I KEA Case Study

Sharleen Suwaris-SUSND11
Sharleen Suwaris
MAN3503-Strategic
Management
Executive Summary
The following is an analysis of the IKEA case study found in the Strategic Management Text book. This analyses the
strategies used by IKEA to gain competitive advantage in markets outside its original area. The report begins by providing a
background into IKEA. It studies International Business Level Strategy and the three international corporate level strategies.
The case study goes into informing its target market and pricing strategy, which is already discussed. This case study further
says how different people in different parts of the world thinks about IKEA, how elegant their designs are and how affordable
for them to purchase IKEA products. Some of IKEAs main markets are in three of the fastest growing markets such as
Russia, US and China. IKEA store bring out products such as furniture to small product like a scented candle. IKEA has over
1300 suppliers in about 53 countries. They further have 12 full time in- house designers with 80 free lancers and other
production workers to identify the correct raw materials and produce products efciently and cost effectively. Primarily, IKEA
produced standardized products however; this international strategy did not work for one of its vital markets that is, US.
Therefore, they had to emphasize on taking corrective actions. The report also analyses the entry methods used by IKEA
and its sustainability.
IKEA Case Study 2
Table Of Contents
Introduction 4
History 4
I/O model 6
The External Environment 6
The Industry Environment 7
The competitive environment 8
Value Chain 8
International Strategy 10
Strategic Choice 11
International Business Level Strategy 11
Multidomestic Strategy 11
Global Strategy 11
Transnational Strategy 11
Modes of entry 13
China 13
USA 14
Conclusion 14
References 15
Sharleen Suwaris
MAN3503-Strategic
Management
I ntroducti on
History
IKEA was founded by Ingvar Kamprad a native of Sweden in 1943, when the founder, at the age of 17 was given money by
his father in return for doing well in his studies. This money was used to start up his own company, IKEA, which stood for his
intials and the rst letters of the farm and village in which he grew up. The company initially sold basic items such as pens,
picture frames, table runners, wallets, jewellery, nylons stockings and watches, at a low price("History of ikea," 2010).
Furniture was rst introduced into the IKEA range of products in 1948, and due to a positive response, the product line
increased in size. Customers were allowed the ability of viewing and touching the furniture that was previously only viewable
through catalogue. IKEA opened a showroom in Sweden to create a competitive advantage, due to a price war with their
main competitor, so that customers could determine whether they were getting value for money. Finally IKEA made the
decision to design its own furniture due to competitors trying to make suppliers boycott IKEA products. The at-packs and
self assembly concepts arose when an employee disassembled a table in order to prevent damage during transport
("History of ikea," 2010).
In 1963 the rst IKEA store outside of Sweden was established in Norway. From this point on, IKEA began to spread like a
wildre, rst to Denmark, then Switzerland, Germany, Australia, Canada, Austria and Netherlands. Many alliances were
struck up with different suppliers in order to introduce new products, together with new concepts, which led to cost-
effectiveness. One example was an innovative, multifunctional seat/recliner, which was made by utilizing a denim, a raw
material from another industry, which could be obtained at a low cost.
In 1980, together with the new furniture concepts being born at certain intervals, IKEA was looking to expand to further
markets, and did so through franchising. To ensure continuation and long term independence of IKEA, the founder created a
new ownership structure and organisation. The major portion of IKEA was donated to a foundation, while the right to
franchise the IKEA concept worldwide remained with the IKEA group of companies.
In the 1990s, the IKEA market expanded not only geographically, but in terms of target market. The company began to
design furniture that catered expressly to children. A website was launched to cater to the many markets that were now
open, and the childrens line was enhanced on consultation with experts on with experts to develop play areas, room
settings, and baby areas within the stores themselves. Kitchen-ware and kitchen areas were another concept developed in
this period.
IKEA also began participating in a number of forestry projects to ensure sustainability, by taking responsibility for developing
acceptable practices and policies in countries where IKEA works.
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Company Outline
IKEA is a world renowned furnishing company reputed for selling Scandinavian-style furniture and other home-based goods.
The company has 230 stores, with operations carried out in over 42 countries with well over 70 000 employees. The stores
themselves can host 410 million shoppers per year. It is a Swedish based company built on the idea of offering a wide range
of well-designed, functional home furnishing products such low prices, that a majority of people will be able to afford them.
The IKEA group is currently solely owned by the INGKA Foundation through a holding company, unlisted on any stock
exchange.
The vision at IKEA is to create a better everyday life for the many people("Ikea," 2011). The main business of IKEA supports
this vision, by the manufacture and selling of a wide range of home furnishing products at an affordable price. Since the
ethos of IKEA is to make good quality products at an affordable price, the company has succeeded in development of cost-
effective and innovative production methods. This has been the companys focus since its inception, and the company has
succeeded in doing so by making the maximum use out of raw materials, and adapting the products to meet peoples
needs.
Currently, in addition to the historical additions to the IKEA range, customers can now shop online. Other innovations include
the boards with patterns created on them directly, called print on board, in addition to a concept known as product
recovery concept where returned products are repaired instead of being thrown away where possible.
The majority of the operations occur within the retail business; while IKEA does purchase from external suppliers, in addition
the company produces its own products through their industrial group known as Swedwood.
Company Structure
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INGKAHolding B.V.
Range Industry Purchasing
Group support
Iunctions
Distribution &
wholesale
Retail
Expert
Iunctions
INGKAHolding B.V.
Range Industry Purchasing
Group support
Iunctions
Distribution &
wholesale
Retail
Expert
Iunctions
Inter IKEA
Systems
INGKA Foundation
Finance & Treasury
PR&Communications
Social&environment
Property /Legal aIIairs
Logistics /Risk management
Retail development
Human resources
IKEA IT
IKEA Food services
IKEA Retail equipment
IKEA Raw material
IKEA Catalogue services
Modul services
IKEA rail
Travel
IKEA oI Sweden Swedwood
Retail Europe
I/O model
The External Environment
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IKEA GROUP STORES WORLDWIDE In 2010, the IKEA Group
opened 12 new stores, in 7 countries. On 31st August 2010, the
IKEA Group had a total of 280 stores in 26 countries.
ANNUAL SALES FIGURES, BILLION EURO
FY10
CO-WORKERS
PER FUNCTION
Purchasing, distribution,
wholesale, range & other: 14,500
Retail: 96,500
Swedwood: 15,500
Swedspan: 500
CO-WORKERS
PER REGION
Asia & Australia: 8,000
North America: 15,500
Europe: 103,500
THE IKEA GROUP
countries -29 Trading Service Ofhces
127,000
CO-WORKERS IN 2010


