IKEA: Essentials of Strategic Management

Introduction

IKEA is the abbreviation of Ingvar Kamprad Elmtaryd Agunnaryd and the founder of the company is Ingvar Kamprad in Almhult (at that time he was only 17 years old boy), the company was founded in the year 1943, in Sweden. The headquarters of the company is located in Delft, South Holland, The Netherlands. IKEA is privately owned but it is an international-based company. IKEA has 278 retail outlets in 36 countries; most of these stores are in UK, Europe, United States, Canada, Asia, and Australia. It is considered to be the world’s largest manufacturer of furniture. The company has somewhere around 12,000 products available on their website, which is very near to their products range. In 2005 a survey was conducted and it was reported by the management of the company that they had over 275 million hits on their website. The motto of the company is that they are trying to create a better life for people all over the world through their products and the business idea of the company also supports the vision of the company and that is it provides furniture at reasonable and affordable prices so that many people can afford their products. The revenue for IKEA in 2009 was £22,713 million. The company has somewhere around 123,000 employees working for them all over the globe.

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IKEA is a retail outlet that sells flat pack furniture, bathroom accessories, kitchen accessories, and bedroom set, etc. all over the world. When the company started off it used to sell everything from wallets to picture frames, it really became famous when the company started to sell flat pack furniture at very affordable prices. IKEA has somewhere around 9500 products in their entire product ranges. All of the IKEA retail outlets carry all their ranges, but mostly it depends on the size of the retail outlet that how many ranges it can carry. But all the retail outlets do carry the core range of the company.

Strategic Issue

IKEA specializes in furniture making. IKEA’s clientele is mostly of an average income household. The company itself is one of the most huge furniture selling businesses in the world. However, this company is still in the process of learning and it is learning a great deal from its customers as well.

IKEA operates in the furniture industry; this industry is very highly diverse. For example, the furniture industry made somewhere around $23 billion in 2001, from only wholesale shipment and the industry made $64 billion from retail sales that year as well. There is a lot of countries like México, Italy, China, Canada, Brazil, and the Philippines that import their furniture, rather than making it. Household furniture is the most used furniture around the globe and it sells a great deal too. The household industry is made up of 2 major elements and they are as follows:

  • Case goods: case goods can be defined as furniture that is made from wood; these goods are basically packed and shipped in cases. This is where the product got its name from. Case goods would include beds, sofa sets, kitchens, cabinets, chairs etc. There are a lot of variety and designs within each category of the furniture.
  • Upholstered furniture: upholstered furniture can be defined as furniture that has leather or any other fabric covering. This kind of furniture has springs, webbing or padding etc. Upholstered furniture is mostly based on frames.

The strategic situation is that in today’s time there is a great deal of global competition for the companies who operate in furniture selling international market. Therefore it is very important for a company like IKEA to maintain viability in their operations, maintaining viability is considered to be very essential for a company along with innovation, which is also consistent. Therefore it gives companies like IKEA no option rather than to change and innovate themselves if they want to stay ahead of the competition.

External Analysis

It is important for the marketers of the company to identify any significant changes in the environment. The marketers need to be the people who track trends and be the people who seek opportunities for the company and a great deal of opportunities can be found with the help of trends and fads.

The best way to analyze the external environment would be through PEST analysis. PEST analysis is an abbreviation for Political, Environmental, Social, and Technological analysis. This analysis is a marketing tool that helps the company in making strategies. It helps the company to know its environmental challenges and it also helps the company to in how to operate their company in the present and it helps the company to prep itself for the future as well. This analysis also helps the company to match its resources with its activities and helps the company to move along in the right direction.

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Political Analysis

Here the political term refers to the global, national, regional and local trends, changes or events. IKEA in the year 2004 was not given the permission by the Office of the Deputy Prime Minister to build a future store in Stockport, Greater Manchester, but later they were given the permission to built one of their stores in Greater Manchester a few miles away from the original location. Somewhere around £10,000 were spent on the traffic policing and even more were spent by the company for re- routing the traffic from Aston and M60 motorway, so that the general public will be able to visit the retail outlet.

