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Since 1997, Ikea has increased its number of stores by 51. The company
comprised 165 stores as of August 2003, and there are plans to open a further
16 new stores in both fiscal 2004 and 2005. However, although the company
opened 14 new stores in fiscal 2003, sales growth was only 2.7%, largely as a
result of the depressed economic conditions across Europe, the company’s core
business region. Thus, it is clear that, in order to improve performance at a
significant level, merely opening new stores is not enough. Instead, Ikea must
assess its external and competitive environment, determine the key opportunities
and threats which face it, and align its strengths and weaknesses to best counter
the weak consumer market, and thus generate the strong growth it needs to
remain a strong brand and presence in its chosen markets.
This paper will assess the external environment IKEA is operating in using the
PESTEL analysis to determine the political, economical, social and
environmental outlook as well as the industrial environment using the Portal’s five
forces model to analyse the industry IKEA is operating in. knowing the external
environment is insufficient if the company’s internal strengths and weakness are
not fully exploited and the SWOT analysis is used to analyse the company’s
internal performance and determine the opportunities and threats facing it.
After determining the firm’s environment, a review of the processes and options
available to IKEA to promote growth will be given followed by recommendations
on the steps IKEA can take to grow in this economic downturn. An assessment of
the usefulness of the various models used in this paper will also be provided.
1 Introduction
An international retailer of home products, IKEA is a privately held retailer chain
that sells flat pack furniture, bathroom and kitchen accessories all over the
world. Founded in 1943, IKEA is an acronym. The name IKEA is derived from the
initials of its founder Ingvar Kamprad, the farm where Ingvar grew up and the
home country of Ingvar. IKEA is however owned by a foundation which is Dutch-
registered and is owned by the Kamprad family.
Since 1943, Ikea has expanded its operations steadily in many countries with
most of the stores of the company concentrated in Europe, USA, Canada, Asia
and Australia. The IKEA group also has existence in Israel and Middle East.
IKEA originally started by selling picture frames, wallets, pens, watches, table
runners, jewelry, and nylon stockings etc. Furniture was first added in the year
1948 and IKEA started manufacturing its own furniture since 1955, providing
furniture that could be self assembled at relatively low cost. Since then, the name
has been synonymous with self-assembled furniture.
However, IKEA may stand to lower its costs as governments begin to lower taxes
or provide subsidies to help businesses stay afloat in this economic crisis.
2.2 Economic factors
The fluctuating commodity and raw material prices all over the world result in
rising purchasing costs for IKEA. This will have an impact on the margins of the
organisation and might lead to passing over the cost to consumers by increasing
prices of most things in the supermarket. Furthermore, rising fuel costs will have
implications right throughout the supply chain of IKEA leading to an overall
situation of increasing prices, resulting in decreased competitiveness.
The credit crunch can impact IKEA negatively as it might decrease the
purchasing power of consumers and though they will still buy the essentials they
may be more cautious. Furthermore, furniture, unlike fast moving consumer
goods, are durable and can last for several years and in such economic
uncertainty. Consumers may be reluctant to change what they perceive to be still
serviceable sets. They may also spend less on luxury items, something that has
a greater profit margin for IKEA. All this may result in lowered sales and thus,
reduced margins for the firm.
At the same time, IKEA may also face stiffer competition from local small retailers
who offer furniture at more affordable prices- something which will appeal to cost
conscious consumers. This may cause IKEA to reduce its margins, affecting
profitability.
In relation to buyer power in the industry Ikea seeks to enhance customer loyalty
through a focus on enhancing existing relationships while aiming at winning new
customers also and tying them into long term relationships with companies. This
is done by providing customers with positive shopping experience through good
customer service. For example, Ikea provides nursing rooms and playgrounds for
parents to ensure that the children have positive experience at the outlets and
providing home delivery and assembly services for patrons who require them. At
the same time, it also provides a hotline for customers who have missing parts or
problems with the assembly. It’s return policy, at 100 days, is also something
quite unheard of in the industry.
4 SWOT Analysis
Having looked at how the external environment can affect Ikea in its strategy, let
us look at the internal analysis of the company.
