IKEA and Macro Environment Analysis of UK Furniture Industry - Essay Example

?Strategy Context Report: IKEA Executive Summary IKEA has always been known for its convenient and stylish furniture range at affordable prices and also offers customised services to the customers. In spite of the bleak prospects of the furniture industry IKEA has been generating decent amount of profitability. The company has gained worldwide recognition through innovative design and unique customer service. The study has dealt with how various strategic management models can bring about the betterment of the organization and also helps to form a strong global footing. The company can yield high amount of profitability along with enhancing its business model through the varied recommendations given by the author of the study. The main motive of the strategic group and competitor analysis would be to identify the company’s current market and strategic position in the market. The author of the study has focused on the current strategic issues faced by the company with respect to the current situation of the furniture industry. Thus, IKEA could not only enhance its business model but also formulate varied strategies to improve the existing business systems. The analysis would also ensure the increase in the organizational outcome along with its brand restoration. Table of Contents Executive Summary 2 Introduction 5 Industry Overview 5 Scene Setting of UK Furniture Industry 5 UK Furniture Industry Size & Growth 6 Macro Environment Analysis of UK Furniture Industry 7 PESTLE Analysis 7 Competitive Environment Analysis 10 Porter’s Five Forces Analysis 10 Strategic Group Analysis 10 Competitor Analysis 10 Evaluation of Business and Corporate Strategies 11 Purpose, Mission and Objectives 11 Resources & Activities: Value Chain Analysis 11 Organizational Culture & Stakeholders 13 Value Proposition Model 14 Identification of Major Strategic Issues Facing Organization 15 Conclusion 16 Recommendations 16 References 18 Appendices 20 Porter’s Five Forces Analysis 20 Value Proposition Model 21 Introduction IKEA is one of the world’s renowned and successful brands of furniture industry and has attained success through sheer innovation, creative thinking and cautious planning and design. The company was established by Ingvar Kamprad of Swedish origin who had introduced the concept of “democratic and innovative design” in the furniture industry. The concept revolved around the fact that the designs of the furniture reflected modernity and are available at affordable prices (IKEA, 2013a). The first store was opened in Almhult, Sweden which showcased modern and innovative designs of the furniture range to the common people (IKEA, 2013c). The main objective of IKEA has always been to cater to the needs and requirements of the common people since its inception (IKEA, 2013b).The study will deal with the effectiveness of the IKEA management in providing its goods and services to the common people. The author of the study will also highlight the effective strategies devised by the company to retain its strong position in the furniture industry and gain competitive advantage over its competitors. Macro environment and competitor analysis will be done to understand the impact of the external forces on the company. Finally, the study will conclude with recommendations for the betterment of the company with respect to the current situation of the furniture industry. Industry Overview Scene Setting of UK Furniture Industry Presently, the furniture industry is recovering from the economic slowdown in UK and the entire European region. It also had a considerable effect on the UK economy. Since the year 2012, the sales of UK furniture have been declining gradually due to the effect of the difficult furniture trading environment. Customer confidence and spending was considerably very low during the tenure 2010 to 2012 due to the decrease in the purchasing power of the common people and non introduction of the innovative design by the UK furniture companies. The UK furniture companies did not invest considerable amount of money into the design of the furniture due to their low earnings since 2010. It has been a major setback to the UK economy since the furniture industry has been major contributor to the country’s GDP. It has been contributing ?7.073 billion to the UK economy since 2010 which is almost equivalent to the 2 percent of the manufacturing output and has provided employment to around 71000 people in 6205 companies (BFC, 2013). It has been forecasted by the British Furniture Federation that the industry constitutes of almost 18880 individuals and has generated an annual value of ?2 billion (BFC, 2013). Presently, the UK furniture industry can be further divided into three categories; Domestic, Contract and Office. The furniture companies also serve the individuals and the corporate offices. It has been estimated that 30 percent of the turnover generated by the company is attributed to the office and contract customers. UK Furniture Industry Size & Growth The sales of the UK furniture market have declined drastically by 17 percent since the tenure 2007 to 2010 with a drop in the annual turnover from ?12.7 to ?10.5 billion (Euromonitor, 2012). The manufacturing of furniture range has declined gradually by 35 percent with a drop in annual turnover from ?11billion to ? 