Strategic analysis and planning for IKEA

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IKEA Case Study

Executive Summary

IKEA is the world’s most triumphant global enterprise. According to the statistics, in 2007, IKEA had established around 300 home decorating retail stores in 35 countries. It has been visited by around 583 million customers. IKEA’s inexpensive, smartly designed products, exhibited in huge depot stores, made sales of €21.2 billion only in the year 2008 compared to €4.4 billion in the year 1994. Although IKEA has refused to issue statistics of its profitability, the net profit margins of IKEA were believed to be around 10% higher than an average retailer. Ingvar Kamprad, the founder of IKEA, is believed to be one of the richest men in the world.

Discussion

IKEA was founded in 1943 in Sweden by Kamprad when he was only 17 years old. The young organisation sold Christmas magazines, fish, and seeds of his family ranch. His primary business was trading matches. The IKEA is an acronym: I and K are the initials of Ingvar Kamprad; E is for Elmtaryd, which is the name of his family ranch and A is for Agunnaryd, which is the name of his home town. Shortly, Kamprad added ballpoint pens to his product range and innovated the way of selling through mail. His depot was a shack on his family ranch.

In the year 1948, furniture was added to the company’s product line and by the year 1949, the very first catalogue was published. In the year 1953, Kamprad bought an unoccupied industrial unit in Almhult and converted it into a depot. With the rapid growth of the business, Kamprad recruited Gillis Lundgren, a young designer, who initially helped out to do snapshots for the catalogues, later on he began to create furniture designs for IKEA, which includes many best sellers.

Corporate Level Strategy

Corporate strategy primarily is focused to the collection of businesses in which an organisation competes and develops and coordinates the business portfolio (Baum & McGahan 2004, p 55-87). Corporate strategy deals with:

• Corporate responsibilities; these include goal identification, type of business, he process of business management.

• Defining the competitors.

• Developing synergies by coordinating, sharing and investing personnel, financial resources and other assets across all the business units and using business units to assist other corporate activities.

• Management style such as centralization or decentralization.

Organisations are liable to create value through their businesses by maintaining their business portfolio, making sure that their businesses are thriving for a long time (Baum & McGahan 2004, p 55-87).

Therefore, the important questions addressed by corporate strategy are:

What sort of businesses we should be in?

How can we enforce the synergies among different units of the business?

What are the international trends that are impacting our business, and how can we manipulate them?

Business Level Strategy

Business strategy is concerned with creating and nourishing a competitive edge for the products that are produced and services that are rendered. Business strategy deals with:

• locating the business against competitors

• predicting changes in technologies and demand

• manipulating the competitive nature with the help of strategic actions.

Kamprad has successfully used his abstinence to cut down vendor prices. IKEA makes a decision of what you want and tells you to buy that instead of relying on R&D to figure out your needs (Thompson 2002, p 22-31). They position little items called the “hot dogs” (due to their incredibly low price) throughout their warehouse and when you see them you feel the urge to buy them even though you did not need it.

Another business strategy used by IKEA is that when a rival introduces similar commodities into the market at a comparatively cheaper price, IKEA goes for a “stripped-down and even cheaper” policy to compete with its competitors.

The crucial business strategy that helped wealth maximising for the Kamprads was the formation of the IKEA Group and the Stitching in the year 1982 where Kamprad gave his shares to the alleged charity mostly for the purpose of tax-exemption and to lock up IKEA to avoid bankruptcy or sale (Thompson 2002, p 22-31).

IKEA’s success has accredited to luck, good showmanship and timing, obsession, strategic brutality, efficiency, good corporate, business and global strategy – and the capability to turn around barriers into competitive edge.

Reasons for failure of IKEA in US market

IKEA opened its first United States store in 1985 in Philadelphia. The company had decided to locate on the coasts. Surveys of American consumers suggested that IKEA consumers would probably be people who had travelled overseas, call themselves risk takers, and are fond of fine food and wine. These people were concentrated on the coasts (Thompson 2002, p 22-31). Although IKEA initially garnered favourable reviews, and enough sales to persuade it to start opening additional stores, by the early 1990s, it was clear that things were not going well in America. The company realised that its European inspired offerings did not usually go with American consumers. Centimetres were used to measure beds, not the twin, king, queen and sizes with which Americans are used to (Segil 2005, p 46-52). American sheets did not fit on IKEA beds. Sofas were not big enough, wardrobe was not deep enough, glasses were too small, curtains were too short, and kitchens did not fit American-size appliances.

