Strategic Analysis of IKEA: Resources, Capabilities

Introduction

Headquarted in Delft, Netherlands, is a multinational conglomerate founded in 1943 by Ingvar Kamprad. It is a retailer company dealing mainly with furniture, and if you are looking for business dissertation help, analyzing IKEA can be a impactful area In addition to retail services, the company owns the design, manufacturing, and distribution of its products through several of its subsidiaries under Inter IKEA Systems B.V. It has expanded to have retail stores across the globe particularly in major international cities becoming the largest and most well-known furniture brand globally. As of March 2021, it operated 422 stores across more than 50 markets (Forbes, 2021). This is largely due to COVID-19 pandemic. The company’s ideology, “to create a better everyday life for the many people” has been centre to its customer relations and growth model. In this paper, a critical analysis of the IKEA’s internal resources and capabilities the it gives a competitive advantage in the market will be done. Subsequently, using VRIO model, it identifies the drivers in the external environment of the company, and way it impacts its operations. Lastly, it evaluates the competitive forces influencing the company’s performance.

Internal Resources and capabilities

Using VRIO analysis, four key areas are explored, namely; value of the brand, uniqueness of the company and its products, inimitability by competitors, and the organisation itself, lensing on its structures and process whether they are aligned to market needs.

IKEA Brand

The IKEA brand name and image has been a key asset. In addition to recognisable blue and yellow colours, it is brand attributes that include low pricing, quality, functionality, and sustainability are core to its product development. It bride itself as designing quality products that are affordable to everyone (Yohn, 2015). It further adopts the philosophy of effective and efficient in marketing. Collectively, these attributes have morphed into core values associated with the company.

E-commerce and Digital Implementation

In attempt to diversify as well as accommodating the changes in the market brought by technological advancement, the company has an online division under ecommerce segment. During the lockdown due to the pandemic, it online business saw a sharp increase in sales by 60% and 3.6 billion visitors. In 2020, the segment accounted for 18% of its retail sales. However, it has seen a steady growth since 2001 with a revenue of 10.4 billion euros. The company has intensified its social media presence on platforms that include Facebook (over 30 million followers), Twitter (30 thousand followers), Instagram (2.4 million followers), and Pinterest by actively engaging with customers in addition to posting regular on products available. Its advertising and marketing strategy that include ‘Emoji campaign’ ‘UK Store Sleepover’, and ‘Sleep like a princess’ have relied heavily on digital media to connect, market, and engage with customers (Tregear, 2016). Additionally, it offers discounts, promotions, giveaways, as well as updates and events via the social media platforms.

Financial Capital

According to Statista (2021), the company’s annual revenue for 2020 stood at 39.6 billion euros, a slight decline from a year before of 41.3 billion euros. In 2020, the company’s source of revenue came from sales of goods, franchise fees (3%), and selling catalogue and marketing materials while expenses include cost of goods sold, operating cost, loans, investments, and income taxes. The company has also diversified by investing in renewable energy (wind turbines and solar panels across 14 countries) and sustainability.

Supply Chain Distribution and Logistics

The company’s supply chain system is distributed aimed at reducing the cost on logistics. Although it is well structured and robust with number of suppliers in the marketer its operate, stores across the globe, digitalised logistics and warehouse systems, and transport network, it is a common feature in the industry.

Brand Extensions and Marketing

The furniture retail market is still a new with several niches emerging. This largely due expanding consumer size, changing preferences, segmentation based on culture and financial status, as well as region. Also, in addition to home décor and office furniture, working from home induces another market for working purpose. However, due the ease in which competitors can venture into these niches and emerging markets by replicating, the company requires a huge financial backing for marketing and advertising for it to succeed.

Customer Loyalty

IKEA emphasises on quality, service, value of product, and satisfaction of customer. Under its goal of being ‘the leader of life at home’, it has instituted a ‘Life at Home’ program where regularly visits customers’ home to observe, document, and develop an insight from the consumers’ perspective their needs and views of the products (Rodrigues, and Brandão, 2021). According to REF, 23% the company’s customers accounted for approximately 84% of sales. Attaining such loyalty is a rare phenomenon in current market. Although, theoretically replicating customer loyalty is possible, attaining success can be quite difficult for some companies.

Drivers of change in the IKEA’s external environment

Retail industry is undergoing unprecedented transition. The market has evolved driven by several factors. Technological innovation has had a significant influence in the direction and nature of buying and consumption in today’s market. Internet gave birth to social media, digital marketing, content advertising, optimisation in marketing, business-to-consumer model, as well as ways in which consumers are engaged (Kestenbaum, 2021). Moreover, online business under e-commerce has grown to be a core segment for most if not all business entities in the industry. Others notable factors that have caused considerable changes in the industry include automation, distribution system, globalisation, sustainability, and recently pandemic (Adam, 2021). The mind map, Figure 1, outlines the interconnection and subsequently ways in which each factors impacted the retail market, particularly the furniture segment. From the diagram, the drivers are categorised into four areas, namely: Technology, Globalisation, Consumer behaviour, and Sustainability.

