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 submission
JANUARY 2009

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Table of Contents
1. INTRODUCTION....................................................................................3 2. PORTERS 5 ANALYSIS...........................................................................3 2.1 POTENTIAL THREAT OF NEW ENTRANTS.........................................3 2.2 BARGAINING POWER OF BUYERS ...................................................4 2.3 BARGAINING POWER OF SUPPLIERS................................................4 2.4 THREAT OF SUBSTITUTE PRODUCTS...............................................5 2.5 INDUSTRY COMPETITORS................................................................6 3. PESTLE ANALYSIS.................................................................................6 3.1 Political............................................................................................6 3.1.1 Local Capacity Sourcing & Risk Reduction Strategies...............6 3.2 Economic Factors............................................................................7 3.2.1 Adapted Place & Price Strategies..............................................7 3.3 Socio-Cultural..................................................................................7 3.3.1 Operational & Supporting Strategies........................................7 3.4 Technological..................................................................................8 3.4.1 Harmonised Regulations & Global Supply Chain.......................8 3.5 Legal Factors...................................................................................9 3.5.1 Warranty & labour laws............................................................9 3.6 Environmental Factors....................................................................9 3.6.1 Corporate responsibility & Requirements.................................9 4. SWOT ANALYSIS.................................................................................10 5. 7s Model............................................................................................11 5.1 Strategy........................................................................................11 5.2 Systems........................................................................................12 5.3 Structure.......................................................................................12 5.4 Style..............................................................................................13 5.5 Staff...............................................................................................14 5.6 Skills..............................................................................................14 5.7 Shared Goals.................................................................................15 6. Recommendations.............................................................................15 7. Conclusion..........................................................................................15 8. Reference & Bibliography...................................................................16

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Assignment Overview

1. INTRODUCTION
Ingvar Kamprad founded IKEA in 1943 in Sweden and from humble beginnings as a retail distributor the company has expanded globally to become one of the worlds most largest and famous retailers of home furniture with operations spanning forty four countries whilst maintaining a 39% share lead, Bartlett et al (1996). By sticking with its core standardized strategy for all its products worldwide and working closely together with manufacturers and subcontractors in countries with very cheap labour such as Poland, China and Russia, Ikeas is able to utilize their skills and expertise to produce high quality standardised designs coupled with huge differences in the cost of labour, raw material and capital. In this report I would analyse the current strategic and competitive position of IKEA through utilizing Porters five forces, PESTLE, SWOT, and the 7 S models to examine the current economic situation and analyse possible 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 which hinders 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 this will determine the level of competitive pressure that exists in the industry, Keri (2001). In the case of IKEA its decision to stick with very visible suburban outlets which is very much accessible from the major high and motorways is a huge barrier for potential entrants, Cowlett (2007). Each outlet is characterized with a massive 300,000 square-foot which sits on a mass of allotments up to six times that of its competitors. With this strategy, it would be virtually impossible for new entrants to compete, Edvardsson et al (2006), Cowlett (2007). In addition, its differential access to cost productive inputs and low-cost position provide substantial entry barriers in terms of scale economies and cost advantages. By working closely together with manufacturers and subcontractors in Poland, China and Russia, Ikeas is able to utilize their skills and expertise to produce high quality standardised designs coupled with huge differences in the cost of labour, raw material and capital. IKEA is thus able to differentiate itself 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 et al (2002). 2.2 BARGAINING POWER OF BUYERS Grant (2008) states that if the numbers of buyers are high in an industry this increases the power of a firm within that industry and consequently the competitive pressure is reduced. On the contrary, if a firm is able to trade with only few buyers within an industry, her competitors will struggle to obtain these valuable customers as each customer represents an important share of the total market shares in the industry, Keri (2001). With respect to IKEA, it embarked on a switching cost strategy which attracts customers by utilizing in its stores a self-service model based on clear, in-store displays and ready-to-assemble furniture to fit its positioning, Edvardsson et al (2006). In huge stores, IKEA displays every product it sells in room-like settings, so customers dont need a decorator to help them imagine how to put the pieces together [34]. Adjacent to the furnished showrooms is a warehouse section with the products in boxes on pallets rather than having to wait for weeks for delivery compared to its competitors, Edvardsson et al (2006). 2.3 BARGAINING POWER OF SUPPLIERS The more the suppliers, the higher the power of the firm within an industry and the lower the competitive pressure, Kotler et al (2001). Conversely, there will be more competitive pressure in an industry with few suppliers. In reference to IKEA, its low cost strategy provides a defence against powerful suppliers by providing more flexibility to cope with input cost increases, Cowlett (2007). The availability of cheap sources of labour in emerging economies has led to the emergence of outsourcing companies who are generating high profits and in that turn they can invest in high qualitative machines so that they are able to produce qualitative products at low cost [34, 35], Grant (2008). The competition amongst these outsourcing companies suggests that big foreign companies such as IKEA would have the capacity to source from a multitude of sources at the cheapest price possible. When faced with substantial choices among the suppliers of labour, insistence on lower labour price and imposition of their designs of products by IKEA would be met with little opposition, Grant (2008). Determinants of supplier power 1. 2. 3. 4. 5. Differentiation of inputs, Keri (2001). Switching costs of suppliers and firms in the industry, Keri (2001). Presence of substitute inputs, Keri (2001). Supplier concentration, Keri (2001). 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 Industry wide

