Writing assignment Assignment 2 Case Analysis: IKEA Slowly Expands Its U.S. Market Presence” To help you better understand the concepts of Marketing

Writing assignment
Assignment 2
Case Analysis: IKEA Slowly Expands Its U.S. Market Presence”
To help you better understand the concepts of Marketing Analysis, you will be asked to complete a case study for each weekly assignment. To prepare for this level of analysis, first read “How to Analyze a Case” in the W1 lesson folder.
This Week’s Case
IKEA Slowly Expands Its U.S. Market Presence”(located in textbook appendix)
After reading, reviewing and analyzing the case study, pretend you are the VP of Marketing for IKEA. Outline your position and objectives in a plan to the Board of Directors. Develop a PowerPoint Presentation that will address (at a minimum) the questions listed below. You may include other insights gleaned from our study of marketing analysis so far. Also, cite at least 2 outside sources to support your analysis.
1. Given the SWOT analysis presented in the case, what are IKEAs key competitive advantages?
2. What should the strategic focus be as the company looks to expand further into the US market?
3. What strategic options, steps and alternatives would you direct IKEA to make to further penetrate the US market?
The requirements below must be met for your paper to be accepted and graded:
Include cover page and reference page.
At least 80% of your slideshow must be original content/writing.
No more than 20% of your content/information may come from references.
Use an appropriate number of references to support your position, and defend your arguments. The following are examples of primary and secondary sources that may be used, and non-credible and opinion based sources that may not be used.
1. Primary sources such as, government websites (United States Department of Labor Bureau of Labor Statistics, United States Census Bureau, The World Bank, etc.), peer reviewed and scholarly journals in EBSCOhost and Google Scholar.
2. Secondary and credible sources such asCNN Money, The Wall Street Journal, trade journals, and publications in EBSCOhost
3. Non-credible and opinion based sources such as, Wikis, Yahoo Answers, eHow, blogs, etc. should not be used.

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IKEA Slowly Expands

Its U.S. Market Presence
IKEA is known around the world for its stylish, quality, and low-cost furniture and home

furnishings. The companys success is based on a strategy of operational excellence in
production, supply chain operations, and marketing. IKEAwildly popular in Europehas
leveraged its brand reputation to penetrate markets in other countries. However, its

penetration of the U.S. market has been hampered by a weakened economy and the

inconsistency between the traditional U.S furniture market and IKEAs low-cost operating
philosophy. IKEA must find a balance between its operational excellence strategy and

U.S.consumers demands for customization, good service, convenience, and quality.

When 17-year-old Ingvar Kamprad founded IKEA in 1943, he could not have imagined that his

company would become one of the worlds most popular and iconic brands or the worlds largest
home furnishings retailer. The IKEA name is a combination of Kamprads initials (IK) and the
first letters of the farm (Elmtaryd) and village (Agunnaryd) in southern Sweden where he grew up.

From the beginning, IKEA was founded on different principlesnamely, frugality and low cost.

Most furniture companies offer personalized service and advice in lavish showrooms where

salespeople compete for sales commissions. Kamprad, however, recognized that customers are

willing to trade off typical amenities to save money. Today, the no-frills frugality is the cornerstone

of the IKEA cach and one of the reasons for its immense popularity.

IKEA operates under a unique corporate structure. When Kamprad founded the company, he

wanted to create an independent organization that would be sustainable for the long term. Since

1982, the Stichting INGKA Foundation, a Netherlands-based charitable foundation, has owned the

IKEA Group. Many estimates peg the foundation as one of the worlds wealthiest charitiesworth
an estimated $36 billion. INGKA Holding B.V., also based in the Netherlands, is the parent

company for all IKEA Group companies.

