Business strategy of IKEA - Essay Example

?Background: Home furnishing was a market with immense potential globally. The global sales for the industry reached a staggering $600 Billion in items such as furniture, textile, and floor coverings. A significant percentage (less than 50%) of these sales were constituted by furniture stores. IKEA was standing strong with a 2.5% share in the global market and reaching sales of greater than $20 Billion. The market was highly fragmented, with most of the competition occurring locally rather than globally. Competition: The type of competition IKEA faced in each of its regions was varied. These included 1) Multinational furniture retailers: These retailers had operations in various countries and the US market constituted one part of their portfolio. 2) Specialized furniture manufacturing: These were companies specializing in only some aspects of the furniture product range, e.g. kitchen, rooms, etc. They played a vital role in the overall industry. 3) Single Country: Single country multi branch retail furniture outlets (this category dominated the US market). These companies had operations concentrated in one country and aimed to gain the maximum share from within that country. 4) Non Specialist companies: These companies carried furniture as only one part of a wider product range. The largest operator of this kind of firm in the US was Home Retail Group. 5) Small &/or Specialized Retailers/Manufacturers: These firms were the most abundant type of furniture companies in Europe and accounted for 90% of the total European market. SWOT Analysis: Swot analysis allows an analysis of the internal and external business environment which is extremely essential to understand business dynamics. It also plays a vital role in the strategic planning process (Unsupported source type (InternetSite) for source Qui12.). The factors that are most relevant to the internal processes of the firm are its strengths and weaknesses. Whereas factors that are largely dependent on external environment are the firm’s opportunities and threats (Pahl & Richter 2009). IKEA Strengths: Strengths are the core competencies and strong points of firms (Ferrell & Hartline 2010)A look at the strengths of IKEA would give us an idea of how the firm has been so successful throughout the years. Strong Connection with Culture: The IKEA furniture has become an essential part of the culture. Its perennial existence has made it the de facto furniture company and many of its products have a long history. Employee Focus on Thrift: In an environment of increasing competition every last penny has value. The practice and culture of employees being thrifty to ensure that they utilize every last penny properly indicates that the firm’s culture dictated that resources be used properly. Staffing levels are appropriate, and not excessive, and even top employees fly economy to indicate that squandering of resources will not be tolerated. Entrepreneurial spirit of the Kamprands: Kamprand was known for his entrepreneurial abilities and skill of identifying profit opportunities. He had a knack of choosing the ventures with most potential. Even with IKEA he was able to establish a low cost supply line very early into the firm’s existence. High Turnover to Visits ration: IKEA poses a high visits to turnover ratio. For every million visits to the store revenue of 34 million is generated. This is a really good figure as it reflects the firms’ brilliant selling skills and customer loyalty. Strong presence in 25-50 year old population: The strong connection of Sec B and C to IKEA is a strongpoint for the firm. Even some portion of the A class consider IKEA as an option. The customers are smart, hence IKEA doesn’t need to do the pitch for everyone. Weaknesses: The weakness of IKEA will help us evaluate what is wrong with the firm and how it can improve it for the betterment of its owners and stakeholders. Informal ownership structure/No Shares: The absence of shareholders and a proper board of directors means that there is little accountability of managerial practices. The domination of the Kamprand family means that the corporate structure format of firms is missing and the firm continues to be more of a family businesses influenced by incumbents rather than managerial experts. Too much focus on cost-cutting: IKEA’s sole focus of operations is on cutting costs. While this strategy can have pros when it comes to sustaining business in trying times, it can reflect badly on the firm’s willingness to innovate and bring up new solutions. Opportunities: The Asia Pacific Market: IKEA has only a 3 % share in the Asia Pacific market. It can look towards expanding its operations in the long run to cater to this market. Countering the recession: IKEAs strategy, post recession, could serve to leverage the downturn and turn its brand into the brand that was available in the hour of need. Not only does the affordability of the brand help sustain the business, but it can serve to enhance brand loyalty at an unprecedented pace. Threats: New Entrants: The threat of new entrants is always present no matter how entrenched the business is. Same goes for IKEA as the one size fit all strategy can motivate competitors to innovate and bring in products that IKEA does not offer. It is essential that IKEA leverages its brand loyalty and builds upon its core competencies to differentiate itself from the crowd through its innovative solutions. Change in consumer tastes/preferences: The IKEA target market ‘knows what it wants’, and thankfully for IKEA, the consumer wants its furniture at the moment. But that can change rapidly. Shifts in fashion and fad can trigger a transformation in furniture tastes, especially in Britain where IKEA does not have as great an influence as in other countries. Porter’s Five Forces: Micheal Porter provided a framework that identified several forces that impacted industries. The five forces that he identified include bargaining power of customers, bargaining power of suppliers, rivalry among the firms, threat of new entrants and threat of substitutes (Hills & Jones 2009). We shall now analyze where IKEA stands when considering these factors. 1) Bargaining power of customers: This aspect of the five forces focuses on the buyers. It involves considerations such as what volume does a specific buyer buy? Are buyers concentrated in an area? Is there a threat of backward integration that can impact IKEA’s operations? What is the price sensitivity of buyers towards furniture prices? Are there any substitutes available? (Society for HR Management, US 2006) The defined target market of IKEA does not have significant bargaining power because there are not many other cheap and quality furniture alternatives for them. We must understand that this low bargaining power comes from the fact that IKEA specializes in affordable quality furniture. The moment IKEA makes furniture expensive, customers may be prompted to look for alternatives. 