IKEA is the worlds largest seller of home furnishings, operating more than 300 stores around the world.
Question:
IKEA is the world’s largest seller of home furnishings, operating more than 300 stores around the world. IKEA specializes in low-priced goods, sold whenever possible in compact “flat-pack” form for in-home assembly by the customer.
IKEA also offers rugs in the price range of $30-$300.
The most expensive Silkeborg low pile rug is handmade, created from patches of old Turkish rugs and is priced at $799.
On average the raw material cost for an IKEA rug is $20.
The weaving is outsourced to factories in India and Bangladesh and costs about $50 per rug including shipping.
The storage, handling and shipping cost is about $20 per rug. [We can assume that rugs are a minuscule category for IKEA so Ignore any fixed costs for IKEA for this problem.] Due to high volumes, IKEA typically receives a discount of 20% on raw materials, manufacturing rates and shipping charges over the standard market rates offered to smaller competitors. Storage, handling and shipping cost of a high-quality rug can be 10 times of that of a regular rug. a) Compare and contrast the strategic position of Alyshaan and IKEA on rugs.
2) What is the numerical value of the unit rug cost difference ΔC between Alyshaan and IKEA?
3) What component of the unit rug cost difference ΔC is strategic? That is, what is the increase in cost (ΔCStrat ) that IKEA would incur if it decides to manufacture fine custom rugs assuming IKEA would have to use similar raw materials and artisan workshops for manufacturing fine custom rugs as Alyshaan?
4) What component of ΔC is due to operational efficiency? That is, what is the unit rug cost difference (ΔCOE ) between Alyshaan and IKEA if IKEA decides to manufacture fine custom rugs assuming IKEA would have to use similar raw materials and artisan workshops for manufacturing fine custom rugs as Alyshaan?
5) Is IKEA a threat for Alyshaan? If so, what should Alyshaan do pro-actively?
Expert Answer:
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