IKEA is an international company that deals with furniture and has become one of the largest retailers of furniture across the world. IKEA is a relevant case study because it has a clear mission, goals, values, and strategies, which have propelled it to the current status in the global markets. Therefore, the report seeks to analyze IKEA by examining its background, external environment, internal environment, business-level strategy, and corporate-level strategy to provide appropriate recommendations to improve its stance in the global market.
In 1943, the founder, Ingvar Kamprad started IKEA in Sweden at the age of 17 years as a company that dealt with mails. Based on his experience of retailing products such as jewelry, wallets, watches, and picture frames, Ingvar Kamprad opened a furniture store in his village, Agunnaryd (IKEA). By 1945, IKEA had experienced exponential growth for Ingvar Kamprad was unable to run the business individually, and thus, he decided to hire salespersons and marketers. In 1948, IKEA introduced furniture and expanded lines of products in its stores leading to a significant increase in sales.
By 1951, IKEA realized the potential of the furniture market and introduced a catalog in a bid to undertake large scale production. The competition compelled IKEA to launch a showroom in Almhult where customers experienced the touch and sight of products before purchasing them at affordable prices making them get value for their money. Through its concept of showcasing quality and affordable products, IKEA managed to dominate the local market and venture into international markets (IKEA). By 2000, IKEA had expanded its stores to the United States, Japan, France, China, South Korea, Australia, Germany, Russia, and the United Kingdom. Currently, IKEA has over 375 furniture stores in 47 countries out of which most of them (70%) are in Europe.
The mission and the goal of IKEA are to create diverse products that are not only affordable and accessible but also improve the way of life among people in different socioeconomic categories. IKEA strives to achieve its mission and goal by designing and selling diverse home furnishing products at affordable prices that meet the unique needs of its target customers across the globe. The mission originated in 1951 when IKEA experienced tough competition from its rivals prompting it to design quality and affordable products. To enhance the accessibility of its products, IKEA has launched its stores in various parts of the world including Germany, the United Kingdom, the United States, Canada, China, Japan, and Australia (IKEA). Currently, IKEA has big stores such as Stockholm Kungens Kurva in Sweden, Wuxi in China, Gwangmyeong in South Korea, and Shanghai Baoshan in China, which have enhanced penetration of IKEA into global markets and promoted accessibility to products.
IKEA has core values that have enabled it to grow and develop into an international company and dominate global markets. The core values are respect, role model, dynamism, unity, cost-consciousness, innovation, and delegation (IKEA). In the core value of respect, IKEA respects its customers and suppliers in conducting businesses for they are lucrative players. Since leadership determines the performance of organizations, IKEA encourages its managers and employees to be role models in upholding the reputation of the company. Regarding the value of dynamism, IKEA dares to be a dynamic company by adopting new strategies and undertaking reforms. IKEA values unity for its uses it in resolving complex issues that require concerted efforts of parties involved. Operating in a competitive environment, IKEA values cost-consciousness for it understands that prices have a marked influence on their competition and performance in the global markets. As IKEA operates in modern society, it values innovation because it determines the quality of products, saves money, and improves customer satisfaction. Due to the increasing responsibilities and duties of employees, IKEA believes that delegation alleviates workload and allows employees to grow and develop in their careers.
The analysis of the external environment of IKEA using Porter’s five forces highlights its competitive ability in the industry. In the force of rivalry among competitors, IKEA faces intensive competition since there are competitive players. Wal-Mart Stores, Argos, Ashley Furniture Homes Stores, and Euromarket Designs are the leading competitors of IKEA in the furniture industry (IKEA). However, IKEA is competitive because its products are not only quality but also affordable and accessible to customers. Concerning the threats of new entrants, IKEA has no major threats because competitors have flooded the industry and hindered the establishment of new entrants. Since globalization improves the economic conditions of the people, the bargaining power of buyers increases with time. In this view, customers have a strong purchasing power for they can afford to purchase quality products of IKEA. Moreover, as IKEA offers diverse products, customers have a wide range of choices that meet their tastes and preferences.
The analysis of suppliers shows that they do not have significant bargaining powers because IKEA does not rely on a single source of materials. Additionally, IKEA obtains cheap labor from the communities it serves in various countries, hence, lessening the cost of production. As IKEA undertakes its roles of corporate social responsibility, it partners with communities, governments, and environmentalists in promoting sustainable use of wood, resulting in the reduced bargaining power of suppliers (IKEA). In the aspect of threats of substitute products, IKEA experience minimal threats. The uniqueness of products minimizes threats of substitute products because most customers prefer IKEA’s products. Although competitors of IKEA offer some similar products, which have the potential of substituting IKEA’s products, they are expensive and inaccessible. Essentially, the affordability and accessibility of IKEA’s products alleviate the threats of substitute products.
