Case Analysis: IKEA

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Md. Tareq Rahman Shubro Barua Sanjana Mehnaz M Mazharul Arefeen Bhuiyan Sumayia Hassan

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Background of IKEA IKEA 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. The company is the world's largest furniture retailer. Founded in 1943 by 17-year-old Ingvar Kamprad in Sweden, the company is named as an acronym comprising the initials of the founder'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 million shoppers. IKEA’s low priced elegantly designed merchandise displayed in large warehouse stores, generated sales of $21.2 billion in 2008, up from 4.4 billion in 1994. The fledgling company sold fish, charismas magazine, and seeds from his family farm. His first business had been selling matches, the enterprise Kamprad purchased them wholesale in 100 box lots and then resold individually at a higher mark up. Before long, Kamprad had added ballpoint pens to his list and was selling his products via mail order. In 1948, Kamprad added furniture to his product line. In 1949 he published his first catalog. Kamprad hired 22 years old designer, Gillis lundgren originally helped Kamprad to do photo shoot for catalog but, later he became a designer of many furniture for IKEA. Its goal was over time to provide stylish functional design that can be cost effective. Ultimately this led to concept of what IKEA calls “democratic design”. In 1957, IKEA started to exhibit and sell its products at home furnishing fairs in Sweden. By 1958, an expanded facility at the Almhult location became the first IKEA store. The original idea behind the store was to have a location where customer could come and see the IKEA furniture set up. Kamprad experimented with adding restaurant to the store so that customers could relax and refresh when shopping. The restaurant was hit and, it became an integral feature of all IKEA stores. In 1965, IKEA opened its first store in Stockholm. By now, IKEA was generating the equivalent of $ 25 million and had already opened a store in neighboring Norway. IKEA experimented with a self service pick up solution, allowing shoppers to enter the warehouse, load flat packed furniture on to trolleys and then take them through the checkout. It was so popular that soon it became the company norm in all stores. By 1973, IKEA was the largest furniture retailer in Scandinavia with nine stores. The company enjoyed market share of 15% in Sweden. The main in charge of European expansion was Jan Aulino, Kamprad’s former assistant, who was just 34 years old when the expansion started. IKEA also entered in North America, opening 7 stores in Canada between 1976 and1982 and got success then in 1985 in entered in United States later the company found that its European style offerings did not always resonate with American consumers. IKEA also acquired Britain’s Habitat in the early 1990s and to run it under the Habitat brand name. In total there were 285 IKEA stores in 36 countries and territories. And important limiting factor on the pace of expansion was building the supply network. Later IKEA opened its store in China. In china store was located near public transportation, and IKEA offers delivery services so that Chinese customers can get their purchase home. The store them salve are large warehouse festooned in the blue and yellow color of the Swedish flag that offers 8000 to 10000 items, from kitchen cabinet to candlesticks. There plenty of parking outside and the stores are located with good access to major roads. The interior of the stores is configured almost like a maze that requires customers to pass through each department to get to the checkout. By 2008, IKEA had 1380 Page | 2

