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IKEA Invades America

IKEA Invades America

February 7, 2012
IKEA Invades America

ISSUES

IKEA is currently the worlds top furniture retailer, yet they remain far from being the leading

furniture retailer in the United States. IKEAs current niche position and targeting strategies are

unable to sustain the growth that they are looking for. In order to expand aggressively and open

50 stores by 2013, IKEA needs to target to a larger market and find ways to appeal to a broader

consumer base that may still be unfamiliar with Scandinavian design and IKEAs self-service

culture. This must be accomplished while allowing IKEA to retain their quintessential Scandinavian

roots. As Anders Dahlvig, the Global Production Head, puts it, We have to find a balance.

DECISION ALTERNATIVES

The following three decision alternatives target consumers segmented by existing shopping habits

(See Appendix A for Segmentation Analysis)

1. Target consumers who shop at high-end retailes. Drastically change the marketing mix to

position IKEA as a provider of traditionally designed furniture.

2. Target the entire USA market without changing IKEAs core products. Aggresively advertise and

promote IKEA and Scandinavian design to change existing consumer preferences.

3. Target all consumers who shop at low-end retailers while retaining IKEAs current positioning.

Tweak the product lineup to appeal to this new expanded target market. 1
Our decision criteria include:

Fit with company goals: IKEAs number one concern is to be able to expand and appeal to a

broader consumer base while retainining its Scandinavian roots and differentiating factors.

Potential profitability: The potential for IKEA to increase market share, grow, and increase sales.

Brand image: Ability to retain and strengthen its brand of self service, low price and good design.

Customer satisfaction/customer lifetime value: Long-term customer satisfaction and brand loyalty

Feasibility: The costs associated with implementing the solution.


IKEA Invades America

Industry Analysis

The US furniture retail industry is a potentially very profitable market for IKEA, with over $67

billion in sales in 2002. With a highly fragmented market, the industry is competitive and

consumers have high purchasing power: they can pick and choose from a large pool of retailers.

As of result, companies need to strongly differentiate and advertise themselves in order to attract

consumers, especially given the fact that furniture purchases tends to be infrequent due to their

costs. However, this also presents an opportunity: with the right positioning and differentiation, a

company can easily lure a customer away from established brands. The large difference between

low-end and high-end retailers, where consumers have to trade off between price and quality,

also provides an opportunity. IKEA is ideally positioned in the middle of the low-end and high-end

retailers (See Appendix B for Perceptual Map). With only 14 stores in USA, IKEA also has many

opportunities to expand into large cities such as New York City, Seattle, Detroit and more.

Company Analysis

IKEA is currently the worlds top furniture retailer with an extremely well-known and strong brand.

Their do-it-yourself culture that requires buyers to transport and assemble their own furniture is

both a strength and a weakness. IKEA can cut costs and pass the savings on to the customer, yet

most US consumers are used to a more traditional service experience, with sales consultants, free 2
delivery and set up service. Further weaknesses include the furnitures short life span, as many

high-end retailers highlight the longevity of their products. However, IKEA fills the gap between

low-end and high-end retailers by operating based on their strategy of low price with meaning.

They compete very effectively by utilizing their global supply chain network to cheaply produce

well-designed products that are marked 30% to 50 % below competitors prices. They also

provide value through an unique shopping experience: large bright and well-designed theme

park-like stores, play areas for children and in-store restaurants. IKEA has managed to create a

niche market for themselves in the USA, and they can capitalize on this to expand further.
IKEA Invades America

Evaluation of Alternatives

Alternative 1

This alternative requires IKEA to target consumers who currently shop at high-end retailers. Thus

the product line will be adjusted and tailored to consumers who prefer traditionally designed

furniture. IKEA will continue to provide their unique one-stop shopping experience while adding

to their sales force to accommodate the expectations of the market. IKEA may also consider

providing free shipping and installation of their furniture. Their pricing scheme will change and

increase to reflect their new target market and costs. IKEAs distribution strategy will remain the

same with large, freestanding retail stores. IKEA needs to advertise their redesigned products and

promote through social media, personal selling, ads in more high-end publications.

PROS:

- As the target is no longer a niche, this alternative will significantly increase the target market size

- Manageable and well-known market, with high potential margins and profits

CONS:

- High costs associated with R&D and completely new marketing strategy

- High marketing costs; it is difficult to change the perception of IKEA as a low-price retailer

- Deviates from IKEAs original Scandinavian design and brand, may alienate existing customers

- Ignores many of IKEAs critical success factors (See Appendix E for Critical Success Factors) 3
Alternative 2

With this alternative, IKEA will target the entire market of low- and high-income consumers by

promoting IKEAs unique approach towards customers. Customers are expected to be more than

just mere purchasers; transportation and assembly become their responsibility. However, this effort

is rewarded through extra value derived from significantly lower prices, and an inimitable positive

shopping experience. Promotion of this particular extra value is crucial for mass success IKEA

is not just the shop, it is a partner for life. Therefore, there is a need to design a more massive
IKEA Invades America

and long-term marketing campaign that addresses the broad public and explain IKEAs reasons

for unconventionality and change their views towards Scandinavian design. The message should

underline the benefit of customer involvement and persuade them to accept the difference.

PROS:

- Preserves brand image and is not in conflict with any of IKEAs original brand values

- Maintains competitive advantage of differentiation and its critical success factors

- Potentially significant profitability if entire market can be reached

CONS:

- High marketing campaign costs in order to cover the entire market

- Difficult to find proper message to promote with a risk of message rejection

- Highly difficult to change US consumer preferences for traditional design and service

Alternative 3

With this alternative, IKEA should target low- to middle-income consumers who currently shop at

low-end retailers. They are more likely to accept IKEAs current products, price, promotion, and

distribution strategy. IKEA would slightly tweak its product line and add to their style matrix, (ie.

an American style in addition to Scandinavian, Modern, Country and Young Swede). This will

appeal to the broader American market yet still retain IKEAs core Scandinavian design style. 4
IKEA should continue to promote aggressively to get Americans to take a more commitment-free

approach to furniture and expand to large cities with their traditional large store format.

