IKEA Strategy Analysis: Introduction
IKEA is one of the most well-known global furniture retailers nowadays. It was founded as a small, local business in 1943 by Ingvar Kamprad in a southern province of Sweden (Lewis). By 1956, the company became highly competitive due to a newly introduced ready-to-assemble furniture technology and, because its competitors’ put pressure on manufacturers, persuading them to halt all supplies to IKEA, the company started to develop foreign partnerships for the first time (Lewis).
Based on the data provided in a recent IKEA report, today it serves nearly 780 million customers in 355 stores located across 29 countries and employs about 149.000 individuals (INGKA Holding B.V. 7). Along with this, the retailer successfully engages in e-commerce, and a substantial part of its sales takes place online. A highly differentiated product portfolio and low pricing are the main things attracting buyers from diverse backgrounds to the company.
Vision and Mission
IKEA’s vision and mission are clearly stated on its official website and are effectively communicated through multiple media including seasonal catalogs, advertising campaigns, and various online platforms. The company’s vision is as follows: “to create a better everyday life for the many people” (Inter IKEA Systems B.V., Vision and Business Idea). Its mission is “to offer 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” (Inter IKEA Systems B.V., Vision and Business Idea).
From these statements, it is clear that the company aims to produce furniture in large volumes to make it available to buyers from diverse backgrounds. At the same time, low cost and unique, patented designs play an essential role in IKEA’s value chain. In this way, not only does the company strive to enhance customers’ purchasing experiences but also helps them create a better home and work environments.
External Environment Analysis
General Analysis
The global furniture market is currently growing at a considerable pace. According to a recent report issued by Zion Market Research, the main reason for that is an increasing demand for premium and luxury products. Additionally, such environmental factors as a governmental investment in infrastructure development, industrialization, and booming urbanization across different countries contribute to the expansion of the global furniture market as well (Zion Market Research). These trends create opportunities for the existing business players and also attract new entrants.
Notably, the rate of demand for furniture varies based on geographical area. It is observed that the Asia Pacific produced the greatest amount of revenues compared to other regions in the global furniture market in 2017, whereas India and China were the dominant consumers of furniture (Zion Market Research). As for the European countries, the consumption rates are expected to rise there mainly in the luxury furniture segment and, therefore, small and medium-sized firms offering exclusive, premium products drive the local market growth at present (Zion Market Research). Overall, the rapid growth rate indicates that the competition is currently high and such competencies as innovation, creativity, skills, and technological advancement are needed to meet consumers’ demands.
Porter’s Five Forces
Competitive Rivalry
The level of competition is high in the industry, while prices, quality, and technologies are the key drivers of the overall business success. It is possible to say that cost leadership is the primary strategy used by IKEA to increase its competitiveness. Additionally, the company has a positive and widely advertised brand image, which helps attract customers. Nevertheless, the quality of products may be insufficient at the present moment, indicating an inadequate level of management control over the production process.
Threat of Substitutes
The threat of substitutes is significant in the global furniture market because different firms produce similar products. The best way to address this problem is through constant quality improvement, cost leadership, and the creation of new product and service features (Liljekvist and Carlson 35). According to Yuan et al., IKEA pays significant attention to its design copyright protection, which makes its products unique (3). It also continually focuses on the development of new products and technological upgrades. These practices help the company be protected against the threat of substitutes.
Bargaining Power of Suppliers
The bargaining power of suppliers in the industry is high because they can influence product competitiveness by increasing the prices for inputs, decreasing the quality of materials, and so forth. Nevertheless, it is valid to say that IKEA effectively deals with this factor by working with thousands of suppliers, which means it does not rely significantly on them and can replace them in case something goes wrong without significant losses. At the same time, the company aims to build long-term and trustful relationships with suppliers. Such a manner of cooperation is associated with reduced risks to cost competitiveness because it implies that mutual interests are considered, and benefits for all involved parties are produced as part of the partnership.
Bargaining Power of Buyers
The bargaining power of buyers in the industry is high, and it leads to reductions in prices. Nowadays, buyers can switch to different furniture retailers effortlessly and at low costs because the number of companies offering similar products is significant (Liljekvist and Carlson 36). IKEA addresses the risks associated with this factor by striving to be a cost leader and focusing on design and marketing activities.
The threat of New Entrants
Due to the rapid growth of the global furniture market, new entrants are attracted by opportunities for gaining high returns. They also often bring new technologies, innovations, and resources because these are the core factors leading to competitiveness and success (Zion Market Research). IKEA minimizes the risks to profitability due to a high threat of new entrants by developing products regularly and through effective marketing strategies. Along with this, the company enjoys scale effect and experience curve, which allow it to maintain cost-efficiency.
Internal Analysis
Core Competencies
Profound experience can be considered the primary strength of IKEA and the source of its competencies in marketing, logistics, and other operations. According to Wong, the more experience a company has in producing an item, the lower production costs are (2). Such a learning curve effect arises because a company gains knowledge based on the quantity of produced products and time spent on their development. It is valid to say that in the case of IKEA, experience provides a significant advantage over competitors and poses significant barriers for new entries into the market. At the same time, the core competency in terms of product development is the overall approach to design and a unique style of furniture. Not only does the company utilizes innovative technologies but also sticks to modern fashion trends and aims to foster pleasant user experiences through its furniture.
