IKEA: Case Study Summary
IKEA
The world’s largest furniture retailer, IKEA, was founded in 1943, Sweden. The company assumed its current position as primarily a furniture business after Ingvar Kamprad, its founder, started selling furniture through IKEA five years later. The expansion of IKEA into different countries in Europe and then subsequently to other continents could be regarded as one of the historically significant event that led to modern globalization. As of today, IKEA is operating a sum of 384 stores and in 48 countries. This essay is an attempt to outline the working principle of IKEA, its organizational structure, corporate culture, management methods, ideology, etc.
The founder of IKEA Ingvar Kamprad was already an established salesperson at the age of 17. His experiences in selling small commodities such as matches (at age 6), fish and Christmas decorations (at age 10), had made him well versed in business transactions and management even at this young age. And with the small sum of money that he received from his father for doing well in school, he built IKEA, mostly as a mail order service. The company began selling furnitures made by local manufacturers in 1947. It took the protests from local manufacturers, that IKEA was selling furnitures at very low prices, to force the company to design its own furniture stems which would later revolutionize the furniture business in the flat pack form. This is how the self assembly concept also began.
If this was how IKEA began its business journey, the roots of it ran through the consumers due to its attractive prices. It was Ingvar Kamprad’s ideology that everyone should be able to afford quality furniture. There was also a shrewd underlying concept that most of his competitions did not realize at that time. As the others were struggling to decrease the cost of furnitures without giving up on high profit margins, IKEA expanded their business by making slight compromises that the others were too reluctant to make. And using the same business strategy, IKEA grew, from merely a mail order service to having their first original furniture store in Sweden (1958). In 1963, the first IKEA store opened in Norway marking its expansion outside the parent country. IKEA spread its subsidiaries to Copenhagen, Denmark in 1969. The company further expanded to Switzerland, Australia, Austria, Netherlands, France, Belgium, etc in the coming decades.
IKEA opened its first shop in U.S.A, marking its territory outside Europe, in 1985. The number of co-workers working for IKEA was now 10,000 with 60 stores. Their subsequent expansion to other countries and continents occurred after Ingvar stepped down and appointed B.V. Anders Moberg as the new CEO of IKEA group. But Ingvar remained as an advisor to the parent corporation of IKEA group, INGKA Foundation. The slow but steady rise of IKEA to the top was seen later into the years. Much like the vision that Ingvar kept during the early years of its formation, IKEA still holds the “affordable furniture for all” ideology. To keep up with the technological advancements of the last decade, by utilizing internet and connectivity, IKEA products are now available online for purchase.
Internal Strengths and Weaknesses
Some of IKEA’s strengths are related to their 1.Ability to innovate 2.Customer satisfaction 3.Efficient management and 4.Product design. The company thrives on its ability to adapt. The innovations that the company had brought to its range of products still remains undisputed in the furniture sector. Concepts such as flat-pack furniture, particleboard, Mammut (a series entirely designed for kids), etc are a proof of this creative thinking that IKEA is based upon. Perhaps this is the biggest strength of this company. It is true that IKEA simply refuses to forfeit even when many companies churn out their old ideas in new wrappers. The print-on-board concept of IKEA is a big example of their continuous struggle to innovate.
Apart from their internal drive to innovate, IKEA also profited from the satisfaction of its customers. IKEA had never been reluctant to give up on some of excess profits to keep the consumer satisfied with the quality of their products while still being affordable. You could use the first IKEA showroom as a unique example of customer oriented business model. They introduced their first showroom to enable the customers to view and test the quality of the products before ordering them (a feature others did not have at that time). The next big advantage that IKEA had over the others was its efficient business management. At a time when most businessmen were deterred from taking risks (due to the financial crisis in Sweden) such as venturing into other countries in search of potential markets, IKEA was able to stand up and take on such adventures head on. Identifying the company’s capabilities is what made all of this possible for Ingvar. For instance, when the local manufacturers refused to cooperate with IKEA, the company did not falter or give in for their unnecessary demands (increase their profits). Ingvar knew that his company was capable of starting its own line of furniture by now.
