“At IKEA our vision is to create a better everyday life for the many people. Our business idea supports this vision by 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.”
Introduction and Background
IKEA was founded in 1943 in Sweden by Ingvar Kamprad.
The word IKEA was an acronym of his name and address: “Ingvar Kamprad” and “Elmtaryd, Agunnaryd” the name of his farm and the name of the village it was located within. Kamprad’s new company was essentially a one-man effort, and sold fish, vegetable seeds, and magazines to customers in his region.
Then in 1950, Kamprad set the foundation for the future direction of IKEA by adding furniture and home furnishings to the mail-order line.
Stores were opened in neighboring countries Norway and Denmark before the company opened in Switzerland (1973) and Germany (1974). After further expansion in Europe the first store was opened in The United States (Philadelphia in 1985).
In December 2012, IKEA was operating in 41 countries, as a global destination store for home furnishing, appliances, ready-to-assemble furniture, home accessories and kitchen products. It is the world’s largest furniture retailer with more than 301 stores and 30 franchised units. The largest market for the company is Germany with 44 stores followed by the United States with 37 stores. Sales volume of the privately held company is estimated at over $24 Billion with $3 Billion coming from the US according to recent reports. According to the company 533 million people visited its stores last year. IKEA’s products are exclusive to IKEA and typically reflect its Swedish heritage with modern architectural design.
The world’s five largest IKEA stores in December 2012 were:
- 552,000 square feet in Stockholm, Sweden.
- 494,000 square feet in Shanghai, China.
- 470,000 square feet in Shenyang, China.
- 457,000 square feet in Tianjin, China.
- 450,000 square feet in Berlin, Germany.
The Company offers armchairs, bath suites, bean bags, bed linens, beds and bedroom suites, bookcases, boxes, CD storage, ceiling lamps, children’s furniture, clocks, coffee tables, cookware, cord management, desk accessories, and dining tables and chairs. It also provides dinnerware, entertainment units, floor lamps, frames, instruments for children, kitchen organizers, kitchen units, leather sofas, lighting, mattresses, mirrors, office chairs and suites, posters, rugs, sofas and more.
This report includes the Strategic Management analysis for IKEA Company, by identifying and analyzing:
- The External Environment using tools like “PESTEL” and “Five Porters” to discover the Company’s threats and opportunities
- The Internal Environment using “VRIO” analysis tool to evaluate the Company’s resources and thus the
A PESTEL Analysis
A PESTEL analysis is a framework or tool used by marketers to analyze and monitor the macro-environmental (external marketing environment) factors that have an impact on an organization. The result of which is used to identify threats and weaknesses.
As one of the largest furniture retailer Companies in the World, IKEA’s success is linked to its ability to identify the external Political, Economic, Socio-Cultural, Technological, Environmental & Legal factors which can influence on its activities.
IKEA is operating in almost 41 countries, political forces in every country can affect its business in this country from the Supply Chain Process to the Sales, these political forces include:
a. Governments bureaucracy
Actually, IKEA faced that problem in in Russia, as it has waited for years to receive the enabling set of documents to open its branch in the city of Samara which led IKEA in 2009 to freeze its new investment in Russia.
b. Stability of Political Systems
IKEA ‘s most of business is in Europe and United Sates of America, where the developed political systems are stable which is providing a comfort environment for investors, on the other hand IKEA is not working in the middle of Africa where some nations are not politically stable.
c. Government policies on taxation, tariffs and trade restrictions
Different tax rates in different countries will affect for sure any multinational country.
In 2016, IKEA has been accused of avoiding more than ˆ1 billion in taxes over the past six years by Ministers of the European Parliament and it has been published that “Ikea’s founder, Ingvar Kamprad, created the complex tax structure in the 1980s to escape Sweden’s high tax regime.”
Any change in tariffs and trade policies will affect the company’s business and profits as well specially that most of IKEA furniture are manufactured abroad and then imported to different countries.
When IKEA opened in China 1998, it couldn’t set at the appropriate price for its products to both company and consumer because it has been burdened with heavy taxes on imported products because China exports almost everything. Today approximately 22% of IKEA range is produced in China.
a. Countries growth rates
It would be attractive for IKEA to choose countries with high growth rates to open or even to expand in, these high growth rates which will impact on the countries employees’ wages and accordingly on IKEA’s sales.
b. Economic recession
The World economy conditions decide what any business will earn because it controls the people purchasing power although even if IKEA manages its products prices in a good way. It might be the reason why IKEA entered the Chinese and Indian Market which were least affected by global recession
c. Exchange rates
Unstable exchange rates will have an impact on the business activities, specially as mentioned before that most of IKEA furniture are manufactured abroad, so these unstable exchange rates between EUR and USD and other major currencies will affect IKEA revenues.
d. Interest rates
The interest rate is a very common risk to companies having any interest-bearing asset as loans, if it is variable that would be an economic risk for any business.
e. Personal taxes rates, level of unemployment and Inflation rates
IKEA revenues will be directly affected if the personal taxes on wages in the country, the level of unemployment or the inflation rates are high.
a. Different tastes
People all over the World might have different tastes which IKEA is obliged to deal with.
When the Company entered the United States in 1990, the executives were confused by the number of vases they were selling before knowing from the workers of the Shop that Americans were using the vases to drink from not to put flowers in.
b. Different thinking
Again, people might have different thinking as well and company is following the best procedures to gain profits.
