IKEA Company - SWOT Analysis and Porters Five Forces - Case Study Example

IKEA Case Study Name: Institution: Table of Contents Table of Contents 2 Introduction 4 Organizational Tenets 4 IKEA Vision 4 IKEA Mission 4 Market Positioning: 4 SWOT analysis 5 Strength 5 Weakness 6 Opportunities 7 Threats 8 Porter’s five forces 8 Rivalry from existing firms 8 Threat to new entrants 8 Bargaining power 8 Threat to substitutes 8 Suppliers’ power 9 IKEA strategies 10 Low-cost leadership strategy 10 Product Strategy 10 Promotion Strategy 11 Marketing Communication Strategy 11 Competitive advantage 12 Part B: Reflection 12 References 17 Introduction IKEA is originally a Swedish company that deals with a vast range of home furniture and furnishing. In recent years the company has expanded to open retail stores all over the world. According to Ivarsson and Alvstam (2010) the company has become the largest retailer of home furniture. The company is owned by the founder’s family through a Dutch registered company. By 2009, IKEA operated over 301 stores in North America, Australia, Asia and Europe. Organizational Tenets IKEA Vision IKEA states its vision as: “To create a better Everyday life for many people” (Capell, 2005) IKEA Mission IKEA seeks to achieve its organizational vision through its mission statement that states; “ To offer 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” (Capell, 2005). Market Positioning: IKEA positions itself as a firm that enables it customer’s live more comfortable part by playing their part in enabling customers: The objectives of IKEA in business are: To provide the lowest prices for quality furniture in the market to its customers. To better the lives of their customers To provide the widest variety of furniture offering a customer can find in one furniture store. SWOT analysis In the SWOT analysis, there are factors that help the organization and hindrances that the company has. IKEA Company faces internal strong factors which are its strength and some hindrances such as weaknesses. External factors such as opportunities and threats are of help and hindrances towards the organization. Strength Among the strengths that IKEA has a noteworthy market presence whereby IKEA is known to be the largest retailer of furniture in the world which sells approximately 9500 home furnishing products in the distributed stores in over 26 countries. To ensure that there is adequate distribution in the furnishings that it offers to both homes and offices; IKEA has set up customer care centers and trading services offices in the 26 countries. The main aim of the company is to provide for home furnishing products with the lowest price possible in all geographical areas and at the same time emphasize on quality. To make this possible, the company has merged with other design, manufactures and transporters and through this they cut costs that would be incurred if they had middlemen selling or transporting their products. The company ensures that there is efficiency in the manufacturing of their products that way there is minimization of waste. The company does not work on its own and in all their decision making processes, they involve stakeholders such as their own clients and designers on the best place to assemble their products and the mode of transport that they would prefer their products being transported to their residence. This in a big way reduces the costs involved in the prices of furniture as transportation expense is in the side of the client. With this kind of merging of services, IKEA has seen a decrease in the prices that they charge its clients by 35% each year over the past ten years. The large occupation of market presence therefore has been boosted due to having a wide variety of furnishings where customers can choose from, deduction in prices that still guarantee quality and the much customer loyalty that the company has earned from its clients. In the case study, IKEA is not mostly known for its merchandising of furniture but is known to provide a unique lifestyle that clients all over the world are comfortable with and they can comfortably embrace the designs offered. Another strength that IKEA has is its power to provide for products that can give service to its consumers for a long period of time. To ensure that there is sustainability, the company has come up with an environmental policy that involves ways of reducing carbon emission, manufacturing products that can give service and be durable for a long period of time, ensuring that there is reduction of waste in the company and finally to be socially responsible in the society. With the introduction of Sustainable Product Score Card (SPS) the company aims at producing quality sustainable products that indicates the sustainability of the product through the raw materials used and how it can be recycled once it is done with its lifetime. The case study strongly supports this as the company not only involves the high class but incorporates all classes because the money spent per customer is almost the same. Weakness Among the weakness that exists in the company are that it has found it a difficulty to deliver its services in time and the quality is still wanting as its aim is to deliver furnishings all over the world. This weakness has been witnessed in the UK stores where clients have found themselves complaining in areas that the company is demanded to excel. According to a survey carried out by Data monitor’s retail arm, in 2011, there was a decrease in quality in the service and delivery of goods in the stores by 12.8% which lead to poor performance as there was no convenience in the services rendered (Raab, 2010). Due to the reduced quality on furniture and services offered with the aim of maximum distribution, the company has seen reduction in profits due to customers spending less or otherwise looking for other alternatives. The company has also a weakness