Business Strategy - IKEA - Essay Example

CASE STUDY: IKEA INTRODUCTION Most of us are quite often worried about the present and do not tend to worry about the future. in fact, many of us will admit that most of the things we experience today were unimaginable or not perceived to happen even a few years or months back. However, our actions usually tend to work in the opposite manner. Most of the things we do tend to have a long standing impact on our economy and environment. Man has always been in the quest for goods and services of better quality and is in the constant pursuit of improving the standards of living. Our actions and choices that are a result of this venture have had long-term consequences for all entities that have been influenced as a result. As such, we as individuals and the organizations that utilize our services need to show collective responsibility towards each and every aspect of our society. One of the best ways this can be achieved is by continuing to use resources and developing better processes for managing our businesses, albeit in an efficient manner without causing any harmful impact on the environment and by foreseeing how best we can preserve our economy and nature for our future generations. IKEA is one such organization that has been demonstrating corporate social responsibility over a long period. The company is popular worldwide for selling low-cost furniture across outlets around the globe. The range of products produced by IKEA span every possible thing that can be used in a home from kitchens and drawing rooms to bathrooms and bedrooms. IKEA today has sales in over 36 countries and looks all set to expand into 6 other countries in the near future (Gerald S. Albaum, Edwin Duerr, Jesper Strandskov, 2005). The present case study is an attempt at studying the success behind IKEA and studying the reason behind what has enabled it to become the largest furniture company in the world. The study is deemed important as IKEA has come to dominate the furniture world within a short span of 60 years and the turnover of the company simply suggests the existence of a very strong business model and supporting processes that aid in generating high revenue. The study will concentrate on evaluating the different aspects of IKEA’s operations and performance figures against a set of six models that will attempt to answer a variety of questions. The current strategic position will be ascertained by using the Porters generic strategies and the Bowman’s clock models. The key external drivers of change by which the company is constantly influenced will be identified and evaluated with the help of PEST analysis as well as Porter’s 5 forces. The manner and extent to which IKEA adds value to the brand and the market shall be ascertained by making use of Value chain and Resource audit. Q1. IKEA’s strategic position Porter’s generic strategies are a valuable tool in the field of strategic management. Generic strategies have been implemented in the industry since the 1980s. Generic strategies highlight the company from the market perspective and deduce that the most basic options encountered by a business organization are essentially dependent on the scope of the market that the company manages to serve and determine the select markets in which the company would be in a healthy position to compete. As such, the primary purpose of such competitive strategies is to enable a company to focus on ways in which it can obtain that most preferred and advantageous position within the industry. As profits are essentially revenues minus the costs incurred, the Porter generic strategy model professes that high profitability can only be achieved through a combination of high pricing and lower costs, where setting a price is dependent on the level of competition in the market. In this respect, Porter has used the terms ‘cost leadership’ and ‘differentiation’, which will be applied to assess IKEA (Cynthia A. Montgomery, Michael E. Porter, 1991). IKEA has followed an approach of cost leadership, wherein it has emerged as the lowest cost producers in the furniture industry. cost leadership strategy has enabled IKEA to earn the highest profits. Ingvar Kamprad, the owner of IKEA understood the importance of cost leadership and this has been one of the hallmarks of IKEAs successes. The company formed and maintained a close relationship with cheap suppliers from abroad. During the initial years, the company succeeded in carving a niche by sourcing raw material from suppliers in Poland and Easter Europe during the communist era. During the 60s and 70s, sourcing material such as wood and other raw material from the east European nations was a very cheap option, but only a few such as Ingvar succeeded in obtaining material through the Iron curtain. Since China opened up its economy for business, the country has become a cheap source of producing goods. With the fall of communism, the company took over most of the producing facilities in Poland end elsewhere and this combined with China provided it a constant source of cheap products (Albrecht Rothacher, 2004). The above-mentioned price advantage over