Case Analysis: IKEA

8/6/2019 Case Analysis: IKEA

1/29

wertyuiopasdfghjklzxcvbnmqwertyuipasdfghjklzxcvbnmqwertyuiopasdfghklzxcvbnmqwertyuiopasdfghjklzxcvbmqwertyuiopasdfghjklzxcvbnmqweryuiopasdfghjklzxcvbnmqwertyuiopas

dfghjklzxcvbnmqwertyuiopasdfghjklzxvbnmqwertyuiopasdfghjklzxcvbnmq

wertyuiopasdfghjklzxcvbnmqwertyuioasdfghjklzxcvbnmqwertyuiopasdfghj

klzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwerty

iopasdfghjklzxcvbnmqwertyuiopasdf

hjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmrty

iopasdfghjklzxcvbnmqwertyuiopasdf

hjklzxcvbnmqwertyuiopasdfghjklzxc

Case AnalysisMGT 489Submitted To: Mohammed Hannan Miah

Prepared By Group 7

Md. Tareq Rahman 073 003 030Shubro Barua 073 004 030Sanjana Mehnaz 072 105 530M Mazharul Arefeen Bhuiyan 073 016 030Sumayia Hassan 072 779 030


2/29

Page | 2

Background of IKEAIKEA is a privately held, international home products company that designs and sells

ready-to-assemble furniture such as beds and desks, appliances and home accessories. Thecompany is the world's largest furniture retailer. Founded in 1943 by 17-year-old IngvarKamprad in Sweden, the company is named as an acronym comprising the initials of thefounder's name (Ingvar Kamprad), the farm where he grew up (Elmtaryd), and his home parish.IKEA has 300 home furnishing superstores in 35 Countries and was visited by some 583 millionshoppers. IKEAs low priced elegantly designed merchandise displayed in large warehousestores, generated sales of $21.2 billion in 2008, up from 4.4 billion in 1994. The fledglingcompany sold fish, charismas magazine, and seeds from his family farm. His first business hadbeen selling matches, the enterprise Kamprad purchased them wholesale in 100 box lots and thenresold individually at a higher mark up. Before long, Kamprad had added ballpoint pens to hislist and was selling his products via mail order.

In 1948, Kamprad added furniture to his product line. In 1949 he published his firstcatalog. Kamprad hired 22 years old designer, Gillis lundgren originally helped Kamprad to dophoto shoot for catalog but, later he became a designer of many furniture for IKEA. Its goal wasover time to provide stylish functional design that can be cost effective. Ultimately this led toconcept of what IKEA calls democratic design. In 1957, IKEA started to exhibit and sell itsproducts at home furnishing fairs in Sweden. By 1958, an expanded facility at the Almhultlocation became the first IKEA store. The original idea behind the store was to have a locationwhere customer could come and see the IKEA furniture set up. Kamprad experimented withadding restaurant to the store so that customers could relax and refresh when shopping. Therestaurant was hit and, it became an integral feature of all IKEA stores. In 1965, IKEA opened itsfirst store in Stockholm. By now, IKEA was generating the equivalent of $ 25 million and hadalready opened a store in neighboring Norway. IKEA experimented with a self service pick upsolution, allowing shoppers to enter the warehouse, load flat packed furniture on to trolleys andthen take them through the checkout. It was so popular that soon it became the company norm inall stores. By 1973, IKEA was the largest furniture retailer in Scandinavia with nine stores. Thecompany enjoyed market share of 15% in Sweden. The main in charge of European expansionwas Jan Aulino, Kamprad s former assistant, who was just 34 years old when the expansionstarted. IKEA also entered in North America, opening 7 stores in Canada between 1976 and1982and got success then in 1985 in entered in United States later the company found that itsEuropean style offerings did not always resonate with American consumers. IKEA also acquiredBritains Habitat in t he early 1990s and to run it under the Habitat brand name. In total therewere 285 IKEA stores in 36 countries and territories. And important limiting factor on the paceof expansion was building the supply network. Later IKEA opened its store in China. In chinastore was located near public transportation, and IKEA offers delivery services so that Chinesecustomers can get their purchase home. The store them salve are large warehouse festooned inthe blue and yellow color of the Swedish flag that offers 8000 to 10000 items, from kitchencabinet to candlesticks. There plenty of parking outside and the stores are located with goodaccess to major roads. The interior of the stores is configured almost like a maze that requirescustomers to pass through each department to get to the checkout. By 2008, IKEA had 1380


3/29

Page | 3

suppliers in 54 countries. IKEA always maintain a good relation with its suppliers and insistthem to buy new technology so that the production cost could decline.

In common with some other retailers, IKEA has launched a loyalty card in its stores in Sweden,Denmark, Finland, Turkey, the UK, Australia, Netherlands, Belgium, Germany, Austria, Russia,

China, Japan, Switzerland, Czech Republic, Slovakia, Ireland, Poland, Italy, Hungary, France,Dominican Republic, Portugal and Spain called "IKEA Family." The distinctive orange card isfree of charge and can be used to obtain discounts on a special range of products found in eachIKEA store. In particular, it gives 25% off the price of commissioned ranges of IKEA productson presentation of the card. The card also gives discounts on food purchased in the restaurant andthe Swedish Food Market. In the Netherlands, Australia, Denmark, Finland, Germany, Austria,Russia, Japan, UK, Switzerland, Slovakia, Czech Republic, Italy and Poland it also entitles theholder to free coffee in the restaurant. In Spain, France, Hungary, Czech Republic, Belgium,Ireland and Poland, this offer is only available on working days.