The IKEA Group includes IKEA of Sweden (which designs and develops all IKEA products),

Swedspan (which makes environmentally friendly wood panels), Swedwood (which makes all

IKEA furniture), the sales companies that operate IKEA stores, and all purchasing and supply

chain functions. This type of ownership is unique in that the foundation is a nonprofit organization

designed to promote innovation in architectural and interior design. Some criticize IKEAs
ownership as an arrangement that leverages the uniqueness of Dutch law to avoid taxes and prevent

a hostile takeover attempt.

Today, IKEA is Swedens best-known export. The company had 2011 worldwide sales totaling
EUR 25.2 billion and an average annual growth rate of almost 7 percent. Roughly 79 percent of

IKEAs sales come from operations in Europe, with North America and Russia/Asia/Australia

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contributing 14 percent and 7 percent, respectively. The company has 131,000 employees and

more than 325 IKEA stores in 38 countries, with 287 stores in 26 countries belonging to the IKEA

Group. The remaining stores are owned and operated by franchisees. The first U.S. IKEA store

opened in Philadelphia in 1985. Today, there are 38 U.S. stores, with 11 stores in Canada. IKEA

had originally planned to have 50 stores operating in the United States by 2010, but the 2008
2009 worldwide economic recession slowed IKEAs plans.

The IKEA Concept

The backbone of IKEAs success is The IKEA Concept, which serves as both the companys
vision and core operating philosophy: The IKEA Concept: Provide functional, well-designed

furniture at prices so low that as many people as possible will be able to afford them. Creating a

better everyday life for the many people.

The IKEA Concept guides every aspect of how the companys products are designed,
manufactured, transported, sold, and assembled. To transform the IKEA Concept into reality, the

company provides stylish, functional, low-cost home furnishings that customers must assemble

themselves. Furniture products are shipped in flat packs to save money on manufacturing and

distribution, which IKEA then passes on to customers in the form of lower prices at retail. To

compensate for the customer having to do it yourself, IKEA offers other services that make this
proposition a little more attractive. These extra services include in-store child-care and play areas,

restaurants, and longer store hours. To help visitors prepare for this experience, IKEA provides its

customers with pencils, paper, tape measures, store guides, catalogs, strollers, and shopping bags.

IKEA even offers delivery for the bulky items that customers cannot carry themselves. For those

who want to carry their own bulky furniture home, IKEA rents carracks for convenience.

IKEA stores are designed as a circle so that everything can be seen no matter in what direction the

customer is headed. The aisles are wide to reduce traffic congestion that could occur when

customers stop to look at different showrooms and displays.

Production

IKEAs key objective regarding production is to establish and maintain long-term supplier
relationships. When designing new products, IKEA actually begins with a target retail price in

mind, and then works with thousands of suppliers in over 50 countries to find the lowest cost way

to manufacture that product. Its oldest suppliers are Swedish; however, other major suppliers are

located in China (22 percent), Poland (18 percent), Italy (8 percent), and Germany (4 percent).

IKEA accounts for approximately 10 percent of the furniture market in each country where its

products are manufactured.

One strategy that IKEA has implemented is to place its trading offices in countries around the

world to localize operations. This gives IKEA leverage to increase production capacity (that is,

labor hours and purchasing materials) when needed. The strategy also allows IKEA to closely

monitor manufacturing performance. Producing high-quality products at the lowest possible cost

drives IKEAs production mentality. In addition to local trading offices, IKEA also manages
production through long-term contractual relationships based on bulk buying. Committing to high-

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volume purchases over a longer time frame allows IKEA to dramatically cut costs. Additionally,

IKEA is in a position to offer its suppliers financial assistance if necessary. This optimization is

key to achieving the low-cost business model that IKEA wants to maintain.

Cost consciousness dominates all aspects of IKEAs operations. In land acquisition, IKEA locates
stores on property just outside of target cities. In production, the remnants of fabric and wood used

for products are used to create more products. IKEA uses natural colors to cut production costs

and increase social responsibility to the environment through the manufacturing process. Across

its distribution centers, flat packages are used to efficiently transport the large bulk of products

from suppliers to IKEA stores. The use of flat packages lowers warehousing and distribution costs

and the environmental impact throughout the supply chain.

