Strategy Development IKEA

Introduction

This report describes the vision of IKEA, the main internal and external factors affecting its strategy development based on the articles and information published in press affecting the socio-economic activities of organisations.

The first part of the report is about the history of IKEA and the idea behind IKEA Group then we will discuss the company’s social responsibility programmes and how it strives to take advantage of public relations. Afterward, we will move on the affects of internal and external factors influencing the company’s strategy development and finally how IKEA has performed since 2005.

The external factors show political, economical and social analysis affecting the IKEA Group. It helps readers easily see what the main factors that IKEA should consider in its strategy development are.

The history of IKEA

Mr. Ingvar Kamprad, the founder of IKEA has been in his own business since he was five. At age of five, he bought matches in bulk cheaply in Stockholm and re-sold them to his neighbours at a lower-price but he was still making profit. Thereafter, he expended his business to selling flowers and greeting card, Christmas tree decorations and also pencils and ball-point pens. In 1961, IKEA starts its first quality test on the products using Swedish testing standards. Since then the company has been engaging innovating, producing and creating quality products with the lowest prices.

The idea

IKEA, as it says on its website, has a simple but challenging idea “To create a better every day life for the many people.” The group tries to support this idea, vision, by offering a wide range of stylish home furnishing products at prices so low that everyone will be able to afford them.

Developing and creating quality products at low prices is not an easy task. To meet this strategy, high quality at the lowest price, the company involves with diverse aspects of management, production process and also innovation. However, the group does not scarify everything to meet its targets, keeping prices low but not at any price. IKEA works in an industry where there are many rivals and stakeholders, new competitors come in to the market with diverse products and target customers. In such a market environment, it is not easy yet focal to monitor changes and predict what your competitors’ next step would be. We will discuss the factors that have an impact on IKEA later in the report.

“We shall offer a wide range of well-designed, functional home furnishing products at process so low that as many people as possible will be able to afford them.”

THE IKEA Business Idea

Strategy Development Factors

Furniture retail industry is a huge industry with numerous competitors. Hence, to achieve a considerable market share having innovative products based on customers’ needs and wants is crucial. Moreover, innovation should be based on a cost effective mind in order to keep the manufacturing process cost as low as possible.

The External Factors

There are internal and external factors (forces) influencing the development process on every manufacturer.

External factors mainly known as political, legal, social/green, economic and competitive and technological forces are often seen by managers as forced factors, nevertheless they plan their strategies based on based forces. These external factors could restrict some industries while open new opportunity windows for others.

Currently, there are two external forces that should be more considered in strategy development than others. These factors are social/green forces and economic forces. In recent years, countries and people are more conscious about the environment because of global warming problem. This indicates that companies should become more environmentally friendly and employ new green technologies to reduce their negative impacts on the environment. Going green helps organisations to show their public how responsible they are to the environment. IKEA has published some documents and reports on its official website to reflect its green activities.

“Social and environmental responsibility is a prerequisite for doing good business. IKEA´s sustainability direction is that “IKEA`s business shall have an overall positive impact on people and the environment”. The IKEA vision and business idea encourage the work with social and environmental responsibility.”

Anders Dahlvig, President and CEO, IKEA Group

It is important for firms to convince their customers about their activities and behaviour against different aspects of their activities such as sources of raw materials, production process and standards, etc. all these needs are forces by external forces through new legislations and campaigns. Therefore, IKEA like any other market player should consider reasonable response to such factors.

In addition, Economic forces are other external factor affecting companies’ sales, profits and turnovers. Currently, the world economy is suffering huge problems and difficulties due to US credit crises and international credit crunch. The recent credit crises in the US has cause a recession in the US market where is the second main market place of IKEA¹ in other words, due to the economic difficulties, the US customers are not willing to purchase new goods as same as before as they do not have enough money to afford it. Hence, the group should consider new strategies for the US market to not only keep its market share, also avoid any profit loss.

Furniture retail industry like other industries needs innovation to survive and compete in perfect markets. Innovation is the key to design and produce new products at competitive prices. However, about 50% of new products are not successful and are failed for different reasons. A company like IKEA with powerful presence in international markets should always recognise new product and opportunities to produce new innovated successful products.

The Internal Factors

The internal factors that should be considered in strategy development are more focused on factors that are controllable and can be predicted. E.g. customer services, product promotion, etc.

The group is planning to double its size and build 20 new factories in the next five years according to the group. This new expansion requires considerable strategies and plans to the group’s targets. However, building new facilities do not guarantee the success of the business. The idea behind IKEA is to produce quality products at low prices that appeal to the most people as possible. To hit this target, the group needs innovation to produce competitive products in one hand; on the other hand, it should exploit new technologies to make the production lines more efficient. A report published by Jeanette Martens son there are serious problems concerning the store project cost follow ups. Moreover, he argues that the store project cost follow up is too inflexible and a deliberate deviation from the specifications has to be done in order to study costs for different items specifically.

In addition to cost management, marketing strategies and advertising programmes are internal factors that should be planned and considered in the strategy development plan.

1- IKEA financial fiscal report published on the Internet

IKEA since 2005

IKEA Group is a multinational company possessing 231 stores expanded 24 countries. The group has developed 45 trading service offices in 31 countries, together with31 distribution centres and 11 customer distribution centres in 16 countries. According to the financial figures published by the group, there is a steady rise in the sales figures, increased by 1.34% from 2005 to 2007, hit a new record of 19.8 billion euros in 2007. As the official figures illustrates, IKEA’s main market places are Europe, North America with 82% and 15% respectively. Asia and Australia had only 3% of sales contribution in the same financial period. Nevertheless, China with 22% and Poland with 16% are the countries with higher purchasing figures. Italy with 8%, and Sweden and Germany both with 8% are other countries where customers were more interested in the products of the group. Apart from financial statistics, IKEA has business relationship with 1,350 suppliers in 50 countries. Moreover, the group has employed 96,300 people in Europe, 16,450 workers in North America and also 5,250 employees in Asia and Australia.

Apart from the published financial data, the group has been trying to increase its corporate social responsibilities and become more environmentally friendly by become greener and also employing new technologies with the lowest negative impact on the environment. Furthermore, the company is concerned about sources of raw materials used in the production lines.

IKEA code of conduct – IWAY

Showing responsibility for people and the environment is a prerequisite for doing good business. That’s why IKEA requires suppliers to comply with the company’s code of conduct, “The IKEA Way on Purchasing Home Furnishing Products” (IWAY).

IWAY defines in detail criteria relating to working conditions, minimum wages, overtime payments, the right to belong to a trade union, emissions to water and air, waste and chemical management, and bans on child labour and discrimination in the workplace.

Conclusion

In conclusion, planning a strategic development plan requires numerous considerations and aspects. Every strategy development plan includes two main factors, internal factors and external factors. The external factors are those factors that are not controlled by companies whereas the internal factors are controlled by companies.

Furniture retail industry is a huge industry with its especial potentials. However, there are some factors in retail industries that have direct impact on sales and also future success of each member of retail industries. Economic influences are part of these motivations. IKEA Group, as a multi-national group should consider the current economic recession in the US as North America is its second major market place. Recent mortgage crises, credit crunch and economic recession have caused financial difficulties for US economy; hence, customers are not willing to buy new products as they cannot afford it.

IKEA is considered as a dominant furniture retail market player in Europe and it is recognised as a serious competitor in North America market; nonetheless, IKEA is not recognised as a major market player in Asia and Australia according the group’s official annual report. Therefore, theses markets should be targeted in the future development and marketing plans if IKEA looks for new customers from these regions and also higher turnover.