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Table of Contents

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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IKEA, short for Ingvar Kamprad Elmtaryd Agunnaryd is a Swedish furniture


conglomerate, global furnishing company that designs, manufactures, deliver, retails
low cost, ready to assemble and functional products to people. It is one of the worlds
best known furnishings company with more than 200 stores in over 30 countries
Their business idea is focused on the concept of the IKEA Way.
IKEA Singapore opened in 1978 is managed by Ikano Pte Ltd, a franchisee of Inter
IKEA Systems B.V. that is the owner of the IKEA Concept worldwide. Under the
IKEA concept, all IKEA stores worldwide will adopt the similar business processes
and philosophy of IKEA furniture business.
Ikano Group was originally a business unit of the international home furnishing
company IKEA founded by Ingvar Kamprad in 1943. The Ikano Group operates in
Europe and Asia. Its retail arm has achieved 245 million Euro in 2010, the largest
shares among its business units.
IKEA Singapore opened its first store on Sixth Avenue in 1978, and then moved to
Amber Close in 1984, before finally settling down at Alexandra Road in 1995.
IKEA Singapore employs more than 380 people in its Alexandra Road store and
warehouse. As of 2011, IKEA Singapore has two megastores in Alexander Road and
Tampines. With a huge space of 22,500 sq m outlet at Alexander and one and a half
times the size of the Alexandra outlet at Tampines.IKEA Singapore is the regional
headquarters. .
The IKEA Group today have a total of 314 stores in 38 countries which 37 stores are
owned and run by franchisees outside the IKEA Group in 17 countries, Singapore
being one of them. It has currently approximately 9500 products.
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Inter IKEA Holding S.A

Inter IKEA Systems B.V.

Ikano Group

Ikano Retail Asia

Other Business units

Inter IKEA Holding S.A

Inter IKEA Systems B.V.

Ikano Group

Ikano Retail Asia

Ikano Pte Ltd

Other Business units

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

2. Strategies for Change Management - Porters Competitive Five


Forces
The Porters Five Forces Model will be adapted to IKEA Singapore to examine the
forces that influence the organisation by identifying five basic forces that can act on
the organisation. The rationale behind such an analysis is to investigate how the
organisation needs to form its strategy to aid in the development of opportunities in its
environment as well as to overcome competition and threats that it faces in the
industry.

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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

Determinants of Substitution Threat


Relative price performance of substitutes
Switching costs
Buyer propensity to substitute

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

Determinants of Buyer Power


Bargaining Leverage
Buyer concentration vs.
firm concentration
Buyer volume
Buyer switching costs
relative to firm
switching costs
Buyer information
Ability to backward
integrate
Substitute products
Pull-through

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,

2.1 Threat of potential new entrants


Singapores home furnishing market is filled with many players, mainly oligopolistic
with plentiful of small companies. IKEA Singapore is one of the biggest players in the
local market with a combined space of around 53,900 sq m along with other big local
players that shared a smaller scale of the market like The Furniture Mall, Courts,
Harvey Norman, Novena Furnishings and even likes of high end retailers like
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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

No. of local Furniture Companies

2,020

1,768

1,700 .est

(Including wholesale and retail)

Figure 3: Local Furniture Companies in Singapore


(computed from SFIC Annual reports of 3 years)

Figure 4: Market size of local furniture companies in Singapore


(Source: SFIC, SPRING Singapore 2007-2010 Furniture Industry Survey)
The above collective data reveals that locally, more furniture companies are finding it
harder to earn profits, thus leading to closure. A large portion of these companies are
pure retailers, with no manufacturing processes involved. However the furniture
industry market size has grown, this proves that the trade is making money but
smaller scales companies are finding harder to survive. Basing on these statistics, a
potential entrant may reconsider to start a furniture business.
High capital investments required to start up a furniture business also reduces the
potential entrants. For the furniture manufacturer, factories need to build or contract
manufacturing needs to be sourced. They need to optimise its production capacity in
order to achieve economies of scale. Furniture designers will need to be hired to
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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.