IKEAs production goals also include a strong sustainability component. The company has
partnered with the World Wildlife Federation and the Forestry Stewardship Council to ensure that

raw materials (primarily wood and cotton) come from responsibly managed and sustainable

sources. IKEA helps educate cotton farmers in India, China, Pakistan, and Turkey to use

sustainable methods, such as reducing water, pesticides, and fertilizers. Currently, 16 percent of

wood materials and 24 percent of cotton materials come from sustainable sources. In addition,

IKEA has a goal to obtain 100 percent of its energy from renewable resources. The company

operates its own wind turbines and solar systems to power both stores and distribution centers.

Today, 51 percent of IKEAs energy comes from sustainable sources.

Marketing

IKEAs marketing program has four focal areas: product design, catalogs, advertising, and public
relations/promotions. IKEAs product designs are arguably the most important part of its brand
image. Customers love the clean lines, frugal styling, and cach that ownership affords. IKEA

admits that creating stylish and inexpensive products is a challenging task.

To fulfill its vision, the companys full-time and freelance designers work closely with inhouse
production teams to pair the appropriate materials with the least costly suppliers. Though the work

is tedious, IKEA is well known for its product innovation. IKEAs main marketing focus is its
printed catalog, where the company spends the majority of its annual marketing budget. The 300-

to 400-page catalog is produced in 59 different editions in 30 languages. In 2012, 211 million

copies were put into circulation. New for 2013, the IKEA catalog featured special symbols that

are readable by IKEAs iPhone and Android apps. When users scan the symbols, they are presented
with an augmented reality experience that allows customers to see the companys products more
in depth. The apps also offer 3D models of products and how-to videos. A similar experience is

available online where customers can view products and download free programs to help redesign

kitchens, bathrooms, and bedrooms. The website also provides information about each stores local
events and promotions, services, and product specials. Because the website offers limited online

purchasing capabilities, customers are often forced to visit the stores to buy products.

Approximately 30 percent of IKEAs product line is available for online purchase.

In addition to the catalog, IKEA also uses television, radio, and Internet-based communication to

reach its target customers. The companys advertising is intended to increase both brand awareness

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and store traffic. Some of the companys advertising is controversial, especially ads that portray
gay customers or sexually suggestive storylines. IKEA has even taken its advertising to the streets

in Italy (with a graffiti campaign) and in Paris (where a complete IKEA furnished apartment was

installed in the Paris underground). Advertising, however, is not a major focus of IKEAs
promotional efforts.

The company prefers to rely on word-of-mouth communication. This is reflected in its use of social

media. For example, IKEAs Facebook pages provide up-to-date information on company
activities, sales, and local store events. IKEAs U.S. Facebook page boasts over 1 million fans,
while its international pages have several hundred thousand fans each. Several thousand fans

typically follow each local store page. Local store events are another key marketing focus for

IKEA. The San Diego, California, store offers birthday parties for children on the first Tuesday of

every month. The Atlanta, Georgia, store features activities such as culinary tasting events, face

painting, college student activities, and fundraising events for local charities. In a unique

promotion prior to the grand opening of the Atlanta store, IKEA managers invited locals to apply

for the post of Ambassador of Kul (Swedish for fun). The five winners of an essay contest
received $2,000 in vouchers, had to live in the store for three days, sleep in the bedding department,

and participate in contests. Finally, the entire IKEA family holds Antibureaucracy Weeks on a
regular basis. These are times when executives work on the shop floor or stockroom, operate cash

registers, and even load trucks and cars for IKEA customers. This simple step goes a long way in

upholding the IKEA culture and maintaining employee morale.

IKEAs marketing program is designed to be thrifty but still effective. In fact, all of IKEAs
marketing activities are designed to maintain a downward pressure on operating expenses. For

example, in most stores, IKEA does not accept checksonly cash or credit cards, including its
own IKEA Card. This helps to reduce IKEAs accounts receivable and eliminates the need to
maintain an expensive collections operation. With policies like these, it is not surprising the

companys operating margin of 10 percent is among the best in the home furnishings industry.
And, despite its low cost and price model, IKEA aims to cut prices by an average of 2 to 3 percent

every year.

