Founded in 1943 by Ingvar Kamprad, IKEA generated the sales of 23.1 billion Euros in 2010 through its operations in more than 38 different countries with 27 distribution centres. The IKEA Group has 280 stores in 26 countries and the remaining of the stores are run by franchisees (Berger, 2011).
The business concept of IKEA involves selling high volume of mostly furniture products in low prices. Moreover, “with an aim of lowering prices across its entire offering by an average of 2% to 3% each year, its signature feature is the flat packed product that customers assemble at home, thus reducing transportation costs” (Profile:IKEA, 2011, online)
The vision of the company reflects this strategy in an effective manner. “The IKEA vision is to create a better everyday life for many people. We make this possible 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” (Inter Ikea Systems B.V, 2011, online).
As one of the leading retailers in a global scale IKEA is engaged in systematic environmental monitoring and analysis which serves to be an effective source of information for decision-making. Internal benchmarking is one of the main methods of environmental monitoring and analysis engaged in by IKEA. Benchmarking is “method of improving business performance by learning from other companies how to do things better in order to be the ‘best in the class’”(Janakiraman & Gopal, 2007, p.181).
The Internal benchmarking practice engaged in by IKEA involves comparing different divisions and subsidiaries of the company and thus establishing the best practice and aspiring to it for the remaining divisions and subsidiaries of the company.
Moreover, IKEA is engaged in extensive market research both in global and local levels that is conducted by marketers employed by the company, as well as, independent market research companies.
- IKEA Financial Analysis
- Complexity of the Market Environment and the Key Business Challenges for IKEA
- Recommendations for IKEA
- A Rationalised Improvement Plan for IKEA
- Current Situation within IKEA Affecting the Implementation of Rationalised Improvement Plan
- Alternative Options for IKEA
- Recommendations for IKEA to Address Major Challenges
- Factors that Might Influence Implementation of Recommendations
IKEA Financial Analysis
During the financial year of 2009 15 new IKEA stores have been opened and the total revenue of the group has grown to 21.8 billion EURO (1.4% growth). During the same time operating income has increased by 4.4% to reach 2.8 billion EURO (Welcome Inside, 2010, online). Although it is a modest growth for IKEA considering its size and resources, it has to be noted that during the same period of time high number of business of various sizes along a wide range of industries have experienced losses caused by the global financial crisis of 2007-2010 that reached its peak during the same financial year.
There was a fluctuation of net income between 10% and 13% of revenue during the past ten years and fixed assets have increased by 527 million EURO to reach 16.8 billion EURO in total caused by net investments in property and investment (Welcome Inside, 2011, online).
Moreover, “IKEA generates 79% of its sales in 2010 in Europe. 15% of sales IKEA generated in North America and only 6% came from Asia/Australia. The main three financial principles of IKEA are financial stability, independence and flexibility” (Berger, 2011, p.2)
Complexity of the Market Environment and the Key Business Challenges for IKEA
IKEA has an effective business strategy that has been effectively implemented and this has ensured global leadership position for the company. This strategy consists of finding an effective combination of quality and prices for the products and thus appealing to a wide range of customers who mainly represent middle class in society.
However, the current position of IKEA should not be taken for granted and there are specific set of challenges that need to be addressed by the company in an effective manner in order to remain competitive in the future and achieve long-term growth.
The key business challenges faced by IKEA can be summarised into the following four points:
- Keeping costs down. One of the major challenges faced by IKEA relates to the necessity of keeping costs down on the face of increasing prices of raw materials. Raw materials used by IKEA contractors for the majority products of the company involve wood and metal. The prices for both of these materials are increasing in global level and this fact causes difficulties for the company in terms of achieving its objective of lowering the prices by 2 to 3% annually.
- Addressing cross-cultural differences in international markets. IKEA operates in more than 38 countries on the basis of both; company operated stores, as well as, franchising. The population in each of these counties have their unique culture and cultural differences find their reflection on various aspects of life including perceptions of value propositions offered by companies, the level reception and interpretation of various marketing materials and consumer preferences (Pride and Ferrell, 2008). This situation presents challenges for IKEA in terms of adapting various aspects of the business to local markets taking into account the cultural differences associated with each individual market.
- Dealing with competition from China and India. Producers from new emerging superpowers, China and India present substantial threat to leading multinational businesses from US and Europe due to their significant competitive advantages in the forms of cheaper access to resources (Mullins, 2005). Therefore, there is a risk for IKEA to lose the attractiveness of its value promise due to cheaper discounted furniture being offered to the marketplace by Chinese and Indian companies.
- Achieving flexibility for the business. IKEA has been growing in size for several decades as a result of aggressive international market expansion strategy. While the massive size of the company offers a number of substantial advantages such as economies of scale it has serious limitations as well. Namely, IKEAs massive size may negatively affect the level of flexibility of the company which is essential in current constantly changing marketplace. In other words, IKEA is faced with a challenge of remaining flexile and adaptable to rapidly changing marketplace, amid its massive size that slows down the speed of implementation of the proposed changes.
