According to Hill, Jones, and Schilling, Furniture was first introduced into the IKEA range of products in 1948, and due to a positive response, the product line increased in size. They were having a “price-war” with competitors at the time when IKEA opened a showroom in Sweden to create a competitive advantage. The company believed that the showroom method would customers could determine whether they were getting value for money (Hill, Jones, & Schilling). Finally, IKEA made the decision to design its own furniture due to competitors trying to make suppliers boycott IKEA products. The “flat-packs and self-assembly” concepts arose when an employee disassembled a table to prevent damage during transport and the rest was history (‘History of IKEA”).
In 1963, the first IKEA store outside of Sweden was established in Norway (Hill). From this point on, IKEA began to spread like a wildfire, first to Denmark, then Switzerland, Germany, Australia, Canada, Austria and Netherlands (Hill). Hill explains that many alliances were struck up with different suppliers in order to introduce new products, together with new concepts, which led to cost-effectiveness. One example was an innovative, multifunctional seat/recliner, which was made by utilizing a denim, a raw material from another industry, that could be obtained at a low cost (Hill). The expansion of Europe went well due to reducing its overall costs and was less responsive to the needs of the locals. However, IKEA came with a strategy to manufacture furniture with unique design, low prices and immediate availability in delivering which solved customers much-needed services. Additionally, customers were willing to buy stylish furniture with low prices which the company had (Hill).
IKEA’S Business Strategies
IKEA pursues many strategies to attract customers, differentiating its products from its competitors and cutting the prices of its furniture. IKEA focuses on transnational strategy, international and global strategies to succeed internationally.
The first strategy IKEA uses is differentiating its products, also known as a transnational strategy (Hill, Jones, & Schilling). Since competitive conditions in the market are so intense, some companies need to focus on both cost-leadership and differentiation, notes Hill. This strategy is difficult to pursue, as it has conflicting demands on any company. IKEA has succeeded in following this strategy by distinguishing its furniture from other furniture companies and has branded its company to fit the taste of a wide variety of buyers. This helps the company target different audiences an opportunity to enter different markets. Differentiating key features that IKEA was soon known for were flat packaging and self-assembly, as state previously (Hill). Hill explains that flat packaging became very effective to IKEA and its customers. The concept is very useful for customers, and the efficiency drew a distinction between IKEA and other furniture companies. IKEA also provides stylish designs with “minimalist lines” (Hill, Jones, & Schilling). With stylish and trendy furniture, the company maintained to keep everything at a considerably low price. In addition to modern style and low price, IKEA offers its customers high quality and a wide range of products (Hill).
Additionally, as stated before, IKEA uses large showrooms for its furniture and offers uniquely designed warehouse type stores to its customers (Hill). The interior of the store is structured like a maze, which encourages customers to pass by each department and showroom to get to the checkout (Hill). Therefore, customers can check every available department at one visit. In addition, IKEA formed self-service checkouts and merchandise pick up areas (Hill). Along with their modern designs, IKEA experimented with adding an in-store restaurant to its warehouses. The restaurant was a hit and became an essential feature of all IKEA stores (Hill). Majority of IKEA stores are usually located on the outskirt of the city, rather than the crowded downtown. These locations offer IKEA customers easy access roads and plenty of parking spaces (Hill).
According to Hill, Jones, and Schilling, in Strategic Management, if a company uses a strategy through which goods and services are sold outside its domestic market it is known as an international strategy. Expanding into international markets can allow potential opportunities to the firm in question (Hitt, Ireland & Hoskisson). According to Hitt, Ireland, and Hoskisson, the incentives are as follows:
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Increased market size – According to Ansoff’s growth matrix strategy, IKEA has taken Market development strategy, trying to sell existing products to new markets. They are entering new geographical markets with their Swedish designed furniture.
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Greater returns on major capital investments – On initial expansion, IKEA earned a greater return from other countries than their home country. Therefore, they explored different markets. Currently, they have identified the US, China, and Russia as their main markets which generate better returns.
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Economies of scale – This can be exploited by expanding into markets that contain homogeneous consumer tastes and do not require much adaptation, by using standardized products all over the world. IKEA’s main focus was to produce elegant products and sell at low prices. (Suarez). By identifying commonalities in consumer buying patterns, the standardized Swedish furniture was accepted by the Europe market too.
