IKEA Company Background

IKEA was founded in 1943 by a Swedish entrepreneur Ingvar Kamprad , who still has control over the company through the INGKA Foundation, based in the Netherlands. Swedish company IKEA was the world's largest furniture retailer since the early 1990s. It sold inexpensive furniture of Scandinavian design. Nowadays, the company operated in 55 countries with a workforce of 76,000. IKEA offered nearly 12,000 items to the home furnishings market worldwide. It sold a wide range of products including furniture, accessories, bathrooms and kitchens at 186 retail stores in 30 countries across Europe, North America, Southeast Asia, Middle East and Australia. IKEA enjoyed high brand equity.

IKEAs global strategy

The concept which IKEA calls democratic

It is a main concept of design that, according to Kamprad, was not just good, but also from the start adapted to machine production and thus cheap to assemble.

A key feature of IKEA: self-assembly

Kamprad quickly realized that flat-packed furniture reduced transport and warehouse costs, and damage (IKEA had been having a lot of problems with furniture damaged during the shipping process). Moreover, customers seemed willing to take on the task of assembly in return for lower prices. By 1956, self-assembly was integral to the IKEA concept.

Obstacles that lead to the company powerful development

(Problem) Kamprad could undercut the prices of established retail outlet, much to their chagrin. Established outlet claimed that IKEA was imitating their designs. This was to no avail, however, so the retailers went further, pressuring furniture manufacturers not to sell to IKEA.

 (Solution) This had two unintended consequences. First, without access to the designs of many manufacturers, IKEA was forced to design more of its products in-house. Second, Kamprad looked for a manufacturer who would produce IKEA-designed furniture. Ultimately, he found one in Poland that was much as 50% cheaper than furniture made in Sweden (furniture manufactured in Sweden was much expensive.)

By 1958, an expanded facility at the Almhult location became the first IKEA store. The original idea behind the store was to have a location where customers could come and see IKEA set up. It was a supplement to IKEAs main mail-order business; but it very quickly became an important sales point in its own right. The store soon started to sell car roof racks so customers could leave with flat-packed furniture loaded on top. Noticing that a trip to an IKEA store was something of an outing for many shoppers (Almhult was not a major population center and people often drove in from long distance), Kamprad experimented with adding a restaurant to the store so that customers could relax and refresh themselves while shopping. The restaurant was a hit, and it became an integral feature of all IKEA stores.

(Problem) The response of IKEAs competitors to its success was to argue that IKEA products were of low quality.

(Solution) In 1964, after 800,000 IKEA catalogs had been mailed to Swedish homes, Swedish magazine Allt i Hemmet published a comparison of IKEA furniture to that sold in traditional Swedish retailers. The furniture was tested for quality in a Swedish design laboratory. According to the magazines analysis, it showed that not only was IKEAs quality as good if not better than that from other Swedish furniture manufacturers, the prices were much lower. This publicity made IKEA acceptable in middle-class households, and sales began to take off.

(Problem) In 1965, the new store in Stockholm, Sweden, generated a large amount of traffic, so much so that employees could not keep up with customer orders, and long lines formed at the checkouts and merchandise pick-up areas.

(Solution) To try and reduce the lines, IKEA experimented with a self-service pick up solution, allowing shoppers to enter the warehouse, load flat-packed furniture onto trolley, and then take them through the checkout. It was so successful that this soon became the company norm in all stores.

International Expansion

- By 1973, IKEA was the largest furniture retailer in Scandinavia with nine stores.

- Starting with a single store in Switzerland over the next 15 years, the company expanded rapidly in Western Europe. IKEA met with considerable success, particularly in West Germany.

- IKEA continually expanded in the United Kingdom. IKEA also entered North America, opening seven stores in Canada, and it was very successful.

- In 1985, IKEA enter the United States. It proved to be a challenge of an entirely different nature and culture.

The difference of culture at the entry stage to the new market

By the early 1990s, it was clear that things were not going well in America. The company found that its European-style offering did not always resonate with American consumers. For example, beds were measured in centimeters, not the king, queen, and twin size with which Americans are familiar. Sofas were not big enough, glasses too small, curtains too short, and kitchens did not fit American-size appliance, and so on. Moreover, some of the stores were poorly located, and not large enough to offer the full IKEA experience familiar to Europeans.

Adaptations

Many products had to be redesigned to fit with American needs. Newer and larger store locations were chosen. To bring prices down, goods were sourced from lower-cost locations and priced in dollars. IKEA also started to source some products from factories in the United States to reduce both transport costs and dependency on the value of the dollar.

IKEA noticed a change in American culture. Americans were becoming more concerned with design, and more open to the idea of disposable furniture. For example, younger people were more open to risks and more willing to experiment. They were looking for design elegance and quality.

