The Swedish-founded and Dutch-headquartered multinational conglomerate IKEA has become one of the most recognized brands in the world thanks to its iconic and relatively affordable ready-to-assemble furniture items, modern-looking kitchen appliances, and a wide selection of home accessories and home improvement solutions.
Nevertheless, a situational analysis of IKEA using the SWOT framework provides an insight into how it operates as a multinational business organization, as well as its key strengths and opportunities available for furthering its success, and its weaknesses and pressing threats that undermine its short-term and long-term viability.
Situational Analysis of IKEA: Insights into Its Strengths, Weaknesses, Opportunities, and Threats
Strengths of IKEA
1. Low Costs Through Economies of Scale
One of the strengths of IKEA is its large-scale manufacturing and distribution capabilities that have allowed it to lower the costs associated with production and overall operations. This also sets the company apart from other furniture-makers and similar companies.
The aforesaid strength is a fundamental competitive advantage of the company compared with other furniture manufacturers, especially small-sized and medium-sized ones. Its business is relatively cheaper to operate due to its scale, thereby allowing it to market mass-produced products at lower price tags.
2. Cost Leadership and Penetration Pricing
Remember that the company is known for selling affordable home furnishing products. The scale of its operations has also enabled it to maintain its cost leadership in the industry.
Furthermore, considering the scale and costs of its operations, the company has maximized the marketability of its products to the mass consumers through a penetration pricing strategy. Its inexpensive price tags also serve as one of the major barriers to entry in the entire furniture-making industry.
3. Strong Vertical Integration Strategy
Another strength of IKEA is that it has a considerable amount of control over its supply chain and distribution channels. Its capability to order production inputs at large volumes has enabled it to minimize the bargaining powers of its suppliers.
Furthermore, the company sources inputs closer to its outsourced manufacturing facilities, thus lowering acquisition and transportation costs. Its distribution strategy utilizes principles and practices from the retail and e-commerce industries such as warehouse automation and merged sales channels.
4. Unique Value Proposition of Its Products
Of course, central to its brand identity is its unique value proposition that centers on designing and marketing affordable and modernist ready-to-assemble furniture products.
The ready-to-assemble nature of its products makes them easier to transport while also providing consumers with a unique product experience that comes from purchasing and assembling their chosen items. Furthermore, the modernist design principles and the low price tags make these products attractive to middle-income households.
5. Established Global Market Presence
It is also important to consider the global distribution channels of IKEA as one of its strengths, especially when compared with local furniture makers and authorized distributors of global furniture brands. Remember that it operates similarly to a big box retail store.
The Swedish company has made significant investments in establishing its retail footprint in key regional markets outside Europe. These include North America and emerging markets in South Asia, East Asia, the Pacific, and Southeast Asia. This global presence allows it to maximize the advantages of mass production.
Weaknesses of IKEA
1. Standardization of Production and Output
IKEA has achieved economies of scale in manufacturing and low-cost production due in part to the standardization of its production processes that in turn, result in the creation of standardized products. Remember that its products are intended for the mass market.
However, standardization can also be a disadvantage or weakness of IKEA, especially when compared to other companies offering bespoke or tailor-fitted home furnishing solutions and services. The company also does not cater to specific segments in the market who are looking for non-modernist designs.
2. Focus on Cost Leadership Over Quality
Another weakness of the company is that it is having a hard time balancing between keeping down the cost of its production and operations while maintaining the quality of its outputs.
One of the prevailing criticisms of IKEA is that some of its products have shorter lifespans due to the quality of material used and the overall level of craftsmanship. Note that this problem can be traced back either to its suppliers, the outsourced manufacturing facilities, or both. The company has less control over these aspects.
3. Multiple Global Operations and Complications
Remember that the company sources its production inputs or raw materials from different suppliers across the world. Furthermore, its outsourced manufacturers are also located in different countries. It also has an expansive chain of retail stores around the globe.
The problem with this multi-faceted multiple global operations is that it creates complications. Note that it has a complicated corporate structure. Furthermore, its large scale also creates problems in maintaining uniform control standards. It also has to address issues hurled toward its suppliers or outsourced partners.
4. Notable Criticisms and Negative Publicity
The entire brand image and corporate reputation of IKEA have also been tainted with several criticisms and instances of negative publicity transpiring in the previous years.