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Scope for internationalization and learning – Expanding knowledge base by expanding into markets that are important as a source of innovation in that specific industry, and the ability to access and develop resources and capabilities through value-adding activities. Growth in the target market segment would enable them to grow the size of the market by catering to more people (IKEA’s global marketing strategy).
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Competitive advantages of location – Differences in culture, specific economic factors, administration, and geography can be made use of. After a time, competitors reengineer and find out ways to imitate products. To protect the resources IKEA had they decided to enter new markets, mainly Russia, and also with the aim of earning a better return (Suarez).
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Extend the product lifecycle – Swedish market was saturated in 1960 and IKEA decided to expand its business formula elsewhere. Since Sweden is not a very large market, there is limited growth, leading to similar markets such as the Scandinavian countries Norway and Denmark (Suarez).
As for global strategy, IKEA initially began this specific strategy, which they try to increase profitability through cost reductions. Within this strategy, production and marketing are primarily focused in a few locations, and there is no customization to maintain economies of scale. However, IKEA had to change strategies to cater to the US consumer needs once they entered the market (Tandon).
Hardships in the United States
According to Hill, the company started off with wholly owned subsidiaries but with their globally standardized equipment. However, as the entry proved unsuccessful as the IEA failed to listen to US markets preferences over furniture. There, IKEA is currently giving more decision-making power regarding design building in the US markets subsidiaries (Hill). Hill explains that the entry into the US was not as successful for IKEA as entering European counterparts. The root of most of these problems was due to the company not paying attention to local needs and preferences. US customers preferred large sets of furniture and household items. For instance, Swedish beds were five inches narrower than those US customers were used to, IKEA’s kitchen cupboards were too narrow for the large dinner plates that were used in the US, IKEA’s glasses were inadequate for US consumers who generally add quantities of ice, therefore requiring larger versions, and IKEA chests of drawers were too shallow for US consumers, who needed more room to store clothes (Hill). In addition, IKEA Swedish-sized curtains did not fit American windows.
As a result of poor performance in the US market, IKEA’s management realized that a standardized product strategy is the best way to respond to demands and the company has recently adopted a more balanced strategic focus. They are doing so by giving priority to global and domestic concerns (Tandon). The current approach emphasizes global market coordination to reduce the standardization of activities and acquire both economies of scale and scope. IKEA redesigned its strategy and adapted its products to the US market. While overall its subsidiaries follow instructions from the corporate head office in Sweden, subsidiaries in the US are given more autonomy, to respond effectively to the local business environment (Tandon).
IKEA’s Strategy in India
As stated, IKEA has become one of the most successful retailers in the world and wants to expand even further into foreign markets. They plan to globally open another 25 stores by 2020 into the nonwestern markets including China and India. IKEA is known globally for its lower prices and innovatively designed furniture (Suarez). But wanting to pursue global expansion into India, they need a different strategy geared to the different culture of their market.
According to Expanding in India comes with restriction by their government. One restriction was, IKEA is not allowed to put stores near food and beverages outlets, which reduced locations to put their stores. Another issue, operations in Indian as a single-brand segment were only allowed to own 51% of operation, but in the past year, the government has given IKEA permission to own 100%, which also affects their strategy (Hitt, Ireland & Hoskisson). Now, IKEA strategic plan in expansion in India is to ask consumer their needs, understand the culture and location, as well CEO stated, to keep to their core concept; to offer a wide range of well-designed, functional home furnishing products at low and affordable cost. (“IKEA Concept and History”).
IKEA SWOT Analysis
Through global expansion, we can determine IKEA’s possible strengths, weakness, opportunities, and threats, as seen below.
Strengths: According to Bhasin, contributor for Marketing91, IKEA’s strengths are focused on its overall low-cost products, brand value, and overall low costs. IKEA’s products are very cost effective and are a value for money. Additionally, they are on constant researching as well as innovating to keep bringing the prices down for the customers and to keep adding different products to attract their audiences. Additionally, IKEA is known to be a smart marketer, concentrating on creative strategies to make a strong brand for themselves (Bhasin).