Despite its Swedish roots, IKEA is owned and operated by a complicated array of not-for-profit

and for-profit corporations. The corporate structure is divided into two main parts: operationsand franchising. Most of IKEA's operations, including the management of the majority of itsstores, the design and manufacture of its furniture, and purchasing and supply functions areoverseen by INGKA Holding, a private, for-profit Dutch company. Of the IKEA stores in 36countries, 235 are run by the INGKA Holding. The remaining 30 stores are run by franchiseesoutside of the INGKA Holding. INGKA Holding is not an independent company, but is whollyowned by the Stichting Ingka Foundation, which Kamprad established in 1982 in theNetherlands as a tax-exempt, not-for-profit foundation. The Ingka Foundation is controlled by afive-member executive committee that is chaired by Kamprad and includes his wife and attorney.While most IKEA stores operate under the direct purview of Ingka Holding and the IngkaFoundation, the IKEA trademark and concept is owned by an entirely separate Dutch company,Inter IKEA Systems . Every IKEA store, including those run by Ingka Holding, pays a franchisefee of 3% of the revenue to Inter IKEA Systems. The ownership of Inter IKEA Systems isexceedingly complicated and, ultimately, uncertain. Inter IKEA Systems is owned by Inter IKEAHolding, a company registered in Luxembourg. Inter IKEA Holding, in turn, belongs to anidentically named company in the former Netherlands Antilles that is run by a trust companybased in Curaao. In 2009, the company in Curaao was liquidated. The company responsible forthis liquidation traces back to the Interogo Foundation in LiechtensteinIngvarKamprad hasconfirmed that this foundation owns Inter IKEA Holding S.A. in Luxembourg and is controlledby the Kamprad family.

In 1986, Kamprad gave up day to day control to Andres Moberg, a 36 year old Swedish who haddropped out of college to join IKEAs mail order department. Despite relinquishing managementcontrol, Kamprad continued to exert influence over the company as an advisor to seniormanagement and as an ambassador for IKEA.


4/29

Page | 4

External Analysis

PESTEL Analysis

Political factors

There are no data about the political influence over the industry. Though it is anticipated that theorganizations are heavily supervised by the government. There are many departments involvedin the process of controlling and managing the corporations. The political situation is stable andthe political parties respect the agreements made between the MNCs and the government. Thisensures a healthy business environment.

In Poland after the fall of communist government the political situation changed drastically. Therelationship between the supplier and IKEA deteriorated as the suppliers tried to raise price, toreup contracts and denominated new technologies provided by IKEA.

Economical Factors

The financial recession is clearly the greatest economic factor for IKEA. As mentioned in theNew York Times the recession of 2008 was not getting any better.


5/29

Page | 5

Moreover IKEA was unable to understand the effect of floating rate of currency cross-countries.As the Swedish Kronors was getting strong against US dollar the importing cost of raw materialsfrom Sweden was getting more expensive.

Social factors

The cultural differences of Europe/Scandinavia and USA may play a significant role on thebusiness strategy of IKEA. As the Scandinavians emphasis on the design and the perfection of the products, on the other hand the Americans emphasize on the functional ability of the product.People in all the countries tend to inherit furniture from their forefathers. Furniture may last forgenerations. This practice is more common in Sweden. In USA this culture has been changingrecently.

Technological Factors

Technological factors can lower barriers to entry, reduce minimum efficient production levels,and influence outsourcing decisions. Technological factors include R&D activity, automation,technology incentives, and rate of technological change.

IKEA developed some unique features in the furniture industry like self-assembly. This featureenabled IKEA to ship its products in flat-packs reducing the damage while transporting.

Porters Five Forces Analysis

Competitiverivalrywithin

industry

Threats of new

intrants

Burgainingpower of suppliers

Threats of substituteproducts

Burgainingpower of

buyers


6/29

Page | 6

Rivalry within the industry

In Sweden there is handful of companies involved in the furniture industry. Moreover there are alot of retailers in the market. The condition is pretty much same in USA. There are Home Depot,Wal-Mart, Costco and many other small retailers. On top of this many retailers import from

china and sell it in the market at low price. This indicates that the competition within the industryis very high.

Bargaining power of suppliers

It can be say that the bargaining power of suppliers is low. IKEA has a well-established relationwith suppliers all over the world. Till 2008 IKEA has 1380 suppliers in 54 countries 21% of which are in China. Moreover IKEA also own manufacturing company like SwedwoodManufacturer. So it is evident that IKEA can threats the suppliers to enter into their business.

Bargaining power of buyers

There are a lot of retailers who are directly involved in price war against each other. There areimporters who are importing from china also in direct competition in the market. So theconsumers have many alternatives. They can chose which manufacturers they will buy from. Sothe bargaining power of buyers is high.

Threats of new entrants

There are no entry barriers in the industry. But the intensity of competition may scare off potential entrants. The required initial investment is not too much. Anyone can open a retail shopwith small investments. But if someone wants to become a major player in the industry; than thefirm needs to invest a lot of money, need to establish relation with suppliers, select suitablelocations for outlets. These will require a lot patience and capital. So it is safe to say that thethreats of new entrants are high if competitors want to do business for a long term.

Threats of substitutes

Since the born of civilization men are using furniture. The styles are changing so as the trends.The industry is moving wood to plywood, rot iron even plastics. As the market is becoming moreenvironment concerned many firms are giving slogan to go green. But the basic functionaldemand has remained the same. So it is safe to say that there are no threats of substitutes.


7/29

Page | 7

Opportunities

IKEA can expand its product line by producing high end products

From the very beginning IKEAs target market has been the middle class to lower middle class

people. This strategy has been worked for a long time but IKEA never wondered about howfarther they can reach.

In USA the trend was changing; people were getting thirstier for elegant design. IKEA candevelop products that are designed for the high class people who are sensible about the designand quality and do not care about the price. For example Toyota: Lexus.

