MAN3503-Strategic Management -IKEA Case Study

Executive Summary

The following is an analysis of the IKEA case study found in the Strategic Management Text book. This analyses the strategies used by IKEA to gain competitive advantage in markets outside its original area. The report begins by providing a background into IKEA. It studies International Business Level Strategy and the three international corporate level strategies. The case study goes into informing its target market and pricing strategy, which is already discussed. This case study further says how different people in different parts of the world thinks about IKEA, how elegant their designs are and how affordable for them to purchase IKEA products. Some of IKEA’s main markets are in three of the fastest growing markets such as Russia, US and China. IKEA store bring out products such as furniture to small product like a scented candle. IKEA has over 1300 suppliers in about 53 countries. They further have 12 full time in- house designers with 80 free lancers and other production workers to identify the correct raw materials and produce products efficiently and cost effectively. Primarily, IKEA produced standardized products however; this international strategy did not work for one of its vital markets that is, US. Therefore, they had to emphasize on taking corrective actions. The report also analyses the entry methods used by IKEA and its sustainability.

MAN3503-Strategic Management

Table Of Contents

Introduction                                                                                                                                       4

History                                                                                                                                               4

I/O model                                                                                                                                            6

The External Environment                                                                                                                6

The Industry Environment                                                                                                           7

The competitive environment                                                                                                           8

Value Chain                                                                                                                                        8

International Strategy                                                                                                                      10

Strategic Choice                                                                                                                              11

International Business Level Strategy                                                                                             11

Multidomestic Strategy                                                                                                                   11

Global Strategy                                                                                                                               11

Transnational Strategy                                                                                                                    11

Modes of entry                                                                                                                                13

China                                                                                                                                           13

USA                                                                                                                                             14

Conclusion                                                                                                                                      14

References                                                                                                                                      15

Sharleen Suwaris

Introduction

History

IKEA was founded by Ingvar Kamprad a native of Sweden in 1943, when the founder, at the age of 17 was given money by his father in return for doing well in his studies. This money was used to start up his own company, IKEA, which stood for his intials and the first letters of the farm and village in which he grew up. The company initially sold basic items such as pens, picture frames, table runners, wallets, jewellery, nylons stockings and watches, at a low price(“History of ikea,” 2010).

Furniture was first introduced into the IKEA range of products in 1948, and due to a positive response, the product line increased in size. Customers were allowed the ability of viewing and touching the furniture that was previously only viewable through catalogue. IKEA opened a showroom in Sweden to create a competitive advantage, due to a price war with their main competitor, so that customers could determine whether they were getting value for money. Finally IKEA made the decision to design its own furniture due to competitors trying to make suppliers boycott IKEA products. The “flat-packs and self assembly” concepts arose when an employee disassembled a table in order to prevent damage during transport (“History of ikea,” 2010).

In 1963 the first IKEA store outside of Sweden was established in Norway. From this point on, IKEA began to spread like a wildfire, first to Denmark, then Switzerland, Germany, Australia, Canada, Austria and Netherlands. Many alliances were struck up with different suppliers in order to introduce new products, together with new concepts, which led to costeffectiveness. One example was an innovative, multifunctional seat/recliner, which was made by utilizing a denim, a raw material from another industry, which could be obtained at a low cost.

In 1980, together with the new furniture concepts being born at certain intervals, IKEA was looking to expand to further markets, and did so through franchising. To ensure continuation and long term independence of IKEA, the founder created a new ownership structure and organisation. The major portion of IKEA was donated to a foundation, while the right to franchise the IKEA concept worldwide remained with the IKEA group of companies.

In the 1990’s, the IKEA market  expanded not only geographically, but in terms of target market. The company began to design furniture that catered expressly to children. A website was launched to cater to the many markets that were now open, and the children’s line was enhanced on consultation with experts on with experts to develop play areas, room settings, and baby areas within the stores themselves. Kitchen-ware and kitchen areas were another concept developed in this period.

IKEA also began participating in a number of forestry projects to ensure sustainability, by taking responsibility for developing acceptable practices and policies in countries where IKEA works.

