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UNIVERSITY OF Hertfordshire

MASTER OF BUSINESS ADMINISTRATION

COURSE CODE: XXXXXX

TITLE OF ASSIGNMENT

Strategic Challenges: A case of IKEA PLC

Author's initials and surname

J. Law

Students Registration Number

XXXXXXXX

Month and year of submissionJANUARY 2009

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Table of Contents

1. INTRODUCTION....................................................................................32. PORTERS 5 ANALYSIS...........................................................................3

2.1 POTENTIAL THREAT OF NEW ENTRANTS.........................................32.2 BARGAINING POWER OF BUYERS ...................................................42.3 BARGAINING POWER OF SUPPLIERS................................................42.4 THREAT OF SUBSTITUTE PRODUCTS...............................................52.5 INDUSTRY COMPETITORS................................................................6

3. PESTLE ANALYSIS.................................................................................63.1 Political............................................................................................6

3.1.1 Local Capacity Sourcing & Risk Reduction Strategies...............63.2 Economic Factors............................................................................7

3.2.1 Adapted Place & Price Strategies..............................................73.3 Socio-Cultural..................................................................................7

3.3.1 Operational & Supporting Strategies........................................73.4 Technological..................................................................................8

3.4.1 Harmonised Regulations & Global Supply Chain.......................83.5 Legal Factors...................................................................................9

3.5.1 Warranty & labour laws............................................................93.6 Environmental Factors....................................................................9

3.6.1 Corporate responsibility & Requirements.................................94. SWOT ANALYSIS.................................................................................105. 7s Model............................................................................................11

5.1 Strategy........................................................................................115.2 Systems........................................................................................125.3 Structure.......................................................................................125.4 Style..............................................................................................135.5 Staff...............................................................................................145.6 Skills..............................................................................................145.7 Shared Goals.................................................................................15

6. Recommendations.............................................................................157. Conclusion..........................................................................................158. Reference & Bibliography...................................................................16

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Assignment Overview

1. INTRODUCTION

Ingvar Kamprad founded IKEA in 1943 in Sweden and from humblebeginnings as a retail distributor the company has expanded globally tobecome one of the worlds most largest and famous retailers of homefurniture with operations spanning forty four countries whilst maintaininga 39% share lead, Bartlett et al (1996). By sticking with its corestandardized strategy for all its products worldwide and working closelytogether with manufacturers and subcontractors in countries with verycheap labour such as Poland, China and Russia, Ikeas is able to utilizetheir skills and expertise to produce high quality standardised designscoupled with huge differences in the cost of labour, raw material and

capital.

In this report I would analyse the current strategic and competitiveposition of IKEA through utilizing Porters five forces, PESTLE, SWOT, andthe 7 S models to examine the current economic situation and analysepossible outcomes and recommendations for the future

2. PORTERS 5 ANALYSIS

2.1 POTENTIAL THREAT OF NEW ENTRANTS

The type of barrier in an industry competition can be a major factor whichhinders new entrants to the business of joining the industry, Kotler et al(2001). The higher the quality of barriers erected by an industrial leader,the less likely it is for new entrants to come in and try to compete, as thiswill determine the level of competitive pressure that exists in the industry,Keri (2001). In the case of IKEA its decision to stick with very visiblesuburban outlets which is very much accessible from the major high andmotorways is a huge barrier for potential entrants, Cowlett (2007). Eachoutlet is characterized with a massive 300,000 square-foot which sits on amass of allotments up to six times that of its competitors. With thisstrategy, it would be virtually impossible for new entrants to compete,Edvardsson et al (2006), Cowlett (2007). In addition, its differential accessto cost productive inputs and low-cost position provide substantial entrybarriers in terms of scale economies and cost advantages. By workingclosely together with manufacturers and subcontractors in Poland, Chinaand Russia, Ikeas is able to utilize their skills and expertise to producehigh quality standardised designs coupled with huge differences in thecost of labour, raw material and capital. IKEA is thus able to differentiateitself based on its cost advantage as it is able to supply identical products

with good quality at low costs on a massive scale. The new company must

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possess either all this or more to have an edge over IKEA, Edvardsson etal (2002).

