Ikea’s Business Strategy

Ikea, from its humble beginning to a multinational corporation has entered the hearts of many of the world’s citizen thorough its unique design and low cost products. Ingvar Kamprad, the founder of Ikea and the genius behind this phenomenon, continues to build his empire throughout the continents of the world by his vision and bold business strategies. Spanning his wing around the world globally, Ikea is set to make its mark in history. 2. Background Note Company vision is to create a better everyday life for the many people by integrating sustainability in all business strategies.

Today Ikea encapsulates all the key beliefs and vision of its founder, which includes: a. Democratisation of consumption – Offering good value furniture at an affordable price b. Enhanced visual sensitivity c. Non hierarchical world and anti-bureaucratic attitude d. Empowerment e.

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Frugal attitude – Ikea is in the hands of Dutch charitable trust. Looking at Ikea’s turnover from 1954 to projected turnover in 2010 one could only marvel at their ability to continue to grow at such a steady pace.The Ikea Group opened 16 new stores in 2009 and 15 more as at October 2010 (Ikea, 2010) Ikea’s success lies in the way it has been able to put together various strategic activities vis-a-vis strategic thinking and strategic planning. Strategic thinking encompasses key tenets like: 1. Taking a holistic view 2.

Focusing on the intent and purpose 3. Real time thought process- using the knowledge and experience of past behavior and predict the future trend 4. Hypothesis driven – Scientific method of testing and re-testing a scenario. This is a creative and critical or analytical process 5.Opportunistic 3.

Building an Empire Ikea’s biggest investment plan yet is to expand in China, the world most populous nation. Bloomberg (2010) reported that Ikea plans to dump in US$300 million for their expansion in China. They target to more than double the number of stores in China from 8 now to 18 in 2015. This is to capture the China market where retails sales rose 18 percent in the first eight months in 2010. Ikea plans to invest up to US$1. 2 billion in China over the next five years.

Ikea has had their fair share of experience in the Asian market.In 1974 Ikea opened its door in Japan. After a long struggle it pulled out from Japan in 1986. In 2006, Ikea returned to the land of the rising sun just to reopen a giant store in the outskirts of Tokyo. The very essence of their success in Japan where many other foreign companies have failed to do is to understand the local market. The company needs to have local people employed right from the start.

A local at a high level will ensure the success of the company, who understands the people’s culture and what this country is all about (Lane 2007).In 1998, Ikea opened its first store in Shanghai, China. The demand of housing increased when the Chinese government allowed foreign investment in the real estate industry in the mid 1990s. This surged the home ownership which in return also boosted the demand for fine home decoration and furnishing. As per Porter’s Diamond – The determinants of National Advantage, Ikea’s business srategy in China can be described in the following four broad attributes.

•Factor conditions – China’s with its large human population gives the much needed advantage in terms of labour supply.Ikea is able to take this advantage to build its empire within China and also all over the world by producing its products in China and has kept its cost low. •Demand conditions – A nation with population set to reach 1. 4 billion by the end of 2010, demand for household goods of higher quality and unique design is set to soar with the increase of per capita income. In a country where showing off one’s status symbol by acquiring material goods of high quality and standards, the affluent don’t mind spending the money for this cause.However, it’s the middle class that Ikea wants to capture by adopting a low cost strategy in China.

Now even the middle class can also enjoy the same status by bringing home a piece of Swedish designed products which doesn’t burn a hole in their pocket. •Related and supporting industries – China being dubbed as the world factory with majority of Ikea’s product are made in China. This helps to lower the production cost of Ikea products significantly thus passing on this cost saving to the consumers of China. Proximity of supplier for their products is key to their sustainability in the long run.Distribution of these products to their world wide stores is also crucial in determining Ikea’s success. Careful planning of routes and logistics are a focus for constant development.

•Firm strategy, structure and rivalry – Home ownership in China is expected to boost with China economic growth. Home-furnishings market will expand to 186. 9 billion yuan ($28 billion) this year, according to data from Euromonitor (Bloomberg, 2010). This is an opportunity for other furniture retails players to eat into Ikea market share. With this competition, Ikea is much eager to monopolise the industry.

4. Success Factors Ikea’s strategy has been thought to be that of focused cost leadership style. The focus being the target market which is the young people who are well educated, liberal in cultural values, white collar and embarking in establishing a home because they have children. This is akin to Ikea’s global strategy. •Its products are another differentiator that has contributed to Ikea’s success.