The Future of IKEAs U.S. Expansion

IKEA considers the United States an important part of its plans for global expansion. The U.S.

standard of living is higher than most countries; however, most American consumers actively buy

into the cost-conscious mentality. The value of the U.S. dollar is stable and not prone to wide

exchange rate fluctuations. The United States has very high Internet usage, and IKEAs
sustainability efforts are welcomed by a wide margin of the consuming public. Another factor that

makes the United States favorable to IKEA is its melting pot of cultures. The IKEA Concept can

appeal to the different lifestyles and ways of life found in the United States.

Despite these advantages, IKEA must address two key issues regarding U.S. expansion. The first

is the need to adapt to the preferences of U.S. consumers. American consumers are very demanding

and tend to reward marketers that go out of their way to address individual tastes and needs. Further

expansion into the U.S. market will require IKEA to adapt its offerings and stores to local tastes

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a marketing strategy that is much more expensive to deliver and contrary to IKEAs cost-conscious
operating philosophy.

IKEAs franchised structure is well suited to this task. This allows IKEA to get closer to customers
by hiring local employees that represent the same values, cultures, and lifestyles of the local area.

Another adaptation issue involves IKEAs promotional strategy, which must be tailored to U.S.
standards. For example, most of IKEAs television commercials are considered too edgy for
American viewers.

The second key issue is quality. Although American consumers are increasingly value driven, they

also demand quality products. In this regard, IKEAs low-cost, do-it-yourself concept misses the
mark for many potential furniture consumers. Many Americans view self-assembled furniture as

being lower in quality, and similar to the types of furniture one might buy at Walmart or Target.

The particleboard construction often used in these products has tarnished consumers perceptions
of do-it-yourself furniture.

Facing these challenges, IKEAs U.S. expansion has moved slowly. The company opened only
three U.S. stores from 2009 to 2012 and does not plan to open any new U.S. stores in 2013. IKEAs
low-cost, do-it-yourself marketing strategy is not a perfect match for U.S. tastes in furniture

retailing, nor does the company have the financial resources and marketing experience to roll out

a large number of products and stores simultaneously. The most recent economic conditions have

not helped either. As the company looks toward further expansion into the U.S. market, it must

consider a number of relevant issues in both its internal and external environments.

IKEAs Strengths

Low Cost Structure IKEAs low cost structure has been the very essence of its success. Being
that low cost measures are ingrained into IKEAs corporate DNA, the company does not have a
hard time tailoring its operations around this business model. This model also pairs nicely with

customers who appreciate IKEAs operating style. Furthermore, IKEAs low cost structure has
kept the company profitable while competitors, such as Pier 1 in the United States, are struggling.

Despite the state of the economy, IKEA has continued to see positive revenue growth. IKEA has

continued to use every possible avenue to maintain its low cost structure and competitiveness

without compromising customer value.

Corporate Culture IKEA values anti-bureaucracy in its operations, and strongly follows worker
and environmental protection rules. These tenets are codified in the companys code of conduct
know as The IKEA Way. The companys culture is based on the core values of togetherness, cost
consciousness, respect, and simplicity. Kamprad once said, Work should always be fun for all
colleagues. We all only have one life; a third of life is work. Without desire and fun, work becomes

hell. To ensure the company culture is upheld, the company looks for very specific traits in
potential employees.

IKEAs managers look for people who display a desire to learn, motivation to do things better,
common sense, and the ability to lead by example. The company believes in keeping employees
happy by engaging in activities throughout the year that promote well being and job satisfaction.

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These are all reasons that IKEA has been ranked in Fortune magazines annual list of 100 Best
Companies to Work For on many occasions.