Value Chain
A business’s value chain can be analyzed against five major activities, including inbound logistics, outbound logistics, services, marketing, and operations, and their contribution to the firm’s value creation capacity. According to De Marchi et al., IKEA outsources most of its production activities, while focusing mostly on value creation through design and marketing (306). It means that the company’s value chain is mainly buyer-driven.
At the same time, IKEA has an extensive network of strategic suppliers that work to provide the retailer with the majority of its products (De Marchi et al. 306). The primary disadvantage of such an approach is a reduced level of control over the production and supply process. However, it may also entail significant savings because the company does not need to bear expenses associated with the maintenance of production facilities.
Additionally, to minimize various risks to the success of operations performed by suppliers, the company shares knowledge and innovation with them regularly “to ensure the upgrading of their technological and environmental capabilities” (De Marchi et al. 306). It is worth noticing that environment protection incentives are currently among the most pronounced in IKEA’s multiple operations, starting from design and ending with product delivery.
For instance, according to the company’s official statement, “100% of cotton used for IKEA products comes from more sustainable sources” (Inter IKEA Systems B.V., Key Figures). Along with this, it has an objective of reducing greenhouse gas emissions and increasing the efficiency of energy and material use across the production and supply chains (De Marchi et al. 307). In this way, the company adds value for environmentally-conscious consumers and local communities in general.
As for the services, IKEA strives for excellence by taking into account customers’ suggestions and feedback. The company identified such customer needs as more shopping convenience and assistance during furniture assembly and responded to them by providing appropriate services (INGKA Holding B.V. 55). It mainly refers to the digitalization of shopping and the provision of opportunities to use various apps to improve purchasing and post-shopping experiences. For instance, IKEA developed a partnership with TaskRabbit, an online platform for connecting customers with skilled workers specialized in furniture assembly and other services (INGKA Holding B.V. 55). This example demonstrates that the company aims to differentiate the range of its services and make them more flexible and relevant to consumer interests.
SWOT Analysis
Strengths
The term “strength” implies expertise and any other internal factor that adds value to products and services. In the case of IKEA, strengths include a very strong global brand and human-centered design, combining functionality, aesthetics, and affordable prices (Circle International 78). The firm’s vision and sustainability initiatives, showing its commitment to people, may be regarded as a strength as well because, along with a promise for low prices and quality, they help attract customers.
Weaknesses
IKEA’s main weaknesses are due to the size of the organization. According to Circle International, since it is a global business, it may fail to implement high professional standards across its numerous stores and departments located worldwide (79). Moreover, it is particularly hard to ensure that all suppliers conduct their businesses ethically and adhere to sustainability policies. It may also be difficult to maintain an excellent quality of products at all times while implementing low pricing strategies. For instance, Chen et al. note that, in recent years, IKEA has recalled some of its products more frequently than before (6). Considering that quality is one of the key customer values, the company should undertake appropriate measures to improve it.
Opportunities
Opportunities arising in the external environment allow firms to maximize the advantages of the strengths they have. In IKEA’s case, they are growing demand for sustainable products and services (Circle International 78). Nowadays, consumers have become more aware of production impacts on the environment, and the overall roles of large corporations in developing communities. Thus, they demand a fairer approach to business conduct and value those companies that actively participate in various corporate social responsibility activities.
Threats
The main threats are due to unfavorable environmental forces: high rivalry and economic unpredictability. Nowadays, a lot of new competitors enter the global and domestic furniture industries and offer affordable products that are similar to those produced by IKEA. Moreover, a decline in spending and disposable income of some consumer groups can be observed (Circle International 80). Nevertheless, it is valid to say that IKEA’s low pricing helps it respond to this risk efficiently.
Business-Level Strategy
Cost leadership and differentiation strategies are the main approaches to produce advantages in any industry. It is valid to say that IKEA utilizes both of them, yet its primary focus is on low pricing. As stated by Liljekvist and Carlson, “tight cost control systems, quantitative cost goals, close supervision of labor, raw materials, inventory, and other costs, and a cost leadership philosophy” are the primary organizational management systems that lead to success in the realization of cost leadership strategy (16). Overall, IKEA implements all of them as part of its business-level strategy,
It is valid to say that the main source of the company’s cost advantage is the utilization of ready-to-assemble furniture technology and flat packaging. According to Yuan et al., they allow decreasing production, service, storage, and logistics expenditures (3). Moreover, IKEA works with those suppliers that bid the lowest price (Yuan et al. 3). Yuan et al. also observe that IKEA’s advertising exposure in large media is limited, while the promotion mainly takes place through catalogs and brochures distributed in stores (3).
As for product differentiation, IKEA uses it as a complementary yet necessary measure because although cost leadership is a major competitive advantage, “low-cost products must be provided by different competitive level” (Yuan et al. 3). It means that they must satisfy a wide range of customers’ needs and preferences. For this reason, the company employs professional designers who help develop new, attractive, and functional products. Moreover, it uses efficient customer communication channels and obtains their feedback.
