Situation Analysis of IKEA
Situation Analysis of IKEA
Executive summary
IKEA is the leading furniture provider in the world. The company has made great achievements implying its business operation is worthy of study. In this report, the current situation and competitive competence of IKEA are examined. The company has significantly been benefited by its strong competence of innovations, flexibility and adaptability, and sensitivity to consumer needs and adequate marketing segmentation. These core competences of IKEA are reflected in its major activities of business management such as supply chain management, use of information technology, implementation of branding strategy and cost control. As a result, IKEA can provide quality as well as affordable products to its customers and set up its unique and dominant position in the global market. In this way, IKEA successfully achieves its sustainable development and stable performance. It is found in this report that IKEA is a successful model of business operation which should be studied by other companies.
Table of contents
TOC o “1-3” h z u HYPERLINK l “_Toc370628072” 1.0 Introduction PAGEREF _Toc370628072 h 1
HYPERLINK l “_Toc370628073” 2.0 Innovation and organizational sustainability PAGEREF _Toc370628073 h 1
HYPERLINK l “_Toc370628074” 2.1 Innovation PAGEREF _Toc370628074 h 1
HYPERLINK l “_Toc370628075” 2.2 Organizational sustainability PAGEREF _Toc370628075 h 2
HYPERLINK l “_Toc370628076” 3.0 Operations and internal processes PAGEREF _Toc370628076 h 3
HYPERLINK l “_Toc370628077” 3.1 IT capability PAGEREF _Toc370628077 h 3
HYPERLINK l “_Toc370628078” 3.2 Scale and range of product PAGEREF _Toc370628078 h 4
HYPERLINK l “_Toc370628079” 3.3 Supply chain management PAGEREF _Toc370628079 h 4
HYPERLINK l “_Toc370628080” 4.0 Customer and marketing PAGEREF _Toc370628080 h 5
HYPERLINK l “_Toc370628081” 4.1 Market segmentation PAGEREF _Toc370628081 h 5
HYPERLINK l “_Toc370628082” 4.2 Branding strategy PAGEREF _Toc370628082 h 5
HYPERLINK l “_Toc370628083” 4.3 Sales channels PAGEREF _Toc370628083 h 6
HYPERLINK l “_Toc370628084” 5.0 Financial performance PAGEREF _Toc370628084 h 7
HYPERLINK l “_Toc370628085” 5.1 Analysis of financial indicators PAGEREF _Toc370628085 h 7
HYPERLINK l “_Toc370628086” 5.2 Reasons for the current financial situation PAGEREF _Toc370628086 h 8
HYPERLINK l “_Toc370628087” 6.0 Conclusion PAGEREF _Toc370628087 h 9
HYPERLINK l “_Toc370628088” Reference PAGEREF _Toc370628088 h 10
HYPERLINK l “_Toc370628089” Appendix 1: Organizational structure of IKEA PAGEREF _Toc370628089 h 12
HYPERLINK l “_Toc370628090” Appendix 2: Income statement of IKEA PAGEREF _Toc370628090 h 13
HYPERLINK l “_Toc370628091” Appendix 3: Balance sheet of IKEA – assets PAGEREF _Toc370628091 h 14
HYPERLINK l “_Toc370628092” Appendix 3: Balance sheet of IKEA – equality and liabilities PAGEREF _Toc370628092 h 15
HYPERLINK l “_Toc370628093” Appendix 4: Sales of IKEA PAGEREF _Toc370628093 h 16
HYPERLINK l “_Toc370628094” Appendix 5: Global stores of IKEA in 2010 PAGEREF _Toc370628094 h 17
1.0 Introduction
IKEA is the world’s leading furniture manufacturer and provider. It has expanded its business to 35 countries and implemented the hybrid strategy at the business level offering economic and innovative products to the global consumers. The standardization of production and the one-suit-for-all business model allows IKEA to control its costs effectively and the global supply chain facilitates its implementation of the hybrid strategy. As the result, the company has achieved good financial performance and sustainability. Even impacted by the 2008 international financial crisis, IKEA made good performance. Business success of IKEA is due to a variety of reasons. Innovations, optimization of internal process, and customer orientation are major reasons contributing to IKEA’s leadership in the global furnishing industry. In fact, the increasingly intensive global market has put great pressure on companies and required them to establish and reinforce their competitive advantages. The competitive advantages of IKEA such as innovations, efficient supply chain management, and sensitivity and adaptability to the changing customer needs are rooted in its business operations. In this report, the major aspects of IKEA’s business operation are analyzed including innovation and organizational sustainability, operations and internal processes, customer and marketing, and financial performance. With analysis of these aspects, the report aims to outline the features of IKEA’s business operation as well as explain why the company manages to establish the leading and unique position in the global market.