Strength of this company also lies in its product designing. They have been known to associate with great artists from all over Sweden (and later from all over the world) to create excellent designs and, sometimes, experiment with them. For instance, the concept of flat-pack furniture came into existence after an employee took the legs apart from a table for easy transportation. The curved edged furniture line, designed especially for kids, is yet another instance where IKEA was able to claim the aforementioned compliment.
Even in midst of all of their great potentials, IKEA, just as many others, is not entirely free from shortcomings or inherent flaws. Some of the shortcomings or weaknesses that IKEA had exhibited over the years are 1.Disparity in the cost and quality of products and 2.Large operational reach that hinders quick changes. As a global company, all or most of the merits that was mentioned before may vary with respect to the country or region where IKEA is operating. The biggest issue IKEA had to experience as a global country was its disparity in cost and quality. For instance, if the customers in Sweden had believed that the products were satisfactory with respect to its low costs, the customers in America did not share this belief for a long time. Because, with IKEA, the cost is not determined by just the quality of the product. They take into account the availability of the materials, the cost of a special feature, and/or business overhead that went into the making of the product to determine its cost. After making many adjustments and compromises to reduce its cost considerably, the rates may not be a direct reflection of the product quality.
Also, due to the rapid spread of IKEA and its subsidiaries into many countries and continents, the corporation had almost lost its flexibility that the company once enjoyed under the governance of Ingvar. The failure of a few product lines to pick itself up from the initial staggering sales indicates this lack of flexibility. Especially in the Japanese markets, IKEA was unable to pick its sales up for a brief period of time due to the inability of its management to change its business model (1974). The self assembly model was not welcomed by the Japanese because service was an important cultural entity for the average Japanese person. The furniture models of IKEA had a significant resemblance to European furnitures that was unfit for traditional Japanese houses. IKEA took nearly two decades (until 2006) to recover from their faults. This is a shortcoming that needs serious introspection and remedial efforts.
Analysis of External Environment
The external environment of IKEA is marked by the insurgence from a variety of native and foreign competitions that are just as good or cheap as IKEA products. The success story of IKEA had attracted many large corporations to venture into self service furniture business. This is especially significant in local markets. Since IKEA is not a native company for many countries, that it is highly prospering in, the local manufacturers as well businesses are able to provide much cheaper products that are almost similar in quality with that of IKEA. Local business environments, including legislations directing foreign investments, are greatly confining IKEA from large scale expansion. For instance, the Chinese lowering of Yuan (unit of currency) and its financial boost to local businesses, are forcing foreign companies to reduce their investments in China. There came a time when IKEA had to build their manufacturing units in China without which their products would have become highly expensive with just negligent increase in its quality. This was the only way how the company could bypass the large import duties imposed by the Chinese government.
The next big challenge in the external environment of IKEA is the change in social and ecological trends of its customers. Since IKEA is no longer a local business, the rapid variations in the current trends of many countries, especially in the western culture, is forcing IKEA to create and market new categories and designs of products intermittently. One inherent issue with this constant innovation and research process is the huge financial liability of some or most of its failure. The inflexible corporate management of IKEA will hugely affect this innovation process as well. For instance, a local manufacturer will be able to change their product design without any hassle but as a large corporation, IKEA might need executive level intervention or decision makings to complete the same simple task the local manufacturer did in a few steps.
But the expansion process of IKEA hasn’t ended yet. The most promising business for IKEA is still remaining in rapidly expanding economies like India. Due to the fragmented (mostly localized) form of furniture businesses in this country and their flexible foreign investment norms, IKEA has a promising market here. IKEA had been supplying furnitures for Indian retailers for some time now. But the company’s direct involvement was marked by opening IKEA stores in various locations (such as Hyderabad). In a similar way, many developing countries are now opening their doors to foreign investment. Multinational corporations such as Walmart, KFC, etc have already started their expansion into such markets, IKEA has a similar scope in these countries as well.