competitors was further augmented by product differentiation. Within the confines of a low budget, a customer was also provided a wide range of products to choose from. IKEA has always placed prime importance on better quality in it products and provides additional services such as home delivery and the like at cheap rates. Customers were further attracted by the wonderful performance of the furniture especially in the cold parts of North America, Europe and Russia (Gerry Johnson, Kevan Scholes, Richard Whittington, 2008). The sheer number of stores has also enabled easy availability and extreme inter-relationships between neighboring stores within a region ensuring high rates of product availability. IKEAs success has been further augmented by the use of an aggressive focus strategy. The company depended on rapid expansion into new countries that were huge markets and were in fact just opening up during the 80s and 90s. For example, IKEA was one of the first furniture chains to set up shop in Russia upon the collapse of communism. This combined with the added advantage of local production enabled it to offer products at very cheap prices helping it register record sales of $260 million during the second year of operation (Emily Ross, Angus Holland, 2006). In regions where IKEA was unable to carve a niche during earlier attempts, an alternate strategy of takeovers was initiated to capture existing markets and draw new customers with lower price offers. In the UK, where IKEA was unable to make any inroads due to another brand ‘Habitat’, the former took over the British retailer in the midst of a style revolution and captured the resulting market share. A combination of these strategies and their dominant successes has ensured a favorable strategic position for IKEA (Brian Nattrass, Mary Altomare, 1999). The Bowman’s strategy clock model provides further insights into the strengths and weaknesses of IKEA, which will be studied along the eight strategic options provided by this model. IKEA does not conduct production operations on its own and has instead contracted its production operations to sub contractors all over the world. As has been mentioned before, most of the manufacturing is done in regions such as Eastern Europe and China where production and labor costs are cheap. As such, IKEA is a low-price leader. However, the company has thwarted the risk of a price war. The possibility of low quality products emerging out of the low cost production process has also been overcome by concentrating all research and development in technologically advanced Sweden. Thus, the products that roll out of IKEA’s factories are the result of a hybrid strategy of low price and differentiation. IKEA also claims to have cut down costs by ensuring that customers are in pro-consumers, which essentially means that they have to assemble the products on their own. The absence of any significant labor costs in additional manufacturing stages product assembly combined with the availability of facilities to help deliver the product to the customer have found a favorable place in the market. The extent of research and effort that has gone into keeping costs to a minimum is evident in the way the unassembled product is packed in compact boxes thereby helping cut costs during logistics, distribution and inventory space. Therefore, IKEA occupies the position 3 within the Bowman’s strategic clock (Claire Capon, 2008). Q2. Key External Factors influencing IKEA Like any business organization, IKEA operates in an environment that is heavily dependent on external factors at nearly all levels of operation. IKEA depends on external elements in almost every phase of operation ranging from production and supply to sales and marketing. In turn, IKEAs sales and mode of operation are determined by a number of external agents that work closely in determining the pattern of strategies of IKEA. PEST stands for Political, Economic, Social and Technological analysis. As the name suggest. PEST analysis facilitates the assessment of a business entity against the political, economic, social and technological determinants that play an influential role in the operation of IKEA (John R. Ruberson, 1999). As such, PEST analysis serves as a macro-economical tool that aims to study the important ingredients of strategic management that form an integral part of IKEA’s strategy. As IKEA is an international organization, it operates in several countries and the reason for its popularity is attributed to the brand name that has become popular over the years. However, such a rapid growth both in terms of countries as well as the number of outlets has demanded an centralized strategic policy. IKEA additionally has to take into consideration that local culture as it plays a significant role in what can be sold in that country. For example, the company cannot aim to sell furniture having a Scandinavian design in large numbers within the Middle Eastern market. Besides, it has to take the local sentiments into consideration before planning the introduction of a product. The political limitations also comprise the need of the company to look into