IKEA as a Successful Multinational Organization Operating in the Global Retailing Industry - Case Study Example

IKEA Case Summary of the of the No Contents Contents 2 Brief Overview 3 Case Updating 4 Internal Business Analysis 5 Challenges to Manage 10 Alternatives 10 Best Alternative 13 References 14 Brief Overview This report throws light upon a multinational organization of Sweden known as IKEA. The firm engages in manufacturing and designing furniture that can be independently assembled. The company had begun its business in 1943 and has henceforth expanded the scale and scope of business. IKEA at present is considered to be the largest home furnishing manufacturer in the world. Since its inception, IKEA has strived to produce good quality products at very low cost. The company’s products are useful for households and are affordable to consumers of all income groups. IKEA successfully lowers the cost of manufacturing with the essence of its DIY (do it yourself) idea. Under this process, IKEA manufactures the semi-finished and final products mostly with own sources, thereby experiencing scale economies in manufacturing. IKEA is a popular brand in the European market, which is also considered to be the largest exporting organization of Sweden. The company is extremely successful across all marketplaces because of superior manufacturing, marketing and supply chain management processes. IKEA sells separated furniture parts to customers and the buyers are able to combine these parts into whole furniture after purchase. The products sold by IKEA are largely used in playing areas, eating restaurants and in-store child care houses. Whereas, bulky products sold by the company are delivered at doorstep of the consumers. If the consumers opt for self-delivery, then IKEA pays back the delivery charges of carracks to the buyers (Hertz and Hultman, 2008). This proves that IKEA owns unique product, pricing, promotional and distributions strategies for conducting its trade efficiently. The biggest supplier of IKEA is from Sweden, but as the current scope of business internationalization of the firm is enhancing, it appears to procure raw materials from suppliers of Germany, Italy and China. IKEA maintains good trading relationships with suppliers and is able to acquire raw materials and semi-finished products at lower costs. While the company delivers high quality products to buyers at lower costs, it is ensured that all operational activities are sustainable to the environment. From the case study, it can be briefly stated that IKEA is a successful multinational organization operating in the global retailing industry. In 2011, the net sales were EUR 52.2 billion and the organization experiences an average growth of 7% every year. However, it is noted that IKEA is facing certain problems while conducting its internationalization activities in the U.S. market. The firm implements low cost strategy in business, but the U.S. furniture market is highly creative and innovative. So, it is highly rational to estimate the strategic ways whereby IKEA would be able to satisfy customers in the U.S. with its limited financial resource. The cost of living for the U.S. consumers in high and they possess adequate discretionary spending power to purchase comfort products such as, furniture. Though business expansion in the U.S. market seems to be highly beneficial for IKEA, yet tastes and preference pattern of the U.S. consumers are substantially different from that of the European buyers. The level of conspicuous consumption effect is very high in the U.S. and in order to gain adequate brand reputation in its marketplaces, IKEA must frame efficient marketing mix strategies for capturing potential market demand (Isaksson & Suljanovic, 2006). Case Updating IKEA is known to conduct business in 38 countries with 325 stores spread across the world (IKEA Group, 2013b). In 1984, IKEA had made its first attempt to penetrate in market of the U.S. In order to enter within the U.S. retailing industry, the company implemented global strategy in business. It should be noted that the global strategy was based on the principles of standardization, but not differentiation (Jonsson, 2008). Through this strategy, IKEA manufactured and sold standardized products in both the European and U.S. marketplaces. However, the company was quick to realize that the taste and preference pattern of potential buyers in the U.S. are greatly different from that of the Europeans. Hence, in order to enhance utility levels of the U.S. customers, IKEA had implemented transnational or differentiated strategy of internationalization therein. Under this process, the organization started to design and manufacture furniture according to local taste and preference patterns in the U.S. (Jonsson, 2008). IKEA also entered in other emerging markets such as, China, with its transnational internationalization strategy. It entered in the market of China in 1998, through a legalized venture business agreement. Transnational operational strategy of IKEA was highly successful, which helped to tap a wide base of potential customers for its products worldwide. Nevertheless, it was noted that local Chinese companies recruited inexpensive laborers and procured cheaper raw materials than that of IKEA (Jonsson, 2008). As a