7 billion (Euromonitor, 2012). The furniture export rose within the internal UK region during this tenure from ?4 billion to ?4.4 billion. The growth in the UK furniture imports is driven by China followed by Germany and Italy with rates 33, 11 and 8 percent consecutively (Euromonitor, 2012). There was a consecutive drop in the manufacturing of the furniture range by 22 percent since 2008 due to low sales (Euromonitor, 2012). The furniture range was further divided into varied categories ranging from bedroom furniture to kitchen furniture. The bedroom furniture market has been witnessing decline in sales and the kitchen furniture market shows stagnancy (Marketing Research, 2012). Financial constraints are one of the major factors that have limited the entry of varied companies into the industries (Euromonitor, 2012). While the imports have increased within the internal UK region, the demand of bedroom furniture has decreased drastically compared to that of the kitchen. The demand in the modular kitchen has been increasing especially for the individual customers (Kandula, 2006). Overall, the entire UK furniture industry is expected to witness high growth in the upcoming five years with trends expected to show modest volume growth. It is expected to have a market valuation of ?650 million by the end of the year 2016. Macro Environment Analysis of UK Furniture Industry The business environment constitutes of varied factors with the potentiality of influencing the company in both direct and indirect manner. The marketing environment is divided further into the micro and macro environment (Kaplan and Norton, 2006). The macro environmental factors affect the activities of the company and constitute of demographic, socio cultural, economic, physical, economic, political and legal forces. PESTLE Analysis The political, economic, social, technological, legal and environmental analysis will be conducted for identification of the threats and opportunities faced by the UK furniture industry. Political The Furniture Industry Research Association (FIRA) is one of the oldest furniture associations in UK and has been established by the UK government. The prime objective of the association is to lay down furniture standards and guidelines for the UK furniture companies. The association also checks whether the companies are adhering to technological standards and methods to manufacture the furniture range as committed to the customers. The stringent rules, regulations and guidelines laid down by FIRA are quite difficult to comply with, generally. This has limited the entry of the varied novice furniture companies into the industry. Economic As mentioned before that, the current economic scenario in UK is unfavourable for the UK furniture companies as it has not only limited the entry of novice companies but also has led to intense competition among the existing established players. The current economic scenario has also led to the decline in sales of varied subcategories of furniture like bedroom, traditional and modular kitchen, and attic furniture. The current market valuation of the UK furniture industry is ?575 million representing the 12 percent of the overall UK domestic furniture market (BFC, 2013). There has been major decline in the sales of the furniture range manufactured by leading UK furniture companies too. Social The decline in the sales of the leading furniture companies reflect that the customer preferences, confidence and purchasing power has decreased considerably since 2008. The economic slowdown has led to the gradual decline in the income of the customers and the decline in the customer confidence and preferences has decreased due to the non introduction of innovative and creative furniture range at an affordable price by these companies. Since, the design of the household patterns are quite modern in UK homes, the common people prefer compact and comfortable furniture with an affordable price range. These social factors are considered very crucial while designing furniture range for the common people. Therefore, customer preferences are quite important for the furniture companies for establishing and maintaining the production and sales of the company. Technological Technology plays a pivotal role in the furniture industry. The usage of the software applications such as Autodesk Auto CAD helps the furniture designers to develop unique designs for the prospective clients (Parsons, 2009). This technology has become crucial in bedroom and cabinet manufacturing industry that caters to the needs and requirements of the common people. Legal FIRA has made it mandatory for the UK furniture companies to implement fire safety rules and regulations within their companies. The fire safety rules and regulations ensure that the company designs a well laid-out layout for the protection of the furniture range against fire and other hazards. It is mandatory for the UK furniture companies to abide by the rules and regulation for the safety and protection of the employees and workers. Environmental Corporate Social Responsibility (CSR) charter ensures that the companies not only develop systems and policies for the environment and community development (Pulakos, 2009). These environmental policies developed by the companies help them to garner attention from potential and existing customers and also enhance the image of the company. Most of the UK furniture companies abide by the CSR charter for manufacturing environment-friendly product ranges (Smither and London, 2009). Competitive Environment Analysis Porter’s Five Forces Analysis This analysis will help the management of IKEA in understanding the forces with the potentiality of affecting the profitability of the industry (Kotler, 2008). The Porter’s five forces analysis of IKEA has been demonstrated in Appendices section. Strategic Group Analysis Strategic group analysis in the UK furniture industry is crucial for understanding the competitive position of the company (Lamb, Hair and McDaniel, 2011). In this context, the market position of IKEA is identified and understood which aids the company to devise effective strategies for product and service development (Summers and Hyman, 2005). It also helps the company