IKEAs business model and sources of competitive advantage - Essay Example

?Investigate IKEA’s business model and sources of competitive advantage as depicted in this case. Why do you think it has been so successful in the fragmented furniture industry? What do you consider to be IKEA’s main weaknesses? IKEA’s business model is designed in alignment with the vision and philosophy of its founder, Ingvar Kamprad. IKEA aims to sell furniture to its customers across the globe at a price that is extremely affordable without compromising on quality. What is best about IKEA’s furniture is that although it is cheap, yet it is stylish and durable. IKEA’s business model is based on maintaining low cost structure so that it can continue to deliver its promise of low price and good quality lifestyle to its customers. IKEA has very carefully managed to keep its cost structure low by practicing a few strategies. For instance, it has chosen suppliers from different parts of the world and maintained strong and long term relationship with them by offering them office facilities and technologies to carry out their business smoothly. IKEA focuses on efficiency though long production runs so as to entice investors and bring down the cost structure. The raw material needed for the manufacturing of furniture is chosen carefully without any interference of third party; expensive wood is replaced by less expensive and good quality raw material. To further reduce its cost structure, IKEA’s furniture arrives at the stores in disassembled parts in flat packaging along with instruction manuals; this not only lowers the transportation costs but offers ease of handling to the customers. Unlike other stores in the category, IKEA’s stores are located in the outskirts and only few are owned by the company. Franchising is a good option for lowering the cost structure and IKEA has taken it up religiously. Moreover, IKEA ensures that it does not rely on one supplier for the manufacture of a single product. Take an example, for an IKEA chair, the seat is supplied by a manufacturer who is in one corner of the world, legs come from a supplier from another corner and nuts and screws are supplied from totally different regions. IKEA’s furniture designs are basically Scandinavian with little or no modifications. These designs are considered outclass and accepted widely in non Scandinavian countries equally. However in some regions the customers’ exhibit displeasure towards Scandinavian designs because the items do not fulfill their cultural and personal needs. Apart from all the good steps taken by IKEA to maintain cost leadership, there is still room for weaknesses which must be addressed to as to strengthen the brand image. Although IKEA has expanded its operations in major territories of the world for earning more revenues but it has failed to understand is that every country has different culture, demand, taste and most of all, legislations which it has to abide by. Since these factors vary from country to country, it has come to IKEA as a big challenge to meet the customer and country’s requirements while maintaining cost leadership. Because IKEA promises low priced furniture to its customers, innovation is not seen much because bringing in new designs can disturb the cost structure. Sometimes IKEA fails to understand that one size fits all cannot hold in the line of furniture. Scandinavian designs might be appealing to countries in the Europe and nearby but cannot please the Americans in the same manner. The stores of IKEA are located outside the cities as per the low cost strategy. This causes the customers to travel long distances so they prefer to make purchases from nearby stores. We have learned from the given case study that IKEA has chosen cost leadership to be its core aim and strategy but only this one factor is not enough for its survival. It has to have more points of differentiation because when other competitors in the industry bring their prices down and offer quality and superior customer service, then chances are likely that customer loyalty and brand image of IKEA will drop off. IKEA fulfils the needs of customers who want to buy inexpensive and durable furniture for their homes but when it comes to catering the needs of those who are looking for modern and stylish furniture items, IKEA fails to do the job. With the use of relevant globalization and internationalization models, analyse and evaluate IKEA’s internationalization strategy. What do you consider to be the key opportunities and threats facing IKEA at the end of the case? Whenever a multinational company wants to expand its business across the boundary of home country, it has to undertake one of the four strategies mentioned in the diagram below. IKEA opted for globalization and internationalization. Companies globalize when there is no room for further growth in their home country. Same goes for IKEA-it was a huge hit is Sweden and when the management saw that for making more profits and growth, they have to cross the boundaries. The most common and fruitful strategy that firms adopt when they want to expand at global level is through mergers and acquisitions. When IKEA made the firm decision to expand at international level, it ensured that it will grow independently and not purchase or collaborate with popular chains in other countries. The underlying logic behind this step was that if IKEA purchases any store chain and use its name for expansion, in some countries that store will have good reputation whereas in others the image wouldn’t have been pleasant. When any organization wants to expand at global level, it has to work out on its image; a positive image will attract more customers and vice versa. In some countries, the image of IKEA was reasonably positive whereas in others it was either considered as a very cheap or very expensive brand. Nonetheless, people outside the Scandinavian boundaries mostly considered IKEA as a brand for the upper middle class. For any company that aims to expand its operations into other countries, carrying out a cultural analysis is mandatory. This is because every country has a culture that is different from others and so are the laws and customer preferences. For instance, when IKEA entered Germany, it faced problems such as the quality standards were high and IKEA had to undergo legal proceedings. Similarly, the managers at IKEA Germany work more on the ‘go by the principles’ philosophy whereas those in Sweden were result oriented. When expanding into other European countries, IKEA had to take into account currency differences whilst maintaining its low cost leadership. IKEA’s expansion is Europe didn’t have to face many challenges as it did in the U.S. The preferences of American customers were quite different from European and Asian. The furniture items appeared to them quite unusual than what they really were for instance, a vase seemed to them like a drinking glass. The competition in America was high as the markets were already saturated with European stores and didn’t have room for IKEA. The mantra of low price couldn’t do its magic well in the beginning because the imitators were already there waiting to make clever moves. Competition was very fierce but IKEA remained strong on its original Swedish philosophy and made its image through. After reading the case, we have come across some opportunities and threats. IKEA is investing more and more in social responsible activities because it has realized that for any organization to become successful and enhance its image, it has to take active part in social wellbeing activities. For instance, IKEA saw that the quality standards of German are quite high and strict as compared to other countries and so it decided to bring it quality in line with those standards. The pamphlets offered for the customers at the IKEA stores are all made of recyclable materials. IKEA offers special training programs for its employees and ensure that all employees work at least a week every year at the inventory to get a good idea of how the whole network works. The employees are encouraged to take part in projects that are aimed at the environment protection and betterment of the community. In fact, IKEA also decided to open a recycle plant at every store location so that it could play a vital role in saving the planet. IKEA ensures that it gets supply of larger volumes so that cost of manufacturing could be minimized and it could continue to deliver less expensive and quality furniture to its customers. IKEA also minimized the transportation costs by transporting huge volumes so as to reduce the number of trips. Usually the supplies were transported at odd hours so as to avoid traffic hours. In addition to the threat from competitors which are trying to imitate the concept of IKEA, it faces great threats from unsatisfied customers. This is because when the customers are not pleased, they can easily switch to other furniture stores and also use ‘word of mouth’ technique to pull the loyalty of others away. Another threat to IKEA’s image is form the long lines of customers that are seen at the opening of stores in new regions; customers push each other and accidents occur. Mismanagement of stock is one of the threats IKEA faces because when a customer demands a particular item, it should never go out of stock or the repute of the store would get affected. Read More