Strategic Situation of the Furniture Group of IKEA - Coursework Example

Inter IKEA Systems B.V. (Business Strategy) Table of Contents Section Page No. 1. Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. Brief Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. Recent Past . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.1 Development History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 3.2 Prior Investments and Disinvestments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.3 Markets Served and Products Offered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7 3.4 Resources Gained and Capabilities Developed . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.5 Culture, Leadership and Management Style . . . . . . . . . . . . . . . . . . . . . . . . . .7-8 3.6 Strategies Pursued and Outcomes Achieved . . . . . . . . . . . . . . . . . . . . . . . . . . 8-9 4. Current Strategic Situation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.1 Trends in the Macro Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-11 4.2 Changes in Industries and Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.3 Strategic Resources, Assets and Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.4 Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.5 Industry Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.6 SWOT Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5. Future Strategic Direction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.1 Strategic Situation and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.2 Variables of Strategic Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-15 5.3 Choices for Future Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-16 5.4 Evaluation of Available Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.5 Justifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.6 Getting to the Future First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7. Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ABSTRACT This paper covers the furniture industry with regards to the retailing industry. The industry is closely related to the home industry in the sense that people buy new furniture once they moved to a rental home or into a house they had recently bought. On this note, the furniture industry relies on new sales (when people buy entirely new furniture) to furnish a home or on replacement sales (when a furniture is worn due to use or is out of style). The paper discusses in broad terms the significant changes in the business environment such as new lifestyle patterns, threats such as the environmental movement and depletion of forests and the opportunities presented to pro-active industry players who can seize the opportunities to expand market shares and further revenue growth. The paper then focuses on the furniture group of IKEA which is from Sweden but is now present in some 40 countries and territories with about 316 stores (as of 2010, combined for franchised and company-owned stores). The subsequent discussion is broadly grouped into three sections, namely: the company’s recent past, its current strategic situation and lastly, the future strategic direction open for the firm. This paper undertakes a thorough evaluation of the company’s strengths and weaknesses; then it attempts to find a viable future strategy that can be pursued by IKEA to maintain its position in the furniture industry based on a comprehensive industry and company analysis of current situation. Various options are discussed and a recommended strategy is put forward. Keywords: design, function, furnishings, furniture, low-prices, quality, retailing Introduction The furniture industry is closely related to home sales. In this regard, sales of these furniture items (chairs, beds, study tables, dining sets, kitchen cabinets, etc.) and companion products like home furnishings are, to a large extent, dependent on the building industry. In particular, these product items are sold depending on the mortgage rates when the prospective home owners contemplate buying new homes and furnishing them suitably for home use. The furniture industry is affected by key economic indicators such as single-family home re-sales, privately-owned housing starts and sales of new single-family homes (such as by developers). The twin threats to the furniture industry, as it relates to the housing industry, is the slowdown in new home sales as well as the reduction in the average size of new homes being built. This is not surprising considering the current economic recession brought about by the implosion of the housing bubble in the US market as well as in other foreign markets due to speculative purchases, over-leveraging and irrational exuberance with expectations that housing prices will continue to rise indefinitely, notwithstanding the absence of real new demand. The furniture industry is also closely related to the retailing industry. As such, it is also vulnerable to changes in the economy, such as a rise in interest rates charged on credit cards. In furniture retailing, the top ten retailers combined for less than 20% of the entire industry. It means the industry is ripe for some consolidation through mergers, acquisitions or alliances. It means the industry is largely fragmented with some branded names like IKEA, La-Z-Boy and Ethan Allen able to sell directly to consumers and bypass retail chains like Walmart or Tesco. An environmental movement likewise puts pressure on the furniture industry as it is a big user of wood and forest products. Other sources of potential industry threats are long-term trends in lifestyles and the changes in demographics which require effective strategy choices. Firms like IKEA must stay ahead of the competitive curve in order to survive and grow. Discussion This first section gives a