IKEA Financial Analysis

29.04.2020 in Economics Essays
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IKEA is an internationally recognized company known for home furniture retailing, which was founded in 1943. It has rapidly grown since its establishment. It is one of the world’s largest furniture retailers due to its Scandinavian style furniture. Most of its furniture is flat-pack and ready to be assembled by consumers, which reduces the cost of packaging. It has a range of about 9,500 products, including home products and other accessories available in the stores. Moreover, customers can order the products online via IKEA’s official website. The company has been known for its enormous amicable stores, low prices, simple product design, and remarkable customer loyalty across the globe. The given paper will discuss more strategies employed by IKEA, and how they influence the ability of the company to compete in the market.

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Since its establishment, IKEA has concentrated most of its efforts on repeated cost cutbacks, which enhanced it nearly to a form of art (Caglar, Kesteloo, & Kleiner, 2012).

Ingvar Kamprad, the company’s founder, stated in his autobiography, The Testament of a Furniture Dealer: A Little IKEA Dictionary, that “wasting resources was considered being a mortal sin at IKEA”. And that mediocrity is usually the result of expensive solution to any type of problem (Caglar, Kesteloo, & Kleiner, 2012).

IKEA follows a focused cost leadership strategy, whereby it targets young buyers searching for fashionable and stylish furniture and household accessories by providing lower cost. It offers home furnishings that combine functionality, good design, and quality products at low prices (Caglar, Kesteloo, & Kleiner, 2012). The company partakes in several activities in order to maintain a low cost. For example, instead of relying primarily on third party manufacturers, its engineers always try to design modular furniture at low-cost, ready to be assembled by customers (Suarez, 2006). IKEA products are usually positioned in domestic settings by displaying varieties of a single product in different rooms. It means that customers view living room sofas in one room, chairs in another room, tables in a different room, and accessories in an entirely different place. However, customers can also view complete product combinations in a single room, which eliminates the need to help customers imagine the furniture arrangement when placed in customer’s home by sales associates or decorators (Suarez, 2006).

Based on the fact that IKEA follows a focused cost leadership strategy, it will be challenging for imitators to compete with it. It is because any company that wants to compete with IKEA has to shift its focus from its original strategy in order to adopt the one, being used by IKEA. Such competitors will definitely find it challenging to compete, since it is not their original strategy and seems to be a form of distraction instead of achievement.

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In China, imitation is sometimes considered being vital to the effective exercise of innovation itself, and not only critical to business survival and prosperity. However, it is believed that China is in the phase of imitation, and needs to come out of it (Weihua, 2012). Some Chinese firms are creative imitators; some are pirates, while some engage in blind imitation. As a result of such cost leadership strategies and relatively ineffective property rights, imitators are tend to succeed in China.

However, IKEA could succeed in my home country due to the customer satisfaction strategies it employs, and its online presence whereby consumers can purchase products from its website. Some of its strategies are based on the fact that its stores include restaurants and cafes serving typical Swedish food. They also have small shops that sell groceries, including meatballs and jams, which tend to satisfy other needs of customers. They also make provisions for kids that do not want to shop; they can play in the supervised play area, which attracts customers with kids. Nevertheless, IKEA’s concern for people and the environment helps in expanding its market, and therefore, my home country is not exception to this reality.

The fact that IKEA is usually associated with the threat of the increase in average consumer income means that consumers will tend to purchase less low quality and low price products provided by IKEA (Jurevicius, 2013). With the increasing income, consumers will be less attracted to IKEA, and so will prefer to patronize firms that offer high quality home furniture products similar to those offered by IKEA. However, in order to address this threat, IKEA decided to become superior in the four main areas (Caglar, Kesteloo, & Kleiner, 2012):

  • Reducing its operational cost in order not to cut back investment in retail stores.
  • Increasing the volume of products with relatively better quality in order to maintain its competitiveness.
  • Developing better functional supply chain to meet up with the challenge of maintaining its stock of items.
  • Empowering co-workers by trying to keep the center of the company relatively lean, and avoid making decisions centrally, which are better made in stores and factories located close to customers.

Due to the effects of this threat on its competitiveness, IKEA could focus on emerging markets in order to maintain its position in the market. It should be able to identify and try to maximize its opportunities in order to penetrate such markets. It is based on the fact that most emerging markets come up with new opportunities and challenges, which could be used by IKEA to take advantage over them and dominate.

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More so, IKEA’s Swedish culture and typical values seem to be a form of disadvantage to its business strategies, as it grows into emerging markets with relatively different cultures. The Swedish culture of the firm is considered being a limitation to its penetrating power, whereby different cultures need to be approached differently, and not based on a single culture. In order for the company to penetrate such countries as China or India, which practice different cultures from Sweden, the company needs to hire applicants representing these cultures, and integrate their cultures into its business strategies.

Furthermore, there are both advantages and disadvantages that IKEA owns all buildings and the lands where its shops are located, as retailers rent the locations on a long-term lease basis. This tends to improve their chances of survival in the market over many years because they accumulate profit and are considered being a form of collateral in case of any liquidation. What is more, IKEA can improve its return on assets by leasing its properties to others. Nevertheless, if the company would be for sale, the buyer will like retaining this strategy, since it is the source of return on assets.

In addition, Dick Beatty’s statement “you don’t ever want to hire someone who is (just) looking for a job” means that employers are not only ready to employ people who are looking for a job but those who are also after the success of the company, especially in satisfying the needs of consumers.

In conclusion, IKEA is an internationally recognized company known for home furniture retailing, which was founded in 1943. It is one of the world’s largest furniture retailers due to its Scandinavian style furniture. The company has concentrated most of its efforts on continuous cost reduction, which elevated it almost to an art form. IKEA follows a focused cost leadership strategy, whereby it targets young buyers searching for fashionable and stylish furniture and household accessories at a lower cost. Some of the issues discussed are the disadvantages of applying only its Swedish culture in emerging markets, the effects of the increase in average consumer income, return on assets, as well as its asset management strategy.

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