result, the native firms in China were found to establish lower prices than that of IKEA, which rendered former’s products more competitive. In order to resolve such problems, IKEA built new manufacturing units in China and started to procure raw materials at low prices from local suppliers. With the help of abovementioned alterations, IKEA successfully lowered the product prices in China and enhanced revenue from the market (Jonsson, 2008). Differentiation strategy was highly beneficial for IKEA and helped to enhance revenue at an annual rate of 7% since the early twentieth century. In 2010, it was estimated that the gross revenue of IKEA was € 23.1 billion, which had increased to a level of € 28.5 billion in 2013 (IKEA Group, 2013b). However, researchers claim that over 65% of the sales of IKEA are generated from its European marketplaces. On the other hand, 7% of its revenue is attained from the Asian, Australian and Russian marketplaces (IKEA Group, 2013b). Approximately 14% of IKEA’s gross revenue is drawn from the U.S. sales. Success of IKEA can be attributed to its unique internationalization strategy (IKEA Group, 2013b). Product innovation and diversification is one of the most crucial marketing strategies of IKEA. The most popular product line expansion program of IKEA is the newly launched BOKlok houses (IKEA Group, 2013b). These are flatpack houses that are easily affordable at lower prices. In 2013, the company has declared to launch special solar panel packages in these houses. It is the only retailing multinational company that uses catalogue distribution as another proficient marketing tool at the mass level. IKEA publishes 300 to 400 pages wide catalogues in order to display diverse products offered and their features. These catalogues of IKEA are published in more than 30 different languages. This proves that IKEA strictly implements differentiation in marketing and advertizing strategy. Social media is also widely employed by IKEA to facilitate marketing and advertizing activities. From the above context, it can be stated that IKEA has gained strong brand reputation across all marketplaces, only with the essence of unique business and corporate level strategies (IKEA Group, 2013b). Internal Business Analysis The internal status of IKEA can be analyzed through a SWOT analysis model. Strengths High Brand Value and Sustainability Focus Unique Stores Business Experience Innovation and Creativity Superior Corporate Culture Productive Human Capital Cost efficiency Opportunities Economic Conditions Sustainability and Style Growth of Digital Sales Emerging Economies Weakness Faulty DIY Approach Scarce Customization Less Promotional Expenditure Weaker Digital Support Negative Publicity Threats Competition Volatile Taste and Preferences Market Maturing Preferences Rise of Consumers Income Strengths High Brand Value and Sustainability Focus: IKEA enjoys a high brand reputation and image in the global retailing industry. Business activities of IKEA are highly sustainable to the environment. The company has adequate expertise for providing differentiated strategies across diverse marketplaces (Jonsson & Foss, 2011). Unique Stores: The stores of the company are well-decorated and help to attract large number of customers. The special childcare services offered by the IKEA stores take care of children, allowing customers to make their purchases conveniently. The company has recently launched new eating hubs in the large stores. Business Experience: IKEA experiences a long learning curve in business and hence, possesses adequate knowledge about the taste and preferences of customers worldwide. Innovation and Creativity: The inexpensive BOKlok houses produced by IKEA are affordable to a wider base of customers. After recession, it is noted that consumers across economies aim to purchase products that are less expensive. As a result, the flatpack houses of IKEA are extremely useful for individuals who experience less disposable income thresholds (Jonsson & Foss, 2011). Superior Corporate Culture: IKEA is known as one of the “best companies to work for” in the contemporary world. The company entails superior corporate culture in its workplaces and practices diversified activities to motivate employees at work (Jonsson & Foss, 2011). Productive Human Capital: The labor forces of IKEA are well trained and skillful. The company can expand into the U.S. more effectively with the help of efficient human capital resource. Cost efficiency: IKEA has cost efficiency in business and can benefit from the cost leadership strategy in the U.S. marketplaces. Many competitors of IKEA in the U.S. market possess higher operational cost. IKEA would be able to successfully expand into market of the U.S with the help of the above strengths. Weaknesses Faulty DIY Approach: Many customers dislike the DIY approach of IKEA. They are less interested in assembling newly purchased furniture. These buyers prefer paying premium prices for products so as to experience greater convenience. These inexpensive furniture manufactured by IKEA are less attractive to these wealthy, comfort preferring buyers (Jonsson & Foss, 2011). Scarce Customization: It is found that customers in the U.S. are more fashion conscious and prefer to purchase customized home appliances and