IKEA Catalogue

BUSINESS REVIEW
The IKEA Effect:
Co-creation instills pride in
ownership
Balenciaga vs FRAKTA bag
Fake IKEA

A Business Review on IKEA
DEVELOPED AND PRODUCED BY:
Amelia Iesham

STATE OF IKEA’S BUSINESS TODAY
The big blue and yellow.
Spanning across 5 continents – Australia, Asia, Europe, North America and Africa, IKEA is the
largest home furnishing retailer in the world. From pack furniture to kitchen items, IKEA offers an
extensive range of well-designed, functional home furnishing products at affordable prices to help
more people live a better life at home.

1 MICRO ANALYSIS OF IKEA
Strengths
We analysed the strength of the
company from an internal
perspective with focus on our
internal resources such as
finance, physical, natural and
human resources as well as
current processes.
Financial resources
As the world’s largest home furnishing retailer, IKEA has a strong
global brand worth US$11.9 billion, making the furniture giant one of
the top 10 organisation in the retail industry (Marketing 91, 2018). A
leading brand in financial strength, IKEA reached a global revenue
worth €36.3 billion in 2017. With over 400 stores worldwide, IKEA
positions itself as a furniture retailer with an international presence.
IKEA Group owns at least 277 stores across 21 countries and the
remaining stores are operated by franchisees outside the IKEA Group.
The sheer size of the empire allows IKEA to enjoy economies of scale
in terms of bulk buying, financial economies and transport and
packaging.

Physical resources
Thanks to bulk buying, customers can be certain that their purchases are secured
and the effective management of the massive inventory in every store provides IKEA
and its customers a smooth purchase.
Target market
IKEA targets the majority market who has limited income and limited living space. As
such, IKEA customers are ones who value quality products at affordable prices. The
market itself makes up 69 percent of the world population enabling IKEA access to
more than 4.8 billion consumers worldwide (Pew Research Centre, 2011;
Worldometers, 2018).

Natural resources
A furniture giant, IKEA primarily produces furniture and home furnishing goods which
consumes at least one percent of the world’s wood supply annually. Hence, to
ensure sustainable operations, IKEA purchased more than 250,000 acres of forests in
Alabama, Romania and the Baltic states to sustain the raw materials required for
furniture production. Thus, even when the prices of timber are expected to increase,
IKEA’s business operation will be largely unaffected.
Current processes
IKEA undergoes intensive research and development processes to keep prices low
for customers and to develop new furniture for their portfolio. Logistics being one of
the largest costs for IKEA has proved to be a constant challenge in product
development and production. However, our R&D team are constantly innovating
ways on changing the size or design of the product to allow more products on one
pallet, thus reducing transportation costs significantly. In addition, all production and
packaging are done in-house. Hence, any changes to processes or products can
be altered done easily and uniformly, making it cost effective for IKEA.

Weakness
For every weakness lies an opportunity for progress. This segment will analyse IKEA’s
shortcoming from an internal perspective with the same focus on internal resources
and current processes. It will also discuss the current solutions undertaken to
overcome and manage the issues.
Financial resources
IKEA has a weak presence in Asia with only nine stores currently in Southeast Asia. In
order to penetrate the Asian market, mini IKEA stores are slated to roll out in smaller
cities as a low-cost method to reach the growing middle-class (Inside Retail Asia,
2018). Our first mini showroom will roll out in Thailand before expanding to Manila by
2020 and Vietnam by 2022. Each miniature outlets costs approximately a 30 th of a
full-scale IKEA store and will have minimal products in stock as items purchased will
be delivered from our larger counterparts in major cities.