2.3 The Bargaining Power of Buyers


The buyers in IKEA business are purely the customers as they do not sell their
products to resellers or exporters. Price negotiations are kept very minimal except
probably in cases of bulk purchases for corporate orders. As a retail chain, IKEA sells
to a fragmented group of individuals.
IKEA products are created with functionally; low cost with complementary design
looks in mind. Its products line serves a whole range of items that an empty house
will need. It also stocks lightings, kitchen wares and many smaller items as well. For
smaller items such as these, buyers will have plenty of choices in our local stores
segmented by the type of goods. However none are comparable to IKEA store
experience which IKEA seeks to enhance customer loyalty while enticing new
customers, bonding a long term relationship. Buyers have the freedom of strolling
inside a large space with regularly updated collaterals, playground for their kids to
enjoy, a restaurant for everyone that serves their famous Swedish meatballs, free
parking space, fast food with prices that our local chains cant compete.
A way to maintaining customers was introducing the IKEA member card, customers
can get free coffee at their restaurant or larger discounts. IKEA practices their
corporate responsibility shown in their sustainability efforts to create a positive public
image to their customers. Consumer behaviour may shift to IKEA advantage.
In the pretext of comparing with competitors in pricing, designers work, constant
quality, interior design services and even 100 days return policy there is simply no
alternative for buyers. .In addition, the low price strategy is another way to response in
buyers needs.
The IKEA business idea is: "We shall 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." Due through these facts presented above, IKEA has become stronger
than its buyers. IKEA is unique among its competitors in the local market and even
overseas.
2.4 Threat of Substitutes
Threat of substitute products is a matter of searching for other products that can
perform the same function as the product of the industry or player in the industry.
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In furniture products the probability of substitutes is almost impossible as there are no


practical replacements for furniture. Even through products cant be substituted but
the delivery methods of how furniture companies supply their products or services
have changed due to technological developments and consumer buying behaviours.
From the traditional retailing of walk in customers, the world today has evolved to Ecommerce and will steadily change the competitive positioning in the market.
A survey by the government indicates 33% for the young adults prefers to in person
shopping, which means a high percentage of population are receptive to online
shopping. However such online businesses still remains underutilised but may posed a
threat in future.

Figure 5:IDA survey of Online Shopping 2010


Source: Info-communications Development Authority of Singapore
Currently ecommerce threats to IKEA are minimal due to innovative software
products created by their subsidiaries. Customers can use the simple software to
design and visualize their furniture online, something that is rarely heard of in local
market. Online and offline distribution of their catalogues keep customers updated.
IKEA uses online social media to attract customers and develop a fan base in 2011..
IKEA has to be on track with upcoming product developments and style to remain
competitive with local designers. They should make use of their value chain to further
provide value to customers besides low cost furnishings and differentiate themselves
away from other local players carrying high end furniture that serves only a marginal
consumer market.

2.5 Internal Rivalry/Competitors


Rivalry among competitors is often the strongest factor of the five forces model.
The local furniture industry is a very fast paced and competitive one. With an
approximately 1,700 companies to compete against, it is a mammoth task to stand out.
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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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Whether it is a prescriptive, analytical or conflict models, all three models provides a


certain perspective assessment on the organisation and how to implement strategic
changes to maximise viability and development of profits. By carefully managing the
process of identifying, analysing and change, organisations will reap the rewards of
competitive advantage.
The current business world is very dynamic, IKEA management constantly needs to
review the Competitive Forces Model to embrace changes and exploit particular
characteristics to their advantage.
Porters Five Forces on IKEA Singapore has shown that positive outcomes outweigh
the negative. The likelihood of IKEA Singapore is still leading a dominant advantage
over its competitors is very promising.
Type of Threats

Analysis Result

Threat of potential new entrants


The Bargaining Power of Suppliers
The Bargaining Power of Buyers

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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