Overall, product differentiation is important because it allows companies to stand out among competitors. At the same time, the uniqueness and exclusivity of a product are frequently associated with higher costs and, consequently, higher prices. In this way differentiation strategies are not always as profitable as cost leadership strategies. Considering that IKEA’s main objective is to reduce extra costs and attain a large market share, it is clear that overall cost leadership is its main strategy.
Corporate Level Strategy
International expansion is a primary corporate-level strategy implemented by IKEA to increase revenues and meet other vital business goals. One of the most recent IKEA’s achievements in this regard was the opening of the first store in India (INGKA Holding B.V. 40). This step demonstrates that the company acknowledges India’s role in driving the global furniture market growth mentioned in the report by Zion Market Research. It is worth noticing that while entering international markets, IKEA stays loyal to its brand concept and vision. However, it also takes into account the specific characteristics of a country and adapts to them.
For instance, according to Harapiak, IKEA customizes the showrooms according to the local living patterns in China (32). The researcher states that “many Chinese people live in small apartments with balconies, therefore, IKEA has added model sets and special balcony sections in the stores to show how to furnish your balcony” (Harapiak 32). The given approach is highly efficient considering that China and other Asian cultures are distant from the traditional Swedish culture. For this reason, targeting specific population features and behavioral standards throughout the product and service range is important because it allows eliminating cultural barriers, attract customers, and increase demand for products.
Cultural distance also defines the overall entry mode into the market. As Lingxiu notes, when entering the Chinese market for the first time in 1998, IKEA utilized the joint venture mode because it offered such advantages as “risk sharing and gaining the local market” (46). When collaborating with local partners, it may be difficult to control all operations and adhere to the same operational standards and rules that are implemented in IKEA’s wholly-owned subsidiaries in Europe and other regions. Nevertheless, such a cautious approach to internalization was optimal for IKEA as it allowed gaining the necessary knowledge and facilitated its entry into other markets, similar to the Chinese.
Recommendations
Based on the analysis findings, it is possible to suggest that the primary problems and concerns that need to be addressed are an inadequate balance between product quality and price, and the loss of control over operations due to a large scale of the business. At the same time, there is a need to take advantage of the current opportunities, namely, growing demand for furniture in the Asia Pacific region and a rising interest in premium products in Europe.
Considering that IKEA mainly collaborates with suppliers when manufacturing its products, it can approach quality improvement through supplier management. It may be recommended to apply stricter quality standards when developing partnerships. Additionally, it is important to take into account an observation by Chen et al. who refer to the fact that IKEA’s recent quality problems are mainly due to an extremely long list of current IKEA’s suppliers and a rapid expansion pace (30).
For this reason, it would be appropriate to slow down the process of new store opening across different regions and, instead, focus on the enhancement of current processes by ensuring partners’ compliance with standards and policies. Notably, new points of sales should be open more cautiously and mainly located in strategically important areas, such as India.
While improving the quality of products, IKEA may also focus on the development of premium product series to address current customer trends. It does not mean that the company should reject its cost leadership strategy entirely. However, by creating exclusive furniture items at higher prices, it will be able to attract a new group of consumers. It may also be suggested to develop these premium products as part of a new, separate brand because many consumers interested in luxury objects often prefer to avoid associations with mass production, which is one of the primary IKEA characteristics.
Works Cited
Chen, Xiyu, et al. “The Future of IKEA: Watch Your Expansion Steps.” DiVA, 2013.
Circle International. SWOT Analysis and Sustainable Business Planning. Web.
De Marchi, Valentina, et al. “The Greening of Global Value Chains: Insights from the Furniture Industry.” Competition and Change, vol. 17, no. 4, 2013, p. 299-318.
Harapiak, Clayton. “IKEA’s International Expansion.” International Journal of Business Knowledge and Innovation in Practice, vol. 1, no. 1, 2013, pp. 21-42.
INGKA Holding B.V. Yearly Summary FY17. 2017. Web.
Inter IKEA Systems B.V. “Key Figures.” IKEA. Web.
Inter IKEA Systems B.V. “Vision and Business Idea.” IKEA.
Lewis, Robert. “IKEA: Swedish Company.” Encyclopaedia Britannica. 2018. Web.
Liljekvist, Elin and Sandra Carlson. “Working Process for Supplier Market Analysis, in Line with IKEA’s New Business Approach.” Lund University Publications. 2015. Web.
Lingxiu, Jiang. “IKEA Marketing Entry Strategy in China.” DiVA, 2017. Web.
Wong, Lam F. “A Generalized Learning Curve Adapted for Purchasing and Cost Reduction Negotiations.” Advances in Operations Research, vol. 2013, 2013, pp. 1-9.,
Yuan, Jin-Yuan, et al. “Analysis for Cost Leadership Strategy and Core Competitiveness Points of IKEA CO.” DPI Proceedings, 2016. Web.
Zion Market Research. “Global Furniture Market Will Reach USD 472.30 Billion By 2024: Zion Market Research.” GlobeNewswire. 2018. Web.