Market analysis and effects of globalization on IKEA

IKEA is a home products retailer with its branches spreading internationally and is privately owned. It sells furniture, Bathroom and Kitchen items and accessories in flat packs. IKEA is the world’s largest furniture sellers due to its unique concept of the furniture sold in flat packs, affordability and at home assembling by the costumer.

Immense retail experience, product diffentiation and reasonable prices are the key for IKEA s success. It is the world’s most successful multinational retailers.

In 37 countries IKEA has 301 stores (31 August 2009). Last year a total of 286 million people visited the IKEA Group’s stores around the world, most of them in Europe, North America, Asia and Australia.

Its catalogue is printed in 118 million copies in 45 editions (23 languages).

History

IKEA is owned by a Dutch registered foundation and is controlled by Kamprad Family. It was founded by Ingvar Kamprad in 1943 in Smaland, Sweden when he was only 17 years old. He started with an innovative concept for the economically stricken but hard working people of Smaland. He first started his company with 15 co workers. His concept mainly based on cost cutting solutions which do not affect the quality of the product and thus offering the sale in a much lesser price than his competitors. He never compromised on the quality but he scrapped from everything else. The word IKEA comes from the first initials of his first and last name and the farm and the village he came from (Elmtaryd and Agunnaryd)

Corporate Structure

IKEA is owned and operated by convoluted groups of profit and nonprofit corporations.

The corporate structure of IKEA has two major parts:

Operations

Franchising.

Management of various stores is the IKEA Operations responsibility. INGKA Holding is a private Dutch company which is owned by Stichtting INGKA Foundation which was established in 1982 in Netherland as a tax exempt non profit foundation. The design and manufacture of its furniture, purchasing and supply functions are overseen by INGKA. In 36 countries 2,235 stores are run by INGKA Holding, the rest 30 stores are run by franchises. The INGKA Foundation is controlled by a five-member executive committee that is chaired by Kamprad and includes his wife and attorney.

The IKEA trademark and concept is owned by Inter IKEA Systems, registered in Luxembourg, which is an exclusive Dutch company and its ownership is very complicated and uncertain but believe to be owned by Kampard Family members. All IKEA stores including ones run by the INGKA Holding pays a fee of 3% of the total profit to Inter IKEA systems.

All the stores are operated by Inter IKEA Systems under a franchise agreement. In Australia however IKEA is operated by two companies: Eastern Coast Stores including Queensland, New South Wales and Victoria are under the owner ship of INGKA Holding. Stores in the South and Western Australia are owned by CEBAS Pvt. Ltd.

The suppliers acquire a long term contract with IKEA transferring technical advice and leased equipment from the company. IKEA keeps the rights of exclusion and also for low prices.

Vision and Mission

“To create a better everyday life for the many people.”

This vision provides the structure of a Marketing message to all IKEA businesses worldwide. This message reflects the working and idea behind IKEA’s well designed and functional products of home ware. Also keeping the product affordable for encompassing as many people possible to purchase in turn providing a remarkable profit.

Compromising the price doesn’t include compromise in the quality of the product or of the company’s principles. As they say “Low price but not at any price”.

This promise is the key factor for their sustainable and flourishing business. IKEA’s approach was positively appreciated worldwide as the good and the services are beneficial for both the costumers and the environment.

The business idea is “To offer a wide range of well designed, functional home furnishing products at

prices so low that as many people as possible will be able to afford them.”

The market positioning statement is “Your partner in better living. We do our part, you do yours.

Together we save money.”

The product range varies in home furniture and accessories and includes 9500 items. The items are available in big warehouse type display stores or exclusively on IKEA website on the internet making purchases easier for the consumer.

In United Kingdom IKEA has opened 18 stores so far. The first one was opened in Warrington in 1987. There is also a new store opened in Dublin in 2009 which is the first one in Ireland.

In August 2008 the IKEA stores were visited by 565 million visitors in a year and 450 million people used the website. The sales went up to 21.2 billion Euros ($30 Billion) with an increase of 7%. The biggest consumer countries were Germany, USA, France, UK and Sweden. Only 11% of the sales were generated in Sweden in 1997.Germany contributed 29.6%, Western Europe sale was 42.5% and 14.4% from North America. IKEA is now opening stores in Asia and China.

The growth strategy includes the opening up of new stores in different locations to attract more customers. Their company objectives enable their strategy for the customer to come back by which they weaken the competitors market and increase their share.