suppliers in 54 countries. IKEA always maintain a good relation with its suppliers and insist them 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 is free of charge and can be used to obtain discounts on a special range of products found in each IKEA store. In particular, it gives 25% off the price of commissioned ranges of IKEA products on presentation of the card. The card also gives discounts on food purchased in the restaurant and the Swedish Food Market. In the Netherlands, Australia, Denmark, Finland, Germany, Austria, Russia, Japan, UK, Switzerland, Slovakia, Czech Republic, Italy and Poland it also entitles the holder 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: operations and franchising. Most of IKEA's operations, including the management of the majority of its stores, the design and manufacture of its furniture, and purchasing and supply functions are overseen by INGKA Holding, a private, for-profit Dutch company. Of the IKEA stores in 36 countries, 235 are run by the INGKA Holding. The remaining 30 stores are run by franchisees outside of the INGKA Holding. INGKA Holding is not an independent company, but is wholly owned by the Stichting Ingka Foundation, which Kamprad established in 1982 in the Netherlands as a tax-exempt, not-for-profit foundation. The Ingka Foundation is controlled by a five-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 Ingka Foundation, 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 franchise fee of 3% of the revenue to Inter IKEA Systems. The ownership of Inter IKEA Systems is exceedingly complicated and, ultimately, uncertain. Inter IKEA Systems is owned by Inter IKEA Holding, a company registered in Luxembourg. Inter IKEA Holding, in turn, belongs to an identically named company in the former Netherlands Antilles that is run by a trust company based in Curaçao. In 2009, the company in Curaçao was liquidated. The company responsible for this liquidation traces back to the Interogo Foundation in LiechtensteinIngvarKamprad has confirmed that this foundation owns Inter IKEA Holding S.A. in Luxembourg and is controlled by the Kamprad family. In 1986, Kamprad gave up day to day control to Andres Moberg, a 36 year old Swedish who had dropped out of college to join IKEA’s mail order department. Despite relinquishing management control, Kamprad continued to exert influence over the company as an advisor to senior management and as an ambassador for IKEA.

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External Analysis PESTEL Analysis

Political factors There are no data about the political influence over the industry. Though it is anticipated that the organizations are heavily supervised by the government. There are many departments involved in the process of controlling and managing the corporations. The political situation is stable and the political parties respect the agreements made between the MNCs and the government. This ensures a healthy business environment. In Poland after the fall of communist government the political situation changed drastically. The relationship between the supplier and IKEA deteriorated as the suppliers tried to raise price, tore up contracts and denominated new technologies provided by IKEA. Economical Factors The financial recession is clearly the greatest economic factor for IKEA. As mentioned in the New York Times the recession of 2008 was not getting any better.

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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 materials from Sweden was getting more expensive. Social factors The cultural differences of Europe/Scandinavia and USA may play a significant role on the business 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 for generations. This practice is more common in Sweden. In USA this culture has been changing recently. 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 feature enabled IKEA to ship its products in flat-packs reducing the damage while transporting.

Porter’s Five Forces Analysis Threats of new intrants

Burgaining power of buyers

Competitive rivalry within industry

Threats of substitute products

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Burgaining power of suppliers

Rivalry within the industry In Sweden there is handful of companies involved in the furniture industry. Moreover there are a lot 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 industry is very high. Bargaining power of suppliers It can be say that the bargaining power of suppliers is low. IKEA has a well-established relation with 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 Swedwood Manufacturer. 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 are importers who are importing from china also in direct competition in the market. So the consumers have many alternatives. They can chose which manufacturers they will buy from. So the 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 shop with small investments. But if someone wants to become a major player in the industry; than the firm needs to invest a lot of money, need to establish relation with suppliers, select suitable locations for outlets. These will require a lot patience and capital. So it is safe to say that the threats 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 more environment concerned many firms are giving slogan to go green. But the basic functional demand has remained the same. So it is safe to say that there are no threats of substitutes.

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Opportunities IKEA can expand its product line by producing high end products From the very beginning IKEA’s 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 how farther they can reach. In USA the trend was changing; people were getting thirstier for elegant design. IKEA can develop products that are designed for the high class people who are sensible about the design and 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 items with the kitchenware furniture. This way when a customer walks through the kitchenware department 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 can make products that are environment friendly; products that consume less water so the carbon footprint will be at minimum.

Product customization can boost up IKEA’s sales IKEA can call for idea from its customers. This will definitely bring in some unique idea to the tent. IKEA can initiate a service that will allow customers to order customized products for some extra charges. This will help IKEA to capture the particular segment of the market who loves customization.

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Threats Changing social trend can hinder the growth of sales of IKEA IKEA’s 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 the market 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 retailers who 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 often provide 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 world is suffering from a recession since fiscal year 2006-07. This economic condition may affect IKEA. Since the purchasing power of buyers has gone down they would be reluctant to purchase products that are not vital to them. This can cause a free-fall of sale revenue of IKEA worldwide; especially in USA.

