Business Conditions Affecting IKEA Company | Free Essay Example

Business Conditions Affecting IKEA Company

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Topic: Business & Economics
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Abstract

This report entails an analysis of the conditions prevailing in the global retail industry. The report’s objective is achieved by evaluating the different marketing concepts and theories that IKEA has considered in its strategic marketing practices. The report assesses the market conditions affecting IKEA, which is a multinational retail firm in its quest to maximise profitability. The report reviews the prevailing industry situation using Porter’s five forces. Other aspects taken into account include the competitive environment and the market size. Furthermore, the report assesses how IKEA has integrated the concepts of market segmentation, targeting, positioning, and value proposition. The report examines the organisation’s approach to new product development and management. Moreover, the report evaluates the organisation’s approach towards product distribution, innovation, and pricing.

Introduction

IKEA specialises in designing and marketing different types of ready-to-assemble furniture. The firm has undergone remarkable growth over the past few decades due to the adoption of effective strategic management practices. The firm’s operations are guided by a clear vision, which focuses on influencing different customer groups by offering a variety of optimally designed home furnishing products at a reasonably low price. The low pricing strategy has strengthened the firm’s market position due to its capacity to market to a large number of customers. IKEA’s ability to sustain its low pricing strategy has arisen from the ability to optimise the value chain. Apart from specialising in the production of furniture, IKEA also relies on supplies from different producers. The firm is committed to establishing and sustaining a strong and long-term relationship with its suppliers (IKEA 2015).

In addition, the company’s market dominance has been fostered by its capacity to develop high-quality furniture products by using efficient production techniques. Consequently, the firm undertakes large-scale production through IKEA industrial group, Swedwood. Over 75% of the company’s production processes are undertaken in Europe. The company’s operational efficiency is enhanced by its commitment to sustainable growth. One of the fundamental approaches in its pursuit for sustainable development entails re-investing a substantial proportion of its profits (IKEA 2015). Due to its profit re-investment strategy, IKEA has undertaken new product development in addition to establishing new stores.

Moreover, the strategy has enabled IKEA to sustain its low pricing strategy. Currently, the firm has established operations in 42 countries located on the six continents. The firm operates 165 retail stores. The firm’s operations are made possible by its workforce, which is comprised of over 147,000 employees (IKEA 2015).

Aim

This report evaluates the prevailing environment in the global retail industry. The report focuses on the business conditions affecting IKEA in its operations.

Situational analysis

The marketing environment is characterised by a high degree of dynamism due to the existence of different market forces. Therefore, businesses must adapt to the changing business environment (Hill & Jones, 2005). The company’s operations are subject to changes in the internal, micro, and macro environments. The microenvironment is comprised of the forces that directly affect the firm’s marketing and business operations.

Industry analysis

The furniture market is considerably large. Currently, the market is comprised of individual and institutional customers, which makes the market very attractive and lucrative. According to Baraldi (2008), an industry’s structure has a considerable impact on a firm’s ability to sustain its financial performance. The home furnishing retail industry is characterised by cyclical market trends. The demand for furniture is influenced by consumers’ behaviour and economic changes. Thus, the industry players are forced to compete based on the breadth of products, effective marketing strategies, and volume purchasing. In order to be effective in formulating its strategic marketing practices, IKEA’s marketing managers must understand the prevailing industry forces (Johannson & Thelander 2009). Using Porter’s five forces model allows IKEA to understand the industry structure. The industry forces currently facing the firm are assessed herein.

The threat of entry – low

The furnishing industry is experiencing remarkable growth due to high profitability. Consumers appreciate the consumption of high-quality furniture products. The industry is characterised by considerably low or no barriers to entry. The initial capital required to venture into the industry is not substantial. Moreover, potential entrants are not required to develop large economies of scale. Nevertheless, the competitive nature of the industry may limit potential entrants (Kotler, 2012). In order to survive in such an industry, IKEA will be required to develop and sustain a strong relationship with its customers. The firm’s management must develop a strong supply chain in addition to establishing a unique brand name. These aspects will play a fundamental role in strengthening the firm’s capacity to cope with the threat of entry.

