Assignment - Asif

Introduction

IKEA known for its Scandinavian style has moved on from selling vegetable seed, magazines and fish as it did in 1943 to furniture & other household items.

However, as the organisation has grown over the past decades the key question is whether IKEA is at a strategic crossroad? Is IKEA lacking strategic direction? Can IKEA continue to roll out its “one-size-fits-all” proposition with little variation in a diverse world facing economic downturn, increased attention to the environment and changing consumption patterns?

In 2008 IKEA home furnishing celebrated its 50th birthday after recording revenues of $21.2 billion Euro. Since 2003 it has added over 100 new stores to its home furnishing business, nearly doubling its network, and now operates in 36 countries around the world.

The global economy is now changing and increasingly the majority of IKEA's stores are aimed at a new type of emerging customer with different preferences to those from its traditional market. There is opportunity to further expand and build market share but how can they maintain the core IKEA culture whilst adapting to this new challenge?

Through this paper the author will consider this issue by presenting and evaluating several strategic options before making a final recommendation.

Background Analysis - Company Analysis

Market Segmentation -

The home furnishing industry is divided into three major parts: low-budget, value for money and designer furniture. IKEA integrated cost-effective production processes with adequate design and re-created the value for money furniture market. The market is segmented into various pricing segments with perfect competition criteria overall, yet oligopolies with the pricing segments.

  1. Supply Chain
  2. Sales Strategy
  3. Sales Service

The concept of IKEA is based on 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. Rather than selling expensive home furnishings that only a few can buy, the IKEA Concept makes it possible to serve the many by providing low-priced products that contribute to helping more people live a better life at home. For IKEA a sustainable and vertical supply chain is crucial to be cost effective. IKEA sales strategy differs as it sells a product at a low profit margin per unit but generates its profit through volumes and hence a high turn-over rate thus engaging customers to buy impulsively to generate volumes.

Competitor Analysis -

Although the market is widely segmented based on price, design and the style of the product but is led by some brands which occupy a sizeable share of the market in various categories. Some of the direct and indirect competitors can be categorised as -

The Business Model

IKEA approaches unknown, small, high risks markets by franchising IKEA has a lot of subsidiaries in many countries of the world. Franchisees have to carry basic items, but have the freedom to design the rest of the products.

IKEA focuses on selling cash cow items with big market share and solid growth rate. Suppliers of raw materials in production processes are either vertically integrated or horizontally contracted at IKEA - the advantages is the sustainable development of operations and better forecasting possibilities enabling the economies of scale approach. The advantage of contract is the high level of flexibility to meet market demand and short time project based work as well as well as technological innovation. The disadvantage is uncertainty of sustainable supply and lesser chances of transforming fixed to variable costs.

Sustainable Supply Chain - Original Equipment Manufacturer (OEM) - also in regards to operations management and OEM aims to outsource operation to suppliers with the goal to minimize cost creating a scale of economy with the operations. The usage of core technology in controlling market channel are key aspect of OEM, thus IKEA seeks a seamless cross-channel set-up within its supply chain combining operations which are linked together being effective. Thiis view of outsourcing also resembles a resource based view where the core competencies are used to create a perfect value chain.

Sustainable Development & Public Relations - Insisting all products designed by itself and hold their patents - The consumer is aware and demands and ethical way of doing business, thus the code of conduct gives the consumer a good feeling. The market based view can describe this approach where product and marketing campaign is being designed to satisfy consumers need.

Established economy and market simulation - Stability - Another key success factor within the industry - Household furniture is not regarded as an essential purchase and hence during the time of economic instability the decision to buy the products can be deferred.

Marketing Strategies

IKEA has an integrated soft selling marketing approach such as

  1. Experience Marketing - Letting the consumer to try the product and judge the product based on their own experience.
  2. Information Marketing - Support the purchase decision by giving out information about usage of the product, price and purchase procedures.
  3. Vivid Marketing - Combine related products and set up as a ideal living space in order to inspire the consumer to buy.
  4. The success of IKEA is based on strategies that remain uniform throughout the world, offering customer the freedom and choice with regards to buying home products, and offering low prices intended to create a “sale” mentality amongst customers.

SWOT analysis

Strengths

  • Strong international brand recognition with focus on key demographic consumer groups.
  • Unique business model with little competition on a like for like basis targeting well educated, liberals, white collar and those unconcerned with status symbol.
  • Clear strategy of cost leadership offering functional & innovative products to the customer.
  • Specialist knowledge within key product areas in product ranges which require assistance such as kitchen installations.
  • Total control over pricing, design and supply of products globally.