brief summary of the birth and rise of IKEA as a global name in furniture and home furnishings retailing. This is intended to emphasize the tremendous and incredible achievement and rise of the company so far in its brief corporate life. 3. The Recent Past The IKEA company was started in 1943 by Ingvar Kamprad in the small town of the Smaland in southern Sweden. This region is characterized by a lack of natural resources and its inhabitants are used to getting by with so little. The general hardships endured by people of Smaland shaped in large part the eventual business philosophy of Mr. Kamprad. His idea was to sell furniture products very cheaply so more people can afford them but without sacrificing either quality or style (IKEA, 2010:1). Even as a young boy, he already showed the signs of a good entrepreneur and brilliantly realized that selling items at low prices does not necessarily mean no or low profits; on the contrary, he knew if one has a good product but selling it at a low price that one can still make good margins if one manages the costs very well. This is the same corporate philosophy being followed by the IKEA Group today despite its big size. This core philosophy provides the basis for its corporate strategy as a “low-cost provider” because it believes it has more efficient operations (in its design, manufacturing, sales and transport). The firm grew quite fast in the past six decades and is approaching its seventh decade in business by pursuing the same philosophy of a low-cost structure (Inter IKEA, 2010:1) by doing simple cost cutting measures and having “tax efficiency” as well (which means doing tax avoidance, which is legal, but not tax evasion, which is illegal). Its strong brand name (which is built up on quality modern furniture) and low prices enabled it to weather the worst economic downturn by posting healthy revenues by growing sales by 7.7% in fiscal year 2010 (to 23.1 billion euros) while its competitors struggled (The Economist, 2011:63). 3.1 Development History The company formally started in business by selling furniture but with emphasis on using functional design that projects the products with an image of modernity. Further, it had pioneered the idea of self-assembly to keep costs down. This cost consciousness extends even to its sales and marketing efforts by utilizing newspaper inserts in Swedish Farmer’s Gazette (Inter IKEA Systems, 2010:1) in order to reach a wide audience at low cost as well as product using catalogues and a showroom. It further developed and tested many theme-based concepts such as the Poang and Billy wooden bookcases. By 1963, its opened its first store outside of its native country Sweden in the city of Oslo in Norway. 3.2 Prior Investments and Divestments The rapid expansion of IKEA during its first few years was due to investments made in its suppliers. Its superior operations resulting in lower costs and fewer disruptions were due to investments it had in its suppliers’ infrastructures (Miller & Le Breton-Miller, 2005:268). It had developed independently its own system of supplier collaboration very similar to that of the Japanese system of kanban (related to lean manufacturing and just-in-time operations). It had followed a complex supplier network of pre-packed, low-cost but high-quality furniture from eastern and central Europe such as Slovakia and Poland (Smith, 1998:344). More often, IKEA buys out its suppliers to secure its supply networks. An example was its purchase of the Swedwood firm due to its skilled low-cost labour and a supply of excellent spruce reserves. IKEA practically had no prior divestments because it makes all investment decisions very carefully and therefore very rarely commits an egregious mistake that requires it to make divestments. In fact, the company eschews formal strategy planning as too rigid and formal a process and tries its best to solve problems encountered in a creative way by looking for more pragmatic solutions instead, leading to few mistakes (Segal-Horn & Faulkner, 2010:394). 3.3 Markets Served and Products Offered The company had started out serving the European market only. It opened stores in Oslo, Norway (the first store outside Sweden), then expanded into nearby countries such as Denmark, Switzerland and Germany. The first stores outside of continental Europe were in Australia (Artarmon) and Canada (Vancouver). It opened its first store in the US much later in Philadelphia and the first store in the United Kingdom (Manchester) soon followed. The first store in the Middle East region was in Saudi Arabia (Jeddah) followed by that in Kuwait. The first stores in Asia were located in Hong Kong, then Singapore and followed by that in Taiwan (Taipei) and in China (Shanghai). There are plans to open more stores in China and then later on in India when its retail laws are liberalised (The Economist, 2011:63). More stores will be added to the existing ones in Russia once problems there are resolved. Experts may be surprised to learn that IKEA does not follow any explicit international strategy for its globalisation expansion programs. The only defining principle it adheres to is assessing the market opportunities in a certain country. This is combined with its search for the cheap undeveloped land for its vast stores, ready availability of furniture sourcing, close proximity to a regional warehouse, cost cutting in transport fees and lower marketing costs. A few people say the group is not market-driven in terms of trends and styles but rather tries to impose its own concept of what is stylish and develop an image as a trend setter instead. With this in mind, it is no wonder it is slow to adapt or react to new consumer trends. Interestingly, IKEA does not own furniture manufacturing plants but outsources all its requirements, making sure all