The look and feel of the products is the same across its stores worldwide. Ikea’s designs the products and someone else manufactures. The design is light and modern. Considerable time goes into the design of the product. Ikea is considered to be a strategic centre enterprise, which means it is the centre of alliance network. Thousands of manufacturers supply Ikea with the needed products.

This also helps Ikea in outsourcing the activities that are not its core competencies. •Another key strategy is competitive pricing. Ikea’s prices are at least 20-30% lower than its rivals fully assembled products. There are also BTIs (Breath Taking Items) that are low priced. Aggressive attitude is critical to keep the costs down.

For instance, Lack coffee table, sold in Singapore’s flagship Ikea store, has its price reduced from $89, 3 years ago to mere $12. 0 in 2010. The cost and price leadership is achieved by a combination of strategies ranging from large quantity purchasing and cheaper manufacturers to low cost logistics and Do It Yourself (DIY) approach. In an effort to reduce cost, Ikea used to outsource to Poland. Now one can find goods made in China without compromise on quality. •Ikea’s catalogue is one of the most important marketing tools.

It is one of the best known features. The layout of the catalogue is consistent throughout the world with little minor difference. It is the main advertising tool for Ikea. 5. The road aheadIkea’s success lies in its strategic thinking, which is both innovative and forward thinking, since it is ahead of its time and also focuses on the future.

By doing so it recognizes and creates the future scenarios. Thus understanding and changing the world, even if it is a small impact. The above fact is very much evident in the way Ikea expands into the foreign market. It starts by replicating its successful strategy at home and refining it along the way and at the same time renovating its product. For instance when Ikea moved into US, the first few years were loss making.This could be attributed the exchange rate, making swiss kroner pricier in 1990s.

However, there was also another striking flaw which didn’t go well with the Americans, the size. Americans found the Swiss size too European. The beds were narrow and small; the drawers were not deep enough. Ikea altered the way of doing things by adopting American sources, which accounted for 45%. Yet it retained its vision of providing furniture to the mass market.

The results were positive and also profitable. Ikea has an excellent platform for future growth since has it has branded itself to enter into new markets.The main challenge is to expand without loss of quality and to ensure the homogeneity is retained to generate the much needed economies of supply that has been a key factor in Ikea’s success in the past. Ikea has started looking at its Corporate Social Responsibilities efforts since environmental and social obligation as a nation of the world. 6.

Conclusion Ikea has been a close organization and clearly has defined its objective on what it wants to achieve. As an organization it has succeeded to identify the market segment of young and low-medium economy level customers, whose needs were never addressed before in the furniture market.Ikea differentiated itself by selling well-designed furniture of a good quality at low prices. Ikea applies aggressive approach in keeping its cost low and passing the benefit to its customer. Ikea has always tried to do more with less.

This goes hand in hand with environmental work-to-use resources in an economical and careful way. Thus this will see them through on which ever market they would want to penetrate. However, the complexity of the logistics system will only increase as they expand globally. It will be challenging for Ikea to respond to different national needs and adhere to cultural sensitivity issues.It may even be detrimental to Ikea growth in future. Faced by these challenges Ikea will have a difficult task in maintaining a global organizational structure.

To address these challenges Ikea must continue to balance its business strategy within the countries that it penetrates with a level of autonomy and it has to build and strengten its capabilties in centralised logistics systems.7. References1. Lane, G. (2007) A study of how different companies have failed, and tips on how to succeed, in the Japanese market (Online).

Available at http//www. japanic. om/mgz_sep-oct_2007_issue_failed-businesses (Accessed on 20th Oct, 2010)2. Bloomberg 2010 (Online). Available at http://www. bloomberg. com/news/2010-10-19/ikea-plans-to-add-300-million-to-mall-developer-s-investment-in-china. html (Accessed on 20th Oct, 2010)3.

Ankli, R. E. (1992), Michael Porter’s Competitive Advantage and Business History. pp. 0228-0236.

Available at http://www. h-net. org/~business/bhcweb/publications/BEHprint/v021/p0228-p0236. pdf (Accessed on 25th Oct, 2010)4. Ikea 2010 (Online).

Available at http://franchisor. ikea. com/showContent. asp? swfId=facts1(Assessed on 20th Oct,2010)