This report critically analyses the competitive position of IKEA which has led to its success and failures over the past five decades. IKEA has been well known for its low price concept and wide range of furniture’s. IKEA has grown enormously and now operates in 55 countries.
This report analyses the external environment of IKEA by using the PESTEL Analysis. The analysis shows that political factor plays most important role while other external factors such as economic, socio-cultural, legal, environmental and technological contribute to some extent in determining the expansion and success of IKEA.
The resource and capability of IKEA is analysed by using the Michael Porter’s five force analysis. The study shows that IKEA has to dominate in all the five areas to succeed in future. The report also studies that marketing mix used by IKEA in different countries which have had a major part in IKEA’s success.
IKEA is committed to satisfy its customers. For customer satisfaction IKEA has worked hard to understand the needs of their customers. This report also examines the customer perception and the IKEA philosophy leading to happy and satisfies customers.
The strengths and weaknesses of IKEA as well as opportunities for expansion and threats from competitors are revealed by conducting the SWOT analysis.
Finally the causes that could lead to the demise of IKEA are discussed along with its future.
Table of contents Page no.
PESTEL Analysis 4
Resource and Capabilities 6
Marketing Mix 8
Customer Perceived Values 10
SWOT Analysis 12
IKEA’s Future 13
The economic slowdown has had a negative impact on most businesses world over. Despite the slowdown IKEA plans to open stores in china and world over. The business was started by entrepreneur Ingvar Kampard who had the idea of selling things cheaper than the market price. Thus IKEA came into existence in 1943, when he was just 17 in the small village of Agunnaryd in Sweden. Furniture was introduced in the IKEA product range in 1947 and there after IKEA designed its own furniture. After opening its first store in Almhult in 1958(IKEA, 2009), Ikea has expanded its business worldwide and now operates in 36 countries around the world. Its sales for 2008-09 were 21.2 billion euros and had 127,800 employees. IKEA’s success in the retail industry is due to its vast experience which spans over five decades in the retail market. Ikea also achieves product differentiation and cost leadership by its unique concept of selling furniture’s in kits that are assembled by customers at home .IKEA’s vision is to create a better every day life for many people (IKEA’s Annual report 2009).
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Macro Analysis (PESTEL Analysis)
According to Scherrer (2003), changes in political and legal environment adversely affect the market place as well as the sale and distribution of a product. The political factors include the nature, level of corruption and stability of the government. While the legal factors include import laws, taxation, employment law, competition law, health and safety laws. Europe accounts for large part of IKEA’s business with 82% of its sales coming from there (IKEA, 2009). This is because the governments in Europe are been stable, encourage foreign trade and favorable taxation policies. IKEA relocated its Group management, finance and treasury departments to Leiden in the Netherlands from Denmark. This move can be attributed to the favorable government policies in Netherlands that benefited the company over and above any other country in Europe and even Sweden. Globalization influenced IKEA to enter the Chinese furniture market much later after the import control rules were relaxed and government opened up property markets. According to Miller (2004), heavy import taxes have hit IKEA; thus IKEA has been having difficulty in setting a price which good for the customers and the company. IKEA plans to relocate production of many items in china. One the other hand IKEA has no plans of entering Indian markets due to its strict licensing laws for the foreign owned companies.
According to Scherrer (2003), economic growth of any country is reflected by its economic climate which influences its plans for expansion. IKEA has no plans on expansion into underdeveloped and developing countries like India. The economic conditions do not favor its business strategy as the buying power of the customers is low. Thus IKEA’s main market is Europe where every ordinary person including students can afford to buy an IKEA product. IKEA faced massive problem in china due to its economic condition as it became a luxury furniture brand in the Chinese mind and not many could afford its products.
Scherrer (2003) states that consumer preference; purchasing patterns and conditions under which products can be sold are affected by the socio cultural changes. IKEA had to adapt to the cultural environment to expand its business in china. It had to get the Chinese customers to adapt to the do-it-yourself (DIY) concept. As labor is cheap in china, the DIY notion has not taken hold in china as in the western countries where customers know they save money by assembling the furniture
IKEA uses technology to stay ahead of the competition by producing furniture cheap and quality furniture. IKEA also uses technology by marketing and selling its products online. Thus IKEA is able to market its products to far many homes and increase its sales considerably. According to Rowley and Slack (2003), a new technology known as kiosk is used by IKEA’s customers to view their choice of sofa covered in various fabrics available in that range.