Weakness

  • Over reliance on European market, with approximately 82% of stores located in Europe and the rest across Asia, America and the Middle East.
  • Underperformance in managing customer expectations in terms of service as well as price, especially in countries like the UK.
  • Low level of customer service thus offering a limited shopping experience to the customer.
  • Limited manufacturing capabilities thus dependence on subcontracted manufacturers.
  • Difficulty in coordinating and maintaining uniform quality standards across all the regions.
  • Subcontractors may manufacture their own line of products and compete with IKEA.

Opportunities

  • Focus on expansion into Eastern Europe and emerging Asian markets.
  • Sales increase through effective use of e-commerce sites in various countries.
  • The shift in the demographic base by offering products in the mid and higher price points will see an increase in the average sale per consumer.
  • Concept of selling a lifestyle based on good design and value for money is a major selling point.
  • Focus on differentiated products for the Asian markets which have the fastest growth with an affluent middle class.
  • IKEA commands only 5 to 10% of the retail furnishing market in each of the country it has outlets in so huge potential to increase market share especially in a large market such as the North American region and China.

Threats

  1. Competitors are beginning to replicate IKEA's low cost model which may impact the sales figures of IKEA in the long run.
  2. Economic concerns over rise in the cost of living and the depleting disposable incomes may have impact on the performance of the company.
  3. Negative impact on sales owing to economic crisis in its core European market as well as the impact of weakening dollar on sales in the US.
  4. Potential threat to heavy investment in short to mid-term in the Russian and the Chinese markets owing to the economic and political instability.
  5. Difficult to sustain good design quality products at low cost as the number of competitors keep increasing.
  6. Major challenge to keep the core values alive especially when the company becomes larger and more diverse and the founder retires from the business.

Key Strategic Issue

‘Following the vision for growth whilst balancing the “IKEA way” approach to business with the need for adaptation within new markets'

The culture of IKEA has been important to its success in the past however its ability to adapt will be key to its future success. Some of the external factors which IKEA needs to adapt to and balance against its culture in order to secure future growth are as followed:

Cause of Issue:

Culture

The “IKEA WAY” (IKEA's own word for culture) extends to every area of its business, the foundation of which consists of three main elements: focus on low cost, constant improvement and Swedish design and identity. All core competencies (SCM, Swedish design and management style) are embedded within IKEA's culture. Thus, the IKEA WAY is the cornerstone of IKEA's competitive advantage.

Problems arise when we consider that culture can be very difficult to change. Culture is an intangible force very often embedded within a company and for this reason the IKEA culture could be very difficult to change. Since the IKEA way has been the road to success for the company in the past, IKEA will be reluctant to make any changes which affect this 'recipe'. Furthermore, the fact that the culture is embedded means it cannot be controlled directly by management decisions.

Adaptation

The current global financial crisis has caused a major shock to world markets and is now spreading to more general economic trading conditions. Growth in all major countries has slowed considerably with some already in a technical recession and the forecast is that it will remain difficult at least until the end of 2009. IKEA currently operates in 36 countries around the world and it remains to be seen what the impact will be on IKEA's traditional customer base.

Awareness of sustainability is also now on the agendas of most large global companies. Increased pressure by consumers to become more sustainably responsible is increasing and since IKEA is an intensive user of natural resources this report wonders how IKEA plans to continue with its stated vision of quality home furnishings at low prices as environmental externalities are priced into a company's cost structure.

In addition, the expansion of IKEA is a key objective of the firm. To “make lives better for the many” the firm plans to expand both in existing markets like China but also in new markets such as India. To realise these opportunities IKEA will need to successfully adapt to new customer tastes, trends and ways of business.

Strategic Options

While considering the strategic options the economic view and geography also needs to be accounted for. Considering the economic view the short term can be defined as 1-2 years & the long term as 3-6 years. In terms of the geographical context three different market have been identified: Existing markets in developed countries, Existing markets in developing countries and new markets in new developing countries.

Option 1: Focus on current market and current product range with no further expansion.

In light of the present economic downturn a consolidation of IKEA's largest mature markets such as Europe and America can be considered a viable option. This would involve a suspension of any expansionary plans for new stores in developing markets while also refocusing certain parts of its operation.

The advantages of Consolidation include the opportunity to further reduce production costs whilst improving the existing supply chain to prevent stock shortages. The risk of supplier failure could be mitigated by streamlining the existing product range in line with existing market demand. Cultural adaptation would then become more easily manageable and IKEA would have time to improve its business in the face of an uncertain but increasingly severe economic downturn.