IKEA can expand its business into interior designing and crockery products

IKEA can expand its core business of furniture to a next level. IKEA can place crockery itemswith the kitchenware furniture. This way when a customer walks through the kitchenwaredepartment he/she will be attracted to these products and may end up buying some.

IKEA can go for environment friendly technology

Customers now a days are now more concerned about the environment than ever. So IKEA canmake products that are environment friendly; products that consume less water so the carbonfootprint will be at minimum.

Product customization can boost up IKEAs sales

IKEA can call for idea from its customers. This will definitely bring in some unique idea to thetent. IKEA can initiate a service that will allow customers to order customized products for someextra charges. This will help IKEA to capture the particular segment of the market who lovescustomization.


8/29

Page | 8

Threats

Changing social trend can hinder the growth of sales of IKEA

IKEAs objective is to provide products to its customers at cheaper rate than the competitors.

This objective does not recognize the necessity of a constant development of design and quality.In the pursuit of becoming a cost leader in the market IKEA can lose a major portion of themarket that want quality and well designed products.

Accelerated market competition in USA

The furniture market of USA is very fragmented. But there are some well-established retailerswho are selling functional furniture at a very low cost for example: Wal-Mart, Office Depot.These retailers will be in direct competition with IKEA. On top of this there are also some high

end retailers who sell high-quality, well designed furniture. These high-end retailers oftenprovide additional services like interior designing, home delivery and free set-up.

The risk of global financial crisis

The global is under a constant threat of depression since 2007. The whole economy of the worldis suffering from a recession since fiscal year 2006-07. This economic condition may affectIKEA. Since the purchasing power of buyers has gone down they would be reluctant to purchaseproducts that are not vital to them. This can cause a free-fall of sale revenue of IKEA worldwide;especially in USA.


9/29

Page | 9

Internal Analysis

Strengths

IKEAs low cost concept keeps it ahead of its competitors.

IKEA is the cost leader in the furniture industry. A living room furnished with IKEA products isas much as 65% less expensive than one furnished with equivalent products from other stores. Itstarget market are the young married couples, college students, 20 to 30-something singles andmiddle class families who are basically price sensitive customers. So, if they can get furniture ata much lower price, of course the will opt for that. Thus, this concept gives IKEA its biggestcompetitive advantage keeping it ahead of its competitors.

IKEA has successfully combined low cost with good quality.

Generally people have an idea that price and quality are directly related as in, higher the pricebetter is the quality and lower the price lower is the quality. However, IKEA has successfullychanged this idea related to furniture. Not only is its furniture much lower priced than itscompetitors, they also have great quality. It has productively combined low cost with goodquality. Its democratic designs which balances function, quality, design and price gives IKEAthe competitive edge.

IKEAs research and development team finds ways to alter designs to save onmanufacturing costs.

Starting with the designer Gillis Lundgren, IKEAs research and development team always findsways to alter designs to save on manufacturing costs. The goal of the research and developmentteam is to come up with stylish functional designs with minimalist lines that can be cost-efficiently manufactured. This keeps the cost down and allows for the prices to be much lowerthan that of the competitors.

A key feature of IKEA furniture is self-assembly.

A key feature of IKEA furniture is self-assembly. This proves to be a very efficient concept forboth the parties IKEA as well as its customers. The furniture pieces are taken off and flat

packed and then assembled by the customers at their homes. It reduces IKEA transport andwarehouse costs as well as saves additional hassles related to transporting a big piece of furniture, and the customers are also willing to take on the task of assembly in return for lowerprices. Due to this, the furniture are always readily available which means the customers do nothave to wait 2/3 days after purchase for their furniture. This is a breath of fresh air for thecustomers.


10/29

Page | 10

IKEA uses cheap labor which keeps its costs down and gives them a competitive advantage.

Starting from the days when it discovered that furniture manufactured in Poland was as much as50% cheaper than furniture made in Sweden, IKEA has started looking for cheap labor. It topfive supplying countries are China (21% of supplies), Poland (17%), Italy (8%), Sweden (6%)

and Germany (6%). China, as everyone knows, provides really cheap labor so IKEA gets itslargest chunk of furniture manufactured from there. Cheap labor keeps the costs down and allowthem to charge customers low price and helps IKEA sustain its competitive advantage

Its strong long-term relationship with its suppliers gives it a competitive edge.

IKEA has built a strong long-term relationship with its suppliers over the years. The relationshipthat IKEA established with the Poles has become the archetype for relationship with suppliers.This is one of their biggest strengths. A strong relationship established with the suppliersprovides a very smooth supply chain which saves IKEA from quite a lot of additional costs andhassles. Due to this strong relationship IKEA can put in a lot of additional advice regardingproduction. It is widely seen that companies have always been benefited by a strong long-termrelationship with their suppliers.

IKEA has the ability to adapt its tactics according to the market.

Another of IKEAs strengths lies in its ability to adjust its tactics according to the market. Anexample of this can be seen in what it did in the American market. At the time that IKEAlaunched itself in USA, it noticed a change in American culture. Something was shifting inAmerican culture. To tap into this shifting culture of America, IKEA redesigned its marketingstrategies adjusting it according to what would be appropriate in this cultural shift. The resultwas double revenues in a four-year period.

IKEA is a global brand.

From the Scandinavian countries to Germany, Switzerland, UK, to the Asian countries of China,

Japan and Russia and all the way across the Atlantic to USA and Canada IKEA is everywhere.It has spread its wings and expanded all over the world. With its stylish Scandinavian designsand strong and conquered cost leadership concept it has conquered all of these territories. Thus,IKEA has become a global brand. Its reputation and brand image acts as one of its greateststrengths.


11/29

Page | 11

Weaknesses

Its organizational culture can become a demotivating factor for many of its employees.