In a story often repeated at IKEA, managers noted that customers were buying glass vases and using them to drink out of, rather than the small glasses for sale at IKEA. The glasses were apparently too small for Americans who like to add liberal quantities of ice to their drinks. To make matters worse, IKEA was sourcing many of the goods from overseas, priced in the Swedish kronor, which was strengthening against the American dollar. This drove up the price of goods in IKEA’s American stores (Thompson 2002, p 22-31). Moreover, some of the stores were poorly located, and not large enough to offer the full IKEA experience familiar to Europeans. Turning around its American operations required IKEA to take some decisive actions. Many products had to be redesigned to fit with American needs. Newer and larger store locations were chosen. To bring prices down, goods were sourced from lower-cost locations and priced in dollars.

IKEA also started to source some products from factories in the United States to reduce both transport costs and dependency on the value of the dollar. Simultaneously, IKEA noticed a change in American culture (Segil 2005, p 46-52). Americans were becoming more concerned with design, and more open to the idea of disposable furniture. It used to be said that Americans changed their spouses about as frequently as they changed their dining room tables, but something was shifting in American culture. Younger people were more open to risks and more willing to experiment. There was a thirst for design elegance and quality. Starbucks was tapping into this, as was Apple Computer, and so did IKEA.

To tap into America’s shifting culture, IKEA reemphasized design and started promoting the brand with a series of quirky hip advertisements aimed at a younger demographic: young married couples, college students, and 20- to 30-something singles.

One IKEA commercial, called “Unboring,” made fun of the reluctance of Americans to part with their furniture (Segil 2005, p 46-52).

The shift in tactics worked. IKEA’s revenues doubled within four years from $600 million in 1997 to $1.27 billion in 2001. By 2008, IKEA had its second largest market in the US, after Germany, with 35 stores accounting for 10% of its total revenues, or around $2.4 billion, and expansion plans called for 50-plus stores in the United States by 2012.

IKEA’s growth potential in China

During the last century there was an increase in growth of international companies in the world. The surge of globalization has forced companies to deal with customers with different cultural backgrounds. China has faced remarkable boom in the economic growth in the last 20 years and is now a global business attraction (Segil 2005, p 46-52). China’s colossal potential in business has compelled many international organisations to compete in attracting Chinese consumers. Some have succeeded but some have lost. However, IKEA is now on the winning side.

In 1998, IKEA penetrated into the Chinese market when it opened its first store in Shanghai, the financial hub of the China. However, the need for expansion is evermore. IKEA’s market performance in Shanghai is based on the 4Ps of marketing mix model. In order to attain customer value and build long-term customer relationship in China, IKEA has to think globally and act locally.

The three generic strategies of Michael Porter i.e. cost leadership, differentiation, and focus can be applied at the business level to achieve a competitive edge over the competitors.

Therefore, the main organizational questions they address are:

What markets can we excel in?

What resources do we have to do in order to succeed in this business unit?

What is our unique differentiating value proposition?

To fulfil their mission and gain competitive advantage, IKEA adopted Porter’s generic strategy which enables organisations can achieve greater value at low costs by distinguishing their goods and services from the goods and services of their competitors (Porter 1985).

Cost leadership

Cost leadership is the basic of the Porter’s three generic strategies. In this strategy, firm should try their best to reduce the cost. For a firm to be a top performer in its industry it has to achieve and sustain cost leadership but the firm has to ensure that it does not overlook the basis of differentiation. According to Porter, if a consumer feels that a company’s product is not good as compared to its competitor’s product, the firm should achieve cost leadership by reducing the price of the product (Byars 1991, p 113).

Differentiation

Differentiation is Porter’s second generic strategy in which a firm looks for becoming distinctive in its industry. It opts for one or more characteristics that are perceived important by the consumers in an industry, positions itself distinctively to satisfy those desires, this distinctiveness results in great value (Byars 1991, p 113).

If the extra cost for differentiation is less than the premiums price, the firm which has the competitive advantage of differentiation can get better profitability than other firms in the industry (Pearce & Robinson 2005 p 15-36). Because the extra cost for differentiation is the disadvantage of the differentiation, the firm cannot ignore the cost position. So, only based on the price is almost the same as competitor, the differentiator could get the high profitability.