PROS:

- IKEAs brand image will evolve and adapt slightly to the US market, yet still remain Scandinavian

- A commitment-free approach to furniture would encourage consumers to purchase more from

IKEA, generating high customer lifetime value

- Potential profitability is high as the target market, the low-income consumer, is extremely large

- Good fit with the companys goals to expand and open more stores, appeal to a braoder
IKEA Invades America

consumer base but still retain its critical success factors

- Feasible to invest in R&D, tweak product line, expand and increase advertising

CONS:

- Will not appeal to Americans who prefer the traditional furniture shopping experience

- Targetting low- to middle-income consumers provides lower margins than high-income consumers

- Adding a product line will incur large costs: increased inventory and design costs

Recommendation

It is recommended that IKEA choose Alternative 3. This addresses all of IKEAs issues, and is

the best method to lead the company to be the leading furniture retailer in the United States.

The low- to middle-income consumer is a large segment and by targeting them, IKEA would be

able to support their expansion goals. According to our Segmentation Analysis, these consumers

are most likely to want to try new things and are looking for low-price, functional furniture with

decent design. IKEA already has all the ingredients in place: well-designed furniture, low prices,

and a superior large store experience. Influencing consumer preferences for Scandinavian

design is difficult, but IKEA has the budget to advertise to its consumers, and this will benefit in

the long-run. Adding a new American-style product line will also help ease new consumers into

shopping at IKEA while allowing IKEA to slowly adapt to the US market and retain its core brand 5
image and differentiating factors. We believe that the benefits of this decision vastly outweigh

the disadvantages of IKEA not appealing to those who prefer a more service-oriented furniture

shopping experience.

To implement this strategy, IKEA should focus on market research to see which major cities they

should expand to that will best serve the target market of low- to middle-income consumers. As

they consist of the working class and students, ideal locations would be near schools, suburban

areas and business districts. IKEA should also focus on researching and developing a new

product line that would appeal to Americans, yet still retain their distinctive Scandinavian style.
IKEA Invades America

Appendices
Appendix A - Segmentation Analysis
Consumers Low-end Retailers High-end Retailers
who shop at: Students Families Singles Families Professionals
Geographic Urban - live in Urban and Urban - live in Suburban Urban - live in
cities, close to suburban - live cities. areas. cities. Down-
schools. in cities. town core
Demographic Low-income, Low to middle- Low-income, Middle to High-income
single. income. living by them- high-income professionals,
self. earners, dual age 25-35,
earner house- career-focused
holds. professional.
Psychographic Willing to Fairly Willing to Fairly Willing to
change and traditional. change and traditional. change and
try new try new try new
things. things. things.
Product Looking for Looking for Looking for Looking for Looking for
Related convenience low-priced, low prices style, design, style, design,
and low durable and and conve- and durable and conve-
prices. functional nience. furniture. nience.
furniture.

Appendix B - Perceptual Map


High Quality
High-end retailers

Low Price High Price


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Low-end retailers Low Quality

Appendix C - Porters 5 Forces Analysis


Substitutes: Low Threat. There is little threat outside that of resellers (craigslist, antique stores)
New entrants: Low/Medium Threat. There are high costs of setting up production facilities.
Independent furniture makers can differentiate but may be too small to create a large impact.
IKEA Invades America

Supplier: Low Threat. Globalization means that large retailers can obtain supplies almost
anywhere, especially in developing countries where prices and labour is significantly cheaper
Competition: Medium/High threat. The market is highly fragmented, with many companies all
vying for market share. There is a wide dichotomy between low-end retailers who compete on
price and thus have low quality stores, and high-end retailers who compete with selection and
high quality service.
Buyer: Medium/High threat. Buyers have almost unlimited options, they can easily change
their minds and switch to better companies, especially since furniture is a big purchase. Thus
consumers will seek out nformation and shop for the best quality products for the cheapest prices.

Appendix D - CDSTEP Analysis


Culture: Interior design is a very personal and unique to the customer. IKEA creates pieces that
are simple and covers nearly all forms of furniture. IKEAs corporate culture is considered waste a
deadly sin at IKEA, and employees are on a first name basis, despite seniority or position.
Demographic: The typical IKEA shopper is a person who travels abroad, likes taking risks, likes
fine food and wine, has a frequent-flier plan, and is an early adopter of consumer technologies.
Social: US consumers are unwilling to change and replace their furniture. Yet many have
constantly changing tastes to keep up with changing design trends.
Technology: IKEA uses its flat packaging technology as a competitive advantage to cut costs.
Economic: During economic downturns, cheaper retailers tend to flourish more.
Political/Legal: IKEA is based in Sweden.

Appendix E - IKEAs Critical Success Factors


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- Superior shopping environment: large stores with many ammenities to provide a one-
stop shop experience. Stores include restaurants, children play rooms, and supplies to
help with furniture shopping (rulers, pencils, catalogs). Large and open spaces with
many model furniture encourages customers to spend time comfortably browsing.
- Uncomplicated design: Customers can easily mix and match simple furniture pieces.
- Strong purchasing power: IKEA globally sources their supplies and suppliers compete to
provide the lowest costs possible.
- Low prices: Their distribution superiority with flat packaging significantly lowers shipping
costs and their strong purchasing power allows IKEA to price lower than competition.