procurement, sales and employment related issues. some countries such as Turkey have a limitation on the number of foreign workers that can be employed by a franchise. In such a situation, it becomes important to consider that there needs to be proper employee training that will enable local workers to work efficiently and upkeep the brand value. IKEA operates heavily through franchises, which have contributed significantly to its growth and sales. However, with more franchises seeking increased autonomy, there is a significant challenge to the company towards determining the level of autonomy that can be granted to these franchises. Additionally, differing world demographics and their related aspirations will force the company to broaden its social strategy in order to be able to accommodate all such demands. One of the most efficient ways in which the company can respond to such demands is by way of responding in varying degrees to different consumer groups at the national and regional level. As has been mentioned before, IKEA’s research and development activities are concentrated in Sweden. As such, costs related to developing new products and improving the quality and longevity of existing products is a challenging task, which IKEA has been able to answer through its research efforts (Alexandra Waluszewski, Håkan Håkansson, 2002). However, newer expansion into farther regions raise questions on the procedures in place that assist in collecting information related to obtaining the relevant information from consumers that will enable to develop newer products. As such, all such related challenges need to be addressed soon by IKEA. Porter’s 5 forces analysis is an industry framework for the development of business strategies. Porter’s 5 forces help determine the level of competition and the attractiveness of the business. As such, an unattractive business would be one that would work towards driving down the overall level of profitability for the business entity. In contrast to the macro analysis provided by PEST analysis, porter’s 5 forces help determine the organization’s strategy at the micro level enabling firms to asses their core competencies and improve them (Richard Luecke, 2006). When analyzing under the porter’s 5 forces, it initially seems clear that in terms of the threat posed by substitute products, the company does not face any substantial challenge from competitors when viewed from an global perspective. However, when looked at the operations of the company within the 26 countries where it has stores, it has been unable to capture pole position. For example, the company is quite behind Harveys furniture, which continues to dominate the UK market through its 150 outlets (Gerald S. Albaum, Edwin Duerr, Jesper Strandskov, 2005). However, the lower cost and the Scandinavian style of design have been attracting customers especially in the UK, although the growth is expected to take time. Anyone wanting to enter the furniture business as a new competitor in any of the markets where IKEA operates is bound to face have pressure from the very outset as apart from being able to set up a significant number of shops, the entrant’s supply chain should allow it to sell good quality products at prices comparable to that of IKEAs. Besides, the currently strong supply position of IKEA has been a result of implementation of well planned strategies of over 60 years. As such, any new competitor would have to stand the test of time in order to be able to make inroads. Additionally, IKEA has been facing intense competition in many countries such as Germany and the UK apart from the established markets of the United States. However, the appeal that exists within the middle classed in most countries allows it to make appreciable amounts of business every year. Customers also find IKEA to be a preferable solution to their furniture needs as it falls within their budget. This is especially significant in the case of the Russia market, where people were not left with enough money after the fall of communism. Despite these hardships, IKEA has managed to post sales in excess of $200 million during 1993, which is a phenomenal figure given the harsh market conditions that existed within the Russian economy back then (Emily Ross, Angus Holland, 2006). Q3. How does IKEA add value? Upon having discussed the influence of the external factors that play a key role in determining IKEAs competitiveness, it is also important to analyze the manner in which IKEA has been able to contribute significantly to improving its internal value chain. This is extremely important in the current analysis as it helps the research effort determine the competitive position of the internal processes that are key to enabling the value chain perform at the least possible cost and eliminate additional overhead thereby placing it in a better position than its competitors. As part of the value chain, assessment is made at primary and secondary levels. These are categorized depending on the level of importance to the business. While primary activities pertain to activities such as production, marketing and logistics, secondary