2.2 BARGAINING POWER OF BUYERS

Grant (2008) states that if the numbers of buyers are high in an industrythis increases the power of a firm within that industry and consequentlythe competitive pressure is reduced. On the contrary, if a firm is able totrade with only few buyers within an industry, her competitors willstruggle to obtain these valuable customers as each customer representsan important share of the total market shares in the industry, Keri (2001).With respect to IKEA, it embarked on a switching cost strategy whichattracts customers by utilizing in its stores a self-service model based onclear, in-store displays and ready-to-assemble furniture to fit itspositioning, Edvardsson et al (2006). In huge stores, IKEA displays every

product it sells in room-like settings, so customers dont need a decoratorto help them imagine how to put the pieces together [34]. Adjacent to thefurnished showrooms is a warehouse section with the products in boxeson pallets rather than having to wait for weeks for delivery compared toits competitors, Edvardsson et al (2006).

2.3 BARGAINING POWER OF SUPPLIERS

The more the suppliers, the higher the power of the firm within anindustry and the lower the competitive pressure, Kotler et al (2001).

Conversely, there will be more competitive pressure in an industry withfew suppliers. In reference to IKEA, its low cost strategy provides adefence against powerful suppliers by providing more flexibility to copewith input cost increases, Cowlett (2007). The availability of cheapsources of labour in emerging economies has led to the emergence ofoutsourcing companies who are generating high profits and in that turnthey can invest in high qualitative machines so that they are able toproduce qualitative products at low cost [34, 35], Grant (2008). Thecompetition amongst these outsourcing companies suggests that bigforeign companies such as IKEA would have the capacity to source from a

multitude of sources at the cheapest price possible. When faced withsubstantial choices among the suppliers of labour, insistence on lowerlabour price and imposition of their designs of products by IKEA would bemet with little opposition, Grant (2008).

Determinants of supplier power

1. Differentiation of inputs, Keri (2001).2. Switching costs of suppliers and firms in the industry, Keri (2001).3. Presence of substitute inputs, Keri (2001).

4. Supplier concentration, Keri (2001).5. Cost relative to total purchases in the industry, Keri (2001).

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6. Impact of inputs on cost or differentiation, Keri (2001).7. Threat of forward integration relative to threat of backward integration

by firms in the industry, Keri (2001).

Uniqueness

perceived by

customer

Low cost position

Industry

wide

Particularsegment

DifferentiationOverall cost

leadership

Focus

Figure 1.1: Three strategies for achieving competitive advantage:Adapted from -Michael E. Porter and Victor E. Millar (1985) -HOW INFORMATION GIVES YOU COMPETITIVE ADVANTAGE.HARVARD BUSINESS SCHOOL.

2.4 THREAT OF SUBSTITUTE PRODUCTS

The following are the determinants of substitution threats in an industry:Relative price-to-performance of the substitute, Buyer propensityto substitute and the level of switching cost a buyer may face,

Grant (2008). The low cost strategy of IKEA places the firm in a favourableposition vis--vis substitutes relative to its competitors in the industry ascustomers are expected to do their own pickup and delivery therebycutting the cost of the furniture hugely, and IKEA will even sell you a roofrack for your car that you can return for a refund on your next visit [34],Edvardsson et al (2005), Edvardsson et al (2006). Although much of itslow-cost position comes from having customers do it themselves, IKEAoffers a number of extra services that its competitors do not. In-store childcare is one. Extended hours are another. Those services are uniquelyaligned with the needs of its customers, who are young, not wealthy,likely to have children (but no nanny), and, because they work for a living,have a need to shop at odd hours. Customers will therefore find it difficultto find a close substitute anywhere else, Edvardsson et al (2005).