Low cost position

Differentiation

Overall cost leadership

Focus Particular segment only

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 propensity to substitute and the level of switching cost a buyer may face, Grant (2008). The low cost strategy of IKEA places the firm in a favourable position vis--vis substitutes relative to its competitors in the industry as customers are expected to do their own pickup and delivery thereby cutting the cost of the furniture hugely, and IKEA will even sell you a roof rack 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 its low-cost position comes from having customers do it themselves, IKEA offers a number of extra services that its competitors do not. In-store child care is one. Extended hours are another. Those services are uniquely aligned 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 difficult to 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). If few competitors exist in an industry to compete, this allows for much more room to operate and the competitive pressure is reduced. Intense rivalry in an industry ensures that a competitor will respond quickly to your strategic actions (Pearlson, 2001). Although the low-cost position of IKEA gives the firm a defence against rivalry from competitors, however, it is not enough to guarantee a sustainable advantage. IKEA is able to overcome any potential imitation by its competitors by offering a cost based focused and trade-off to a narrow customer group Edvardsson et al (2002). This means that the more IKEA has configured its activities to lower 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. By the trade-off, lowering its costs and targeting the special needs of a subset of customers and by designing its activities accordingly means that its customers are locked in for the foreseeable future and IKEA can still earn returns after its competitors have competed away their profits through 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 and developing countries, IKEA has utilized a mix of strategies with regards its international marketing strategy and operations. In politically sensitive countries, 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 AlFuttaim Group of companies, as the role of the company across most of the repressive regimes where freedom of choice is limited is to provide IKEA with useful inputs on the political situation which might pose as a threat or opportunity for IKEA. With regards global operations in most Asian countries such as China, Japan and Taiwan where there are strict requirements for usage of local raw materials, and strict policies for earthquake resistant shelters, IKEA pursues an adaptation strategy whereby all its kitchen appliances such as cabinets sinks, taps, dishwashers, fridges, etc., fulfil Taiwan, Chinese Japanese law requirements for at least 40% local capacity raw materials, Edvardsson et al (2006). An advantage of this is