12
3
12


48
192
The Industry Environment
Porters Five Forces
Threat of New Entrants
There are little or no entry barriers, but intensity of competition may scare offpotential entrants. The required initial
investment is not substantial and economies of scale can be used easily. To compete effectively with IKEA, the competitor
must invest a greater amount, develop long-standing relationships with clients, and select suitable and competitive locations
for outlets for which much patience and capital is required. It is relatively difcult to establish in major cities and gain the
reputation of IKEA, establishing a vast supply chain and creating a unique brand name. Due to less regulations, the threats of
new entrants are high, with no immediate threat because of the intensity of competition.
Bargaining power of suppliers
The bargaining power of suppliers is considerably low. IKEA has succeeded in managing and maintaining long and well-
established relationships with suppliers across the globe. IKEA has been recorded to have 1380 suppliers in as many as 54
countries, 21% ofwhich are established in China in 2008. IKEA also possesses their own manufacturing company,
Swedwood Manufacturer which manufactures its own designs. Therefore suppliers possess less bargaining power, and can
be compelled to meet the terms of IKEA rather than vice versa.
Bargaining power of buyers
There are a number of retailers with a direct price-war occurring, while there are many entities who are importing from China
involved in direct competition with IKEA. Consumers are faced with many choices and alternatives, and there is great
amount of bargaining power at present with the buyer, due to greater choice. The buyers themselves have a substantial
degree of inuence over IKEA's product line and direction; for example, as mentioned in the history, IKEA developed the
concept of at packaging at a buyers suggestion, making it convenient for the buyer. Due to escalating demand from
buyers, IKEA will continue expanding geographically, opening 50 stores in North America by 2010 (Caplan, 2006).
Threat of substitute products
No specic product can substitute the furniture, but IKEA needs be updated with the latest trends, to avoid losing their name
for style. Through simplicity of design and innovative technology, IKEA can follow any new style fairly well and rapidly and
move each the product into its stores. Ever since the inception of the concept of furniture, styles and trends in that sense
have undergone much change. Since the current trend is going-green, many rms are following this concept. However, the
demand for basic, functional furniture has remained relatively constant, therefore there is less threat of substitutes in the near
future.
Rivalry among competing rms
This is a highly competitive industry, characterized by other low priced furniture producers such as Galiform of England and
retailers such as Wal-Mart of the United States In addition to local competitors. Due to the competition worldwide, IKEA has
wisely attempted to compete by entering the China and Japan, markets which pose the largest competition(Caplan, 2006).
Many retailers are present, and a number of them import products from China selling at a low price signifying intense
competition.
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The competitive environment
Competitors of IKEA are mainly the local competitors, who copy the idea or counterfeit the goods of IKEA. In US, IKEA
would face competition from Pottery Barn, Sears, Minimalista. In UK competition for IKEA would come from Tesco, Next.
While in Sri Lanka, Damro would be the main competitor for IKEA.
Globally, the main competitor is Wal-Mart though prices are lower at IKEA. The competitors offer differentiation in terms of
styles and functions. Conrin has a low cost strategy; Cratel & Barrel offers a higher priced furniture in a box; Ethan Allen
targets a more exclusive market; Wal-Mart is classied as less stylish, general store must-have-items. IKEA has proved to be
more successful in delivering both high quality at a less price to the customers reecting on weak competitors.
Value Chain
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Source: Thetimes100.co.uk, 2010
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International Strategy
If a rm uses a strategy through which goods and services are sold outside its domestic market it is known as an
international strategy. Expanding into international markets can allow potential opportunities to the rm in question(Hitt,
Ireland & Hoskisson, 2010). Incentives are as follows:
1 Increased market size -According to Ansoffs growth matrix strategy, IKEA has taken Market development strategy,
trying to sell existing products to new markets. They are entering to new geographical markets with their Swedish
designed furniture.
2# Greater returns on major capital investments- On initial expansion, IKEA earned greater return from other countries