IKEA Culture

Instead of acquiring the regional and national trends and tastes IKEA followed its vision which was”typically Swedish”. This was a big global hit and the main reason for the success.

Their market research was minimal with no intention finding out consumer interests, instead the Swedish management decided what to present to the global public, which was simply good quality functional furnishers in affordable prices. The company also highlights the Swedish culture and roots from putting shops and cafes offering Swedish legacies from meatballs to jams in their stores to the blue and gold color scheme of their display units.

They tend to sell the same product worldwide and also to cut costs of the products by 30% in price from the competitor maintaining the after tax return.

Despite breaking the rules of international retailing, the formula of selling Swedish designed products worked in Europe but it took a while for this business to shoot off in North America. In early 90 s most of the IKEA stores were considered to be in trouble because of the adverse movement of the exchange rates.

Moreover the IKEAs beds were too narrow and all of the measurements were in the European scales. The kitchen cabinets were also too narrow in short the furnishers and accessories were not appropriate for Americans. Finally the company decided that in order to succeed in US market they have to customize and redesign their product range. The redesigning of the furnisher gave a 30-40% boost in sales in bedroom furniture and 15% in kitchen furniture instantly. By 1997 about 1/3 of IKEA furnishers were designed for US market.

The company is generating huge profits from American market but European market has a bigger share in this profit.

Current Situation:

PEST

Political

IKEA is one of the best example of a firm, successful in both Scandinavian and global market. The political condition in Sweden is stable and the environment eases condition for many markets. After the 1978 reforms and open up policy in china IKEA was also one of the western retailer who took this opportunity and enter into the Chinese market.

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Economic

Global recession is of the biggest challenges facing by multinational companies all over the world. IKEA timely enter in Chinese and Indian market which was least affected by global recession. In the UK, Opening up of Southampton store in 2009 helped hold up sales otherwise hit by recession, but operating margin have declined from 11% in 2005 to 3.3% in 2009.

Social

IKEA contributed much in the society as they provide opportunities in people and the employees are entitled in different benefits and incentives such as insurance and pensions. Moreover, the company promises to provide more high quality furniture that sticks to their original concept – stylish furniture at low prices. IKEA is turn out to be a successful global brand attracting similar social group of customer with different cultures and societies in all the big markets in the world.

IKEA is building online help out to guide customers to a more sustainable life. It supports customers with tips as well as ideas on its website to reduce their impact on the environment. This will also save them money. Staffs are trained on sustainability, both on what IKEA is doing and how they can take responsibility to become sustainable for themselves.

Technological

The IKEA used quality technology and systems to promote the shorter queues and proper scheduling, tracking and trading patterns, and staffing. It aims to be more productive and establish employee preferences. The system made the IKEA in a position to ensure the right number of staff in a right place and in a right time to match the unique trading pattern at each stores of IKEA.

Porter Five forces

Michael porter has determined five forces to analysed a industry.

Power of the Buyers

There is a little power because of the IkEA’s exiting low-price options. Furniture as well as other small items has an alternative and consumers have limited alternative choices in getting high quality in low price that make the IKEA unique among its competitors. In addition, the strategy of low price is another way of the company to response in customers’ needs.

Power of Supplier

IKEA has its thousands of suppliers from Asia, Africa and other parts of the world that set standards in delivering the materials. Only few times for some products, the IKEA bids for the contracts with multiple companies to craft the same products. Most of the suppliers work in IKEA and compete with other suppliers that helps the company to reduce the power of its supplier and result of that they have little bargaining power. Because of the low-pricing strategy, IKEA’s profit margin also affects the prices in raw materials than by prices in labour.

Rivalry

The IKEA’s furniture competitors’ offers slightly different styles and functionality. In the European market IKEA has a very strong market imagine for low price products with a good quality, in the USA market Conrin is targeting a new low cost in terms of furniture line; Cratel & Barrel offers a furniture in a box which is subject in higher prices; Ethan Allen aimed at a more higher market; Wal-Mart is equipped in a big box furniture that is categorized under the general store must-have-items, but don’t have much of a style as IKEA. IKEA is the most successful in delivering the complete package for the customers that reflects on weak rivalries.

Substitutes

There is no specific product that can be an alternate for the furniture however IKEA must have to keep up with the latest trends, to avoid becoming out of style. Another advantage is that, through IKEA’s cutting and leading technology, IKEA could copy any new style fairly and move each the product into its stores.