furniture suppliers comply with its strict standards instead. The core market of IKEA is young furniture buyers (usually in the 25-34 age groups) who are just starting out a household and want style, function and durability at low cost (Winfield, Bishop & Porter, 2004:335). IKEA trades limited service for low cost (Ferrell & Hartline, 2008:517). Its products composed a wide array of home furniture and furnishing items typically found in a modern functional home. This product list includes beds, mattresses, dining sets, bookcases, kitchen utensils, fabrics, lighting fixtures, carpets, curtains and decorative items. It usually highlights certain products through its use of evocative names and also uses children’s themes when selling kid-related products. It has to be careful when using names and words as it sometimes translates to completely something else in other languages. 3.4 Resources Gained and Capabilities Developed The company has learned over the years to make stingy or wise uses of products such as wood. It realises its manufacturing activities has a big environmental impact and tries its best to minimise adverse environmental effects (Nattrass & Altomare, 1999:66). It clearly has understood how sustainability and renewability has to be incorporated into its corporate goals because 75% of its raw materials come from forestry products. IKEA has developed the capability to manage a complex logistics chain that involves about 2,300 different suppliers from 50 countries but most of its furniture supplies (80%) are coming from only 20% of its suppliers worldwide. Its tries its best to reduce environmental impacts by advising suppliers in some regions with lower environment standards to comply with the firm’s own environmental standards by increasing their suppliers’ awareness. About two-thirds of all purchases come from Europe with the balance from Asia. Globally, only four countries predominate in terms of actual manufacturing production which are China, Poland, Italy and in Sweden itself (less than 10% of the total production comes from Sweden). 3.5 Culture, Leadership and Management Style The corporate culture at IKEA is generally described as open, meaning it allows for a high degree of personal initiatives. But in practice, before any changes and suggestions can be implemented, everything has to be cleared with top management. Problems are solved using a consensus-style approach. There are only three hierarchical layers within a typical IKEA store and everyone is expected to share their knowledge, skills, information and expertise with all. It is expected also the co-workers “learn things by doing” and so there is little formal training. Managers are expected to provide guidance through examples and by way of discussions and explanations about the “I-Way” which is the shortened version of the IKEA Way as contained in the iconic “Testament of a Furniture Dealer” written by the founder himself back in 1976. Leadership style is informal with business managers driving in the same cars as that of everyone else (a company requirement) regardless of rank or position. Its style can be thought of as informal but innovative by refusing to go along with conventional wisdom. New recruits are indoctrinated in the I-Way by older employees to help newer employees capture and retain the original spirit and vitality of the earlier years. Swedish managers are usually imported to do the managing of foreign stores, in part to instil the so-called “I-Way” of the founder. 3.6 Strategies Pursued and Outcomes Achieved The company had stumbled into the furniture business by accident when a bankrupt furniture shop was up for sale in the early 1950 but he had doggedly pursued this business despite meeting various obstacles. As mentioned earlier, IKEA does not pursue a formal plan with regards to corporate strategy, preferring to manage by the seat of its pants, so to speak. It means it will innovate and improvise along the way whenever problems are encountered and try to find the best creative solutions. An example of that improvised approach to any problem was when it underestimated the size of the crowds to its first-day opening of a warehouse sale in Stockholm. The few employees were overwhelmed by the task of fetching purchased items from storage areas and so Mr. Kamprad requested the customers to get the items themselves. It gave birth to the idea of reduced customer service but led to lower product costs. A strategy of IKEA can be described as overall cost leadership using Porter’s model (Griffin, 2008:207). If we use Miles and Snow’s typology, its strategy can be described as a defender strategy. Judging from its not-so-modest success when its competitors are struggling, IKEA had found the right formula for a business model that works. It pioneered the concept of prosumer or producer-consumer where a customer is involved in the production process (by taking the delivery and the final product assembly) when it was not very fashionable yet at that time. In a sense, IKEA has no deliberate or formal business strategy other than to exploit opportunities it can find in new markets. This lack of a definite process of strategy formulation makes it a bit hard to categorize its corporate strategy. In this regard, it can be classified as either as form of a defender strategy or even a variant or combination of analyzer and reactor strategies. This is an observation made from its refusal to follow consumer trends in furniture styles (ibid.). 