Table of Contents1) Introduction.....................................................................................................................2

1.1) Company Background................................................................................................3

2) Strategies For Change Management................................................................................5

2.1) Threat of New Entrants..............................................................................................6

2.2)Suppliers Bargaining Power........................................................................................8

2.3) Buyers Bargaining Power...........................................................................................9

2.4)Threat of Substitutes................................................................................................10

2.5)The Nature of Rivalry in the Industry........................................................................11

3) Conclusion......................................................................................................................12

4) References......................................................................................................................13

1. Introduction

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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 Porter’s Competitive Forces Model, Resource Based View (RBV) and Strategic Conflict Model.

Michael Porter’s 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 strategies, 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 Porter’s competitive forces and IKEA Singapore and its owners are companies that could utilize this model.

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 world’s best known furnishings company with more than 200 stores in over 30 countriesTheir 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.

Page 3 of Inter IKEA Holding S.A

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Ikano Retail Asia Other Business units

Inter IKEA Systems B.V.

Inter IKEA Holding S.A

Ikano Group

Ikano Retail Asia Other Business units

Inter IKEA Systems B.V.

Ikano Group

IKEA Singapore

Ikano Pte Ltd

IKEA Malaysia

IKEA Thailand

Ikano Ltd.

Figure 1: Simplified Organization chart for IKEA retail stores in Southeast Asia

2. Strategies for Change Management - Porter’s Competitive Five Forces

The ‘Porter’s 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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IKEA Singapore

Ikano Pte Ltd

IKEA Malaysia

IKEA Thailand

Ikano Ltd.

New Entrants

BuyersSuppliers

Substitutes

IndustryCompetitors

Intensityof Rivalry

Threat ofSubstitutes

Threat ofNew Entrants

Bargaining Powerof Suppliers

Bargaining Powerof 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 maker’s incentives

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

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

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

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

Singapore’s 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 Singapore’s 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

(Including wholesale and retail)

2,020 1,768 1,700 .est

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.IKEA’s 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.

IKEA’s 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 greaterefficiency 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 3 2

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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 don’t just sell furnishings but also kitchen and home accessories. Along with a restaurant and a kid’s 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 supplier’s 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, Älmhult 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 can’t 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, designer’s 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 buyer’s 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 can’t 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 E-commerce 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 2010Source: 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.

Porter’s 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.

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Type of Threats Analysis ResultThreat of potential new entrants LowThe Bargaining Power of Suppliers LowThe Bargaining Power of Buyers Low

Threat of Substitutes Low

Internal Rivalry/Competitors High

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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