Strategic Management Analysis of IKEA Hong Kong

Introduction
In order to understand what strategic position and direction which IKEA takes in Hong Kong market so as to keep making successful business, it is important to conduct a strategic analysis of IKEA HK from internal, external factors to its strengths, weakness, opportunities and threats to evaluate this company. To tide over the economic crisis, most of the HK home furniture business tends to “low price strategy” so as to gain market share, such as Pricerite, DSC. However, under the vision of “create a better everyday life for the many people” IKEA HK well understanding how important of differentiation and the risk of only focusing on the “low-cost strategy” and that’s why IKEA put great afford on product development and build up the positive corporate images as “taking responsibility towards people and the environment” all these make IKEA HK becomes unique in the same industry sector in Hong Kong.

IKEA HK owns by The Dairy Farm Company Limited as franchisees run outside of the Dutch INGKA Holding to operate IKEA home furnishing retailing business in Hong Kong. The mission of IKEA Hong Kong is to provide well-designed, functional and good quality home furnishing with low prices for as many people as possible to be able to afford them. They are now having 3 IKEA stores in Hong Kong which locates in Shatin, Causeway Bay and Kowloon Bay providing service for customer in the whole Hong Kong market. People could be shop in IKEA HK easily.

In order to maximize the profit to all stakeholders, IKEA not only doing cost leadership but also pays much attention on innovating their product to be more differentiation. Since 1956, IKEA using their great concept of “flat-packed” packaging and “self-assembly” which increased the track loading capacity, reduced the transportation, storage and labour cost, less fuel and exhaust pollution during each journey. It makes customer willing to carry the IKEA furniture home and assembly by themselves. It also helps IKEA could further reduce their prices as they do not need to build the delivery and assembly costs into their products. This helps IKEA to be much more outstanding in the market.

In order to meet customer goal, IKEA develops its product range to be modern but not trendy, functional yet attractive, people-focussed and child-friendly. The Swedish home furnishing tradition makes IKEA home furnishing become so distinctive in the market. Hong Kong young people find this type of style is really modern and having good taste. It makes them believe buying home furnishing in IKEA HK would bring certain identity among peer group and friends. This is one of the reasons IKEA HK successfully won certain supporter in the HK younger market..

To help expand their business, IKEA HK just relocated their Kowloon Bay store from Telford Plaza (6,500㎡) to new Mega Box (14,000㎡). The new store having much more space for product display and also provide large area for “Kid’s playroom” and restaurant. IKEA HK denominates this is a “family friendly store” which customer not only benefit from their low price and good design products but also having a great day with family in IKEA store. They even promote visiting IKEA store would be a good weekend planning during the family day. And they gain much more friends from the family market.

To help achieving sustained success in HK home furnishing market, IKEA HK looking into several new service so as to increase their business turnover and also gain to increase the market share. They are now providing the new business design service for the “home-office” customer and also doing home design service especially for the newly-wed couples.

External Environment influences much the development of IKEA in HK market, to help analyze the attractiveness and likely-profitability of this part, Porter’s Five Forces and PESTEL Analysis could be help on finding out the situation and several forces which IKEA HK faced to.

Potential entrants, threat of entry:
It is really high competitive among the existing furniture market in HK. Due to the high operation cost and hard to obtain certain market share in the market, the risk of new potential entrants are not really high. Under the rapid population growth in HK, the demand of home furniture is keeping rising. As per the large market attraction, there are two significant competitors towards IKEA HK and also making great business in the same market – DSC and Pricerite. However, under the beneficial of positive company image, the unique product design and good quality furniture, IKEA HK still standing the front position far beyond the other two competitors which means the potential entrants force do not have great influence to IKEA HK.

Buyers, bargaining power:
Even though there are much home furniture retail shops in HK which providing many difference types of households furniture for selection. But most of them come from the traditional China manufacturers which do not have much design or only trend to the basic and ordinary pattern. This is another reason drives people to buy in IKEA because of their low price, modern design and good quality would be able to ensure all aspects could be satisfied their customers. IKEA HK also makes uses of their good corporate responsibility image to attract their customers to be their loyalty customer. The “regular / customary purchasing mode” weakens the buyer bargaining power that means the “Buyers” forces do not provide great influence to IKEA HK.

Suppliers, bargaining power
IKEA has their own in-house designers working on product development in Sweden which help reducing the development cost from the suppliers. They also having a wide range supplier network in all over the world, nearly 1300 suppliers which supplying wooden and steel furniture, household products to the Global IKEA shops. Although the raw material cost keep raising in the period of time, under the large competitive among difference suppliers, IKEA still having great power to counterbalance the supplier cost. They have certain right drive away the unqualified supplier and to choose appropriate supplier which must be able to provide lower price products but in good quality. In short, the bargaining power of supplier would not threat much profit of IKEA.

