The following is an extract from a strategy paper
submitted as part of the coursework for the INSEAD MBA programme in the summer
of 1997.
In this extract, the success of IKEA is first of all considered in terms of "value innovation". Its lessons are then applied hypothetically to marketing in the automotive industry.
Robert McCann was one of the members of a small team
of students who collectively submitted this paper.
(Click on this link to return to Robert
McCann's Home Page)
“In this paper, our aim is twofold: to demonstrate that value innovations can take place on a number of platforms and to discuss the transferability of specific value innovations to other industries. To do this, we look at three specific value innovations - one on the product platform (Benetton), one on the service platform (Club Med) and one on the distribution platform (IKEA). For each of these innovations, we discuss the applicability and transferability of the value innovations identified to other industries. We are thus interested not so much in the value innovations themselves, but in the thought processes and logical steps that lay behind these innovations.”
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4. The Delivery Innovation :
- Integrating the customer into the value chain
If you were Ingvar Kamprad in 1987 (year of entry into UK market), managing a successful national business selling own label durable goods in your national market, how would you build a distribution network in order to maximise the value delivered to customers, whilst minimizing cost? Ingvar Kamprad’s solution made a substantial break from the existing industry standard in the UK. The product was not fundamentally different and the sales and order management system existed already (MFI), yet Kamprad broke the industry rule by no longer assuming that the retailer had to move to the customer’s doorstep; on the contrary, if the value offer were sufficient, the customer would move to seek the vendor.
We will argue that Ingvar Kamprad’s strategy in the furniture industry, could be applied by a new entrant, violently rocking the boat in the car industry.
4.1 Delivery System Description
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In 1987, quality furniture was available in the UK through vendors such as Habitat who managed an extensive network of City-Centre located retail stores. The lower cost end of the market was served by the chain MFI who had stores located slightly out of town centres in most medium to large sized UK towns and cities. MFI used a sophisticated computer-based shopping and inventory management system, allowing customers to walk around the store, choose items that were on display by marking their code number on a shopping list, submit this list to a sales assistant who would enter the codes into the computer system and bill, proceed to the delivery gate where the items would be presented in flat packed cardboard packages that could be carried home by car (The system is similar to IKEA’s).
Although MFI continues to make reasonable profits with its activities in the UK, it has stayed far behind IKEA in terms of growth and profitability. The key difference is the size of stores and their physical location. IKEA stores are enormous, 20,000m2 warehouses, situated “out of town”, but all are located in the most densely populated areas of the UK.
By limiting the total number of stores in the UK to seven, IKEA’s logistical process was radically simplified. Final customer delivery is, for the most part, assured by the customer himself.
4.2 What makes this concept such a Value Innovation?
“Value Innovation is the simultaneous pursuit of radically superior value to buyers and lower costs for companies”. IKEA achieved this goal through rationalization of its distribution channel to the operational minimum necessary, enabling their broad range of higher quality products to reach as wide a customer base as economically possible, at the same time drastically reducing high city costs (property, staff, taxes, logistical requirements etc).
Value Profile : how IKEA
beat MFI and Habitat
Delivering High Quality and Variety at Low Cost
As we see from the value curve, MFI altered the traditional furniture store profile, by introducing flat-packed furniture. IKEA further changed the profile by offering greater product variety and quality, and concentrating on a small number of enormous stores. By locating outside main city centres, IKEA was able to maintain low prices, thus capturing a broad mass market and innovating out of the traditional Porterian cost-quality trade-off (see diagram).
IKEA’s strategy was pro-active in that it did not go out to beat the competition at their own game; rather it sought to attract the broadest customer base possible and provide the most complete service in the furniture and furnishings sector.
As a new entrant in the UK market, IKEA was not restricted by existing assets or reputation and therefore no re-engineering of corporate process, strategy or image was necessary. In addition, IKEA had achieved considerable success with its total furniture shopping concept in Northern Europe and elsewhere, and thus a formidable experience base as regards to catering for the mass customer.
The IKEA “shopping experience” limits itself not only to furniture, but extends to a wide range of furnishings, household appliances, toys, garden equipment, DIY accessories etc. Thus, the customer is able to satisfy a range of needs at one stop. IKEA stores carry a restaurant/cafeteria, child-minding services and playgrounds and there is an abundance of service and sales personnel at hand to assist the shopper. In this way, IKEA can almost be said to have defined a unique standard, well above that which the competition has to offer.