in its products as in the year 2011; the company saw recalls of faulty products being returned to the company after they had been purchased. This recalls had a major loss on the sales made during the year because the clients gave an opinion that the company no longer gave its attention to the quality of products it made. Opportunities There are diverse opportunities that can lead to economic growth. Investing in the Indonesian market that is known to rank as the fourth populous nation in the world and in the recent years has been attracting a lot of businesses with its gross domestic product growing to 6.55 in the year 2011.By IKEA investing in such a country, there are positive prospects of increasing its sales as it being the biggest economy in the South east Asia economy and it having low interest on its commodities, it is sure way that there will be increased growth in the profits made. There is also an opportunity to invest and grow the business through online services. With the launch of a website; www.Ikea.com in 2011, the company has seen an increase in retailing online on the customers as through this, there is wide variety of customers who can enquire for the services offered without visiting a customer care center. By IKEA using a gentle coercion where customers with children are given a place where the children can be playing, it will increase the opportunity on customers while choosing the variety that is offered by the company (Nemati and Barko, 2004). By increasing their show rooms, the company can have an opportunity to display wide variety of their products. Threats A threat facing this group is the hindrance to making a lot of profit in the market. Taking an example in the Indian market, IKEA was prevented from having retail operations in the Indian region. The Indian government cancelled a deal of 41 billion from IKEA that was meant to expand on the company’s operations in the country. By IKEA being prevented from investing in India, this has been seen as a threat as sales will massively drop. Porter’s five forces Rivalry from existing firms IKEA shares in the furnishing industry with major players in the market like Wal-Mart, Euro mart designs Inc and Galiform. To still be the best in the other existing firms, IKEA has remained to be the leader in the market due to discounting furniture in a global setting. Threat to new entrants The current furnishing market is already flooded making it not a threat to the entrance of new markets. To enter in such an industry, a company must have large capital base hence by other companies wanting to invest in the industry does not threaten Ikea. Bargaining power The bargaining power of IKEA customers is strong because there is increase in competition and the customers have a wide variety of furnishing companies to choose from. Threat to substitutes There is not much competition when it comes to substituting products in the Furnishing industry. There are minimal substitutes that can replace IKEA products hence this is a guarantee that the company will remain in the industry for a long period of time. Suppliers’ power IKEA has partnered with a lot of suppliers who are capable of providing raw materials in bulk at considerably low prices (Ivarsson and Alvstam, 2010). To ensure that there is constant supply of the materials needed; Ikea has come up with a strategy of forming long term relationships with the suppliers of its products Financial Performance Source: Marketline Advantage (2012) Ikea Group Financials (2012). IKEA Group SWOT financials, 1-8 In 2010 the store hosted over 410 million shoppers into their stores each customer spending over 83 dollars (Marketline Advantage, 2012). The company’s sales have been growing phenomenally since 2000: For the financial year 2005 revenues stood at 14.8 billion and by 2010 they had risen to 23.1 billion. Despite a steady cut in prices profits keeps increasing for IKEA. IKEA expansion strategy performance has been exemplary; the store has been received with wild enthusiasm everywhere it decides to open a store. IKEA stores in new countries including the US, Russia, and China have a large following since the company opened for business in the three countries. IKEA recorded $120 million from its Chinese operations in 2010. IKEA strategies Low-cost leadership strategy The majority of IKEA sales are reliant on this strategy of providing products at the lowest prices in the market (Capell, 2005). IKEA shows its concerns for customers who are challenged financially by making sure all the processes used to manufacture the final product keep the cost low. IKEA supply chain is adapted to low cost leadership; assemble able products minimize the cost of transport of the finished product as they fit in smaller spaces. IKEA is able to achieve cost leadership by using tactics that means every activity within the firm is efficient. According to the company manifesto produced by the founder, wasting resources is a sin. This means every effort is made to cut costs at IKEA. It is company policy for its executives to travel economy class instead of the business class favored by most business travelers. Other cost cutting measures at IKEA include offering large volume of products in the same range to leverage on economies of scale. Another measure that is used by IKEA to cut costs is the average size of their stores. An average store is 300,000 sq feet, a deliberate attempt eliminate the need to have multiple store. IKEA encourages customer participation in their service by letting the customers assemble their furniture at home. Product Strategy IKEA product range represents their reaction to the needs of consumers by dividing them into different consumer segments. IKEA uses the Product Price matrix to determine the product range it stocks in its stores. The matrix enables the retailer offer product to every consumer country in diverse countries. Overall, IKEA