Supplier bargaining power

The industry is characterised by comparatively low supplier bargaining power. Over the years, IKEA has succeeded in developing a strong relationship with suppliers located in different parts of the world. Currently, the firm sources its supplies from over 1,400 suppliers located in different countries. In an effort to sustain its low pricing strategy, IKEA sources its furniture from countries characterised by a low cost of production such as China. For example, in 2008, IKEA sourced over 21% of its supplies from China. Furthermore, the firm has suppressed the suppliers’ bargaining power by engaging in furniture production through Swedewood. By engaging in its own production process, IKEA produces its own unique designs rather than depending on the designs developed by suppliers. Moreover, due to its vast knowledge of furniture production, IKEA is in a position to compel suppliers to comply with the stipulated quality standards (Moon 2004).

Buyer bargaining power

The industry is characterised by a large number of small, medium, and large players. The industry players engage in the manufacture of furniture in addition to importing from other countries. Subsequently, consumers have a wide choice and alternatives of products. Therefore, consumers have high bargaining power. In order to develop a high level of customer loyalty, it is imperative for IKEA to ensure that it understands the customers’ interests.

Threat of substitute

IKEA should be conscious of the high rate at which investors are venturing into the furniture industry. In order to cope with this challenge, IKEA should design and produce unique furniture products. Additionally, the firm must align its operations with the prevailing industry trends. One of the core aspects that the firm should take into account entails the concept of ‘going green’. This goal can be achieved by integrating innovating technology.

Rivalry

The industry’s competitiveness is considerably high. The intensity of competition arises from the existence of large and small players such as Wal-Mart and Galiform of England. These companies are in a position to compete based on low price (IKEA 2015).

Competitive environment

IKEA faces intense competition both in the local and international market. Its operation in the international market is threatened by intense competition from Wal-Mart. Wal-Mart has integrated the low-pricing strategy, which is similar to IKEA, in an effort to establish a highly competitive edge. Despite the intense competition from Wal-Mart, IKEA’s ability to produce high-quality, stylish, and affordable furniture products have improved its market dominance. In the UK, IKEA faces competition from Tesco and Next, while the other major competitors in the United States include Manimalista, Sears, and Pottery Barn. Conversely, in the Sri Lankan market, the firm faces competition from Damro.

In a bid to maximise its market dominance and profitability, IKEA must ensure that its furniture products are differentiated and affordable (Pride 2012). Additionally, the firm must ensure that customers can easily access its services. Thus, the firm must adjust its marketing strategies; for example, by improving its distribution channels. These approaches will play a fundamental role in the firm’s quest to achieve a high rate of customer attraction and retention.

SWOT Analysis

The following SWOT model can summarise the firm’s internal environment.

Strengths
Strong brand – IKEA has positioned itself as an international brand by focusing on quality, effective design, and diversity hence attracting different consumer groups.
Purchasing power – IKEA is in a position to partner and outsources furniture from different suppliers, hence reducing the cost of production.
New technologies – the firm can design and produce furniture products using innovative and new technologies.
Strong revenue base – the firm’s financial capacity enables IKEA to enter new markets.
Weaknesses
The rapid international expansion poses a challenge to the firm’s low cost of production.
Opportunities
Climate change – IKEA can strengthen its market position by engaging in eco-friendly operations, hence protecting the climate.
Social responsibility – the firm can develop a strong corporate image by participating incorporate social activities such as contributing to non-profit organisations such as the UNICEF.
International market expansion – the firm can increase its profitability by entering new markets, especially the emerging economies.
Threats
Intense competition – the firm faces intense competition from different industry players such as supermarkets, which are integrating furniture into their operations.