To tap into Americas shifting culture, IKEA reemphasized design and started promoting the brand with a series of quirky hip advertisement aimed at a younger demographic. One IKEA commercial, called Unboring, made fun of the reluctance of Americans to part with their furniture.

The IKEA Concept and Business Model

Target Market: IKEAs target market is the young, upwardly mobile global middle class who are looking for low priced but attractively designed furniture and household items. This group is targeted with somewhat wacky, offbeat advertisements that help to drive traffic into the stores. There is plenty of parking outside, and the stores are located with good access to major roads.

Concept: The interior of the stores is configured almost like a maze that requires customers to pass through each department to get to the checkout. The goal is to get customers to make more impulse purchase as they wander through the IKEA wonderland. Customers who enter the store planning to buy a table which the price not over $50 can end up $300 with many products from storage units to kitchenware. The flow of departments is constructed with an eye to boosting sales.

At the end of the maze, just before the checkout, is the warehouse where customers can pick up their flat-packed furniture. IKEA stores also have restaurants which located in the middle of the store and child-care facilities which located at the entrance for easy drop off so that shoppers stay as long as possible. Customers can feel comfortable and pleasant with the companys providing facilities.

Lower price

As IKEAs Web site states, We design the price tag first, then the product. Once the price tag is set, designers work with a network of suppliers to drive down the cost of producing the unit. The goal is to identify the appropriate suppliers and the least-costly materials. IKEA had a lot of suppliers to work with. By 2008, IKEA had 1,380 suppliers in 54 countries. The top sourcing countries were China (21% of suppliers), Poland (17%), Italy (8%), Sweden (6%), and Germany (6%).

 IKEAs attention to finding the right supplier for each item.

IKEA originally manufactured the product in Sweden but soon transferred production to lower-cost suppliers in Poland. Then, with the increasing demand, IKEA decided that it made more sense to work with suppliers in each of the companys big markets to avoid the costs associated with shipping the product all over the world. Today, there are five suppliers of the frames in Europe, three in the United States and two in China. IKEA has concentrated production in four core suppliers in China and Europe. The resulting efficiencies from these global sourcing decisions enabled IKEA to reduce the price of the products by some 40% between 1999 and 2005.

IKEA Expansion to Asia

Due to the company consistent growth, IKEA seems to have its great potential to expand its market in Asia. In this report, Indonesia and India are the chosen countries that are considered as a target market for IKEA. And the followings are the detail of the market opportunities and constraints.

Indonesia

|Opportunities | |Labor cost is low |Stability in economy and political climate | |The shift of consumer behavior |Diverse culture exists |Growing in home furnishing market |Usage of media is growing | | |

|Constraints | |High competition

|Intellectual property law is not strong

|Corruption | | | | | | |

India

|Opportunities |Large market |Geographic and demographic |People speaks English

|Constraints |Government regulations |The furniture sector is small |Limited knowledge of culture |Political risk | |

| | | | |

|The fastest growing economy in Asia Pacific region | | | |

|Intensity of competition |Trade barrier |Low protection of intellectual property | |

IKEA in China

IKEA opened its first store in Shanghai, China in 1998. Although the company's global strategy had worked well in the past in most of the markets it had entered, it quickly learnt that success in the Chinese market required a different strategy in the areas of Marketing and HR.

IKEA also had to alter two of the most important aspects of its time-tested and proven global strategy when it came to China; IKEA had always located its stores in less expensive areas and sold its furniture on the do-it-yourself (DIY) principle. These elements had to be changed in China. IKEA claimed that it had decentralized most of its functions including HR and stores management in China, but despite this, there was criticism that IKEA was far too bureaucratic with many of its operations being globally controlled and systematized. Commenting on this, Ian Duffy, IKEA's China retail manager commented, "We need time to learn and change in the (Chinese) market to become a success."

The Chinese government allowed foreign investments in the real estate industry in the mid 1990s. As the construction of commercial and residential establishments increased, it also boosted the sales of

home decoration and furnishings companies. The demand for housing increased considerably over the late 1990s and early 2000s. Increased home ownership further boosted the home improvements and decoration market. People wanted better quality products. To fill this need, many foreign home decoration and furnishings companies like B&Q entered China during the 1990s. At that time, IKEA started its retailing operations in China with the opening of its first store in Shanghai in 1998 (the store was redesigned in 2003).

In 2004, the Shanghai outlet was the second largest in Asia after the one in Kuala Lumpur, Malaysia, and offered more than 7,000 products. The store was 33,000 m2 in size, and included a 170 m2 children's playground and a 500-seat restaurant. Moreover, in 1999, IKEA opened its second store in Beijing.

Nowadays, IKEA has made an outstanding progress by expanding its Chinese market. As of today, IKEA has 8 locations that located in the big cities nationwide.