IKEAs organizational culture reflects informality. It is nonhierarchical, team based and titles

and privileges are taboo at IKEA. Pay is not particularly high and there are no special perks forsenior managers. The culture is egalitarian. According to Kamprad, people generally work herebecause they like the atmosphere. However, there is a downside to this sort of organizationalculture. In an egalitarian culture where everyone is equally treated, someone putting more effortand hard work than others might get demotivated since he is being treated the same way assomeone whose efforts and inputs are much less than his. He will obviously want somethingextra for his extra effort. This will lead to demotivation and he might stop putting in that extrahard work for the company.

In todays competitive world, people work for that special perks associated with designations and

promotions. This is what keeps them going. But all these are missing in IKEA. Anotherimportant factor is that, the management style that works in Europe does not work in America orin Asia. So, IKEAs American or Asian employees will not like this sort of organizationalculture. Thus, with an organizational culture like this, IKEA might repel future employees.

IKEA is not at all customer focused.

IKEA is mainly cost focused. Its main focus is keeping the costs down so that it can keep theprices of the furniture low. However, in this 21 st century companies are more focused oncustomers needs, wants and preferences. Companies first conduct a market research on whatcustomers want and then produce that. Nowadays, mostly everything is completely customerdriven. IKEA is not at all customer focused. An example of this can be seen in its productofferings with which it launched in USA. Americans wanted bed sizes king, queen and twin butthey offered beds measured in centimeters. Thus, in such a customer oriented era IKEAs notreally caring about customers wants can put it at a disadvantage.

IKEA lacks product innovation.

IKEA designs the price tag first, then the product. IKEAs product strategy council is so muchobsessed with low price that they spend almost no time on product innovation. IKEA has beenenjoying sustainable competitive advantage due to their low cost strategy. However, to some

extent, product innovation is also required in order to back their sustainable competitiveadvantage up. Here, IKEA lacks product innovation which is one of its weak spots.

It lacks thorough market research on customers preference before entering into a newmarket.

When IKEA first entered the USA market it provided the customers with beds measured incentimeters whereas, they wanted king, queen and twin sized beds. As a result, their sheets did


12/29

Page | 12

not fit on IKEA beds. The sofas were not big enough, wardrobe drawers not deep enough,glasses too small, curtains too short and many more such blunders. From this it can be seen that,IKEA does not conduct a thorough market research on customers preference before enteringinto a new market. As a result, it gives a chance of blunders occurring in those markets and laterhas to deal with additional hassles which could have been easily avoided had they onlyconducted a research earlier. This also puts its reputation at stake in those markets.

IKEA never took economic issues into consideration before being faced with the problem.

Another factor that puts IKEA at a disadvantage and its reputation at stake is that it never took economic issues into consideration before being faced with the problem. An example of this canagain be seen in its American market where the goods were priced in the Swedish kronor, whichwas strengthening against the American dollar. This drove up the price of goods in IKEAsAmerican market.

IKEA has a tendency of making mistake first and then realizing that it should have takenmatters into consideration beforehand.

One of the biggest weaknesses of IKEA is that it does not look before it leaps. It makes amistake, creates a blunder at first and then realizes that it should have known better. When IKEAfirst entered the USA market it provided the customers with products that did not suit theirlifestyle and match with their preference like, beds measured in centimeters, too short curtainsetc. Later, when it realized all these blunders it had to redesign the products to fit with Americanneeds. Again, in its American market the goods were priced in the Swedish kronor, which wasstrengthening against the American dollar. This drove up the price of goods in IKEAs Americanmarket. So, after IKEA realized this blunder, it changed its pricing. This tendency puts IKEAunder a lot of unnecessary hassle and puts its reputation at stake.

Kamprad suffers from Icarus Paradox.

Ingvar Kamprad, the founder and head of IKEA suffers from Icarus Paradox which puts thecompany at a disadvantage. The paradox is that ones greatest asset causes his demise. Manycompanies become so dazzled by their early success that they believe more of the same type of effort is the way to future success. As a result, they can become so specialized and inner-directedthat they lose sight of market realities and the fundamental requirements for achieving acompetitive advantage. Sooner or later, this leads to failure. In IKEAs case, Kamprad has gainedsuccess by being solely cost focused. However, he is losing sight of the market realities. Afundamental requirement for achieving a competitive advantage in todays era is being customer oriented which IKEA is not.


13/29

Page | 13

Kamprad does not take into consideration the change of times.

Kamprad, the founder and head of IKEA, views his team of employees as his extended family.According to him, the fundamental key to good leadership was love. In earlier times, theemployees all liked each other very much and they joined IKEA because the company suited

their way of life. The employees used to stick with the company because they loved their work beyond anything else. However, times have changed and with that peoples want out of their jobhas also changed. People no more work just for the love of it. They want the special perks, powerand status associated with designations and promotions. Thus, they are more competitive intodays world. So, assuming that the employees will work in IKEA just because they love towork here can put the company at a major disadvantage.

IKEAs strategy is not exactly aligned with its vision.

IKEAs vision is to create a better everyday life for the many people. We make this possible byoffering a wide range of well-designed, functional home furnishing products at prices so low thatas many people as possible will be able to afford them (IKEAs website). Yes, it is offering

products at prices so low that as many people as possible can afford them. However, isntcreating a better everyday life for the many people mean caring about the needs and preferencesof these many people and producing accordingly? But, IKEA is not doing this. It is moreconcerned with lowering the costs. So, this strategy is not exactly aligned with the vision.


14/29

Page | 14

SWOT Analysis

Strengths

IKEAs cost leadership concept keeps it ahead of its competitors.

Justification: whenever IKEA produce their furniture, firstly they fixed the price and then theystarted producing. So with the context of cost leadership IKEA is ahead then the othercompetitors.

IKEA has successfully combined low cost with good quality.