Recommendations for IKEA
The current leadership and management practices in IKEA are promoted by the corporate culture that has been laid by its founder Ingvar Kamprad. Rothacher (2004) informs Ingvar Kamprad’s leadership style to be a combination of charismatic and autocratic leadership styles and also states that the founder of IKEA was notorious for micro-management.
Moreover, according to Martins (2010, online) the quote “if there is such a thing as good leadership, it is to give a good example. I have to do so for all the IKEA employees” belongs to Ingvar Rothacher, thus it can be stated that IKEA founder has practiced exemplary leadership as well.
There have been some modifications in corporate culture and management style since Ingvar Kamprad retired from the leadership position in 1986, nevertheless the impacts of his autocratic leadership style have lasted until present days and effects current leadership and management practices in IKEA. This statement can be justified by the fact that Ingvar Kamprad still serves as a senior adviser to IKEA and wields great influence to the company managers in various levels (Berger, 2011).
While autocratic management style can still be highly effective in present days, for instance, in the case of Steve Jobs of Apple Corporation, generally, this style of management is widely criticised by business researchers and practitioners for a number of serious shortcomings. Specifically, the increased level of criticism associated with autocratic management style relates to low employee motivation and morale, high level of dependence on the competency of one or few people, and the lack of innovation.
IKEA has a great potential in present day to increase its effectiveness and obtain competitive advantages in various levels thorough changing the management style practiced in the company from autocratic to democratic.
“As the name implies, a democratic management style gives employees a much greater say in decision making. Rather than making unilateral decisions and expecting employees to carry them out, the democratic entrepreneur encourages employees to get involved in the process” (Kishel and Kishel, 2005, p.158).
Embracing the democratic management style will offer IKEA numerous advantages such as highly motivated workforce, valuable insights to existing issues and innovative ideas for improving various business processes.
A Rationalised Improvement Plan for IKEA
As it has been shown above, the rationalised improvement plan for IKEA directly relates to the change of leadership and management style from autocratic to democratic. Such a dramatic and fundamental change within IKEA needs to be implemented in an effective manner in order to eliminate the chances of negative implications of the change on various business processes.
Burke-Litwin model of organisational change can be employed in order to ensure successful implementation of proposed changes in IKEA. “According to the Burke-Litwin model of change, planned change flows from top (external environment) to bottom (performance). The arrows that point downwards are given more casual weight. Thus, with respect to organisational change, external environment has the greatest impact. Inside the organisation, the transformational factors have the greatest impact” (Sharma, 2006, p.65)
Source: De Smet (1998, online)
Ingols et al (2011) divide the variables within Burke-Litwin model of change into two categories: transformational factors and transactional factors. Accordingly, environment, leadership, mission and strategy and culture are considered to be transformational factors, whereas, all the remaining variables are transactional factors. “Transformational factors “entail significantly new behaviour by organisational members and major alterations to other variables in the model. However, when fundamental reorientation and re-creation are a necessity, they may represent the only viable approach to organisational rejuvenation and long-term success” (Ingols et al, 2011, p.93).
According to the model the proposed changes in IKEA should be promoted from the top to the bottom. Specifically, strategic level management in general and IKEA Group President and CEO Mr. Mikael Ohlsson in particular should promote the new democratic style of management to be integrated into the corporate culture. This can be achieved through appointing a change agent, ideally Mr. Ohlsson to lead by example and to demonstrate the advantages of democratic management style in a practical manner.
Moreover, in order to increase the level of effectiveness of change management the proposed democratic style management should be integrated into mission statement and strategic plans of IKEA, the company’s organisational structure, as well as, its systems and policies.
In this way the work climate within IKEA can be improved in a desired manner and individual needs and values can be altered to appreciate and embrace the principles of democratic management system.
Current Situation within IKEA Affecting the Implementation of Rationalised Improvement Plan
The plan proposed above that mainly involves changing autocratic management style to democratic management offers the potential of dramatically improving IKEA’s prospects. However, an in-depth analysis of the current situation within IKEA reveals several areas of weaknesses associated with the proposed plan.
Firstly, Mr. Ingvar Kamprad still has a major influence on company employees in his capacity of the founder of IKEA in his position of senior advisor to the CEO. This fact might defer the proposed changes from taking place because Ingvar Kamprad might see these changes unnecessary and even violating the basic principles of leadership that has ensured the achievement of the current status for IKEA.
Secondly, the current team of senior level management of IKEA – Mr. Mikael Ohlsson President and CEO; Mr. Soren Hansen, Vice President and Chief Financial Officer; Mr. Goran Grosskopf, Chairman of the INGKA are performing well in their current positions according to the financial performances of IKEA. As such, the proposed plan of changing the management style in IKEA might be perceived as unnecessary by them as well. In other words, the current team of senior level management in IKEA may fail to appreciate the advantages of democratic management style, being deceived by their current high level of performance and taking current leadership position of the company for granted.
