IKEAs International Strategy and the Establishment of New Stores - Research Paper Example

Introduction The IKEA Group is a global organisation with activities of retailing furnishings across a number of nations. With sales of around 20.6 billion pounds in 2009 that had tripled those of 1999, the company is the largest in the market and posed the highest potential to continue to grow. During the 2008/2009 financial year, the world had experienced a global recession that affected all industries including the furnishings market. IKEA was also a victim, which saw the CEO of the group slashing 5000 jobs out of the total 120000 employees in the organisation. In August of the same year, the company opened another 15 stores, but only experienced a 1.4% growth. This illustrates the troubles in the sector at the time which saw some of the competition (MFI) close shop as they could not cope. However, IKEA seemed to be going strong as its 20.6 billion accounted for 2.5% of the global furnishings market sales with its closest rival coming in at 1% market share. This paper seeks to analyse the advantages and disadvantages of the group’s business strategy and provide an assessment of the international strategies with the aim of suggesting the sustainability of IKEA’s strategy using the Why we still love IKEA case study. Business strategy analysis In the home furnishings market, consumers have a large choice of goods to choose from due to the large number of companies offering the services. However, IKEA seems to have found a perfect mix of strategies that enables the gaining of a competitive advantage over others (Porter 1985, p. 85). These strategies can be analysed using the Bowman’s Strategy Clock that is an extension of the three classic competition strategies (Mindtools.com 2014, n.p.). Bowman’s argument is that the competitive nature of a company or organisation is determined by the position of the policies of the strategy on a clock of strategic positions. The clock consists of eight strategic positions, namely; low price/low added value, low price, hybrid, differentiation, loss of market share, focused differentiation, risky/high margins and monopoly pricing (Utrilla et al. 2012, p. 5). In the case of IKEA, the strategies of business integration focus on product differentiation and cost leadership. Cost leadership One of the key policies of the IKEA group is that it does not target the rich and instead sells to the smart (Crampton 2008, n.p). The interpretation of this is that it struggles to minimise the prices of its goods as much as possible. This means that the production has also to minimise costs. According to (Bowman 1988, p. 67) this strategy may have two implications; a an increase in market share due to the competitive prices or a reduction in market share due to the reduced quality caused by reduction in production costs. This is illustrated by the quality of the IKEA goods that cannot be described as the best (Thomson 2009, p. 184). The disadvantage is that the customers are not satisfied with the goods. In one case, a customer claimed that he was happy with none of the products from the store (Scholes 2010, p. 5). In the end the reduction in price may turn out to be a disadvantage as the group loses customers due to poor quality. The large number of firms offering the same services in the market makes it a competitive market. This means that the group has to have competitive prices in accordance with product value if it is to compete successfully (Doyle 2011, p. 258). If IKEA was the only player in the market it could increase prices without value addition. However, due to the market conditions the company is able to offer cheap and quality goods which is an advantage. A key part of the IKEA’s strategy is to act as the market’s low cost leader (Jacobsen 2009, p. 144). The idea is to balance low margins with high volumes by driving the prices down. When Ingvar Kampard first started IKEA, the home furnishing’s market was run by cartels who dictated the prices of products (Scholes 2010, p. 1). However, Ingvar bought direct from the small producers which meant that he could sell at a lower price. Instead of using the small input cost to make a high turnover, he decided to pass a big part of the cost saving he made to the customers making the goods cheaper. This works as an advantage for the group as it gained more customers and enabled the development of profits of up to 18%. Bowman describes this phenomenon as the establishment of a hybrid company (Nayab and Finn 2011, n.p.). A hybrid company is one that offers its goods at a fairly low cost with the quality being higher than those of low priced competitors (Baraskova 2010, p. 33). IKEA has adopted this model as a strategy of integrating the markets fully especially in the UK. Although there are some dissatisfied customers with talks of “wobbly tables”, the products offered by the stores