Table of Content

1 Introduction.....................................................................................................................2

PART 1 – Recent past strategic development history of IKEA and its outcomes..............3

2 Strategic development history an overview....................................................................3

3 Pattern of strategy development in IKEA.......................................................................3

4 Anders Moberg’s era, low cost high quality strategy.....................................................4

5 International expansion strategy of IKEA.......................................................................4

6 IKEA’s corporate culture a way to its sustainability......................................................5

7 IKEA’s product differentiation strategy that attracts the customers...............................6

8 Summary of IKEA’s recent past strategic development.................................................6

PART 2 – Current strategic situation of IKEA.....................................................................7

9 PESTEL analysis on furniture industry...........................................................................7

10 Porter’s five forces for IKEA in furniture industry.........................................................8

11 SWOT Analysis for IKEA............................................................................................10

PART 3: Strategic directions for the future........................................................................13

12 Strategic clock to develop competitive strategy options...............................................13

13 Strategic direction using Ansoff Matrix........................................................................14

14 Evaluating the strategic choice......................................................................................15

15 Conclusion and Recommendation.................................................................................16

16 Bibliography..................................................................................................................17

1 Introduction

This paper consists of three major parts that leads to the strategic development process for

IKEA. Part one evaluates the recent past strategies that IKEA pursued and its outcomes. It

identifies the strategic development process involved in its past and its consequences. Part

two evaluates the current strategic position of IKEA, current strategic position is been

identified by analysing the macro and micro environmental factors that influence the

performance of the organizations and identifying the strengths, weakness, opportunities and

threats of IKEA. Based on the above results, Part three deals with developing future strategic

choices that suits IKEA’s goal and mission and those choices are been evaluated to identify

the suitability, sustainability and acceptability in its context. Finally a strong recommendation

is been given to IKEA about its future strategic choice.

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PART 1 – Recent past strategic development history of IKEA and its outcomes

2 Strategic development history an overview

IKEA is a leading furniture retailer that operates globally. The company was founded by

Kamprad in 1943, at that time he started selling pens, Christmas cards and seeds from a shed

on his family in Southern Sweden. In 1951, First catalogue is been realised, Kamparad

penned all the text himself. The company is been transformed into a huge company that

generates 23 billion Euros per annum. IKEA emerged one of the most successful companies

in retail business. Retail commentators and business analysts said that the success is based on

its well established long-term strategy that has clear focus on its customers and the skill in

implementing the strategies successfully (Economist, 2011, pp. 67-68).

IKEA pursued many strategies in the past to obtain the current top position. Some of those

were long-term changes and far-ranging implications for organisational structure and control.

IKEA had an understandable purpose and structured value in both business achievements and

both customers and employees relationship. Moreover, IKEA had focused on young furniture

buyers and also it targeted them to market its products. While looking into IKEA’s growth it

was organic growth, the company gradually expanded to a giant retailer. In the beginning the

stores were built in Scaninavia and it’s been expanded wherever it got opportunities.

Kamparad used the same retailing concept in all countries (Norman & Ramirez, 1993).

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3 Pattern of strategy development in IKEA

Strategic development process of organisations is better to describe and understood typically

in terms of continuity. There is a tendency towards momentum of strategy (Miller & Friesen,

1980). Once an organization has adopted a particular strategy, it tends to develop from and

within that strategy, rather than fundamentally changing direction (Johnson & Scholes, 1997).

However, it depends upon the successfulness of the adopted strategy. For example, Company

like Burton Group transformed from manufacturing to retailing, which is a major change. In

IKEA’s case the company transformed itself from a small corner shop to a giant retailer.

However, the growth of the company was incremental and it adopted a particular strategy

“To offer a wide range of well designed, functional home furnishing products at cheap price”

and stick to it by improving its resources and capabilities to meet its strategic requirement.

The company’s incremental strategy is been detailed in the following sections.

4 Anders Moberg’s era, low cost high quality strategy

In 1980’s IKEA remained economical in its spending, it relocated to Denmark to save

Swedish taxation. Anders Moberg became the CEO, his simplicity and business tactics of

understanding the customers and fulfilling their expectations encouraged the customers.

Anders Moberg dressed informally, he used to clock in just like other employees, he used to

stay in economically class hotels in international trips, and he used to travel on economy class

air-tickets and expected his executives to do likewise (Norman & Ramirez, 1993).

