Case Study Analysis of IKEA Canada

IKEA Canada is a subsidiary of the IDEA Company which is based in Sweden. It was formed in Sweden in 1943 by Ingvar Kamprad who was then seventeen of age. The company is a private owned company specialized in home appliances, furnishers and furniture. The corporate structure of IKEA Canada is based on the parent company structure in Sweden. The company is controlled by the parent company IKEA which is in turn managed by INGKA holding company, a company based in Netherlands. In turn, INGKA holding is controlled by the Dutch Stichting INGKA Foundation. INGKA Holding which is the parent company of all IKEA companies including IKEA Canada. IKEA has its branches spread worldwide especially in Europe, USA, Australia and Asia.

IKEA Canada

Like the parent Company, IKEA Canada practices a functional organizational structure whereby it is headed by a chief executive officer who is assisted in management by heads of various departments. These department managers form part of the company’s management team who spearhead various activities undertaken by the company. The departments that control the company’s activities are the production department, sales and marketing department, finance and accounting department, finance and accounting department and HR department.

In this structure, the company’s mission and strategy is met successfully. This is possible because the chief executive who is the custodian of the company’s core mission and strategies is always in touch with all operations (Schermerhorn, 2010). The control mechanisms of the company are also simplified through the involvement of various departments in related activities aimed at meeting the organization’s objectives. Responsibilities are also well defined within each company’s middle and senior levels of management.

Porter’s Five Forces

Michael porter’s five competitive forces model can be used to describe the industry within which this company operates. According to this model, there are five forces of competition facing companies within an industry. These are: potential entrants, suppliers, industry competition, rivalry among firms, Buyers and substitutes (Grundy, 2006). They can be represented by the figure below:

Roy (2009) says that the threats of new entrance in the industry depend on the size of barriers erected by existing firms in the industry and the threats expected by the existing firms from potential entrants. Some of the barriers that can be used by existing firms include easy access to resources such as human capital, economies of scale, political influence, etc. The potential entrants on the other hand can react by using such possibilities as financial resources, bargaining power and understanding the curve effect of mass production (Roy 2006). The new entrants which may threaten IKEA include Penney Company recently opened by Michael Penney at Whitby. Roy (2009) also asserts that existing firms may be faced with threats of technological changes and the limited realization of new options. Penney and Company uses a unique design which mixes old and new fabric so as to give a traditional shape a new look. As a result, new entrants cause pressure on capital, prices and costs within the industry.

Roy also recognizes bargaining power of suppliers as another fundamental component of the five force model. This occurs as a result of increased independence of suppliers in the industry. Suppliers often protect companies’ pricing and lobbying. To suppliers, the industry as a whole is less important than the customer. However, the products delivered by suppliers are very essential to the buyer. In this case, substitutes are limited. The existing suppliers will therefore increase prices and reduce product quality. In the case of IKEA, the suppliers of fabrics, wood for furniture and other raw materials often offer the company with raw materials in large quantities and therefore the company enjoys discounts and offer good prices for its customers as a result.

Another competitive force that can be used to analyze an industry is the bargaining power of buyers. Roy (2009) suggests that buyers have the power to influence pricing and demand high quality and performance in the industry. This results in different strategies set by the industry participants regarding to costs and profits. Therefore, with increased competition posed by new firms entering the furnishings industry has offered low prices due to buyer’s bargaining power. This has made IKEA to follow the same trend or lose customers. Roy (2009) also recognizes threat of substitutes as an important component of Michael porter’s forces of competition. Roy explains that the existence of substitute products in the market enables consumers to find alternatives. Substitutes in this case do not refer to similar products but different ones which can be used in place of the existing products. The determining factors in the trade of substitutes include buyer switching costs, relative price of substitutes, level of product differentiation, the ease of substitution and the amount of substitute products available in the industry. Substitute products offered by new companies such as Penney and Company make IKEA to reduce its prices so as not to lose its customers.

Finally, Roy holds that rivalry in the industry is also a determinant competitive force in industry analysis. According to him, the intensity of competitive rivalry in the market is the core element of competitiveness in any industry. The performance of rivals in the market will be determined by competitive advantage due to innovation, internet marketing competitions, marketing strategies and costs, strength of competitive strategies and flexibility and adaptation to change. In the case of IDEA, there has been competitive rivalry in the furniture and household furnishing in Canada. This has cause IKEA to cut its prices so as to gain a market share from the rising competition (Knell, 2005). This is evident from the release of IKEAS intentions to cut prices of its products such as furniture by 17% and these new prices published in the company’s 2006 catalogue.

External Analysis

Apart from Michael Porter’s five forces of competition, it is also important to analysis of the company’s external environment and its market share as well as its comparative position in the market compared to other companies in the same industry. In order to analyze the external environment, it is important to illustrate the economic indicators and trends in the household appliances industry. the table below provides the economic indicators of the industry from 2004 to 2008.