4.3 Applicability to the automobile industry
Consider how the described leap in value created by IKEA could be applied to a different durable goods industry, currently constrained by strong brand identification, complex structure and after-market requirements - such as the automobile industry. What strategy should be adopted by a new entrant who may wish to grow out of its domestic operations and enter the UK or other European market? The example could be valid for companies like Chrysler, Daewoo, Proton or Hyundai, who may wish to establish a European manufacturing and distribution facility.
4.3.1 Competition
In Europe's 17 national markets there are 56,000 dealers and a further 43,000 sub-dealers selling new cars and in total employing about a million and a half people (source KPMG). The UK has 6,200 first-tier and 1,100 second-tier dealers.
The benefits of lean distribution in this industry are enormous. Current parliamentary legislation is reviewing the state of the franchised car dealer system and is likely to open up new opportunities for large, multi-brand dealerships across Europe, closer to the US model.
Car firms
have radically reduced order-delivery lead times to within ten days from order
receipt to car delivery :
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However, vehicles subsequently spend from 60 to 70 days in dealer showrooms and parking lots. Approximately Ffr.100bn of excess finished car inventory is unnecessarily stocked in the European pipeline. Further, as Dan Jones (Professor at Cardiff Business School and European president of the International Motor Vehicle Programme) states:
"the salesperson is often
not interested in what the customer wants, only in selling what he has in
stock. Worse, forecasts based on what
customers were persuaded to buy - often what they didn't want - resulted in big
errors and future discounting."
Rather than benchmarking competitors (eg. making reactive incremental reductions in vehicle stocks from say 60 days to 50 days), the new entrant may be pro-active, leaving its competitors no option but to react. The aim is not to beat the competition, rather to radically redesign the value proposition by eliminating costly attributes offering weak benefits and by accentuating basic requirements.
4.3.2 Customers
The company should target the masses by focusing on the commonalities in customer value, rather than insisting on retaining all customers and playing segmentation exercises. It should be willing to leave out some customers situated in remote and inaccessible areas in order to serve the 90% of the population living in concentrated urban areas. For the customers within the catchment area, the leap in value added may be ensured by maintaining high levels of product quality and choice at low cost.
4.3.3 Assets & Capabilities
The advantage of viewing this exercise from the point of view of a potential new entrant is that the company is not constrained by existing assets and capabilities. When the ideas currently espoused were presented to an executive from the commercial division of Renault SA., he demonstrated the firm's attachment to the existing structure :
"given that one in three cars in the current park
is a Renault, the garage entrepreneur is assured access to an unlimited supply
of after-market customers by choosing to carry
the Renault flag. His customers
are loathed to take their car to a non-Renault franchise as they feel that the
repair will be less professional. The
omni-presence of these dealers is a major incentive to the new car buyer who
asks the question 'where will I service and repair my car once I have bought
it'.
That is why our current market strategy is to
support the small dealer."
Renault's attachment to its network of almost 7,000 agents and dealers in France is anchored on the premise that car buyers are concerned about service and repair. Didn't the Japanese weaken this dependence by selling cars that were (at least perceived to be) reliable in the first place ?
We argue that the value proposition that the client wants is to have a reliable and quality built car at low cost that may be conveniently serviced and maintained. European trends indicate that clients are evolving into recognizing that quality servicing may be performed on a competitive basis in any of the mushrooming franchise networks such as Speedy, Midas, Halfords (in the UK) or Carrefour (in France). Most manufacturers now sell reliable and quality cars, but those clinging to their dense commercial networks will not achieve the required objective of low cost and will lose market share.
4.3.4 Product/Service offerings
The entrant is not restricted by traditional boundaries. He may thus extend his thinking to a total customer solution and exceed traditional industry offerings. Just as IKEA integrated the customer into its value chain and increased its value offering with a mail order catalogue and enormous 'everything on display - everything in stock' warehouse shops, we propose the following value proposition for a new entrant to the European car market :
4.3.4.1 Sales :
The new entrant would establish a sales network based on the IKEA model, establishing a small number of large sales points in densely populated areas. Every model would be on display and in stock. The purchase process and financing options should be as simple as hiring a car from Hertz or Avis. Sales assistants and interactive computer screens (allowing Accor style credit card purchases) would be liberally accessible, enabling the client to purchase and drive away his car in less than fifteen minutes.