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Internal Analysis Strengths IKEA’s 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 is as much as 65% less expensive than one furnished with equivalent products from other stores. Its target market are the young married couples, college students, 20 to 30-something singles and middle class families who are basically price sensitive customers. So, if they can get furniture at a much lower price, of course the will opt for that. Thus, this concept gives IKEA its biggest competitive 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 price better is the quality and lower the price lower is the quality. However, IKEA has successfully changed this idea related to furniture. Not only is its furniture much lower priced than its competitors, they also have great quality. It has productively combined low cost with good quality. Its “democratic designs” which balances function, quality, design and price gives IKEA the competitive edge. IKEA’s research and development team finds ways to alter designs to save on manufacturing costs. Starting with the designer Gillis Lundgren, IKEA’s research and development team always finds ways to alter designs to save on manufacturing costs. The goal of the research and development team is to come up with stylish functional designs with minimalist lines that can be costefficiently manufactured. This keeps the cost down and allows for the prices to be much lower than 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 for both 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 and warehouse 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 lower prices. Due to this, the furniture are always readily available which means the customers do not have to wait 2/3 days after purchase for their furniture. This is a breath of fresh air for the customers.

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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 as 50% cheaper than furniture made in Sweden, IKEA has started looking for cheap labor. It top five 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 its largest chunk of furniture manufactured from there. Cheap labor keeps the costs down and allow them 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 relationship that 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 suppliers provides a very smooth supply chain which saves IKEA from quite a lot of additional costs and hassles. Due to this strong relationship IKEA can put in a lot of additional advice regarding production. It is widely seen that companies have always been benefited by a strong long-term relationship with their suppliers.

IKEA has the ability to adapt its tactics according to the market. Another of IKEA’s strengths lies in its ability to adjust its tactics according to the market. An example of this can be seen in what it did in the American market. At the time that IKEA launched itself in USA, it noticed a change in American culture. Something was shifting in American culture. To tap into this shifting culture of America, IKEA redesigned its marketing strategies adjusting it according to what would be appropriate in this cultural shift. The result was 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 designs and 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 greatest strengths.

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Weaknesses Its organizational culture can become a demotivating factor for many of its employees. IKEA’s 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 for senior managers. The culture is egalitarian. According to Kamprad, people generally work here because they like the atmosphere. However, there is a downside to this sort of organizational culture. In an egalitarian culture where everyone is equally treated, someone putting more effort and hard work than others might get demotivated since he is being treated the same way as someone whose efforts and inputs are much less than his. He will obviously want something extra for his extra effort. This will lead to demotivation and he might stop putting in that extra hard work for the company. In today’s 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. Another important factor is that, the management style that works in Europe does not work in America or in Asia. So, IKEA’s American or Asian employees will not like this sort of organizational culture. 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 the prices of the furniture low. However, in this 21st century companies are more focused on customers’ needs, wants and preferences. Companies first conduct a market research on what customers want and then produce that. Nowadays, mostly everything is completely customer driven. IKEA is not at all customer focused. An example of this can be seen in its product offerings with which it launched in USA. Americans wanted bed sizes king, queen and twin but they offered beds measured in centimeters. Thus, in such a customer oriented era IKEA’s not really caring about customers’ wants can put it at a disadvantage. IKEA lacks product innovation. IKEA designs the price tag first, then the product. IKEA’s product strategy council is so much obsessed with low price that they spend almost no time on product innovation. IKEA has been enjoying sustainable competitive advantage due to their low cost strategy. However, to some extent, product innovation is also required in order to back their sustainable competitive advantage 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 new market. When IKEA first entered the USA market it provided the customers with beds measured in centimeters whereas, they wanted king, queen and twin sized beds. As a result, their sheets did Page | 11

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 entering into a new market. As a result, it gives a chance of blunders occurring in those markets and later has to deal with additional hassles which could have been easily avoided had they only conducted 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 can again be seen in its American market where the goods were priced in the Swedish kronor, which was strengthening against the American dollar. This drove up the price of goods in IKEA’s American market.

