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IKEA’s Global Strategy Case

1. Discuss IKEA’s country-specific advantages and its firm-specific advantages

IKEA has a variety of firm-specific advantages since its business approach appeared to be quite unique for the furniture industry. First of all, IKEA’s strategy is to develop ethnocentric (Swedish) view on marketing for many of its subsidiaries (especially European subsidiaries) (Ireland & Hoskisson & Hitt, 2008). Secondly, IKEA managed to reduce shipping costs due to the idea of shipping the products in unassembled form. Furthermore, the most innovative decision of IKEA is to reduce merchandise costs through involving customers in the assembly cycle. This idea also allows to save on warehouse costs and helps to reach another economy for customers on transportation costs. Another set of firm-specific advantages of IKEA is related to the relationships with suppliers.

Finally, one more firm-specific advantage of IKEA is its reputation for quality: the furniture and other items sold by the company have been praised for high quality all over the world.

With regard to country-specific advantages, there is a factor related to suppliers: they are located in low-cost regions with access to raw materials and distribution channels (Segal-Horn & Faulkner, 2010). Other country-specific advantages for IKEA can be also referred as region-specific advantages. At the beginning of global expansion, IKEA did not address cultural and local differences, and this approach worked fine within Europe as a basis for an economy of scale (Ireland & Hoskisson & Hitt, 2008). However, at USA the selection of merchandise did not match the needs of US customers. As a result, IKEA adopted a different country-specific approach: in large markets with significant differences compared to traditional Swedish needs subsidiaries of IKEA are given more autonomy and they can order customized merchandise for these markets (Ireland & Hoskisson & Hitt, 2008). Using this region-specific approach, for example, IKEA finally managed to succeed at US market.

2. Describe and evaluate IKEA’s efforts to adapt to the needs of U.S. consumers

When IKEA first entered the market of U.S., it was a market failure because the needs of American and European customers were significantly different. For example, IKEA’s cupboards were too narrow for large plates in the US, glasses were too small, curtain sizes also did not match the size of windows in the US, etc (Daft & Vershinina, 2010). Then IKEA changed its strategy in the US and relied more on local suppliers (which allowed to reduce costs), and also empowered the US subsidiaries to change the standards. The recommendations of local suppliers and the needs of customers were analyzed by IKEA’s professionals, and new standards for US merchandise were adopted. The company also managed to adapt other factors at its stores to the needs of US customers, e.g. installed new cash registers in order to remove long lines, added delivery service, and adjusted store layout to American aesthetics (Segal-Horn & Faulkner, 2010). The locations were also analyzed and adjusted in order to provide more convenience to the clients. IKEA also changed its marketing approach: more focused advertising using various media was implemented, and adjusted the symbol and the slogan to be more attractive for the customers (Daft & Vershinina, 2010). As a result, IKEA managed to reduce costs and increased its market share to about 45% of all furniture sold in the US (Daft & Vershinina, 2010). Thus, the company managed to tailor its business strategy to the needs of US customers in a successful way.

3. How did IKEA’s TV advertising in the U.S. help overcome the entry barrier of high advertising expenditures?

Business climate in the US appeared to be more competitive than in Europe, and IKEA found out that it had to advertise just to stay in business. Several decisions on TV advertising helped to reduce the overall cost of advertising and allowed to address a large audience of potential customers. First of all, marketing department of IKEA in the US chose a unique advertising message and a strong slogan. The company replaced its Moose symbol with a slogan “It’s a big country. Someone’s got to furnish it” (Johansson, 2003). With regard to TV advertising, 8 advertising spots were created, which showed different kinds of people at different stages of their life (the ones which were most likely to need new furniture) which benefited from shopping at IKEA. These groups of customers included a young family, a couple whose children left home, a divorced woman, and even a homosexual couple (Johansson, 2003). As a result, IKEA attracted public attention and managed to target diverse groups of customers (thus reducing overall advertising expenditures needed to cover all these groups).

4. Why is IKEA able to offer such low prices on its products? Be specific

The reason of the low pricing adopted by all IKEA’s subsidiaries is its unique business strategy. The costs of assembling the items are eliminated as customers purchase the furniture and assemble it at home themselves. The costs of transportation, shipping and delivery (in case of delivering merchandise to the customer’s home) are also reduced due to unassembled shape of the items. (Ireland & Hoskisson & Hitt, 2008) The need for warehouses is significantly reduced because of the same reasons.

