Ikea Report
A feasibility of a company determines the ability of a company to achieve its vision and mission successfully by analyzing their financial stability, organizational flow, product and service effectiveness and market efficiency. By looking at all the feasibility analysis, we can determine how smooth and successful can the company be. Financial feasibilityFirstly, financial feasibility explains how Ikea controls their assets and liability with their cash flows.
IKEA started off with a small amount of capital and now it is clearly noted that IKEA’s financial stability is going smoothly where in was recorded that they earn €25. 2 billion in 2011 compared to the year 2005 which is almost €10 billion lesser. In their website, IKEA stated that they finance all the investment in 2011 with their own cash flow, (IKEA, 2011) where this shows that their company has a strong financial reliability compared to most of its competitors such as Boconcept and Tema.As IKEA have a stable finance, investors would be more interested to invest as they have a higher possibility to generate more income. Next would be the feasibility of the organizational itself where it is concern with how the company operates and how they organize their resources to achieve their competitive priority.
Generally, in order to evaluate IKEA’s organizational feasibility two primary issues need to be taken into account which are management prowess and resource sufficiency. IKEA started when founder Ingvar Kamprad had an idea of selling furniture in a different way and introduced a new concept of showroom display where it allows ustomers to experience their furniture by testing and feeling them before buying. IKEA had been using this concept since 1951 until now which means that the management is efficient enough to keep up with the challenges faced. Besides that, IKEA’s resources efficiency analyzes no financial resources such as the availability of suppliers, quality employees and location to operate its business. According to IKEA’s website, they mentioned that their ‘suppliers and service providers covers a wide range of products’, (IKEA, 2011) which proved that they have a stable resource for their products.
IKEA believed that ‘a key success factor has been the recruitment of committed individuals’, (IKEA, 2011) to become its employees and IKEA managed to do that as they have a supply of around 127,000 employees in 2010. Furthermore, IKEA proved to be one of the biggest furniture stores worldwide as it has 316 stores in 38 countries which prove that they manage to obtain effective locations for their stores. Besides that, the feasibility analysis is also known as “the process of determining if a business idea is viable” (Barringer & Ireland, 2006).Well, feasibility analysis takes the guess work which also provides an entrepreneur with a more secure notion that a business idea is feasible or viable. A feasibility analysis need to be conducted for a new business is early in thinking through the prospects for a new business is the proper timing for conducting feasibility analysis.
Anyway, there are four components/forms of feasibility analysis and they are product/service feasibility analysis, industry/market feasibility analysis, organizational feasibility analysis and financial feasibility analysis. Product FeasibilityFirst of all, product feasibility analysis is an assessment of the overall appeal of the product that is being proposed which is also the idea or plan of the product before a prospective firm rushes a product into development. This is to ensure that the product or services that are going to be offered is what prospective customers want (Diane M. Sullivan, 2010). Well, the prospective of customers want should be comply confident with the product. Anyway, there are two components of a product feasibility analysis and they are concept testing and usability testing.
Every single company undertakes product feasibility analysis and before that, a concept statement should be developed. A business that is distributed by a startup entrepreneur to people who asked to provide feedback on the potential of the business idea is a description of a concept statement and these feedback will provide the entrepreneur with a sense of the viability of the business idea and also suggestions for how the idea can be strengthened before proceeding further. Target Market Firstly, IKEA went to a direction which is designing inexpensive and well-functioned furniture of house product retailer.Thus, IKEA’s vision is to create a better everyday life for the many people; therefore, people that IKEA targets is every single person in the whole world, this is why IKEA designed varieties of pattern’s furniture in good quality and offering the price of the product as low as possible in order to afford them. By lowering their prices almost 3% annually, IKEA still managed to generate a large profit.
Industry/Market Feasibility Analysis Industry feasibility analysis is about an industry in an assessing of the overall appeal of the market for the product or service being proposed.Furthermore, there are some primary issues that should need to be considered by a proposed business such as, industry attractiveness, market timeliness, and the identification of a niche market. The five forces model or also known as five competitive forces is a framework for understanding the structure of an industry and determine industry profitability. Furthermore, there are quite a numbers of competitors of IKEA in the market because the scope of house furnishing products is a very large scale of business.But, IKEA can reduce the level of threats by lowering the price as low as it can.