IKEA has a tendency of making mistake first and then realizing that it should have taken matters into consideration beforehand. One of the biggest weaknesses of IKEA is that it does not look before it leaps. It makes a mistake, creates a blunder at first and then realizes that it should have known better. When IKEA first entered the USA market it provided the customers with products that did not suit their lifestyle and match with their preference like, beds measured in centimeters, too short curtains etc. Later, when it realized all these blunders it had to redesign the products to fit with American needs. Again, in its American market the goods were priced in the Swedish kronor, which was strengthening against the American dollar. This drove up the price of goods in IKEA’s American market. So, after IKEA realized this blunder, it changed its pricing. This tendency puts IKEA under 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 the company at a disadvantage. The paradox is that one’s greatest asset causes his demise. Many companies 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-directed that they lose sight of market realities and the fundamental requirements for achieving a competitive advantage. Sooner or later, this leads to failure. In IKEA’s case, Kamprad has gained success by being solely cost focused. However, he is losing sight of the market realities. A fundamental requirement for achieving a competitive advantage in today’s era is being customer oriented which IKEA is not. Page | 12

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, the employees 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 people’s want out of their job has also changed. People no more work just for the love of it. They want the special perks, power and status associated with designations and promotions. Thus, they are more competitive in today’s world. So, assuming that the employees will work in IKEA just because they love to work here can put the company at a major disadvantage.

IKEA’s strategy is not exactly aligned with its vision. IKEA’s vision is “to create a better everyday life for the many people. We make this possible by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them” (IKEA’s website). Yes, it is offering products at prices so low that as many people as possible can afford them. However, isn’t creating a better everyday life for the many people mean caring about the needs and preferences of these many people and producing accordingly? But, IKEA is not doing this. It is more concerned with lowering the costs. So, this strategy is not exactly aligned with the vision.

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SWOT Analysis Strengths IKEA’s cost leadership concept keeps it ahead of its competitors. Justification: whenever IKEA produce their furniture, firstly they fixed the price and then they started producing. So with the context of cost leadership IKEA is ahead then the other competitors. IKEA has successfully combined low cost with good quality. Justification: As we all know that IKEA, they produce low cost product than the others that don’t really 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 well IKEA’s research and development team finds ways to alter designs to save on manufacturing costs. Justification: after a little success, the chief of IKEA Mr. Kamprad appointed a designer to design good quality product. Moreover the designer finds out the strategy to make the product manufacturing 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 is self-assemble. IKEA tried to make their customers knowledgeable about their product. They also tried to create a good impression toward their furniture to the customers that, customers can rely on 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 cheap labor 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 good relationship with the suppliers. A strong relationship established with the suppliers provides a very smooth supply chain which saves IKEA from quite a lot of additional costs and hassles.

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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 see the scenario of America, than we can realize that – whenever Americans didn’t their not accept the 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 the atmosphere of IKEA. They follow a very informal environment over there. But the most painful part 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 be strength 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 always preferred the cost first. The world is changing every day. Customer needs customize product or they might have some preferences which IKEA should consider. It lacks thorough market research on customers’ preference before entering into a new market. Justification: to provide a good quality product and also value the customers need and wants should be the organizational motto; this is because it’s a furniture company. IKEA did not do any sort of market research regarding customer’s needs and wants. So they should come up with a market 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 critical issues like in American market where the goods were priced in the Swedish kronor, which was strengthening against the American dollar. This drove up the price of goods in IKEA’s American market. 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 taken matters into consideration beforehand. Justification: to be a successful furniture company, IKEA should take the customer preference first and then they should start producing. Whatever, they did not do and research about the need Page | 15

of customers. After failed with any furniture they started change the design and style and all those things. Kamprad does not take into consideration the change of times. Justification: in this world, everyone wants an entity or identity, a designation. The employees used to stick with the company because they loved their work beyond anything else. However, times have changed and with that people’s want out of their job has also changed. With regards to time changes, Kamprad should come up with a proper hierarchy. IKEA’s strategy is not exactly aligned with its vision. Justification: Actually, in this case we see that, Kamprad just focused on low cost furniture producing. After that, he tried to expand his business all over the world, but the problematic part was he did not have any long term goal that where actually he wanted to see his business in future.