stores provide all the furnishing needs of a home in one store designed to suit the needs of various customers (IKEA, 2010). To make sure products suit their customers IKEA have a fully fledged design unit consisting of full time and part-time designers. Although IKEA products are cheap they are also very stylish in design. Some of IKEA customers admit that the retailer offers more stylish products at lesser prices. To make sure that its product form a lasting impression on the minds of consumers IKEA uses single name branding. However, it is not logical to use single names for all products. The company employs the services of, Colin Edwards, an international naming expert. For example coffee tables, bookshelves, doorknobs and upholstered furniture are named using Swedish place names. Materials and curtains are named using the common women names. Promotion Strategy IKEA carries out high profile promotion campaign as it has the financial muscle to support such promotional activities. The firm prints over 600 million catalogs which it distributes through its stores and by ordinary mail. Marketing Communication Strategy IKEA marketing communication strategy is meant to build on the brands image and motivate people to walk into IKEA stores. IKEA’s marketing communication is based on the firms marketing position that states; We do our part, You do yours. The marketing communication seeks to pass on the message that IKEA is doing its part in making life better for people. IKEA marketing communication is based on nine key messages; The IKEA concept makes a proactive effort to make sure prices of their products remain low by using inexpensive materials to come up with novel products. The IKEA concept concentrates on keeping every cost that impact on the final price down. The IKEA, the home furnishing specialist; IKEA concentrates on making appealing products, but functionality of the product is most important. Most IKEA products are simple as the company avoids designing for trends. IKEA advertises itself as the shop that offers the lowest price for higher quality products. IKEA products are rigorously tested to ensure they are functional and they are of the highest quality in the market (Ivarsson and Alvstam, 2010). Everything under one roof concept: IKEA offers an extensive range of household products that ensures that a customer’s does not have to move from store to store looking for what they need. The shop design enables consumers see what they need by walking in one direction. The displays are also easily arranged to enable the customers choose the products they want easily. As part of its marketing communication strategy IKEA is involved in various corporate social responsibility initiatives. The INGKA foundation is the charity arm of the IKEA foundation and has a net worth of over 36 billion dollars. The foundation is dedicated to scientist research to find innovative solution of designing household items. Competitive advantage From the analysis above it can be concluded that IKEA get its competitive advantage by applying the low-cost leadership strategy. IKEA dedicates a lot of resources in ensuring they continue this strategy of keeping prices down. Every aspect of business at IKEA is aimed at supporting this strategy and IKEA has gained from it in becoming the number one furniture shop in the world. Part B: Reflection The reflections on the case study are based on the concepts and theories that are congruent with the unit reading and as applied by the company under study; IKEA. Therefore, the strategies chosen by the company are discussed in length and in light of how they are contributing to the success of the organization in addition to helping the firm gain a competitive advantage in the market. In addition, other factors that affect the success of the organization for instance, the business level strategy, corporate level strategy and corporate governance are some of the concepts which will also help in shedding light in reflecting on the concepts and the theories applicable to the organization. In my view, the theory of corporate governance has been emphasized in this case study and to apply it to the strategies in this case, corporate governance is focused on showing the relationship that exists between the managers and the shareholders. Shareholders in this case are customers who are the backbone of the IKEA group. This is seen through the way IKEA designs its products in accordance with varying tastes of its customers across the globe. For instance, the company when designing wardrobes for American and Italians, the company had to conduct research into the habits of Americans and Italians to identify the habits of the customers. As a result the company manufactured drawers that had deeper drawers for Americans and others suited to the Italians fashion of hanging clothes. In applying the low cost leadership strategy, I think the company will attract more client both freedom the UK and other regions for the strategies put forth by IKEA makes it capture even the niche market. Business level strategy is attained when value to the customers is created and hence the organization attains a competitive advantage which IKEA has well managed to do that (Marketline Advantage 2012). They way IKEA’s products are designed to meet customer’s expectations makes the company to have a competitive advantage over others in the market hence the success of IKEA in penetrating the market. Strategic leadership as a concept discussed in the lectures refers to the ability of a leader to formulate strategic intent and strategic mission that ensures that the resultant outcomes is successful strategic actions. Therefore leaders have to make strategies that ensure that their organization attains strategic competitiveness. Hence IKEA has exhibited that there is strategic leadership in the organization through the way the company has succeeded in selling