4.1 Strengths
Ikea’s main strengths are a strong international brand recognition attracting key
demographic customer groups, built upon a unique philosophy. This IKEA
business model is unique in its construction and execution with little direct
competition on a like for like basis. Perhaps a key asset Ikea possesses is the
IKEA catalog. Published in the entire world and translated into more 40
languages, the Ikea catalog is present in a lot of homes, ensuring high brand
recognition and penetration. It is its catalog which allows it to be known around
the world. Ikea’s success has been driven from the price architecture offering
value to the customer in innovative but functional products which are low priced
vis-à-vis similar products. Since 1997, the company has enjoyed high sales
performance which boosted profit margin and created a healthy reserve which
could be used to fund company expansion. Another strength is that the company
also maintains total control of its design, pricing and supply of product ranges
globally, creating a product portfolio that caters for most consumer lifestyles and
budgets. The backward integration also ensures that the firm enjoys economies
of scale by producing its own furniture.
4.2 Weaknesses
The firm’s main weakness is the fact that it is very much reliant on Europe, with
82% of stores located in this region and is underserved in the emerging
economies of Asia and Latin America. This could be a potential drag on company
performance in the long term as the European market is fairly saturated with little
growth. Another potential snag is that though Ikea promotes low prices such
policy has been identified as being synonymous with a low level of customer,
especially in the UK where large queues at the cashiers at weekends are
common features. This suggests that there is a need to work on service to
ensure a complete shopping experience and ensure repeat business within the
existing customer base especially in saturated markets where new customers are
harder to draw.
4.3 Opportunities
Ikea is countering its main weakness with its key opportunity, which is expansion
into emerging markets in Asia and Eastern Europe. Traditional product for IKEA
has been affordable, low-priced high volume products. However the movement
into mid and higher price points will see an opportunity to move the demographic
base and increase the average basket value with less reliance on a limited
demographic group. Another opportunity available to IKEA is the increasing
popularity of online shopping. Its expansion into the realm of the virtual
marketplace, the possibility of greater reach coupled with lowered expenses is
now a real one for IKEA. Although there are negative associations within the
development of the IKEA Ecommerce site there is an associated opportunity to
achieve growth and increase levels of customer service as the additional
transactional capability will reduce pressure from stores to a certain degree.
Thus, possible growth areas include he development of premium lines, whether
within existing stores or through new high street fascias complementing the out-
of-town stores, and an increase of sales via the development of e-commerce
sites in each country. At the same time, IKEA also needs to be mindful of
improving customer service, and reducing the volume demand on existing stores.
4.4 Threats
Unfortunately, these extra developments are driving the threat of a possible over
saturation of the market, as mainstream retailers are beginning to mirror the
model of low cost value flat packed furniture which will impact on the buoyancy of
IKEA. Such move will have an adverse effect on IKEA which draws a significant
portion of its revenue from the sale of low-priced flat furniture. This is
compounded by the negative impact on sales of continued depressed economic
conditions in its core European market as well as the adverse effect of a weak
dollar on sales in the US, and the political and economic instability of the Chinese
and Russian markets, in which the company plans to invest heavily in the short-
mid term. With economic concerns over rising living costs and depleting
disposable income due to the global depression, there is an overall threat to the
performance of the business in UK and American markets specifically. Even its
emergent markets in Asia are impacted as economies around the world
experience a severe depression.
Another area it can look at is to increase sales through the use of promotional
strategies. Currently, IKEA's advertising campaigns were based on unique
marketing conditions and cultural sensibilities of each country, which varied
significantly across markets. For example, European advertisements, especially
in the UK, were more straight-forward than those in North America, which were
generally more witty. Over the years, IKEA had worked with different advertising
agencies to bring out some of the most creative and unconventional television
spots across the globe. For these reasons, an IKEA account was considered a
choice catch as it allowed the agency the freedom to explore some interesting
and unexplored ideas.
Ikea’s stores can also be a means to attract more and more customers in their
stores. As when a customer enters a Ikea store, he can not go out without having
seen all the furniture available in Ikea due to the way the products are placed. In
fact, Ikea stores are big and the customer is obliged to visit the 2 floors of the
store before exiting as It is impossible to go directly to the exit. It is a marketing
strategy which incites customers to buy. This system results in customers often
buying more furniture than they need and Ikea can capitalise on this by getting
more personnel to help customers walking through the shop. This is important as
one drawback is that many customers feel that the service at Ikea could be
erratic at times due to high customer turnout and low number of staff working.
