CASE STUDY 1

IKEA – THE GLOBAL RETAILER

Dato’ Shamsudin B. Mat

Royal Malaysia Police (RMP)
Police Training Centre Kuala Lumpur, Malaysia
This case concerns a global retailing firm that is dealing with strategic management and
marketing issues. In this case provides a thorough analysis of the current business environment
for IKEA.

Traditionally in Europe, children inherited their furniture from their forefathers. However,
modernization and globalization in both developed and developing countries have changed
consumer buying patterns. Recently, younger generations are more prone to purchase low
costing, portable contemporary furniture and home furnishing products (Jonsson, 2008). As a
result, global retailer IKEA has intentionally designed their products to cater to this target
market, further reducing costs by streamlining operations with local suppliers. In fact, IKEA is a
model example of a company that has redesigned an industry in relation to how its supply chain
operates (Antidote Issue, 1997). IKEA has successfully implemented its strategic business
models in numerous countries in Europe, North America, Asia Pacific and Russia/Ukraine
(Jonsson, 2008).

Furthermore, IKEA intends to extend their corporate strategic models when entering Serbia,
Croatia, South Korea, Russia, China and India (Bloomberg, 2011). IKEA is world renowned for
combining competitive low pricing with high quality products, within an appealing store setting
(Reynolds, 1988). In fact, IKEA’s corporate slogan is “Low price with meaning”, and Vision
Statement is “To create a better everyday life for the many people” (IKEA Group, 2011; Moon,
2004). In other words, IKEA’s main driving force is to provide customers with trendy functional
products with minimalist lines that are manufactured cost-efficiently with suppliers, and priced
low enough so that most people can afford them (Hill & Jones, 2005). Moreover, IKEA
“measures strengths by utilizing Key Performance Indicators (KPI) which help assess the
progress of its vision and long-term goals by setting targets and monitoring progress” (Times,
2009, p. 3).

IKEA was founded in 1943 as a Swedish company which head quartered in Netherlands. The
company designs and sells furniture, kitchen appliances and home accessories. It has been listed
as the world’s largest global retailer and franchising operations. IKEA was awarded several
recognitions by Forbes, such as 58th World’s Most Valuable Brands, 115th America’s Best
Employers and 115th Canada’s Best Employers with over 783 million stores visits and more than
9500 products offer to consumers. In operating over 41 countries and 30 franchised units, the
company’s sales volume is estimated to achieve at least $24 billion since 2012, reported by
Forbes. The largest market for IKEA is Germany, followed by the United States. In term of
revenue, the company has generated a continuing growth profit and its global profit amounted to
35.1 billion Euros in 2016.

IKEA is also known as the most successful global retailer due to its unique forward-thinking
business strategies, reported by Financial Post. The fierce competitions around the world and
the changes in environments are not seen as a threat for the company. It is successfully
transforms those challenges into business opportunities. There are some crucial factors had led to
IKEA’s success, in terms of the globalization of market and globalization of production have
contributing much to the company’s overall achievement. The company has adjusted its
strategies in order to adapt its operations to the environment changes effectively.

Globalization of Markets benefited IKEA

Globalization of market is referring to the merging of separated national markets into one global
marketplace. The remove of barriers to cross border trade have make the firms can sell their
products globally. They can expand the operations in other geographical areas by gaining better
profits and competitive advantages. IKEA is taking this trend by producing consumer furniture
products in global marketplace. The company has benefited from globalization in several
dimensions.

A main advantage is seeking opportunities for growth through expanding and market
diversification. There are many substantial potential markets existed outside the home country.
The globalization has enable IKEA to growth internationally and becomes well known in many
countries. There are many potential markets with the high growth rate especially Asian market.
Asian market is viewed as one of the main markets for global economic growth. The market is
believed to grow at 6.1% at year 2015 and 6.2% in year 2016 under the forecast. IKEA has
entered into this market by setting up many outlets in Asia countries. The brand “IKEA” is
existed in many countries which allowed the firm to gains large economies of scale. Statistic
shows that IKEA group is the world’s largest furniture retailer who has more than 301 stores and
30 franchised units.

The largest market for IKEA is Germany with total number of 44 stores, the suppliers are more
than 1380 in 54 countries and coworkers are exceed 154,000 in 40 countries [16]. The company
was founded in year 1943 with the concept of low price business idea. It focuses on cost
reducing and innovation such as introducing materials that contribute to more environmental
friendly. It makes the firm become famous in global marketplace where the manufacturing has
been outsourced to China and other Asian countries. With the global expanding, IKEA has
awarded “Brands Top 100 Most Valuable Global Brands 2014”.