Alternative Options for IKEA
Alternative approaches need to be developed for IKEA that would address the above mentioned weaknesses of the proposed plan. The most appropriate alternative approaches available for IKEA can be summarised into the following points:
- Promoting and implementing inspirational management style. Because it has been revealed that the implantation of democratic management style in IKEA might prove to be highly challenging due to above specified reasons, the most suitable ‘second best’ alternative would be the promotion and implementation of inspirational management style. The advantages of inspirational management style include high level of performance from the workforce through motivating them with an effective combination of tangible and intangible motivational tools. The implementation of inspirational management style is going to face less opposition within various management ranks in IKEA compared to the implementation of democratic management style because the latter style is associated with less changes and disadvantages compared to the former.
- Devising a plan for implementing democratic management style over a longer period of time. IKEA founder Ingvar Kamprad and the strategic level management team might be more receptive to the idea of implementing democratic management style over longer period of time through devising relevant programs and initiatives because implementing the proposed changes in such a manner would not involve dramatic changes in a short period of time, and thus may not contradict to established principles and norms within the company.
Recommendations for IKEA to Address Major Challenges
The findings of this report can be used in order to formulate recommendations for IKEA in order to achieve its main objective of profit maximisation in a more effective manner. These recommendations can be summarised into the following points:
Firstly, focusing on using recycled materials. The awareness of population who are the current and potential customers of IKEA about various environmental issues is increasing due to the activities of various non-government organisations and wide coverage of these issues by the media. One of the most discussed environmental issues in a global scale relates to deforestation in various regions and its negative impacts for the future of the nature and humanity.
As a result, the demand for the various types of products such as paper and plastic bags made of recycled materials has dramatically increased. This change in consumer preferences presents good opportunity to IKEA to promote research and development initiatives among its suppliers with the aims of introducing furniture and other types of products in the marketplace that are made of recycled wood and other recycled materials.
Having followed this advantage IKEA would possess the first mover advantages in the market of recycled furniture and in this was the company would be able to further strengthen its position in the marketplace.
Secondly, engaging in product differentiation. There is an opportunity for IKEA to dramatically increase its revenues through engaging in product differentiation. IKEA is recommended to follow the strategies of Argos and Tesco where the offerings of products and services range from international calling cards to various types of insurances and loans and accordingly they have greater potential for increased amount of revenues.
IKEA already has a firmly established effective strategy and infrastructure and these can be used in order to increase the product ranges of the company in an effective manner.
Thirdly, engaging in market expansion in an international level. IKEA is also recommended to increase its revenues through engagement in market expansion strategy in an international level. Specifically, the company is recommended to enhance the level of its presence in Eastern European and Central Asian region. Markets in countries where IKEA is currently operating has become saturated, and from this perspective international market expansion would make a good business sense for IKEA.
Factors that Might Influence Implementation of Recommendations
Specific factors may effect the implementation of recommendations formulated above. Some of the most important factors of this nature are described below.
- Possible global financial crisis. In the case of another global financial crisis some of the above formulated recommendations that relate to product differentiation and international market expansion would have to be deferred for the later period of time. This is because financial crises are usually associated with decline in sales for most types of products and services and uncertainty in the marketplace and IKEA management would consider it inappropriate to invest in product differentiation and market expansion in such an environment.
- Regulations in Eastern European and Central Asian countries. Rules and regulations might be introduced by the some governments of Eastern European or Central Asian countries that can make it highly challenging or even impossible for IKEA to launch operations in within those countries. Such activities by the governments can be initiated for the reasons of protecting local businesses.
- Berger, A, 2011, Operations Management: IKEA, Grin Verla
- Inter IKEA Systems B.V., 2011, Available at: http://franchisor.ikea.com, Accessed July 1, 2011
- Janakiraman, B & Gopal, RK, 2007, Total Quality Management: Texts and Cases, John Wiley & Sons
- Kishel, GF & Kishel, PG, 2005, How to Start, Run, and Stay in Business: The Nuts-and-Bolts Guide to Turning Your Business Dream Into a Reality, 4th edition, John Wiley & Sons
- Martins, T, 2010, Ingvar Kamprad Quotes: Business Leadership Advice from IKEA’s Founder, Available at: http://www.strategicbusinessteam.com/famous-small-business-quotes/famous-business-and-leadership-quotes-from-ingvar-kamprad-founder-of-ikea/ Accessed July 10, 2011
- Mullins, LJ, 2005, Management and Organisational Behaviour, Prentice Hall
- Pride, WM & Ferrell, OC, 2008, Foundations of Marketing, Cengage Learning
- Profile: IKEA, 2011, Innovation Leaders, Available at: http://fp05-527.web.dircon.net/ikea_company_profile.htmL Accessed, July 1, 2011
- Rothacher, A, 2004, Corporate Cultures and Global Brands, World Scientific
- Welcome Inside, 2010, IKEA Group, Available at: http://www.ikea.com/ms/en_CN/about_ikea/press/press_releases/Welcome_inside_2010.pdf Accessed July 10, 2011