activities comprise support mechanisms such as research and development, human resource management, and infrastructure development. The primary purpose of the value chain is to maximize the customer value through each of these activities (Carliss Y. Baldwin, 2000). IKEA has managed to enhance the quality of the value chain by incorporating the customer into the process and using a dual value system between the suppliers and consumers to the company’s management. As part of this strategy, the customer serves as a supplier of necessary ingredients such as time, effort and feedback as also transportation and distribution. Additionally, suppliers also act as customers, who receive assistance from IKEA through various services such as quality management, customer support etc. as such, IKEA has been constantly improving and popularizing the concept that customers not just help in providing value, but rather take an active part in helping create the value (Emily Ross, Angus Holland, 2006). IKEA has further maintained its role in the value chain by helping mobilize customers and suppliers thereby enabling them to contribute more value to the supply chain (Umit S. Bititci, Allan Carrie, 1998). This is done by means of conveying to the consumers through catalogs and various other means on various services provided by the company through its operations and products and also educates them on their expected contribution to add value to the process. IKEA also maintains that it constantly innovates to provide products at the least possible cost and is in the constant search of suitable suppliers in this regard. However, it also ensures that all eligible suppliers are in a position to deliver high quality material at the lowest unit cost. IKEA’s management constantly monitors all suppliers and provides them all the necessary help through required training, leased equipment and proper assistance at all levels of manufacturing. This long term and closely binded relationship helps produce products of high quality and enhances the value addition to suppliers thereby differentiating IKEA competitively both from the customers and suppliers perspectives (Albrecht Rothacher, 2004). How sustainable is IKEA? Over a span of 65 years, IKEA has evolved into the world’s largest furniture retailer and has attained fame the world over for producing high quality products with a predominant Scandinavian design. The company operates in 36 countries through fully owned stores and franchises and is visited by 110 million people annually. Its sales during 2008 stood at $28 billion and its progress has been termed as steadily increasing in nature. The preceding chapters have assessed the company’s position through different angles. The Porter’s generic strategy model has enabled the research to conclude that IKEA has achieved success through the establishment of franchises, product differentiation as also cost cutting at all possible levels thereby helping it to provide low quality products at the highest qualities. Its long term sustainability is also a demonstrator of the strength of the firm’s global strategic position and clearly highlights the ongoing efforts of the company to consolidate its position in existing markets of operation. By including the customers within the value chain, the company has enabled suppliers and customers to provide efficient feedback and this strategy has served as a source of motivation for all stakeholders. The PEST analysis further suggests that efficient product differentiation, extent of operation and the nature of sourcing the raw materials from cheaper producers has enabled the company to maintain a tight grip on markets and its brand value has encouraged customers to adopt it as preferred providers of furniture. As such, it can be deemed that the strategic position of IKEA is very strong, which can be improved in order to strengthen the current position and capture new markets with innovative products. REFERENCES 1. Gerald S. Albaum, Edwin Duerr, Jesper Strandskov (2005), International Marketing and Export Management. New York: Pearson. 2. Brian Nattrass, Mary Altomare (1999), The Natural step for Business. London: New Society. 3. Albrecht Rothacher (2004), Corporate Cultures and Global Brands. California: World Scientific. 4. Gerry Johnson, Kevan Scholes, Richard Whittington (2008), Exploring corporate strategy. New York: Pearson. 5. Emily Ross, Angus Holland (2006), 100 Great Businesses and the Minds Behind Them. London: Sourcebooks. 6. Alexandra Waluszewski, Håkan Håkansson (2002), Managing Technological Development. London: Routledge. 7. Cynthia A. Montgomery, Michael E. Porter (1991), Strategy. Harvard Business Press. 8. Claire Capon (2008), Understanding Strategic Management. New York: Pearson. 9. John R. Ruberson (1999), Handbook of PEST Management. London: CRC Press. 10. Richard Luecke (2006), Marketer's Toolkit. Harvard Business Press. 11. Carliss Y. Baldwin (2000), Harvard Business Review on Managing the Value Chain. Harvard business school review. 12. Umit S. Bititci, Allan Carrie (1998), Strategic Management of the Manufacturing Value Chain. New York: Springer.      Read More