In November 2013, the French authorities put IKEA and two of its executives in France under investigation for spying allegations because they got police records of their employees to check their pasts, maybe they hired private detectives.
c. Different Cultures
Maybe what is acceptable in Sweden is not acceptable in another place, in Saudi Arabia, IKEA faced criticism over its literature by airbrushing women out of its Saudi Arabian catalogue.
d. Consumers ages
IKEA’s Consumer ages are between the 20s and 30s, so IKEA must put that its consideration while preparing designs and manufacturing its products and must find a way to attract the different ages to maximize its revenues.
a. Adoption of technological changes
Technological changes impact the business performance, effectiveness of the company and its employees. IKEA has up to day website including catalogues, checking of items before traveling to shops, ordering online and contacting with Customer services, IKEA should maintain adopting these technological changes.
b. Increasing Connectivity worldwide
The increasing number of Internet users “A new report from a United Nations agency says that 47 percent of the world’s people now use the Internet” might help Companies as IKEA to grow more, simply any person connected to the internet can enter to IKEA website and checking its products and even makes an order.
a. Environmental laws regarding natural resources as wood
As a giant furniture retailer, IKEA is depending on wood in its business, so it must follow the environmental laws regarding the wood. All IKEA’s wood is sourced in compliance with the IWAY Forestry Standard, which bans wood from sources involved in forest-related conflicts or illegal harvests.
b. Using Renewable energy
In order to have a positive impact on the environment, and be part of the solution to climate change, by 2020 IKEA is going to produce as much renewable energy as it consumes using renewable sources (100%).
IKEA uses recycled materials whenever possible, wood, plastic, paper, and metal, to protect the environment.
Health and safety, equal opportunities, advertisements standards, employment laws, consumer rights and laws, tax laws. IKEA must ensure that the company’s activities and the operations are not violating rules and regulations framed by the governments of the different countries.
IKEA had a problem with workers in India who wanted to work overtime hours contradicting with its internal daily limits (8 hours).
Porter’s Five Forces Analysis
Porter’s Five Forces is a model that identifies and analyzes five competitive forces that shape every industry, and helps determine an industry’s weaknesses and strengths.
Threat of Entry
The threat of entering the market and stealing from IKEA share
Is small to moderate, there are relatively low barriers to enter the Furniture market but the new entrants will not be able to have the same economies of scales, cost advantages and products differentiation which IKEA has reached at least for the initial operating period.
If a new player entered the market it will take time, efforts and investment to compete Fiercely with IKEA.
So, the threat from a new entrant is quiet low.
Threat of Rivalry
The competition in the furniture industry is moderate, although IKEA has a lot of competitors as super markets and brand stores which are selling furniture at relatively low price offering discounts like IKEA, some of those are Wal-Mart Stores Inc, Wayfair, Sears, Tesco and Pepperfry (India)
Even huge online retailers such as Amazon, EBay and Alibaba , but still IKEA is the giant leader in discounts and low cost items.
Threat of Substitutes
The threat of substitutes of IKEA is low for the following reasons:
a. IKEA’s image, IKEA had built a strong brand image accompanied by trust between consumers and itself.
b. The wide range of variety in one place which is hard for competitors to offer.
c. The affordable prices which is offering.
d. Customer services system.
Threat of Powerful Suppliers
The threat of Powerful Suppliers is low, IKEA can easily switch from one supplier to another.
IKEA is working with 1380 suppliers in 54 countries, it developed its own rules to be followed by suppliers, the company developed a code of conduct between itself and the suppliers called “IWAY” which includes:
a. Prevention of child labour and support for young workers
b. Protection against forced or bonded labour
c. Right to non-discrimination
d. Right to freedom of association
e. At least minimum wages and overtime compensation
f. A safe and healthy work environment, preventing pollution to air, ground and water and work to reduce energy consumption.
Accordingly, suppliers are responsible to communicate that code of conduct to their co-workers and sub-suppliers to ensure the implementation of IKEA’s required measures during operations.
Moreover, IKEA conducts around 1,000 audits each year on suppliers to ensure the implementation of such measures.
Threat of Powerful Buyers
After all the consumer has a lot options and varieties regarding the furniture market, so the threat of powerful buyers is moderate in the case of IKEA, the factors which moderate such threat are:
a. IKEA’s low prices
b. IKEA’s good quality
c. IKEA’s marketing strategy
d. IKEA’s customer service
VRIO Analysis is an analytical technique brilliant for the evaluation of the company’s resources and thus the competitive advantage, which includes the analysis of the value, rarity, cost to imitate and the organization of the firm’s resources.
Yes, resources of IKEA are valuable, IKEA’s resources and capabilities allow to respond to external threats and opportunities by:
a. differentiation from competitors
b. innovation of business model and value chain which helps the firm to produce new designs.
IKEA had succeeded to create a nice atmosphere in its stores and making the workers enjoy the work like if it was “a family outing”. None of its competitors could make such easy processes.
Simply, IKEA had created a rare combination of:
a. low prices
b. good quality
c. innovative modern designs
d. a nice shopping experience.
Cost to imitate
It is hard to imitate or re-implement IKEA’s model in the short term, IKEA will always be the leader and the competitors behind due to its long learning curve and experience. Other competitors who want to imitate the company’s model should have the investment, efforts, time and the most important factor which is the management.
Since IKEA is in the furniture market for a longtime with a strong presence in many countries, so it has:
a. the needed experience and know-how,
b. the needed investment
to exploit its resources and capabilities in the best way.
IKEA succeeded to use its capabilities and resources to enter countries with different cultures and tastes such as China, India, Russia and Saudi Arabia.