to develop its competitive positioning strategy in order to gain competitive advantage over its competitors (Lee and Kotler, 2009). It is observed that IKEA has opened several outlets in UK and plans to further develop it service through assembly, installation and pick-up delivery services (Rogers and Peppers, 2010). Competitor Analysis The furniture industry is highly concentrated and the competition is very intense in this specific segment. Some of the renowned companies of the UK furniture industry would be Spring, GMan, Ercol, IKEA, Woolsworth and Parker Knoll. These existing furniture companies have not only been facing intense competition within themselves but also from those of other regions. Woolsworth, Parker Knoll and IKEA have been the market leaders of the UK region during the tenure of 2010 to 2012. Woolsworth had a total market share of 25.5 percent in the UK region whereas Parker Knoll and IKEA had a total combined market share of 52.5 percent in the UK region during this tenure (ASX, 2012). GMan and Ercol were able to maintain stability in the UK markets and generate revenue from the regions like, Manchester and Leeds. Evaluation of Business and Corporate Strategies Purpose, Mission and Objectives The major purpose of management of IKEA was to promote the concept of “prosumers” which focuses on the fact that customers are half customers and half producers. Since IKEA does not have its own manufacturing layout, the customers are encouraged to assemble their own furniture range (IKEA, 2013d) The mission of the company is to provide a better life to the customers by offering high quality and unique design furniture at affordable prices (Ledderhos, 2003). The objective of the company was to focus on the development of the high quality but low priced products for enabling mass consumerism (Berger, 2011). Resources & Activities: Value Chain Analysis The value chain of IKEA is segregated into primary and supporting activities. Primary Activity The primary activity of IKEA would include the design and manufacturing of the elegant and stylish furniture range at affordable prices. The company also manufactures diversified product ranges ranging from candle stick to coffee table. Inbound and Outbound Logistics: IKEA had developed a strong and smooth relationship with its suppliers in Vietnam and this resulted in, low cost labour and availability of cheap raw materials. This enabled IKEA to operate on a larger scale and understand other Asian Markets. Operations: The bulk hardwood is processed into fine furniture range by IKEA in most of its US manufacturing facilities. Marketing and Sales: IKEA gained popularity among its customers because it distributes the catalogues and brochures showcasing their furniture range. Apart from the traditional catalogue system, the company promotes aggressively though print and other media, specifically in the Asian and American region. Services: The Company provides pick-up delivery, installation and assembly service for the benefit of the customers. Supporting Activity Support activities involves support assistance require for the primary activities. Procurement: The Company procures most of the hardwood for their range from most of the local Vietnamese companies. This procured wood is certified by Rainforest alliance and World Resource Institute. Technology development CAD technology has helped IKEA in design making. It has also helped in the development of methods and systems like, fine polishing and finishing of the furniture range. The drafting technology has led to the development of unique design with 3D multidimensional technique enabling precision and accuracy. The overall technological dimensions utilized by the furniture companies helps them to manufacture the furniture range at a great speed. Human Resource Management: IKEA has provided employment opportunities by hiring diversified workforce from different countries. The workforce is trained skilfully in processing the wood and the customers service department is also trained equally for providing effective customer service support to the consumers. Infrastructure: Presently, IKEA is pervasive in more than 32 countries with more than 330 stores worldwide and its largest stores are available in Stockholm, China and Germany. The layout of the stores is directly influenced by the social lifestyle of the common people of the country. Competitive Advantage: The biggest competitive advantage of IKEA is that is the only furniture store in the world which offers not only exclusive furniture range but also other products like home and kitchen appliances. Organizational Culture & Stakeholders The organizational culture of IKEA is very informal with the absence of suits and blazers and all employees are treated equally. This was an unpopular concept with many of the newly recruited employees from other companies. A good company is efficient only when its employees are working efficiently (Neely, 2007). The management also maintains smooth relationship with its suppliers and believes in educating them. The education of suppliers is done by imparting them with proper training and induction programmes. The informal organizational culture is largely responsible for the success of IKEA and its strong global presence. Value Proposition Model The value proposition model is created for customer’s satisfaction and to cater to their needs and requirements (Albaum, Duerr and Strandskov, 2006). The value proposition model of IKEA will indicate the varied methodologies adopted by the company to cater to the business to business and individual customer necessities (Chaffey, et al., 2008). The value proposition model of IKEA is depicted in the Appendices which highlights the key customer issues and the development of several measures to solve the complexities