IKEA: SWOT Analysis
SWOT analysis involves the brief introspection of all that are the company’s 1.Strengths 2.Weaknesses 3.Opportunities and 4.Threats. IKEA’s biggest strength is its business model. The “cheap furniture for all” concept that IKEA held up for a brief while did have a profound effect on the global furniture markets. This effect was the primary reason why IKEA was able to take over many local furniture market niches from literally nothing. They have reiterated that their business model is in line with this basic underlying principle that governed the company for many years. By taking away a few of the unnecessary business overheads, IKEA was able to fulfill this innovative strategy of attracting more customers without compromising much on the profit margins. The self assembly flat-pack furniture of IKEA had made reverberations in even the most unwelcoming and tradition bound furniture markets such as Japan and China.
IKEA’s weakness, as outlined before, is its inflexible corporate structure. It has already been demonstrated how difficult it is for IKEA to make necessary changes to its products or retail shops depending on the immediate demand of its environment. The best example being the case of Japan. The first venture of IKEA into Japan (with the help of a business partner) failed due to their inability to pick up the cultural and traditional demands of its customers. IKEA took more than three more decades (2006) until the company was able to change its business model to fit the requirements of Japanese customers. For a global company to thrive in the rapidly expanding and contracting business environment, it needs to add the feature of flexibility to its structure. The lower level management need to have a certain level of discretion in making decisions or suggestions without receiving serious flak for their failure.
The next component of the SWOT analysis, Opportunities, of IKEA is the big unexplored market niche in rapidly developing countries such as India. Before the end of this decade, IKEA can capture more than fifty percent of furniture sales share in these countries due to their comparatively flexible trade norms (which are more likely to stay the same for a few more decades). So if the expansion process of this business has reached its saturation point in Europe and North America, most of Middle east and Southeast market still remains untouched. IKEA can use its adaptability and ability to innovate to make their mark in these markets.
But, since SWOT analysis cannot be completely without identifying the possible threats to this company, we need to venture into this task without any presumptions. For instance, the competition faced by IKEA from domestic companies are nothing to be trifled with. This is especially seen in the case of Chinese and Japanese markets. To rescue the tumbling economy of China, the government had imposed many import duties for foreign products while providing economic boosts to local manufacturers. Using local manufacturing units, IKEA might not be able to keep up its quality while keeping the cost fairly low. Subsequently, if the Chinese customers lose their faith in IKEA products, the rein of this company there would meet its end. The same trend is seen in the United Kingdom and N. America as well.
Corporate Level Strategy in IKEA
Ever since its beginning in Sweden, IKEA has a characteristic charisma in managing its business with considerable finesse that many of its rivals lacked. The incomparable expansion of IKEA and its subsidiaries into different countries and continents can be explained by this finesse. For instance, even before the economic crisis of Sweden was completely over, IKEA was able to spread to Norway (1963). This can be explained with the kind of corporate level strategy that IKEA is fostering in itself. These strategies are 1.Powerful and branched corporate structure 2.Diversification 3.Franchise based expansion, etc. The branched corporate structure enables IKEA to spread to different countries without any hassle. This means that even though the chain of command is located in the parent corporation, INGKA foundation, the subsidiaries in other countries enjoy a significant level of autonomy. They have certain decision making powers that are enough to get the branch up and running while still being under the control of the parent corporation. For instance, before the opening of the Japanese IKEA (on 2006), a team from parent corporation intervened to investigate into the market thoroughly. And after making changes as recommended by this team, the new branch was opened with sufficient autonomy to make small changes so as to fit the needs of the Japanese traditional culture.