2.0 Innovation and organizational sustainability
2.1 Innovation
IKEA is a company with strong competence of innovation. Its innovation is mainly reflected in two aspects. First, it innovatively creates the current business model. One-suit-for-all business model effectively enlarges purchasing sale of IKEA, helps it to enhance its bargaining power against the suppliers, and get preferential prices to cut down its costs. In addition, One-suit-for-all business model enhances the level of standardization making business management more easily and allowing consumers around the world enjoy the same high quality products (Enquist et al, 2007). In addition, to reduce costs, IKEA cut down the unnecessary services. For example, a majority of IKEA’s furniture is self-assembled and the company does not provide free delivery services. This is different from many companies which want to provide more services for customers to attract them and enhance consumer satisfaction. Second, IKEA pays attention to product innovations. The company leads the fashion of furniture designing in the global market. The innovative designers worked in IKEA help the company to deliver the new product models to the market. IKEA tries to provide practical and quality products with affordable prices to the customers and innovation of products is a very important element of “the IKEA Way”, the corporate culture of IKEA. Innovation competence contributes to IKEA’s business to a large extent. Nowadays, customers have higher requirements for products and services. Since they have many alternatives and can vote by feet, companies have to impress them and attract them with continuous innovations and improvements. Innovations help IKEA to achieve these objectives and differentiate itself from its competitors to establish the unique position in the global market.
2.2 Organizational sustainability
IKEA has strong competence of sustainable development. Nowadays, the business environment is changing fast and global economic fluctuation puts great pressure on companies. For instance, the 2008 international financial crisis impacted many companies and led to significant declination of their performance. IKEA managed to survive this crisis in a rather smooth way. This provides some evidence for sustainability of the company. To deal with the difficult times, IKEA explored the ways to cut down its costs. It kept seeking for quality and cheaper suppliers. In addition, its designers cooperate with the suppliers closely so as to develop the new products in a more efficient and economic way (IKEA, 2010). In addition, IKEA pays attention to develop the green and energy saving techniques in its production and product designing. These measures help the company to adapt to the new business environment since corporate social responsibility and sustainable development are given more and more attention by the public. Corporate social responsibility benefits companies to improve their reputation, promote their public relations, and win trust of the customers and other stakeholders. IKEA has been aware of the new trend and made adequate response. In general, the competence of sustainable development can largely be attributed to IKEA’s flexibility and adaptability in its business operation. It keeps improving its supply chain management and adjusts its business operations and product designing toward the changing customer requirements and business environment. Success of IKEA reveals that to achieve sustainable development, companies should take active attitude toward change management to enhance their flexibility and adaptability.
3.0 Operations and internal processes3.1 IT capabilityIKEA has adopted information technology to improve and measure its performance. The company has established its official website and exploited some social media to implement its marketing activities. It allows consumers to make purchasing orders online. In this way, the product availability of IKEA has been significantly enhanced. In addition, IKEA uses information technology system to optimize its internal operations and business management. Information technology has been used in its major aspects of business operation such as supply chain management, human resource management, and financial performance analysis. For instance, in recruiting employees, IKEA uses the online approaches to enhance its efficiency. It also collects data of customers and sets up a strong database to analyze the customer behaviors and demographic features, provide services and manage contracts. For example, the company has updated its contact centre operations by setting up the Interactive Intelligence’s Customer Interaction Centre (CIC) 4.0 (Callcentre Helper, 2013). By introducing the advanced information technology into CIC 4.0, the company hopes to improve quality of customer service and business performance.