Current processes
The main concept of IKEA’s product is the ideal balance between low prices and
good quality. However, the rise in cost of raw materials has substantially affected
IKEA’s profit margins, making it challenging to maintain the quality of products in a
cost-increment environment. The massive production scale further aggravates this
profit realisation. However, IKEA has withstood the test of time even during the
economic recession in 2008. In fact, IKEA’s market share increased significantly as a
result of strategic change.
In order to be operationally cost-effective, IKEA cut back on luxury air travel and
hotel stays for its employees (Strategic Business, 2012). Further, instead of reducing
volume due to lower demand, the company pushed for higher volumes to benefit
from lower cost of goods and operating costs. IKEA was also focused on lean
management in the supply chain and work empowerment was crucial in driving
business growth.

Apart from cost of production, the sheer massiveness of IKEA’s empire has taken its
toll on the company’s production standards and quality. There is a lack of legislation
to regulate the quality of production in countries where IKEA products are made. As
a result, IKEA has suffered damaged reputation due to a series of unfortunate
incidents which mostly revolved around product deficiency.
For instance, the newly launched Lurvig pet collection had a global recall following
the deaths of two dogs who suffocated after having their heads trapped in the
water dispenser. In another case, the company has been sued in China over an
‘exploding’ Stelna IKEA drinking glass which has caused an IKEA customer to suffer
four stitches in the lips and a broken front tooth after the explosion (Global Times,
2018). IKEA now has an IWAY code where inspectors will visit IKEA factories to ensure
compliance to IKEA requirements and policies.

VRIO Analysis
Value
Great products are goods that
enable a firm to exploit opportunities
and enhance the perceived
customer value. IKEA has been
lauded for decades for being a
furniture retailer that designs products
that customers appreciate. IKEA
customers work hard, live frugally and
try to make the most out of limited
resources and thus, an expensive
single-functional product may not be
what they are looking for.
With an extensive range of welldesigned
functional products, IKEA
places deep emphasis on keeping
the prices as low as possible so
everyone can buy them. A
democratic scheme, IKEA has found
the ideal balance between good
design, functionality, quality and
affordable price.

Organisation structure
Good companies make money. But great companies make meaning.
IKEA is the epitome of a cost-focused organisations where everything
revolves around a price tag. However, being cost-obsessed is more than
just for profit. IKEA wants its products to be affordable to as many people
as possible, so they can live a better life. With this cost-driven philosophy,
IKEA revolutionizes product innovation and found creative means to keep
costs as low as possible and the first step begins with the production
process. IKEA champions economies of scale where long-term partnerships
are established with suppliers to achieve volume commitments.
With volume in purchase, IKEA can negotiate for lower prices in which the
cost-savings are transferred to the customers and customers get to enjoy
cheaper deals plus greater security and guarantee in their purchases.
Materials used for production are often sourced near the factories or
supply chain and products are directly delivered from suppliers to IKEA
stores. This helps to cutdown on handling costs, reduce road miles,
minimise transport costs and lowers IKEA’s carbon footprint.
In addition to cost-focused strategies, IKEA advocates for sustainable
business practices. Apart from the responsibly sourced timber efforts, IKEA
has been increasingly taking advantage of renewable materials. As of
current, 60 percent of IKEA’s product range uses renewable materials and
approximately 10 percent contains recycled materials (Reuters, 2018)
which helped reduce production costs.

2 IKEA USPs
Furniture Purchase Made Simple
Buying furniture used to be a tedious, anxiety-inducing moment for purchasers who
saw furniture as an investment meant to last for decades and even generations. This
is because majority of furniture retailers offered purchase-built and extremely durable
furniture that comes with a hefty price tag. IKEA, on the other hand, did furniture
retail differently and revolutionized the furniture outlook in the purchaser’s eyes.
Instead of offering high quality furniture tagged at steep prices, IKEA focused on
retaining the functionality and quality of the design but at affordable prices. IKEA’s
collection is durable enough to be used for a few years which by then, purchasers
would desire for a new decor. Alternatively, purchasers may choose to keep the
furniture longer although it would not be a necessary heirloom for future generations.
For customers, simplifying the furniture purchase meant savings on cost and
deliberation time without compromising the product quality and design.