are of fairly good quality considering their prices. The idea is to remove personal wealth as determining factors for the purchase of quality home furnishings to result in products that suit everyone even smart rich people (Scholes 2010, p. 4). The large sales in the UK with the 17 stores is testament enough of the success of this model. Differentiation Every customer has different needs and wants that translate into buying different products for the same purpose. This means that any organisation that can differentiate their products will see an increase in sales as the products are able to meet the needs of different people (O’Sullivan 2011, p. 6). The IKEA business strategy does not allow for this style of marketing. It adopts a one-size-fits-all approach where products offered in Moscow are the same as those in Sweden (Scholes 2010, p. 5). The idea is to use homogeneity to reap from economies of scale. IKEA offers a wide range of homogenous products and aims to make profits by having a large volume of sales and not the high margins. However, it does not offer products that are designed for specific people. Their products are not intended for the rich, but for the smart (Scholes 2010, p. 4). Focused differentiation means the production of designer products, custom made for the buyer (Voropajeva 2012, p. 13). Bowman claims that if an organisation focuses to produce customised goods for specific customers (focused differentiation), it establishes a competitive structure that maximises profits through the creation of high margins of returns (Faulkner and Bowman 1995, p. 56). The cost of production may not be high, but the perception of value drives the premiums high creating a high profit margin. This serves as a disadvantage as the group has to rely on sales volumes to make profits. IKEA’s international strategy An international strategy is the options that a company utilities in conducting operations outside its country of origin (Roth, Schweiger and Morrison 1990, p. 43). Porter’s international strategies are able to analyse the competitiveness of an international strategy. Porter recognized that value chain was a means of organisational activities’ strategic relevance analysis as it provides the behaviour of costs. A more cost effective model creates a competitive advantage (Porter 1986, p. 18). The competitiveness is determined by five market forces of competitive rivalry, power of buyers, power of suppliers, threat of new entry and the treat of substitutes (Jarzabowski, Giuletti and OLiviera 2010, p. 18). However, he argues that the competitive strategy is what determines the overall success of the competition of a business especially on the international market. Porter’s international strategy model analyses a business through value chain analysis on an international level (Chang Moon 1994, p. 53). A value chain is the nine generic activities involved in the production and sale of products and their manipulation. IKEA has over 250 stores in 24 countries spread out across various continents. All in all it is the largest home furnishing group across the globe dealing with household textiles, floor coverings and general furniture. This means that it needs to have a marketing strategy that will focus on the international market (Sylverberg 2004, p. 5). The group’s customers comprises of a wide range of people from all social classes with the owners of the company being the Kampard family. The company outsources its products directly from the designers from a number of countries with China and Poland being the biggest suppliers. However, it also produces some of its products in the town of Almhult. The main drivers of IKEA’s internationalisation have been the similarity in needs of the customers of the industries across the globe as well as the strategies incorporated by the competitors. Currently, the multi-store franchise does not offer differentiated products. The tables offered in Moscow resemble those in Sweden (BBC 2009, n.p.). Generally, the products are offered in the stores are homogenous. The success of the franchise that has seen it dominate the global market share of the industry has illustrated this property of the consumers. As a strategy of ensuring the maximisation of the economies of scale, the company offers somewhat the same products across the international market as a strategy of integrating itself. Competitors of IKEA range from multinational franchises like itself to small stores. Just because it is the largest store at the moment does not mean that this was always the case. When Kampard started the store, he faced stiff competition from cartels that supplied the products. However, he decided to utilise one strategy that has been behind then success and growth of the company to date. He decided that he was going to purchase directly from the producers and therefore have a lower cost in presenting the product to