# than their home country. Therefore they explored different markets. Currently they have identied US, China and
# Russia as their main markets which generate better returns.
3 Economies of scale-this can be exploited by expanding into markets that contain homogeneous consumer tastes
and do not require much adaptation, by using standardized products all over the world. IKEAs main focus was to
produce elegant products and sell at low prices.(Suarez, 2006). By identifying commonalities in consumer buying
patterns, the standardized Swedish furniture was accepted by the Europe market too.
4 Scope for internationalisation and learning-expanding knowledge base by expanding into markets that are important
as a source of innovation in that specic industry, and the ability to access and develop resources and capabilities
through value adding activities. Growth in the target market segment would enable them to grow the size of the
market by catering to more people(IKEAs global marketing strategy, 2011).
5# Competitive advantages of location-differences in culture, specic economic factors, administration and geography
# can be made use of. After a time, competitors reengineer and nd out ways to imitate products. To protect the
# resources IKEA had they decided to enter new markets (mainly Russia) and also with the aim of earning better return.
6# Extend the product life cycle-Swedish market was saturated in 1960 and IKEA decided to expand its business
# formula elsewhere. Since Sweden is not a very large market, there is limited growth, leading to similar markets such
# as the Scandinavian countries Norway and Denmark (Introduction to global strategic management, 2006).
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Strategic Choice
There are four basic strategies in which to enter and compete in the international environment. The suitable strategy for a
company is based on the extent of pressure faced for cost reduction and local responsiveness.
International Business Level Strategy
The means of proting from global expansion are linked to the business level strategies of cost-leadership and differentiation.
The transfer of distinctive competencies to other areas is in fact the companies trying to realise greater gain from their
current competitive advantage. IKEA has moved to advanced economies such as Europe, USA, Australia and tried to gain
more advantage through their differentiation of products by adapting to the various markets(Hill, Jones & Galvin, 2004).
Multidomestic Strategy
In multidomestic strategy, companies try to achieve maximum local responsiveness. The key feature is that there is extensive
customization of product and marketing strategy to match the variation in markets. This has a high cost structure, and does
not leverage core competencies effectively(Hill, Jones & Galvin, 2004).
Global Strategy
Here companies try to increase protability through cost reductions. Production, marketing and other activities are
concentrated in a few locations, and there is no customization, to maintain economies of scale, since it raises cost, and
requires shorter position runs. IKEA initially began using a global strategy but after entering the USA market they had to
change to cater to their needs.
Transnational Strategy
Since competitive conditions in the market are so intense, some companies need to focus on both cost-leadership and
differentiation. This strategy is difcult to pursue, as it has conicting demands on the company. IKEA has succeeded in
following this strategy however, as shown below:
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The following diagram shows how IKEA has gained competitive advantage in numerous ways:
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Modes of entry
IKEA has adapted to many situations and many entry modes to during their multinational experiences.Refer to the appendix
for further details.
China
When IKEA rst entered into the mainland China, it set up a joint venture with a local partner, and opened its rst store in
Shanghai with its partner by renting land from government. This entry mode choice was made passively since a joint venture
was the sole way to operate business in China because at that time, and there were many restrictions. IKEA opened retail
stores in the regions that were allowed; Nonetheless, IKEA selected its partner and maintained full management control of
their partner (Jonsson, 2007). Since IKEA was heavily constrained by institutional pressures they couldnt make decision out
of the companys own interests.
Very obviously, for IKEAs rst entry, the institutional factor played a dominant role because of the coercive power from the
government. In a later stage, IKEA changed this entry mode as soon as new policies allowed foreign retailers to build wholly
owned stores. After China joined the WTO and the government allowed foreign retailers to establish wholly owned
subsidiaries, IKEA purchased the remaining shares from their partners and gained ownership of the store and expanded
further.
There were three reasons:

