International Business

IKEA Business Model

IKEA

A brief history of IKEA

IKEA was founded in 1943 by Ingvar Kamprad as a mail-order sales company and only introduced

furniture to their sales five years later, in 1948. Möbel-IKÉA, their first store, opened in 1953 in

Lmhult, a town in Smland, southern Sweden.

In 1963, the first IKEA store outside Sweden opened in Norway, and it was closely followed by

its Denmark store in 1969. IKEA quickly spread to other parts of Europe throughout the following

decade, with showrooms opening in Switzerland (1973) and West Germany (1974).

By the end of the decade, IKEA had already established itself as a top player in the furniture

industry, opening stores and showrooms in different parts of the world. In 1973, the company
operated in Japan through a joint retailer under the name “IKEA Corner”. Unfortunately, due to

corporation problems, the Japanese business was shut down in 1983, only to return twenty years

later in 2003. In 1975, IKEA opened stores in Australia, Canada, and Hong Kong. And, in 1978,

Singapore and the Netherlands got their slice of the IKEA pie.

The 1980s brought with it further expansion for the company following the opening of stores in

France, Spain, Belgium, the United States, the United Kingdom, and Italy.

IKEA made its first appearance in Latin America in February 2010, opening its first branch in the

Dominican Republic. Its first store in India was opened in August 2018 in Hyderabad, the capital

of southern India’s Telangana state.

IKEA’s largest store, measuring 65,000 square meters, is located in the Philippines and was opened

in November 2021.

2 019 marked the launch of the company’s mobile app, IKEA Place. Making use of augmented

reality technology, the application allows users to see how products would look in their own

homes. This, combined with other features, has made the app extremely popular among

consumers, leading to the over 31.3 million downloads and 4.6-star average rating that it boasts.

Due to the COVID-19 pandemic, IKEA has had to cease publication of their popular annual catalog

after seventy years in print. The company has also been forced to shut down one of its stores in

Guiyang and is undergoing stock shortages and shipping problems. The prices of their products

have also increased.

In March 2022, IKEA paused all retail operations in its 17 Russian stores and its stores in 2022

that it would sell all four of its factories in Russia, close its offices, and reduce its Belarus as a

result of the Russian invasion of Ukraine. The company announced in June workforce.

Who Owns IKEA

IKEA is owned by Inter IKEA Holding B.V., a holding company under the private foundation

Interogo Foundation. Interogo Foundation is a self-owned entity, and there is no individual

beneficiary.

Inter IKEA Holding used to be under the ownership of IKEA’s founder, Ingvar Kamprad, but is

n ow run by the company’s CEO, Jon Abrahamson Ring.

I KEA’s Mission Statement

“To offer 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.”

How IKEA makes money

All IKEA stores (except one) operate under franchise agreements, and the company makes the

majority of its money from annual franchise fees and the wholesale of products to franchisees.

IKEA combines this franchise system with a direct producer-to-consumer system to generate I n

come.

Franchise fees

In exchange for access to the IKEA trademarks, authorization to market and sell the IKEA p

product range as well as managing IKEA stores and sales channels, IKEA franchisees pay Inter I

KEA Group an annual fee of 3% of their net sales.

Sale of goods

IKEA franchisees must purchase their store’s inventory from the company’s product supplier.

The wholesale of IKEA products to franchisees generated $25.46 billion in revenue in 2021.

Sale of catalogs and other materials

The sale of the IKEA catalog and other materials created for IKEA franchisees is marked under

what the company refers to as “other income”. This makes up the least percentage of the

company’s income.

I KEA’s Customer Segments

IKEA’s customer segment is single customer-oriented. IKEA targets young middle-class

individuals who are cost-conscious and in need of stylish, quality furniture. The company provides

for them by offering such products at a lower price than competitors.

`I KEA’s Value Proposition

IKEA’s value proposition consists of:

• Ready-to-assemble furniture system: IKEA offers this DIY style of furniture to

customers, which not only attracts them to its easy nature of transportation and assembly,

but also to the satisfaction gained from building something from the ground up;

Use of renewable resources: The use of renewable resources attracts customers to the eco-

friendly side of the company, as well as creates a healthy balance between business and the e

environment

I KEA’s Channels

I KEA’s channels consist of:

• Physical stores

• website & Mobile app

• Catalog

I KEA’s Customer Relationships

I KEA’s customer relationships consist of:

• Customer support

• Social media

I KEA’s Revenue Streams

I KEA’s revenue streams consist of:

• Franchise fee

• Wholesale of goods

• Sale of catalogs and materials

I KEA’s Key Resources

IKEA’s key resource involves around 1,400 suppliers from over 60 countries. These suppliers

provide IKEA with furniture designs, wood, distribution facilities, and other necessities the c

company requires to function.

