seems to be competing
more towards our local furniture companies then overseas competitors.
Threat of potential new entrants is low as IKEA Singapore is unique by its own, rather
then comparing IKEA to our local furniture companies.
Based on statistical data by Singapores Furniture Industries Council , local
Singapore furniture companies amounted over 1,700 companies in 2011. There has
been decreasing numbers of furniture companies over the last three years.
Year
YR2008
YR2009
YR2010
2,020
1,768
1,700 .est
design functional and unique products before making it on the production line. As for
a retailer, the need for a large shop space to showcase products needed while battling
rising high rental prices in prime areas in Singapore further drives new entrants away.
Most of these small retailers maximising space constraints by using products pictures
to showcase their other products available. However customers will more convinced if
they actually can see the real product since it is a hefty investment especially for beds
and sofas. IKEA besides having the financial backing of a conglomerate, also adopts
many sustainability strategies to reduce operation costs and even environmental
impact. The outcome of these will benefit all IKEA stores, suppliers and customers.
IKEAs unique way of product design, by designing the price tag first follow by
product to suit the price, enables them to control and lower cost, minimising wastage
on raw materials as well.
Channel distribution for furniture whole sellers may also be a barrier to entry as the
large bulky furniture are harder to distribute among retail chains like shopping malls
due to space constraints and the high cost of securing a warehouse to house their
products. Logistics wise, large trucks are required to transport goods to stores or
customers. This process again is a disadvantage to new entrants due to high costing of
transportation or maintaining a logistics fleet. In this competitive market, the new
entrant requires to capture a certain market share before it could reap the necessary
economies of scales to allow it to compete with rival firms.
IKEAs logistic strategy is very much different. IKEA works in various ways not only
to rationalise and simplify distribution, but also to taking care of the environment.
One way of cutting cost is using a wide distribution chain and most notably by less
costly transportation. The IKEA Group has about 31 distribution centres in 16
countries, supplying goods to IKEA stores. It has about 45 trading service offices in
31 countries.
Here there are only two IKEA megastores in Singapore, strategically located in the
West and East side of the island out of the prime locations. Channel distributions are
minimal as there are only two places to deliver to, thus reducing logistic costs. All
IKEA products are shipped in from its subsidiaries overseas.
These goods are flat packed means that they can be transported with greater
efficiency in containers. Compared to other manufacturers who are shipping whole set
in pieces of furniture often result in high cost.
A possible decreasing level of customer loyalty has resulted in higher degrees of
competition with existing retailers expanding faster by opening many smaller scale
stores around the island, while threats have also come from new entrants to this
industry.
The furniture industry enjoys fairly high product differentiation since established
retailers enjoy a degree of brand name recognition as well as stable consumer markets
of their own,making it tougher for new entrants to enter. The small family owned
businesses, which formed a segmented portion of the market have exited the industry
due to decreasing profit margins and increased competition. See figure 32
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It is fair to say that a unique branding strategy plays an important role in maintaining
long term customer bases. In the Singapore local market, acquisition of competitive
advantage and market differentiation is required for potential success.
IKEA has a big advantage towards most home furnishing shops; they dont just sell
furnishings but also kitchen and home accessories. Along with a restaurant and a kids
corner, the unique shopping experience brings out much value to customers.
2.2 The Bargaining Power of Suppliers
Many of the local companies are having factories overseas to supply the products.
These factories however in turn manufactures products belong to different companies
as well. This will have an effect on the local companies as many will bid for the best
price and also be wary of imitation of their designs. As most overseas factories have
no standard code of practices and often unregulated in their country. Only a few major
local players have the ability to own and manage their own factories overseas.
Raw materials like wood, cotton are also subjected to changing prices and bargaining
power of the suppliers and farmers. In a chain reaction of rising prices or natural
shortage of raw materials, every aspect from production to logistics to customers and
profits will be affected.
In IKEA case it is the opposite, the bargaining power of suppliers are low. IKEA
Singapore imports all goods and supplies overseas through IKEA own distribution
network. IKEA Group has contracts with thousands of suppliers to make its furniture
and products. As of 2011, IKEA home furnishing suppliers totalled to 1,350 in 53
countries.
Healthy relationships with suppliers provide high quality, technology transfers and
economies of scale. IKEA makes a point to have a local office close to their suppliers
creating close and sustaining relations.
