Strategies That Help to Grow the Business for IKEA - Case Study Example

Executive Summary IKEA which performs in the furniture industry had developed a niche market for itself as following the policy of being a low cost provider along with the differentiator has helped to create demand for the products. The company while looking to build a pool of loyal customers have understood the external and internal environment and based on it designed a strategy which will help them in the long run. IKEA has understood the manner in which the external environment influences their working and have looked towards drafting strategies based on it. The internal analysis highlights that IKEA has worked upon their capabilities and resources and developed a generic strategy for themselves which is to be a differentiator and a cost leader. This strategy has helped to grow the business for IKEA and will be able to grow further by developing their business on similar lines. Table of Contents Introduction 3 SWOT Analysis 3 Environmental Analysis 6 Porter Five Force Model 9 Low Cost Provider & Differentiator 11 Conclusion 11 References 12 Introduction IKEA has been working in the industry since 1943 and is one of the major furniture dealers in the world. Being in the business for such a long period has enabled them to have the largest chain of furniture stores which deals in a variety of furniture, bathroom fittings, accessories and kitchen fittings” (Company Website, 2012). IKEA has ensured growth by having policies which favour the business and has resulted in the store having more than 300 in 37 different countries (Company Website, 2012). The company has followed a policy of differentiation and being the cost leader looks to provide quality furniture at the lowest possible rates. The company has looked towards differentiation as their main strategy which has ensured that all their stores are designed similarly so that customers visiting the stores anywhere in the world find the same feeling (IKEA, 2012). To ensure effective marketing the company has worked on loyalty programs, discounts and continuously innovating so that customers find something new every time they visit the stores. The paper thereby looks into the SWOT Analysis which helps to understand the internal analysis, the external analysis through PESTEL and Porter five force models. This helps to identify the generic strategy of IKEA being of a low cost provider along with being the differentiator in the market. SWOT Analysis This analysis works on the internal analysis and helps to understand in the manner in which IKEA will be able to use its resources and capabilities to develop itself Strengths IKEA produces its product under the brand name Swedwood and is done by the company itself which has ensured consistency in quality and design (SWOT, 2012). This has helped to ensure optimum production and minimizing waste IKEA looks towards designing products itself which has ensured that the design are concealed and the chances of duplicity is reduced (SWOT, 2012) IKEA has a strong brand position due to being in the business for agea and having operations almost over the entire world (SWOT, 2012) Strong supply and distribution network ensuring regular supply of raw materials which are transformed into finished products and made available at the different stores over the world (SWOT, 2012) Unique business proposition of being a differentiator as well as a low cost producer has ensured to create a niche market Having the services of specialist has ensured that the business works on the global standard and matches the code of conduct prescribed by the company Weakness Limited penetration level in some countries due to lack of adequate stores has ensured customers switching the products which has thereby relatively reduced the demand for furniture (SWOT, 2012) Lack of consistency which has resulted in the products being called off from the market has created a negative perception about the product in the mind of the consumer making them to look towards alternatives (IKEA SWOT, 2012) Opportunities Sourcing furniture from other destinations which are low cost provider like China will help to ensure that their generic strategy provides the required dividend and ensures growth for the business (IKEA SWOT, 2012) Moving towards online mode due to increased penetration of internet which will help to ensure that the company is able to sell their products through a different mode which will increase sale (IKEA SWOT, 2012) Looking towards promoting themselves on the background where they bank to be green and reduce the effect on environment (IKEA SWOT, 2012) Threats Increased pressure from global providers looking to tap the market with a similar strategy of being a differentiator and low cost provider (SWOT, 2012) Decrease in the disposable income due to falling income Availability of substitute for wooden furniture which are less costly and durable has seen a spurt in demand for those kind of furniture This thereby highlights that IKEA has been able to use its