The IKEA Effect: The Experiential Model
Most furniture deliveries take days, if not
weeks to reach the homes of
purchasers. To address this issue, IKEA
pioneered the flat-pack furniture
design where deconstructed furniture
could be purchased off-the-rack from
an IKEA store and customers could
deliver the purchase themselves and
assemble the furniture at home.
Having customers to deliver and
assemble their own furniture not only
reduces transportation and delivery
costs for IKEA, of which the cost-savings
are transferred to customers,
customer’s participation in creating the
product has also led to the IKEA effect -
where value attached to a product
increases due to personal labour
involved in the production process
(Washington Post, 2018). Also known as
the Experiential Model, the co-creation
of product has promoted a sense of
pride in ownership for IKEA product
users.

The IKEA Store
Browsing through furniture in traditional furniture stores meant browsing one type of
furniture such as beds being lined in a uniform manner in a single section and
wardrobes in another section altogether. Unorthodoxly, IKEA features its range and
collection by rooms - bedroom, living room, the study and the kitchen to illustrate the
different synergies and harmonies created from piecing together assorted furniture
and furnishings in a single space. An average IKEA store measures approximately
350,000 square feet. Paths in these colossal-sized stores are lined with arrows to
provide direction and orientation through the showrooms, and store layout maps
can be found in every other corner to assist lost or wandering customers.

Most IKEA stores also feature a restaurant that serves the signature Swedish meatballs
and good quality food at low prices. IKEA Tampines in particular, took the retail
experience on a whole new level by providing free lockers for customers to leave
their belongings and browse the store hassle-free. Further, the store features
Smaland, a Swedish forest-themed play area for children, to allow parents to shop
leisurely while leaving their children to play in the care of IKEA staff (IKEA, 2018). In
essence, IKEA’s store design is not only engineered for shoppers to linger in the store
for hours and buy more merchandises, but it is designed to curtail stress - so much so
that IKEA stores have become more of a family destination for leisure outings and
short getaways.
"One could describe it as if Ikea grabs you by the hand and consciously guides you
through the store in order to make you buy as much as possible"
~ Johan Stenebo, author of The Truth About Ikea.

IKEA’s response to luxury Balenciaga bag worth $2,000 that closely resembles its
original FRAKTA carrier bag

Creative Content Marketing
Traditional furniture marketing commonly extends to television advertisements,
catalogues and a company website. Similarly, IKEA has tried its hands at marketing
since 1945 when its first marketing effort was an advertisement in a Swedish
newspaper combined with a makeshift mail order service (IKEA, 2018). Forward 73
years later, IKEA has been constantly revered for its quick and light-hearted response
to trending news delineating expensive purchases such as the $2,000 Balenciaga
bag which bore close resemblance to IKEA’s iconic FRAKTA carrier bag and a
Leonardo da Vinci painting worth $450 million.
Aside from its playful marketing gimmicks, IKEA’s more substantial marketing tool is its
300+ page catalogue that is as or perhaps more popular than holy books such as
the Bible and the Quran and young adult fiction, the Harry Potter series (Business
Insider, 2018). Selling more than 200 million copies a year, IKEA’s catalogue is a
powerful tool that drives traffic and sales. Its popularity derives from the highly
customised content in each country, inspiring customers worldwide on how to live
better lives at home. Just like the store design, IKEA’s catalogues feature furniture
and furnishings by living spaces which also consists of the bathroom and gardening
area. The name, description and price of the furniture is clearly printed in the
catalogues enabling customers to prepare a shopping list and a budget in advance
before heading to the physical store.