Weaknesses: Ikea has operations in many countries and keeps attracting local troubles. Ikea has been recently in the news being involved in a corruption case due to expansion problems in Russia (Bhasin). They also were in the news for issuing an all men catalog in Israel mocking their religion. Steps like this result in negative publicity. Another weakness is that they are focused to keep the cost minimal but at the same time provide good quality service and high product performance, which is not always possible (Bhasin).
Opportunities: IKEA is focusing on their eco-friendly products since the world is moving forward to a healthier lifestyle (Bhasin). Additionally, consumers are becoming more cost-conscious which is an opportunity for the company to opt for such products as they tend to change their furnishing periodically. Lastly, IKEA is efficiently focusing on their global expansion, primarily in India. Expanding in developing countries is a smart move for the company since their products are low-cost (Bhasin).
Threats: IKEA needs to watch out for other companies that keep counterfeiting their products (Bhasin). IKEA is known to constantly update and innovate their offerings to stay ahead of the game. Additionally, they also need to be cautious of the changing laws and tax policies, which can badly impact the prices of IKEA’s products, states Bhasin.
Porter’s Five Forces Analysis
Threat of new entrants: To compete effectively with IKEA, the competitor must invest a greater amount, develop long-standing relationships with clients, and select suitable and competitive locations for outlets for which much patience and capital is required. It is relatively difficult to establish in major cities and gain the reputation of IKEA, establishing a vast supply chain and creating a unique brand name. Due to fewer regulations, the threats of new entrants are high, with no immediate threat because of the intensity of competition
Bargaining power of buyers: Buyers have heavy control and power because they have such a wide variety of alternative supplies. Maintaining customer satisfaction is important in this industry and satisfying customers’ needs and desires.
Bargaining power of suppliers: The bargaining power of suppliers is considerably low. IKEA has succeeded in managing and maintaining long and well-established relationships with suppliers across the globe. IKEA has been recorded to have 1380 suppliers in as many as 54 countries, 21% of which are established in China in 2008 (Hitt, Ireland & Hoskisson). IKEA also possesses their own manufacturing company, Swedwood Manufacturer which manufactures its own designs (Hitt, Ireland &Hoskisson). Therefore, suppliers possess less bargaining power and can be compelled to meet the terms of IKEA rather than vice versa.
Threats of substitutes: IKEA is the top ten-furniture retailer by sales as recorded in the US. (Tandon). Therefore, their threats or rivals do not pose an equal amount of power in the industry to pose a threat to taking high numbers of customers from IKEA. However, KEA needs to be updated with the latest trends, to avoid losing their name for the style. Through simplicity of design and innovative technology, IKEA can follow any new style well and rapidly and move each the product into its stores. Ever since the inception of the concept of furniture, styles, and trends in that sense have undergone much change. Since the current trend is “going green”, many firms are following this concept. However, the demand for basic, functional furniture has remained relatively constant, therefore there is less threat of substitutes soon.
Rivalry among existing competitors: Being an internationally serving industry, IKEA must compete with local and large named companies in each country. These rivals have a better grasp of their business and business development since it is harder for IKEA as a large spread company to oversee needed changes at each store location, country or region.
Increase in annual growth in both China and India is an advantage to expanded business to those countries. As stated by Suneera Tandon, IKEA has been researching intensively to prepare for India. After six months of policy approval, finalizing large parcels of lands, and figuring out local sourcing, IKEA is now pulling out all stops to expand in Asia’s third-largest economy. Patrik Antoni, IKEA’s deputy country manager in India, stated that they are really going all in for India by truly understanding their targeting audiences and bringing in 7,500 products to local needs (Tandon). Antoni stated that they have researched the people to create and implement products that will suit them. Antoni also adds that there is high awareness in the country among people in the country who have previously traveled abroad and are able to understand IKEA.
Conclusion
It is apparent that IKEA has managed to both capitalize on its cost leadership and ensure they meet local demands through differentiation of products by using transnational strategy. IKEA has chosen to mostly enter markets through wholly-owned subsidiaries in order to maintain their brand image, although when compelled, other methods such as joint ventures and franchising has been made use of. This strategic decision has enabled IKEA to maintain a competitive advantage and earn above-average returns due to leadership in the market.
