Opinion

Frugal strategy

C Gopinath | Updated on February 11, 2018 Published on February 11, 2018

For IKEA and Sony, cost control really worked

IKEA and Sony, two companies in the news recently, have sent out a common message that stresses the importance of executing strategy. Generally, strategies to generate high profitability have been seen as falling into two idealised categories. In one, the focus is on offering a special and unique product to the customer and to charge more to cover the additional costs. In the other, one offers a generic product not different from the others but tightly controls costs to generate that profitability. In reality, firms strive to do both, and these two companies have been successful at that.

IKEA’s founder, Ingvar Kamprad, passed away recently, leaving behind a $43 billion (about ₹2,70,900 crore) furniture retailer operating in about 48 countries. Being privately owned and with a complex ownership structure that annoys tax authorities, we have few numbers on the firm’s profitability but it is widely believed to be very profitable. Kamprad resisted pressures to adapt furniture styles for different countries, and instead stuck to a standard style that was uniquely designed: simple, modern looking and easy to put together by the customer. It came to define what became popularly known as a Scandinavian style.

But the company, with all its mass-merchandising and innovations in style, never lost control on costs. Most of the furniture was made in developing countries, with Poland and China being the major suppliers. Keeping a careful watch on costs meant that they were able to price products 20-50 per cent below competitors. The founder who grew up on a farm in Sweden was extremely frugal in his personal lifestyle. He transferred this cost-consciousness to the company.

A contrasting firm, but with a similar strategy of combining cost control with unique features is Sony that is making the news for a successful turnaround. Under the leadership of Kazuo Hirai, the company has managed to become profitable hitting an all-time record this year. And it is making money in all its divisions, which include the less known image sensors to the better known ones like movies, electronics, video games and smartphones. The result has come from staying focused on costs and the chief financial officer who led this effort is now to become the next CEO. The company has brought a focus back to technology and still thinks of consumer electronics as its core. We are yet to see if the company, having ceded leadership in this field to Apple and Samsung, can bring its brand back as a product people would like to own.

It is always tempting for companies that are in competitive markets with demanding customers to chase that unique distinct positioning in the customer’s minds. That requires investments in product R&D, design, and advertising. These are areas where everyone knows that 50 per cent of the money spent is a waste, except one does not know which 50 per cent. So to be able to combine it with cost control in order to generate decent profits takes special care.

These companies have done it by making cost consciousness part of the culture of the employees. With leadership transitions in both, it remains to be seen if they can sustain the culture.

The writer is a professor at Suffolk University, Boston

Published on February 11, 2018
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