This is the reason that IKEA also have new designs and improves quality with lower price than other competitors; therefore, other people will buy their products. Thus, there will have a potential of growth to make such industry because with the innovative idea of the founder of IKEA had reduces the numbers of competitors in the market. In addition, IKEA is a Sweden company and also known as the largest retailer for house furnishing product and have retailer shop around the world.Precisely, new entrants that intentionally want to join in the furniture retailing industry; it will be a tough and difficult mission for them because new comers do not have the capital to compete with IKEA which is a company that have large capital in hand to continuously expand its business. In another hand, with the everyday new design that suits and follow the newest fashion and trend in the society, well-functioned and better quality in a very low price, this is enough to be a reason as a barrier for the new entrants and new entrants is hard to build up their brand recognition to compete and be a threat with and to IKEA.Furthermore, substitutes for IKEA are probably other furniture retailer shops that on the street such as EM Furniture Manufacturer Sdn Bhd, SJY Furniture (M) Sdn Bhd and Panwood Manufacturing Sdn Bhd.
These three companies are also manufacturing house furniture products at a low price with other concepts of design for the furniture. But, IKEA handle this kind of substitute situation well because IKEA always gives out low price and creative design that are attractive to its entire consumer.IKEA also gives the customer to shop at a place that is comfortable and relax and let the customer to shop around like shopping their groceries at grocery shops. Bargaining power of suppliers for IKEA is not really a issues for IKEA, because from 1944 until now, there are not much supplier of furniture in the market too for the reason of that not much people have such innovative idea to expand their business. Besides that, market timeliness is also a main factor since it can decide whether it is suitable timing to project into such business.As the attractiveness of industry is favorable through the above five forces analysis, it states that there are always have opened opportunities and it will be a suitable time for IKEA to enter into furniture industry.
Internal and external factors affecting IKEA Internal Factors To cope with challenges in our world now, IKEA need to consider not only the internal factors of the company which includes resources and employees, but also to consider the external factors. One of the internal factor that strengthen IKEA is it their significant consumer loyalty, with a well established globally recognized brand name.The company is recognized for affordable high quality products incorporating contemporary designs, with a strong consumer following from young couples or those with children (Speigel Online, 2009). Besides that, IKEA measures its strength using practices. This helps it to set target and see how it is achieving its vision which is ‘to create a better everyday life for many people’. ‘Democratic design’ is one of strength for IKEA for reaching an ideal balance between function, quality, design and price.
IKEA’s ‘Cost Consciousness’ which 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. Furthermore, IKEA has a good process technology such as they use new technologies such as the Enterprise Resource Planning (ERP) to ensure that IKEA is modern and improving the efficiency during the production process. These strengths can help IKEA to maintain its low cost operation and save time in business. Besides that, there are internal factors affecting IKEA which needs improvement for example, the lack of internal information which means that it doesn’t efficiently show and publicize their annual report and environmental activities.
Customers and stakeholders are unable access the important information about the company. Therefore, IKEA has the need to keep the public and IKEA stakeholders well informed about its environmental activities. IKEA might lose their loyal customers and stakeholders without a good communication. According to Fredberg (2008), IKEA has major markets in the US and Asia, exposing the company to significant currency exchange rate fluctuations.This may affect IKEA’s results of operations and the value of its assets and revenues, and increase its liabilities and costs, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations.
External Factors On the other hand, there are some external factors such as social trends, market forces and economic factors will affect the IKEA’s business negatively and positively. For instance, social trend such as the slowdown of buyers entering the market is the core market segment for IKEA’s products.Therefore, IKEA is providing online accessibility to guide customers to a more sustainable life. Here it can focus on home improvement in the slowing housing market. It also support with tips and ideas on its website to reduce their impact on environment.
This can help consumers in saving money and it is very convenient. Besides that, there are many charitable activities have been increased popularity in the society. Therefore, IKEA could take this opportunity to develop social responsibility. IKEA’s policy includes support for charities such as the World Wildlife Fund, UNICEF and Save the Children and 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. The next external factor is the economic factor. For example, the recession slows down consumer spending and disposable income reduces. Because of this, consumer couldn’t spend more money on the products and it will affect the sale of IKEA. Do they have job security? Here is show that the changing economic environment will impact and influence IKEA’s furniture business.