3 MACRO ANALYSIS OF IKEA
The PESTEL analysis (acronym for political, economical, social, technological,
environmental and legal) is a strategic framework we used to identify and analyse
external forces impacting IKEA’s business and growth.
Domestic Solutions for Brexit Strategy
Economical
Economic factors consist of changes in inflation rate and interest rates, shifts in
demand and supply, foreign exchange rates, foreign direct investment and
economic growth patterns (PESTEL Analysis, 2018). IKEA in the UK experienced
adverse economic impact following Brexit as the British pound plunged by 12
percent against the Euro (BBC, 2018). With UK being a major market for IKEA and with
60 percent of IKEA’s goods being produced in Europe, the divorce between both
territories significantly affected UK and Europe business operations on a short-term
and long-term basis. With a lower pound, imported goods became more expensive
and the company observed potential cost increments resulting from new tariffs after
the formal separation.
In dealing with this issue, IKEA UK is actively looking at increasing production of sofas
and mattresses domestically to negate risks and costs of imported goods. The team
would also focus on volume selling through its existing stores to keep prices low for
customers. Further, IKEA is expanding to emerging markets such as South Asia and
China to further develop its global presence and strength in business. Both regions
showed promising economic growth as South Asia and China revealed a projected
CAGR growth of 5.7 percent and 4.6 percent respectively over the next two
decades. As disposable income increases for these regions, bigger numbers are
expected to reflect in furniture and household items expenditure which means more
opportunities for the furniture giant.

More Purchases with Tech Assistance
Technological
New technological innovations such as automation and the market awareness on
technological advances may impact business operations positively or negatively.
IKEA largely appeals to a younger audience given its minimalistic and clean designs
and younger audiences tend to be more tech savvy. Thus, IKEA leveraged on the
latest technologies to redefine the IKEA shopping experience. IKEA planned on
introducing a conceptual Assemble AR to assist shoppers with their IKEA furniture
assembly by digitally illustrating how and where each piece of wood connects.
While this app is still in the works, the company recently acquired TaskRabbit, a gig
economy where the user community engages an independently-contracted
“Taskers” to carry out household chores, to assist shoppers with assembling IKEA
furniture at home. The price of this convenience is tagged at a $36 threshold and is
based on a flat rate per time of an item. The TaskRabbit service however, is not
available worldwide and is currently operating only in the US. With Assemble AR and
TaskRabbit, IKEA hopes to encourage more purchases from shoppers who have
been putting off buying IKEA furniture due to the hassle of self-assembly (Forbes,
2018).

Sustainable Business, Sustainable Environment
Environmental
Factors of environmental analysis for a business commonly surrounds topics of
changes in climate, geographical location, environmental offsets and sustainability.
IKEA has pledged a sustainability agenda to focus on social responsibility and to
meet the increasing demand for green and low-priced products. The flat-pack
pioneer targeted to completely remove plastic straws and single-use plastic by
October 2018 in the UK and Ireland. The demand for lower carbon footprints has
further prompted IKEA to reduce unnecessary packaging and curtail the use of air
transport for business flights. IKEA also used sustainable and renewable materials such
as recycled plastic packaging and biodegradable composites in the BILLY
bookcases and KUNGSBACKA kitchen fronts. The company’s extensive efforts to
reduce negative environmental impacts was recognised in the World’s Economic
Forum where IKEA was awarded the Accenture Strategy Award for Circular
Economy.