Substitutes, threat of substitutes:
As of now, there seems have no substitute to the “home furniture”, every home would need to have certain number of home furniture. Even if there are many people trend to have a more simple living area, home furniture is indispensable to a home. So, the threat of substitutes would be a “weak” force to IKEA HK.

Competitive Rivalry:
IKEA HK trying to keep its competitive advantage among rivals in order to prevent the existing market share “invade” by the other competitors. They have to put much more effort on marketing promote and product development. The good quality products and their long life cycle bring the problem of slow market growth. In order to make the continue success in HK market, IKEA have to come over this big issue of every durable goods industry have to face to. This becomes the great force toward IKEA HK.

Political:
Due to the free trade port advantage in HK, there is 0% tax rate on importing Home Furnishing products into HK. IKEA which derives from Sweden also attracted by this taxation policy and started their business in HK market since 1980’s. It shows the tax rate policy provide a very positive influence toward IKEA on having business in HK.

Economic:
Indebted the Government stability and the CEPA Arrangement between Mainland China and HK, the economic and financial in HK market continued growth, the living environment of HK people have much improved and they are learnt to seek for a quality of life which provide a good business environment for IKEA on developing their market in HK.

Sociocultural:
Tend to have “better life” becomes the main stream among HK people especially for the young people. IKEA HK well understand such circumstance and they make use of this opportunity to launch a series of new home furnishing and design services which marketing to the younger and also the young couples. In addition, IKEA HK also putting much afford on developing their “business” product line, according to the survey information form a popular HK magazine – Recruit, the result shows there are much more HK people change their workplace culture from the traditional “office” to the new concept “home office” which help saving the higher and higher office renting cost.

Technological:
Due to the growing information and communication technology (ICT) such as internet to be more convenience, HK becomes an “Information society”. This is another reason, IKEA HK sells much more business furnishing during these few years, as most of HK office workers prefer to leave office on time and then shift their office work or self-study to be “work at home” under the speed of ICT technology development which also helping people to be more “work-life balance”.

Environmental:
With much more people concern about the environment issue by the period of time. Difference countries make certain environmental protection law in order to help taking better care of the environment and its resources. As a largest home furnishing retailer in the world IKEA pays great attention on this topic. IKEA not only follow all these laws but also set up an IKEA “Never Ending list” which lists out certain guideline to make sure all their suppliers, business alliances and their whole company also working on improves the environment and creates a more sustainable life to people.

Especially for the wood supplier control, IKEA participates in a number of forestry projects with “WWF”, “Sow a Seed Foundation” and “Forest Stewardship Council”. They put much effort forth on combating illegal logging and focus on responsible management practices. IKEA HK also focus on the importance about taking responsibility towards people and the environment. They held serial environmental friendly activities such as “Every Day No Plastic Bag”, Fluorescent Lamp & Rechargeable Battery recycling programme and “Little Green Ambassador” programme. With helps of all these activities, IKEA build up a positive company image successfully.

Legal:
Under legal regulation, IKEA HK abides by every HK laws.
To be a conscience corporate, they also guide their work by their own way “IWAY” which formulates by the international conventions and declarations such as the United Nations Universal Declaration of Human Rights, the International Labour Organisation Declaration on Fundamental Principles and Rights at Work, and the Rio Declaration on Environment and Development. IKEA suppliers are required to ensure “IWAY” are implemented at all their workplaces, such as prevent child labour, the working environment should be health and safety to workers, taking responsible forestry management on wood supply. Such regulation helps IKEA HK to be a famous conscience corporate among their industry sector and provide a more positive company image to their customer.

To help analyze the IKEA HK resources and capabilities, we may also look into its external environment – threats (T), opportunities (O) and internal environment – weaknesses (W), strengths (S) by using the SWOT analysis.

Strength:
Internally, the strong band name and its positive company image provide IKEA some advantage while promoting in the HK market. People purchasing their products due to a certain extent reliance on its well-known and good quality “band name”. Under the good effect of being “conscience corporate”, IKEA HK made good reputation among customer. They advocate not only focus on low cost but taking responsibility towards people and the environment would be much important. IKEA in-house designers focus on developing their technology to find out how to maximize every parts of each raw material and also minimize the production cost and then export such technology to their global suppliers. The cost advantages from proprietary know-how help IKEA become more strength in the market. IKEA becomes the largest “home furnishing” retailer in the world which made 22,713 million Euros turnover during 2009. The strong brands enhance loyalty customer which would repeat purchases in IKEA.

