Reference no: EM133484806

Problem

What does it mean for one of the world's most recognizable retail brands to go digital? For almost 80 years, IKEA has been in the business of selling its distinct brand of home goods to people in large, big box stores. When it comes to IKEA's target audience, the brand has a broad demographic appeal, but it generally focuses on middle-class consumers who are budget-conscious and looking for affordable yet stylish home furnishings.

In particular, IKEA's target audience includes young adults and families who are setting up their first home, as well as those who are looking to upgrade or refresh their existing living spaces. The company's emphasis on functionality and practicality also makes it a popular choice for college students, renters, and people who live in smaller homes or apartments. In order to fulfill this business model, IKEA had to make a supply chain that could undercut the competitor's price, while still fulfilling their quality promise to their consumers. IKEA's stores became massive warehouses, where customers selected furniture from showrooms and picked up the final product from the actual warehouse shelves, allowing IKEA to cut down on its handling and transportation costs. Combined warehousing and retail space also meant that the company did not have to maintain an excessive amount of real estate and bear the associated costs.

IKEA has been known to appeal to environmentally conscious consumers, as the company emphasizes sustainability in its products and operations. By offering affordable, eco-friendly options, IKEA has built a loyal following among those who are passionate about reducing their carbon footprint and making responsible choices.

IKEA is likely the world's largest single consumer of wood and owns about 600,000 acres of forests globally. It uses one percent of the world's wood supply to create its furniture. IKEA has said owning and operating forests sustainably would help it secure long-term access to sustainably managed wood at affordable prices.

Though consumers in the home improvement category have globally been slow to migrate online, the threat of omnichannel retail (experiential, physical, new communication platforms, new payment models) and changing consumer behavior (as urbanization increases, and traditional car ownership models change, more consumers prefer to buy online, rather than visit the outskirts where IKEA sites its shops to keep rentals low). At the same time, competition from online players like Amazon posed the same challenges to IKEA that other traditional retailers faced worldwide. Like other iconic traditional brick and mortar retailers, IKEA, has been slow to move online. It only started selling online in 2009. The mandate the company has given itself is to transform itself into a multi-channel brand. No more business as usual, the company wants to 'change everything almost' to reinvent itself as a tech company. A key digital goal for IKEA is to avoid erosion of business in Europe, its home market, where customers tend to be younger with preferences for online shopping. It also hopes for increased penetration of the North American market which is already mature in digitalization. Asia is also a key market where the digital economy is growing rapidly and challenges from home-grown players will be significant. In Asia, IKEA is taking advantage of the ecommerce and payment facilitating aspects of WeChat to run limited "IKEA Home Flash Store" sales. Offering five home inspiration collections on a limited basis, customers can complete their purchase in WeChat itself or through the IKEA website. They can then have the products delivered to their home or another address of their choosing (such as to a friend using the gifting options).

IKEA has expanded its digital marketing efforts to connect with its target audience especially after ending the era of printed-on-paper IKEA catalogs. As social media platforms like Instagram and Pinterest are the new publishing presses and magazine sellers, the Swedish furniture giant IKEA chooses to focus on using them. IKEA has a strong presence where it shares images of its products and offers design inspiration to followers.

The first step in their digitalization plan is to cease the expansion of traditional IKEA brick and mortar stores. The new store completed in 2020 in Karlsruhe, Germany is the last of the large-scale IKEA superstores, and the company will instead be focusing on smaller locations which will serve as showrooms from which products can be viewed before completing the order online.

The company is currently testing this concept with showrooms and pop-up stores in Madrid. The first of these small-scale stores opened in 2019 in New York with 30 more planned for over the next few years. With showrooming (the consumer practice of viewing products in a shop and then purchasing them online) becoming ever more commonplace, this could provide one way of embracing the concept rather than trying to fight it.

For IKEA, expansion at this time makes particular sense. Ecommerce sales grew 73% in 2021 at the retailer amid the pandemic boom. Last year, IKEA announced plans to invest $3 billion in a bid to turn stores into delivery hubs across the U.S. and Europe. The latest U.S. expansion will see new stores that have the "dual role" come online.

The shift taking place at big box stores changes the competitive landscape in retail. For years, Amazon took more and more share in retail and built a bigger lead in ecommerce. This left other retailers playing catch up, and Amazon dictating more of the terms of engagement as it built out its own fulfillment network, rose to dominate categories like electronics and signed up more customers for the shopping machine that is Prime. But now that the big box retailers have worked through their experimentation periods and leveled up their digital capabilities, they can build a playing field on which they can make their own rules.

This market is not determined by a battle between ecommerce and retail, or even the ability to immediately build an ecommerce operation that is directly competitive with Amazon. Given the exorbitant cost of building a fulfillment network, it's unlikely the latter would be sustainable, even for the massive businesses under consideration here. Rather, retailers can build from the place where their strengths already lie: The store. From this starting point, they are still in position to realize some of the upside of Amazon's model without having to build a new operational structure. The store-based approach doesn't close off options such as turning a logistics network into a revenue-generating business of its own. Plus, it's an area where Amazon has yet to crack the code, despite experiments in grocery and apparel. For all the talk about ecommerce growth, it's worth remembering that, at the end of the day, brick-andmortar is still the dominant player in retail. As Amazon CEO Andy Jassy himself pointed out in the company's annual shareholder letter, about 80% of global retail takes place in physical stores. As retailers use the tools of digital commerce to reach shoppers and create experiences that are tailored to their needs, they need not cede the built-in advantage of physical stores.

To further its online expansion, IKEA will be making a EUR400 million investment in new distribution centers which will be strategically placed to speed up the IKEA delivery service. IKEA presently has an average delivery time of five to six days for online orders, but the new distribution center network will aim to bring that time down to an average of just three hours This dramatic reduction in target delivery times demonstrates IKEA's commitment to online. While lead times of a week or longer are typical in the traditional furniture buying process, e-tail customers expect a significantly prompter service.

"The era of large furniture emporia on the outskirts of town is over," said CEO and Country Retail Manager for IKEA Germany, Dennis Valsev "online is my main focus". For this reason, IKEA has also put an end to all enlargement and expansion plans. "We expect this trend to continue so we're changing our focus and putting a lot of investment into the expansion of online trading. After all, we are in no doubt that this is the future."

IKEA may have been late to the ecommerce party, preferring instead to concentrate on its famous large stores, but it's certainly playing catch up now. Not only is it creating brand new infrastructure and stores to facilitate its new online focus, but it's also deploying innovative technology to help it access markets such as China in which it has traditionally struggled.

Task

Question I

1. Describe the 3 types of business-level strategies available to IKEA in developing its strategic plans, and how the company could use each strategy now. Provide all examples from the case to support all 3 strategies.

2. Which business-level strategy do you think is the best one for IKEA and why? Provide all examples from the case to support your analysis.

Question II

Explain a SWOT analysis of IKEA. Provide all examples from the case to support your analysis.

Question III

Explain what is a virtual organization and how IKEA can become a virtual organization. Provide all examples from the case to support your analysis.

Question IV

1. Explain backward integration and how IKEA uses this in its strategy?

2. How is this type of vertical integration beneficial to IKEA? Provide all examples from the case to support your analysis.