• Suppliers Network

• Brand

• Store’s

IKEA’s Key Activities

I KEA’s key activities consist of:

• Designing of furniture

• Manufacturing of furniture

• Sale of furniture

I KEA’s Key Partners

I KEA’s key partners consist of:

• Designers

• Carpenters

• Manufacturers
 • Transporters

• Delivery companies

IKEA’s Cost Structure

IKEA’s cost structure consists of:

• Manufacturing of designs

• Manufacturing of products

• Distribution

IKEA’s Competitors
Walmart: Walmart is famous for providing a wide range of quality products. One such product is

home furnishings. As a popular retail brand, their furniture is not only of good quality, but also

easily available and affordable;

Amazon: Amazon provides its services online and offers a wide range of furniture under the name

“Amazon Home”. Their provision of easy installation and free scheduled delivery services makes

them a top IKEA competitor;

Wayfair: Wayfair is an American e-commerce company that specializes in the sale of furniture

and home accessories online. Their unique user interface as well as their provision of free shipping

encourage customers to choose their products over IKEA’s;

Tesco: A United Kingdom-based company, Tesco Home and Furniture, offers attractive discounts

and services to customers;

Pepper fry: Pepper fry is an online furniture shop in India that provides home decor, furniture, and

other homeware at affordable prices. Their products, prices, and the wide-reach the company has

in their home country make them one of IKEA’s competitors;

IKEA’s SWOT Analysis

Here’s a breakdown of IKEA’s SWOT analysis:

IKEA’s Strengths

• Customer knowledge: IKEA understands its target market and creates products that suit

customers. All products are designed in a way that makes them easy to transport and

assemble and offers a positive shopping experience for customers;

• Use of innovations to drive down costs: IKEA boasts of its low prices, and the company

is constantly finding new ways to reduce the cost of products while simultaneously

keeping them at high quality;

 • Supply chain integration: IKEA’s supply chain is structured in such a way that costs are

reduced during supply;

• Brand reputation and market presence: IKEA has succeeded in establishing itself as a

furniture retailer giant, and the company’s worldwide presence and reputation draw

customers to it;

• Diversified product portfolio: Aside from providing furniture, IKEA also runs

restaurants, houses, and apartments. The company’s diversified portfolio saves it from

the changing furniture market forces that affect competitors.

IKEA’s Weaknesses

• Negative publicity: The company has been widely criticized for a slew of reasons,

ranging from price discrimination to illegal wood sourcing practices;

• Decreasing quality: Unable to find a way to maintain quality with the increasing price

of materials, IKEA has taken to using cheaper alternatives of less quality, which leaves

customers dissatisfied;

• Standard products: IKEA deals with standard products, so customers in need of

customized goods have no place shopping with the company, leaving competitors to

satisfy that need for potential customers.

IKEA’s Opportunities
 • New markets in developing economies: Retail markets have the potential for growth

and expansion in developing economies that have so far gone without such businesses.

IKEA will benefit from spreading its reach to developing economies;

• Expansion into the growing grocery market: IKEA has already taken the initiative of

adding restaurants to its stores, and the company could profit greatly from going into

the grocery business.

IKEA’s Threats

• Intensifying competition: IKEA’s competitors are quickly catching up with the

company as they offer virtually the same products at the same or even cheaper rates;

• Growth of consumer income: IKEA is all about offering low-quality products, which

are only attractive to people trying to cut costs. The growing average income of

consumers means they will go for more expensive, luxurious products, thereby leaving

the company behind.

Porters 5 Forces

Bargaining power of suppliers: This force is weak because suppliers of IKEA are constantly

competing to maintain their relationship with the global giant who can easily access resources and

capabilities in the form of potential suppliers, seeking opportunity is to form affiliation with IKEA.

However, IKEA values to create the strategic relationships with suppliers, to empower its suppliers

in certain extent excluding their bargaining power. Therefore, this weak industrial force in case of

IKEA actually sanctions the corporation to optimize resources and maximize its profits.

Bargaining power of buyers: This force is strengthening by factors such as intense competition,

and wide choice of substitute products. Nevertheless, the threat of substitute products is weak
because of IKEA unbeatable expertise in manufacturing low- cost, good-quality flat pack furniture.

On the other hand, buyer power is also controlled by IKEA growth strategy of opening its stores

Rivalry among existing competitors: IIKEA operates in an extremely competitive industry, defined

by many other low- priced, good quality furniture manufacturers namely Gasiform, Euromarket

Designs Inc., Argos and so forth. Given the attractiveness of the of DIY (Do-it-yourself) furniture

industry, IKEA continues to compete and grow in market.