Market segmentation, targeting, positioning and customer value proposition

The effectiveness with which a firm addresses the market need is subject to the marketing concepts adopted by the management team. Strydom (2006) emphasises that marketers “need to know the wants and needs of their customers so that they can to provide satisfying products and services” (p. 60). One of the most important aspects relates to market targeting and segmentation. Market segmentation involves dividing the entire target consumer market into small groups characterised by similar needs, wants, and consumer behaviour (Shimp & Andrews 2013). Through market segmentation, an organisation can improve the ease of marketing, identify new market niches, and become efficient (Pride & Ferrell 2010).

In the course of its operations, IKEA has integrated the concept of market segmentation. This goal has been achieved through the integration of diverse market segmentation variables. First, IKEA has segmented its market based on demographic, behavioural, and psychographic variables. The decision to adopt the broad targeting strategy has been informed by the need to market to a large number of customers. By adopting the low-cost strategy, IKEA markets its products to consumers belonging to diverse income group. However, the major consumer group is comprised of the young, middle-class, and consumers who prefer trendy household and furniture products.

IKEA also targets the upwardly mobile consumers. In its quest to align with the prevailing behavioural changes, it is imperative for the company to target customers who are environmentally conscious. Currently, consumers are inclining towards eco-friendly consumption behaviours in an effort to protect the environment. In order to achieve this goal, IKEA should integrate the concepts of reducing, recycling, and reusing. This approach will play a vital role in improving the firm’s market position (Weinstein, 2009).

In an effort to attain optimal market dominance, IKEA has integrated the concept of market positioning. Zimmerman and Blythe (2013) argue that a direct relationship exists between an organisation’s performance and the market positioning strategy. IKEA’s market positioning is based on effective product designing and delivering high consumer value through the integration of ingenious solutions to the customers’ needs. Through this positioning approach, IKEA has attracted and retained a large number of customers. One of the factors that have entrenched the firm’s market position is its ability to use inexpensive materials in the production process.

In order to strengthen its market position, it is fundamental for IKEA to integrate the concepts of reducing, recycling and reusing in its production processes. Additionally, IKEA should adjust its positioning strategy by incorporating the concepts of variety and need-based positioning. Variety-based positioning will enable the organisation to offer diverse products, while the need-based positioning will improve the firm’s ability to address the customers’ needs (Zimmerman & Blythe 2013).

IKEA’s value proposition is based on developing high quality and appealing designs in all its furniture products. IKEA is committed to developing a brand that creates high value for the target customers. The firm achieves this goal by delivering furniture products characterised by exceptional quality. Zimmerman and Blythe (2013) cite the core value options to include low-cost culture, value perceptions, and cost advantage. Over the years, IKEA has succeeded in entrenching the core value options. However, it is imperative for IKEA to consider the most effective strategies to adopt in sustaining the value propositions.

Market review of current activities; the marketing mix- the 7Ps

The capacity with which an organisation achieves excellence in its marketing process is influenced by the marketing strategies adopted. In the course of its operation, IKEA has integrated the 7Ps of the marketing mix, viz. pricing, place, promotion, people, physical evidence, product, and process.

Pricing

IKEA’s pricing strategy is based on the concept of delivering value to target customers. The strategy is achieved by integrating the concept of low pricing. The firm has ensured that its production, designing, and distribution processes are based on a no-frill framework, which enables it to maintain the low pricing strategy.

Place

IKEA is focused on offering its products to a large number of customers. In a bid to achieve this goal, the company has adopted the international distribution strategy by establishing retail stores in different geographical locations, viz. North America, Australia, Europe, and Asia. The firm’s stores are conveniently located, and they comprise different services such as food shops and restaurants.

Promotion strategy

Blythe (2002) argues that creating market awareness is fundamental in generating sales. Currently, the firm creates awareness by advertising through various mediums such as television and print media [magazines and newspaper]. Moreover, the firm creates market awareness through sponsorships and hosting public relations events. In order to reach a large number of customers, it is imperative for IKEA to consider improving its advertising process by using emerging advertising platforms such as social networks.

People

The company’s long-term existence is based on developing a strong relationship with its suppliers and customers. The firm’s ability to establish such a relationship has arisen from the incorporation of the concept of serving people as one of its core business philosophies. Its commitment to establishing a strong relationship is further underscored by the development of eco-friendly products. One of the approaches that the firm has considered entails the integration of energy-saving bulbs in its product line (Cant 2006).