IKEA planned to deliver low-cost and high-quality products by redefining its relationship

with its suppliers by establishing 30 buying offices around the world. IKEA chosen most

economical suppliers over traditional suppliers, it made the shirt manufacturer to be

employed to produce seat covers. It is an impractical practice however, once suppliers join

into the IKEA network they got access to global markets and received technical assistance.

Suppliers leased equipments and they were trained to bring the quality up to world-class

standards. IKEA managed to procure 12,000 items from 1,800 suppliers in 45 countries at

approximate 20 to 40 percent lower cost compared to its competitors. Thus, IKEA developed

its core competence with good quality and cheap price.

Through the above strategy the company attracted most of the cost sensitive customers and

obtained a significant market share. The company attained its break-even and started offering

the best designs in low price that attracted most of the population. Now, it is time for the

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company to expand its market. So Anders Moberg started looking opportunities in

international markets for expansion. The following section details the expansion strategy of

IKEA.

5 International expansion strategy of IKEA

Sweden is a very small country and it is logical, in a country like this if a business is very

strong and successful then it is reasonable to expand into international markets at some point.

IKEA found much bigger growth potential outside Sweden. IKEA was one of the leading

companies to become a global player. IKEA built its brand through its uniqueness on its

products and its low cost high quality strategy. The company believed that the brand

awareness has always been higher than the company’s actual size and sales volume (Kling &

Goteman, 2003). He planned to expand the company using its internal funding itself, 15

percent of the turnover is being reinvested in expansion (Norman & Ramirez, 1993).

IKEA re-organized its supply chain as it was supposed to cope up with the widely dispersed

sources of components and high-volume orders made it imperative for the company to have

an efficient logistics system for ordering parts, integrating them into products and delivering

them to the stores with less cost of inventory management. IKEA has achieved this through

its world network of 14 warehouses. These provided storage facilities, acted as logistical

control points, consolidation centres and transit hubs and aided integration of supply and

demand, reducing the need to store production runs for long periods, holding unit costs down

and helping stores to anticipate needs and eliminate shortages (Baraldi, 2008).

6 IKEA’s corporate culture a way to its sustainability

In 1996, IKEA split into three groups, comprising the retailing operations, an organisation

holding the franchise and trademarks, and third one in banking and finance. The new

structure meant that the Kamprad’s family would not access to the capital of the business or

the right to inherit it. However, it would continue to have influence-rich roles in the

governance of IKEA. Kamprad believed that IKEA will survive, preserving both its

profitability and egalitarian culture. In 1999, Andres Dahlvig became a new president and

CEO for IKEA group of retail stores. In October 9, 1999, total sales profit of that special day

form the worldwide stores was divided equally amongst all co-workers and hard working

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employees which was €84.85 million. This was one of the key strategies to improve the

working ability of the employees towards the organisation goal.

IKEA shopping online was introduced in the year 2000 which made easier way to buy the

products from home itself. It produced the furniture in fibreboard and particleboard for the

first time in same year. IKEA recovery was launched in 100 stores in Europe in 2003 by

which repaired and recycled instead of waste the materials. In 2005, IKEA made all type of

home products available under a roof. The next, IKEA labelled foods were launched about

150 foods with high quality in 2006. These new products launched every year shows that the

IKEA recognized the environment needs and made the valuable strategy. IKEA catalogue- it

was considered the major marketing medium tool. Catalogue was spent 70% of the annual

marketing budget. It was printed in 38 various editions in 17 languages of 28 countries. In

2008, 110 million copies of catalogues were distributed which was three time higher than

bible prints available in United Kingdom (IKEA, 2011).

7 IKEA’s product differentiation strategy that attracts the customers

IKEA’s product range is developed to be extensive enough to have something that appeals to

everyone and to cover all functions in the home. The products are modern not trendy so they

are practical enough for everyday use. IKEA is the home furnishing specialist. IKEA

products are functional and appealing, and enable many people to improve their home life

through practical solutions to everyday problems. IKEA’s concept of marketing is that “We

do our part” by focusing on our part by designing consumer valuable products through

inexpensive materials in a novel way ad minimising production, distribution and retail costs

to benefit its customers through low price (Norman & Ramirez, 1993).

IKEA believes that products don’t appeal unless it represents good value for money. So, the

company is committed to have a good relationship with its suppliers to purchase good quality

products, economically. IKEA’s products are based on a functional approach to design. Its

designs products those are attractive, practical and easy to use. They don’t have unnecessary

features and they give genuine solutions for specific home furnishing needs and are made of

the most suitable materials for their purpose. IKEA makes sure that the quality of the product

must be appropriate for the intended use (IKEA, 2011).

