Case Study: IKEA

IKEA is a Swedish based multinational company and giant furniture manufacturer and retailer. Originally from Sweden, it has since gone global with currently over 387 stores in 48 countries. The company offers a range of home furnishings and diverse household products like dinnerware, furniture, lamps and lighting, bathroom and kitchen accessories, rugs, bed linens, clocks, cookware, desk accessories as well as beds and bedroom suites. Known for its modern, simplicity-themed appliances and furniture, IKEA provides a range of easy and ready-to-assemble furniture that saves delivery costs. It also offers kitchen planning services where professional planners are sent to plan the furnishings or redesigning of a new kitchen.

IKEA moved into the smart home business in 2016. In this market, it offers intelligent, inter-networked devices enabled with control, monitoring and regulation functions and related subscription and maintenance services for home automation in a private household. This includes remote-controllable and digitally connectable devices, sensors, actuators, cloud services, related hardware, software and subscription packages.

IKEA: MARKET STRUCTURE

IKEA operates in a monopolistic competition. A monopolistic market is an imperfectly competitive market with a large number of competitors and consumers. IKEA has to compete with a number of other similar firms in the industry that sell a range of household furniture. The pressure between rivals in a monopolistic market allows firms to be able to differentiate their products and set their own prices. The demand for highly differentiated products tends to be less price sensitive and therefore have an inelastic demand curve. Firms have a certain degree of power over prices and can retain price-insensitive demand by working towards brand loyalty. IKEA’s products are differentiated from its rivals like Walmart and Amazon in terms of price and design. They combine a crossover of eco-friendly simplicity, quality and functionality and are offered in a range of choices to suit the diverse tastes of customers in different parts of the world, all the while maintaining its simple, stylish and affordable proposition. In this market structure, the barrier to the entry and exit of firms is quite low.

IKEA: COMPETITION AND POSITIONING

IKEA’s competitors in the furniture retail industry comprises of many non-furniture as well e-commerce retailers. Namely, some of its main competitors are Walmart, Target, the online retail giant Amazon, Wayfair, Overstock, American Woodmark and Pepperfy. IKEA's rivals offer diverse styles and functions. Walmart, an American retailer with a chain of hypermarkets, caters for every-day household requirements and offers a range of cheap and accessible products in various categories. The stores are conveniently located, and products are easily accessible online. Crate and Barrel, the American retail chain specializing in furniture and housewares, offers a relatively high-priced furniture-in-a-box scheme. Walmart’s products are displayed in aisles and are usually targeted towards families and college students. In contrast, IKEA provides a showroom rather than a store experience. The combination of quality, functionality, design and affordability makes it perfect for new homeowners that are looking for trendy and durable furniture at a reasonable price. Typical IKEA customers mostly likely are individuals who frequently travel abroad, take risks, enjoy good food, fly often and were probably one of the first to adopt trendy technologies like laptops, discmans and cellphones (Lyne, 2009). On the downside, not everyone prefers having to assemble the furniture themselves. Shipping and assembly costs can be significantly higher and complicated than making a purchase at Walmart or at an online ecommerce store like Overstock. Moreover, IKEAs are few in number by location. Collecting the purchase at the store in order to avoid shipping costs can be very inconvenient for some customers.

IKEA has a unique positioning, unparalleled in value by any particular substitute in the market. Rather than just selling furniture, it sells the concept of a modern, classy, simple and effective lifestyle by offering a wide range of products. This is the main attraction of IKEA. It’s rivals like Target and Walmart mainly compete using price differentiation by offering low-cost substitutes. However, being general retailers, they do not have a particular style or detail unlike IKEA that has to keep up with the latest trends in order to stay relevant and maintain their product proposition. In fact, IKEA’s competitive edge mostly stems from its affordability, given the quality of its products. IKEA’s differentiation strategy focuses on offering a unique and superior value through product quality. This has helped IKEA create a strong brand loyalty. The lack of perceivable substitutes to IKEA products combined with their value for price has created substantial barriers to the entry of other players and alternatives in the market. Moreover, the IKEA concept is easy for people across the world grasp and incorporate into their lifestyles. Despite having picked up the concept of affordable furniture, companies like Bush Industries in the US failed to adopt a design that was suited to a diverse body of furniture consumers. IKEA’s concept is embedded in all of the firm’s activities from design to sourcing, packaging and distribution.

IKEA: PORTER’S FIVE FORCES ANALYSIS

Porter’s five forces model helps us describe the main forces that affect the competition in which a firm exists.

• Bargaining power of suppliers – The bargaining position of IKEA’s suppliers is low as they are financially weak and small in size. IKEA can easily switch between suppliers and has the upper hand in setting the rules for deals and agreements. IWAY, the code of conduct for IKEA suppliers makes sure that suppliers comply with all the rules to remain in business with IKEA. Each year, IKEA conducts around a thousand audits to check for violations of the IWAY. If found guilty, suppliers will be removed.

