IKEA the SWOT Analysis Framework

IKEA

The SWOT analysis framework (strengths, weaknesses, threats and opportunities) provides a scan of a company's internal and external environments (QuickMBA, 2010). The objective of the SWOT is to help understand how well the company's strengths much up with its opportunities and how well its weaknesses align with its threats. This analysis can then shed light on potential strategic directions.

IKEA has a number of strengths that it can leverage in order to improve its business. The company has one of the best brands in retailing. The company believes that its brand awareness is "much bigger than the size of our company" (Capell et al., 2005). The company's brand is powerful enough to draw crowds to store openings and to attract a dedicated fan following. This brand power allows IKEA to enter new markets and succeed immediately. The company has a 5-10% share of the furniture market in each country in which it operates.

Another strength of IKEA is in its team of designers. Design is a source of competitive advantage for two reasons. The first is that the company's products have a distinct aesthetic that is easily recognizable. This attracts customers who appreciate the design, but also the consistency of that design applied across a broad range of products. The design also helps in the manufacturing process. Consistency in design makes it easier to produce and ship the goods around the world.

The company's supply chain is another source of strength. As of 2005, IKEA had 1300 supplies located in 53 countries. This provides diversification in its supply chain, hedging against adverse events in any one country. The company's logistics allow it to move its goods around the world. The company is also able to turn over its product line frequently (up to 1/3 turnover per year). In addition, these logistics allow the company to offer around 7000 items per store, delivering a total shopping experience that few furniture retailers can match but which appeals to its customer base.

The company is believed to be strong financially. It is privately held, and the section on its website where it posts its annual report is non-functional, but all indications are that IKEA is highly profitable. Its net margin is estimated to be 10%, a healthy rate for the industry. In 2005 it was believed to have recorded an operating profit of $1.7 billion. For FY 2009, the company saw an increase in revenues by 1.4% to €21.8 billion. Profit that year -- in the middle of the recession -- increased 11.3% to €2.5 billion (IKEA.com, 2011).

This financial strength gives IKEA flexibility with respect to its capital structure and its pace of expansion, among other benefits.

A firm as successful as IKEA does not usually have many weaknesses. One potential weakness that has been identified is a dependence on founder Ingvar Kamprad. Though retired, he set the corporate culture and most of the current management team trained under him, allowing that culture to permeate further. It has been speculated that as his influence wanes, the unique culture at IKEA will wane as well, taking with it a source of competitive advantage (Capell et al., 2005).

Another weakness, one that the company has hopefully addressed, is that the products are designed for universal tastes and standards. This caused the company problems when it first entered the U.S. market, as the products did not fit with American needs and tastes, particularly with respect to sizing (Capell et al., 2005). As a result, the company struggled when it first arrived in the U.S. market. As it moves into more exotic markets like the BRIC countries and the Arab states, it must ensure that it is fully aware of local tastes and purchasing styles in order to avoid a repeat of its initial struggles in the U.S. market.

The U.S. market actually represents a good growth opportunity for IKEA, as do other markets where the company is underrepresented relatively to European-level saturation. The company sees tremendous potential in a number of global markets and intends to pursue geographic diversification as the primary means of growth. It is aided by globalization, which has allowed it to also diversify its supply chain. The ability of IKEA to enter and exit markets around the world, both as retailer and purchaser, has been facilitated by globalization. The eradication of trade barriers in particular has allowed IKEA to leverage purchasing economies of scale by purchasing globally to service its stores.

The company has consistently viewed efficiency improvements as a means of delivery improved profitability. IKEA leverages this opportunity by using its buying power, its strength in product design and by expanding globally to improve its economies of scale in countries and regions around the world. Though IKEA is a differentiated firm, it also competes as a cost leader, marketing its products at a relatively low price as a means of attracting ongoing business. In order to make this strategy work, the company needs to be continually seeking efficiency improvements and other ways of controlling costs.

There are a number of threats in the global environment that IKEA faces. The company faces intense competition, especially in key markets. Major competitors are often well-financed and with strong brands. There are, however, no major threats to IKEA worldwide. No major furniture retailers are a credible threat. Major discount retailers like Wal-Mart or Costco, or hypermarkets like Carrefour pose regional threats, but they are not very well differentiated compared to IKEA and have weak brands with respect to furniture.

On the surface, the global financial crisis would appear to be a threat, but from what can be gleaned about IKEA's financial performance this is not the case. The company increased both sales and profits during FY 2009 which ran from September 1st, 2008 to August 31st, 2009, the depths of the crisis. The company has been a profit machine for years, so it has no need to tap international capital markets. Not only is it privately held, but the company can finance expansion efforts with retained earnings, eliminating the need for debt. A company with IKEAs financial condition could borrow if it so desired -- a bank that could not lend to IKEA is a bank that is no longer in business. Thus, the ongoing global financial crisis poses little threat to IKEA, save for regional sales declines. Even those have largely been countered, however, with strong differentiation.