Justification: As w e all know that IKEA, they produce low cost product than the others that dontreally mean that they manufacture low grade product. They always maintain the good quality

product for the customers. From the very beginning they maintain their product quality as wellIKEAs research and development team finds ways to alter designs to save onmanufacturing costs.

Justification: after a little success, the chief of IKEA Mr. Kamprad appointed a designer todesign good quality product. Moreover the designer finds out the strategy to make the productmanufacturing cost as low as possible.

A key feature of IKEA furniture is self-assembly.

Justification: with regards to low price strategy, IKEA come up with a good strategy and that isself-assemble. IKEA tried to make their customers knowledgeable about their product. They alsotried to create a good impression toward their furniture to the customers that, customers can relyon their furniture.

IKEA uses cheap labor which keeps its costs down and gives them a competitive advantage.

Justification: if we talk about the competitive advantage of IKEA furniture, than that is the cheaplabor cost. Whenever they discovered that furniture manufactured in Poland was as much as 50%cheaper than furniture made in Sweden, they started to get the competitive advantage of that.

Its strong long-term relationship with its suppliers gives it a competitive edge.

Justification: whenever IKEA started their production in Poland, they made a very goodrelationship with the suppliers. A strong relationship established with the suppliers provides avery smooth supply chain which saves IKEA from quite a lot of additional costs and hassles.


15/29

Page | 15

IKEA has the ability to adapt its tactics according to the market.

Justification: IKEA has a very good strategy to adapt the way according to the market. If we seethe scenario of America, than we can realize that whenever Americans didnt their not acceptthe previous on and within a very short time they come up with new target market as well as with

reflection of customers needs and want.

Weaknesses

Its organizational culture can become a demotivating factor for many of its employees.

Justification: According to Mr. Kamprad, people work at IKEA this is because of they liked theatmosphere of IKEA. They follow a very informal environment over there. But the most painfulpart is they did not have any hierarchy. So to sustain properly and to do well in this sector they

should have an organizational hierarchy. This is because, after have the hierarchy it could bestrength for them and also a motivational factor as well.

IKEA is not at all customer focused.

Justification: one of the bad parts of IKEA is, they are not at all customer focused. They alwayspreferred the cost first. The world is changing every day. Customer needs customize product orthey might have some preferences which IKEA should consider.

It lacks thorough market research on customers preference before ente ring into a newmarket.

Justification: to provide a good quality product and also value the customers need and wantsshould be the organizational motto; this is because its a furniture company. IKEA did not do anysort of market research regarding customers needs and wants. So they should come up with amarket research results which will give them more profit.

IKEA never took economic issues into consideration before being faced with the problem.

Justification: whenever any company wanted to go global, they should consider some criticalissues like in American market where the goods were priced in the Swedish kronor, which wasstrengthening against the American dollar. This drove up the price of goods in IKEAs Americanmarket. So this sort of mistake should be done by IKEA.

IKEA has a tendency of making mistake first and then realizing that it should have takenmatters into consideration beforehand.

Justification: to be a successful furniture company, IKEA should take the customer preferencefirst and then they should start producing. Whatever, they did not do and research about the need


16/29

Page | 16

of customers. After failed with any furniture they started change the design and style and allthose things.

Kamprad does not take into consideration the change of times.

Justification: in this world, everyone wants an entity or identity, a designation. The employeesused to stick with the company because they loved their work beyond anything else. However,times have changed and with that peoples want out of thei r job has also changed. With regardsto time changes, Kamprad should come up with a proper hierarchy.

IKEAs strategy is not exactly aligned with its vision.

Justification: Actually, in this case we see that, Kamprad just focused on low cost furnitureproducing. After that, he tried to expand his business all over the world, but the problematic partwas he did not have any long term goal that where actually he wanted to see his business infuture.

Opportunities

IKEA can expand its product line by producing high end products

Justification: usually IKEA manufacture their product for the middle class, upper middle classfamily. But if we consider the present market situation then we can see that, people wants elegantdesign and they are ready to pay for that, so IKEA can come up with a new target customer thatis upper class and grab the market as well.

IKEA can expand its business into interior designing and cookeries products

Justification: as furniture is highly related with interior designing and also interior designingbecome very popular nowadays, so IKEA can come up with a new idea and that is interiordesigning division to maximize their market share as well as their profitability. Moreovercookeries also can be an ideal product for IKEA.

IKEA should listen to the customer demand to make more sustainable solution

Justification: The people are becoming very conscious about the environment nowadays. So tobe a successful furniture company they can come up with environmental friendly furniture withvast customization.

Product customization can boost up IKEAs sales

Justification: As we know, IKEA manufactured very stylish product but general, whereas if IKEA can come up with a customize product for their customer then if could be a very profitablebusiness for IKEA. People wants customize furniture and there is no substitute product of furniture.


17/29

Page | 17

Threats

Changing social trend can hinder the growth of sales of IKEA

Justification: from the very beginning IKEA is emphasize on the low cost product but if we

consider the customer trend then we see that, a large number of people wants quality product. Sothere is high possibility to lost that market who wants good product. So IKEA should come upwith a good quality product strategy with their low cost strategy.

Accelerated market competition in USA

Justification: some of the well established retailer sale furniture with low cost than IKEA, so itcould be very difficult for IKEA to continue their business with only low cost strategy. If weconsider walmart, Office depot price then we can see that, their price is 20% to 30 % lower thanIKEA. So, IKEA should come up with another strategy besides low cost strategy as early aspossible.

The risk of global financial crisis

Justification: The world wide recession is a major factor of bad economic condition. Since 2007,globally most of the business organizations turnover is decreasing. So it might have some badeffect on IKEA.