New Entrants

All the big furniture manufacturer and retailer have their wide range have in big town. Another furniture company is rolling on the strategy of low-cost and should compete with the IKEA as the excellent company in delivering the furniture and house wares. IKEA stores and some of other competitor do not reach many small towns and this is an opportunity for the new competitors to move into small and midsize cities with smaller stores and less selection. But not easier in city because new entrants have to establish a vast supply chain and create a unique brand name on as low prices.

Generic strategies:

IKEA clearly stated in its mission statement its strategy; IKEA has built its cost leadership position on these steps, and furnish the customer with a quality product with components derived from all over the world utilizing multi-level competitive advantages, low-cost logistics, and large simple retail outlets in suburban areas. Furthermore, cost-leadership has been effectively incorporated into the IKEA’s culture through symbols and efficient processes.

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The value chain

The value chain approach identifies two major activities, such as primary and secondary.

Primary actives which include production, marketing, logistics and after-sale functions.

Secondary activities, on the other hand which are identified as support processes to primary activities. These include, firm’s infrastructure, Human Resource Management. Technology development and procurement.

The way from supplier to customer must be as shortest, cost-effective and environmentally pleasant as possible. Flat packs are a very essential aspect of this work: eliminating wasted space means we can transport and store goods more efficiently. Since efficient distribution plays a key role in creating the low price, goods routing and logistics are a focus for constant development.

The corporate culture of IKEA is built upon this philosophy all the way from design teams to suppliers and to the customer. A continuous strife for development in all areas of the value chain is an effective way to shape the industry to better-fit IKEA’s future strategies. Due to the distinctiveness of IKEA’s strategic positioning, being the largest competitor in its field, the firm has the advantage of setting the phase of the industry.

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IKEA has developed the value chain approach by integrating the customer in the process and introducing a two-way value system. In order to furnish the customer with good quality products at a low cost, the firm must be able to find suppliers that can deliver high quality items at low cost per unit. The headquarters provide carefully selected suppliers with technical assistance, leased equipment and the necessary skills needed to produce high quality items. This long-term supplier relationship not only produces superior products, but also adds internal value to the suppliers (Normann et al, 1993: 72).

SWOT analysis

IKEA’s goals of sustainability and environmental design are central to its business strategy.

It has launched a new sustainability plan for the company to take it through to 2015. This will combine socially, environmental and economic issues.

Strengths:

Global Brand which attract the key customer group which promises same quality worldwide.

A strong concept – based on offering a broad range of well designed, functional products at affordable prices.

Increasing use of renewable materials – IKEA superior its overall use from 71% in 2007 to 75% in 2009.

Volume commitments: IKEA believes in having long-term partnerships with its suppliers.

Economies of scale.

By using new technologies: Like IKEA’s OGLA chair has been in its range since 1980.

Opportunities

A growing demand for low priced and greener products. Trends in the current financial environment may result in consumers trading down from more expensive stores.

Growth of middle class in china and India

Demand for reduced water usage and lower carbon footprints.

Solutions for a sustainable living at home – IKEA gives online tips and ideas for this.

Reducing carbon footprint. IKEA aims to trim down energy usage, use more renewable energy, cut its use of air transport and reduce packaging. Its green transport plan includes an aim to reduce business flights by 20% in 2010 and 60% by 2015.

Developing social responsibility. IKEA’s policy which includes support for charities such as the World Wildlife Fund, UNICEF and Save the Children.

Weaknesses

IKEA has to acknowledge and recognize its weaknesses in order to improve and manage them. This can play a key role not only in helping it to set objectives but also to develop new strategies. IKEA’s weaknesses may include:

The size and scale of its global business is very challenging to standardise its products. This can represent a weak relationship in IKEA’s supply chain, affecting consumer views of IKEA’s products.

Keep balance between low cost products and good quality. IKEA also wants to differentiate itself and its products from competitors. IKEA believes there is no concession between being able to offer good quality products and low prices.

IKEA must improve communication with its consumers and other stakeholders about its environmental activities. The scale of the business makes this a difficult task. IKEA produces publications in print and online, carries out major TV and radio campaigns to enable the business to communicate with different target audiences.

Threats

If a company is aware of all possible external threats, it can plan to counteract them. By generating new ideas, IKEA can use some particular strength to defend against threats in the market. Threats to IKEA may stem from:

Significant reduction in first time buyer in housing market.

More competitors entering in the low price household and furnishings markets. IKEA needs to reinforce its distinctive qualities to compete with these

Recession turn down consumer spending and disposable income reduces.