Company Outline

IKEA is a world renowned furnishing company reputed for selling Scandinavian-style furniture and other home-based goods. The company has 230 stores, with operations carried out in over 42 countries with well over 70 000 employees. The stores themselves can host 410 million shoppers per year. It is a Swedish based company built on the idea of offering a wide range of well-designed, functional home furnishing products such low prices, that a majority of people will be able to afford them. The IKEA group is currently solely owned by the INGKA Foundation through a holding company, unlisted on any stock exchange.

The vision at IKEA is to “create a better everyday life for the many people”(“Ikea,” 2011). The main business of IKEA supports this vision, by the manufacture and selling of a wide range of home furnishing products at an affordable price.  Since the ethos of IKEA is to make good quality products at an affordable price, the company has succeeded in development of costeffective and innovative production methods. This has been the company’s focus since its inception, and the company has succeeded in doing so by making the maximum use out of raw materials, and adapting the products to meet people’s needs.

Currently, in addition to the historical additions to the IKEA range, customers can now shop online. Other innovations include the boards with patterns created on them directly, called “print on board”, in addition to a concept known as “product recovery concept” where returned products are repaired instead of being thrown away where possible.

The majority of the operations occur within the retail business; while IKEA does purchase from external suppliers, in addition the company produces its own products through their industrial group known as Swedwood.

Company Structure

I/O model

The External Environment

The Industry Environment

Porter’s Five Forces

Threat of New Entrants

There are little or no entry barriers, but intensity of competition may scare off potential entrants. The required initial investment is not substantial and economies of scale can be used easily. To compete effectively with IKEA, the competitor must invest a greater amount, develop long-standing relationships with clients, and select suitable and competitive locations for outlets for which much patience and capital is required. It is relatively difficult to establish in major cities and gain the reputation of IKEA, establishing a vast supply chain and creating a unique brand name. Due to less regulations, the threats of new entrants are high, with no immediate threat because of the intensity of competition.

Bargaining power of suppliers

The bargaining power of suppliers is considerably low. IKEA has succeeded in managing and maintaining long and wellestablished relationships with suppliers across the globe. IKEA has been recorded to have 1380 suppliers in as many as 54 countries, 21% of which are established in China in 2008. IKEA also possesses their own manufacturing company,

Swedwood Manufacturer which manufactures its own designs. Therefore suppliers possess less bargaining power, and can be compelled to meet the terms of IKEA rather than vice versa.

Bargaining power of buyers

There are a number of retailers with a direct price-war occurring, while there are many entities who are importing from China involved in direct competition with IKEA. Consumers are faced with many choices and alternatives, and there is great amount of bargaining power at present with the buyer, due to greater choice. The buyers themselves have a substantial degree of influence over IKEA’s product line and direction; for example, as mentioned in the history, IKEA developed the concept of “flat packaging” at a buyer’s suggestion, making it convenient for the buyer. Due to escalating demand from buyers, IKEA will continue expanding geographically, opening 50 stores in North America by 2010 (Caplan, 2006).

Threat of substitute products

No specific product can substitute the furniture, but IKEA needs be updated with the latest trends, to avoid losing their name for style. Through simplicity of design and innovative technology, IKEA can follow any new style fairly well and rapidly and move each the product into its stores. Ever since the inception of the concept of furniture, styles and trends in that sense have undergone much change. Since the current trend is “going-green”, many firms are following this concept. However, the demand for basic, functional furniture has remained relatively constant, therefore there is less threat of substitutes in the near future.

Rivalry among competing firms

This is a highly competitive industry, characterized by other low priced furniture producers such as Galiform of England and retailers such as Wal-Mart of the United States In addition to local competitors. Due to the competition worldwide, IKEA has wisely attempted to compete by entering the China and Japan, markets which pose the largest competition(Caplan, 2006). Many retailers are present, and a number of them import products from China selling at a low price signifying intense competition.

The competitive environment

Competitors of IKEA are mainly the local competitors, who copy the idea or counterfeit the goods of IKEA. In US, IKEA would face competition from Pottery Barn, Sears, Minimalista. In UK competition for IKEA would come from Tesco, Next.