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2.5 INDUSTRY COMPETITORS

The higher the number of competitors and the more they compete

aggressively, the higher are the competitive pressure, Porter (1985). Iffew competitors exist in an industry to compete, this allows for muchmore room to operate and the competitive pressure is reduced. Intenserivalry in an industry ensures that a competitor will respond quickly toyour strategic actions (Pearlson, 2001). Although the low-cost position ofIKEA gives the firm a defence against rivalry from competitors, however, itis not enough to guarantee a sustainable advantage. IKEA is able toovercome any potential imitation by its competitors by offering a costbased focused and trade-off to a narrow customer group Edvardsson et al(2002). This means that the more IKEA has configured its activities tolower costs by having its customers do their own assembly and delivery,

the less able it is to satisfy customers who require higher levels of service,thereby offering more of one thing which necessitates less of another. Bythe trade-off, lowering its costs and targeting the special needs of asubset of customers and by designing its activities accordingly means thatits customers are locked in for the foreseeable future and IKEA can stillearn returns after its competitors have competed away their profitsthrough rivalry Edvardsson et al (2006).

3. PESTLE ANALYSIS

3.1 Political

3.1.1 Local Capacity Sourcing & Risk Reduction Strategies

To gain advantage in its drive for global dominance in both developed anddeveloping countries, IKEA has utilized a mix of strategies with regards itsinternational marketing strategy and operations. In politically sensitivecountries, IKEA adopts a risk sharing strategy with third parties,Edvardsson et al (2006). A classic example of this is its joint venture

scheme in the Middle East where it engages the services of the AlFuttaimGroup of companies, as the role of the company across most of therepressive regimes where freedom of choice is limited is to provide IKEAwith useful inputs on the political situation which might pose as a threator opportunity for IKEA.With regards global operations in mostAsian countries such as China, Japan and Taiwan where there arestrict requirements for usage of local raw materials, and strictpolicies for earthquake resistant shelters, IKEA pursues anadaptation strategy whereby all its kitchen appliances such ascabinets sinks, taps, dishwashers, fridges, etc., fulfil Taiwan,

Chinese Japanese law requirements for at least 40% local capacityraw materials, Edvardsson et al (2006). An advantage of this is

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that IKEA is able to access low cost manufacturing cost inputsdue to the cheaper access for labour and other raw materials. InChina for instance this especially fits in with Ikeas low productioncost strategy as it utilizes up to four separate sets ofmanufacturers just for a single table and chair, Edvardsson et al

(2006).

3.2 Economic Factors

3.2.1 Adapted Place & Price Strategies

Differences in buyer behaviour are as a result of the dynamics of theprevailing economic condition, Kotler et al (2001). Ikeas low cost strategyprovides a solid defence in its global operations in most underdeveloped

countries where low living standards and discretionary income is highlyprevalent. In many of such nations, IKEA utilizes the place, distributionand price strategies as a supporting strategy to its trademark operationalstrategy. For example, in China with an average income of $1800 per yearand where 59% of the population use public transport and do not haveprivate cars, IKEA has adapted its strategy on place by opening up itsoutlets in the Xuhui, Shanghai, Guangzhou and Chengdu Districts whichare in the city centres and downtown districts a huge departure from itsworldwide strategy of big suburban outlets far from the town centres inmost developed countries. In addition, 49 Chinese Yen would get you abasic Junzc cushion, while 1199 Chinese Yen can get you a complete

Klanda sofa, Edvardsson et al (2006). This reflects the deep prevailingeconomic dynamics and culture for frugality in the Asian continent. Withregards to its operations in the developed economies such as Europe,IKEA is able to overcome market entry constraints and enhance its globalexpansion with the liberalisation of investment across the EU, Edvardssonet al (2005), Edvardsson et al (2006). IKEA is ranked as the most famousbrand based on recent surveys and still maintains its 39% share lead. Inspite of the recent economic downturn, it is still estimated and projectedthat the domestic demands for furniture will continue to rise in the nearfuture in major European markets. This can only be favourable for IKEA as

it seeks to maintain its lead in the coming years, Edvardsson et al (2006).