Focus

Focus is Porter’s third generic strategy which means to choose a fine competitive reach in an industry. Here, the organisation opts for a niche or group of niches and alters its strategy to serve them exclusively. The focused organisation opts to achieve a competitive edge in its target niches even if it does not hold a competitive edge over the rest of the industry. The focus strategy has two variations. Cost focus is the strategy in which a firm opts for a cost edge in its targeted niche, whereas in differentiation focus a firm opts for a differentiation in its targeted niche. (Porter, 1985)

The firm can focus the time, the resource and the money on the segment to get the competitive advantage. If the firm can get the competitive advantage of cost leadership or differentiation in its target segment, the firm could provide customer the better service and meet the special requirement. Because of the different requirements of customer, there are always many segments in one industry (Byars 1991, p 113).

Porter’s each strategy has a different purpose of creating and sustaining competitive edge.

If a firm is flexible using the strategies, like use more than one strategy at the same time, this firm will get a greater competitive advantage and market share (Capron & Glazer 1987, p 10-21).

The competitive advantage model of IKEA

After the long time research, there is so much knowledge about IKEA. From the web, the interview, and especially follow the history of IKEA, we can find many methods which IKEA used to improve the competitive advantage (Pearce & Robinson 2005 p 15-36). This theory of “competitive advantage” can be summarised in table 1.

The Five-Force model of Porter maintains strategic indulgence wherever authority lies in a business condition. It helps organisations to evaluate its strength in the current competitive position and the position that the company is opting for (Capron & Glazer 1987, p 10-21).

Clear understanding of the position of the authority enables an organisation to achieve strengths, improve weaknesses, and avoid mishaps.

In order to conduct the analysis of Porter’s Five Force model, it is necessary to consider all significant aspects for the market situation of the company. Next emphasise the key aspects and summarise the magnitude and the degree of that force (Capron & Glazer 1987, p 10-21).

After recognising favourable and unfavourable aspects for the organisation’s performance and attractiveness of the industry, it is essential to evaluate the condition and scan the results of those aspects.

By realising impact of each force on the organisation, and by discovering the strength and trend of that force, it gives a prospect to evaluate the strengths of the position and the capability to achieve a continual profit in the industry (Kotter & Schlesinger 1991, p 24-29).

Innovation in the industry is constantly revolutionised which signifies the limited value of Porter’s Five Force model. Hence, it is not sensible to create a strategy exclusively on the foundations of Porter’s models, but it can be used to analyse other strategic models such as S.W.O.T analysis and P.E.S.T analysis.

PEST analysis

There are many forces that have direct impact on a company’s macro-environment. The analysis of such forces is called PEST analysis. PEST analysis is the examination of the external macro-environment in which the organization works and operates (Cooper 2000, p 1-15). It can be stated in terms of the following factors:

Political

Economic

Social

Technological

The term P.E.S.T (also called “STEP”) is used to describe a structure for the investigation of macro-environmental issues (Johnson & Scholes 1993, p 26-55). The P.E.S.T analysis fits into an overall environmental scrutiny as shown in figure 1.

Political Factors

Political factors consist of legal issues and government regulations and include both formal & informal rules that firm must obey (Cooper 2000, p 1-15). Some examples of such regulations include:

regulations of the environment

tariffs & trade limitations

tax policy

stability in the politics

laws of employment

Economic Factors

The economic factors have major affects on the purchasing power of customers and the cost of capital of the firm (Cooper 2000, p 1-15). Illustrations of such factors are given below:

rate of exchange

economic growth

rate of inflation

interest rates

Social Factors

Demographic and cultural aspects are part of the Social factors of the macro-environment (Hill & Jones 2005, p 88-96). These factors have a huge impact on the customer needs and size of the potential market. Examples of these social factors include:

age demographics

safety

growth rate of the population

career approach

consciousness of health

Technological Factors

Technological factors help in reducing barriers to entry, lowering minimum level of efficient production, and impacts decisions of out-sourcing (Cooper 2000, p 1-15). Examples of such factors are:

mechanization

technological change rate

Research & Development activity

incentives of technology

External Opportunities and Threats

The PEST analysis helps in the overall analysis of the organization (Cooper 2000, p 1-15). It helps in identifying opportunities and threats to the organization in the S.W.O.T analysis.

S.W.O.T Analysis

S.W.O.T analysis is the analysis of the internal & external environment. It is a significant area of the overall process of strategic planning of the organization (Hill & Jones 2005, p 88-96). Internal environmental factors of the organization usually are categorized as weaknesses and strengths, however, external factors of the firm can be categorized as opportunities and threats. The S.W.O.T analysis identifies data that is useful in utilizing the firm’s capabilities and resources according to the competitive surroundings in which it works (Cooper 2000, p 1-15). However, it is also influential in formulation of organizational strategy.