• Bargaining power of buyers – IKEA places enormous emphasis on attracting and retaining its customers with the right product proposition. Due to growing empowerment of buyers in general, customers do have a certain power over the brand. However, due to IKEA’s low product prices and excellent marketing strategies in general, the power of buyers is relatively moderate.

• Threat of substitute products – Although IKEA operates in a highly competitive market, it has yet to see any substitute in the market that offers the same value that IKEA does. Therefore, IKEA faces very little threat from substitute brands. It’s brand image, loyalty and unique value neutralizes any threat that emerges in the market.

• Threat from new entrants – IKEA faces low to moderate threat from new entrants in the market. The threat has eventually risen due to the emergence of many new brands specializing in furniture retailing and home furnishings in the last two decades. Many firms have tried to copy IKEA’s strategy to gain a market share that can compare to IKEA’s. However, even with low barriers to entry of new players, it will take significant effort and time to reach IKEA’s level of dominance in the market. This is due to the fact that innovation is key to beating IKEA. In order to gain market share, a firm has to bring something else to the market that IKEA doesn’t already offer, and innovation requires significant time and investment.

• Competitive rivalry – IKEA has a moderate to somewhat high level of competitive rivalry in the market. This is because aside from other firms in its industry, many non-specialist players in other industries also compete with IKEA, ranging from supermarkets to big fashion brands. Many retailers have started including home furnishings and houseware in their product ranges.

IKEA: Strengths and Opportunities

• IKEA has strong brand image and loyalty. With a strong concept and a clear vision, it is well positioned in terms of an ideal balance between value, range and price.

• There is a high demand for low-cost items. The current trend in the global economy has driven consumers to seek out less expensive, low-investment products for a great value.

• IKEA’s future opportunities lie in the emerging Asian markets with their growing and well-off middle-class population that are attracted to the concept of affordable modern furniture to match their lifestyles.

• Customer service and business effectiveness can be further enhanced through e-commerce platforms.

IKEA’S GENERIC STRATEGY: Cost Leadership

The generic strategy of a firm describes its strategic positioning in the market in relation to its competitors (Porter, 1985). According to Porter, the two generic positioning strategies are cost and benefit leadership. The cost leadership strategy revolves around the logic that a firm can generate more value than its competitors by lowering its price enough to compensate for any benefit disadvantages if they exist while at the same time generating enough revenue to make a greater profit than its rivals.

IKEA is large enough to enjoy economies of scale which, supported by a better integration of technology into its business process, enables the firm to lower its average costs by seeking out suppliers willing to manufacture well designed self-assembly furniture at the lowest possible costs. Such savings on cost allows them to follow a low-cost leadership strategy, making them affordable to a large number of customers.

IKEA also follows a differentiation strategy. The brand’s core competencies arise from its low-cost distribution system and its creative and innovative product engineering. With its uniqueness and innovation, IKEA has successfully differentiated itself from other retailers in the market, to the point where it is pretty much unrivalled. It is still a matter of debate whether a differentiation strategy and a cost-leadership strategy can go together at the same time. According to Porter, the two are mutually exclusive. However, IKEA has emerged as an iconic example that has successfully employed both strategies to win over market share. The simultaneous usage of differentiation and low-cost leadership has enabled IKEA to reach economies of scale. IKEA’s use of this hybrid strategy has secured maximum competitive advantage and purchase volumes. This has contributed to the high performance exhibited by the firm. A research by Richardson and Dennis (2003) on the British wine industry revealed that a hybrid strategy produced the highest results in niche segments.

IKEA: INTERNATIONAL STRATEGY

IKEA is a global company. The international strategy employed by IKEA is the global strategy, which emphasizes on cost leadership and economies of scale. The main objective of a global strategy is global efficiency. Products are standardized across different nations and strategic decisions are centralized to the home market. IKEA’s concept is made for a globalized world and is acceptable to a diverse range of customers in different parts of the world. It sells the same furniture models across the world and uses the same brand name, image and strategy. Therefore, it has low local responsiveness and a single global strategy instead of a series of local strategies to accommodate for different regional needs. Recently, however, the company has effectively combined standardization and a slight adaptation to its overseas markets, thus adopting some features of a domestic strategy.

The main features of IKEA’s global strategy include the elimination of sales personnel, the manufacture of ready-to-assemble furniture and global sourcing. Contemporary businesses like IKEA have discarded sales personnel and adopted a self-service model that allows customers to shop in their stores according to their preferences. IKEA’s stores are designed into prototypes to display furniture in a new and unique way. Self-assembly furniture serves as IKEA’s unique selling point that gives it an edge over its competitors in the international market. Furthermore, IKEA makes significant cost savings on production by making global sourcing decisions that allows it to reduce prices and attract customers in every part of the world. IKEA has effectively identified the buying behavior of the modern consumer and incorporating this to their global strategy has made IKEA the global furniture retail giant that it is today.

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