In addition, the next external factor that will affect IKEA negatively is market forces.Nowadays, there are more competitors entering the low price household and furnishings markets. According to Marketing Teacher (2000), businesses such as IKEA will struggle against the larger portfolio suppliers such as Tesco in the United Kingdom and Walmart in the United States. For example Tesco’s sells not only groceries, but TV sets and mobile phones, so it is only a matter of time before the business diversifies into a range of bedroom furniture or kitchens.
Besides that, the IKEA’s products are imitated and unlawfully copied, providing cheap alternatives for similar looking products (Kerelanext, 2009).This is the serious threat that will affect the sale of IKEA and it will influence the place and power of the IKEA in the industry. The business modal and value chain of IKEA IKEA’s business modal IKEA focuses building a concept where others had not done yet which is to sell inexpensive quality furniture by using a showroom concept with maximum guidance to customers who need it. IKEA’s prior focus was on furniture that had ‘function’, ‘quality’, and ‘low price’, and these attributes remain as the main components of the business model that is firmly inserted in the IKEA culture’ (Edvardsson, 2011).Kamprad wanted to save space and make it convenient for customers to carry their products home, so he recommended a concept where most of their products were packed in a flat box where customers can easily carry it back home.
This saves them distributional cost and also allows more space for displaying their showroom rather than using the space just for inventories. In addition, the business model of IKEA includes the establishment of new stores and inventing new innovative furniture to prove they are one of the best furniture store in the world. Value chain of IKEAAccording to Porter’s value chain (1985), an organization can enhance its competitive positioning by performing key internal activities in the value chain at a lower cost and better than its competitors. The value chain approach can be classified by two major activities- primary and secondary. Primary actives include production, marketing, logistics and after-sale functions. Secondary activities, on the other hand, are classified as support processes to primary activities.
The ultimate purpose of the firm is to add as much customer “value” in each of the primary activities.IKEA developed their value chain approach by evaluating customers in the process and introduced good interactions between customers, suppliers, and IKEA’s headquarters. IKEA’s role in the value chain is to muster suppliers and customer to help them further adds value to the chain. Customers are clearly educated in the catalogs of what the firm’s business systems offer, and what they are expected to add to the final process. To meet IKEA’s competitive priority of providing inexpensive quality furniture, the company needs to maintain good interactions with their suppliers to get the best price for the materials they need.The management had selected carefully selected their suppliers which they will get technical support, leased equipment and the required skills to produce high quality furniture.
‘This long-term supplier relationship doesn’t only produce better-quality products, but also attached internal value to the suppliers’, (Normann, 1993). Moreover, the value-chain modification distinguishes IKEA from its competitors. IKEA Financial Report 2008 and 2009 IKEA Financial Statement 2010 IKEA financial report 2011 Profitability Year 2008Profit margin = 2,280/21,534 x 100% = 10. 59%Return on asset = 2,280/37,056 x 100%= 6. 5%Return on equity = 2,280/18,582 x 100%= 12.
27%| Year 2009Profit margin = 2,538/21,846 x 100%= 11. 62%Return on asset = 2,538/37,056 x 100%= 6. 85%Return on equity = 2,538/18,583 x 100%= 13. 7%| Year 2010Profit margin = 2,688/23,539 x 100%= 11. 42%Return on asset = 2,688/41,273 x 100%= 6. 51%Return on equity = 2,688/21,284 x 100%=12.
63%| Year 2011Profit margin = 2,966/25,173 x 100%= 11. 78%Return on asset = 2,966/41,881 x 100%= 7. 08%Return on equity = 2,966/24,126 x 100%=12. 29%| Year | Profit margin (%)| Return on asset (%)| Return on equity (%)| 2008| 10. 9| 6. 15| 12.
27| 2009| 11. 62| 6. 85| 13. 7| 2010| 11..
42| 6. 51| 12. 63| 2011| 11. 78| 7. 08| 12.
29| Profitability ratio is a ratio to determine the ability of a company to generate profits as it spends on expenses and relevant costs. It is understood that when a company with higher ratio value compared to their competitors or their previous value, the company is in good condition or is profitable. There are three types of ratio that can show a company’s profitability which are the profit margin ratio, return on asset ratio and return on equity ratio.Firstly, profit margin ratio helps IKEA to measure how much out of every dollar of sales they can earn or keep. From the graph, the profit margin increases from the year 2008 to 2009 by 1.