Threats of substitutes: Threat of substitutes is weak force here. IKEA specializes in manufacturing

functional, low-cost, good-quality furniture. Even though customer retention rate remains best

with IKEA and Argos, nonetheless combination of IKEA characteristics remains un-matched by

its competitors. IKEA brand perception ‘trendy’ also surpass Argos ‘affordability’ and John Lewis

‘quality’ (Mintel Oxygen,2010), due to unmatched product and service functionality

Threat of new entrants: This force is considered weak and the probability of development of new

competition for the furniture retailer is insubstantial, due to market saturation, high amount of

capital investment, and skilled labour required to become a global giant in discounted-DIY-

furniture manufacturing sector. Other factors such as suffering of pricy-labelled household items

and furniture considered as a low spending priority (Mintel Oxygen,2010) due to recessed

economies, further weakens this industrial force.

PESTLE ANALYSIS

External

Political – The Company operates in more than 41 countries; therefore, the company must abide

by the regulations of each. Some countries may have similar influences on the business but that

not always the case. Political stability within a business is particularly important as without it, the
economic stability is impossible. This means that the organization would lose profits in one

location over another, this is dependent on who is in charge and what role they have within the

business.

Furthermore, unfriendly government can make importing and exporting foreign products (goods)

inconvenient for the business and make it a hassle. IKEA is dependent on relationships with the

government. Good relationships will make the company remain stable therefore the revenue of the

business is secure and is not at stake. Asian countries, such as; India and China have become more

open to international companies, this creates an opportunity for the organization to move into the

Asian markets and expand their business.

Economical – Ikea is influenced by the worldwide economy, like every other organization. Some

big companies are still suffering from the 2007 recession. Thousands of people lost their jobs.

This responded with consumers making conscious buying decisions. Items which were bought

were based on the need rather than luxury.

As IKEA is a company which sells furniture and other accessories which are not essential or

mandatory. Which means that at the time many people did not spend money in their store. This

put the company in crisis as there weren’t as many purchases, therefore the organization had to get

rid of employees to pay the bills and other necessary financial spending. To get purchases and be

able to run their business, IKEA priced their wares conservatively. From then onwards the prices

of the furniture became cheaper and made the company the most popular globally. The inexpensive

furnishing has been continued ever since.

On the business side, IKEA is influenced by a strong and weak dollar. If the stronger the dollar

gets, the more US brands can lose money, but now the economy has strengthened – while still

recovering. This made more jobs for people and sales are rising again.
Social – This is one of the rules businesses should follow. This will allow the organization to suit

the needs of the customers and will avoid offending any social values. IKEA is one the companies

that keep this rule close, every product is affected by. However, the following effort is not always

well-received.

As an example, IKEA removed a same-sex couple from a Russian magazine. This thing was

applied because homosexuality is still considered shameful and dishonorable in the country.

Therefore, this was done to suit the general thinking and interpretations of the Russian culture.

Whereas, in other countries homosexuality is more widely accepted and appeared to be a problem

within IKEA’s business and reputation. Removing the couple from the magazine put IKEA in a

bad position and lowered their reputation from the hate from the citizens. Another example, the

organization removed women from a Saudi Arabian catalogue, which had the same, negative

impact on IKEA’s business, and once again put the company in a hot seat.

Ikea monitors what is appropriate for a particular location, based on the countries’ culture and

society. If the organization would have printed the same magazine worldwide, it most likely faces

a bigger retaliation and backlash from each country. Which would end up with the business losing

profits. Which is the main aim and objective of IKEA, like any other big company.

One of the negatives on the company is the amount of one-star reviews on their products and the

business itself. One of the biggest customer service review websites (Trust Pilot) shows that the

company’s rating is very low and is even below 2/10 stars. This could make the company lose

customers therefore less profits and turnovers. The reviews mostly consist of products not being

received, appalling customer service, or when products are delayed. Some of these problems could

be the delivery driver or the delivering company itself which is used by IKEA but as IKEA’s name

is on the package received by the customer, they’ll always be the one receiving the bad press
Technological – In real time, internet is one the main things in the world and most shopping is

done online. IKEA still to this day offers paper catalogues as well as an electronic one. This helps

the business to keep people who are computer illiterate updated with offers, prices and new

products. While also having a web copy of the catalogue, customers can access it at any time.

Seeing live offers and other deals. Also any updates could be emailed to registered users of the

website so customers are constantly up to date with new products and other important notices.

Having a website for IKEA is highly important as most of the customers will be s hopping online

and would want to view the company on the internet, this will allow the shareholders to see the

main factors of the company, the reviews on purchases, description and any other important

information. People are able to view the closest IKEA store to them by allowing locations or typing

their address. Their website has many useful factors, such as; searing products by a certain room

(bathroom, bedroom, kitchen, etc...). Other searching filters could also be applied, an example

would be, buying products below £10, which is achieved by changing the product’s price range.