Environmental Analysis

The environmental term over here refers to the local or national issues of the company. The company believes in keeping the environment keep clean. IKEA has decided to use iconic reusable blue bags and it is encouraging the British to stop using bags entirely. It is one of the first retailers in the UK to stop using plastic bags. IKEA has introduced low energy bulbs in the entire UK outlet. And the company has switched its company’s cars to low omission hybrid models. In the year 2006, the company gave somewhere around 9000 folding bikes to its UK employees, so that they would become green.

Social Analysis

The social term in the analysis refers to the developments within the society that is means culture, behavior, the expectations of the customer, the attitude of the company towards the society etc. In the year 2005 the company introduced IKEA Social Initiative, to invest in social programs all over the globe. IKEA has provided with the British people with an option of leaving their cars at home when they come to visit IKEA, the company provides its British customers with free bus service, from the outlet to their homes.

Technological Analysis

The technological term over here refers to the development, such as, the processing of the products, how the machines are operated. In the 2008 it was decided by the company to introduced green technology in all of its stores including the ones which operate in the United Kingdom. IKEA has developed a technology called GreenTech which will focus on solar panels, alternative light sources, different product materials, efficiency of the energy, water saving and purification of water, this project is a £50 million, which will soon be implemented in all the stores of the company.

Industry Analysis

Introduction

At the moment the furniture industry is very much affected by the buying behavior of the customers. One of the company’s external customers is the end-user, who buys the product for final consumption. The expectations of the customer are influenced by their past buying experience, friends’ and associates’ advice, marketers’ and competitors’ information, and promises. The requirement of these customers is that they want their product to be of a good quality, easy to afford, durable or long lasting, branded and user friendly etc.

Driving Force

Global recession plays a very important role in the buying behavior of the general public. Statistics show that great deals of industries are also facing a meltdown. Since there is an increase in the rate of inflation, it has become difficult for people are finding to buy new products like furniture because things have become a tad expensive. The buying behavior of the people has become affected by these situations as well, for example, the decrease in the economy, the prices of the crude oil are unstable, there is no end to inflation and an increase in the cost of businesses, etc. The financial crisis of 2008 – 2009 is called ‘credit crunch’ or ‘credit crisis’, which means that there is a reduction in the availability of loans for the general public, which means that the people do not have the resources or the money to buy the products they want. And due to this, the purchasing of furniture has decreased considerably.

The customers are going to buy furniture which is very affordable and comes in the range of their budget; they will not buy furniture based on luxury itself, but out of necessity.

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Key Success Factors

The key success factors in the furniture industry would be as follows so that the companies like IKEA can get back on track. They are:

  • Control in Assembly Lines: Assembly line is a process that lies between batch and continuous process on the continuum, volumes are high and the products or services are standardized which allows resources to be organized around a product or a service. Products that are created by a line process are furniture, toys or appliances, etc. There are line flows, with little material held between operations. Each operation performs the same process over and over again, with very little variability in the products or services. Manufacturers with line processes often follow a make-to-stock strategy, with standard products held in the inventory so that they are ready when the customer places an order over here the case would be an online order. The assemble to order strategy amounts to designing operations to include processes that are devoted to producing a set of standardized products and processes that are devoted to assembling standardized offerings for a specific customer’s needs. The assembly processes must be flexible so that the correct package is assembled. For example, IKEA can produce hundreds of particular styles to meet customers’ selections of fabric and wood.
  • Model for Re-Designing Product Lines: for example, IKEA decided to redesign its product line in 2003. The company decided to shift its flow of products from Sweden to farfetched countries like China. The company has somewhere around 11 product lines, 140 stores, manufacturing facilities, and thousands of employees around the world who are keeping track and managing the system. Therefore such kind of redesigning was not possible, but IKEA decided to go for it. The new system included a flattening of the company’s structure and hierarchy, it involved customers and suppliers in the design process from the very start, it developed direct contact with the suppliers and the retail outlets, changing and adding the responsibility of the central management’s staff, updating and modifying the information system of the company. The new design was to take the concerns of the customers very seriously and take corrective action when needed. With the new system, a variety of designs were created against the proposed goals of the company.4