Strengths

An organization’s capabilities and resources which can help the organization in achieving a competitive edge over its competitors are the strengths of that organization. Examples of these strengths include:

cost advantages from business know-how

suitable access to networks of distribution

strong brand names

good reputation among customers

exclusive access to high grade natural resources

patents

Weaknesses

The lack of the above mentioned strengths may be observed as the weaknesses of that organization (Hill & Jones 2005, p 88-96). Examples of such weaknesses are:

high cost structure

poor status among clients

deficiency of access to key distribution channels

a weak brand name

shortage of copyright protection

shortage of right of entry to the natural resources

Usually, a weakness is viewed as the opposite area of strength. Take the example where an organization has much larger amount of manufacturing capacity (Haley & Tan 1999, p 91-104). However, this capacity can be believed as strength of the organization that competitors do not have, it may also be a deemed as a weakness of the organization if the investments in manufacturing capacity of the organization prevents it from responding fast to changes in the organization’s strategic environment.

Opportunities

In an organization’s external environment, there may be certain opportunities which may help an organization to earn profit and grow (Haley & Tan 1999, p 91-104). Following are such opportunities:

loosening of regulations

an unfulfilled customer need

removal of international trade barriers

arrival of new technologies

Threats

Organizations are constantly facing threats from the external environment. For examples such threats contain:

new regulations

emergence of substitute products

increased trade barriers

shifts in consumer tastes away from the firm’s products

Balanced Score Card (BSC)

The BSC translates vision and strategy into four perspectives: the learning and growth perspective, the internal business process perspective, the customer perspective, and the financial perspective.

The financial perspective is a financial model of the firm and identifies types of profitability objectives. The customer perspective points out the means for developing customer and marked preferences and identifies dimensions of the product or service that may meet the value proposition of target customers. The process perspective is a value chain involving questions about production, sales, and distribution facilities. Last, the learning and growth perspective is concerned more generally with organizational capabilities such as infrastructure and intangible assets.

Strategy Translation

The BSC can be understood as a strategic tool for the firm. The strategy is only strong if it can be translated into the BSC, which makes it a mechanism to ensure quality and communicate strategy simultaneously. When communicating strategy, BSC shows by way of a strategy map relations between the four elements. Then it identifies and communicates particular actions and projects across the whole BSC picture to implement the firm’s strategy coherently.

Good results in learning and growth lead to good results in internal processes, which again lead to good results in customer relations, and ultimately to good financial results. The future of BSC research is considerable. BSC allows research to investigate in concrete terms how firms that are completely inscribed in information can work.

BCG Portfolio Analysis

The BCG portfolio analysis is a portfolio analysis with growth rate of business on the y-axis and competitive relativity on the x-axis. The BCG presumes that business with high growth rate is better than the business with low growth rate and a relative market with high rate is better than the relative market with low rate.

The proportion of an organisation’s returns or profits normally establishes its relative significance to that organisation.

Star

:

Continue to invest in and to build the business and its profits.

Cash Cow

:

Minimize investment in building the business but seek to maximize short- and medium-term profits. Harvest those profits to invest in Stars and those problem children considered worthy of trying to build into star businesses.

Problem Child

:

Determine which Problem Children have substantial potential to become Stars and which do not. Invest in those with the best potential to become Stars and divest the rest.

Dog

:

Divest the Dogs.

The stress on market share in establishing relative competitiveness is based on the hypothesis that the bigger the organisation’s market share, the bigger will be the profitability of that organisation.

Ansoff Matrix

In order to depict corporate growth strategies for alternative purposes, Ansoff matrix model can be used to focus on an organisation’s current and prospective goods and industry. There are four possible product and market combination that could contribute in the growth of organisation with the help of existing goods and new goods, and in existing markets and new markets.

In market penetration an organisation opts to attain growth with current products in their relative current market niches in order to boost organisation’s market share.

In market development an organisation opts to attain growth by aiming its current products to new market niches.

In product development an organisation opts to produce new products aimed towards its current market niches.

In diversification an organisation opts to attain growth through diversification in new industries by establishing new goods for new industry.

Selecting a Product-Market Growth Strategy

Because the firm is expanding into a new market, a market development strategy typically has more risk than a market penetration strategy. However, diversification is the most risky of the four growth strategies since it requires both product and market development and may be outside the core competencies of the firm.