Besides, globalization market allowed IKEA earns higher profits and margins. Market growth in
mature economies will force firms to seek for global market. Intense competition also makes the
firms to enter in other marketplace for better earnings and profit margins. IKEA has successfully
ranked the 4th most valuable retailer in the world with the value of approximately 19.4 billion
USD. The company operates businesses in more than 40 countries and achieved the sales of over
27.5 billion Euros in year 2012. Global market allows IKEA’s revenues doubled in a 4 years
period to from $600 million to $1.27 billion. By year 2012, United States was becoming the
company largest market after Germany which accounting for 14% of the total revenues. Besides,
IKEA was investing additional 2.5 billion Euros in year 2014 for stores, factories and shopping
centers.

Globalization of market also encourages the company to invest in renewable energy in year
2015. By October of 2014, its sales increased 3.1% to 27.9 billion euro. The net profit also
increased 0.4% to 3.33 billion euro. IKEA said to receive more than 270 million visitors at its
Russian shopping centers in year 2014 and setting the goal to raise the revenue to 50 billion euro
by year of 2020. It also aims to open more stores to generate higher profit margin which
including 25 in India. Furthermore, IKEA can gain new ideas about products, services and
business methods through globalization market. Foreign market can help firms to work with
different environments and expose to new opportunities. Besides, the experience of doing
business on global market allows firms to acquire new knowledge for better enhancing
organizational effectiveness. It may result in innovation and better quality products. IKEA
businesses are found in more than 40 countries which included Asia, Europe and America. The
different taste and preferences of customers in different nations make IKEA to innovate new
offers to satisfy the customers’ needs. Besides, the company works well with local suppliers to
understand the customers’ expectations on furniture. For example, IKEA joint venturing with
China partners when entering Chinese market to understand the local needs. It modifies the
furniture and develop new business model to serve huge market demands. IKEA managed to
come out with many new product ideas to sell in China and generated over 540 billion RMB in
year 2012. The company plans to expand businesses with a total of 40 stores in China by year
2020.

Globalization of Production benefited IKEA

The globalization of production refers to the tendency among many firms to source goods and
services from different locations around the globe in an attempt to take advantage of national
differences in the cost and quality of factors of production, thereby allowing them to compete more
effectively against their rivals. The globalization of production has enabled IKEA to focus on
efficiency. IKEA relies on some 1,300 suppliers located in 53 countries. Because IKEA aims to
reduce its prices by 2-3% each year, finding the right supplier is critical to the success of the firm.
IKEA tries to avoid high shipping costs by working with suppliers in each of its big markets. For
example, the company uses ten different suppliers for its most popular sofa frame. IKEA believes
that by having suppliers in Europe, China, and the USA, rather than sourcing from a single
location, it can minimize shipping costs. In addition, the company gains efficiencies by
concentrating production of certain items in markets like China.

Sweden based furniture giant, IKEA can target its China markets by producing at host country
which help to reduce the transportation cost for exporting and transportation. IKEA believes that
choosing the right location for their local production base is critical decision which allows the
firm to reduce logistic cost. When the cost is lower, the company is able to offer great home
furniture at cheaper price with right quality. It can enhance the competitive advantage in local
market. When producing at foreign market such as China, IKEA has successfully cut prices by
an average of 50% during year 2000 to 2012.

IKEA is well known as practicing cost leadership whereby it is considered low cost provider by
offerings affordable furniture to most of its customers. Producing large volumes is the significant
factor to make the prices low. The company successfully achieved economies of scale in sourcing
of materials which make the production cost reduced. It has resulted in cheaper selling prices
while maintaining good quality. Furthermore, globalization production creates an opportunity for
firm to produce better quality product. The availability to get materials from global market
allows firms to seek for better alternatives. IKEA has enjoyed this benefit by offerings high quality
furniture in lower price. Therefore, more customers choose to buy IKEA products.

What does the IKEA story teach you about the limits of treating the entire world as a single
integrated global marketplace?
In my opinion, every country is unique and has a different culture. If the strategies to provide
low price of product offer a company must identify what and which factor that can bring the
lowest cost in term of labour, transportation, materials and so on.

IKEA was adopting ethnocentric approach which treating the entire world as a single integrated
global marketplace. This approach is simple and easy to use because the firm markets its goods
in international market by using the same marketing mix that uses in domestic market. This approach
is also saving time and cost by avoiding the introduction of new products to global market.
However, there are many limitations and put the firm in higher risk when serves the global
marketplace by using standardization strategy. IKEA has experienced the pain by the products
are rejected by local consumers due to the different taste and preference. It will result in poor
customer satisfaction and bad profit margin in long term.