An important consideration is that evidence suggests that economic downturn has a strong influence over buyer behaviour. Given IKEA positions itself as a low-price high-value offering this could be viewed as an opportunity for the company to improve market share.

However, this option would not allow IKEA to continue with its stated goal of continuous improvement and a belief in its duty to expand the home furnishing offering. For this reason we believe it is not the right approach.

Option 2: Focus on gaining market share in existing markets through expansion.

In order to maintain growth in the next 3-5 years, IKEA could try to penetrate existing markets thereby increasing its 2.5% global market share. In order to sustain its competitive advantage IKEA needs to penetrate its existing markets further. A 6% market share in Europe suggests that there is potential to open new stores.

Given the key strategic issue, the advantage of this option is that IKEA does not need to change their culture, have existing resources and competencies to deal with penetration and therefore the need for adaptation is limited. By opting for market penetration in existing markets like Europe, US and Asia, IKEA can apply their existing business model which has already proven to be successful.

IKEA may face stiff competition from other firms but would have an advantage in so far as they operate under a hybrid strategy of differentiated products and low price. This value type approach would be more attractive and has the potential to act as an advantage. IKEA should be careful not to expand too intensively in areas where it already has significant operations to avoid cannibalising revenue.

Due to the global economic downturn, for the short to medium term, the strategy of market penetration as opposed to market development seems more feasible. Market penetration is also a great opportunity to capture new market segments in existing markets. Possible new methods for market penetration could be:

First: Given the current economic downturn, IKEA could market their low cost proposition more intensively. Create trust among their customers, suppliers and the general public about IKEA's initiative on sustainability. This is particularly relevant in European and American markets where consumers are increasingly becoming more environmentally conscious.

Second: Open showroom style stores in the city centres where it already has a traditional store thus catering to the growing urban population.

Third: Continue to open traditional stores in Eastern Europe and China were markets are growing. Evidence suggests that IKEA's existing store concept has been successful in these markets.

Option 3: Focus on entering new markets through slight adaptation to existing products based on local tastes and preferences.

In the longer term the economic balance of the world is shifting gradually towards the emerging economies in the east and so it is absolutely critical that IKEA enters these markets to remain competitive and gain market share.

New market development puts pressure on IKEA's culture and business model in two ways. First the need to adjust to local tastes, culture, design, delivery and service expectations Second, moving into new markets requires strengthening the supply chain to be geared to avoid long lead times and stock outs.

A disadvantage is less control over the brand and consumer experience and a fear of losing the Swedish identity and culture. If IKEA opens up new stores on their own without using the franchise model, there is a huge risk of potential financial loss and the possibility of not being able to adapt the business offering to the new environment.

Option 4: Focus on providing modified and new products in existing markets

New product development could be introduced to keep with the ‘everything under one roof' strategy as well as increase annual turnover.

In developed countries and mature markets new product lines like food and grocery can be considered. Also an increased range in the Small Office Home Office (SOHO) section can be developed to tap into the growing SOHO market segment.

Within the emerging countries and existing markets, the Bablok (complete house development) category can be promoted. The success of this category in some of the mature markets can be transferred to remaining markets to generate additional revenue.

Conclusion

IKEA's strategy in the near future seems to be focused on steady development of its retail business, and is not likely to include aggressive expansion into new regions, but rather concentrate on growing in the existing areas. Though, over the last few years the company has adopted an aggressive expansion strategy but the weakness of the economic conditions of the markets means that the growth of sales over the next few years should remain relatively modest.

IKEA has also faced a fall in profit margins owing to the high set up costs and low spending power along with other external issues in the existing and developing markets.

Given, the uncertainty and severity of the current economic climate the first option - “Focus on current market and current product range” initially seemed attractive in the short term. However, the evaluation revealed that given IKEA's low cost products, which are well suited to this economic situation, this option would be too defensive and not in line with IKEA's growth aspirations.

The evaluation shows that the option - “Gaining market share in existing markets” is the most attractive irrespective of the worsening economic situation. This option balances the risk of IKEA's growth aspiration. Furthermore, by creating show rooms in city centres this option addresses other wider consumer trends such as increased urbanisation, growing use of public transport and people being more time sensitive. By opening show rooms in key cities within existing markets whilst opening new traditional stores in existing markets IKEA gets the optimal balance between culture and adaptation given the external forces. However, IKEA needs to take into account implementation issues, which arise when opening the showrooms. Furthermore, there is an issue on identifying which cities to open the show rooms in.

While for the longer term option - “entering new markets” seems to be best suited. Given the economic climate this option is currently too risky because of the identified need for a high level of adaptation when moving into new markets. However, when the economic situation improves IKEA should be ready to test new markets like India.

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