The analysis of macro-environment shows that there are major factors that influence the performance of IKEA in both local and global arenas. IKEA is subject to political factors since taxation regulations, trade barriers, and political stability determine operations and performance in various legal jurisdictions (Hamilton and Webster 93). Economic factors influence IKEA’s performance because it determines the bargaining power of suppliers, purchasing power of buyers, inflation rate, market trends, and the cost of labor. Social factors such as fashion, consumer trends, and demographics change the demand for IKEA’s products in both local and global markets. Given that IKEA aims to improve the accessibility of its products, it has employed technology in availing online stores, online marketing, radiofrequency identifications, mobile shopping, and social media in improving the efficiency of operations, reducing costs, and increasing sales. Since IKEA deals with wood, it must ensure that it conducts its operations ethically and in a sustainable manner by protecting and conserving the environment. In the aspect of legal factors, IKEA has to comply with laws and regulations that govern consumer protection, employee protection, and operating permits of different jurisdictions.
The analysis of the industry and macro-environment indicates that they present opportunities and threats to IKEA. As IKEA experiences intensive competition in the industry, its opportunities are the improvement of quality of products, enhancement of accessibility, and the provision of cheap products. High bargaining power of buyers and low bargaining power of suppliers, weak threats of new entrants, and weak threats of substitutes present an opportunity for IKEA to expand market share, increase sales, and dominate the industry. In the macro-environment, IKEA has opportunities to employ technology, capitalize on economic growth, and enhance the sustainability of forests. However, the threats are increasing competition and a shift in consumer demographics and behavior.
The analysis of the value chain shows that primary and secondary activities contribute to the competitiveness of IKEA in the local and global markets. IKEA has elaborate inbound logistics because it has over 2000 suppliers and more than 42 distribution centers, which enable it to collect raw materials and produce over 10,000 products. In ensuring that its products are competitive in the markets, IKEA designs quality and innovative products, which are not only affordable but also meet the diverse needs of customers. In the manufacturing process, IKEA manages to produce affordable products by setting the costs of each product and then designing them within the set limit (Han and Zhong 210). IKEA has extensive operations as it operates in over 42 countries with 340 stores. The extensive operations promote the accessibility of its products to customers in various parts of the world.
To ensure that their products are affordable, IKEA allows customers to transport their products once they purchase. Young families, students, and singles are the target customers of IKEA since they are low-income earners. The target market comprises a significant proportion of the market segment, and thus, it boosts sales of IKEA considerably. Like its services, IKEA provides catalogs and showrooms for customers to view their products and experience them before purchasing. IKEA reduces customer service by designing products with simple features that the clients can quickly fix through the procedure of do-it-yourself.
Concerning support activities, IKEA has a hierarchical structure of management, which enables it to streamline its operations. Moreover, IKEA has large stores that enable it to store large quantities of products and distribute them to different centers or customers. In human resource management, IKEA employs the best labor practices, develop effective management systems, and provide training opportunities to its employees. IKEA applies technology in reducing costs, designing quality products, distributing products, and improving customer experience. In procurement, IKEA creates and maintains a long-term strategic relationship with its suppliers and customers. Overall, the analysis of the value chain activities reveals the strengths and weaknesses of IKEA.
The strengths are IKEA has elaborate inbound logistics that makes it produce diverse products that are not only affordable but also quality. As notable strengths of the value-chain, the operations of IKEA are extensive and widespread, and thus, enhance the accessibility of its products. IKEA targets an extensive market and permits customers to view its products in showrooms and catalogs. The use of hierarchical management structure, compliance with human resource practices, and the adoption of technology are other strengths of the value chain. However, the weaknesses of the value chain are that customers transport their products and there are limited numbers of salespersons in stores.