Ability to have wholly owned subsidiaries in China

Sufcient nancial resources to buy land from local government

Customer to know what a standardized IKEA really is(maintaining brand identity)

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USA
The company started off with wholly owned subsidiaries but with their globally standardized equipment. However as the
entry proved unsuccessful as the IEA failed to listen to USA markets preferences over furniture. There IKEA is currently giving
more decision making power with regard to design building in the USA markets subsidiaries.
Entry into USA was not as successful as entering into European counterparts. The root of most of these problems was the
companys not paying attention to local needs and preferences. US customers preferred large sets of furniture and
household items. For example, Swedish beds were ve inches narrower than those US customers were used to, IKEAs
kitchen cupboards were too narrow for the large dinner plates that were used in the US, IKEAs glasses were inadequate for
US consumers who generally add quantities of ice, therefore requiring larger versions, and IKEA chests of drawers were too
shallow for US consumers, who needed more room to store sweaters in them. In addition, IKEA Swedish-sized curtains did
not t American windows.
As a result of initial poor performance in the US market, IKEAs management realized that a standardized product strategy
should be exible to respond to demands, and has recently adopted a more balanced strategic focus (by giving priority to
global and domestic concerns). The current approach emphasises on global market coordination to reduce standardisation
of activities and acquire both economies of scale and scope. IKEA redesigned its strategy and adapted its products to the
US market. While overall its subsidiaries follow instructions from the corporate head ofce in Sweden, subsidiaries in the US
are given more autonomy, to respond effectively to the local business environment.
Conclusion
Therefore it is apparent that IKEA has managed to both capitalise on its cost leadership and ensure they meet local
demands through differentiation of products thus using transnational strategy. IKEA has chosen to mostly enter markets
through wholly-owned subsidiaries in order to maintain their brand image, although when compelled, other methods such as
joint ventures and franchising has been made use of. This strategic decision has enabled IKEA to maintain a competitive
advantage, and earn above average returns due to leadership in the market.
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References
IKEAs global marketing strategy (2011). IKEA internationalization. Retrieved on 15th August 2012 from: http://www.
123helpme.com/ikeas-global-marketing-strategy-view.asp?id=165535
Innovation Leaders (2011). Prole: IKEA. Retrieved on 20th August 2012 from: http://fp05-527.web.dircon.net/
ikea_company_prole.html
Introduction to global strategic management (2006). IKEA: case study. Retrieved on 20th August 2012 from: http://
www.oup.com/uk/orc/bin/9780199266159/mellahi_ch01.pdf
The IKEA way (2011). IKEA history. Retrieved on 20th August 2012 from: http://www.ikea.com/ms/en_US/about_ikea/
the_ikea_way/index.html
Suarez, F (2006). International Business Strategy IKEA . Solvay Business School http://www.actuarisk.be/les/IkeaSite.pdf
Ikea. (2011). Retrieved from http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/our_business_idea/index.html
History of ikea. (2010). Retrieved from http://www.ikea.com/ms/en_AA/about_ikea/the_ikea_way/history/index.html
Hill, C., Jones, G., & Galvin, P. (2004). Strategic management:an integrated approach. (5th ed.). Singapore:
Hitt, M., Ireland, R., & Hoskisson, R. (2012). Strategic management: Concepts and cases. (10thed.). Cengage learning.
Hitt, M., Ireland, R., & Hoskisson, R. (2010). Strategic management: Competitiveness, Globalisation concepts. (10th ed.).
Cengage learning.
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