The next strategy that IKEA fosters in its corporate structure is Diversification. This is comparatively a simpler concept that is used by many multinational corporations. But for IKEA, it had begun even before the company became a global entity. Adaptation of furnitures into their business was the first instance of diversification in IKEA. As of 2006, the company had invested a significant amount of resources into IKEA Foods (Systems, 2012).
And there is yet another reason why IKEA is able to expand to many countries (and even continents) without any credible difficulty. This is due to its franchise-based expansion strategy. By setting up franchises in other countries, IKEA is able to promote its brand name and instill the brand ideology, affordable furniture for all, in the hearts of its people. And the added advantage is the freedom to forgo the liabilities of running a direct chain of stores. By compromising a little on the profit end, IKEA can establish itself in other countries (through franchises) before moving with a direct chain of IKEA stores. This also provides them enough time to study the target market without incurring huge losses.
Business Level Strategy of IKEA
IKEA has always been known for their cheap but quality products. Their rapid expansion and success was based on their ability to make and market designer furniture products with the cheapest possible price. This is not exactly an accident. When Ingvar Kamprad introduced furnitures into his mail order business, IKEA, the core business strategy was to make beautiful and quality furniture products affordable for everyone. To achieve this goal, IKEA made significant effort in analyzing business overheads that can be avoided (such as advertisements, direct marketing, transportation labor charges, etc). This is how the self assembly principle of IKEA emerged. By avoiding the on-site installation charges, IKEA was able to create cheaper products without compromising on the profits.
The method via which IKEA fixes their rates (of furniture) has been outlined in their official website. This is in direct correlation with the materials used, design and any added special features to the product. This is in contrast with the method other manufacturers use where they add business overheads such as product promotion, marketing, incentives for salespersons, etc to the actual prize. Since IKEA avoids the involvement of such business overheads, they can cut their costs significantly.
Company Structure and Control Systems
For IKEA this is an inevitable control system. Establishing a hierarchical control scheme takes time and resources to find the right person for the right job. This will hinder the expansion process of the company significantly. IKEA has found a better solution by inducting an informal approach in fixing its control systems. They select the scheme according to the nature of a particular market niche. The case of Japan (the second attempt of expansion in 2006) is the best example in supporting this claim.
Recommendations
The concept of expansion and taking over the domestic furniture business of the host country had been the basic ideology that kept IKEA going for the past few decades. Rapid expansion had given IKEA an advantage that many other manufacturers did not possess. IKEA was capable of improving the shortcomings of its one subsidiary (in one country) while prospering in another. This ensured that the IKEA name was not lost completely even when the company was struggling or incurring losses. IKEA was able to peak the interest of the customers in the target country even when the period of interest in another country had almost diminished. This is a strategy that worked well for IKEA for a brief period of time. But with the unprecedented growth of many economies (such as China) IKEA is finding it difficult to compete with the native businesses without losing at one point or another.
The era of expansion is almost over (except in developing countries) for the company. Now it is time for IKEA to focus more on the products and their marketing rather than setting up subsidiaries in more countries. IKEA should add more flexibility to its corporate structure to apply changes without any difficulty. Adaptability is a talent that is only useful if the corporate structure enables the company to materialize it. The company will be facing tough competition from its rivals in the coming years. And in a service oriented modern world, features such as self service and self transportation is not as attractive as it once was. The best solution that IKEA has for such changes is diversification. But the issue here is that IKEA had chosen food products as a viable alternative. This is already a well established product line. IKEA will not enjoy the freedom that they once had while innovating in the global furniture markets. This is the time to make rapid and accountable actions. One important recommendation to IKEA in this regard is to make every step slightly and carefully, especially when the company is diversifying or innovating. The modern world is not as forgiving as Japan in 1974.
References
Systems, I. I. (2012). History - IKEA. Retrieved June 13, 2016, from http://www.ikea.com/ms/en_GB/about_ikea/the_ikea_way/history/