While in Sri Lanka, Damro would be the main competitor for IKEA.

Globally, the main competitor is Wal-Mart though prices are lower at IKEA. The competitors offer differentiation in terms of styles and functions. Conrin has a low cost strategy; Cratel & Barrel offers a higher priced furniture in a box; Ethan Allen targets a more exclusive market; Wal-Mart is classified as less stylish, general store must-have-items. IKEA has proved to be more successful in delivering both high quality at a less price to the customers reflecting on weak competitors.

Value Chain

International Strategy

If a firm uses a strategy through which goods and services are sold outside its domestic market it is known as an international strategy. Expanding into international markets can allow potential opportunities to the firm in question(Hitt, Ireland & Hoskisson, 2010). Incentives are as follows:

1. Increased market size -According to Ansoff’s growth matrix strategy, IKEA has taken Market development strategy,        trying to sell existing products to new markets. They are entering to new geographical markets with their Swedish      designed furniture.
2. Greater returns on major capital investments- On initial expansion, IKEA earned greater return from other countries        than their home country. Therefore they explored different markets. Currently they have identified US, China and     Russia as their main markets which generate better returns.
3. Economies of scale-this can be exploited by expanding into markets that contain homogeneous consumer tastes            and do not require much adaptation, by using standardized products all over the world.  IKEA’s main focus was to   produce elegant products and sell at low prices.(Suarez, 2006). By identifying commonalities in consumer buying           patterns, the standardized Swedish furniture was accepted by the Europe market too.
4. Scope for internationalisation and learning-expanding knowledge base by expanding into markets that are important

         as a source of innovation in that specific industry, and the ability to access and develop resources and capabilities

          through value adding activities. Growth in the target market segment would enable them to grow the size of the

          market by catering to more people(IKEA’s global marketing strategy, 2011).

• Competitive advantages of location-differences in culture, specific economic factors, administration and geography        can be made use of. After a time, competitors reengineer and find out ways to imitate products. To protect the         resources IKEA had they decided to enter new markets (mainly Russia) and also with the aim of earning better return.
• Extend the product life cycle-Swedish market was saturated in 1960 and IKEA decided to expand its business formula elsewhere. Since Sweden is not a very large market, there is limited growth, leading to similar markets such     as the Scandinavian countries Norway and Denmark (Introduction to global strategic management, 2006).

Strategic Choice

There are four basic strategies in which to enter and compete in the international environment. The suitable strategy for a company is based on the extent of pressure faced for cost reduction and local responsiveness.

International Business Level Strategy

The means of profiting from global expansion are linked to the business level strategies of cost-leadership and differentiation. The transfer of distinctive competencies to other areas is in fact the companies trying to realise greater gain from their current competitive advantage. IKEA has moved to advanced economies such as Europe, USA, Australia and tried to gain more advantage through their differentiation of products by adapting to the various markets(Hill, Jones & Galvin, 2004).

Multidomestic Strategy

In multidomestic strategy, companies try to achieve maximum local responsiveness. The key feature is that there is extensive customization of product and marketing strategy to match the variation in markets. This has a high cost structure, and does not leverage core competencies effectively(Hill, Jones & Galvin, 2004).

Global Strategy

Here companies try to increase profitability through cost reductions. Production, marketing and other activities are concentrated in a few locations, and there is no customization, to maintain economies of scale, since it raises cost, and requires shorter position runs. IKEA initially began using a global strategy but after entering the USA market they had to change to cater to their needs.

Transnational Strategy

Since competitive conditions in the market are so intense, some companies need to focus on both cost-leadership and differentiation. This strategy is difficult to pursue, as it has conflicting demands on the company. IKEA has succeeded in following this strategy however, as shown below:

The following diagram shows how IKEA has gained competitive advantage in numerous ways:

Modes of entry

IKEA has adapted to many situations and many entry modes to during their multinational experiences.Refer to the appendix for further details.

