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STRATEGIC MANAGEMENT ANALYSIS

CASE STUDY ON IKEA

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Contents INTRODUCTION .......................................................................................................................... 3

SECTION 1: STAKEHOLDERS ................................................................................................... 3

Identification of IKEA’s stakeholders and their interests .................................................... 3

SECTION 2: INDUSTRY ANALYSIS.......................................................................................... 5

Analysis of furniture and home industry structure using Porters Five Forces Model ......... 5

SECTION 3: RESOURCES AND CAPABILITIES ...................................................................... 7

Resources and Capabilities and strengths and weaknesses of IKEA ................................... 7

SECTION 4: BUSINESS AND CORPORATE STRATEGIES .................................................. 11

Business and Corporate Strategies of IKEA ...................................................................... 11

CONCLUSION ............................................................................................................................. 12

REFERENCES ............................................................................................................................. 13

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INTRODUCTION

Strategic management is a continuous process that enables organization to assure that resources

and other competencies are utilized effectively for the accomplishment of goals and objectives,

mentions Nedelea and Paun (2009). This process carries out internal and external assessment of

organization to identify its key strengths and weakness and thereby formulates suitable strategies

to edge over in competition (Hitt, Ireland and Hoskisson, 2016). IKEA is one of the renowned

multinational firm proficient in the process of designing and distribution of ready to assemble

furniture (Kristoffersson, 2014). In the current report, the researcher by paying special attention

to the identification of stakeholders, resources and capabilities and the strategy of IKEA provides

in-depth understanding on relation between management and sustainability.

SECTION 1: STAKEHOLDERS

Identification of IKEA’s stakeholders and their interests

By definition, stakeholders of organization are those parties who have special interest towards

the activities of company and typically this may include customers, employees, government,

suppliers, investors etc, refers McPhail (2011). As referred by Nedelea and Paun (2009)

stakeholders are valued as main resources of organization and therefore it eminent to coordinate

the practices and policies of organization in accordance with their interests. IKEA the leading

organization responsible for furniture innovations in terms of style, function, quality and low

prices is renowned for its healthy relations with stakeholders (Kristoffersson, 2014). Dahlvig

(2011) reported that, by cooperating and maintaining communication with stakeholders, it

became possible for IKEA to share and learn more for the development and improvement of

business.

According to McPhail (2011) stakeholders can be classified in to internal and external. Internal

stakeholders are inside parties of organization while external stakeholders are outsiders who pose

keen interests on the activities of entity. By classification, the internal stakeholder of IKEA

includes the employees, Board of Directors, investors, managers and shareholders and the

external stakeholders of the company comprises of customers, Local community/global society,

competitors, suppliers and local government.

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Employees and managers are highly interested towards the activities of IKEA, since their wages,

salaries, promotions, payments and perks are related to its overall performances in furniture

industry. IKEA is spotted as one of the best company to work as it offers positive working

environment and fair pay to its employees, mentions Smith (2012). This constitutes that the

performances of IKEA is well favorable to its employees and managers.

The shareholders of IKEA are more concerned towards the actvities of the organization since

their dividend payments and share values are depending up on it. For meeting the credibility and

investment preferences of shareholders, IKEA has successfully maintained its business

operations in accordance with sustainable practices. This attempt has benefited IKEA to achieve

net profit up by 5.5% to $3.9 billion in the year 2015 (Ringstrom, 2015).

IKEA have solid set of suppliers working in collaboration with the company for meeting

growing demands of customers instantly. Suppliers of IKEA are promised with continuous

growth of the organization and big volume profits at low costs. Additionally the company has

taken great effort to monitor the alignment of supplier practices with the code of conduct.

Reports of Snell (2012) reported highlighted that IKEA has terminated about 19 suppliers due to

their misalignment with IKEA’s supplier’s code of conduct known as IWAY. It is identified

from the case study that by collaborating with IKEA’s partner, WWF, the company has well

reduced social and environmental impacts related to cotton production in Pakistan and India.

Customers are concerned about the price, quality, offers and standard of service they receive

from IKEA. IKEA provided perfect quality of products to customers at standard prices and also

provided daily deals, offer and discounts to enhance their shopping experience with the company

(Hitt, Ireland and Hoskisson, 2016).

Among the aforesaid stakeholders, suppliers and customers belonging in external stakeholder

category are the major stakeholders of IKEA and the company has given more priority to the

interest of these groups. With reference to case study, IKEA maintained innovative concept in its

business, i.e. flat packaging for effective logistics for reducing number of shipments and also

increased concern of the firm towards sustainable practices led suppliers to concur with code of

conduct.