furniture. In order to follow low cost strategy in business, IKEA establishes simple designs for its products. The customers are not able to order customized products from the organization (Jonsson & Foss, 2011). Less Promotional Expenditure: The company invests less amount of money for advertisement purposes. IKEA follows word-of-mouth promotional strategy and catalogue distribution strategy to an extent for promoting its products. Even so, majority of consumers in the U.S. are highly responsive to the promotional activities displayed over television and internet. IKEA’s media commercials are unrecognized outside the European markets. Weaker Digital Support: IKEA has minimal digital shopping facilities. The case study explains that the company often forces the online customers to make purchases from its brick and mortar selling locations. Certain company products cannot be purchased from the online stores. However, a large proportion of the U.S. buyers prefer to make purchases through internet media. Furthermore, with minimal physical selling locations and scarce digital trading activities, IKEA would fail to expand business in the U.S. market in future (IKEA Group, 2013c). Negative Publicity: IKEA has experienced considerable negative publicity in its existing markets. It is claimed that the organization often ill-treats employees and practices lobbying agreements with different government authorities (Johnson, 2013). Thus, the above context indicates that the inherent weaknesses of IKEA’s business will create barriers for the business expansion process in the U.S. Opportunities Economic Conditions: The state of economic affairs is highly volatile and complex in the contemporary era. At this juncture, real income thresholds on the consumers constantly changes due to frequent fluctuations in aggregate price levels. Some researchers have stated that the U.S. middle and lower income group customers aim to purchase good quality products at lower costs. Considering this trend, IKEA can tap a large base of potential customers in the U.S. in long run (Jonsson & Foss, 2011). Sustainability and Style: Instead of only manufacturing simple assembling products, IKEA can produce more customized and stylist products for its clientele in the U.S. If the company is able to conduct production with eco-friendly recycled items, then those can be rendered more competitive in the U.S. markets. Growth of Digital Sales: It should be noted that the proportion of online customers are increasing in the U.S. market in a multiplicative manner. If IKEA improves its digital selling facilities, then a wider base of loyal customers can be ensured in the U.S. marketplaces (Jonsson & Foss, 2011). Emerging Economies: Apart from the U.S., emerging countries such as, India, China, Russia and Brazil, can be selected as lucrative business expansion markets for IKEA. The company can procure cheap labor and raw materials from these countries for operations in the U.S. Threats Competition: WalMart, Home Depot and Target are some of the potential competitors of IKEA in the U.S. These companies also sell less expensive good quality home appliances and furniture in the U.S. market. Furniture.com and BluDot.com are potential digital business competitors of IKEA. Higher competition can create barriers in the path of IKEA’s market share expansion (Jonsson & Foss, 2011). Volatile Taste and Preferences: In the contemporary era, it is found that taste and preference patterns of the consumers substantially changes across all the marketplaces. In long run, IKEA’s products might become less popular in markets of the U.S. in case the utility levels of consumers are not improved. Market Maturing Preferences: The case study claims that the U.S. customers generally aim to purchase well-designed high quality home décor and furniture equipments. IKEA, being a well-known firm for manufacturing less pricy products, might lose popularity among the U.S. buyers. Rise of Consumers Income: It should be noted that consumers’ per capita income level in the U.S. is increasing over time. The economic theory of inferior-income effect states that buyers’ demand for lesser quality products is inversely related to their income level. Hence, as income of the U.S. customers is increasing, their demand for inexpensive products is declining (IKEA Group, 2013a). Therefore, the above context elaborates on issues that IKEA is facing while expanding into the U.S. market. Challenges to Manage From the case study is found that IKEA will face several challenges while expanding its business in the market of U.S. The standard DIY approach of IKEA generates limited scopes for customized service provision. The products of the company become less competitive in the U.S. market due to scarce customization. Negative publicity about its products and services is lowering brand value and customers loyalty. The brand recognition and expected revenue of IKEA is low because of inadequate online and offline marketing activities. The U/S. market is more competitive to the firm. Moreover, as the taste and preferences of the consumers are changing, it is becoming difficult for IKEA to sustain or increase its existing market share in U.S. Moreover, as the real income levels of U.S. customers are increasing, their demands for inferior products