China

When IKEA first entered into the mainland China, it set up a joint venture with a local partner, and opened its first store in Shanghai with its partner by renting land from government. This entry mode choice was made passively since a joint venture was the sole way to operate business in China because at that time, and there were many restrictions. IKEA opened retail stores in the regions that were allowed; Nonetheless, IKEA selected its partner and maintained full management control of their partner (Jonsson, 2007). Since IKEA was heavily constrained by institutional pressures they couldn’t make decision out of the company’s own interests.

Very obviously, for IKEA’s first entry, the institutional factor played a dominant role because of the coercive power from the government. In a later stage, IKEA changed this entry mode as soon as new policies allowed foreign retailers to build wholly owned stores. After China joined the WTO and the government allowed foreign retailers to establish wholly owned subsidiaries, IKEA purchased the remaining shares from their partners and gained ownership of the store and expanded further.

There were three reasons:

• Ability to have wholly owned subsidiaries in China
• Sufficient financial resources to buy land from local government
• Customer to know what a standardized IKEA really is(maintaining brand identity)

USA

The company started off with wholly owned subsidiaries but with their globally standardized equipment. However as the  entry proved unsuccessful as the IEA failed to listen to USA markets preferences over furniture. There IKEA is currently giving more decision making power with regard to design building in the USA markets subsidiaries.

Entry into USA was not as successful as entering into European counterparts. The root of most of these problems was the company’s not paying attention to local needs and preferences. US customers preferred large sets of furniture and household items. For example, Swedish beds were five inches narrower than those US customers were used to, IKEA’s kitchen cupboards were too narrow for the large dinner plates that were used in the US, IKEA’s glasses were inadequate for US consumers who generally add quantities of ice, therefore requiring larger versions, and IKEA chests of drawers were too shallow for US consumers, who needed more room to store sweaters in them. In addition, IKEA Swedish-sized curtains did not fit American windows.

As a result of initial poor performance in the US market, IKEA’s management realized that a standardized product strategy should be flexible to respond to demands, and has recently adopted a more balanced strategic focus (by giving priority to global and domestic concerns). The current approach emphasises on global market coordination to reduce standardisation of activities and acquire both economies of scale and scope. IKEA redesigned its strategy and adapted its products to the US market. While overall its subsidiaries follow instructions from the corporate head office in Sweden,  subsidiaries in the US are given more autonomy, to respond effectively to the local business environment.

Conclusion

Therefore it is apparent that IKEA has managed to both capitalise on its cost leadership and ensure they meet local demands through differentiation of products thus using transnational strategy. IKEA has chosen to mostly enter markets through wholly-owned subsidiaries in order to maintain their brand image, although when compelled, other methods such as joint ventures and franchising has been made use of. This strategic decision has enabled IKEA to maintain a competitive advantage, and earn above average returns due to leadership in the market.

References

IKEA’s global marketing strategy (2011). IKEA internationalization. Retrieved on 15th August 2012 from: http://www. 123helpme.com/ikeas-global-marketing-strategy-view.asp?id=165535

Innovation Leaders (2011). Profile: IKEA. Retrieved on 20th August 2012 from: http://fp05-527.web.dircon.net/ ikea_company_profile.html

Introduction to global strategic management (2006). IKEA: case study. Retrieved on 20th August 2012 from: http:// www.oup.com/uk/orc/bin/9780199266159/mellahi_ch01.pdf

The IKEA way (2011). IKEA history. Retrieved on 20th August 2012 from: http://www.ikea.com/ms/en_US/about_ikea/ the_ikea_way/index.html

 Suarez, F (2006). International Business Strategy IKEA . Solvay Business School http://www.actuarisk.be/files/IkeaSite.pdf

Ikea. (2011). Retrieved from http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/our_business_idea/index.html

History of ikea. (2010). Retrieved from http://www.ikea.com/ms/en_AA/about_ikea/the_ikea_way/history/index.html

Hill, C., Jones, G., & Galvin, P. (2004). Strategic management:an integrated approach. (5th ed.). Singapore:

Hitt, M., Ireland, R., & Hoskisson, R. (2012). Strategic management: Concepts and cases. (10thed.). Cengage learning.

Hitt, M., Ireland, R., & Hoskisson, R. (2010). Strategic management: Competitiveness, Globalisation concepts. (10th ed.). Cengage learning.