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The cotton production suppliers of IKEA are entitled to align with sustainable practices for

reducing environment and social impacts. Moreover, IKEA consider customers as corner stone

of business, since the sales and profits of the company are dependent up on purchasing

preference of customers (Dahlvig, 2011). Therefore to meet the expectations of customers, IKEA

stayed highly responsible towards environment and community during its product innovations

and also promoted environment friendly culture among employees and managers.

SECTION 2: INDUSTRY ANALYSIS

Analysis of furniture and home industry structure using Porters Five Forces Model

Figure 1: Porters Five Forces

Source: Roy (2011)

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Rivalry among existing competitors: According to Legg (2015) furniture industry of UK

contributes about £10.1 billion towards GDP of the country and this sector proved to be potential

in generating higher revenue growth. Therefore rivalry among existing competitors in furniture

and home appliances industry stays sturdy. Even though the demand in furniture industry is keen

and strong, people tends to establish business in this industry and this seems to be a major reason

for increased competition. For e.g. Euromarket, IKEA, Argos, Galiform Plc and Walmart Stores

Inc are the leading players in furniture market.

Threat of new entrants: Threat of new entrants in to furniture and home appliances market is

high , as the new establishments in this industry requires affordable capital ranging from 25

million to 1 billion and also the legal hurdles in this industry is comparatively less (Chaudhari,

2015). On the other hand Ngui, Agarwal and Voon (2011) mentioned that access to distribution

channel acts as main barrier for new entrants. While considering the case of IKEA, the company

may face less threat from new entrants, since it requires higher expertise to become discounted

furniture retailer in global level. Additionally, Lutz (2015) mentions that it would not be

favorable for new entrants to gain benefit at its initial operations in furniture market to the same

extent as IKEA experienced.

Bargaining power of suppliers: Bargaining power of suppliers in furniture and home

appliances market is slight as single suppliers may not be able to produce all type of plywood

required for the production of furniture’s (Chaudhari, 2015). As per the observation of Ngui,

Agrawal and Voon (2011) it would be possible for firms in furniture and home appliances

industry to easily replace suppliers, since the technological advancements are mostly equal in

every factory. Additionally, the machines and other equipments required for the production of

furniture’s are easily accessible for firms in furtuniture market without much regulatory hurdles

(Chaudhari, 2015). While considering IKEA, the company has more than 1002 suppliers over 52

countries for meeting growing demands of customers (Malmo, 2011). IKEA follows the strategy

of maintaining long term relationship with suppliers and have easy access to factories located

across the world (Malmo, 2011). Therefore bargaining power of suppliers in the case of IKEA is

slightest.

Threat of substitute products or services: Up to now people have been using furniture’s made

of wood, metal, fiber and plastic, and therefore the threat of substitutes other than the aforesaid

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forms is low in furniture industry, indicates Ngui, Agrawal and Voon (2011). According to

Malmo (2011) IKEA, have been using plastic, metals, fiber etc other than wood for producing

furniture’s, and therefore the threat related to substitution have been slight for the company in

furniture market.

Bargaining power of buyers: As per the opinion of Ngui, Agrawal and Voon (2011) buyers are

more prone to buy products from retailers offering the products at reduced costs. Although the

customers in furniture industry have alternative choice of products and also there exists intense

completion, the bargaining power of customers is strong (Ngui, Agrawal and Voon, 2011).

Bargaining power is slightly more in furniture and home appliance market due to the absence of

customer switching costs.

Though global furniture industry is experiencing high demand from customers, opening more

number of stores in developing countries will be greatest opportunity for IKEA to achieve

competitive position in the market. IKEA have been exerting higher bargaining power for

imposing CSR practices on suppliers (Lutz, 2015). Therefore this will be a greater opportunity

for IKEA to attract environment friendly customers towards the company. Due to lack of

competitors and stiff market, customers in IKEA are highly unlikely to switch over to

alternatives and therefore this forms opportunity for the company to enhance its sales growth

potentially by enhancing customer base.

Customers have wide variety of choice in furniture market and therefore price elasticity acts as

main threat for IKEA to hold customers from rivals. IKEA to survive over competition, it is

evitable to provide discounts, offers and daily deals to customers. Entrants of new firms in to

furniture market by offering low prices to customer’s acts as major threat to IKEA and therefore

the firm need to reinforce unique qualities of products for competing against rivals.