The absence of test-driving facilities would be countered by a two-week money back guarantee, as offered by Rover in the UK. The trade-in price of second hand cars would be based on a simple published catalogue 'book-price' scheme for cars of a given type, age and mileage. The exchange price would be deducted from the price of the new car. Entertainment for children, motoring videos, tombolas with gifts (eg. a free car or free petrol) and an IKEA style cafeteria would equally be provided on site. For customers not wanting to drive away in their new car a home delivery service would be promised for a forfeitary national delivery price.
Customers unable to travel to the new stores would be served in two ways :
1. Travelling sales teams would circle the country, setting up stalls on car parks in popular shopping malls and major events, such as race-days and motor-shows. The same second-hand repurchase scheme, no-frills financing and home delivery programme would be offered.
2. The entrant car manufacturer would establish a home-order system, allowing potential customers to make purchases by telephone or by Internet from an on-line showroom or brochure. Cars would be home-delivered and second-hand cars exchanged on the same 'book-price' basis.
As customers show interest, by telephoning, visiting or purchasing, they would be added to a computer database and sent information on new year-models and deals.
4.3.4.2 After-market :
After-market support is essential to the motor industry. Our new entrant should ensure the best possible after-market value proposition by providing the following three services :
1. Allying with a major road-breakdown network (eg. Europ Assistance, AA, RAC, Green Flag...) to guarantee rapid roadside breakdown assistance.
2. Licensing one or several major car maintenance chains (Midas, Halfords, Carrefour ...) to provide local warranty and service repair work.
3. Providing a leap in customer value by guaranteeing the vehicle mechanically for three years and providing a replacement vehicle in the case of a major breakdown. This may be organised through a licensing agreement with a national car rental firm or through home delivery of a loan vehicle. If the fault is judged to be the manufacturer's, a 'replace with new scheme' may be adopted in order to maintain consumer loyalty and provide quality feedback to the manufacturer.
4.3.5 Redefinition of Value
The strategy outlined above is best summarized using the value-curve analysis :
1. Value factors taken for granted by the industry but of little customer benefit are:
- Local and town-centre car showrooms, associated sales staff, property and stocks of finished cars
- Brand-specific warranty and repair-garages
2. Value factors that should be reduced below industry standard are :
- Test driving facilities
- Second-hand car valuations
- Promotional deals and opportunity for price bargaining
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Value Curve.
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3. Value factors that should be raised well above industry standard are :
- Selection of available vehicles in store
- In-store facilities (catering, child-minding)
- Vehicle warranty period
- Vehicle loan and exchange policy
4. Value factors never offered in the industry that need to be created are :
- At least 20% (ie. Ffr. 20,000 per car) cost savings for equivalent or superior product quality through lean distribution and elimination of dealer subsidies
- Telephone and Internet home-purchase and delivery possibility
- Fifteen minute, no hassle purchasing, including credit-card billing, vehicle registration and insurance.
4.4 Summary, Guidelines for Industry “Best Practices" and Evolution
The above description may be represented graphically in the Value Innovation framework as follows :
For structural reasons, notably the considerable human and financial capital tied up in existing sales and distribution networks, the strategy espoused is available to potential market entrants, but would be difficult for incumbent firms to implement.
The incumbents must find a means of reducing the network's dependence on constructor subsidies and bringing the purchase price of a new car closer to the manufacturing cost. Dealers will likely follow trends such as :
1. Consolidation (France is beginning to follow the UK lead)
2. Find new sources of income, eg. :
- converting city-centre showrooms into car-parks (eg. Renault Marseille)
- taking on car-rental franchises and providing consumer trial through hire rather than display.
3. As current legislation evolves in Europe, dealers are starting to sell and service different brands and will compete for after-market activity by improving cycle-times and lowering costs (eg. 'Renault Minute').
Inevitably and perhaps ironically, the source of the dealers'
very existence, the automobile, and the mobility that it provides, will provide
the weapon for their own elimination as clients are no longer constrained to
the nearest outlet.
© COPYRIGHT 1997
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