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8 Summary of IKEA’s recent past strategic development

IKEA identified its customer’s expectations and developed an inimitable core competency

through low cost high quality strategy to fulfil its customer needs. The company organized its

resources and capabilities to support its core competency. The company developed good

relationship with its suppliers to get cheap products. Its unique corporate culture and diversity

in management roles enable the company to compete more flexibly. Its diversified products

and unique presentation played an important role in its success. Its international expansion

strategy supported the company to create global brand awareness and to increase its market

share.

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PART 2 – Current strategic situation of IKEA

It is essential to understand the strategic position of an organization before choosing strategic

direction for future. There are two basic views to identify the strategic position of an

organization, one is external factors of the organization and the second is internal factors. The

external factors of an organization matters most to the success of a strategy, strategy

development is the process of seeking attractive opportunities in the market. Attractive

opportunities are those favours the internal capabilities on an organization. So, understanding

about external environment matters a lot in formulating future strategies. Internal

environment of an organization should be evaluated to identify the internal strength and

weakness of an organization. It also helps to identify the resource availability to pursue a new

strategy. It weights the internal capability of an organization. It also interrelated with the

external environment as if the environment changes the internal capabilities and resources

need to develop in order to match the external environment (Johnson, Scholes, &

Whittington, 2008).

There are several tools that could be used to analysis the external and internal environment of

an organization, they are PESTEL analysis which is used to analyse the macro-environment,

Porter’s five forces is used to analysis the micro-environment. SWOT analysis can be used to

analysis the internal strengths, weakness and external opportunities, threats of an organization

(Johnson, Scholes, & Whittington, 2008).

9 PESTEL analysis on furniture industry

PESTEL stands for political, economical, social, technological, environmental and legal

elements of a macro-environment. It provides a broad list of influences on the possible

success or failure of the strategies. In these elements Politics refer to the influence of

government policies upon the strategy, Economy refers to the macro-economic factors such

as business cycle, exchange rates and differential economic growth rates around the world.

Social refers to the factors such as demographics, ageing population and changing cultures

that influence the strategy. Technology refers to the elements such as automobiles,

aeronautics, internet that influences the strategy. Environmental stands for pollutions control

and policies related to green issues that may influence the strategy. Legal refers to the

legislative constraints, restrictions upon a company that may influence the strategy (Thomas,

2007).

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Political factors

There are fortunate political situations in European countries and Middle East countries.

IKEA has successful in international and domestic business portfolio. IKEA hopes that

Indian political unfavourable will be revolutionized soon to make foot prints in the country

(Economist, 2011).

Economical Factor

Economic downturn globally hits the IKEA’s sales. However IKEA is adopting the current

trends and moving towards sustainability. IKEA derived economic thoughts and strategies

managing the lacking of the external economic presents. IKEA is focusing middle class and

young buyers to deliver its goods in increasing economic countries such as China, UK, and

Canada etc.

Social Factors

IKEA understands its customer’s social life and implements its design according to their

needs. It considers the various cultures in world and manufacture products accordingly. The

company produces low cost high quality products which is affordable by the society.

Technological factors

IKEA continuously adopts latest technologies and educate its suppliers to follow the same. In

that way the company could able to manufacture cheap products and world-class quality

within the time line. The company incrementally updates its supply networks to obtain

cheapest transportation.

Environmental factors

Due to pressure from global environmental situations IKEA has moved towards

sustainability. Today, 71% of all IKEA products are recyclable, made from recycled

materials, or both. The group recycles 84% of the waste generated in its stores.

10 Porter’s five forces for IKEA in furniture industry

Porter (1980) states that, “Porter’s Five Forces framework helps to identify the attractiveness

of an industry or sector in terms of competitive forces”. The five competitive forces in this

framework are the bargaining power of buyers, bargaining power of suppliers, threat of new

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entrants into an industry, threat of substitutes for the industry’s product or service and

competitive rivalry in an industry.

Fig 10.1 Porter’s Five Forces, IKEA

Bargaining power of buyers

Since there are huge competitions in the furniture industry from direct furniture

manufacturers and retailers to customized designer retailers, the buyer has low of leverage in

switching from one retailer to another. Switching cost between retailers are very less in this

industry.

Bargaining power of suppliers

Since there are lot of furniture and home appliance manufactures in developing countries like

China and India, IKEA has access to lot of suppliers that increases the bargaining power of

IKEA. The company is well experienced in developing small suppliers into a highly

competitive world class producer that increases the wide access.

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Competative RivalryHigh !

Threat of Substitutes

Low !