Every supplier is obliged to practise IKEA suppliers code of conduct call, IWAY. This
ensures all suppliers are audited for quality, environmental, raw materials and
working conditions. With this code, IKEA supply chain can be constant and
controlled, minimising union issues, illegal activities as well.
In turn suppliers enjoyed long term contractual trust financial investment backing
from IKEA, technical advice, , link to IKEA E-commerce system, ECIS and other IT
software.
IKEA from its origin are practising vertical integration by producing and designing its
furniture in its own factories and these benefits customers as products are quality
controlled and lower priced. Strategic partnerships with other organisations like
WWF, FSC and Sow a Seed Foundation, shown in their cotton, forestry initiative to
develop sustainable cotton, wood and other material reduces dependency on errant
raw material suppliers price hike. Unlike local manufacturers whom are battling raw
materials pricing and supplies in other countries for the best bid.
Swedwood the IKEA industrial group manufactures IKEA products internally with
Swedspan or by its subcontractors.
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IKEA product development is in Sweden, lmhult itself, whom are employees of IKEA.
They work closely with the manufacturer on the same premises, decreasing chances or
design imitation by suppliers.
In a summary many suppliers work mostly for IKEA and compete with other suppliers.
Products are easy to produce somewhere else without high switching cost therefore
IKEA will always be an important client to it suppliers due to its reputation and
support from a big company. These intangible efforts by IKEA ensure products of
good quality with low pricing and quality after sales. That is, the core vision of IKEA
philosophy.
Small family-run businesses producing affordable products and bigger retailers like
Giant or Courts with economies of scale to compete, together with high end
independent retailers pushes IKEA tighter in profits and market shares. With Courts
Mega store and Giant in the same location at Tampines, competition is high for IKEA
as customers have choices to choose from. Products sold by competitors are
functionally the same except for some differences in the suppliers and brands.
Therefore it actually competes quite heavily on marketing strategies such as pricing
and promotions to attract consumers. MAS has announced a slow-moving economy,
more furnishings companies may adopt a slash and clear strategy to clear stocks and
scale down operations. Upscale furniture retailers deflate prices making it attractive
for more consumers to switch to their products.
IKEA is able to resolve some of these issues in line using their business concepts.
With a long history of more than 30 years in Singapore, they have developed a cult
status globally..Through IKEA robust branding and marketing strategies,
Singaporeans knows that IKEA is a very affordable, stylish and quality service
company. Small scale neighbourhood stores and even high end furniture retailers
pales in comparison due to inadequate branding.
There are many alternatives on how IKEA store can earn profits. It can sustain
through selling more small items or accessories, profiting from their restaurants,
delivery/ installations fees, and IKEA card memberships as well. A lower profit
margin but with high volume of sales strives continuity and viability. They are still
able to compete even by further lowering prices if sales margin management are
opted. Even in an economic slowdown, IKEA instalment plans with 0% interest allow
customers to buy kitchen furnishings with ease in addition to regular sales
promotions.
Not much competitors can offer long warranty periods like IKEA. 3 to 25 years
coverage with 100 days return policy levelled the competition. Not much retailers can
even stay in business for such lengths. With growing environmental concerns, IKEA
social and environment efforts can attract and retain a segmented consumer group at
the same time enhancing IKEA brand name. Through their recycling program, surplus
or faulty goods can be recycled back to raw materials and into new products since
IKEA owns the factories themselves.
Another distinct uniqueness of IKEA products is that customers can customize its
modular furniture to fit more easily with the furniture market. It is reported that this
trend has spread over the world.
IKEA as a group is not just a furnishings retailer, it is also a designer, raw material
supplier, manufacturer and restaurateur and foundation.
As determined by , the global success of IKEA in the competition zone is attributed
by the product range, strong sourcing, vertical integration, cost leadership and
outstanding image.
3. Conclusion
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Analysis Result
Low
Low
Low
Threat of Substitutes
Internal Rivalry/Competitors
Low
High
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4. References
Diagrams
Figure 2: Porter, M. E. (1985) p6, Elements of Industry Structure [Diagram], Competitive
Advantage: Creating and Sustaining Superior Performance : with a New Introduction, Free Press.
Figure 5: IDA survey of Online Shopping 2010 [ Government Survey] Available
from:
http://www.ida.gov.sg/doc/Publications/Publications_Level3/Survey2010/HH2010ES.
pdf [access in 15th March 2012]
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