3.3 Socio-Cultural

3.3.1 Operational & Supporting Strategies

With regards global operations in most Asian countries such as China andTaiwan where their the buying patterns reflect the culture for frugality,high quality, visible presence, feedback and communication, this clearlyfits in with Ikeas strategy of operational excellence in offering productsthat are cheap but with innovative, durable, functional and of good

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quality, Edvardsson et al (2006). In addition, its advertising strategy hasbeen aligned to the prevailing culture and as a result IKEA does notpursue a global advertising strategy. But in some parts of Europe such asFrance and Germany, although IKEA utilizes operational excellence anduniform standardization as its main core strategy, however to reach out to

the population, IKEA has had to overcome and break down the culturalelements in each country by successfully aligning additional supportingcompetitive strategies of distribution, product and promotion to its corestrategy, Edvardsson et al (2006). With this Ikeas strategy in thesenations is a total / multi-market strategy in order to fit the prevailingculture in most of its areas of operation. An example of this is in Francewhere the high taste of art with compelling quality clearly suggests thepeoples preference for quality and high taste, [35]. IKEA matched thisculture requirement by projecting its products through advertising asdurable, hip, stylish, of good quality and appealing. This comes againstthe backdrop of the fact that its products are simply functional, practicaland cheap, Edvardsson et al (2006).

3.4 Technological

3.4.1 Harmonised Regulations & Global Supply Chain

IKEA is able to maximize its worldwide investments in countries whereaccess to secure and efficient communication is encouraged. With regardsto its operations in the developed economies such as Europe, the set

towards a joint harmonized policy towards information and IT access asasserted in the EU directive, suggests that Information technology,telecommunications and the Internet would therefore ensure worldwideIntegration of IKEA suppliers possible by enabling information on prices,products and profits to be easily accessible globally and instantaneously,Edvardsson et al (2002), Edvardsson et al (2005), Edvardsson et al (2006).

This is achieved through a number of IT and E-commerce solutions suchas; its E-Commerce Information System for IKEA Suppliers (ECIS). Thesituation is also the case in its global operations in most underdevelopedcountries especially in Asia, China in particular where 95% of the

population is IT literate and the fact that precise progression unto newerforms of technology is part of the governments priority. As a result, IKEAis able to run one of the worlds most successful global supply chainsacross all the major continents where it has its operations. Its ECISsoftware also includes EDI links with external suppliers and database linksfor internal suppliers. Based on an assertions by Company Director LarsMeyerAs soon as the ERP system determines we dont have enough of acertain part in the assembly line to satisfy an outlet a message is dent toall suppliers within reasonable distance, Edvardsson et al (2006).Explained one production manager, we can identify which we need andwhere that outlets part needs to be delivered. Ikeas goal was that

45,000 people would use the system at 70 manufacturing centres to co-

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ordinate commercial production around the ECIS system, Edvardsson et al(2006).

3.5 Legal Factors

3.5.1 Warranty & labour laws

With regards its global operations, IKEA respects different cultures andvalues in countries where it operates and sources its products, withoutcompromising the basic requirements of the law especially regardingwarranties, post purchase sales agreements and the rights of the child.Irrespective of the country in operation, with regards to warranty and postpurchase laws across the world, the quality is conformed to the EuropeanUnion and national norms, Edvardsson et al (2006). Even for its Asians

markets in countries such as China, the company products are all backedby EU quality standards, examples of such regulations the company offersinclude kitchens with 10 years and mattresses with 25 years guarantee.With respect to child labour laws and multinational companies, whilstthere is a robust and sufficient legal framework to prevent child labourwithin the EU, United States, Canada and parts of South-East-Asia such asNew Zealand and Australia, however the same cannot be said in othercountries where IKEA operates such as China and Taiwan.Notwithstanding, IKEA has thrown its support and full commitment to theUnited Nations convention on the rights of the child (1989), [34]. Thecompany achieves this by placing stringent requirements on its suppliers

worldwide to certify that no occurrence of child labour takes place or ispracticed in the process of production, Edvardsson et al (2006).