4. Current Strategic Situation The global furniture industry is fragmented with no leading player controlling a very effective market share to dictate prices. It is an industry that is ripe for consolidation, mainly among competing brands although IKEA tends to have an influence in the markets it enters. Competitors are forced to react, sometimes quite late, to the entry of IKEA on their domains. In some markets like the UK and Germany, it is the leading market player. This industry, in particular the household furniture sector to which IKEA belongs, is heavily dependent on the price of lumber and the growth in the home construction industry (Shippey, 1995:145) with a little over 40% of all home furniture made from wood, 10% from metal and the rest made up of various materials, such as upholstery. The industry is characterised by foreign competition and manufacturing overcapacity which results in low margins. Most manufacturers just focus on a few items and specialize in them since the industry has high fixed costs and high-volume production is needed to make profits (First Research, 2010:1). IKEA’s outsourcing strategy is a good decision to keep its overhead costs down and allow it lower prices overall. In home furnishings, the situation is concentrated with many players combining for 70% market share. 4.1 Trends in the Macro Environment Trends in the external environment point towards sustainable product development. IKEA had taken the lead in this area with its sustainable foreign management initiatives. It had also tried to minimise its carbon footprints by reducing transport-related emissions by letting customers take their purchased product items from the stores. The political factor involved in IKEA’s business operations is the renewed calls for it to be transparent about its vaunted “tax efficiency” by hiding itself behind corporate layers of holding companies which is incompatible with its cultivated image of social responsibility. It is also vulnerable to supply disruptions if a major civil or political upheaval will happen in China. This country supplies furniture three times the average provided by Sweden. Economic factors which can affect the industry include a rise in interest rates which is a significant influence on the decision to buy furniture which is often a big purchase. With the economy down for some years, purchase decisions are often deferred when consumers lost the confidence in the economy, especially regarding job security. A major sociological factor that can influence furniture sales is the trend towards the smaller homes. This means fewer furniture items and fewer purchases when people decide to be frugal with their desire for moveable objects intended to furnish for their homes. Another could be the decision to put off having kids or just fewer kids, resulting in fewer purchases for kid-related furniture items such as play chairs for kids’ playrooms. The big technological factor that will surely affect furniture sales is the growing trend of on-line purchases for everything retail, including furniture. Internet furniture retailing made available a large variety of choices not found in the usual product catalogue like that of IKEA. It can be a threat to IKEA since Internet retail sellers can ship their products directly without a need to maintain huge warehouses and showrooms which are expensive to operate. Legal challenges faced by IKEA are more in the nature of trademark infringements. There was a case of a furniture maker who planned to use the brand name IDEA which is very confusingly similar (this is the operative phrase) in trademark cases in a court in Canada. The other possible legal trouble it may face is the alleged operation of sweatshops by many of its sub-contractors located overseas in poor countries, similar to what Nike did years earlier. Environmental factors seem to pose the biggest threat since furniture manufacturing is a heavy polluter of the air and depletes natural resources like forest products such as wood. Its finishing process produces the most air pollution while using wood and timber contributes to global warming. IKEA has engaged itself in sustainable forestry harvesting and re-planting. 4.2 Changes in Industries and Markets The furniture industry is very dynamic with new countries exporting their products. Examples of new entrants becoming major players lately are Canada, Taiwan and Mexico. It has raised the level of competition among major players. The threat of substitutes like plastic and metal furniture has likewise reduced the demand for wooden furniture with supplier more demanding for their share of the profits. Porter’s 5-forces Model also indicates buyers are now more benefited from lower prices and better quality. However, using the same Porter model, it shows some market players might be forced to leave the industry due to low profit margins and the threat of entry of even cheaper producer-countries (Hill & Jones, 2009:43) due to the low barriers of entry in what experts and economists sarcastically term as a race to the bottom that will wipe out ever-slimmer margins (Gallagher, 2008:148) when trying to attract foreign direct investments to their particular country by lowering environmental standards. A market trend these days is away from producing heavy wooden furniture made from hardwood. The idea is that this type of furniture is difficult to market effectively due to its higher prices and the environmental awareness of many consumers who favour instead using cheaper wood. A new trend is towards specialisation rather than an over-diversified product range. 4.3 Strategic Resources, Assets and Capabilities The greatest strength of IKEA is its strong supplier network developed over the years. It had painstakingly secured the trust of various far-flung suppliers by buying in volumes that provides these manufacturers with long production runs that cover their fixed costs. IKEA is often generous enough to provide financial help for struggling supplier at generous rates for them to acquire needed capital equipment. It had also re-designed its supply chain towards a more environment-friendly corporate purchasing policy (Esty & Winston, 2009:203) by hiring auditors who rate its suppliers based on social responsibility and environmental performance. Its capabilities to manage a complex logistics chain are probably unmatched in the industry. 