and intricacies of the problems. Business level Strategies The company has been formulating different kinds of marketing strategies in different areas for its success worldwide. Some of the important business level strategies devised by the company are as follows: The company analyzes the different pricing strategy for different regions which are accordingly applied. IKEA had applied cost leadership marketing strategy in most of the regions. As per this strategy, the management focused on offering low priced products and also deliver genuine quality of products. In cost leadership strategy, the company focused on offering the products at affordable prices according to the customer needs and this helps the company to gain competitive advantage. (Walsh, Lok and Jones, 2006). In this context, IKEA adopts this cost leadership marketing strategy mainly in Asian and European regions. The differentiation strategy focuses on providing value to customers by developing products with the focus on the enhancement of the product features, customer service, product innovation and technological innovation. IKEA has adopted this strategy while entering into the American regions by modifying their furniture design as per the customer tastes and preferences. The company has been able to develop products by creation of differentiation through high switching costs in the American regions. Identification of Major Strategic Issues Facing Organization Although IKEA has gained popularity in the furniture industry and attained recognition for its superior performance, the company still faces certain issues which stop it from gaining advantage over its competitors. Some of the key issues faced by the organization are as follows: The designs of the furniture range reflect Swedish culture and lifestyle and are appealing only to the European customers The “prosumers’ concept is welcomed only in certain regions of the world as the customers from the Asian region prefer availing the customer service support. Customers worldwide have complained of repetitiveness being reflected from the furniture range provided by the company. Although the idea of providing products at an affordable range is very appealing to the mass consumers, this concept directly targets the lower and middle income groups instead of the higher income group. The company lays special emphasis on the customer requirements of the European regions instead of the American and Asian regions. The management of IKEA do not adopt technologies like drafting and 3D dimension for innovative and unique design of furniture range. Conclusion Thus, it is observed that employee dedication coupled with the effective marketing strategies has paved the path of success for IKEA. The management of the company needs to focus on formulating varied strategies through effective marketing models and theories. IKEA needs to revaluate its current marketing strategies and implement techniques which have the potential to curb the threats affecting the profitability of the company. Through macro environment analysis, the company can recognize and understand the external threats and forces affecting the functionality of the company which would naturally help the management in proposing the required techniques for its betterment. Effective strategic analysis will also help the company to set a strong global footing along with unique and innovative thinking Recommendations The SMART (Specific, Measurable, Attainable, Relevant and Time bound) strategies focus on the development of specific objectives which demands cautious and careful thinking. These objectives are important in achieving success for the company (Bord Bia Vantage, 2010). Specific This focuses on the specific objective to be attained by the company and for a particular target segment. In this case, IKEA can focus on imparting training to some of its workforce for designing furniture for its American and Asian customers. Measurable Measurable strategies include the formation of techniques which can be easily quantifiable and measured. The management of IKEA need to improve their sales in the European region within 2013 to 2016 as the furniture industry is expected to generate high amount of profitability during this tenure. Actionable This focuses on the fact that the company can attain their goals within a stipulated time frame and with the available resources. IKEA can provide detailed assessment of installation of the detachable furniture range in their official website. This should be implemented for the all the products offered by the company and must be completed within the end of 2013. Relevant This technique lays emphasis whether the formulated strategies are relevant and feasible or not. In this case, the pricing strategy needs to be revaluated by the management and a relevant providing strategy should be adopted for different products. The pricing of the product should be decided as per the cost of raw materials invested while manufacturing the product. Time Bound The time bound strategies focus on the objectives to be accomplished within the required time frame and the available resources. IKEA needs to develop a schedule which encompasses elements like conducting training programmes for suppliers and employees, promotional strategies and miscellaneous factors. The schedule should be divided into short and long term goals. This needs to be accomplished within the end of 2014. References Albaum, G., Duerr, E. and Strandskov, J., 2006. 