03% which was gained from the profits where ‘the growth came entirely from the opening of new stores’, (IKEA, 2010). In the year 2009, after a period of increased cost of energy, food and housing, the value of money to people had been increasing where IKEA took this chance to attract more customers with their low cost priority implemented in their 15 new stores. In the year 2010, lthough the sales increased by 7. 7%, the profit margin decreased by a small amount of 0. 2% as many of the countries had been affected by the financial crisis in 2009.
The company had to lower its prices by 2. 6% and ‘added seven stores to its growing international chain’, (Ryan, 2012) which helped them to increase their sales in order to avoid negative effects from the financial crisis where the profit margin reached the highest point in 2011 at 11. 78% Next is the return on asset ratio where it shows how much earning IKEA could get from its availability of assets.With trends almost similar to the profit margin where it rose from 2008 to 2009 and drop from 2009 to 2010 before reaching its highest point in 2010. IKEA’s assets increased throughout the years due to investment in property and equipment.
IKEA believes that owning their own land and buildings for their operations where can save cost. IKEA invested in long term asset such as solar panels for their store to lower electricity cost which can help them in meeting their competitive priority of low cost products.Thus, in the year 2011, their return on asset ratio is at the highest point where they had invested billions of dollars to increase their assets and it helped them to increase profits by saving their cost as well. Moving on, by looking at the return on equity ratio, we are able to see how IKEA generate its profit from the given resources in equity by their stockholders or investors. When their return on equity is higher, more investors would be interested to invest and it will generate more availability of resources for IKEA to use to manage its cash flow.IKEA’s assets had been increasing throughout the years but the graph shows that their return on equity dropped near to its lowest point in 2011 where IKEA’s management focuses more on increasing its assets to save cost rather than increasing their equity from investors.
From this decision, we can see that its return on assets is more effective than its return on equity. Liquidity Current ratio = 18,839/11,111= 1. 7Acid test ratio= 18,839 – NA/11,111= 1. 7| Current ratio = 20,247/11,426=1. 78Acid test ratio = 20,247 – NA/11,426= 1. 78| Current ratio = 22,608/12,811= 1.
6Acid test ratio = 22,608 – NA/12,811= 1. 76| Current ratio = 23,292/11,878= 1. 96Acid test ratio = 23,292 – 4,387/11,878= 1. 59| Year | Current ratio| Acid ratio| 2008| 1. 7| 1. 7| 2009| 1.
78| 1. 78| 2010| 1. 76| 1. 76| 2011| 1. 96| 1.
59| The liquidity of a company shows the ability of a company to pay of its short term liabilities or debts. When the value of the ratio is larger than one, the company is considered safe and is able to settle their liabilities smoothly. There are 2 ratios that can determine the liquidity of IKEA which are the current ratio and the acid test ratio.Current ratio shows the ability to pay off short term debt with assets whereby the acid test ratio is quite similar but it eliminates the inventory from the calculation. From the graph shown, IKEA’s acid test ratio dropped down to almost 1.
5% in 2011 but their current ratio had been increasing since 2008. This situation happened because IKEA had increased its inventories and assets in 2011, but acid test ratio does not take inventories in account to calculate their ability in paying their short term debts or liability.Thus, the increased in assets in 2011 managed to increase its current ratio, but increased in inventories affect the acid test ratio which if their liability increases in 2011; it will decrease their liquidity when inventories have to be taken out of the option on the availability of assets to pay off their short term liabilities. Year 2008Debt ratio = 17,682/35,121= 0. 5Debt to equity ratio = 12,119/17,439= 0.
7| Year 2009Debt ratio = 17,330/37,056=0. 46Debt to equity ratio = 17,330/19,726= 0. 79| Year 2010Debt ratio = 18,432/41,273=0. 5Debt to equity ratio = 18,432/22,841= 0. 81| Year 2011Debt ratio = 16,470/41,881=0.
39Debt to equity ratio = 16,470/25,411= 0. 65| Financial Stability Ratio Year | Debt ratio| Debt to equity ratio| 2008| 0. 5| 0. 7| 2009| 0. 46| 0. 79| 2010| 0.