18/29

Page | 18

Corporate level StrategyVertical Integration

Large companies are often involved in many different kinds of businesses and sellproducts in many different countries. So far we have identified that IKEA has been usingVERTICAL INTEGRATION to the Global furniture industry. Managers use corporate levelstrategy in VERTICAL INTEGRATION to identify which industries their company shouldcompete in to maximize its long run profitability. There are two types of vertical integration:

1. Forward vertical integration

2. Backward vertical integration.

So far we found that IKEA using backward vertical integration to expand their businessand to make profit. Here are some benefits of IKEA to have vertical integration.

Facilitating investment in specialized assets

A specialized asset is one that is design to perform a specific task and whose value issignificantly reduces in its next best use. Here IKEAs specializes asset is employees skills thatemployees acquired through training and experience. IKEA invested in specialized assetsbecause it allowed it to lower its cost structure and differentiate their product.

Enhancing product quality

By entering industries at other stage of the value added chain, IKEA enhanced the quality of theproduct in its core business and so strengthen its differentiation advantage.

Improved scheduling

Strategic advantage has been obtained when vertical integration makes it quicker, easier, andmore cost effective to plan, coordinating, and transfer of product like finished goods frommanufacturing plant to retail or distributing shop.

Increased Bargaining Power

IKEA used VERTICAL Integration because it allows them to obtain bargaining power oversuppliers and increased their profitability. By consolidating the industry through VERTICALIntegration IKEA has become a much larger buyer of suppliers product and use this as leverageto bargain down the price IKEA pays for its input, there by lowering its cost structure.


19/29

Page | 19

The raw materials to customer value added chain for IKEA:

Outsourcing

Strategic outsourcing is the decision of IKEA to allow one or more company to performspecifically or selected value chain activities or function by independent specialist companiesthat focus all their skills and knowledge on just one kind of activities. According to availableinformation IKEA now outsource 90% of their product and rest 10% produce internally.

Outsourcing has brought some benefits for IKEA, those are,

Low cost structure

VERTICAL Integration has been cut IKEAs cost structure because it cre ates increasingeconomic of scale. Achieving economic of scale is very important of IKEA because it has a highfixed cost structure. In furniture industries allows IKEA to spread its fixed cost over its largevolume of production and in this way it drove down IKEA to average cost per unit.

Focus on the core business

A final advantage of strategic outsourcing for IKEA is that it allows managers to focus theirenergies and company resources on performing those core activities that have the most potentialto create value and competitive advantage.

Component partsmanufacturing Final assembly Retail Customer


20/29

Page | 20

Business Level strategy Low Cost

From the very beginning, IKEA maintain the price leadership strategy. The founder of IKEA Mr.Ingvar Kamprad started the business whenever he was only 17 years old. It was established inSweden in the year of 1943. Mr. Kamprad always tries to give up a structure of elegance to thefurniture. So it was really nice to the customer that, they found their desired furniture in a verylow price.

Whenever Kamprad started producing furniture at Sweden, it was very expensive there. SoKamprad come up with a good strategy that, make a good design furniture with start adapted tomachine production and also cheap to assemble. As a part of giving low price product for thecustomers, Kamprad undercut the retailers and sold it to the own warehouse.

Product development

As we know that, Mr. Kamprad always try to give up the stylish product and as a part of thisstylish furniture provided to the customer he hired a designer named Gillis Lundgren. Mainly healways helped Mr. Kamprad to make the furniture better and also took the photos of the furnitureto give them into the catalog.

After hired the designer Gillis Lundgren, he started to design more and more furniture, wheremany of them were the best seller in that moments.

According to Mr. Kamprad, he always said that, good furniture should be priced such a way thata flat wallet holder can also buy the furniture. In this regard, Kamprad tried to come up withsome cost efficient manufactured furniture. Moreover the new designer always tried to exploresome new ideas that, how to save the manufacturing cost with new design.

Large warehouse store

This is one of the best parts of IKEA furniture that, they used large showroom for show theirfurniture to the customers. Moreover in the home furniture fair of 1957 they exhibit their productto the customer. The productive part of being a large warehouse was, customer can see that how

it looks after arranging the total furniture setup.IKEA design their warehouse such a way that, after crossing a maze it seems t hat its a finishingor logout of one area. The goal was too simple, to make the customer feel that, after arrangingthe furniture it will be like this. Moreover IKEA provided flat packed furniture which is verysafe to carry and assemble also. Furthermore the idea of making a restaurant within thewarehouse was very effective. It was established in the middle of the warehouse. And last but notthe least, IKEA sold their furniture with reduce price of 30% 50% than the competitors.


21/29

Page | 21

Market development and expansion

After making a large amount of profit and as well as the market share in Sweden, Kamprad gofor Poland. After go to Poland, Kamprad discover that, the manufacturing cost of Poland was50% lower than the manufacturing cost of Sweden. So he started to develop his business to

Poland. The people of Poland preferred Vodka as their business celebration and Kamprad go onthat way and make them happy with Vodka. Kamprad establish a very good relationship with thesuppliers over there. Moreover IKEA started their business in Poland, Norway, UK, USA,Switzerland etc. in 1965 they expand their business to Norway, in 1973 they expand into theScandinavian area, in 1976 to 1982 they expand their business to UK and Canada.

Market penetration

From the very beginning IKEA stated to get the majority market share with providing the lowprice furniture with stylish furniture. As a part of that market penetration they expand their

business to several countries. IKEA started expansion their business in Poland, Norway, UK,USA, Switzerland etc. in 1965 they expand their business to Norway, in 1973 they expand intothe Scandinavian area, in 1976 to 1982 they expand their business to UK and Canada. And lastlythey started their business to USA to grab the USA market as well.