the customer. He went even further and passed on a significant portion of the cost saved to the consumer. The result was that he was able to provide quality products at reduced prices. Although the margin of profit was minimal, the volumes of sales grew and continue growing because of this strategy. This strategy enabled the success of the company because the competition strategies relied on the utilisation of large profit margins to make profits. An assessment of the company from the perspective of the Porters internationalization model shows that the advantage that the company can gain by doing international business is low products costs (Sorensen 1994, p. 25). This is because the company utilises the property of global sourcing. This is the property of a business or organisation to purchases component and services of production from the most appropriate locations and suppliers around the world. The company was started in Switzerland. However, its biggest suppliers are from two different continents. This is because the services and products derived from these two locations are best to the development and success of the company in terms of quality or quantity (Eric and Maccarthy n.d., p. 38). The fact that the headquarters are in the Netherlands, where tax laws are favourable is aimed at reducing costs of business. It is therefore correct to say that the internationalisation of coordination of IKEA’s activities is aimed at creating cost advantages that make the company more competitive. IKEA enters new markets through the use of foreign direct investments. This involves the establishment of subsidiary stores where the company has full control that enables the integration and coordination of services and products in a manner prescribed in organisational strategies (Roth 1992 , p, 535). This has enabled the entry into new markets to be rapid. However, such a model also develops issues that need checking. The group first opens a store in the target country. With time, the operations of the store grow and so does the knowledge on the market. The knowledge provides an understanding of the market, which sees the company increase commitment to the market through the establishment of another store. From the porter’s model of analysis, it is safe to conclude that IKEA uses the Staged International Expansion Model (Susman 2007, p. 184). Sustainability of IKEA’s strategy Over the years, the group has established itself as a global leader in its industry (Wighton 2009, n.p.). This has been through the utilisation of a strategy that focuses on the consumer. However, in business there is no guarantee that the strategy you utilise will be viable in the next year as such it is necessary to know the sustainability of the strategy of the organisation. IKEA’s strategy for the expansion of its business deals mainly with the price and quality of products. Generally, the company endeavours to ensure it offers its products the lowest possible prices and quality that is higher than that of products within the same price range. This has seen the group outsource components from different places around the globe and go directly to suppliers which is a good strategy for a multinational corporation (Porter 1990, p. 23). This has significantly helped the company stay afloat especially during the recession by making it a cost leader. However, when testing the sustainability, we need to put the company in a worst case scenario. The low price of the products is attributed to the company going directly to the suppliers with no restriction on locality. This can be done by any of its competitors which will see them dropping their prices. If the competition outsources the components from the same suppliers, the increased demand may drive the price of the inputs up which results in the increase in IKEA’s prices that cancels out the effect of their lower prices as a competitive edge. The competition may also offer better prices for the components which may see the suppliers turning to them causing a supply deficit for the company. The effect would be the demand of the consumers may not be met by the products supplied which may cause consumers to lose faith in the company resulting in loss in market share. In case the competition decides to also offer its products at a competitive price with the quality being maintained, the company may experience huge reductions in profits. This is because the company mostly relies on volumes of sales and net profit margins to make profits. If the competitive edge is reduced by the reduction in prices by competitors, the volumes of sales will surely decrease threatening the profit making ability (Morrison and Roth 1993, p. 815). IKEA’s international strategy involves the establishment of new stores in new market to ‘test the waters’ before franchising in the new markets by opening other stores. This enables the organisation to have an understanding