3.6 Environmental Factors

3.6.1 Corporate responsibility & Requirements

Whilst differences in environmental requirements and stipulationssuggests different localization strategy for companies, however, IKEA has

got a different take as it implements a uniform and global policy across allcountries of operation. IKEA stipulates a usage of supplied wood a yearwhich amounts to an annual volume of 1/20 of the total quantity of felledwood in Sweden [34, 35]. To ensure that its suppliers conform tostandards of all the stakeholder interests which include; social interest,environmental interest and economical interest, IKEA ensures that;

1. All supplied wood is from forests that are verified and as stipulatedby the local stakeholders as well managed, Edvardsson et al (2006).

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2. Supplies which are found or suspected to originate from intactnatural forest (INF) are rejected accordingly and the suppliersblacklisted, Edvardsson et al (2006).

3. Supplies which are found or suspected to originate from high

conservation value forest are rejected and the suppliers blacklisted,Edvardsson et al (2006).

4. All wood supplies must attach a verification tag or note by the localChief Conservator of Forests, Edvardsson et al (2006).

5. IKEA shall sponsor its personnel to undertake annual studies of thedifferent types of wood relevant to its current and future woodrequirements with the objective of familiarization with new andpotential legislation, Edvardsson et al (2006).

4. SWOT ANALYSIS

Figure 2.2: SWOT Analysis

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5. 7s Model

Figure 3.3: 7s Framework adapted with full permission fromD'Aveni, R. A. (1994). Hypercompetition: Managing the dynamicsof strategic manoeuvring. New York: Free Press

5.1 Strategy

I. In the year 2000, IKEA put together a long term strategic directionwhich was to be the worlds largest home furnishing company bythe year 2010, through increasing its sales volume by 10% eachyear and decreasing its sales price by 20% each year. [34]

II. In all its global operations, IKEA maintains a strategy of offeringdiverse ranges of products with impeccable quality that are stylishand affordable [34]

III. The strategy is a combination of function, low price, simple designfor all its product ranges [34]

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IV. The main targets if IKEA are customers with a bit of flexibility whoseek value and are willing to stretch their budget by bearing thetransportation and assembly cost themselves. This in turn works outcheaper and affordable for most of its product range [34]

Edvardsson et al (2006)

5.2 Systems

In 1996, IKEA put into operation the Vendor Managed Inventory (VMI) aspart of its supply chain module and this is responsible for integrating itssupply chain function in 55 countries. The main modules of this supplychain function include; the Fix module; Call off module; Order PointDistribution Centre module (OPDC); Direct Distribution Module and Transitmodule, Edvardsson et al (2006). The supply chain management systemthrough the Vendor Managed Inventory (VMI) is directly linked with IKEAs

1600 suppliers in 55 countries all over the world is in charge of IKEAs 29distribution centres which supplies its outlets with all its different rangesof products. With this in place when the inventory levels are low in eachoutlet, this integrated system shortens the time for stock replenishment,Edvardsson et al (2006).

Figure 5.5: IKEA Supply Chain Management Logistical Staircase

5.3 Structure

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Figure 5.5: Organizational Structure & Systems of IKEA

The current organizational structure at IKEA is the functional distributedstructure which incorporates the global marketing strategy, Edvardsson etal (2005). In this system, the information flow is a top down approach

where top management maintain a centralized control over all itsoperations worldwide thereby incorporating the activities of itsinternational suppliers Edvardsson et al (2006).This is a system whicheliminates the burden of regional hierarchical control over supplierinformation. The burden of hierarchical functional redundancies iscompletely eliminated thereby ensuring close monitoring of its globallogistics and supply chain management. Recently the company integratedits wholesale systems which are a harmonized system of its distributionand purchasing functions, Edvardsson et al (2006). At Corporate HQ, thefunctions are Corporate and Government Relations, Finance, HR,Marketing, each headed by an Executive Director, Edvardsson et al

(2006).