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that IKEA is able to access low cost manufacturing cost inputs due to the cheaper access for labour and other raw materials. In China for instance this especially fits in with Ikeas low production cost strategy as it utilizes up to four separate sets of manufacturers 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 the prevailing economic condition, Kotler et al (2001). Ikeas low cost strategy provides a solid defence in its global operations in most underdeveloped countries where low living standards and discretionary income is highly prevalent. In many of such nations, IKEA utilizes the place, distribution and price strategies as a supporting strategy to its trademark operational strategy. For example, in China with an average income of $1800 per year and where 59% of the population use public transport and do not have private cars, IKEA has adapted its strategy on place by opening up its outlets in the Xuhui, Shanghai, Guangzhou and Chengdu Districts which are in the city centres and downtown districts a huge departure from its worldwide strategy of big suburban outlets far from the town centres in most developed countries. In addition, 49 Chinese Yen would get you a basic Junzc cushion, while 1199 Chinese Yen can get you a complete Klanda sofa, Edvardsson et al (2006). This reflects the deep prevailing economic dynamics and culture for frugality in the Asian continent. With regards to its operations in the developed economies such as Europe, IKEA is able to overcome market entry constraints and enhance its global expansion with the liberalisation of investment across the EU, Edvardsson et al (2005), Edvardsson et al (2006). IKEA is ranked as the most famous brand based on recent surveys and still maintains its 39% share lead. In spite of the recent economic downturn, it is still estimated and projected that the domestic demands for furniture will continue to rise in the near future 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 and Taiwan where their the buying patterns reflect the culture for frugality, high quality, visible presence, feedback and communication, this clearly fits in with Ikeas strategy of operational excellence in offering products that are cheap but with innovative, durable, functional and of good

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quality, Edvardsson et al (2006). In addition, its advertising strategy has been aligned to the prevailing culture and as a result IKEA does not pursue a global advertising strategy. But in some parts of Europe such as France and Germany, although IKEA utilizes operational excellence and uniform standardization as its main core strategy, however to reach out to the population, IKEA has had to overcome and break down the cultural elements in each country by successfully aligning additional supporting competitive strategies of distribution, product and promotion to its core strategy, Edvardsson et al (2006). With this Ikeas strategy in these nations is a total / multi-market strategy in order to fit the prevailing culture in most of its areas of operation. An example of this is in France where the high taste of art with compelling quality clearly suggests the peoples preference for quality and high taste, [35]. IKEA matched this culture requirement by projecting its products through advertising as durable, hip, stylish, of good quality and appealing. This comes against the backdrop of the fact that its products are simply functional, practical and 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 where access to secure and efficient communication is encouraged. With regards to its operations in the developed economies such as Europe, the set towards a joint harmonized policy towards information and IT access as asserted in the EU directive, suggests that Information technology, telecommunications and the Internet would therefore ensure worldwide Integration 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 such as; its E-Commerce Information System for IKEA Suppliers (ECIS). The situation is also the case in its global operations in most underdeveloped countries especially in Asia, China in particular where 95% of the population is IT literate and the fact that precise progression unto newer forms of technology is part of the governments priority. As a result, IKEA is able to run one of the worlds most successful global supply chains across all the major continents where it has its operations. Its ECIS software also includes EDI links with external suppliers and database links for internal suppliers. Based on an assertions by Company Director Lars Meyer As soon as the ERP system determines we dont have enough of a certain part in the assembly line to satisfy an outlet a message is dent to all suppliers within reasonable distance, Edvardsson et al (2006). Explained one production manager, we can identify which we need and where 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 and values in countries where it operates and sources its products, without compromising the basic requirements of the law especially regarding warranties, post purchase sales agreements and the rights of the child. Irrespective of the country in operation, with regards to warranty and post purchase laws across the world, the quality is conformed to the European Union and national norms, Edvardsson et al (2006). Even for its Asians markets in countries such as China, the company products are all backed by EU quality standards, examples of such regulations the company offers include kitchens with 10 years and mattresses with 25 years guarantee. With respect to child labour laws and multinational companies, whilst there is a robust and sufficient legal framework to prevent child labour within the EU, United States, Canada and parts of South-East-Asia such as New Zealand and Australia, however the same cannot be said in other countries where IKEA operates such as China and Taiwan. Notwithstanding, IKEA has thrown its support and full commitment to the United Nations convention on the rights of the child (1989), [34]. The company achieves this by placing stringent requirements on its suppliers worldwide to certify that no occurrence of child labour takes place or is practiced 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 stipulations suggests different localization strategy for companies, however, IKEA has got a different take as it implements a uniform and global policy across all countries of operation. IKEA stipulates a usage of supplied wood a year which amounts to an annual volume of 1/20 of the total quantity of felled wood in Sweden [34, 35]. To ensure that its suppliers conform to standards 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 stipulated by the local stakeholders as well managed, Edvardsson et al (2006).