Opportunities IKEA can expand its product line by producing high end products Justification: usually IKEA manufacture their product for the middle class, upper middle class family. But if we consider the present market situation then we can see that, people wants elegant design and they are ready to pay for that, so IKEA can come up with a new target customer that is 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 designing become very popular nowadays, so IKEA can come up with a new idea and that is interior designing division to maximize their market share as well as their profitability. Moreover cookeries 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 to be a successful furniture company they can come up with environmental friendly furniture with vast customization. Product customization can boost up IKEA’s 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 profitable business for IKEA. People wants customize furniture and there is no substitute product of furniture. Page | 16

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. So there is high possibility to lost that market who wants good product. So IKEA should come up with 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 it could be very difficult for IKEA to continue their business with only low cost strategy. If we consider walmart, Office depot price then we can see that, their price is 20% to 30 % lower than IKEA. So, IKEA should come up with another strategy besides low cost strategy as early as possible. 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 bad effect on IKEA.

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Corporate level Strategy Vertical Integration Large companies are often involved in many different kinds of businesses and sell products in many different countries. So far we have identified that IKEA has been using VERTICAL INTEGRATION to the Global furniture industry. Managers use corporate level strategy in VERTICAL INTEGRATION to identify which industries their company should compete 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 business and 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 is significantly reduces in its next best use. Here IKEA’s specializes asset is employees skills that employees acquired through training and experience. IKEA invested in specialized assets because 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 the product in its core business and so strengthen its differentiation advantage.  Improved scheduling Strategic advantage has been obtained when vertical integration makes it quicker, easier, and more cost effective to plan, coordinating, and transfer of product like finished goods from manufacturing plant to retail or distributing shop.  Increased Bargaining Power IKEA used VERTICAL Integration because it allows them to obtain bargaining power over suppliers and increased their profitability. By consolidating the industry through VERTICAL Integration IKEA has become a much larger buyer of suppliers’ product and use this as leverage to bargain down the price IKEA pays for its input, there by lowering its cost structure.

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The raw materials to customer value added chain for IKEA: Component parts manufacturing

Final assembly

Retail

Customer

Outsourcing Strategic outsourcing is the decision of IKEA to allow one or more company to perform specifically or selected value chain activities or function by independent specialist companies that focus all their skills and knowledge on just one kind of activities. According to available information 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 IKEA’s cost structure because it creates increasing economic of scale. Achieving economic of scale is very important of IKEA because it has a high fixed cost structure. In furniture industries allows IKEA to spread its fixed cost over its large volume 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 their energies and company resources on performing those core activities that have the most potential to create value and competitive advantage.

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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 in Sweden in the year of 1943. Mr. Kamprad always tries to give up a structure of elegance to the furniture. So it was really nice to the customer that, they found their desired furniture in a very low price. Whenever Kamprad started producing furniture at Sweden, it was very expensive there. So Kamprad come up with a good strategy that, make a good design furniture with start adapted to machine production and also cheap to assemble. As a part of giving low price product for the customers, 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 this stylish furniture provided to the customer he hired a designer named Gillis Lundgren. Mainly he always helped Mr. Kamprad to make the furniture better and also took the photos of the furniture to give them into the catalog. After hired the designer Gillis Lundgren, he started to design more and more furniture, where many 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 that a flat wallet holder can also buy the furniture. In this regard, Kamprad tried to come up with some cost efficient manufactured furniture. Moreover the new designer always tried to explore some 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 their furniture to the customers. Moreover in the home furniture fair of 1957 they exhibit their product to 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 that it’s a finishing or logout of one area. The goal was too simple, to make the customer feel that, after arranging the furniture it will be like this. Moreover IKEA provided flat packed furniture which is very safe to carry and assemble also. Furthermore the idea of making a restaurant within the warehouse was very effective. It was established in the middle of the warehouse. And last but not the least, IKEA sold their furniture with reduce price of 30% – 50% than the competitors. Page | 20

