Executive Summary

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.

Using the current socio-political-economic outlook, I will examine Ikea’s external

general and industry environments, internal analysis of the company as well as
provide an assessment of the performance of the company in terms of the
company in terms of efficiency, effectiveness and returns to investors.

2.1 External general and industry environment

2.1 Political Factors
Increasing globalization and protectionism, presents a challenge as well as an
opportunity to IKEA. The challenge will be to compete against unknown forces
and to source the best quality/financially viable products from world over. IKEA
can enter the markets of emerging companies through joint ventures or
partnerships to explore these new markets. At the same time, however, the
company has to be wary of protectionist policies of many host countries it
operates in since there is a real risk that countries may impose high tariffs on
goods imported in an attempt to spur domestic production.

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.

2.3 Social Factors

As Ikea forays into the lesser tap markets of China and India, social factors may
also come into play. Asian societies are generally more savers than spenders
and in such economic certainty, Asian consumers may be unwilling to spend on
new furniture, preferring to save for a rainy day. At the same time, the more
affluent consumers who are able to spend may be unwilling to buy products from
Ikea which has a reputation of requiring self-assembly.

2.4 Technological Factors

RFID (Radio Frequency Identification Device) technology can be used for
significant benefits to the supply chain of IKEA. If adopted, this technology will
lead to less inventory for the supermarket firms resulting in lower cost for the
company which could translate into cheaper prices.
3 Analysis of Industry
Using the Porter’s five forces model, I will provide an analysis of the industry in
which IKEA operates in.

3.1 INTERNAL RIVALRY/COMPETITORS

The organization operates in a highly competitive industry, characterized by
other low priced furniture producers which are mostly small family-run
businesses producing low-cost characterized by designs that were both
expensive and focused on exclusivity, which translates to small-scale production
for the local market. On the other hand, a few large retailers such as Nova,
Courts and Furniture mall also produce affordable products and enjoying
economies of scales to compete effectively. Thus, it would seem that competition
among rivals is intense with Ikea facing competition from both ends of the
spectrum. Internally, the organization, according to some accounts, has seen
differences of opinion regarding product offerings and positioning. Due to the
intense competition worldwide, IKEA has wisely attempted to compete by
entering the markets which typically pose the largest competition, such as China
and Japan.

3.2 Buyers and Suppliers’ Bargaining Power

It is true to see that consumers pose a credible threat of backward integration to
retailers however in order to compete effectively against the backdrop retailers as
a result seek different ways of improving performance by adopting strategic
schemes of work based on relationship marketing which aim to build greater
customer loyalty and long-term relationships with suppliers. This explains Ikea’s
strategy in the integration process between suppliers, retailers and customers.
Ikea integrates backwards by producing and designing its furniture in its own
factories and this benefits customers as products are priced lower.

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.

3.4 Threat of Substitutes

The position of substitute products is a matter of searching for other products that
can perform the same function as the product of the industry or player in the
industry. While furniture generally cannot be substituted for other products by the
majority of people the nature of the organisation supplying them and the manner
in which products or services can be supplied have become highly substitutable
with technological developments. Based on this, the emergence of e-shopping
methods is and will continuously shape traditional furniture retailer’s competitive
positions in the market. E-shopping for furniture may also be more feasible
compared to say clothing, since consumers would not need to try on the furniture
to see if they fit and computer imaging could allow the creation of virtual rooms to
assess the suitability of purchasing the products. However such online business
has as yet remain underutilised and such substitutes have yet become part of
their competitive strategies.

4.5 Potential Entrants

There are several furniture retailers in terms of department stores such as Nova,
Courts and other high end retailers like Lorenzo. It is obvious that the decreasing
level of customer loyalty has resulted in higher degrees of competition while
threats have also come from new entrants to this industry. Capital investment
required in the furniture can be rather high as shop space needs to be rented,
factories need to be built and designs need to be sourced before the entrant
could begin selling the products. Furthermore, the new entrant would need to
capture a certain market share before it could reap the necessary economies of
scales to allow it to compete with rival firms. The difficulty of securing suitable
distribution channels for potential new entrants may also create barriers to entry
since furniture tend to be bulky products and supermarket chains may be
unwilling to distribute such furniture, especially in prime locations. The furniture
industry enjoys fairly high product differentiation since established retailers enjoy
a degree of brand name recognition and customer loyalty, making it tougher for
new entrants to enter. In general there are various forms of new entrants for
established furniture retailers and some companies, notably the small family
owned businesses, have exited the industry due to decreasing profit margins and
increased competition. It is fair to say that branding strategy plays a critical role in
maintaining long term customer bases which itself reflects the increasing power
of customers.

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.

5 Review of Ikea’s strategies and options

Given its business model and environmental factors, Ikea has several options to
ensure that its growth continues even in such gloomy economic climate. One of
the steps it could take is to focus on its core business, producing low-cost
designs to cater to the average consumers who have less discretionary spending
powers. At the same time, IKEA could also invest in research and development
to improve the designs or lower production cost through technological
breakthroughs.

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.

IKEA also benefits from economies of scale and healthy supplier-firm

relationships. IKEA could enter into long-term contracts, provide leased
equipment and technical support in exchange for exclusive, low-cost supplies
from suppliers. For new markets in India and China, IKEA should retain its price-
image to maintain the brand’s positioning of providing low cost quality products.
Product differentiation exists in the value-added dimension since IKEA’s
consumers are treated as ‘prosumers’ with most of its products requiring
assembly after purchase. Although assistance in this aspect is limited, IKEA
offers options for choosing, transporting and assembling furniture.
While this is well accepted in areas where IKEA now operates, it may be a point
of consideration when entering new markets. Should IKEA encounter a market
where DIY is not favored, IKEA may include the cost of the service to the
product’s price.

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.

To capitalise on the use of information technology, IKEA could also persuade

customers to shop online. This reduces the strain on resources especially during
weekends. Free delivery could be arranged to entice shoppers to shop online
and since IKEA’s catalogue is comprehensive, customers should find it easy to
do so.
7 Assessment of the usefulness of strategic management models
The various models used are useful for providing a snapshot of the environment
the company operates in.

The PESTEL framework allows us to analyse the firm’s macro-environment,

useful as there are many factors in the macro-environment that will effect the
decisions of the managers of any organisation. By using the PESTEL framework
we can analyse the many different factors in a firm's macro environment.
However, managers need to do is to think about which factors are most likely to
change and which ones will have the greatest impact on them. To apply this
framework properly, one would need to consider the level at which it is applied,
whether to consider IKEA’s PESTEL locally, regionally or even globally.

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.

Each of these three models is of limited usefulness in itself. For example, to

determine the opportunities and threats facing the company, we use models like
the PESTEL model to analyse the macro factors to identify the most important
drivers for change, that might have serious impact on the organization and 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.