IKEA first discovered this in the early 1990s when it entered the US. The company soon found
that its European-style offerings didn’t always resonate with American consumers. Beds were
measured in centimeter, not the king, queen, and twin sizes with which Americans are familiar.
Sofas weren’t big enough, glasses were too small, curtains too short, and US size appliance
didn’t fit in the kitchens. Since then, IKEA has redesigned its US offerings to appeal to
American consumers, which has resulted in stronger sales. Similarly adaption occurred with the
China market, including a “balcony” section since many China homes had balconies. Also, since
not everyone had a car, IKEA ensured that their stores were located near public transport. So
they went from having one certain style and developed this into many more so they can please all
kinds of consumers from all over the world. This is what is meant with a single integrated global
marketplace. So they integrated their products.

SWOT Analysis for IKEA.

IKEA's goals of sustainability and environmental design are central to its business strategy. It has
launched a new sustainability plan to take the company through to 2015. This will combine
social, environmental and economic issues.

IKEA uses SWOT analysis to help it reach its objectives. This is a strategic planning tool. It
helps the business to focus on key issues. SWOT is the first stage of planning and looks at the
Strengths, Weaknesses, Opportunities and Threats involved in a project or business venture.
Strengths and weaknesses are internal aspects. This means that they are within the control of the
business. They may refer to aspects of marketing, finance, manufacturing or organisation.
Opportunities and threats are external factors. This means that they are outside the control of the
business. These may include the environment, the economic situation, social changes or
technological advances, such as the internet.

Weaknesses
Strengths
1. Weak presence in Asia
1. Attractive product design
2. Damaged reputation due to a series of
2. Market leadership
incidents
3. Solid financial position
3. Competitive advantage difficult to
4. Vast, yet focused product range
sustain
4. Lack of flexibility due to its size
Opportunities Threats
1. More emphasis on CSR 1. Decline in demand due to increase in
2. Increasing presence in developing consumer income
countries 2. Unsustainability of ‘democratic
3. Formation of strategic collaborations design’ concept
4. Adding premium range of products into 3. Emergence of competition from Asia
portfolio 4. Global economic and financial crisis

A business can create opportunities and counter threats by making the most of its strengths and
addressing its weaknesses. For example, one of IKEA’s key strengths is its strategic aim to use
no more material than necessary in the production of each item. In addition, it develops its
product plans to increase its use of waste or recycled materials.
• One particular table, the 'Norden' table, uses knotty birch wood. The knots in this wood
usually mean it is rejected by other retailers and manufacturers as unsuitable for
use.However, IKEA has made the knots part of its design feature.
• 'Ogla' chairs are made using wood waste from saw mills and LACK tables use a‘Sandwich’
of stiff card between wood sheets to reduce the amount of solid wood needed.

Strengths
Strengths could include a company’s specialist marketing expertise or its location. They are
many aspect of the business that adds value to its product or service. IKEA’s strengths include:
• A strong global brand which attracts key consumer groups. It promises the same quality and
range worldwide
• Its vision – ‘to create a better everyday life for many people’
• A strong concept – based on offering a wide range of well designed, functional products at
low prices
• A ‘democratic design’ – reaching an ideal balance between function, quality, design and
price. IKEA’s ‘Cost Consciousness’ means that low prices are taken into account when each
product is designed from the outset.
These strengths contribute to IKEA being able to attract and retain its customers.
One way IKEA measures its strengths is the use of Key Performance Indicators (KPI). KPIs help
IKEA to assess the progress of its vision and long-term goals by setting targets and monitoring
progress towards these. An example of one of IKEA’s KPIs is the percentage of suppliers that
are currently IWAY approved. The IWAY is the IKEA Way of Purchasing Home Furnishing
Products. This guideline defines the social and environmental requirements IKEA expects of its
suppliers.

IKEA has strengths right through its production processes:

 Increasing use of renewable materials – IKEA improved its overall use from 71% in 2010 to
75% in 2012 to 85% in 2015.
 ‘Smarter’ use of raw materials – IKEA increased the use of recycled or reclaimed waste
products in energy production across all stores from 84% in 2012 to 90% in 2015.
 Volume commitments – IKEA believes in creating long-term partnerships with its suppliers
in order to achieve this. By committing to buying large volumes over a number of years,
IKEA can negotiate lower prices. This also benefits the suppliers because they enjoy the
greater security of having guaranteed orders.
 Economies of scale – for instance, bulk buying at cheaper unit costs.
 Sourcing materials close to the supply chain to reduce transport costs.
 Delivering products directly from the supplier to IKEA stores. This slashes handling costs,
reduces road miles and lowers the carbon footprint.
 Using new technologies – for example, IKEA’s OGLA chair has been in its range since
1980. The chair has changed through the years to reduce the amount of raw materials needed.