Business-Level and Corporate-Level Strategy
The analysis of the case of IKEA shows that it employs cost leadership as the form of a business-level strategy. According to Ireland et al., the key features of the cost leadership strategy are low prices of products and large scale production (101). IKEA has these features of cost leadership strategy because it produces affordable products on a large scale to satisfy the diverse needs of customers across the world. The analysis of the external environment reveals that IKEA operates in a highly competitive environment where pricing determines the competitiveness of a company. Besides, IKEA deals with generic products that ordinary households require, and thus, most companies can design and produce. Owing to intense competition and the generic nature of products, IKEA employed cost leadership as a business level strategy of edging out its competitors. To enhance its profitability, IKEA enjoys economies of scale because it deals with diverse products on a large scale. The distribution of stores across the world enables IKEA to make profits from the low-profit margins obtained from individual products. Therefore, a cost leadership strategy has enhanced the competitiveness of IKEA and made it the leading dealer of furniture across the world.
The use of cost leadership strategy has side-effects on the progress, performance, and development of IKEA. Low prices do not attract a significant proportion of customers in all market segments. In some market segments, customers prefer brands to prices, and thus, IKEA risks making low sales contrary to the expectation of high sales due to low prices. Cost leadership strategy does not apply in fragmented markets where customers in each locality have developed a loyalty to respective brands. As for side-effects, cost leadership focuses on the minimization of expenses by reducing the number of employees and the costs of market research, advertisement, and innovation. Limited numbers of employees reduce the performance of IKEA while reduced costs in critical aspects of advertising, market research, and innovation reduce the competitiveness of IKEA in the market. Consequently, competitors that undertake extensive advertisement and create innovative products are likely to edge out IKEA if it continues employing a cost leadership strategy.
The strategy of cost leadership hurts shareholders, employees, and customers. Since stakeholders have made investments in IKEA, they expect a return on equity; however, low prices of products reduce profitability and increase the period of getting returns. Among employees, cost leadership strategy would reduce earnings and increase the workload as IKEA focuses on reducing costs to maximize profit margins. In the long run, customers would get poor quality products because cost leadership strategy reduces costs required in innovation, production, and marketing of products. Thus, in both short- and long-term, cost leadership strategy has negative impacts on the competitiveness of IKEA, dividends of shareholders, earnings, the workload of employees, and the quality of products that customers receive.
IKEA needs to improve the quality of its products to increase its competitiveness since companies such as Wal-Mart Stores, Argos, Ashley Furniture Homes Stores, and Euromarket Designs offer competitive products that threaten to dominate the industry. Han and Zhong assert that the provision of creating quality products is central to the enhancement of competitive advantage in competitive markets (211). Additionally, IKEA should improve its products because the impending shift in consumer dynamics and improvement of economic conditions across the world implies that customers will change their consuming behavior and purchase products that are not only affordable but also quality.
As technology is the driver of modern business operations, IKEA should adopt and use it in the value chain. Inbound and outbound logistics require technology to improve the efficiency of logistic operations and reduce costs. Moreover, IKEA should embrace technology in sales and marketing by creating online stores, showrooms, and adverts.
IKEA should improve the outbound logistics of its value chain because customers usually purchase and transport their products. Outbound logistics comprise a core requirement of value addition in the value chain for they save customers’ logistics costs and time (Christopher 23). Given that IKEA has its stores spread across the globe, customers can easily access them and purchase products of choice. The addition of transport services into outbound logistics would add significant value to the value chain and boost the competitiveness of IKEA. Wal-Mart is very competitive because it has elaborate outbound logistics that allow customers to purchase their products online and have them transported to requested destinations. Thus, the provision of transport and logistics services to customers would improve their satisfaction and experience with the products of IKEA.
Since IKEA relies on cost leadership strategy as a business level strategy, it is not tenable in the long-term because it has numerous side effects including loss of segmented markets, reduced performance, declined profitability, lack of innovation, and poor marketing. To overcome these side-effects of cost leadership style, IKEA should adopt a differentiation strategy. Griffin explains that differentiation strategy enhances the competitiveness of a company because it creates unique products, targets different market segments, and meets the diverse needs of customers (49). Thus, IKEA should employ a differentiation strategy to alleviate side-effects of cost leadership strategy and enhance its competitiveness.
Founded by Ingvar Kamprad at the age of 17 years, IKEA started in 1943 as a mail business in Sweden and has gradually grown and expanded its products over decades to become one of the largest companies listed in Fortune 500. The analysis of the company shows that it is very competitive in both local and global markets because it offers not only affordable and quality products but also provides good working conditions to its employees.
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Han, Rui, and Xin Zhong. “The Analysis of IKEA’s Value Chain Management Strategy.” Business Computing and Global Informatization, vol. 2, no. 1, 2012, pp. 210-212.
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Ireland, Duane, et al. Understanding Business Strategy: Concepts Plus. Cengage Learning, 2012.