Online, IKEA aims to provide the best experience of viewing products for their customers. If

people are unable to attend to their store, they can still experience similar observation online.

Moreover, IKEA puts in effort to get the ideal customer satisfaction as it gains many benefits if

the people are pleased with their purchases and the product quality. This leads to new positive

reviews, customers may refer the store to other people, and finally brand loyalty, which is one of

the most important factors in an organization. The company puts in a big amount of effort into

knowing their consumer base which is why IKEA is the biggest furnishing company to this day.

Legal – Like all businesses, IKEA is required to follow laws and regulations of every government.

As IKEA is a worldwide company which trades globally it is essential to obey the rules within

each, particular country, otherwise it could possibly cause problems for the organization which

can end up with fines, detrainment, and restrictions on the business or even banned from exporting
or importing products to the country. Also, as IKEA is a physical store, staying-up-to-date with

labour laws is essential.

Example, IKEA was in the news because of poor product quality. (TheInteriorDesignAdvocate)

Furniture and products provided by IKEA have fallen or tipped over, this ended up injuring people

or children and has even ended up in fatal accidents. These situations ensured the organization to

carefully check and ensure that their products are totally safe. Otherwise, this may have a massive

negative impact on their reputation which they may not recover from and also monetarily, which

are affected by lawsuits.

Environmental – IKEA is an eco-friendly company, which invests in it.

(The Guardian) The organization has given over $1 billion towards renewable energy in poorer

nations. IKEA’s aim is to have fully renewable energy in their store. This could be completed by

investing in solar and wind panels. Another objective of IKEA is to use more sustainable sources

for materials such as wood and cotton.

Value chain analysis

Value chain analysis, a concept introduced by Porter in 1985 categorizes the activities of a firm as

primary activities and support activities. Primary activities are essential elements to run a business

where as support activities define how businesses obtain competitive advantage in the market.

Presented below is the value chain analysis of IKEA

Inbound logistics, IKEA possesses and develops a well-structured inbound logistics managing

10,000 products manufactured by 2000 suppliers, distributed and transported to the IKEA stores

from 27 distribution centers. The logistics function accounts for 25% jobs of each store
Operations The global giant operates in more than 38 countries. Its operations comprise of

208company-owned stores across, whereas remaining stores are franchised. The manufacturing is

usually outsourced, which leaves business focus on other core activities

Outbound logistics The customers transport the final product enabling the firm to further add

value to its products by keeping their final cost down.

Marketing and sales The target market is well defined, comprised of people with low-income

level, students, and young couples starting their family. IKEA does not rely heavily on advertising,

rather its stores are advertising units in themselves providing family friendly environment, where

customers can actually see and check the products before making any purchase.

Services The business strategy of providing limited customer service means reducing cost of

manufacturing, resulting in low-priced products means that most of the information is provided to

the customer through catalogues and displays. Low number of sales staff within stores also means

cost saving in operations and competitive prices

Infrastructure The IKEA group controlled by INGKA Holding B.V, is a hierarchical

organizational structure, operating through large-sized stores.

Human resources management IKEA demonstrates high level of commitment to its HR

practices, providing consistent investments in staff training and development.

Technology IKEA invests regularly in its research and development activities that are carried outin

Sweden. Eager to use of information technology within business processes, the Corporation makes

most use of technology in order to provide low price quality products and consumer experience.
Procurement

The retail giant establishes long term relationship with its suppliers to investing in their education

training and development. Working close with communities where it operates IKEA facilitates

local suppliers

MODES OF TRADE

The Swedish company IKEA founded with the aim of rendering ready to assemble furniture and

appliance to the customers is global, recognized for its low prices and unique form of furniture.

There are five major kinds of international entry mode, such as:

1) Exporting

2) Licensing

3) Strategic alliances

4) Acquisition

5) Newly owned subsidiary.

The choice of IKEA for the entry internationally was a new wholly-owned subsidiary because the

company has a privately-owned outlet. When the company enters in a new nation, firstly it builds

its own retail outlet and implements the international strategy. Because IKEA was using the low

priced strategy and sell the product, the competitor of IKEA target the company and suppliers stop

giving the raw material for making the product. Therefore, the company changed its strategy for

entering the international market by opening its outlet.

A new wholly-owned outlet is also recognized as a Greenfield enterprise, where a company invests

directly in another nation or country by developing its personal outlet.

There is various advantage, and disadvantage of a new wholly-owned outlet such as:

Advantage:

• It allows maximum control

• Has the highest potential return

Disadvantages:

• This outlet is costly

• Includes the complicated processes

• Bears high uncertainty

The company is pursuing the strategy of a wholly-owned subsidiary due to the need for global

integration is high. In doing so, IKEA can secure a greater presence in the international market.