For illustration, consider IKEA’s relationship with suppliers in Vietnam. IKEA has expanded its supply base in Vietnam to help support its growing Asian presence. IKEA was attracted to Vietnam by the combination of low-cost labour and inexpensive raw materials. IKEA drives a tough bargain with its suppliers, many of whom say that they make thinner margins on their sales to IKEA than they do to other foreign buyers. IKEA demands high quality at a low price. But there is an upside; IKEA offers the prospect of forging a long-term, high-volume business relationship. Moreover, IKEA regularly advises its Vietnamese suppliers on how to seek out the best and cheapest raw materials, how to set up and expand factories, what equipment to purchase, and how to boost productivity through technology investments and management process.

IKEA’s has built upon its strong global brand identification with distinctive philosophy and cost leadership. IKEA also preserves complete authority over the company’s design, price and deliver its wide range of products internationally and has a product assortment which can provide quality products for all its customer’s means and budget. The major limitation of IKEA is the reality that it is largely relying on one market which is Europe where it has 82 percent of retail stores.

Nonetheless, IKEA is considering its major limitation as a significant opportunity, which includes entering into surfacing markets in parts of Asia and Eastern Europe. The introduction of finest lines, in both existing warehouses or in new high-end stores, has led to the rise in sales through the introduction of online sites in various countries. This has resulted in the improvement of customer service and reduction of mass demand in the existing warehouses.

Regrettably, these new introductions are resulting as a threat of a probable over-saturation of the market which is due to the increase in the introduction of identical products from the competitors at relatively low prices (Harrison & Boyle 2006, p 269-272). This has resulted in the form of negative blow to the sales products in the continuing economic depression in its core European market in addition to the unfavourable impact of weak dollar on sales in the US, and the instability in political and economic environment of China and Russia also presents a potential threat, where the IKEA has planned to invest profoundly soon.

Conclusion

IKEA is the company that made furniture fashionable, cheap and disposable. It continues to display innovation in product design, looking to ski makers who bend wood and shopping cart makers to understand how to make sturdier furniture. It has made a significant effort to include Scandinavian design and culture into all of its touch points, which reinforces what IKEA stands for (Harrison & Boyle 2006, p 269-272). IKEA only has five-10 percent market share, but its awareness levels are incredibly high for a business of its size, which speaks to the high affinity for the brand. Its effort to cut prices on its items as well as promote itself in a humorous and quirky way keeps customers engaged and supports the cult following IKEA has built over the years. Additionally, because IKEA had corporate citizenship initiatives in place before it became a corporate trend, they are tied well to the overall brand strategy. In 2009, IKEA entered its 25th market, opened 15 new stores and saw an increase in sales.

In the near future, IKEA’s sound expansion in the retail business emerges as the focal point of the organisation, with strategies not likely to incorporate aggressive expansion into new markets, but would consider structuring and nurturing in the existing market (Haley & Tan 1999, p 91-104). Yet, certain alterations may be possible with the introduction of information technology, which in the foreseeable future, will have unfavourable effects on the revenues of some IKEA warehouses, but will lead to the positive effects on revenue for the company as a whole. Therefore, this is the main illustration of the way in which IKEA is trying to align itself in order to face the potential threat to its conventional stores. Buyers may prefer shopping online, as IKEA has established its reputation for quality and craftsmanship in its goods, contrasting to the current principle of IKEA that quality of products should be felt by the buyers before the purchase.

IKEA has incorporated the aggressive expansion strategy along with all its other strategies within the past few years, however, the disadvantage of the external buyer market means that the growth in sales of IKEA products in the near future may stay comparatively modest (Haley & Tan 1999, p 91-104).

An improvement in the situation in the economy in Europe and US and the sustained growth of business in China, Japan, Vietnam, Indonesia, India and Russia have resulted in the accelerated growth from 2006 onwards, with year on year growth predicted to reach double figures. (IKEA United Kingdom, 2005) The development of e-commerce, making shopping at IKEA more accessible, may also have a positive impact on sales, although no progress has been visible on this front of late, and as such IKEA has been very guarded over its profit levels. However, profit margins may fall in the short term as result of the expansion into existing and new emerging markets, with the company facing high set up costs and low spending power, as well as several other external issues in developing markets (Harrison & Boyle 2006, p 269-272). The company has already faced a number of bureaucratic obstacles in Russia and further hurdles cannot be ruled out, with similar problems potentially arising in China.

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