SECTION 3: RESOURCES AND CAPABILITIES

Resources and Capabilities and strengths and weaknesses of IKEA

Every organisation utilizes various forms of assets for its business growth and expansion.

According to Tovstiga (2015) the asset used by an organisation is termed as its resource. As

defined by the author, threshold resources constitute the basic assets required by an organisation

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to participate in a particular market/ industry and gain equivalence with competitors in the

participating market/ industry. On the other hand Cashian (2007) explains that every entity needs

to have resources which make it unique and distinguished from competitors and these resources

are called distinctive capabilities. While threshold resources assist organisations to take part in a

market, distinctive capabilities help it to attain competitive advantage.

The Threshold resources- distinctive capabilities grid of IKEA is as below:

The strengths and weaknesses of IKEA are as below:

Strengths Weaknesses

Brand name and image

Low-cost product with superior quality

Sustainable and recyclable products

IWAY

Clear and strong vision

Lack of proper communication about

its sustainability initiatives

Poor customer service

Control over suppliers in developing

nations like Pakistan and India

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As per Abraham (2012) IKEA is principally into manufacturing of furniture items and thus the

main resources used by the company are wood and cotton. While wood is used by IKEA to

manufacture furniture pieces, cotton is used in many of its most-loved products like bed sheets,

cushions etc. The case study on IKEA provides the information that the company focuses on

sustainability and hence its threshold resources will include the manufacturing unit, farmers

cultivating cotton in environmental-friendly manner, sustainable suppliers and the retail spaces.

The major threshold resource of IKEA could be its stores. Abraham (2012) cites that IKEA

stores established across the world have warehouse attached to it and the customers can browse

and obtain furniture in the main showroom space. IKEA has a self-pick design in showrooms and

hence it does not employ sales or service staffs in its showrooms. However IKEA employs staffs

in department like administration, billing, procurement etc and therefore the personnel employed

in these departments would also form part of its threshold resources.

Threshold resources are equivalent to the core competencies of an organisation, states Williams

(2009) and it has been observed by Dahlvig (2011) that the threshold resources of IKEA include

its supply chain network. The company maintains relationship with over 1800 suppliers in 55

nations and to manage the relationship with its suppliers, the furniture brand has established

more than 42 trading service offices worldwide. The IKEA Way of Purchasing Home Furnishing

Products (IWAY) strategy also forms part of the threshold resources of IKEA and the case study

informs that through IWAY, IKEA has been able to communicate with its suppliers to produce

raw materials in the most sustainable and environmental-friendly manner. Customers are also the

basic resources of an organisation (Kristoffersson, 2014). As pert the reports of Rankin (2015)

IKEA makes 1.5 million shipments every year and in the year 2015, the company made €32bn

sales. These figures hence show the support that IKEA has gained from its customers worldwide.

The Russian and Chinese markets are witnessing a steady increase in customer numbers,

followed by the UK market and thus customers will become the strongest threshold resources of

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the company in the following years. Inventory stocking is yet another threshold resource in

IKEA and the furniture brand ensures that every store of IKEA is always equipped with the level

of inventory demanded by customers. It can be inferred that the inventory-stocking feature of

IKEA has been a main reason behind growing customer circle for the business (Lu, 2014).

It has been stated by Williams (2009) that distinctive capabilities are substantial and thus cannot

sustain without the support from the core competencies of a business. The threshold resources of

IKEA has thus paved way to its distinctive capabilities namely low-cost product strategy and

selling products at good-value. The reports of Lu (2014) identifies that IKEA provides superior-

quality products to customers at a very low-cost strategy and over 50% products sold by IKEA

are made from eco-friendly materials. Williams (2009) mentions that global brands in furniture

business have still not been able to provide high-quality products at competing prices as done by

IKEA and this makes its distinct in every market. It is the low-cost strategy that has helped IKEA

to gain competitive advantage in all markets.

Another unique aspect in IKEA’s business is its ‘Do-it-yourself’ packing systems. IKEA

manufactures every furniture product in such manner that customers can easily assemble it and

the retail brand has arranged flat-packages which the customers can use. This system of packing

has been the main reason behind low-cost and maximum number shipment offered by the brand.

As stated above, the stores of IKEA comprise warehouses and the inventory management in

warehouse is done by IKEA using the ‘cost-per-touch’ tactic. As the warehouse and assemble

unit is present in IKEA stores, customers save huge amount through reduced shipment,

movement and loading of products. Moreover the in-store logistics of IKEA also forms part of its

distinct capabilities (Abraham, 2012).