Niche Strategy in USA

After expansion in USA, they observed that, thing are not going well. The furniture theydesigned according to the preference of European style was not going to work with the Americanpreference. After analyzing the total situation, Kamprad started redesign their furniture. In thistime they emphasis on the young generation as their target customers.

IKEA reemphasized designed and started promoting the brand with a series of niceadvertisements with targeted to the young married couples, college students and 20 - 30 agessingles.

Business Model IKEA

Actually IKEA does not have any sort of business model. They just try to follow their previousstrategy that makes them profitable. Moreover they are not at all prepared to change their

strategy. The target customers of IKEA was the young generation and the middle class familieswho are looking for the low price furniture but attractive as households items. After that, thelarge furnished warehouse attracted the customers very much that they buy product more thantheir assumptions.


22/29

Page | 22

Structure and Control SystemThe roles of Value Creation Functions in achieving superior efficiency in IKEA:

Infrastructure (leadership):

Provide company-wide commitment to efficiency

Creativity among employees is highly valued in IKEA and the company is full of stories of individuals taking the initiatives; from Gillis Lundgrens pioneering of the self -assemble conceptto the store manager who let customers go into the warehouse to pick up their own furniture. Allthese improve the efficiency of the company. Kamprad, the founder and head of IKEA, is a takesthe subway to work, drives a 10-year-old Volvo and avoids suits of many. This is his form of commitment to efficiency and this form has become a part of the IKEA DNA. Managers do not

fly first class and share hotel rooms. This is their company-wide commitment to efficiency.

Facilitate cooperation among functions

IKEAs organizational culture facilitates cooperation among functions. Kamprad s managementstyle is informal and nonhierarchical. The offices do not have an open plan and private officesare rare. The culture is egalitarian and everyone is called a co-worker, and first names are usedthroughout. Everyone is treated equally in the company. IKEA regularly stages anti-bureaucracyweeks during which executives work on the store floor or tend to registers. All these helpemployees to cooperate among the functions.

Production:

Global sourcing decision

IKEA designs the price tag first, and then the product. Once the price tag is set, designers work with a network of suppliers to drive down the cost of producing the unit. The goal is to identifythe appropriate suppliers and the least-costly materials. IKEA devotes considerable attention tofinding the right supplier for each item. It makes sense to work with suppliers in each of thecompanys big markets to avoid the costs associated with shipping the product all over the world.

For example, for the companys best -selling Klippan love seat, today there are five suppliers of the frames in Europe, three in USA and two in China. O reduce the cost of the cotton slipovers,IKEA concentrates production in four core suppliers in Europe and China. The resultingefficiencies from these global sourcing decisions enabled IKEA to reduce the price of theKlippan by some 40%.


23/29

Page | 23

Marketing:

Adopted aggressive marketing in US market

To tap into Americas shifting culture IKEA adopted a niche market strategy and modified its

target market aiming it at a younger demographic: young married couples, college students and20-30 something singles. IKEA adopted aggressive marketing in USA to makes its place in themind of its target market and the capture the market. This was done in accordance with nichemarket strategy in USA.

Somewhat wacky, offbeat advertisements

IKEAs target market is the young, upwardly mobile global middle class who are looking for low-priced but attractively designed furniture and household items. This group is targeted withsomewhat wacky, offbeat advertisements. This helps drive traffic into the stores.

Materials management:

Store plan

The IKEA stores are large warehouses and the interior is configured almost like a maze thatrequires customers to pass through each department to get to the checkout. This gets customersto make more impulse purchases as they wander through the IKEA wonderland. The way theflow of departments is set also boosts up sales. For example, a tool section is added just outsidethe home textile department so that when the wives stop in this department and the husbands arebored they can always go into the tool section and keep them entertained. This leads toskyrocketing of sales of tools. IKEA stores also have restaurants and child-care facilities so thatshoppers stay as long as possible.

Effort in implementing JIT systems

IKEA contracts out manufacturing for most of its products and a certain portion of goods aremade internally by its own manufacturing company, Swedwood. Nearly 10% of its products are

produced internally. Swedwood strengthens IKEAs supply base. Even if there is ever any rift

with any supplier IKEA can always turn to Swedwood for emergency supplies so that it neverruns out of enough products in stores.


24/29

Page | 24

Research & Development:

Designs products for case of manufacture

Time and time again, the research and development team finds ways to alter the design of

furniture for ease of manufacture which leads to saving on manufacturing costs. IKEA designsare adapted to machine production from the start and thus are easy and cheap to assemble.Moreover, Swedwood also enables IKEA to acquire knowledge about processes that are useful inproduct design.

Seeks process innovation

The research and development team always seeks process innovation that will drive down themanufacturing costs. Process innovation also helps in keeping aligned with the self-assemblyconcept. Products are manufactured such that they can be flat packed and flat packed furniturereduces transport and warehouse costs, and damage. Moreover, Swedwood also enables IKEA toacquire knowledge about processes that are useful in product design.


25/29

Page | 25

Recommendations for IKEA MAIN ISSUE

Throughout the case, one thing was common, IKEA before entering into International Marketdid not do necessary homework in order to conduct a better business due to which it alwaysdid mistakes first, learnt from its mistakes and then made changes to change according to thenew culture they were operating in.

The recommendations given below are solely based on the main issue identified:

We classify IKEAs recommendations into two main categories:

1. Internal Management Issues 2. External Market Issues

Internal Management Issues:

Change in Internal Management:

The management style of IKEA is quite informal. This type of management style may work inScandinavian and European countries. But this will not work in different part of the world. Whena company is going global, it needs to modify its business style a little bit according to the

countries culture. IKEA, for example does not maintain any formal hierarchy, it workscompletely based on teams (as a family), with no proper designations even for seniormanagements, as well as no formal clothing, and is egalitarian. But for instance, if it operates inAmerica it needs to change a little bit because Americans are more formal and suited at work place, focus on hierarchy, and believe in pay for performance. So these things are needed forIKEA to be considered when they are operating on a global scale.