Porter’s 5 Forces Analysis

  • Bargaining Power of Customers: the customers of IKEA are the individuals who buy the finished product for their own consumption. Since IKEA provides its products there is no room for bargaining.
  • Bargaining Power Of Suppliers: IKEA buy’s it raw materials at an affordable price hence there is no pressure on the company by its suppliers. The top five suppliers of IKEA are China 21%, Poland 17%, Italy 8%, Sweden 6% and Germany 6%.
  • Threat of Substitute Product: there is no threat of a substitute product for a company like IKEA who sells all kinds of furniture.
  • Rivalry among Competitors: IKEA’s biggest competitor is B&Q. B&Q is retail of DIY and it is a home improvement tools and supplies outlet. It was founded in 1969 by Richard Block and David Quayle in Southampton, England. B&Q is the largest retailer outlet in Europe and third largest behind Home Depot. This company has somewhere around 361 stores out of which 332 are only in UK and the rest are in Ireland and China. B&Q has somewhere around 39,000 employees working for them. In 2000 B&Q opened it 50th store in York.
  • Potential New Entrants: new entrants would be considered at the local furniture shops that compete with IKEA on a domestic basis.

Industry Profile and Attractiveness

The furniture industry is looking good at the moment; the sales have been increasing gradually but steadily. The best way for the industry to improve itself is to reengineer its self completely. And this can be done with the introduction of technology.

Whereas IKEA it trying to develop a niche in the market where they know that the purchasing power is high in that region of the world. In the future development IKEA is building a distribution center which is going to be a joint venture between IKEA and some companies of China. Since IKEA is relocating its warehouse to China it would decrease the rent considerably and the products would be easily distributed in the Asian countries like Japan or the Middle East Asia.

Company Situation

Introduction

One of the issues with which IKEA is dealing with is diversity as the company expands and develops itself and becomes more diverse the management of the company is trying to keeps its core values alive. But this is not the case here, a great deal of management problems have risen and one of the problems is that the employees of the company do not feel motivated enough to do their tasks properly. This problem has caused the company performance to decrease in the form of not producing standard quality products.

Financial Analysis

Financial analysis analyzes the overall financial framework of the company and it shows that how the company is making its revenue and profit. The management of IKEA can use financial analysis to find profitable strategies that go beyond the sales. The company also keeps in mind that the customers are always changing their tastes and preferences and the company anticipates these changing tastes and preferences of their customers and provides them with new innovative products. With the help of innovation the company to gets new clients and the sales also increase which in return increases the profit.

The management of IKEA is considering their strategies to develop the company further in Asian, Australian and Middle-eastern markets where even now it is only generating only 6% to 8% of sales. IKEA should use its brand name to sell the products that appeal to huge masses of people throughout the world. In the year 2008 IKEA had increased it sales by seven percent.

SWOT Analysis

The overall evaluation of a company’s strengths, weaknesses, opportunities and threats is called the SWOT analysis. Once IKEA has performed its SWOT analysis it can then proceed to develop the specific goals for the planning period of the company. The product manager of the company needs to find the strengths, weaknesses, opportunities and the threats of the company and its products.

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Strengths

  • IKEA’s catalogs play a major role in advertising success of the company. The catalogs of the company are attractive, colorful and convenient for the customers to select the products they need. The catalog shows mostly all the ranges of IKEA.
  • Strength of IKEA is its products. The products are sold at a reasonable and affordable price so that many people all over the world can enjoy the comfort of living. IKEA’s products are known for their modern and Unitarian designs.
  • The reputation of the company is also one of its strengths
  • Environmental performance is also one of the strengths of IKEA. IKEA has introduced rental bicycles for its customers in Denmark, has minimized the use of formaldehyde in its products, has also reduced the use of lead, lacquers, cadmium etc. and has eliminated PVC from its packaging materials.
  • IKEA has excellent brand awareness and a high quality image of its products.
  • Dealers who sell the products are highly knowledgeable and well trained in selling the products to the potential customers.
  • IKEA has excellent network service and the customers also know that they will get quick and good customer service and after sales service.
  • IKEA has a very sophisticated store environment.
  • IKEA has an identifiable concept with a very clear strategy of cost leadership for its company.
  • It targets consumers for all ages.
  • The outlets of IKEA are similar worldwide and they have a huge range of home furnishings within their outlets.