Opportunities
A business uses its strengths to take advantage of the opportunities that arise. IKEA believes that
its environmentally focused business conduct will result in good returns even in a price sensitive
market. As the company states:
‘There is a true business potential for IKEA in providing solutions that enable customers to live
a more sustainable life at home. IKEA is developing effective solutions for customers in order to
support them recycling or reusing used products, aiming at no products ending up at landfill and
the recycled materials used in producing new IKEA products.’

Some of the opportunities that IKEA takes advantage of through its sustainability agenda are:
 A growing demand for greener products
 A growing demand for low priced products. Trends in the current financial climate may
result in consumers trading down from more expensive stores
 Demand for reduced water usage and lower carbon footprints.IKEA has a number of areas of
focus to its work with sustainability, each of which it supports in various ways:

1. Solutions for a sustainable life at home – IKEA gives online tips and ideas for this.
2. Sustainable use of resources. IKEA aims for zero waste to landfill, wastewater treatment and
programmes to reduce its use of water.
3. Reducing carbon footprint. IKEA aims to reduce energy use, use more renewable energy, cut
its use of air transport and reduce packaging. Its green transport initiative includes an aim to
reduce business flights by 20% in 2020 and 60% by 2025.
4. Developing social responsibility. IKEA’s policy includes support for charities such as the
World Wildlife Fund, UNICEF and Save the Children.
5. Being open with all its stakeholders. This involves building trust through good
communication with consumers, co-workers, key opinion formers and the press. Being
sustainable is a central part of IKEA’s image.

Weakness
IKEA has to acknowledge its weaknesses in order to improve and manage them. This can play a
key role in helping it to set objectives and develop new strategies. IKEA’s weaknesses may
include:
• The size and scale of its global business. This could make it hard to control standards and
quality. Some countries where IKEA products are made do not implement the legislation to
control working conditions. This could represent a weak link in IKEA’s supply chain,
affecting consumer views of IKEA’s products. The IWAY code is backed up by training and
inspectors visiting factories to make sure that suppliers meet its requirements.
• The need for low cost products. This needs to be balanced against producing good quality.
 IKEA also needs to differentiate itself and its products from competitors. IKEA believes
there is no compromise between being able to offer good quality products and low prices.
• IKEA needs to keep good communication with its consumers and other stakeholders about its
environmental activities. The scale of the business makes this a difficult task. IKEA produces
publications in print and online (for example ‘People and the Environment’) and carries out
major TV and radio campaigns to enable the business to communicate with different target
audiences.

Threats
If a company is aware of possible external threats, it can plan to counteract them. By generating
new ideas, IKEA can use a particular strength to defend against threats in the market. Threats to
IKEA may stem from:
• Social trends – such as the slowdown in first time buyers entering the housing market. This is
a core market segment for IKEA products
• Market forces – more competitors entering the low price household and furnishings markets.
IKEA needs to reinforce its unique qualities to compete with these.
• Economic factors –the recession slows down consumer spending and disposableincome
reduces. IKEA addresses these issues in many ways. It manages weaknesses and threats to
create a positive outcome.

Social trends: IKEA is building online help to guide customers to a more sustainable life. Here it
can focus on home improvement in the slowing housing market. It supports customers with tips
and ideas on its website to reduce their impact on the environment. This will also save them
money. Staff are trained on sustainability, both on what IKEA is doing and how they can take
responsibility to become sustainable for themselves.

Market forces: IKEA is large enough to enjoy economies of scale. This lowers average costs in
the long run through, for example, better use of technology or employing specialized managers.
Economies of scale also give a business a competitive edge if cost savings are then passed on to
customers in the form of lower prices. This puts up high barriers to entry for smaller companies
entering the market.
Economic factors: IKEA’s low prices create appeal amongst its customers in tough financial
times. It is vital to keep prices as low as possible when the retail sector is depressed. IKEA’s
pricing strategy targets consumers with limited financial resources. Its products will also appeal
to those with higher budgets through good quality and design. The company must ensure that it
is always recognised as having the lowest prices on the market in the future. Communication
plays an important role here.

Conclusion
As it is about all about operating in International Markets, and International Business, we do not
know which strategy will best suit such multinational companies that is we do not know whether
a Global standardization, or Internationalization, Transnational, or Localization, which
international strategy is going to work in which corner of the world. All we can conclude by
saying is that before entering into a new market a firm should do its “necessary homework’s”
unlike IKEA which always did mistakes first and then learnt from it. This will save millions and
billions of dollars of a company and this will also help sustain in the long run and secure its
competitive advantage in the global market as well. In conclusion, IKEA has strategically
designed their products to cater to their target market (i.e. younger generational families), while
further reducing costs by streamlining operations with local suppliers. In addition, they have
pursued a global expansion strategy of primarily entering countries going through periods of
high GDP growth (i.e. China, Eastern Europe) or those developed countries with niches within
the home furnishing industry (i.e. US, Japan).