4.4 Financial Performance IKEA managed to turn out profits year after year even with its low price strategy. This proves that the business philosophy of its founder works by producing high sales turnover that will lift up profits from low-margin product items. The five-year period starting in 2006 up to 2010 showed its total revenues increased from 17.7 billion euros in 2006 to the present 23.8 billion euros when other competitors are clearly struggling and suffered sales declines. It is bit noteworthy that this period covers the years of the start of the mortgage crisis resulting from an implosion of the housing bubble in the US home market that spread throughout the world. Its profits increased by 6.1% from 2009 to 2010 fiscal year to about 2.7 billion euros. In other words, IKEA is very healthy financially and adheres to the founder’s philosophy of financial conservatism by avoiding debts and loans. It earns the profits first before spending any of it and gives it flexibility, stability and independence to pursue its corporate objectives. It is very liquid and its private status shields it from stock analyst demands and expectations. It allows it to pursue its long-term business objectives such as organic growth without public scrutiny. Its only bad image is the use of complex non-profit foundations to avoid paying its taxes due. 4.5 Industry Position The company is doing very well in almost the markets it had entered. In the United Kingdom, it has the leading market share position. In other competitive markets like Spain, sales grew by 8.2% last year while in Italy sales grew higher by 11.3% despite a recession. In markets it entered, IKEA had a dramatic effect on the furniture industry in that country. 4.6 SWOT Analysis Strengths – sources of IKEA strength are its very complex outsourced manufacturing supply chain and a global brand name associated with quality but low-cost furniture products. Weakness – it has a poor public image with regards to its corporate transparency about its finances which is at variance with a carefully cultivated image of social responsibility. The main contention of its critics is its tax avoidance policies and not paying its share of tax dues. Opportunities – the company can pursue the other sectors in the furniture market such as office furniture and institutional buyers of furniture such as hotels, hospitals and restaurants which offer alternative markets for its products although it is doing well in home furniture. Threats – IKEA has virtually nullified possible threats from other low-cost suppliers of furniture by offering added value to their products which is functional style and modernity. It is still subject to certain threat such as changing consumer trends, lifestyles and preferences. A threat which may be undetected is in its business model. The IKEA‘s build-to-stock approach leads to high inventories which may later on be hard to dispose (Davenport et al., 2006:280). 5. Future Strategic Direction The company can start to adopt a formal planning strategy as the environment that it operates in is becoming more competitive, complex and dynamic. The previous successes it had based on the non-adoption of a formal corporate strategy may not work anymore this time around. Secondly, its founder may not be around for much longer considering his age. 5.1 Strategic Situation and Objectives Entrepreneurs like Mr. Ingvar Kamprad (who is now 85) are people who cannot seem to let go of their businesses. They also tend to view themselves as less than successful based on their own standards although by most people’s criteria, they are a tremendous success. His problem now is how to leave his imprint on the IKEA organisation as his legacy. Committees he had formed to take charge of management and directorial functions and set up within those various secretive not-taxable charitable foundations may also not last long after his demise. Although this unusual set-up protects his company from corporate takeovers and usual expected clashes among his descendants, it is nevertheless imperative to put up a professional management team in place before he finally bows out. Along this line, the IKEA organisation must now undertake pre-planning before formal strategy formulation in an exercise known as corporate profiling. This is a process designed to give it a good view of its internal strengths and weaknesses by matching its dynamic capabilities with the appropriate marketing strategy (Sherman, Rowley & Armandi, 2007:163). This was what Miles and Snow had formulated in 1984 as creating a good fit between the firm and its external environment. 5.2 Variables of Strategic Choices IKEA can reduce the complexity of strategy formulation by simplifying the process of choosing an appropriate marketing strategy by using the model by Igor Ansoff, shown below, which is called the Product-Market Matrix that can point the way in the right direction. Fig. 1: Ansoff Product-Market Matrix (Campbell, Stonehouse & Houston, 2002:175) Existing Products New Products Existing Markets Increased market penetration (1st quadrant) Introduce newer products (2nd quadrant) New Markets Enter new markets with the same product line or items (3rd quadrant) Diversification: either partial or total (new product/market) (4th quadrant) Based on an analysis of the various factors using the matrix previously shown (Fig.1), it can be concluded IKEA can pursue either of two strategies or even do them simultaneously. The first will be to introduce new products in its existing markets (2nd quadrant in the matrix) and the second option will