5.4 Style

IKEA utilizes a combination of its unification and adaptation styles. For allits European and Scandinavian markets, IKEA utilizes its traditional simpleblue and yellow standardized style across all its product lines, but forinternational markets it utilizes its international style of country light blueand in some cases Scandinavian natural, Edvardsson et al (2006).

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Figure 5.5: Ikeas Traditional & Modern Styles

5.5 Staff

Figure 6.6: Staff Strengths by region and function

There are a total of 90,000 full-time staff and numerous part-timemembers of staff, [34, and 35].

5.6 Skills

I. One of its huge strengths is its ability in integrating low price

strategies and specific search niches to maintain competitiveadvantage for decades, Edvardsson et al (2006).

II. Ability to maintain product standardization across its globalmarkets, however promotion, prices and place strategies areadapted to suit localized interest in Asia, parts of Europe and theMiddle East, Edvardsson et al (2006).

III. Centralized control of all global operations into a coherent unit,Edvardsson et al (2006).

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5.7 Shared Goals

Attract, take responsibility for developing members of staff, offer

inspiration and keep the culture of IKEA a living reality that is strong andstands the test of time [34]. These goals of the company has beenformulated and established among its workforce worldwide, enunciatingall the ideals starting from mobility, recruitment to training anddevelopment, work-life balance, succession planning, leadership andculture, Corporate Responsibility Management (2005).

6. Recommendations

Whilst IKEA has succeeded with its cross standardization of its range of

products across the globe, however in order to compete successfully withlocal stores, it must adapt its strategies of price, place and promotion if itis to succeed in Asia, Africa and the Middle East, as each country has gotits own local market and culture which would require adaption from IKEA.

The continued expansion of its overseas global markets would bring withit cultural issues and issues with its franchisees and as a result thecompany must tinker with a mixed system which involves both the currentfunctional and a possible matrix functional system to handle localizedsystems

7. Conclusion

Porters five forces is a good means by which to begin to grasp many ofthe market and competitive forces of IKEA in the household furnitureindustry.

Through PEST analysis and SWOT analysis, we have gained a much betterinsight of the international marketing strategy of IKEA in the Swedish,Middle East, Chinese, Central and Eastern European markets. From thestudying in these areas, we came to some conclusions at different aspectsas following:

Through its cost leadership and differentiation strategy, the IKEAConcept is based on offering a wide range of well designed,functional home furnishing products at prices so low that as manypeople as possible will be able to afford them.

Rather than selling expensive home furnishings that only a few canbuy, the IKEA Concept makes it possible to serve the many byproviding low-priced products that contribute to helping morepeople live a better life at home.

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8. Reference & Bibliography

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[4] Cowlett M., (2007). IKEA furniture dances down the red carpet, PRWeek. (London Ed.). London: pg. 21, 1 pgs

[5] D'Aveni, R. A. (1994). Hypercompetition: Managing the dynamics ofstrategic manoeuvring. New York: Free Press

[6] Edvardsson, B, Enquist, E. and Hay, M., (2006). Values-based ServiceBrands:Narratives from IKEA, Managing Service Quality, Vol. 16, No. 3

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[31] Warren.F., McFarlan, (1984). "Information Technology Changes the

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[32] Wickens, P.D, (1995). The Ascendant Organisation, Houndsmills,McMillan.

[33] Wilson C., (2007). Home Sweet Office for Ikea's Workers, New YorkTimes, (Late Edition (East Coast), New York, N.Y.pg. 3.38

Websites

[34] www.ikea-group.ikea.com[28.12.2008]

[35] http://www.ikea.com/gb/en/[29.12.2008]

P
http://www.ikea-group.ikea.com/http://www.ikea.com/gb/en/http://www.ikea-group.ikea.com/http://www.ikea.com/gb/en/

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