Threat of new Entrants

Low !

Bargaining power of buyer High !

Bargaining power of Suppliers

Low !

Threat of substitutes

Threat of substitutes in furniture and home appliance industry is very low. People look for

most convenient and appropriate furniture that suits their home.

Threat of new entrants

Due to huge capital involved in this industry it is hard for a new company to enter a new

market. To be successful in this industry, companies should establish the best supply chain

and supplier relationship to become competitive. Due to huge disinvestment cost involved

there is threat for new entrants.

Competitive rivalry

Due to lot of retailers in this industry the market is highly saturated and the rivalry through

price war is high. Companies developed their own core competencies and focuses on a

particular market to increase its market shares. However, the competitive rivalry is quite high

in this industry.

11 SWOT Analysis for IKEA

It identifies the key issues of a business atmosphere and the strategic ability of an

organization that are like to influence the strategic development. The goal of SWOT analysis

is to identify the degree to which the strength and weakness are relevant to or capable of

dealing with the changes occur in a business environment. SWOT analyse is only effective

when it is comparative in relation to its competitors (Jacobs, 1998). Identifying opportunities

and threats is a valuable part when thinking about strategic choices for the future. It is used to

respond strategically to the environment by reducing the identified threats and taking

advantage of the best plausible opportunities (Valetin, 2001).

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Fig 11.1 SWOT analysis for IKEA

Strengths: - Significant market presence

IKEA sells more than 9,500 home furnishing products in about 301 stores in more than 36

countries. A strong presence gives the group considerable bargaining power and an advantage

in terms of customer recall. The IKEA concept is based on offering home furnishing products

at low prices. To help keep prices low, the group ensures maximizing production equipment,

using raw materials efficiently (IKEA, 2011).

Strong in customer satisfaction

IKEA was ranked 9th in Datamonitor’s retail brand Consumer Satisfaction Index (CSI) which

measures how satisfied customers are with the retailers they use. CSI looks at satisfaction

across different aspects of the retail proposition range, convenience; price, service, facilities,

ambience, quality, and layout that provide an overall satisfaction score for each of these.

Focus of sustainability

In response to pressures on global retailers to co-exist with the environment, IKEA has been

working towards sustainability since 1999. Previously, IKEA was accused of being a landfill-

waste generator because it made large volumes of products that did not last for long time. To

reduce the associated poor publicity, IKEA has been pursuing sustainability in a big way

since then. In 2009, IKEA invested $77 million in clean technology start-ups like solar.

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Strengths1. Significant market presence2. Strong in customer satisfaction3. Focus on sustainability

Weaknesses1. Location disadvantage2. Declining sale densities in the UK

Opportunities1. Diversifying sourcing base2. Increasing online sales

Threats1. Impact of economic slowdown in major markets2. Barriers to enter lucrative growth market3. Unfavourable market trends

SWOT IKEA

Today, 71% of all IKEA products are recyclable, made from recycled materials, or both. The

group recycles 84% of the waste generated in its stores (Datamonitor, 2010).

Weakness – Location disadvantage

Most of the IKEA stores are located outside the city. It is because of high land cost and traffic

access. Since this strategy reduces the cost of operations, IKEA still struggles with

convenience problems. Out-skirts stores are disadvantaged because of long travel

considerations of customers (Economist, 2011).

Declining sale densities in the UK

Since 2005, the IKEA’s average sale density in the UK is declining so the group deviated

from its previous plan and just opened 1 store instead of 32 stores planned previously. IKEA

just operate 18 stores in UK. The sales density increased during 2002-04 and started

declining since 2005. Opening more stores distribute the IKEA customers and decline the

sales density. So, the company has to look into its growth strategy to increase its sale density

in UK.

Opportunities – Diversifying sourcing base

IKEA sources a substantial portion of its products from low cost manufacturing centre China.

In 2009, IKEA sourced 30% of its products from Asia being China (21%) as its major

supplier. To reduce its overdependence on China for the first time in several years, the group

intends to strengthen its sourcing relationship with India. India, which currently accounts for

3% of IKEA’s worldwide purchases, is expected to become a stronger supplying partner. A

diversified supplier base will reduce IKEA’s dependence on China and increase its

bargaining power (Datamonitor, 2010).

Increasing online sales

Online retail spending is expected to increase world-wide. Retail e-commerce revenue in the

US was increased of 4.1% between 2008 and 2009. Retail e-commerce revenue is expected to

grow at an annual rate of 8%, 9.5% and 9.2% in 2010, 2011 and 2012, respectively

(Datamonitor, 2010). To benefit from this trend, IKEA has also started transacting on its

website, www.Ikea.com. Through online sales IKEA can also overcome the issues faced by

customer due to out-skirts stores and inconvenience.