IKEA is committed in using resources in an economic and careful way. (IKEA 2009, social and environmental responsibility). IKEA has been offering compact florescent light bulbs (CFLs) which can last up to 10 times longer and use 80 percent less energy than incandescent. IKEA is also committed in reducing the use of plastic bags and there by has introduced the Blue Bag which is cheap, reusable and durable.
Resource and capabilities
Resource and capability is illustrated by Porter’s Five Force Model
Michael Porter’s Five Force’s Model
Power of Suppliers & Power of Customer/Buyer
IKEA does not enter into actual production but has taken further steps thus keeping the suppliers in an even tighter grip. These suppliers are not only dependent on orders from IKEA but are also in direct financial debt to IKEA, because IKEA has paid for the assembly of their machinery. Hence IKEA has the buyer’s power to pressurize its suppliers to reduce manufacturing costs anyhow. To reduce the supplier power, IKEA has more than 1300 suppliers in 53 countries with majority of its products from Europe (64%), followed by Asia (33%) and North America (3%) (IKEA, 2009).
According to Hopkins (2008) there is more competitive pressure if there are more rivals in the industry. The number of rivals for IKEA is limited in Europe which is where major revenue is generated, as they are able to restrict competition due to their cost leadership and product differentiation. Apart from the competition IKEA faces from UK based B&Q (the largest DIY retailer in Europe and third largest in the world) in china; its biggest worry is that it is facing competition from many international and Chinese chains who are copying its products. Many stores in china have IKEA’s catalogue in their stores and they tell customers that they can reproduce the same furniture at a lower price. IKEA’s online catalogue makes it easy to view and copy.
Threat of Substitute
Furniture made with wood can only be substituted by furniture made with plastic. But wood is bio degradable which is the reason wood is preferred over plastic.
Threat of new Entrants
Pass, Sturgess and Wilson (1994) state that it is difficult for entrants with unknown products to win viable market share as customer loyalty exists with the existing firm. IKEA enjoys loyalty from its customers which has been built up by huge and continuous investment in making its products better and cheaper. There is high barrier for entry set by IKEA which makes it almost impossible for a new entrant with unknown and untitled products to win a viable share of the market.
According to Armstrong and Kotler (2006), modern marketing consists of a major concept know as marketing mix. A firm needs get its marketing mix which includes product, price, place and promotion (the 4PS) right to get the response it wants from the target market.
Source: Armstrong and Kotler (2006) Marketing an introduction. New Jersey: Pearson Education, Inc
Product strategy forms the first of the 4PS of modern marketing strategy. Product includes goods as well as services the company wants to sell. IKEA has large range of products for almost everything that is needed at home. IKEA is positioned itself as a company which sells quality goods at affordable price. In terms of service, IKEA encourages the concept of DIY but makes technical help available for its customers when needed. This makes IKEA’s products different from other products available in the market.
According to Myers, Caustic and Diamantopoulos (2002) it is difficult to price products in the international markets as the competition increases. IKEA’s adopts low price strategy which is achieved by keeping the costs low between then manufacturers and customers. IKEA can also sell its products cheap because it makes bulk orders. IKEA plans to lower its prices in china by 27% to increase its sales. This is possible as china produces 30% of its products. Also large proportion of its raw materials also comes from china. IKEA also offers payment and credit options for its customers.
IKEA has been able to reduce its costs by locating its shops in the suburbs of the cities. In china it has opened its store in shanghai city knowing that only 20 percent of visitors in shanghai have their own cars.
IKEA promotes its products by advertising on TV and newspapers. It also markets and sells its products online. Broachers and catalog are printed which have the latest offers and the new products for convenience of customers. IKEA is also involved in helping NGO’s like UNICEF. This creates a good company image in the customers mind.
Customer Perceived Value
According to Eggert and Ulaga (2002), customer perceived value (CPA) comprises of three elements,
the multiple components of value,
the subjectivity of value perceived and
the importance of competition.
The difference between benefits and costs of an offering perceived by the customers can be stated as customer perceived value.
According to Heinonen (2004), organisations cannot only focus on process and outcome of service delivery which are easy to manipulate. Managers have to put in effort to consider the temporal and spatial elements in service. IKEA’s warehouses are open for customers to test and select the furniture’s. Thus IKEA has been able to create value by providing an arena where customers can perform services at their own convenience.