Production strategy

The company has incorporated the concept of product diversification. The firm’s product portfolio is comprised of different furniture products such as kitchen, living room, and bedroom furniture. Some of its products include coffee tables, shelves, bookcases, sideboards, leather and fabric sofas, and armchairs. Currently, the firm’s product portfolio is comprised of over 10,000 products. Additionally, the firm has also integrated services in its product portfolio, which entail restaurants and play areas.

Process

The company ensures that its furniture products are designed effectively through its production facilities. Thus, customers can order a customised furniture product. The firm has eliminated the concept of delivering products to customers in an effort to minimise the cost of operation.

Physical evidence

IKEA has incorporated this strategy by establishing large stores in different countries. The stores provide customers with an opportunity to select diverse furniture products. The stores have ample parking facilities equipped with modern technologies.

Existing product management and new product management

Most markets are characterised by a high rate of dynamism due to the change in consumer tastes and preferences (Boone & Kurtz 2015). The furniture market is not an exception. Therefore, in order to succeed in such an industry, IKEA must integrate effective techniques. One of the issues that the firm should consider entails market research. Currently, the firm undertakes extensive market research by targeting two main market variables, viz. the competitors and consumers. The consumer market research is undertaken by reviewing comments by customers on the firm’s products. Thus, the firm is in a position to evaluate the level of customer satisfaction.

The consumer market research has also played a fundamental role in improving the firm’s ability to understand the consumers’ purchase behaviour (Cant & Strydom 2009). Thus, the firm is in a position to develop strategies that influence their purchase behaviour, such as low pricing. Furthermore, consumer market research allows IKEA to understand consumers’ product preferences. Through the gained market intelligence, IKEA is in a position to undertake continuous and new product development. This approach has played a remarkable role in improving the firm’s ability to align with the changing market trends. Conversely, the competitor market research enables IKEA to understand and identify gaps in the competitors’ strategies. Thus, the firm is in a position to exploit such gaps (Harapiak 2013).

Distribution channels, innovative edge and pricing mechanism

In an effort to reach the global market, IKEA has integrated an extensive distribution strategy by establishing retail stores in different countries. Moreover, the firm’s effectiveness in distributing its products has further arisen from the adoption of the franchising strategy. Hart (2003) affirms that the franchising strategy is very effective in enabling companies to attain a high competitive edge in fragmented industries, for example, the retailing industry. The franchising strategy has contributed to effective market penetration. Consequently, the organisation has established a strong market network. On the other hand, the adoption of the low-cost leadership strategy has contributed to the improvement in the firm’s effectiveness in sustaining the low product pricing mechanism.

Conclusion

IKEA’s long-term survival and competitiveness are subject to the effectiveness with which it undertakes the marketing function. The firm’s operations are subject to influences by forces emanating from the internal and the external market environments. The firm has the capacity to influence the internal environment, but not the external environment. Despite this aspect, the firm’s management team has the responsibility of analysing and understanding the prevailing market environment.

Gaining such understanding will provide the firm’s adequate market intelligence, which can be used in promoting a competitive advantage. For example, the firm will be in a position to integrate optimal marketing techniques and strategies that foster its competitiveness. Additionally, IKEA should consider improving its marketing strength by developing core competencies and capabilities.

Recommendations

The company’s management team should consider the following issues in its quest to foster a sustainable competitive advantage.

  1. The firm should undertake extensive marketing research periodically by focusing on both the consumer and the competitor. This move will enable the firm to gather market intelligence that can be used in promoting its competitiveness. For example, the firm will be in a position to deliver value to customers.
  2. IKEA should entrench the concepts of continuous and new product development in order to offer a wide range of products. This move will play a fundamental role in enabling the firm to deliver a unique experience to customers.
  3. The firm should enter new markets in order to increase its sales revenue.
  4. In a bid to sustain its low-cost strategy, the firm should enter countries characterised by a low cost of production.

Reference List

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