resources in a most effective way and work on its capabilities to grow their business. Environmental Analysis This analysis will help to understand the manner in which the external environment has an influence on the working of IKEA and the steps developed by the company to deal with those. This has been identified through the PESTEL Analysis Political IKEA has looked towards understanding the political situation of a country and based on it looked to develop a strategy so that they enter the correct market (PESTEL Analysis, 2012). This is identified from the fact that IKEA has not looked towards India as the structure doesn’t allow foreign ownership of a single brand (Corporate News, 2010). IKEA has looked towards country where the government is stable so that sufficient time is available for the policies to be effective. This has helped IKEA to develop their business well and being able to understand the political scenario and having a strategy accordingly has helped IKEA. Economic Economic situation of an economy has a huge role is defining the purchasing power of the people. A country which has a high disposable income and people are willing to spend more money on furniture and other luxury items are found to be attractive destination for IKEA (PESTEL Analysis, 2012). Along, with it IKEA has looked towards gauging the purchasing power of people based on the manner people purchase furniture and the frequency with which it is done (PESTEL Analysis, 2012). This has helped IKEA in identifying the potential customers better. IKEA has also looked to dwell on the tax aspect and looks towards tax subsidy and other benefits so that IKEA benefits and is able to conduct their business after understanding the economic scenario. Social IKEA has looked towards understanding this aspect properly and looks to provide furniture of different range and design based on the taste of the people. IKEA has looked towards understanding the customers profile and prefers customers who are outward and willing to change with time (PESTEL Analysis, 2012). This has made IKEA look towards countries where the population is rapidly growing and is changing as per the changing generations. IKEA has looked to ensure that they design furniture based on the social requirements and with fast changing technology and people preferring new and better products the shift towards furniture which are trendier and attractive have increased the business for the furniture maker. Technological IKEA has looked into this factor seriously and based on the technological advancement of a country developed its supply chain. This has helped IKEA to ensure regular supply of raw materials and ensure that the products are readily available in the different markets (PESTEL Analysis, 2012). This has made IKEA use RFID technology which has ensured correct pricing and ensures similar pricing across all outlets. This has helped IKEA to ensure that they are consistent at the same time ensures that they work on the same business model everywhere. Technology has also enabled IKEA to make rapid changes and ensure that they are able to mould the shape and size of their furniture as per the requirements (PESTEL Analysis, 2012). This has helped IKEA is developing a framework where they are able to provide quality products and ensure efficient mechansim in producing so that wastage is minimized and resources are used in the most effective way. Environmental IKEA which is into manufacturing of furniture looks towards planting trees and saplings so that they are able to preserve the environment. The company ensures that it preserves and plants more trees than they use so that they can look after the environment (PESTEL Analysis, 2012). IKEA on this front have ensured that they contribute towards the society and has made it completely mandatory to ensure that their mechanism of working reflects care for the environment and developing strategy to combat the environment has helped IKEA to have loyal customers and even receive support from environmentalists. Legal IKEA has looked towards adhering to the rules and regulations framed by the government in their respective government of operations. This is seen from the fact that IKEA didn’t open a store in India as the government doesn’t allow foreign investment of a single entity into retail sector in India (Corporate News, 2010). This shows that IKEA adheres to the legal requirements. Further, IKEA has looked towards ensuring that the employees hired by them are as per the local requirements and the salary and time of working is determined as per the rules of the government (PESTEL Analysis, 2012). This has ensured that IKEA follows the regal requirements and have ensured a smooth path of operations for them. Porter Five Force Model This analysis also dwells on the external environment but is more related to IKEA and will help to understand the manner in which IKEA is able to cope up with the requirements of the external environment (Wylick, 2010) Rivalry within the industry The degree of rivalry is very high as