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PART 3: Strategic directions for the future

Decisions about an organization’s future and the way in which it needs to respond to the

pressure and influences of external environment. There are basically three choices should be

made (Johnson, Scholes, & Whittington, 2008). They are,

The choice of how an organization positions itself in relation to competitors.

The choice of markets and products of an organization.

The choice about how the developed strategies are to be pursued.

12 Strategic clock to develop competitive strategy options

If an organization to position itself in the competitive market, it has to develop core

competencies that are not been inimitable by its competitors easily. The base of competitive

advantage in business-level can be identifies using strategic clock tool (Browman &

Faulkner, 1995).

Fig 12.1 Strategic clock to develop competitive strategy options

Source: Bowman C., and Faulkner D., (1995) The essence of competitive strategy, prentice hall.

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Where the strategic clock illustrates price and product benefit relationship in eight ways. In

which it is classified in to 5 major areas such as Price-based strategy, Differentiation

strategies, the hybrid strategy, focused differentiation and failure strategies. Sustaining

competitive advantage: Organizations that try to achieve competitive advantage may try to

hold it for long time. So there are three different areas of sustaining competitive advantages

they are based on the organization’s current strategic position. If an organization plans to

sustain its cost leadership, it should pursue sustaining price-based advantage (Johnson,

Scholes, & Whittington, 2008). IKEA’s strategic direction is towards hybrid strategy where it

produces high quality products in low price.

13 Strategic direction using Ansoff Matrix

Based on the current strategic position and opportunities in the future it has to develop its

market through online sales. Corporate level strategies can be developed using Ansoff matrix.

In this the organization could decide whether it has to concentrate on the product

development or market development or diversification (Ansoff, 1988).

Fig 13.1 Strategic direction using Ansoff Matrix

Products

Existing New

Markets

Existing Market Penetration Product development

New Market development Diversification

Source: Ansoff H., (1988) corporate strategy, penguin

There are huge opportunities visible towards online shoppers and there is chance for IKEA to

increase its market share by launching existing products in a new market.

Alternative methods of strategy development

The above Ansoff matrix concerned with strategic choices at the generic level. However, in

more precise level these strategies are developed into different potential method of

development to support the generic strategies. IKEA also has opportunities to develop its

supplier base by expanding its global sourcing. IKEA has started pursuing into Indian

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markets for sourcing. It can develop its supplier relationships through strategic alliance with

Indian manufacturers to increase its bargaining power. Strategic alliance enables IKEA to

develop good relationship with suppliers and can produce goods at competitively cheaper and

good quality.

14 Evaluating the strategic choice

Evaluating the strategies is necessary to analyse whether the developed strategic choice will

succeed in future. This can be analysed in three main criteria’s they are.

Suitability analysis

It is concerned with whether a strategic choice that is been developed is addressing the key

issues related to the strategic position of an organization. To fulfil the customer needs it is

necessary for IKEA to increase its online sales facilities. It also fulfils the issues related to

store locations as the customers who feel inconvenient to reach outskirts stores can access

online facilities. The company also have enough financial resources to adopt strategic

alliance with suppliers and (Johnson et. al., 2008).

Acceptability analysis

It is concerned with whether the expected performance outcomes such as return or risk of a

strategy and the degree to which these strategies meet the stakeholder expectation (Johnson

et. al., 2008). Since IKEA is pursuing a market development strategy through online

business, the risk involvement is quite low. However, there can be uncertainties in online

sales upon expected return. As the company is going to invest in developing websites and

online shopping facilities, the expectation for sales growth is high and the stakeholders will

be happy that the company could increase its revenue with increased profitability.

Feasibility analysis

It is concerned with whether the company has the capabilities to deliver a strategy and

whether the strategy could work in practice. Financial feasibility analysis and Resource

deployment analysis are the tools used to evaluate the feasibility of a strategy (Johnson et. al.,

2008). IKEA has financial capabilities and infrastructure to pursue the online market

development strategy and expanding its supplier base.

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15 Conclusion and Recommendation

Based on the above analysis IKEA could pursue market development strategy by

concentrating on online business. IKEA could able expand its supplier base into other

developing countries like India to obtain buyer bargaining power among its suppliers. The

company has enough resources and capabilities to pursue these strategies in future. The above

strategies may support the company to obtain its goal.

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16 Bibliography

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