Weakness

  • There is no direct competition for IKEA in the UK, other than small retailer who sell furniture
  • Real estate in UK would be considered a weakness for IKEA because it requires large areas for constructing its stores.
  • One of the weaknesses of IKEA is that it has not been able to change the minds of the British that furniture is fun and it is easily disposed of because British have a mindset that furniture is suppose to be long lasting and durable.
  • Another challenge that IKEA faces is different consumer preferences and needs. Since IKEA is originated from the Scandinavia, it has to modify its products to suit the British market.
  • The product quality of the company is not demonstrably better than that of competing products.
  • IKEA has limited manufacturing capabilities
  • IKEA has some difficultly to coordinate and maintain quality standards in some parts of the world.
  • IKEA needs to learn diversity of other markets like Japanese etc.

Opportunity

  • The consumers of the company are showing increased interest in the flat pack furniture, so IKEA should consider designing more compact furniture.
  • IKEA has only up to 10% of the retail market share in each of the country it operates. Therefore there is a huge potential to increase market share especially in a large market like the UK region.
  • IKEA has a clear and a good concept of selling a lifestyle that is based on good design and value for money.
  • There is an opportunity for the company in e-tailing.
  • Smaller stores are also an opportunity for IKEA, because if it is able to introduce small stores within UK, the local population will be able to visit the outlets often, since they will be scattered all over the place, rather than located in one place. 7

Threats

  • The British market is considered as a huge challenge for IKEA because of its major differences in size, colours and lifestyle of the people.
  • Another threat for IKEA is to keep the core values alive of the company especially when it is becoming larger and more diverse organization.
  • IKEA has a difficultly in sustaining good quality design products at low cost when the number of competitors keeps increasing within the furniture market through the world for example B&Q and Wal-Mart in the UK.
  • Increase in shipping process when it comes down to the transportation of the IKEA products
  • Increases in the prices of the products due to the recession, the people of UK are not able to afford the products. For example, for Christmas time (2008), a survey was conducted in Britain about shopping for products and it was found a great deal of families will spent less than £500 on products
  • Due to this global recession the manufacturing output in the United Kingdom (UK) has been reduced by 7% by the end of 2008.

Company Situational Profile and Prospects

The companies have accepted that the employees are an important source for the competitive advantage over the competitors. It has been considered important that IKEA should adopt human resource management practices and make the best use of those practices. In the end it comes up to the management of IKEA to achieve high performance of the company. For example a moderate amount of stress has a positive effect on the performance of the employees, but extremely high stress contributes to performance decline of the employees and that would lead to burnout which means the emotional exhaustion which results from extended periods of stress.

The management of IKEA approach employee motivation as “you need a job right?” but this is not an effective method to motivate the employees of the company to give their best effort or to perform better. Motivation can be defined as a reason to do something, over here the case would be to provide en employee to perform better on his or her job. In a work environment there are three characteristics (i.e. attitude, harmony and expectancy) that affect the motivation of the employees.

Recommendations

  • Customer service plays a significant role in IKEA; therefore it should enhance its website so that it can accommodate the requirements like, sales support, customer enquiries and requests etc.
  • IKEA should create a constancy towards improvements of their products
  • IKEA should stop its dependence on inspection to achieve quality for their products
  • The company should break down the barriers between the department so that there is a free flow of communication between the employees
  • The company should create work teams and focus on the training of the staff
  • Discuss specific performance expectations for every job with the worker
  • Decompose the work activities into discrete elements that are required for production
  • Be devoted to prevention rather than appraisal and correction
  • Focus on quality measurement and performance
  • Promote participation by the staff of the company

Works Cited

Hill, C. & Jones, G. Strategic Management: An Integrated Approach. Outh-Western College Pub, 2006

IKEA – Official Website. 2009.

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