45| 0. 81| 2011| 0. 39| 0. 65| In contrast with liquidity where it shows the availability of assets to pay off short term liabilities, the financial stability ratio ‘evaluates the long term financial stability of business using balance sheet data’,(Borad, 2011).There are also two ways to indicate the financial stability of IKEA which are the debt ratio and debt to equity ratio. Debt ratio shows the ‘proportion of debt a company has relative to its assets’, (Investopedia, 2012) whereas debt to equity ratio generally conclude that how much IKEA had use debts to finance its growth.
When the debt ratio is more than one, it means that a company’s assets are insufficient to meet their debt and if there is a high debt to equity, it indicates that a company uses a lot of debts to finance its operations.According to the graph of financial stability of IKEA shown, they have a good financial stability as both of the ratios are below 1 and reached its lowest point in 2011. In 2010, before reaching its lowest point, IKEA faced an increase of debt to equity caused by the financial crisis in 2009 where it increases their debt with investors decreasing in that year, so their availability of equity to finance their debts decreased as well. In 2011, IKEA came out with a principle which is ‘we earn our money before we spend it’, (IKEA, 2011) where it helped them to reach a low debt ratio and debt to equity ratio.Thus, this helped IKEA to attract investors to finance their operation throughout the year. Recommendations Effective store location.
Focus more on store placement rather than marketing as IKEA had achieved a good brand name but haven’t managed to reach out to some of its customer effectively. ‘Not everybody wants to assemble their own furniture or transport big packages in their cars’, (Leong, V, 2010). As many of IKEA’s customers live in the outskirts of cities where their shops are located, customers find it inconvenient to visit their shops or showroom. IKEA could ake it more convenient for customers by opening smaller showrooms outlets in several more strategic locations that sells only high demand furniture so that customers staying far from their main showroom are able to visit their outlets. Penetrate luxury class IKEA could develop their product and design a product line specially for higher class customers. As mentioned earlier, IKEA have a product line which suits all ages and compete with lower prices compared their competitors, but some customers are willing to pay more and they are ‘sensible about the design and quality and do not care about the price’, (Barua, S, 2011).
Based on that, IKEA could consider producing a luxurious product line for those who seeks luxury because it’s the common trend for people to differentiate their standard of living or lifestyle class through their houses especially their furniture. Mobile commerce IKEA saw an opportunity in smart phones as they developed an application for smart phone users where it enables users to view their catalogue digitally.It managed to attract customers and impressed current customers but unable to fully satisfy potential customers as they are unable to fully utilize the application where customers are unable to interact with IKEA through the application. Thus no transaction can be done using the application itself. In order to satisfy customers, IKEA should develop the application they have by adding the availability of mobile commerce.
This allows customers to purchase IKEA’s furniture conveniently and faster from their smart phone. Nowadays online shopping is one of the biggest trend as people are getting lazier to step out of their homes.According to Laura Heller in Forbes, ‘shopping online is about to explode’, (Heller, 2011). Based on research, more than a quarter of tablet users used their device to shop using mobile commerce and ‘25% of smartphone owners have used their phones to do the same’, (eDigitalResearch, 2011). Mobile commerce can help IKEA save their cost as labour needed would decrease when less paying counters are needed in their store. In concern with that, it is proven that mobile commerce would attract more customers for IKEA.
IKEA cafeIKEA had fitted a cafeteria in each of its stores where they serve their famous Swedish dishes and they are quite well known for their meatballs. Their cafeteria would be full of customers most of the time which proves that customer’s feedback is good. IKEA can take this opportunity to open their own cafe in several strategic locations. This not only can help them in creating awareness of their brand but also increase their revenue. IKEA could invest by opening a few outlets to see how it would affect their sales before investing more to further develop its new concept of promoting their cafe which will attract more customers to its store.
Conclusion Ingvar Kamprad was 17 when he started IKEA in 1943. In Smaland, southern of Sweden, Ingvar Kamprad realizes people that are poor can’t afford expensive furniture and this gave him an idea and he learned to make furniture in Smaland. After that, he applied the lessons he had learn in Smaland and his innovative idea is to offer home furnishing product of good functions and designs at much lower price than all the competitors and uses simple-cost cutting that will not affect the quality of the products.In addition to, based on the financial and feasibility reports, IKEA can be said as one of the world’s largest and effective company just by selling furniture with its own showroom concept with a low price for almost anyone that can afford it. Reference List Barua, S. (2011).
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