Do-It-Yourself Approach
IKEA maintains its low-cost business model by creating a different furniture shopping experience.

IKEA supplies customers with all possible materials needed to complete their shopping when they

enter the store (that is, measuring tape, paper, and pencils). The floor has showrooms displaying

IKEA furniture with multiple accessories that will accentuate the style. With this approach,

customers do not have to be bothered with salespeople who work on commission. Customers can

pick and choose among the different options of accessories that they would like to use with

furniture.

Many customers appreciate the feeling of accomplishment that comes from doing things for

themselves. For those customer who do not like the DIY approach, IKEA offers assembly services

and home delivery options.

Added Amenities
Although IKEA is not set up as a traditional furniture store, the company does provide several

added amenities. IKEA rents car racks that customers can use to get bulky items to their homes.

IKEA also provides child-care services to give parents time to shop. Once their children are in a

safe place, parents will delegate more time to browsing and purchasing IKEA furniture and

accessories. The company also provides restaurants in some of its stores to encourage customers

to stay a little longer.

Offering breakfast, lunch, and dinner, the restaurants also generate strong profits for the company

each year. Customers can also schedule consultations with professional designers. In sum, the

IKEA experience is designed to make the stores destinations in themselves. IKEA wants the

customer to feel as if there is not a rush to leave the store and customers can do more than just

shop for furniture.

Brand Image
There is no denying that brand image is a key strength for IKEA. Even if they have not been in a

store, most people around the globe recognize the blue and yellow logo as a symbolic

representation of trendy, modern, and fashionable furniture. Customers flock to the furniture giant

to experience what BusinessWeek has referred to as IKEA world, a state of mind which revolves
around contemporary design, low prices, wacky promotions, and an enthusiasm that few

institutions can muster. Part of IKEAs brand strength comes from its wide array of products that
exude a high-quality, low-cost focus. The company offers home furnishings and appliances for the

bedroom, bathroom, and kitchen, as well as furniture for business offices. In addition to home

furnishings, the company sells accent pieces and everyday products such as rugs, linens, and

kitchen utensils. Some of the companys newest ventures include home building materials.
Customers can build an IKEA home with reasonably priced, environmentally friendly materials.

Strong Focus on Sustainability
IKEA considers the environmental impact of every step in its business processes by making

products that are environmentally conscientious and cost-effective. Suppliers are required to

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comply with strict environmental standards and to use as much renewable, reusable, and recycled

materials as possible. With wood as a primary source of material, IKEA also employs field

specialists to ensure the wood obtained comes from responsibly managed forests. From product

design to disposal, the organization truly practices what it preaches in terms of its environmental

responsibilities.

IKEAs Weaknesses

Do-It-Yourself Approach
Some customers may not appreciate IKEAs do-it-yourself approach. IKEA targets young, cost-
conscious customers who want stylish furniture. However, these same consumers also like

convenience and usually have the money to pay for it. For them, the time and effort involved in

shopping for furniture, bringing it home, and assembling it may not be worth it. Furthermore, some

customers enjoy having a conversation with a salesperson and getting individual ideas and advice

from employees. These customers may continue to buy furniture from traditional retailers.

Limited Customization
To ensure alignment with its low cost structure and easy assembly promise, IKEAs products are
very basic and simple in terms of both structure and design. The ability for individualized

customization is limited. Many American consumers prefer items with more style, accent, and

color options.

Limited Promotional Expenditures
IKEA does not spend an enormous amount of money on promotion. Instead, the company depends

on word of mouth and catalogs to generate a buzz among customers. Sadly, most U.S. consumers

are not highly responsive to catalog marketing, making IKEAs bread-and-butter promotion less
efficient and cost-effective for the U.S. market. American consumers also watch television and use

the Internet more often than consumers in other countries. However, most of IKEAs television
commercials are unknown outside of the United Kingdom. Further, many of the companys ads
are controversial and not suitable for a U.S. audience. As a result of these issues, IKEA may be

missing out on a larger potential customer base.

