Furnishing the world, assessing the development of IKEA's competitiveness using Porters 5 forces Model,
Since its origins as a small business selling knives, wallets, picture framings and whatever else its customers required, IKEA founded in 1943 by Ingvar Kamprad has always strived to provide the product at 30-50% less than its competitors. In 1947 furniture was added to their line and in the 62 years since then IKEA has become one of, if not the biggest and most successful furniture company in the world. The company aims to provide its customers well designed and functional furniture at the right price irrespective of the customer's geographic location, in fact IKEA aims to provide quality furniture cheaply as opposed to providing cheap furniture.
The company's vision is to create a better everyday life for its target customers, 20-35 year old first homeowners by offering a great selection of well-designed, practical home furnishings. Since IKEA has chosen this sort of affordable and distinctive marketing strategy, the company has been very successful in its expansion throughout the world. Key to this success is the way the company uses Porter's 5 Forces model covering the following areas, detriment of supplier power, threat of new entrants, rivalry among existing firms, detriments of buyer power, and the threat of substitute products.
IKEA meets these problems head on. By carrying out a SWOT analysis it becomes clear that IKEA's major strength is in its size and the cost savings it makes through economies of scale, it can offer a massive boost to local economies in employment, it currently outsources 90% of its production to low cost suppliers in low labor cost countries close to the raw materials required for its products, then it maximizes its logistical support through shipping and storing all of its offerings as flat pack or ready to assemble furniture. IKEA also have a unique way of pricing their furniture, instead of manufacturing the product at a fixed cost and then marking it up to make a profit, IKEA analyzes the market first and finds out what a particular piece of furniture is selling for. It then drops the price by about 30% and tasks its designers to design a similar offering without sacrificing quality for this price. The designers come up with an innovate design and this design is then given to innovative suppliers who have the technology and skills required to make this work, and who can offer their products to IKEA at a given price due to the vast number of units being produced.
IKEA runs as a franchise and as such has a system of decentralized management in place, this gives IKEA key local market knowledge and especially in local tastes while at the same time the punching power of an international organization. IKEA also keeps costs down by involving the customer, it offers the units flat packed for ease of transport and encourages customers to deliver and assemble the furniture themselves, however it will both deliver and assemble for a separate fee. IKEA does not suffer much by the way of rivalry with other firms as it's concept is pretty unique, it works well as most companies cannot do what IKEA does and IKEA does not want to provide furniture in the same way as other retailers.
One of IKEA's weaknesses is its standardization of products, although it allows for economies of scale it does not allow for individualism in the customer's choice of product, or in variances in regional tastes, as was the case in North America where tastes favored Oak furnishings and ready to assemble furniture was frowned upon and the drawer sizes in its standard offerings were too shallow to store the sweaters Americans had a propensity for. IKEA met this challenge by redesigning their products to suit and by running with the catchy slogan “it's a big country, someone has to furnish it” (International Marketing and Export Management p 215) By 2000, about 30 percent of IKEA's total production output were destined for the U.S. market. This successful strategy brought international sales to $1.38 billion in 2000 from $480 million in 1994.
In some stores IKEA has further secured its position from other new entrants and substitute products by offering its repeat customers the service of disposing of any old or damaged IKEA furniture, this coupled with the play areas for children, Coffee shops and good customer service set it apart from the rest of the pack. This formula albeit with minor variances has seen IKEA's continued development around the globe as can be seen from the world map below.
- ( International Marketing and Export Management p 215) by Gerald Albaum and Edwin Duer
- World Map showing locations of IKEA stores in 2007. Green represents countries with stores in operation and blue shows proposed locations taken from http://irwanarfandi.wordpress.com/2008/12/20/ikea-integrated-information-achitecture/
- Turnover Chart (taken from IKEA website/facts and figures)