*this pint leads us to our next recommendation which is IKEA should have

A Strong Human Resource Management Team:

As the point is about going international, and as it is about international business, it is not clearlymentioned in the case whether IKEA is centralized or decentralized. But if IKEA opens newcorporate offices in whichever new country they want to run business then for its successfuloperations overseas it can have a good HRM team. This team will help IKEA realize the key


26/29

Page | 26

cultural differences among countries and help adapt management strategies which would bestsuit them.

For example: Equality in terms of race, gender, religion and others is fair. But when it comes forbetter performance it needs to consider which employee is better than the other. Reward or pay

employees according to performance. Have a good ranking of employees within the company;allow them to have cars or other benefits so that employees stay in the company for longer terms.Unlike IKEA which does not have any proper internal management.

Which means a strong HRM team will not only help IKEA improve its internal managementstructure and culture, but it will also help IKEA identify the best HR practices to be followed ininternational market like polycentric approach, geocentric approach, ethnocentric approach orwhether to adapt regiocentric approach.

Change in Leadership Style:

Due to Kamprad, IKEA is suffering from Icarus Paradox issues. So we suggest there should be aleader or a SUCCESOR for IKEA who could help in bringing change for the corporationaccording to the fast and ever changing ways of conducting business in the 21 st century. A leaderwho has a good vision, who can help align corporate level strategies with ever changing globalbusiness, one who is flexible and can one who considers employees and top management viewswhile making better decisions for the company unlike Kamprad whose fragility was a part of IKEAs DNA, and a man of his own word and principles who was quite autocratic and did thingwhat he thought was best for the company. That is IKEA needed a more decentralized form of management to be a better global competitor.

External Market Issues:

Focus more on customer wants and preferences:

Unlike any successful company, IKEA needs to focus on customer wants rather than simplyfocusing on lowering costs by setting up price tags and designing furnitures. Whe n IKEAstarted operating its business in United States of America, it faced problems as it was not awareif what Americans wanted or preferred. They first followed what they used to do in Scandinavianmarket due to which its sales went down initially. But later when it came up with customizedadvertisements for younger demographics like married couples, college students and 20 to 30something singles, due to which later within four years IKEAs revenue doubled from $600million in 1997 to $1.27 billion in 2001. This was the result of its focus on what young Americancustomers wanted.


27/29

Page | 27

Stronger Research and Development Department:

IKEA spends too much time and money on finding the right suppliers who can get aligned withtheir lower cost strategy. Instead they may put this same amount of time and money doingresearch and development before going for any international business. Like if they before

entering American market, had already researched on things like American bed in king, queenand double size unlike Europeans who measure beds in centimeters. They prefer larger sofas,deeper wardrobe drawers, long curtains, large glasses and others. If IKEA focused on customerresearch and development on the first place then they would have made profit since they haveentered American market.

Product Innovation

IKEA is having a product strategy but in order to have a competitive advantage in the marketIKEA could become a more customer focused company in certain countries. This could help

them come with more customer focused and more innovative products which might result in ahigher competitive advantage in many different new markets they wish to operate in future, orare currently operating in.

IKEA could go for Related Businesses:

As mentioned earlier in opportunities, IKEA could go for related new business like interiordesigning solution options for its customers or even offer new cookeries products to them, orthey could also go for a complete product solution services for their customers. For example: if acustomer is willing to buy furniture from them, then they could offer customer an additionalservice like give them a solution that is how they can redecorate or change their home interioraccording to the choice of their furniture they are purchasing. They could provide such serviceoptions online on their websites as well. These extra services or customer solutions might notbear extra costs for businesses like IKEA which has generated good amount of profit over theyears.

Outdoor Advertisement:

Since IKEA is been going for a low cost strategy they can change/extend their marketingstrategy. We all know giving ad on TV is very expensive and this price heavily fluctuate on thelength of ad and timing. If IKEA want people to listen to their ad they have to show their ad

products before/after/between news or any popular TV show, which will cost money athemorrhaging rate. They can draw paint/graffiti on public transportations or cab or subways.Because most of IKEA's target customers are average middle class families and these people usepublic transportation like bus/subway; so this marketing strategy will capture attention of maximum target audience at a much cheaper way.


28/29

Page | 28

IKEA could go GREEN:

IKEA could promote programs like tree plantation, save the environment or other related CSR(Corporate Social Responsibility) activities. Such activities will not only be a good initiative fora furniture company toward making the planet earth a better living place for people, but at the

same time it will also help enhancing the brand name IKEA as well as the brand value of IKEA,which is an intangible asset of any corporation. Moreover, IKEA could go for more eco-friendlytechnology for producing its products which will also go along with its low cost business levelstrategy as well.

Internal Management leads to proper external management which leads to happy and satisfied customers.

ConclusionAs it is about all about operating in International Markets, and International Business, we do notknow which strategy will best suit such multinational companies that is we do not know whethera Global standardization, or Internationalization, Transnational, or Localization, whichinternational strategy is going to work in which corner of the world. All we can conclude bysaying is that before entering into a new market a firm should do its necessary homeworksunlike IKEA which always did mistakes first and then learnt from it. This will save millions andbillions of dollars of a company and this will also help sustain in the long run and secure itscompetitive advantage in the global market as well.

Proper InternalManagement

Leads to Satisfied Customers!


29/29

Reference:

Charles W.L. Hill, Gareth R. Jones. Theory of Strategic Management with Case. 9th Edition,South-Western Cengage Learning, 2010.

IKEAs official website. Retrieved July 8, 2011 from http://franchisor.ikea.com/

Documents

Case Analysis: IKEA