IKEA Case Study

Sharleen Suwaris-SUSND11

Sharleen Suwaris

MAN3503-Strategic

Management

Executive SummaryThe 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 IKEA’s 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 efficiently 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

Introduction HistoryIKEA 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 first 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 first 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 “flat-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 first IKEA store outside of Sweden was established in Norway. From this point on, IKEA began to spread like a

wildfire, first 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 1990’s, 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 children’s 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.

IKEA Case Study 4

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 company’s 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 people’s

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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!! Expert functions such as IT, food services, retail equipment etc operates under economiesof scale and is supportive to the basic operations

!! IKEA of Sweden AB is responsible for the range - design, development etc!! Inter IKEA systems B.V (The Netherlands) owns the IKEA concept and trademark which

is bought by the retail operations but is also sold to outside operators on a franchisingbasis

!! The furniture is purchased through purchasing operations (trading service offices) in 33countries with 1800 suppliers in 55 countries.

!! The distribution operations covers 25 regional distribution centres in 14 countriessupplying goods to the stores

!! The retail operations are geographically organised with a specific organisation for RetailEurope

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From the start, in the beginning of the 1950th , the company expanded in a moderate pace upuntil the beginning of the 80th . From an annual turnover of 1, 2 billion Euro in 1984 there hasbeen a rapid development to 11 billion Euro in 2002. The biggest expansion has been in thelate 90th . The first IKEA store opened in Sweden 1958, outside Scandinavia the first storeopened in 1973 (Switzerland). In 1985 the first establishment in the US were made, 1998 inChina and 2000 in Russia.

World wide the picture looks like the following with regard to different regional areas:

Europe North America Asia/AustraliaTurnover per region 80% 17% 3%Purchasing per region 66% 4% 30%Co-workers per region 59000 9000 2000

The IKEA group is very much built on the joint concept described in the business idea and bysupplying the same kind of products world wide built on the design of IKEA of Sweden. Alsothe stores are laid out in the same way – very much due to the fact that the IKEA concept isone of effective distribution (“flat packages”) as well as design and cost-effective material and

I/O model

The External Environment

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23.1

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21.2 21.4

1999

2005

2006

2007

2008

2009

2010

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 EUROSales of goods, excl. rental income

IKEA at a glance FY10

CO-WORKERS PER FUNCTIONPurchasing, distribution, wholesale, range & other: 14,500 Retail: 96,500 Swedwood: 15,500 Swedspan: 500

CO-WORKERS PER REGIONAsia & Australia: 8,000 North America: 15,500 Europe: 103,500

TOTAL SALES FY10: 23.1 BILLON EUROSales increased 7.7% FY10 compared to FY09.

IKEA FOOD SERVICES TURNOVER FY10Turnover for IKEA Food was 1.1 billion EURO.

THE IKEA GROUPThe IKEA Group had operations in 41

in 25 countries and 27 Distribution Centres and 11 Customer Distribution Centres in 16 countries.

INDUSTRIAL GROUPSSwedwood, an industrial supplier within the IKEA Group, had 15,500 co-workers and 41 production units in 9 countries. Swedspan, an industrial supplier within the IKEA Group, had 500 co-workers and 5 production units in 5 countries.

SUPPLIERS IN 2010IKEA had 1,074 suppliers in 55 countries.

PRODUCTS IN THE RANGEThe IKEA range consisted of approximately 9,500 products.

IKEA GROUP STORE VISITORS IN FY10The IKEA Group stores had 626 million visitors.

ESTIMATED VISITS TO IKEA WEBSITES DURING 2010IKEA websites had 712 million visits.

PRINTED CATALOGUES, LANGUAGES & EDITIONSThe IKEA catalogue was printed in more than 197 million copies in 29 languages and 61 editions.

127,000CO-WORKERS IN 2010

SALES PER REGION, %

Asia & Australia: 6% North America: 15% Europe: 79%

PURCHASING PER REGION, %

North America: 4% Asia: 34% Europe: 62%

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192

IKEA Sustainability Report 2010 3

The Industry Environment

Porter’s Five Forces

Threat of New Entrants

There are little or no entry barriers, but intensity of competition may scare off potential 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 difficult 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% of which 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 influence over IKEA's product line and direction; for example, as mentioned in the history, IKEA developed the

concept of “flat packaging” at a buyer’s 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 specific 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 firms 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 firms

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.

IKEA Case Study 7

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 classified 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 reflecting on weak competitors.

Value Chain

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Source: Thetimes100.co.uk, 2010

IKEA Case Study 9

International StrategyIf a firm 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 firm in question(Hitt,

Ireland & Hoskisson, 2010). Incentives are as follows:

1 Increased market size -According to Ansoff’s 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 identified 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. IKEA’s 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 specific 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(IKEA’s global marketing strategy, 2011).

5 Competitive advantages of location-differences in culture, specific economic factors, administration and geography

can be made use of. After a time, competitors reengineer and find 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).

IKEA Case Study 10

Strategic ChoiceThere 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 StrategyThe means of profiting 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 StrategyIn 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 StrategyHere companies try to increase profitability 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 StrategySince competitive conditions in the market are so intense, some companies need to focus on both cost-leadership and

differentiation. This strategy is difficult to pursue, as it has conflicting demands on the company. IKEA has succeeded in

following this strategy however, as shown below:

IKEA Case Study 11

The following diagram shows how IKEA has gained competitive advantage in numerous ways:

IKEA Case Study 12

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.

ChinaWhen IKEA first entered into the mainland China, it set up a joint venture with a local partner, and opened its first 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 couldn’t make decision out

of the company’s own interests.

Very obviously, for IKEA’s first 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

• Sufficient financial resources to buy land from local government

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

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USAThe 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

company’s not paying attention to local needs and preferences. US customers preferred large sets of furniture and

household items. For example, Swedish beds were five inches narrower than those US customers were used to, IKEA’s

kitchen cupboards were too narrow for the large dinner plates that were used in the US, IKEA’s 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 fit American windows.

As a result of initial poor performance in the US market, IKEA’s management realized that a standardized product strategy

should be flexible 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 office in Sweden, subsidiaries in the US

are given more autonomy, to respond effectively to the local business environment.

ConclusionTherefore 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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ReferencesIKEA’s 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). Profile: IKEA. Retrieved on 20th August 2012 from: http://fp05-527.web.dircon.net/

ikea_company_profile.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/files/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.

IKEA Case Study 15