IKEA being a global brand believes in corporate social responsibility and has given high

importance to sustainable and environmental production. As highlighted in the case study, the

company has adopted The Natural Step (TNS) to market products in eco-friendly manner. Its e-

wheel method also makes IKEA unique in global business. Furthermore, Nichols (2014) finds

that by 2020, IKEA aims to be totally green and thus has placed huge solar panels above its

stores. The company is largely investing into promotion and support of green systems, making its

totally unique in global furniture business.

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The above resources and capabilities of IKEA has thus become its major strength and this has

gained the brand a renowned image and reputation in the global market. However, IKEA has its

weaknesses. The main weakness of IKEA has been in its customer service. As per Tovstiga

(2015) the customer service of IKEA is dreadful and despite of its strict guidelines, the company

has faced several issues due to delayed delivery, long queue for billing, congested car parking in

stores, complicated store layout etc. Further, the author finds that IKEA does not make proper

communication with its stakeholders about green and sustainable initiatives and thus, active

participation of stakeholders is still questionable. Furthermore, the case study provides an insight

that IKEA imposes strong control over it suppliers in emerging economies and gives little option

for suppliers to raise their issues and concerns. Thus it can be inferred that for global success and

competitive advantage, IKEA needs to overcome its weaknesses.

SECTION 4: BUSINESS AND CORPORATE STRATEGIES

Business and Corporate Strategies of IKEA

The case study provides the information that the business and corporate strategies of IKEA

adhere to sustainability policies. It can be observed form the case study that since 1990, IKEA

ahs followed TNS (The Natural Step) framework and it is the first of its kind in the global market

to follow such a strategy. The strategy to implement e-wheel system and Sustainability Product

Scorecard is yet another aspect of IKEA’s sustainable strategy. The TNS framework has been

highly successful in reducing and eliminating chemicals like formaldehyde in its cotton products

and also with the TNS framework, IKEA has been able to increase awareness on environmental

protection. As wood is the primary resource of IKEA, the brand has ensured all forestry

requirements and aims to become ‘Forest Positive’ by the year 2020 (IKEA, 2016).

The second most used raw-material by IKEA is cotton and the knowledge that cotton products

utilizes large amount of natural resources like water, it had partnered with WWF to cultivate

cotton in the most environmental friendly manner. The case study shows that the green initiative

taken up by IKEA in cotton cultivation has proved in reducing the amount of pesticides by 50%,

water resources by 50% and fertilizers by 30% within three years. IKEA was also successful in

producing cotton at affordable rates, by still providing profitable margins to its farmers and

suppliers.

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As per the reports of Kelly-Detwiler (2014) the sustainable strategies of IKEA has reached levels

which are far-above-the ground and currently, the multi-national retailer has over 157 wind

turbines with 345 megawatts capacity and 550,000 solar panels producing almost 90 MW. The

study done by Malmo (2011) also shows that the green and sustainable strategies of IKEA has

attained enormous success as the brand has been able to eliminate the presence of

Polyvinylchloride, formaldehyde, acid curing lacquers, non-degradable plastic and materials etc

from its products. IKEA has further restricted on the use of lead, cadmium, AZO etc in its

products and its products are now composed of 100% recycled materials and packages of IKEA

are based on pure materials.

The IWAY strategy of IKEA has been successful in ensuring environmental protection by

suppliers and all suppliers of IKEA currently follow and adhere to eco-management and

environmental standards. The strategies of IKEA have achieved global attention and support,

finds Dahlvig (2011). However to achieve competitive advantage, IKEA needs to progress

further on its strategies. For instance Kristoffersson (2014) finds that IKEA has not yet engaged

in any strategy that could measure the environmental benefits earned though its green strategies.

Similarly IKEA still faces issues with stakeholder communication, sustainable forestry

requirement and manufacture’s responsibility legislation in various markets. It is thus

recommended that the furniture brand involve in more awareness campaigns in identified

markets and educate farmers, suppliers, employees, customers and other stakeholders about

possible benefits of its initiatives. Also, making environmental strategy a part of organizational

vision and mission could also help IKEA attain targeted success.

CONCLUSION

This report has evaluated the strategies and initiatives followed by IKEA in its markets and

through various analysis, it was found that the low-cost strategy and sustainable activities of

IKEA has contributed to its global success and competitive advantage in various markets. This

study has also focused on the cotton cultivation project of IKEA and has identified that the

strategies like TNS, e-wheel, IWAY etc has enabled IKEA to eliminate chemical and non-

degradable materials in its products.

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