Economic Indicators 2004 2005 2006 2007 2008 % change

2007-2008

CAAGR
Apparent Domestic market 2,926 3,038 3,149 3,428 3,357 -2.1% 2.1%
Shipments 1,882 1,802 1,719 1,575 1,355 -14.0% -4.6%
GDP 549 575 558 504 432 -14.3% -4.6%
Manufacturing intensity ratio 29.2% 31.9% 32.5% 32.0% 31.9% -0.1% 0.7%
Total imports 2,303 2,493 2,668 2,851 2,919 2.4% 4.9%
Domestic exports 1,260 1,256 1,238 999 917 -8.2% -2.3%
Trade balance -1,043 -1,237 -1,430 -1853 -2,002 8.1% 10.3%
Import penetration 78.7% 82.1% 84.7% 83.2% 86.9% 3.8% 2.1%
Export orientation 66.9% 69.7% 72.0% 63.4% 67.7% 4.3% 0.2%
Domestic market share 21.3% 17.9% 15.3% 16.8% 13.1% -3.8% -2.1%
Labour productivity 66.0 74.3 81.4 74.9 72.9 -2.7 -2.1
Employment 8.3 7.7 6.9 6.7 5.9 -12% -2.6%

Table 1: House Appliances Manufacturing (NAICS 3352) – Major Economic Indicators (millions of Dollars CAD, employment in thousands) (Statistics Canada, 2008).

Definitions:

CAAGR – Compound Average Annual Growth Rate

Apparent Domestic Market = shipments + Imports – Exports

Import penetration = Imports/ADM

Export orientation = Exports/shipments

Domestic market share = (shipments – exports)/ADM

From the graph above, it is evident that the manufacturing intensity of household appliances in Canada rotated around 31.9% in 2008 despite the fall in GDP and shipments. There was a trade deficit in 2008 of 2,002. This was caused by the decrease in exports and increase in imports. Exports declined by about 8.25 while imports increased by 2.4%. Therefore, imports has led to apparent domestic growth rate, indicating that Canadians prefer imported household appliances. IKEA is one of such companies importing household appliances from Canada. IKEA has made the best use of this demand for imports to increase its market share in Canada through effective value propositions of its products.

IKEA’s market share has been increasing over the years, especially from 2009 when it started to build new stores in various parts of Canada. Its market share rose to almost 8%. The strength of IKEA Canada is that it offers the least prices and hence enjoys a great deal of customer loyalty which enables it to win a wider market share (Senior & Fleming, 2006). The company also enjoys economies of scale and increases its store capacity every year and builds new stores in new regions within Canada while selling large quantities. The company also offers after sales services such as delivery services and sells direct to customers so as to establish customer contact. However, the company faces competition from other companies. The following are some of IKEA Canada’s comparison with competitors:

Company Weaknesses Strengths
IKEA Ø  Rigid marketing structure Ø  offers the least prices

Ø  wider market share

Ø  enjoys economies of scale

Ø  offers after sales

CB2 Ø  Small geographical coverage with few stores

 

Ø  Sleek and colourful look

Ø  Wide selection of products; wider portfolio

Ø  Good internet marketing strategy

 

BoConcept Ø  Higher prices than competitors

Ø  High delivery costs

Ø  Offers customized options for customers

Ø  More tougher and masculine design

 

 

IKEA Canada’s financial performance can be analyzed as shown:

  • Sales increased by 6.9% in 2011 to £24.7 Billion according to IKEA group president Mikael Ohlsson
  • This led to increased net profits by 10.3% to £2.97 Billion. These profits were used to meet the following:
    • Prices fell by 4% in 2011
    • 7 new stores were built in the same year
    • 4,000 employees were employed in 2011
    • Sustainability projects e.g. replacement of traditional wooden pallet with new paper pallet recyclable design (CNW Telbec, 2012).
    • Investment in renewable energy sources in 2011
    • £65 million was contributed by IKEA towards donations to fund various projects to save humanity across the world. This is aimed at helping 100 million people by 2015.

Therefore, IKEA group Canada is one of the most successful companies in Canada’s household appliances industry. Canada’s preference for imported household appliances, enabling business environment and industry as well as IKEA’s strategies and policies have made the company to enjoy good profits which it uses for sustainability programmes, supporting customers through delivery programs and reduced prices as well as contributing towards social programs to help the less fortunate in the society. The overall sales and profits for IKEA are presented below. The sales include sales to Canada and forms part of the company’s profitability.

Year Sales (£) Profits (£)
2007 21.9 2.4
2008 21.5 2.1
2009 21.8 2.17
2010 23.5 2.69
2011 24.7 2.97

Table 3: IKEA profits and sale from 2007-2011

This table shows that there is an upward trend in the profitability of IKEA every year. This is mainly due to the increase in sales due to increased stores opening in countries such as Canada almost every year.

 

 

 

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