4 PORTER’S FIVE FORCES
Bargaining power of suppliers
The size of suppliers who supply raw materials for furniture and home furnishings is
considerably large. The larger the size of the supplier market, the more supply
alternatives available for IKEA and the smaller chance there is for suppliers to clout
due to their weaker financial position. This provide IKEA with a higher bargaining
power to negotiate for lower prices or more favourable terms since IKEA has multiple
substitutes if a deal falls through. In addition, with its own timber supply from its
responsibly managed forests, IKEA relies less and less on suppliers and more on its
own resources. With less reliance on suppliers, IKEA has better control over
production costs and sustainability efforts. Further, IKEA has established its own code
of conduct called IWAY which regulates any forms of policy violation such as child
labour and minimum wages (Cheshnotes, 2017). IKEA suppliers must abide by this
code of conduct as well as their sub-suppliers. It is clear that in the market, IKEA has
absolute dominance.
Threat of new entry
The barriers to entry into the profitable furniture industry is relatively low. Hence, new
entrants into the market that provides similar product and service offerings will erode
IKEA’s profitability. However, for more than seven decades, IKEA has been successful
in being the top furniture retailer in the market due to its global presence and
colossal economies of scale. Economies of scale plays a crucial role in facilitating
low prices for products and new entrants would not be able to take advantage of
such scale during their initial business operations. New entrants also do not have
access to better distribution channels and capital markets with cheap loans, unlike
IKEA who has a high credit rating due to its scale of establishment, hence benefitting
from lower rates of interests. As such, the threat of new entrants is insubstantial to
IKEA as long as IKEA sustains its economies of scale.

Threat of substitute product
The existence of a substitute product in the same market means that customers have
another alternative which may increase the likelihood of customers switching
loyalties. This may be more apparent if prices of products start to increase. One of
the differentiating factor that sets IKEA apart from the many other furniture retail
stores is the IKEA store experience. With its trademark blue and yellow colour scheme
and the iconic FRAKTA bag, IKEA may have its brand image diluted by a copycat
version of itself in China called 11 Furniture. The Chinese furniture store duplicated
most of IKEA’s products and pirated the ‘entire brand experience’ (Daily Mail UK,
2018) except for the signature Swedish meatballs which has been swapped with
minced pork and eggs and a greyish white façade as its disguising exterior.
Interestingly, positive reviews on 11 Furniture revealed a far superior product quality
as compared to IKEA’s.

There are currently seven IKEA stores in China while 11 Furniture just has one – but the
Chinese furniture store has yet to expand its business operations all over China. When
that happens, IKEA will witness a significant drop in market shares and profit margins
as Chinese shoppers brood 11 Furniture for well-designed products made of good
quality and sold at low prices, a formula too familiar with IKEA.
While IKEA may be forced to go on a piracy war against 11 Furniture for infringement
of copyrights and trademark, another democratic approach would be engaging in
a price war with 11 Furniture in which IKEA has a definite upper hand.

Recommendations
Traditional furniture stores are unlikely to have loyalty programmes given the nature
of sales whereby customers usually purchase furniture for the long term. On the
contrary, IKEA’s durable designs and affordable prices makes furniture shopping
simpler and less apprehensive given that shoppers may discard the item after a few
years. IKEA’s large and extensive collection of home furnishing products becomes a
central element in attracting customers to visit IKEA again and again whenever they
desire a new outlook for their homes. This flexibility in purchase makes it perfect for
IKEA to establish its own loyalty program. Members of IKEA’s loyalty program, IKEA
FAMILY, enjoy special discounts on purchases and food, free beverages and free
product insurance. IKEA also holds regular workshops and events for IKEA FAMILY
members. However, IKEA can make its loyalty system even more robust platform for
sales.
With the predominance of digital advances, IKEA can introduce a virtual wallet for
both its loyal members as well as the general market. Virtual wallets are attractive
due to its utility factor that traditional wallets do not offer as well as complementary
service bundles and value-added services that comes along with usage of virtual
wallets. IKEA can also introduce a “Pay Now, Collect from Nearest Franchise” which
allows loyal members to shop online and collect their items from the nearest store in
the vicinity. This provides convenience for shoppers who want to beat the queue
and not worry about expensive transportation costs if they collect the purchases
near their homes. Last but not least, IKEA can hold annual events such as Black
Friday exclusively meant for loyal members. This may be an effective way of clearing
old stocks while maintaining great customer relationships.

Our Mission and Vision
At IKEA our vision is to create a better
everyday life for the many people. Our
business idea supports this vision by
offering a wide range of well-designed,
functional home furnishing products at
prices so low that as many people as
possible will be able to afford them.