IKEA is a multinational company in the furniture retailing industry where the product lifecycle is highly unpredictable. The levels of performance will be evaluated through the performance of a SWOT analysis.

Strengths:

IKEA’s brand awareness keeps the sales growing in spite of competition.

The organization is concerned about cost effectiveness. The benefit of “Cost Cutting” is passed on to the customers in the form of price reduction. This attracts especially the middle class customers.

Customers feel that IKEA provides goods which have value in terms of the price they pay and as well as convenience and reliability.

Customer Value = Product Benefits/Price

The customer value of IKEA is therefore positive.

It has a competitive advantage over the substitutes due to the ability to adopt to the changes in the market conditions quickly.

Weaknesses:

Growth requires IKEA to double its resources by 2010 which would increase the costs.

Increased competition from rivals including Wal-Mart will result in additional advertising costs to IKEA.

The product lifecycle in the furnishing retailing market is highly unpredictable. Therefore IKEA will have to spend considerable amounts on research and development activities to introduce new innovative furniture products.

Opportunities:

The world recession that prevailed in the latter part of 2000’s is now coming to an end gradually. This will enable IKEA to increase its turnover.

The marketability of convenience and cheap furniture models are in the growth. As market leaders in retail furniture, IKEA will be able to positively exploit this opportunity.

IKEA clearly differentiates its products from others.

Threats:

The activities of the European Union may have adverse impacts on the overseas sales of IKEA.

Pressure groups in the local areas would protest against the market expansion of IKEA in their areas including local retailers.

3.0 Macro Environmental Analysis

The objective of macro environmental analysis is to identify the major trends affecting the further trends of the furniture retailing industry and to evaluate whether this industry grows faster or slower than the average growth of the industry. The macro environment is evaluated through a PEST analysis.

3.1 PEST Analysis

Political Trends

Industries in most economies are affected by political influences and legislations. Many governments show a trend for privatization and trade agreements. Free international trade and new firms entering the furniture industry will increase the competition for IKEA in the future.

Economic Trends

Economic trends that affect the furniture retail industry are the gross national product (GNP), personal disposable income growth rates, inflation rates, unemployment levels, interest rates, exchange rates, tax rates and wages rates. These economic trends influence the purchasing power of the customers. The revival of world recession and global economic trends are positive for the growth and stability of IKEA.

Socio-Cultural Trends

Human search changes forever. The requirements, tastes and fashions of the customers are subjected to changes frequently. Therefore IKEA should continue to possess its capacity to adapt to the socio-cultural trends.

Technological Trends

The world is subjected to a series of technological revolutions and so does the furniture industry that is affected by major shifts in the technological paradigms. IKEA should concentrate more on genetic engineering of its product to ensure its long term stability and growth.

4.0 Industry Analysis

The purpose of industry analysis is to evaluate the forces within the industry determining the profitability and the extent of the changes in these forces that will have an impact on the growth rate and profitability of IKEA.

4.1 Porters Five Forces Analysis

Michael Porter has classified the forces affecting the industry into five categories. (Refer appendix 1)

Threat of new entrants

The number of new entrants into the industry is largely determined on the entering costs (sunk costs) and the cost of leaving the industry. The cost of entering the furniture industry is not large; therefore the threat of new entrants to IKEA is fairly significant. To face these threats, IKEA should maintain its brand loyalty amongst the customers.

Bargaining power of suppliers

This force examines the bargaining the power of the suppliers. Ivar storage systems are the best sellers worldwide. They purchase their requirements from more than 50 suppliers in more than 80 countries. IKEA ensures timely and quality supply of their requirements. It maintains a good B2B relationship with the suppliers. Therefore the bargaining power of suppliers is not significant for IKEA.

Bargaining power of Customers

This element is related to the bargaining power of the customers where the existing customers are well informed. Therefore customer knowledge about the range of products available in the market is high. They go for quality goods at reasonable prices. Therefore the bargaining power of the customers is relatively high for IKEA. So the organization should constantly add value to its products to minimize the impact of the customers bargaining power. This would enable the organization to face competition more effectively as well.

Threat of substitutes

There are many substitutes available in the market including those which are retailed by Wal-Mart and other rival businesses. Therefore the threat of substitutes is high for IKEA. This threat could be reduced if IKEA differentiated and positioned its products from substitutes. Positive and aggressive advertising campaigns would reduce the threat of substitutes.