be a partial diversification (4th quadrant). The first option will be consistent with its defender strategy (using Miles and Snow’s typology) which is just right as it coincides with Porter’s low-cost generic strategy as shown below (Fig.2): Fig. 2: Porter’s Generic Strategies (Williams, 2008:133). Low-cost Strategy Differentiation Strategy Broad Targets Cost Leadership (IKEA) Unique Selling Proposition (USP) Narrow Targets Cost Focus only Differentiation Focus only Porter had however warned against using a hybrid of these two generic strategies for it will not give a company any competitive advantage (he calls it as being “stuck in the middle”) but in the case of IKEA, it is completely different. The company seems to be thriving well in pursuing both an overall cost leadership and also with its USP brand image. Porter himself has mellowed over the years and became less dogmatic, accepting it might be possible after all. It has defied Porter’s warning and is getting away with it by being extremely successful. 5.3 Choices for Future Strategies A mixed strategy Porter had warned about is not validated by IKEA’s superior results if we follow the BCG matrix as shown below (Fig.3) in which IKEA is among the Stars. Fig. 3: Boston Consulting Group (Campbell, Stonehouse & Houston, 2002:108). Relative Market Shares Relative Market Growth High Market Share Low Market Share (high growth) STARS QUESTION MARKS (low growth) CASH COWS DOGS The company can consider various options in pursuance of its chosen strategy which are located in the second and fourth quadrants of the Ansoff Matrix. The first option will need to utilize the same dynamic capabilities of IKEA which is to produce new but related products as mentioned earlier; this is the possibility of entering new sectors of the industry like office furniture and the institutional furniture sector (hotels, resorts, hospitals and restaurant chains). The second option is a partial diversification which offers the best chances for expansion and at the same time enter new markets previously not served. A vehicle for this option is entering new partnerships in the prospective countries it plans to enter and any mode is acceptable and IKEA has been doing it already (mergers, acquisitions, franchising and joint-ventures). It had been its strategy over the years with its network of suppliers and it can be done again in sales. 5.4 Evaluation of Available Options Either of the two options is viable as growth strategy for IKEA and will also preserve its market dominance in its present country markets. The challenge is how to maintain this growth rate despite entry of new competitors and an economic downturn. Based on the tests by Johnson, Scholes and Whittington, this will be end profile for IKEA: Suitability – the proposed strategies will extend the global brand image of IKEA as a maker of quality furniture for institutional users but at low cost combined with function. This is a good message to potential users that the same Swedish values will be carried over to the new product categories. Employees will improve performance due to new stylish furniture. Feasibility – IKEA has built up its core competencies over the years of managing its complex outsourced manufacturing facilities through its dynamic capabilities of satisfying its customers’ needs. This is an intangible asset of IKEA put to good use. Acceptability – the company will not venture into unrelated undertakings but stay still within its main industry of furniture design and manufacturing; the directors will like this. 5.5 Justifications The decision to enter new sectors within the furniture industry is to reduce IKEA’s vulnerability to future economic downturns. At present, it is almost entirely dependent on the home mortgage industry (new home sales and private starts) for its revenue streams but other sectors can offer higher margins. For example, the office furniture sector usually makes bigger purchases when furnishing an office due to a larger budget than a typical household couple. It will reconstruct the market boundaries to create blue oceans (Kim & Mauborgne, 2005:47). 5.6 Getting to the Future First A firm doing environmental scanning quite well and combine the results with its own dynamic capabilities will have developed into so-called learning organisations able to satisfy its customers (Heene, Martens & Sanchez, 2008:10). That firm will have gained a foothold in the future markets in what Hamel and Prahalad termed as the new paradigm for the future: an ability to foresee and stretch in order to mobilise for future markets (Grant, 2005:317). Conclusion A company cannot stay in its own comfort zone forever. IKEA has not ventured into any other business except furniture retailing. It has been rewarded handsomely for this single-minded focus but yet it cannot hope to be in this sector forever. Although admittedly it had been able to defy the odds so far, such as proving Porter wrong and having increasing sales in an economic downturn when its rivals are floundering, its revenue bases is pretty limited. Recommendation IKEA can emphasise its value-for-money corporate philosophy in conjunction with a renewed branding strategy that will reposition it in new furniture sectors like hotel chains. It is strongly advisable to expand its catalogue using the Internet as a digital version and stop using its build-to-stock approach which is not a strategic fit as it increases inventory levels. References Campbell, D., Stonehouse, G. & Houston, B. (2002) Business Strategy: Introduction. Jordan Hill, Oxford, UK: Elsevier Butterworth-Heinemann. Davenport, T. H., Leibold, M. & Voelpel, S. (2006) Strategic Management in the Innovation Economy. Erlangen, Germany: Wiley-VCH Verlag GmbH. Esty, D. C. & Winston, A. S. 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