IKEA faces stiff competition from other global players working on the same model (SCRIBD, 2010). This has improved the options for the customers and made customers switch between one company and another. The degree of rivalry further intensifies when the unorganized sector is considered as this sector looks towards providing products directly based on the customer demands and makes changes in the design, shape and color as the customer wants Bargaining power of Suppliers Suppliers have a high bargaining power as wood constitutes a major component of the raw material and with different government rules and regulations the suppliers are able to get a good bargain for their supply (Porter 5 Forces, 2012). IKEA on this front has looked towards backward integration but is limited to a large extent (SCRIBD, 2010). This has increased the concentration of power in the hands of the suppliers and having many producers who are on a look out for raw materials has ensured higher prices for the suppliers. Bargaining power of customers Customers are seen to have a mixed bargaining power as similarity and availability of different furniture provider has increased the options for the customers (Porter 5 Forces, 2012). This has made IKEA look towards offering discounts and having different loyalty programs so that they are able to retain customers and ensure regular sale. The bargaining power seems to increase when the unorganized sector is considered as there are many manufacturers there and customers purchasing from them have a high bargain. Threat of Substitute The degree of threat is very low as people still rely on wooden furniture. There has been a growth in furniture from steel and similar other materials but to a limited extent (SCRIBD, 2010). This has helped IKEA as it has ensured that they are able to use their business model and ensure low price for the customers. Thus, with little or no substitute available in the furniture market the risk reduces to a large extent Threat of Potential Entrant The threat of new entrant shows a mixed picture as there as many players like “Nova, furniture mall and Courts who are in the markets” (SCRIBD, 2010). This has increased competition and due to the heavy cost associated with establishment and rapidly changing fashion and technology the risk has been limited to a large extent. IKEA on this front has an advantage as they look towards backward integration which has helped them to grow their business. The risk of new entrant in high in the unorganized sector but the effect of that sector on IKEA is limited to a large extent. Low Cost Provider & Differentiator IKEA has looked towards following a business model where they look towards supplying furniture at the lowest possible cost. This has ensured that they are able to create a niche market for their products and working on a strategy of being a low cost provider the company has been able to attract different section of the customers easily. Along with it IKEA has looked towards being a differentiator which has ensured they provide different type of furniture which is more trendier and attractive. This has helped IKEA to conduct its business effectively and have ensured that the strategy followed by them provides the required return the company is looking for. Conclusion IKEA thereby have ensured that they are able to develop their strategy based on the environment and internal capabilities and resources. This has ensured that IKEA develops a generic strategy for the company which is of a low cost provider along with being the differentiator. This has helped IKEA in shaping the manner they perform and develop a generic strategy which will help them to grow their business in the long run. Reference Company Website. 2012. IKEA. Retrieved on February 29, 2012 from http://www.ikea.com/ IKEA. 2012. A trusted name in home products. Retrieved on February 29, 2012 from http://www.swot-pest-porter.com/modules/info/index.php?content_id=54 Corporate News. 2010. .IKEA shelves plan to enter India, New Delhi. Retrieved on February 29, 2012 from http://www.livemint.com/2009/06/11135721/IKEA-shelves-plan-to-enter-Ind.html IKEA SWOT Analysis. 2012. IKEA SWOT Analysis. Retrieved on February 29, 2012 from http://www.ehow.com/facts_5278469_ikea-swot-analysis.html PESTEL Analysis. 2012. PESTEL Analysis of IKEA. Retrieved on February 29, 2012 from http://www.businessteacher.org.uk/free-business-essays/free-pest-pestle-essay/ Porter 5 Forces. 2012. Porter 5 Forces. Retrieved on February 29, 2012 from http://chiakwongmin.blogspot.com/2005/05/porter-5-forces.html SWOT. 2012. SWOT Analysis of IKEA. OPPapers.com. Retrieved on February 29, 2012 from http://www.oppapers.com/essays/Swot-Analysis-Ikeahk/175704 SCRIBD. 2010. Executive Summary since 1997, IKEA has grown. Retrieved on February 29, 2012 from http://www.scribd.com/doc/28080693/Executive-Summary-Since-1997-Ikea-Has-Increased Wylick, V. 2010. Porter’s 5 forces. Retrieved on February 29, 2012 from http://foodandretail.blogspot.com/2007/10/porter-5-forces-how-they-work-3.html Read More