Weaknesses:
The distribution channels is really weak in IKEA HK, there are only 3 IKEA stores in HK which are not fully cover the whole HK market. It might reduce the desire to buy in IKEA, if they live far away from the IKEA stores. The high cost structure also weakens the development of IKEA in HK. Due to the limited land supply in HK, the renting cost keep raising in a really high level. To display their home furnishing as a “show flat” IKEA needs to afford extremely high cost on renting large shop area. Besides, to seek for a large and appropriate location to set up the IKEA store is really difficult in HK and it becomes the great barrier of IKEA HK.

Opportunities:
Externally, IKEA HK taking great opportunity about sourcing in China, the low raw material cost and low labour cost reduced a certain large number on production cost. IKEA would then be able to shift much more resources on product development and concentrate on increasing its market share through its more competitively price products. By the help of rapid growth about using internet during these years, IKEA HK put much afford to build up their company web-site and provide much more on-line service. People would now be able to read the IKEA on-line catalog. And IKEA HK well uses this panel to be a good opportunity to broadcast all their promotion.

Threats:
Keep rising on raw material cost and higher environment concern becomes the important threats to IKEA HK. Under their guideline “IWAY”, IKEA declare not to use any wooden material which comes from the illegal logging. And that would be one of the reason which leading the raw-material cost raises because the wooden material which comes from legal logging is much expensive than the illegal one. However, under the impetus of higher environment concern, IKEA would need to follow the atmosphere and pay more cost on raw-material.

TOWS Strategic Alternatives Matrix
External Opportunities (O)
1. Sourcing in China
2. low raw material cost, low labour cost
3. more on-line service External Threats (T)
1. rising on raw material cost
2. higher environment concern
Internal Strengths (S)
1. strong band name
2. good reputation among customer
3. cost advantages from proprietary know-how
4. loyalty customer SO
“Maxi-Maxi” Strategy
Strategies that use strengths to maximize opportunities. ST
“Maxi-Mini” Strategy
Strategies that use strengths to minimize threats.
Internal Weaknesses (W)
1. weak distribution channels
2.High renting cost WO
“Mini-Maxi” Strategy
Strategies that minimize weaknesses by taking advantage of opportunities. WT “Mini-Mini” Strategy
Strategies that minimize weaknesses and avoid threats.
According to the TOWS matrix, IKEA HK should make use of “Maxi-Maxi” strategy which means they should use all their strengths to maximize all their opportunities.

There are many ways to keep sustainable success to the business, using Ansoff matrix would be easily to identify which strategies would be most suitable to IKEA HK. There are including market penetration, market development, product development and diversification.

As per the analysis result from Ansoff Matrix, IKEA HK which already set up their business in HK market for almost 30 years, to promote their existing “home furniture” products among the existing market, the effective “Market Penetration” would be really important. In these years, IKEA HK attends a certain number of activities such as taking responsibility on social and environment. Their marketing not only target to the family or young people but also the childhood. IKEA HK develops much more child products to the children. IKEA also held “Little Green Ambassador” programme which provides a panel for parent and their children to take part in the environment friendly activity.

Through this activity, all family members would have a chance to experience the IKEA services. The newly “Soft Toy Movement” would be another programme which IKEA make use of market penetration to let much more parent and their children could be feeling the social responsibility which IKEA had been taken. Among all these works, IKEA becomes a famous band name which not only focuses on doing business but also caring the society. This successfully marketing penetration provides a really positive company image to IKEA and also brings much more loyalty customers to IKEA HK. The childhood would then be the new customer of IKEA, it helps IKEA HK increase their market share in the HK market.

To sum up the strengths and weakness of IKEA HK, it is clearly found they are making a successful business in HK home furnishing retail market. It indebted by the centralize product development in their headquarter – Sweden. And they just need to make a little modify on some of furniture in order to suitable for certain individual market. It saves much development cost and making more profit of the company which should be a long term strategy IKEA HK would take advantage on it.

The low price strategy helps IKEA HK attracts a certain number of customer in the past ten years. But the economic environment keep improving and much more people learnt to seek for a better quality life, people trend to looking for some furniture and household to be more modern, good quality and functional. To create more new design and functional furniture becomes the mainstream among the market. People are now paying much attention on safety and health life. The market preference is driving toward more ergonomics furniture but IKEA is behind in development of such technology. This is a crucial time to IKEA HK on developing this technology so as to avoid far behind the market.

IKEA HK successfully builds up a great “social responsible company” image among the whole HK market. It would become more success on further promote the important relationship between “environment friendly” and “safety and health life”. There is much more information shows, a more green environment which would exhaust lesser pernicious material. That means environment friendly help providing a better life to people. Under such influence, IKEA HK could be promote as a home furniture
retailer which providing “sustainability health life” to HK people. It should help on increasing the market share of IKEA HK.