Furthermore, IKEA effectively combines its relationships with suppliers and standardization of furniture in order to create economies of scale. The sourcing network of IKEA includes more than 2,300 suppliers residing in about 70 countries worldwide (Johansson, 2003). IKEA establishes relationships with suppliers located in low-cost regions, with access to good distribution channels and high availability of raw materials (Ireland & Hoskisson & Hitt, 2008). IKEA adopted the approach of regional standardization, which means that merchandise at neighboring regions is the same, and it is cheaper to distribute and sell standardized parts. Thus, the combination of economies of scale, elimination of assemble costs and strong economy on transportation, distribution and warehouses allows IKEA to cut a large percent of costs for every piece of furniture.

5. Does demand for furniture and household items tend to be price elastic or inelastic? Why?

Price elasticity of demand for furniture and other household items depends on the class of these items. If these items can be classified as luxury merchandise and are sold at high prices, the demand for these items will be highly elastic (Johansson, 2003), i.e. with the change of price the demand for these items will change significantly. At the same time, inexpensive furniture and household items will tend to be less price elastic, because people who need these items or furniture will have to choose something (and because these items will constitute a smaller part of their budget). However, these inexpensive items will not be price inelastic because in the conditions on recession people will focus more on buying food and paying their bills, and will postpone the purchase of furniture and household items for more stable periods. Thus, the demand for inexpensive household items and furniture (as in IKEA’s case) is likely to be moderately price elastic.

6. Evaluate IKEA’s use of franchising (based on information in Chs. 10 and 13)

IKEA actively uses the concept of franchising which allows it to overcome the problems of adjusting to local needs and preferences, and helps to expand the IKEA philosophy to a large number of countries. The operations of the company can be divided into two distinct sectors: operations and franchising sector. Only 11% of IKEA stores are owned by individual franchisees, while the remaining 89% belong to the INGKA Holding – a Dutch nonprofit company controlled by an executive committee of five members (including Ingvar Kamprad) (Johansson, 2003). The trademark of IKEA is owned by a different company, Inter IKEA systems, and every IKEA store pays a franchise fee which is equal to 3% of revenue to this company (Johansson, 2003). The purpose of such complex franchising approach is to divide the revenues between Kamprad family and other franchisees, and to preserve the trade mark and its philosophy at the same time. Overall, IKEA is an example of effective use of franchising which allows to preserve the spirit of original company’s approach.

7. Evaluate IKEA’s use of electronic commerce. Does IKEA face any unique challenges in using electronic commerce due to the types of products it sells?

IKEA manages to use the potential of e-commence in order to create unique experience for its customers. Certainly, customer experience at IKEA is strongly associated with the ability to feel and touch the merchandise, and many customers would like to see the assembled products. This could be difficult to implement online. However, IKEA managed to turn the challenge of bringing this experience online into a new competitive advantage. The customers of IKEA can use their website based on VirtueMart technology (Segal-Horn & Faulkner, 2010), and they can download a special application which allows them to manage three-dimensional models of furniture items (Segal-Horn & Faulkner, 2010), pass through the assembly process and select the best parameters in just a few clicks. This decision creates a new customer experience: instead of walking along the shelves in a large store, one can choose, evaluate and order furniture from home. IKEA also uses social networking (Facebook) to reach their customers (Segal-Horn & Faulkner, 2010), and IKEA fans can now share their experience online. In my opinion, IKEA managed to turn the minor challenge of selling their merchandise online into a large competitive advantage.

 

References

Daft, K.M. & Vershinina, N. (2010). Management-International Edition. Cengage Learning EMEA.
Ireland, R.D. & Hoskisson, R.E. & Hitt, M.A. (2008). Understanding Business Strategy: Concepts and Cases. Cengage Learning.
Johansson, J.K. (2003). Global marketing: foreign entry, local marketing & global management. McGraw-Hill/Irwin.
Segal-Horn, S. & Faulkner, D. (2010). Understanding global strategy. Cengage Learning EMEA.