3.2 Scale and range of productThe 4Vs model helps to analyze the business scale and range. Figure 1 shows the 4Vs model. IKEA provides a large volume of products to the global consumers with its mature network and huge business scale. It offers a high variety of products since more than 9000 kinds of furnishing goods are sold by IKEA. Its business is of medium level of variation. On one hand, IKEA has some loyal consumers who repeatedly buy its products and support its stable performance. On the other hand, the sales revenue and profits may be impacted by economic situation and other changes of business environment. The products provided by IKEA are of high level of visibility. Consumers can see, feel and touch the furnishing products in the IKEA stores. Even for the online buyers, pictures and instructions are provided for them to see the products and understand their functions and features.
Figure 1: The 4Vs model
Source: Brand, N., 2007, p.4.
3.3 Supply chain management
Supply chain management is a basic competitive advantage of IKEA which supports its business success. To provide high quality and innovative products with cheap prices is a challenging task and IKEA achieves these conflicting objectives with its strong supply chain management (Ivarsson and Alvstam, 2011). IKEA mainly adopts a buy supply chain. Theoretically, make and buy are two basic types of supply chain. Make refers to the supply chain “If an organization produces goods it incurs the full costs of owning plant and manufacturing capacity” (Hines, 2004, Chapter 6). On the contrary, buy refers to the supply chain if an organization orders and buys goods from suppliers and transfer the costs of building and operating plants to the suppliers. IKEA has more than 1220 suppliers in 55 different countries making its furniture and 31 central distribution centers in 16 countries or the suppliers deliver products to the IKEA stores (International Supply Chain Management, 2013). The buy supply chain allows IKEA to reduce risks and keep its flexibility. It can select for more efficient and cheaper suppliers to remain its cost leadership.
4.0 Customer and marketing4.1 Market segmentation
Market segmentation is a necessary approach for companies to accurately target at their potential consumers. IKEA mainly targets at two groups of consumers. One group is young consumers which prefer innovative products and enjoy DIY efforts in assembling the furniture but have limited income (Yu, 2013). In addition, many young people are supporters of easy and simply life. The IKEA products are designed with a simple style which meets with the desires of many young people. The other target consumer group is consisted of people at the middle class. This group of consumers enjoys the quality life and has their own tastes and desires for life. At the same time, they are sensitive about prices. The economic and affordable products are preferred by them. The analysis reveals that IKEA has well understood its potential consumers and clearly known what they want. The products and styles of IKEA exactly meet with needs and desires of potential consumers. In addition, the target consumer groups of IKEA cover a large number of people which indicates that the company has huge market potential.
4.2 Branding strategy
Branding strategy contributes to IKEA’s success largely. IKEA has given special attention to build and improve its corporate reputation and brand image (Tarnovskaya and De Chernatony, 2011). It adopts a brand extension strategy using the IKEA brand to all of its furnishing products. The brand extension strategy has some merits. An important one is to deeply impress customers and make them remember the brand. In fact, many people all around the world know the brand of IKEA. The high brand identification is of extremely importance. For many customers, the well-known brands send out signals of high quality of products and services. Therefore, they tend to choose these brands. In some developing countries such as China, customers are likely to trust the brands of big multinational companies including IKEA. This benefits IKEA’s business operation in these countries. In fact, the emerging countries in particular China have become the new profit sources for IKEA. IKEA effectively integrates its branding strategy with marketing activities (Tarnovskaya and De Chernatony, 2011). By emphasizing its advantages in innovations and prices in its marketing activities, IKEA successfully differentiates its brand from its competitors and win support of customers.
4.3 Sales channels
To enhance availability of products and provide better services for customers, IKEA has set up multi-channels to sell its products. Currently, in-store sales and online sales are two major sales channels of IKEA. In-store sales mean IKEA builds up stores in some countries all around the world so that customers can visit these stores to select the products they want (Reynoso, 2009). This is a traditional sales channel. Table 1 shows growth of IKEA’s stores and Table 2 shows visits of IKEA. Except for in-store sales, the company also establishes online store. The new way helps IKEA to keep up pace of the technological development.
Table 1: Growth of IKEA Stores
Year IKEA’s stores
1954 1
1964 2
1974 9
1984 52
1994 114
2004 201
2005 220
2006 237
2007 260
2008 285
2009 301
Source: Scholes, K. (2010).