Adapting products and services in China

Most of IKEA Chinese customers are 20 to 35 years old, but the stores now attract an increasing number of customers closer to age 45, most likely a result of the store's market repositioning. Many customers are families with children or are double-income, well-educated couples with no children. IKEA also alters products to suit the needs of Chinese consumers.

In addition, IKEA had to adapt its location and do-it-yourself (DIY) assembly concept to China. IKEA has built its PRC stores near public transportation lines, offers local home delivery and long-distance delivery to major cities in China for a fee, maintains taxi lanes, and offers fee-based assembly services.

Could the company continue to do the business in China?

We can say that IKEAs China sales seem certain to boom. Due to the fact that, Chinese customers are now familiar with IKEA and IKEA has developed and adjust its products to suit with Chinese culture. Moreover, IKEA sales revenue in Chinese market has been rising consistently since its first entry to the China.

Was its competitive advantage secure?

IKEA china always tries to protect and maintain its competitive advantage. In terms of its competitive advantage, we can define into three main categories:

Overall cost leadership: The strategy of overall cost leadership is always the IKEAs biggest aim. The history of IKEA is also the history of looking for low price. IKEA try to find the low price at every part of the process. For example, before they design a product, they already confirm the price. They use flatpackage to reduce the cost of transport. They reduce the staff in store to reduce the cost of store. They also use the scale effect to purchase goods from all over the world.

Differentiation: IKEA products are designed to be functional and good looking but at a low price. Customers need the goods low price and good quality. Low price or good quality is easy to achieve, but it is not easy to get both of them. IKEA also takes children to their customers, and the spirit of care for children really wins many customers heart.

Focus: There are three main parts of IKEA that are IKEA office, home storage and Childrens IKEA. The target customer is everybody. According to the life system, they segment the market to many parts. That will be better to meet the requirement of different customers.

By IKEA competitive advantage, it can strengthen its business and compete with other competitors. As from the previous experience, UK-based B&Q, the largest DIY retailer in Europe and the third-largest in world, has several stores in China. However, IKEA can still keep its customers and stay in the top of the market because of its reliability and a rational cost that IKEA offers to Chinese customers.

Recommendations and conclusion The companys been doing great. However, we have recommendations for them to create more opportunities and gain more revenue. First, IKEA focuses too much on Western Europe market; they should expand more to Asia market. The Asia market is a huge market and great opportunities for them to expand their market.

Second, IKEA should build a network of supplier and production lines in each new market. This way will help IKEA to reduce their transportation cost. They can use their suppliers in those particular markets to produce their products and sell them locally. So this will save huge amount of money they have to spend for shipping cost. When IKEA wants to open their store in the new market, opening a small display store in shopping malls first before opening the full size IKEA store could be the good way and reduce risk in that new market. Moreover, IKEA should update their website to have more community features. For example, they can let young customers share their ideas about the ideal furnishing. Not only company can let customers design kitchens in-house via a very unintuitive and complicated interface but also give them an online tool or game to create their dream apartment. IKEA can create contest to let customers participate in a contest and permanently scan their ideas. Then IKEA can consider changing some of the products design according to these proposals because these are their customers of future they should listen to. Finally, IKEA should consider stand-alone IKEAs restaurant or add food in product line. The food of IKEA can generate the revenue for the company and this can be a great potential for them other than just the furniture. They can design the restaurants for young professionals requesting high quality meals with prices not significantly higher than other fast-food chains. Try to be a cost and quality differentiator in focusing on a relatively small set of offers available all day. The IKEA restaurants might start as loss leaders - but can drive significant business into IKEA's core furniture market. IKEA is a well-known global brand. To keep doing well it must assess internal and external factors that may affect the business performance. It takes advantage of opportunities and manages any threats in a positive way. IKEA unites design, low prices and good use of resources. Its products, processes and systems all show a responsible approach to people and the environment. IKEA knows that behaving sustainably is good for customers, the planet and its business.

Q1. What is the business scenario of IKEA?

Political:

The countries on which IKEA operates in are members of the WTO which significantly lowers the operating costs of the company

Legal:

IKEA is subject to various taxation laws in the countries where it operates. Particularly, they are subject to corporation tax or income tax depending on the overall profits made by the local branch.

The quality of wood should be within the standards accepted. It must be sterilized and the company should have proof of such sterilization.

Economic

The economic element involves the effect of the exchange rate on the pricing strategy of the products.

The change in pricing may incur a concurrent change in the demand curve.

Social

The products they are offering are do-it-yourself (DIY) which gives the consumer a sense of accomplishment upon the assembling of the said furnitures.

It gives the consumers the convenience of having their furniture delivered without having to go in a mall or a showroom.

Technology

The technologies used are simple The bases of the furniture have no effect on technology.

Ecology

An increase in the price of the raw material of the company will significantly increase the cost of production

The manufacture of the products are subject to the environmental laws of the particular market.

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