have declined. Alternatives Alternative One IKEA should try to improve digital business in the U.S. The company should offer a wide variety of products for the U.S. online customers. The products should be delivered without any charges and should be accessible to buyers across its diverse marketplaces. The online business of IKEA should be an integrated system that would help to combine all its physical stores into a large store. Advantages IKEA would be able to serve a wider base of customers The additional cost involved in recruiting sales representatives can be minimized The company can enhance revenue and profit IKEA can implement the modern social or viral marketing tools (Jonsson & Foss, 2011) Cost of maintain physical stores will fall It can analyze buyers’ preferences by conducting appropriate surveys. Disadvantages If customers face delivery and quality related problems through online business, then sales and brand value of IKEA would decline The company would not be able to directly promote its products to the buyers Greater investments would be required for both horizontal and vertical business expansion Cyber corruption related problems can arise Confidential information about the business can be leaked through the digital business services Alternative Two IKEA should conduct greater innovation activities and differentiation strategies in business. For instance, along with assembled less expensive furniture, IKEA can introduce a new range of royal home accessories for affluent customers in the U.S. The company can become successful in dynamic market of the U.S. by attaining a more competitive position through this strategy (Jonsson & Foss, 2011). Advantages The brand recognition of IKEA will improve The company will experience increased profit and sales IKEA will experience higher demand and henceforth, scale economies in manufacturing Disadvantages This alternative strategy involves high costs It will be difficult to estimate the changing preference patterns of the buyers in each market Alternative Three The company can aim to lower the intensity of market competition encountered in the U.S. market. For this purpose, IKEA can procure most of its semi-finished products and factor resources at lower costs from the developing economies such as, China. By lowering costs, the company can enhance profits and invest the excess funds in research and development investments (Jonsson & Foss, 2011). Advantages The brand recognition of IKEA will improve The company will experience increased profit and sales It would enjoy higher demand and hence, experience scale economies in manufacturing It would be able to ensure higher market share in the U.S. Disadvantages Extensive outsourcing can enhance bargaining power of the suppliers The firm would lose opportunity to experience scale economies in production IKEA would firstly need to establish a strong trading base in the concerned developing economy (Jonsson & Foss, 2011). Best Alternative IKEA should resolve trading challenges faced in the U.S. by implementing the second alternative. This is because; the company can diversify its product range by implementing this strategy. It can sell both pre and self assembled products to buyers and can launch a new product line, where items will be designed according to customized ideas of the potential buyers. Increased innovation, creativity and diversity can help to enhance brand value of IKEA. The negative publicity can be redeemed through such initiatives. Online business of IKEA can never succeed without adequate innovation and creativity. This strategy would help the company reach a better competitive position in the U.S. market. Changing demand trends can be satisfied by IKEA by way of increased innovation and diversification. If the company launches a new range of expensive products, then it can even cater to affluent customers in the U.S. therefore, it is evident that IKEA can successfully trade in the U.S. market by implementing increased innovation and diversification in long run. References Hertz, S. & Hultman, J. (2008). On Global Supply Chain Development. Northern Lights in logistics and Supply Chain Management, 1, 267-268. IKEA Group. (2013a). IKEA Group Yearly Summary fy12. IKEA. Retrieved from http://www.ikea.com/ms/en_US/pdf/yearly_summary/ys_welcome_inside_2012.pdf>. IKEA Group. (2013b). 2013 Facts & Figures. IKEA. Retrieved from http://franchisor.ikea.com/Whoweare/Documents/Facts%20and%20Figures%202013.pdf. IKEA Group. (2013c). The Annual Report. IKEA. Retrieved from http://static.tijd.be/upload/Inter_IKEA_Annual_Report_2012_4134900-1073924.pdf. Isaksson, R. & Suljanovic, M. (2006). The IKEA Experience. LTU. Retrieved from http://epubl.ltu.se/1402-1773/2006/162/LTU-CUPP-06162-SE.pdf>. Johnson, K. (2013). IKEA. Weebly. Retrieved from http://kevinrjohnson.weebly.com/uploads/5/6/3/7/5637086/marketing_paper.pdf>. Jonsson, A. & Foss, N. J. (2011). International expansion through flexible replication: Learning from the internationalization experience of IKEA. Journal of International Business Studies, 42, 1079-102. Jonsson, A. (2008). A Transnational Perspective on Knowledge Sharing: Lessons Learned from IKEAs Entry Into Russia, China and Japan. The International Review of Retail, Distribution and Consumer Research, 18(1), 17- 44. Read More