Market development and expansion After making a large amount of profit and as well as the market share in Sweden, Kamprad go for Poland. After go to Poland, Kamprad discover that, the manufacturing cost of Poland was 50% 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 on that way and make them happy with Vodka. Kamprad establish a very good relationship with the suppliers 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 the Scandinavian 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 low price 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 into the Scandinavian area, in 1976 to 1982 they expand their business to UK and Canada. And lastly they 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 they designed according to the preference of European style was not going to work with the American preference. After analyzing the total situation, Kamprad started redesign their furniture. In this time they emphasis on the young generation as their target customers. IKEA reemphasized designed and started promoting the brand with a series of nice advertisements with targeted to the young married couples, college students and 20 - 30 ages singles.

Business Model IKEA Actually IKEA does not have any sort of business model. They just try to follow their previous strategy 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 families who are looking for the low price furniture but attractive as households items. After that, the large furnished warehouse attracted the customers very much that they buy product more than their assumptions.

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Structure and Control System The 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 Lundgren’s pioneering of the self-assemble concept to the store manager who let customers go into the warehouse to pick up their own furniture. All these improve the efficiency of the company. Kamprad, the founder and head of IKEA, is a takes the 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 IKEA’s organizational culture facilitates cooperation among functions. Kamprad’s management style is informal and nonhierarchical. The offices do not have an open plan and private offices are rare. The culture is egalitarian and everyone is called a co-worker, and first names are used throughout. Everyone is treated equally in the company. IKEA regularly stages anti-bureaucracy weeks during which executives work on the store floor or tend to registers. All these help employees 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 identify the appropriate suppliers and the least-costly materials. IKEA devotes considerable attention to finding the right supplier for each item. It makes sense to work with suppliers in each of the company’s big markets to avoid the costs associated with shipping the product all over the world. For example, for the company’s 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 resulting efficiencies from these global sourcing decisions enabled IKEA to reduce the price of the Klippan by some 40%.

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Marketing:  Adopted aggressive marketing in US market To tap into America’s shifting culture IKEA adopted a niche market strategy and modified its target market aiming it at a younger demographic: young married couples, college students and 20-30 something singles. IKEA adopted aggressive marketing in USA to makes its place in the mind of its target market and the capture the market. This was done in accordance with niche market strategy in USA.  Somewhat wacky, offbeat advertisements IKEA’s 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 with somewhat 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 that requires customers to pass through each department to get to the checkout. This gets customers to make more impulse purchases as they wander through the IKEA wonderland. The way the flow of departments is set also boosts up sales. For example, a tool section is added just outside the home textile department so that when the wives stop in this department and the husbands are bored they can always go into the tool section and keep them entertained. This leads to skyrocketing of sales of tools. IKEA stores also have restaurants and child-care facilities so that shoppers 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 are made internally by its own manufacturing company, Swedwood. Nearly 10% of its products are produced internally. Swedwood strengthens IKEA’s supply base. Even if there is ever any rift with any supplier IKEA can always turn to Swedwood for emergency supplies so that it never runs out of enough products in stores.

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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 designs are 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 in product design.  Seeks process innovation The research and development team always seeks process innovation that will drive down the manufacturing costs. Process innovation also helps in keeping aligned with the self-assembly concept. Products are manufactured such that they can be flat packed and flat packed furniture reduces transport and warehouse costs, and damage. Moreover, Swedwood also enables IKEA to acquire knowledge about processes that are useful in product design.