IKEA philosophy is to increase customer perceived value by delivering extraordinary customer service. IKEA reduces perceived sacrifice for its customers by offering them a remarkable experience through their new designs, high quality and low cost furniture’s.
IKEA maintains its low prices by reducing its shipping costs, inventory costs and also by their DIY concept.
Source: Bernhard Schindlholzer, the Customer Experience Labs (2008)
IKEA is able to maintain its focus on being easier, cheaper and faster. It is also able to provide excellent customer service by its cost cutting and process optimization techniques.
According to Lee and Ko (2000), the internal as well external customers should be considered while determining the strength of an organisation. IKEA is able to maximize productivity and minimize waste generation as maintains complete control over production process. All the steps in the production process from forestry saw milling and board manufacturing to furniture is handled by the industrial group of IKEA which is called Swedwood.
IKEA’s own design group makes sure that their products match the trend of the market. The design group also co-ordinates with the industrial group and vise versa to effectively convert the design into furniture’s.
IKEA has been a long term partner of UNICEF supporting UNICEF’s programs benefiting children and their opportunities for learning and development in Asia, Africa and Central and Eastern Europe. IKEA has also been working with UN to abolish child labor. By fulfilling its corporate social responsibility and repeated customer satisfaction, IKEA has been able to build a strong brand image and thus enjoys enhances customer loyalty all over the world. IKEA was ranked 41st among the best global brands around the world in 2006.
IKEA has to depend on sub contracted manufacturers as it has limited manufacturing capabilities, which makes it difficult for IKEA to coordinate and control quality standards in some regions. IKEA may also face competition from the subcontractors as they may manufacture their own line of products.
IKEA products are also easy to replicate which the reason it is facing competition in china from the local suppliers. These suppliers in china are able to copy the IKEA products and sell at a cheaper cost.
Lee and Ko (2000) state that opportunities are present every where such as changes in government policies, social patterns and even technology. Asia accounts for small part of IKEA’s business with only 3% of its sales generated from there. IKEA senses an opportunity to make its mark in Asia. IKEA plans to cut prices in china considerably and open new stores. IKEA can also expand by using e-commerce to its advantage. By using innovative technology IKEA can reach customers in parts of the world where it does not have a store.
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The major threat to IKEA is distinct demand in different regions. In a vast country as china, IKEA has to adjust to the living style and culture which differ from one part to the other. IKEA plans to expand despite the business being hit by the global recession. IKEA will have to be cautious of the decisions it takes for its future in these difficult times.
IKEA success can be attributed to its ability of turning problems into opportunities. IKEA has been able to globalize and compete with local products in diverse markets due to its vision and business idea.
IKEA is finding out ways to reduce costs in china and also plans to open 10 more outlets by 2010. IKEA expects china to be the second largest furniture consumption market by 2014 only after USA. Therefore, IKEA has streamlining its resources in Asia-Pacific and will moved its purchasing, financial, operation, security and other functional departments from Singapore to Shanghai.
Rowley and Slack (2003), a new technology known as kiosk is used by IKEA’s for customer convenience. Thus by using better technology like kiosk, IKEA will be able to satisfy more and more customers and will keep growing.
IKEA has to constantly look out for new and innovative ways to reduce costs and improve quality to stay ahead of the competition. IKEA has to be in control of the huge expansion it has planned. Inability to reduce costs and inability to be in control of expansion could lead to the demise of IKEA.
Analyzing IKEA by PESTEL analysis reflects the external factors that IKEA has to counter to achieve its goals. IKEA has to deal with different external factors like taxation policies, government rules and regulations, exchange rate in different countries. IKEA product prices vary from country to country largely due to the external factors.
IKEA has adopted a unique marketing mix which has resulted in the enormous growth of the company. IKEA has been so successful because it has been able to change its marketing strategy to suit the culture of the country. Most of IKEA’s business comes from Europe but now it’s expanding in Asia. To be successful in the highly competitive Asian and especially Chinese markets, IKEA will have to adopt new strategies which suit the cultures of these markets which is different from the western culture.
IKEA’s plan of expansion in China could be quite risks as they have not been able to make their mark in the Chinese markets as they have been able to make in Europe. Moreover, IKEA’s business has been hit by the financial crisis world wide; it could be strategic for IKEA to focus on increasing their sales in the existing stores than expansion in China.
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