Weak Online Support
Many aspects of the companys website leave much to be desired. Although product descriptions
are available, many of the items shown cannot be ordered online. IKEA basically forces consumers

to shop at their nearest brickand-mortar locations. Because IKEAs physical presence in the U.S.
market is small, the company is losing valuable sales due to its lack of online buying options.

IKEAs Market Opportunities

Economic Conditions
IKEAs low-cost, high-quality strategy fits with the relatively weak state of the U.S. economy. As
many consumers look for ways to cut personal spending, IKEA is well positioned to be a logical

choice for home furnishings for the cost-conscious customer. Most American consumers still

ascribe to a value-dominant logic when it comes to purchasing goods and services. However, these

customers want not only high quality at a good price but also convenient access and timesaving

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services. IKEA can play into this buying logic but may have to expand its service offerings to

increase customer convenience.

Demand for Convenience
The number of consumers shopping online continues to rise. With the average schedule getting

busier, technically savvy consumers increasingly enjoy the convenience and ease of online

shopping. Comparison shopping is also a convenience afforded by the Internet that could allow

IKEA to dominate the low-cost, quality furnishing sector. Offering convenient online shopping

experiences would fit well with IKEAs low cost structure because it would allow them to sell
items using a distribution network instead of a complete reliance on physical stores and their higher

overhead costs. Convenience factors within IKEAs stores, such as restaurants and daycare, are
already well suited to customer needs.

Popularity of Stylish, but Sustainable, Products
Swedish designthe simple, futuristic, edgy, and fashionable designs offered by IKEAis
popular among consumers overall. In addition to style, consumers are also interested in green
products that enhance the sustainability of natural resources. The recent corporate movement

toward green practices is becoming more prevalent, and consumers are becoming more aware of
a companys carbon footprint. IKEA is well positioned to take advantage of this trend.

IKEAs Market Threats

Competition
Several other large retailers are vying for the do-it-yourself furniture segment. As consumers

become more cost conscious in todays economy, the offerings of traditional bricks-and-mortar
stores such as Home Depot, Target, and Walmart become more acceptable. IKEA also faces online

competitors such as BluDot.com and Furniture.com. BluDot is a direct IKEA brand competitor

that also claims to offer quality, unassembled furniture at low prices. It too offers simply designed

and modern furniture. Furniture.com is a product competitor that uses the traditional furniture store

concept but offers the ease and convenience of online price and product comparison Changing

Customer Needs/Tastes Customers needs and tastes constantly change.

At some point, customer interest in Swedish design and do-it-yourself furniture will wane. This is

especially true as the U.S. population continues to age. The typical baby boomer consumer

demands quality, values his or her time, and appreciates convenience more than saving a few

dollars. Overall, there are relatively fewer younger customersIKEAs main target marketas
compared to baby boomers. The end result is a likely decline in demand for trendy, low-cost

furniture. IKEAs low-cost and high-quality designs might appeal to some baby boomers, but the
inconveniences associated with the companys DIY approach probably send them looking
elsewhere.

Mature Market Preferences
Most American consumers have preconceived notions of what the best of the best is when it
comes to specialty furniture and furnishings purchases. For example, the average consumer may

not purchase a mattress from IKEA

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because it is not a Select Comfort, Sealy, or Simmons mattress. Although IKEA focuses strongly

on high-quality products, in the U.S. market the company must compete with well-established

companies that have earned significant brand awareness.

Questions for Discussion
1. Given the SWOT analysis presented in the case, what are IKEAs key competitive advantages?
What strategic focus should the company take as it looks to further expand into the U.S. market?

2. What factor is the biggest reason for IKEAs growth and popularity: value or image? Which is
more important in the U.S. market? Why?

3. What strategic alternatives would you suggest IKEA employ to further penetrate the U.S.

market?

4. Speculate on what will happen at IKEA stores as they are adapted to fit local tastes. Is the

companys trade-off of service for low cost sustainable in the long term?

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