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Recommendations for IKEA MAIN ISSUE Throughout the case, one thing was common, IKEA before entering into International Market did not do “necessary homework” in order to conduct a better business due to which it always did mistakes first, learnt from its mistakes and then made changes to change according to the new culture they were operating in. The recommendations given below are solely based on the main issue identified: We classify IKEA’s 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 in Scandinavian and European countries. But this will not work in different part of the world. When a 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 works completely based on teams (as a family), with no proper designations even for senior managements, as well as no formal clothing, and is egalitarian. But for instance, if it operates in America 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 for IKEA 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 clearly mentioned in the case whether IKEA is centralized or decentralized. But if IKEA opens new corporate offices in whichever new country they want to run business then for its successful operations overseas it can have a good HRM team. This team will help IKEA realize the key

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cultural differences among countries and help adapt management strategies which would best suit them. For example: Equality in terms of race, gender, religion and others is fair. But when it comes for better 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 management structure and culture, but it will also help IKEA identify the best HR practices to be followed in international market like polycentric approach, geocentric approach, ethnocentric approach or whether to adapt regiocentric approach.

 Change in Leadership Style: Due to Kamprad, IKEA is suffering from Icarus Paradox issues. So we suggest there should be a leader or a SUCCESOR for IKEA who could help in bringing change for the corporation according to the fast and ever changing ways of conducting business in the 21 st century. A leader who has a good vision, who can help align corporate level strategies with ever changing global business, one who is flexible and can one who considers employees and top management views while making better decisions for the company unlike Kamprad whose fragility was a part of IKEA’s DNA, and a man of his own word and principles who was quite autocratic and did thing what 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 simply focusing on lowering costs by setting up price tags and designing furniture’s. When IKEA started operating its business in United States of America, it faced problems as it was not aware if what Americans wanted or preferred. They first followed what they used to do in Scandinavian market due to which its sales went down initially. But later when it came up with customized advertisements for younger demographics like married couples, college students and 20 to 30 something singles, due to which later within four years IKEA’s revenue doubled from $600 million in 1997 to $1.27 billion in 2001. This was the result of its focus on what young American customers wanted. Page | 26

 Stronger Research and Development Department: IKEA spends too much time and money on finding the right suppliers who can get aligned with their lower cost strategy. Instead they may put this same amount of time and money doing research 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, queen and 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 customer research and development on the first place then they would have made profit since they have entered American market.  Product Innovation IKEA is having a product strategy but in order to have a competitive advantage in the market IKEA 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 a higher competitive advantage in many different new markets they wish to operate in future, or are currently operating in.  IKEA could go for Related Businesses: As mentioned earlier in opportunities, IKEA could go for related new business like interior designing solution options for its customers or even offer new cookeries products to them, or they could also go for a complete product solution services for their customers. For example: if a customer is willing to buy furniture from them, then they could offer customer an additional service like give them a solution that is how they can redecorate or change their home interior according to the choice of their furniture they are purchasing. They could provide such service options online on their websites as well. These extra services or customer solutions might not bear extra costs for businesses like IKEA which has generated good amount of profit over the years.  Outdoor Advertisement: Since IKEA is been going for a low cost strategy they can change/extend their marketing strategy. We all know giving ad on TV is very expensive and this price heavily fluctuate on the length 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 at hemorrhaging 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 use public transportation like bus/subway; so this marketing strategy will capture attention of maximum target audience at a much cheaper way.

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 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 for a 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-friendly technology for producing its products which will also go along with its low cost business level strategy as well.

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

Proper Internal Management

Leads to…

Satisfied Customers!

Conclusion As it is about all about operating in International Markets, and International Business, we do not know which strategy will best suit such multinational companies that is we do not know whether a Global standardization, or Internationalization, Transnational, or Localization, which international strategy is going to work in which corner of the world. All we can conclude by saying is that before entering into a new market a firm should do its “necessary homework’s” unlike IKEA which always did mistakes first and then learnt from it. This will save millions and billions of dollars of a company and this will also help sustain in the long run and secure its competitive advantage in the global market as well.

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Reference: Charles W.L. Hill, Gareth R. Jones. Theory of Strategic Management with Case.9th Edition, South-Western Cengage Learning, 2010. IKEA’s official website. Retrieved July 8, 2011 from http://franchisor.ikea.com/

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