Future Options

IKEA’s one of the main strength flat pack and high quality furniture on a very low price compare to its all competitor all over the world. IKEA’s supply chain strategy where warehouses are divided into different zones and properly located to have a better control. With this strategy, the IKEA can analyze the processing time and cost more effectively, and resource utilization, and queue times and lengths for the various functions. The resources are applied and detailed in applicable working schedules, sorted and simulated at a higher-level

There is a business potential for IKEA in providing solutions and services that enable customers to live a more sustainable life at home. IKEA is developing an effective solutions for customers in order to support them recycling or reusing used products, and aiming at no products ending up at landfill and the recycled materials used in producing new IKEA products.

For a successful global strategy IKEA must maximise its strength, minimise its weakness and by taking market opportunity to strengthen its market share image by avoiding all the external threats.

Social trends: IKEA is providing online help to guide customers to a more sustainable life. The advantages of online business will reduce administration cost and it will give more information to customer of product and IKEA can pass its corporate goal to target its customer more effectively

Market forces: IKEA is large enough to enjoy economies of scale and also target the biggest segment of the market .i.e. middle class. This helps to reduce average costs in the long run through, for example, better use of technology or employing specialized managers. Economies of scale also give a business a competitive edge if cost savings are then passed on to customers in the form of lower prices. This puts up high barriers to entry for smaller companies entering the market.

Economic factors: Global recession and significant decrease in first time buyer has affected the demand in future industry. IKEA’s low prices create appeal amongst its customers in tough financial times. It is vital to keep prices as low as possible when the retail sector is depressed. IKEA’s pricing strategy targets consumers with limited financial resources. Its products will also attract to those with higher income through good quality and design. IKEA must ensure that it is always recognised as having the lowest prices on the market in the future

IKEA had, in fact, has been quite successful with its ‘one-design-suits-all’ global expansion strategy in many markets. However, industry experts were doubtful as to whether this strategy would translate well into some of the Asian and south Asian, culturally diverse and riskier markets. It is very important to have higher degree of localization is essential for companies like IKEA to be successful in diverse markets. 

The Asian markets, where India and china has fastest growing middle class can be very attractive market. Upon entry into the far eastern markets, IKEA faced a number of challenges in terms of varied cultural, demographic and market specific needs IKEA must have more cultural promotional approach to the market.

IKEA must alter two of the most important aspects of its time-tested and proven global strategy when it came to China and Middle East; while elsewhere in the world, IKEA had always located its stores in less expensive areas and sold its furniture on the do-it-yourself (DIY) principle, these elements had to be changed in China and Middle East. IKEA must decentralized most of its functions including HR and stores management in China, There was criticism that IKEA was far too bureaucratic with many of its operations being globally controlled and systematized. Commenting on this, Ian Duffy, IKEA’s China retail manager commented, “We need time to learn and change in the (Chinese) market to become a success.”

Significantly improving the hold in the US market, this has the best growth potential for IKEA. The current hold of IKEA is this market is very limited. Thus, it enables IKEA to keep its growth rate while basically keeping its low-cost strategy in the near and medium future.

The main operative aim at achieving this goal is an adjustment of the company’s products to the US market needs. IKEA’s stores in the US must shift into less internationally homogeny products and more products adjusted to the US market needs, expanding the variation of the product line of IKEA. This might result a relatively low-cost products to the high-income population that might well include innovative design motives that characterizes the current products.

Globalization of IKEA and way forward

This process seems extremely important for achieving the following:

More emphasis must be given on improving the understanding of various markets all over the world for a better strategy planning, decreasing the dependency on the current management. This process should better start before Mr. Kamprad’s manager retires from the company for absorbing much of their spirit into the future international management.

With continued expansion effort underway worldwide, IKEA strive to enforce its USA expansion support the company’s vision and business model to offer its products on affordable prices. For a long term strategic planning IKEA must evaluate in more detailed US market and build more stores where it can achieve economy of scale. IKEA should have clusters of stores within market or different region of USA enable company to efficiently streamline and manage its distribution services, training, recruitment initiatives and development marketing efforts.

On a broad bases strategy IKEA must penetrate into its existing market to gain more share by promoting its product in existing market. On the other hand more store should be open in different part of USA market.

Ansoff’s Matrix – Product-Market Growth Matrix

In the Far Eastern and Middle Eastern markets where Ikea must develop its makets in near future. In the emerging economy like China, india and Brazil where construction industry is growing. IKEA must utlise its market imagine of offering lower price products with and high quality.