its products even in regions where there are indigenous competitors. Where the company, feels that there is need to reformulate the strategies and go back to the drawing board, the company is not afraid to pull out and formulate new strategies that will help it to penetrate the market. I am of the opinion that, such actions emanate from a strong willed leader who is not afraid of taking risks and who will stop at nothing else than to see the success of the company and therefore such organizational leaders are not afraid to pull out, only to study the market and come back with the right strategies (Marketline Advantage 2012). I think that this also emphasizes the corporate level strategy for the company. The move to study the market so that the organization is aware of what the customer wants in a certain market segment shows what the firms stands for as exhibited in the mission and vision for the organization. IKEA’s track record shows that the organization designs products that meet the consumer needs and hence my opinion of why IKEA pulled out from the Japanese market demonstrates the corporate level strategy of the organization in meeting the expectations of its customers. According to the company manifesto that claims wastage to be a sin, the corporation’s leaders make it their responsibility to ensure that there is minimal environmental degradation and minimal costs incurred even in delivery of services to its clients. I believe that by applying corporate governance theory in the company, there will be much control that will be gotten on the demand of the clients. Theory of corporate governance has both internal and external mechanisms which are essential to IKEA Group. I believe that, if the group incorporated more of their clients to hold shares in the company; the company would have a large pool of resources which would lead to incorporation of other departments. Through the departments created, the company will wholly depend on itself hence cutting any costs from relying on other organizations for help. In the product strategy, I believe the management should provide a catalogue in the website created to showcase the various kinds of products that they offer to consumers. In my view, the management should incorporate more designers from all regions of the world and by doing this; there will be more clients from around the globe. In my opinion, IKEA should not be restricted to just home furnishings and since, IKEA is a brand name that is well known, it should invest in other product lines for example furnishings for offices. Also in their naming of furniture, the company should not restrict itself to just Swedish names. In the theory of corporate governance, I think it is best if the management made their own clients to be their promoters. This can be effective where for instance, a previous client registers their name and if a new customer says that they were directed by a certain client who shops with IKEA, a discount or a present is given to the one who introduced the new customer. This ensures that clients are also made to be part and puzzle of IKEA. I think that when everything is under one roof concept makes IKEA to offer an extensive range of household products that ensures that a customer’s does not have to move from store to store looking for what they need. The shops should be designed to enable consumers see what they need by walking in one direction. The displays should also be easily arranged to enable the customers choose the products they want easily. Therefore, the company should incorporate this promotional strategy to realize more sales for the company. In the marketing communication strategy, I think the company should have abroad concept of ensuring that no matter the economic climate the prices remain to be low but still yearn for quality products. To make this possible the company should makes a proactive effort to ensure prices of their furniture remain low by using inexpensive yet recyclable materials to come up with novel products. This concept concentrates on keeping every cost that can positively have an impact on the final price down. This is more so emphasized in IKEA whereby, the commitment to have beautiful designs at low costs and affordable to the clients is emphasized. In the case study, it is cited that there is no design that gets to the market if the customers cannot afford it and this clearly demonstrates that IKEA is committed to having good designs at very low costs (Marketline Advantage 2012). In my opinion, by investing heavily and having lots of participation in being socially responsible in the society and that way the company is deemed to increase more sales because the community is aware that the group is concerned of the welfares of the community. IKEA’s commitment to customer’s satisfaction has made it possible for the company to attain success even in foreign markets. IKEA has shown that through the right corporate level strategies, business strategies and corporate governance elements, a company can succeed in the market and hence become successful. References Capell, K (2005). Ikea: How the Swedish Retailer Became a Global Cult Brand. BusinessWeek, November 14, 2005, 44-54. 21. IKEA. (2010). Yearly Summary 2010. Retrieved 22/12/2011 from http://www.ikea.com/ms/nl_BE/pdf/yearly_summary/Welcome_insi de_2010_update.pdf Nemati, H.R. & Barko, C.D. (2004). Organisational Data Mining: Leveraging Enterprise Data Resources for Optimal Performance, IGI Raab, G.(2010) The Psychology of Marketing: Cross-Cultural Perspectives, Gower Publishin SWOT Analysis. (2010). IKEA Group SWOT Analysis, 1-9 Marketline Advantage (2012). Ikea Group SWOT Analysis. (2012). IKEA Group SWOT Analysis, 1-8 Ivarsson, I., & Alvstam, C. (2010). Supplier upgrading in the Home-furnishing Value Chain: An Empirical Study of IKEA’s sourcing in China and South East Asia. 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