Under technology as driver of change, several innovations have had direct and indirect influence on ways the industry operates. Although technology has opened up new niche markets as well as inducing more efficiency and productivity in the industry, the companies that failed to adopt such advancement as distribution systems, automation, big data, analytics, demand forecasting, as well as digital media face a huge risk of going out of business (McKinsey & Company, 2021). Currently, businesses are built on technology, which without it no business can survive. However, the rapidness in which the technology involves makes some business essentially difficult to cope with (Martins, 2021). For instance, the trends in communication sphere brings generational gaps. The industry contents to adopting current trends and communication methods in attempt to reach out to emerging newer generation market niche, while also ensuring the older segment are engaged effectively.

In term of sustainability, companies are required to set in place structures towards ensuring social corporate responsibility that include, upholding human rights, fair labour practices, economic responsibility, reducing pollution, and greenhouse pollution. Depending on the country, the demands can be a law requirement or forced to maintain a positive image brand. A brand associated with using child labour might receive negative coverage by mainstream media and some calling for boycotting it products. However, failure to explicitly support human rights movements such women rights might be seen as condoning with gender mistreatment. In product development, companies create products with particular consumer in mind. Consumers determine the quality and pricing of the product. As such, retailers are forced to take into account the consumers’ needs and preferences include environmental concerns and stands, socio-economic status, and beliefs beforehand. Lastly, globalisation brings different cultures and traditions across the globe together. Businesses have to content with different viewpoints, beliefs, traditions, and political stands, which occasionally might conflict with their home country. In addition to regulations differences across countries and regions, the conditions and environment of conducting business differ as well as supporting structures such as logistics, suppliers, and distributors. Interconnectedness of global businesses environment was evident in the wake of the COVID-19 pandemic. Most countries globally were forced to close their borders and going into countrywide lockdown to curb the spread of the virus. The result was a widespread unemployment, shutdown of supply chain, near financial crisis, and collapse of businesses in some industries.

Impact of Competitive forces influencing IKEA’s activities

Porters’ Five Forces considers the factors that might influence a business performance both positively or negative. It analyses the competitions, alternative products, consumers, suppliers, and barriers of entering the market.

Competitive Rivalry within the retail, furniture industry

Retail industry, in which IKEA belongs, is very competitive. Such business entities such as Walmart, Tesco, Amazon, and Aldi dominate the market. Although IKEA offers products in a niche furniture segment, it still faces stiff competition from Ashley Furniture HomeStore, Williams-Sonoma, H&M, and Wayfair (Nast, 2021). Globally, the revenue of the furniture industry stood at 509.46 billion USD in 2020 where IKEA contributed approximately 33 billion (Statista, 2021).

Bargaining Power of Suppliers

The suppliers have a high bargaining power because in addition to having several others retailers to take their products, alternatives of raw materials (timbers, wood) are also many. Wood is a scarce material with number of uses (Wu, 2021). Therefore, the company has to develop and maintain proper and effective relationship with suppliers both local and international to ensure availability of raw-materials and furniture products.

Bargaining power of Buyers

Due to high number of competitors in the market both local and international manufactures, buyers have alternative of buying from different companies. In addition to lack of radical innovation in the industry, the switching cost to a different seller or furniture is very low which in turn increases the buyers bargaining power (Kremer, 2019).

Threat of new entrants

The initial capital requirement is relative low with manufacturing process, regulations, and skills not restrictive. This makes entry by newcomers relative easy. However, the niche of quality product and consumer perception of handmade products in some market makes it relative difficult to enter (Sánchez-Alegría, 2021). Hence, making threat of new entrants considerably moderate.

Threat of substitute products

Furniture forms part of human needs. However, the type, shape, material, and quality evolves overtime. Composite plastics might replace wood seats butt this does not constitute to a substitute. Therefore, the threat of being substituted by other form of products is very low.

Conclusion

IKEA’s brand that include image and awareness is the biggest asset it has, giving it a competitive advantage. Its digitalisation approach that include use of social media and digital content to sell and market its product gives it a competitive edge. Importantly, the company’s global presence with operations in more than 50 markets makes it easy to access suppliers, distributors, and markets directly. The company has leveraged such factors as customer loyalty, brand name and attributes, its financial capital, supply chain and distribution system, as well as digital media to gain competitive edge. Furniture industry is one of the most competitive sector with presence of local and international companies supplying near similar and identical products. Differentiation in terms of product quality, pricing, and customer loyalty is what sets successful entities from failure. Seen from Porters Five Forces, there is low product differentiation and switching cost with virtually no alternatives. This leaves IKEA with brand image and customer loyalty as its competitive advantage.

References

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