In conclusion, to grow its market share, IKEA would need to continue to provide
low cost products that is differentiated (in terms of offering consumers a choice of
assembly and transport) and at the same time, to build on its staff competencies
in order to offer consumers an enhanced shopping experience.
6 Recommendations
IKEA currently operates in several countries and since it is mindful of the socio-
cultural aspect of the countries it operates in, Ikea would need to continue
operating as independent business groups with each group making its own
managerial decisions. Such an arrangement would ensure that the various units
can respond quickly to the fluid situations in the host countries they are in.
Secondly, IKEA should also stick to the policy of reaching out to cost conscious
consumers by focusing on quality yet low cost products. This can be done by
sourcing for materials and putting in more efforts to integrate its supply chain to
reduce costs. At the same time, the policy of choosing malls in suburban
locations is also an ideal one as it also lowers rental which can form a substantial
portion of operating expenses.
Next, IKEA could review its service policy. Despite its commitment to provide
quality service, IKEA consistently falls short in this area especially during
weekends or sale periods when the sheer number of customers overwhelms the
service staff. IKEA could cross-train its staff to allow them to serve more than one
product categories. When a particular segment faces too many customer
enquiries, staff from other segments could be deployed. At the same time, it
could also recruit more part timers to fill positions on weekend and provide them
suitable training. This would increase the firm’s ability to handle the weekend
surge in customer enquiries and hopefully, assuage clients’ dissatisfaction over
the quality of its services.
Porter’s model provides the means for analysising industries and competitors
and is an important tool for analyzing an organizations industry structure in
strategic processes. Porter’s model is based on the insight that a corporate
strategy should meet the opportunities and threats in the organizations external
environment. It also states that competitive strategy should base on and
understanding of industry structures and the way they change and this is useful
for us to understand IKEA’s strategic environment in terms of the nature of
competition and IKEA’s strengths vis-à-vis its clients and suppliers, allowing
management to decide how to influence or to exploit particular characteristics of
their industry.
The SWOT analysis analyse internal and external factors affecting the firm. The
SW-Part comprises internal factors – the strengths and weaknesses of the
organization. These are competences and resources that the organization
possesses and that are under its control. On the other hand, The OT-Part of the
SWOT identifies Opportunities and Threats, factors not under the firm’s control or
influence, which the organization faces from trends and changes in its
environment.
At the same time, the SWOT analysis is also limited. The SWOT raises various
questions. The SWOT itself will not give any answers on these questions, it only
helps organizations to start thinking about the right things. For example, the
SWOT identifies the firm’s strengths, but it does not tells us which strengths
should we improve on and which weaknesses should we try to fix to exploit our
opportunities or to minimise our threats.
Although the factors from Porter’s five forces model provide useful input for the
SWOT analysis, there are also limitations when using Porter’s five forces model.
The model analyses individual business strategies and does not provide for
synergies and interdependence found in the portfolio of larger corporations like
IKEA. There could also be a tendency to over or under emphasise on the existing
strengths of the organization. At the same time, the model does not factor the
role of the government. Fortunately, this is addressed by the PESTEL model
which deals with the impact of the government and legal factors.
All three models used have a limitation in that it does not identify the main
revenue generator of the various departments of IKEA. This could have been
done by using the Boston Consultancy Group’s growth-share matrix to determine
the profitability of the various business groups and to better allocate resources
for research and development.
The three models are also limited in identifying and providing the strategy for a
sustainable competitive advantage and alternatives to competition.
8 Conclusion
From a fledging family business in 1943, IKEA has since grown into a multi-
million company. As IKEA moves into the next few years, it would have to
continue to sustain its current market of low cost, quality goods and at the same
time, grow new segments (the high end market for instance). It also has to
continually improve its customer service to ensure that customers remain
satisfied while using technology, especially internet shopping, to grow its
business. Given its strength in its industry and the relatively stable environment it
operates in, the potential for IKEA to grow its business is strong if it embarks on a
two pronged thrust of growing its market share and limiting cost in this downturn.