5th ed. International marketing and export management. Noida: Pearson Education India. ASX, 2012. Woolworths Limited (Wow). [online] Available at: < http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=WOW > [Accessed 18 October 2013]. Armstrong, M., 2009. Armstrong's handbook of performance management. Berlin: Kogan Page. Berger, A., 2011. Operations management: IKEA. Berlin: GRIN Verlag. BFC, 2013. About the Furniture Industry. [online] Available at: < http://www.britishfurnitureconfederation.org.uk/about_furniture_industry.php > [Accessed 13 February 2013]. Bord Bia Vantage, 2010. Developing a Competitive Strategy. Retrieved from http://www.bordbiavantage.ie/marketingbusiness/marketing/competitivestrategy/pages/developingacompetitivestrategy.aspx. Chaffey, D., Chadwick, F.E., Mayer, R. and Johnston, K., 2008. 3rd ed. Internet marketing: strategy, implementation and practice. Noida: Pearson Education India. Euromonitor, 2012. Furniture and Homewares Stores in the United Kingdom. [online] Available at: < http://www.euromonitor.com/furniture-and-homewares-stores-in-the-united-kingdom/report > [Accessed 13 February 2013]. IKEA, 2013a. About IKEA. [online] Available at: [Accessed 17 October 2013]. IKEA, 2013b. People and Planet. [online] Available at: IKEA, 2013c. Stakeholder Dialogue. [online] Available at: IKEA, 2013d. Kitchen Offer. [online] Available at: < http://www.ikea.com/gb/en/ > Kandula, S. R., 2006. Performance management. New Delhi: Prentice Hall of India Pvt. Ltd. Kaplan, R.S., and Norton, D.P., 2006. Translating strategy into action: The Balanced Scorecard. Boston: Harvard Business Press. Kotler, P., 2008. 12th ed. Principles of marketing. Noida: Pearson Education India. Lamb, C.W., Hair, J.F. and McDaniel, C.D., 2011. 7th ed. Essentials of marketing. London: Cengage Learning. Ledderhos, M., 2003. IKEA - success and problems of a Swedish concept. Berlin: GRIN Verlag. Lee, N.R. and Kotler, P.R., 2009. Up and out of poverty: The social marketing solution. New Jersey: Pearson Prentice Hall. Marketing Research, 2012. Domestic Bedroom Furniture Market Report - UK 2012-2016 Analysis. [online] Available at: < http://www.marketresearch.com/AMA-Research-v175/Domestic-Bedroom-Furniture-UK-7042815/ > [Accessed 13 February 2013]. Neely, A., 2007. Business performance measurement: Unifying theory and integrating Practice. Cambridge: Cambridge University Press. Parsons, P., 2008. Ethics in public relations: A guide to best practice. Berlin: Kogan Page Publishers. Pulakos, E.D., 2009. Performance management: A new approach for driving business results. New Jersey: John Wiley & Sons. Rogers, M. and Peppers, D., 2010. Managing customer relationships: A strategic framework. New Jersey: John Wiley & Sons. Smither, J.W., and London, M., 2009. Performance management: putting research into action. New Jersey: John Wiley & Sons. Summers, J., and Hyman, J., 2005. Employee Participation and Company Performance [pdf] Available at: < http://www.jrf.org.uk/sites/files/jrf/1859352995.pdf > [Accessed 13 February 2013]. Walsh, P., Lok, P. and Jones, M., 2006. The measurement and management of strategic change - A guide to enterprise performance management. Frenchs Forest NSW: Pearson Education. Appendices Porter’s Five Forces Analysis Threat of new entrants: The economic slowdown in UK and the low income earned by the existing furniture companies have disrupted the marketing plans of the novice furniture companies entering into the UK furniture industry. The threat of the new entrants into the UK furniture industry is low. Bargaining power of buyers: The bedroom and kitchen furniture range has been witnessing a decrease in sale and demand. The UK furniture companies have been offering discounts and reducing the price to garner attention from potential customers. The existing furniture companies have no other alternative but to sell their furniture range at reduced prices to maintain stability in the market. The bargaining power of buyers is high in this industry. Bargaining power of suppliers: Suppliers form an integral part in the furniture industry because it is the accurate timing of the delivery of the raw materials that distinguishes from the competitors (Armstrong, 2009). The suppliers ensure the prompt delivery of the hardwood which requires abundant storage time before its processing. The suppliers in UK are attracted towards this industry due to its profitabilty and easy alliance with the producers. The bargaining power of suppiers is very high in this industry. Threat of substitutes: There are very limited usage alternatives in this industry. Thus, the threat of substitute is very low here. Intensity of rivalry among competitition: The intensity of competition is very high in the UK furniture market . The UK furniture industry comprises of leading global furniture companies like Collins and Hayes, Content, Duresta, IKEA amd Jensen. These are some of the leading furniture companies which have reduced their price range for retaining its market position and also yield decent amount of profitability. Value Proposition Model IKEA offers customers both quantitative and qualitative values. The quantitative values focus on the average price of the furniture range and other products hoarded in large numbers. The qualitative values focus on the quality of the products and services provided to the customers which are suitable to their individual environment requirements. Figure 2: Value Proposition Model Services: The company provides self service without any involvement of the customer’s service department. The furniture range are easy to assemble and detachable. The delivery service of the company is very prompt and efficient. Experience: Apart from unique and diversified product range, the company provides services like restaurant services, creche services for children etc within the store layout. Products: The furniture range manufactured by IKEA is unique, innovative and diversified ranging from a coffee table to a candle stand. Affordability: The prices of the products range offered to the customers are affordable and can be purchased even in easy instalments. Read More