Case Study:
IKEA The first few years of the twenty-first century were difficult for IKEA, the $31 billion global furniture powerhouse based in Sweden. The euro’s strength dampened financial results, as did an economic downturn in Central Europe. The company faces increasing competition from hypermarkets, “do-it-yourself” retailers such as Walmart, and supermarkets that are expanding into home furnishings. Looking to the future, CEO Anders Dahlvig is stressing three areas for improvement: product assortment, customer service, and product availability. With stores in 38 countries, the company’s success reflects founder Ingvar Kamprad’s “social ambition” of selling a wide range of stylish, functional home furnishings at prices so low that the majority of people can afford to buy them. The store exteriors are painted bright blue and yellow: Sweden’s national colors. Shoppers view furniture on the main floor in scores of realistic settings arranged throughout the cavernous showrooms. At IKEA, shopping is a self-service activity; after browsing and writing down the names of desired items, shoppers can pick up their furniture on the lower level. There they find “flat packs” containing the furniture in kit form; one of the cornerstones of IKEA’s strategy is having customers take their purchases home in their own vehicles and assemble the furniture themselves. The lower level of a typical IKEA store also contains a restaurant, a grocery store called the Swede Shop, a supervised play area for children, and a baby care room. IKEA’s unconventional approach to the furniture business has enabled it to rack up impressive growth in an industry in which overall sales have been flat. Sourcing furniture from a network of more than 1,600 suppliers in 55 countries helps the company maintain its low-cost, high-quality position. During the 1990s, IKEA expanded into Central and Eastern Europe. Because consumers in those regions have relatively low purchasing power, the stores offer a smaller selection of goods; some furniture is designed specifically for the cramped living styles typical in former Soviet bloc countries. Throughout Europe, IKEA benefits from the perception that Sweden is the source of high-quality products and efficient service. Currently, Germany and the United Kingdom are IKEA’s top two markets. The United Kingdom represents the fastest-growing market in Europe. Although Britons initially viewed the company’s less-is-more approach as cold and “too Scandinavian,” they were eventually won over. IKEA currently has 18 stores in the United Kingdom and plans call for opening more in the next decade. As Allan Young, creative director of London’s St. Luke’s advertising agency, noted, “IKEA is anticonventional. It does what it shouldn’t do. That’s the overall theme for all IKEA ads: liberation from tradition.” In 2005, IKEA opened two stores near Tokyo; more stores are on the way as the company expands in Asia. IKEA’s first attempt to develop the Japanese market in the mid-1970s resulted in failure. Why? As Tommy Kullberg, former chief executive of IKEA Japan, explained, “In 1974, the Japanese market from a retail point of view was closed. Also, from the Japanese point of view, I do not think they were ready for IKEA, with our way of doing things, with flat packages and asking the consumers to put things together and so on.” However, demographic and economic trends are much different today. After years of recession, consumers are seeking alternatives to paying high prices for quality goods. Also, IKEA’s core customer segment—post–baby boomers in their 30s—grew nearly 10 percent between 2000 and 2010. In Japan, IKEA will offer home delivery and an assembly service option. IKEA has built a network of more than 2,000 suppliers in 50 countries. This business model has helped IKEA achieve and maintain a low-cost position in the global furniture industry. Source: Mark Antman/The Image Works. Industry observers predict that North America will eventually rise to the number one position in terms of IKEA’s worldwide sales. The company opened its first U.S. store in Philadelphia in 1985; as of 2010, IKEA operated stores in 48 stores in North America. Plans call for opening at least several more U.S. stores each year through 2015. Goran Carstedt, former president of IKEA North America, described his target market by noting, “Our customers understand our philosophy, which calls for each of us to do a little in order to save a lot. They value our low prices. And almost all of them say they will come back again.” As one industry observer noted, “IKEA is on the way to becoming the Walmart Stores of the home-furnishing industry. If you’re in this business, you’d better take a look.”
Q1. Review the characteristics of global and transnational companies. Based on your reading of the case, would IKEA be described as a global firm or a transnational firm?
Q2. It was noted that managers of IKEA stores have a great deal of discretion when it comes to setting prices. In terms of the ethnocentric/polycentric/regiocentric/ geocentric (EPRG) framework, which management orientation is in evidence at IKEA?
Q3. What does it mean to say that, in terms of Porter’s generic strategies, IKEA pursues a strategy of “cost focus?”
Your answer must be, typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.