Industrial Rivalry

Industry rivalry is determined by industry growth rates, brand identity, switching costs, diversity of competition, informational complexity and corporate stakes. The industry rivalry for IKEA is high due to the diversity of its competitors. Therefore IKEA would face industrial rivalry effectively in maintaining brand identity.

4.2 Strategic Grouping

Ina an industry competitors do not compete directly with one and another. There are several groups of competitors which are called strategic groups. It also predicts how groups are going to react to either industry forces or to any specific changes. (Refer Appendix 1) IKEA holds an advantage on middle price ranged furniture when compared to its competitors.

5.0 Internal Environmental Analysis

5.1 Michael Porter’s Value Chain

Porter’s value chain analysis evaluated how firms create value to its customers. The IKEA design and style created value to the customers too. The organization produces furniture in modular pieces which can be packed well so that they can be transported to long distances easily. It also reduces its costs sub-contracting its production to low labor cost countries. IKEA also makes its stores attractive to customers by offering large displays of furniture in comparison to its competitors.

5.2 Analysis of the performance of IKEA using balanced score-card

The balance score card is a toll used in the performance management process. It focuses on many performance indicators including business process perspective, customer perspective, learning, growth and financial perspectives that guide the progress towards the organizations corporate targets.

Internal business process perspective

IKEA has constantly strived hard to achieve cost efficiency by increasing the levels of performance of staff. This has increased the level of performance of the overall IKEA workforce. It also increased the number of stores to 250 around the globe to promote customer convenience. The supply chain of the organization is also strong with a dynamic storage system.

Customer Perspective

IKEA has created effective branding which increased the coordination between customers, suppliers and sales staff. It was able to establish brand loyalty amongst the customers so that they feel “quality products” is offered for the price that they pay.

Learning and Growth

IKEA has introduced portable furniture with the aid of new technology. However it has to spend more in the future to acquire the benefits of new technology.

Financial Perspective

IKEA has become the most profitable furniture retailer in the world. During the fiscal year ended 31st August 2005 revenues increased by 15% to $17.7 billion and IKEA’s pre-tax operating profits are expected to be $1.7 billion.

5.3 VIRO Analysis

(Please refer appendix 3)

6.0 Gap Analysis

The gap analysis evaluates the gaps between the requirements of the strategy and the actual available with the organization. (Refer appendix 4)

Macro Environment Business

Strategy Gap

IKEAS business strategy targets large number of furniture users worldwide, but the ability of the buyers to purchase the products and the resources available with IKEA to satisfy their requirements have a gap. The organization should increase its number of stores to bridge this gap.

Key Competitors Business Strategy Gap

The key competitors for IKEA include Wal-Mart which is a giant in the worldwide retail trade. The business should concentrate more on advertising and product differentiation to reduce this gap.

Business Strategy and Organizational Performance Gap

The growth of IKEA will require it to double its resources in 2010. The business strategy focuses on growth but the cost of financing would be high. So there is a gap which would be bridged through low cost financing.

7.0 Recommendations

IKEA holds a record for its past growth and profitability. Its storage system is dynamic and maintains a good B2B relationship with customers and suppliers. The competition is increasing due to new entrants and the growth of existing furniture organizations including Wal-Mart. Therefore we recommend that IKEA should enlarge its range of products in future. This would be done through “diversification.” IKEA should concentrate on “market expansion” especially in the fast growing regions such as Malaysia, Thailand and the Indian subcontinent nations. This will increase its market share in the global furniture market.

The organization holds approximately 200 stores mainly in Europe and the U.S.A. We recommend that it should increase its stores to 300 in the next 5 years to increase customer convenience. IKEA does not engage in aggressive advertisements and sales promotional activities. Aggressive sales promotional activities will enable the organization to increase its growth.

8.0 Conclusion

IKEA has grown from a small retail shop to a multinational organization in the furniture retailing business world over. The organizational culture of IKEA is team based. The leadership of the organization is democratic and participative styles of leadership. The organizational structure of the firm is functional where each department is directly responsible for the heading of the respective functional department. The leadership and organizational structure is suitable for the current status of IKEA.