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2. Supplies which are found or suspected to originate from intact natural forest (INF) are rejected accordingly and the suppliers blacklisted, 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 local Chief Conservator of Forests, Edvardsson et al (2006). 5. IKEA shall sponsor its personnel to undertake annual studies of the different types of wood relevant to its current and future wood requirements with the objective of familiarization with new and potential 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 from D'Aveni, R. A. (1994). Hypercompetition: Managing the dynamics of strategic manoeuvring. New York: Free Press 5.1 Strategy I. In the year 2000, IKEA put together a long term strategic direction which was to be the worlds largest home furnishing company by the year 2010, through increasing its sales volume by 10% each year and decreasing its sales price by 20% each year. [34] In all its global operations, IKEA maintains a strategy of offering diverse ranges of products with impeccable quality that are stylish and affordable [34] The strategy is a combination of function, low price, simple design for all its product ranges [34]

II.

III.

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IV.

The main targets if IKEA are customers with a bit of flexibility who seek value and are willing to stretch their budget by bearing the transportation and assembly cost themselves. This in turn works out cheaper 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) as part of its supply chain module and this is responsible for integrating its supply chain function in 55 countries. The main modules of this supply chain function include; the Fix module; Call off module; Order Point Distribution Centre module (OPDC); Direct Distribution Module and Transit module, Edvardsson et al (2006). The supply chain management system through the Vendor Managed Inventory (VMI) is directly linked with IKEAs 1600 suppliers in 55 countries all over the world is in charge of IKEAs 29 distribution centres which supplies its outlets with all its different ranges of products. With this in place when the inventory levels are low in each outlet, 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 distributed structure which incorporates the global marketing strategy, Edvardsson et al (2005). In this system, the information flow is a top down approach where top management maintain a centralized control over all its operations worldwide thereby incorporating the activities of its international suppliers Edvardsson et al (2006). This is a system which eliminates the burden of regional hierarchical control over supplier information. The burden of hierarchical functional redundancies is completely eliminated thereby ensuring close monitoring of its global logistics and supply chain management. Recently the company integrated its wholesale systems which are a harmonized system of its distribution and purchasing functions, Edvardsson et al (2006). At Corporate HQ, the functions 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 all its European and Scandinavian markets, IKEA utilizes its traditional simple blue and yellow standardized style across all its product lines, but for international markets it utilizes its international style of country light blue and 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-time members 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 competitive advantage for decades, Edvardsson et al (2006). Ability to maintain product standardization across its global markets, however promotion, prices and place strategies are adapted to suit localized interest in Asia, parts of Europe and the Middle East, Edvardsson et al (2006). Centralized control of all global operations into a coherent unit, Edvardsson et al (2006).

II.

III.

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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 and stands the test of time [34]. These goals of the company has been formulated and established among its workforce worldwide, enunciating all the ideals starting from mobility, recruitment to training and development, work-life balance, succession planning, leadership and culture, 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 with local stores, it must adapt its strategies of price, place and promotion if it is to succeed in Asia, Africa and the Middle East, as each country has got its own local market and culture which would require adaption from IKEA. The continued expansion of its overseas global markets would bring with it cultural issues and issues with its franchisees and as a result the company must tinker with a mixed system which involves both the current functional and a possible matrix functional system to handle localized systems

7. Conclusion
Porters five forces is a good means by which to begin to grasp many of the market and competitive forces of IKEA in the household furniture industry. Through PEST analysis and SWOT analysis, we have gained a much better insight of the international marketing strategy of IKEA in the Swedish, Middle East, Chinese, Central and Eastern European markets. From the studying in these areas, we came to some conclusions at different aspects as following: Through its cost leadership and differentiation strategy, the IKEA Concept is based on 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. Rather than selling expensive home furnishings that only a few can buy, the IKEA Concept makes it possible to serve the many by providing low-priced products that contribute to helping more people live a better life at home.

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8. Reference & Bibliography

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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 York Times, (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]

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