of the market before fully committing itself to the market. After the establishment of the new stores, the organisation sells products that are similar to those of other stores across the region. This is because its international strategy states that it should market homogenous products to maximise on economies of scale. This is not a sustainable market integration strategy because when the group opens its store, they rely on the intuitions and judgements of the employees to determine the nature of the market. If the judgement is wrong and the introduction into the market fails, the company may experience significant losses. It needs to perform research in the markets before opening the stores (Jansson 2008, p. 69). Different regions have different cultures and different beliefs that make them have the propensity to purchase different products (Porter 1986, p. 12). The strategy does not recognise this which means that the integration of the group in a new market is at threat. Bibliography Baraskova, J 2010, Strategic Positioning and Sustainable Competitive Advantage in Food Industry. Aarhus School of Business. BBC 2009, ‘Sweden’s IKEA builds record sales’, BBC website: www.bbc.co.uk. Bowman, C 1988, Strategy in practice. Chang Moon, H 1994, The dynamics of Porter's three generics in international business strategy, in (ed.)Research in Global Strategic Management (Research in Global Strategic Management, Volume 4) Emerald Group Publishing Limited, pp.51 – 64 Crampton, R 2008, ‘Why we love IKEA’, The Times, 7 June 2008, © the Times/The Sun/nisyndication.com. Doyle, C 2011, A Dictionary of marketing. Oxford [etc.], Oxford University Press. Eric, M and Maccarthy, B, Configuration and coordination in international supply chains: Preliminary Findings from International Manufacturing Companies in Indonesia University of Nottingham NG7 2RD UK Faulkner, D and Bowman, C 1995, The Essence of Competitive Strategy, Prentice Hall. A similar framework is also used by Richard D’Aveni, Hypercompetitive Rivalries: Competing in highly dynamic environments, Free Press. Jacobsen, M 2009, The art of retail buying an insider's guide to the best practices from the industry. Singapore, John Wiley & Sons (Asia). http://site.ebrary.com/id/10523985. Jansson, H 2008, International Business Strategy in Emerging Country Markets: The Institutional Network Approach. Cheltenham, Elgar. Jarzabowski, P, Giuletti, M and OLiviera, B 2010, Building a Strategy Toolkit: Lessons from Business. Mindtools.com 2014, Bowman's Strategy Clock: Making Sense of Eight Competitive Positions. Available from: http://www.mindtools.com/pages/article/newSTR_93.htm [21 Nov. 2014]. Morrison, A and Roth, K 1993, “Relating Porter’s configuration/coordination framework to competitive strategy and structural mechanisms: analysis and implications”, Journal of Management, Winter1993; 19: 797-818 Nayab, N and Finn, W 2011, A Look at Bowman's Strategy Clock. Bright Hub. Available from: http://www.brighthub.com/office/entrepreneurs/articles/122654.aspx [21 Nov. 2014]. O’Sullivan, K 2011, Strategic Options – Approaches to Sustainable Competitive Advantage. Porter, M 1985, Competitive Advantage, Free Press. Porter, M 1986, “Changing patterns of international competition”, California Management Review, Vol. 28 No. 2, 1986, pp. 9-40. PORTER, M 1986, Competition in Global Industries (1986). Boston, Mass.: Harvard BusinessSchool Press. PORTER, M 1990, The Competitive Advantaqe of Nations (1990). London : The MacMillan Press. ROTH, K 1992, International Configuration and Co-ordination Archetypes for Medium-Sized Firms in Global Industries, Journal of International Business Studies, Third Quarter, 1992, pp. 533-549 ROTH, K., SCHWEIGER, D, and MORRISON, A. J 1990, An empirical analysis of Porter's international strategy types. Columbia, S.C., Center for International Business Education and Research, Division of Research, College of Business Administration, University of South Carolina. Scholes, K 2010. Case Study: Why we still love IKEA? Sorensen, O 1994 The Porter Approach, Aalborg University Centre for International Studies January 1994,http://www.business.aau.dk/ivo/publications/study/sms6.pdf  Strategy Explorers, Do you Have a competitive strategy? Susman, G 2007, Small and Medium-sized Enterprises and the Global economy. Sylverberg, T 2004 The internationalization process of the firm – a case study, Linkoping, 2004,http://www.ep.liu.se/exjobb/eki/2004/iep/026/ THOMSON, N 2009,Strategy in Context. Oxford, Wiley-Blackwell. Utrilla, P, Torraleja, F, Vazquez, A and Ogayar, M 2012, How Does Strategic Choice Affect Business Results? A Case Study of Mutual Guarantee Societies, International Journal of Business and Management. Voropajeva, M 2012, Implementation of the Differentiation Strategy in Cafe Industry in Turku. Wighton, D 2009, ‘Is IKEA’s business model coming apart’?, The Times, 24 June 2009. Read More