The company has to deal with allegations of unfair labor practices in its outsourced facilities, biased branding and marketing communications, tax avoidance strategies and relevant revenue strategies, negative influence on local businesses involved in making and distributing furniture, and undesirable impacts on the environment.
Opportunities for IKEA
1. Emerging Markets in Developing Countries
The middle class is rising across the world, especially in developing countries. Hence, as the income of the greater population increases, so as the demand for residential real estate properties and related goods and services. This is one of the opportunities for IKEA.
The company can strengthen its presence in Southeast Asian countries such as the Philippines and Indonesia and expand further in other metropolitan areas in countries where it operates. It can also explore and expand in untapped countries in South America, the Near East and the Middle East, and Africa.
2. Possibilities from Electronic Commerce
The growth of electronic commerce also opens another opportunity for the company to expand its market reach. Note that the company has robust online stores in the United States and the United Kingdom.
Improving its e-commerce capabilities and presence can help improve its sales while lowering its operational costs. There is no need for IKEA to build and maintain several brick-and-mortar stores in a particular country if it can maximize the advantage of online or digital sales channels such as its official website.
3. Product Diversification and Business Expansion
Remember that IKEA markets not only ready-to-assemble furniture but also kitchen appliances and home accessories, as well as other home improvement products or homeware. Note that it also markets smart home accessories and residential solar panels.
There is an opportunity for it to expand its smart home product line or enter into partnerships with technology companies such as Amazon and Google to create and market different products for a smart home system. It can also explore developing hypermarkets or grocery stores within its existing retail stores.
4. Green Business Model for Ethical Consumers
A sizeable number of consumers around the world have become more conscious about their consumption and behavior and choices. Countries are also promoting environment-related initiatives.
Part of the existing corporate social responsibility program of IKEA is its numerous environmental initiatives aimed at minimizing the negative environmental impacts of its business. It can maximize this program by integrating its sustainable business model into its branding and its marketing messages.
Threats to IKEA
1. Disruptions in Supply Chain and Logistics
The COVID-19 pandemic proved to be detrimental to the short-term to medium-term viability of manufacturers and retailers after the global public health crisis disrupted global trade. IKEA was not spared. It had to increase its retail prices to cover the increasing cost of its supply chain.
Furthermore, the company also suffered from more specific logistical problems that include delays in the shipment of production inputs, as well as the forwarding of processed inputs and final outputs. Note that Brexit and the Suez Canal blockage also disrupted the supply chain and logistics of the company.
2. Exposure to Foreign Currency Risks
The prices of IKEA products do not drastically change with the fluctuations of the value of the currency of a particular country. However, in some instances, similar products appear to be more expensive in another country.
Nevertheless, because it markets its products across the globe, in addition to the fact that it also secures supplies from different suppliers in several countries, it has exposure to the risks associated with the volatility in the foreign exchange market to ensure that its expenditures are optimized to keep them as low as possible.
3. Regional and Global Economic Downturns
The disruptions in global trade due to notable events such as the COVID-19 pandemic and volatility in the foreign currency exchange market demonstrate how economic problems in a particular country, a global region, or the entire world can affect the sales performance of IKEA.
The company is dependent on a growing economy as determined by the vibrancy of the consumers in a particular country and the strength of their purchasing capabilities. Widescale economic problems such as the 2007-2008 Financial Crisis or the Eurozone Debt Crisis would significantly affect retail-oriented companies.
4. Increasing Intensity of Industry Competition
Another significant threat to IKEA is the seeming increasing intensity of competition in the industry or market in which it operates. The barriers to entry are not significantly high enough.
To illustrate further, note that other multinational retailers such as Walmart, Target, and Tesco have already ventured into the home furnishing market with similar value propositions. The market is also populated by other giants such as Amazon and the more reputable and established brands such as Sears and Wayfair.
5. Various Exposures to Regulatory Hurdles
Remember that the company has a global operation. It has to comply with different laws and varied specific regulations in different countries. Some countries or markets can be too stringent. IKEA needs to keep itself extensively informed about regulatory developments across its markets.
Note that there are countries that limit the store size of retailers. Also, in other countries, there are special policies related to labeling and packaging requirements, especially for consumer-grade products. It is also possible for other countries to change their trade and business regulations depending on the economic and political climate.