2) Bargaining power of suppliers: This aspect focuses on the power of suppliers. This power emanates from several factors including supplier concentration, importance of the volume that IKEA buys to the supplier, impact of inputs on costs as well as differentiation of furniture products, importance of low supplies to IKEA, threat of forward integration taken up by the supplier and the cost of inputs provided by specific suppliers against the costs of such products in the industry (Grunig, Kuhn & Clark 2010). The IKEA chain has significant purchasing power. Its two key sources of supply are Poland and China and the firm is able to extract profits reaching 18% despite passing on majority of cost savings to customers. The high purchasing power means that IKEA is an important customer for suppliers and hence they would be reluctant to let go of it. Hence the bargaining power of suppliers is relatively low. 3) Rivalry among firms: The degree of rivalry among firms is determined by several factors. These factors include the industry concentration ratio of participating firms, the entry and exit barriers in the industry, the differences in products of different firms, the costs of switching to other firms for customers, the diversity of rivals and the amount of stakes of each firm within the industry (Porter 1998). Smaller rivals of IKEA have been eliminated. There is, however, significant rivalry with the competitors mentioned above. The core competency of IKEA is high quality cost affective furniture, and while its rivals do not compete on the same grounds, they do form an important portion of the total furniture market. The firm has 2.5% share in the global market, whereas 82% of its sales are in Europe, 15% in the Americas and 3% in Asia Pacific. IKEA’s competitors include Jysk in the multinational furniture retailer’s category, Alno in the specialized furniture category, Bed, Bath & Beyond in the Multi branch retail category and several other non specialized and small manufacturers and retailers. 4) Threat of Substitutes: The threat of substitute products emanates from the switching costs that the customers will pay to move towards different products, the inclination of buyers to substitute to separate products, and the trade off that the customers will make to substitute (Stahl & Grigsby 1997). The specialized furniture that IKEA produces is not easily available in the market. That is why customers would find it difficult to identify alternative products against IKEA furniture. Furthermore, the low cost of IKEA products is also a major competitive advantage that it has. 5) Threat of New Entrants: The barriers to entry of an industry define the amount of threat of new entrants. These barriers to industry emanate from existence of economies of scale of firms, access to input needed to produce products, the level of capital investment needed, the brand loyalty of existing competitors, the proprietary products of existing players and the absolute cost advantages of existing players. IKEA’s one size fit all strategy has enable it to establish economies of scale and produce at costs lower than most of its existing competitors. The fact that its existing competitors are finding it difficult to compete suggests that the threat of new entrants is not very high. PESTLE Analysis: Pest analysis involves a scan of the external environment. This analysis is at a macro level and focuses on the political, economical, social, legal, environmental and technological factors of business environments (Faarup 2010). Political Factors: The case does not mention existence of any laws or regulations that can hinder IKEA’s surge forward or its fight for sustenance. Economic Factors: The recessionary cycle has taken its toll on most businesses including furniture. The economy plays a vital role in determining consumption and hence periods of, and following recession are very challenging for businesses. IKEA has survived the worst part of the storm and its established modes of production will enable it to continue surviving in the future. Technological Factors: Technological advancements play a vital role in transforming business models and bringing up new challenges. IKEA must make sure that its products are in line with any new technologically savvy products that its competitors may offer. Although the specialized low cost market continues to be dominated by IKEA, new technology can trigger a sharp decline in production costs, leading competitors to enter IKEA’s model of core competency. Legal Factors: There are no major legal hindrances in the expansion of IKEA. However, penetration into new markets can bring new challenges. Environmental Factors: Environmental considerations hold more weight in some countries and less in others; however, they can never be completely disregarded. That is why environmentally sound practices must be undertaken by IKEA. The Priority Matrix: The priority matrix or the BCG matrix is a model that guides companies on where to place their resources to enable maximum utilization. Also referred to as the Boston Consulting Group growth share matrix, it displays various business segments of a firm on a graph of the market growth rate vs the market share relative to competitors (Giffin 2010). This model was verified into the priority matrix. The priority matrix focuses on importance and performance of business functions. This model will apply to IKEA in the context of its cost focused strategy of furniture production. The fact that the economic environment is not suitable post recession, IKEA should focus on its cash cow strategy of producing cost affective furniture to cater to Bs and Cs of the public, rather than investing in highly stylish or technologically savvy and expensive furniture. The sustainability of this strategy is important to whether the storm. Less Important More Important High Performance Cost Effective Manufacturing Low Performance Innovation and Customization Penetration into Asia/Pacific Will IKEA still be loved: IKEA has taken the rough route in times of tough economic conditions. It has got rid of workers and insisted on cost cutting rather than innovation. This, however, was the need of the hour as the economic conditions demanded such action. The worst is just about to be over and as time goes by IKEA will innovate and move towards expanding its market share. People will still love IKEA, but let IKEA play the waiting game for now. References Faarup, PK 2010, The marketing framework, Academica. Ferrell, OC & Hartline, M 2010, Marketing Strategy, Cengage Learning. Giffin, RW 2010, Management, Cengage. Grunig, R, Kuhn, R & Clark, A 2010, Process-based Strategic Planning, Springer. Hills, C & Jones, G 2009, Strategic Management Theory:An integrated approach, Cengage Learning. Pahl, N & Richter, A 2009, SWOT Analysis- Idea, Methodology And A Practical Approach, GRIN Verlag. Porter, ME 1998, Competitive Strategy, Simon and Schuster. Society for HR Management, US 2006, Essentials of Strategy, Harvard Business Press. Stahl, MJ & Grigsby, DW 1997, Strategic management: total quality and global competition, John Wiley and Sons. Read More