Table 2: Visits and turnover of IKEA
Year Visits to IKEA (million) Turnover of IKEA (million)
1954 0.05 1
1964 1.6 25
1974 8.2 169
1984 52.1 1216
1994 125.6 4396
2004 400.8 13570
2005 453.8 15212
2006 504.2 17658
2007 583.1 20685
2008 631.8 22498
2009 660.1 22713
Source: Scholes, K. (2010).
5.0 Financial performance5.1 Analysis of financial indicators
IKEA is a private company. Comparing with the public companies, the transparency of IKEA’s financial performance is lower. Table 3 shows some major financial indicators of IKEA revealed in its summary of performance. The table shows that IKEA made good performance in sales and had strong competence of cost control. In 2009, the sales revenue of IKEA increased €312 million while the cost increased only €76 million. The strong cost control competence allows the company to achieve large profits. The financial indicators imply that IKEA has good financial competence to support its current business operation and new investments. For example, the company plans to set up a chain of economic hotels in Europe. This investment is supported with its good financial performance. On one side, IKEA can invest its own money into the new project. On the other side, the strong financial performance of IKEA helps it to get support from the financial organizations and allows it to get financial support at low costs.
Table 3: The financial performance of IKEA
Financial indicators (€million) Fiscal year 2009 Fiscal year 2008
Sales revenue 21846 21534
Cost of goods sold 11878 11802
Gross profit 9968 9732
Operating cost 7198 7078
Operating income 2770 2654
Income before minority interests and tax 2913 2813
Tax 384 546
Net profit 2538 2280
Source: IKEA. (2010).
5.2 Reasons for the current financial situation
The above financial indicators show that IKEA has set up a strong financial position currently. Even in the difficult times, the company succeeded to achieve growth of performance. Though IKEA’s financial data is not publicized timely as the public companies, the company’s good performance is reflected in its business expansion. The successful financial situation of IKEA is achieved with the following reasons. First, the company has formed a large consumer base. By improving its brand and products continuously and developing the membership policies, IKEA retain the regular consumers. These consumers contribute largely to its growing sales revenue. Second, IKEA is sensitive about the business opportunities. The company has given special attention to the emerging markets in particular China (Johansson and Thelander, 2009). It realizes China is of bright prospect with its rapid economic growth and increasing household income. The attentions given to the new markets help IKEA to avoid saturation in its traditional markets and allow it to exploit globalization more efficiently. Third, though IKEA tries to differentiate itself from its competitors with innovations and quality products, it emphasizes implementation of the cost leadership strategy and keeps improving its cost control. Nowadays, cost control pressure becomes increasingly large with inflation. This competence benefits IKEA to a large extent. Fourth, IKEA has set up its business continuity system and plans to enhance its resilience, flexibility and adaptability. Business continuity system facilitates IKEA to survive the difficult times and make stable financial performance.
6.0 Conclusion
This report analyzes the current situation and competence of IKEA. It is found that the company has set up the dominant advantages in innovations, flexibility and adaptability of international business operational process, and good understanding of consumer needs and adequate marketing segmentation. In recent years, IKEA has kept improving its major activities of business management such as supply chain management, adoption of information technology, brand construction and cost control. All these activities are guided by IKEA’s hybrid strategy which integrates the differentiation strategy and the cost leadership strategy. The competitive advantages and the clear business strategy of IKEA contribute to its stable performance and the current financial performance. In fact, IKEA also has to face the changing customer needs and the difficult times, but it manages to adapt to them by giving attention to sustainable development and business continuity. In summary, IKEA is a successful company with strong competitive competence in the global market.
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Appendix 1: Organizational structure of IKEA
Source: IKEA, 2010, p.11.
Appendix 2: Income statement of IKEA
Source: IKEA, 2010, p.20.
Appendix 3: Balance sheet of IKEA – assets
Source: IKEA, 2010, p.21.
Appendix 3: Balance sheet of IKEA – equality and liabilities
Source: IKEA, 2010, p.22.
Appendix 4: Sales of IKEA
Source: IKEA, 2010, p.25.
Appendix 5: Global stores of IKEA in 2010
Source: IKEA, 2010, p.25.
