How IKEA Does It - Case Study Example

IKEA Name Professor Institution Course Date IKEA Executive Summary This paper assesses the business Level strategy of IKEA Company and their strategic impact on strategy the firm. It will also define strategy, structure issues, analyze the SWOT and provide recommendation to the firm. IKEA Company is a Swedish firm registered in the Netherlands which design and sells furniture like chairs, beds, desks, appliances and other home accessories (Edvardsson, Enquist & Hay 2006, p.231). According to Edvardsson, Enquist & Hay (2006, p.230), IKEA Company was first established in 1943 in Sweden and now owns and runs 349 outlets in 43 nations across the world. The company is operated by a complex range of for-profit and not-for-profit corporations. Its corporate structure is categorized into two major parts including the operations and franchising. Some of the business level strategies pursued by the company include decentralization, market leadership and low-pricing, while the corporate level consists of people-oriented and futuristic strategy. The found out that most IKEA on a 24-hour basis, but also faced with controversies such as forced labor and partial advertising in Norway. Table of Contents IKEA 2 Executive Summary 2 Table of Contents 3 1.0 Introduction 4 2.0 Business Level strategy and its impact in IKEA Company 4 3.0 Corporate level strategy and its impact in IKEA Company 6 4.0 Strategy and structure issues IKEA are facing 9 5.0 SWOT Analysis of IKEA 10 5.1 Strengths 10 5.2 Weaknesses 11 5.3 Opportunities 11 5.4 Threats 11 6.0 New strategies as result of matching Strengths and Opportunities 12 7.0 Findings 12 8.0 Strategic recommendations 13 9.0 Conclusion 14 10.0 References 15 1.0 Introduction Globalization, information technology advancement, growing pressure from both internal and external forces, and increase in number of organizations joining getting into the market implies that business environment has changed a great deal and management has become very much different from the past (Hill 2010). As such, the competition has increased compelling the top management to rethink their business and corporate strategies so as to satisfy consumer needs and gain market advantage. IKEA Company remains a market leader in furniture designs and sales (The Times 100 n.d). However, it faces pressure with its complex strategies and structure from its major rivals who intends to surpass it in terms of revenue. In light of information, this paper assesses the business Level strategy of IKEA Company and their strategic impact on strategy the firm. 2.0 Business Level strategy and its impact in IKEA Company With globalization changing the business environment, IKEA currently pursues several business level strategies consisting of decentralization, low-pricing, differentiation strategy, and quality focus business and market leadership (Edvardsson, Enquist & Hay 2006, p.235). The company believes in distributing its designing and selling facilities in many countries in order to tap the unique resources existing in these nations. IKEA has 349 designing and assembling stores distributed in 43 countries and serving different continents, including Europe, Asia, North America and Oceania (Edvardsson, Enquist & Hay 2006, p.233). Its top five markets include China, Germany, Italy, Poland and Sweden. Decentralization has helped this company compete on many fronts so as to maximize its profits. The major competitive advantage for IKEA particularly when compared to its key competitor Home Depot is its cost leadership. In fact, the firm enjoys economies of scale in its home country and some of major markets like China (The Times 100 n.d). Furthermore, the firm has the capability to allocate each of its major resources into useful activities when it separates projects and businesses. Edvardsson, Enquist & Hay (2006, p.237) argue that another business level strategy that IKEA leveraged is to develop independently (in place of being a public corporation) with an objective to offer exceptional designed furniture for a particular market segment. They had a successfully defined supplier management relationship, quality management together with global vision to get new markets and provide a new range through their product cost differentiation strategy. In support for the cost leadership strategy, the company is involved in this strategy try to achieve efficiency, quality, innovation and quality and customer awareness (Hitt, Ireland, Hoskisson 2012). It must be noted that IKEA endeavors to realize superior efficiency by raising their learning effects, economic scale, flexible productions systems, mass customization and experience curve. By outsourcing quality products across the world, it not just assist IKEA decrease products cost due to cheap labor and low-cost materials from other nations, also assist them research and embrace new technology into the business. The company also practices low pricing strategy as one of its business level strategy. Lancaster & Reynolds (2005) contend that IKEA always tough to be launching products on a low pricing strategy so as to enable the middle income consumers buy their products. This makes IKEA to get larger share of customers in their early stage of the product life cycle with the similar strategy embraced in global markets (The Times 100 n.d). The company also pursues quality when designing their products. IKEA Company’s product has always been regarded value for money, making it the main rationale that consumers are attracted to their products and other market players not able to offer similar quality at competitive prices. To provide high quality products, IKEA normally invest heavily in research and development, getting outstanding suppliers, who can provide it with raw materials at a cheaper prices The company is the largest furniture marker in the world. As such the company boasts of market leadership in the furniture industry. To be a market means the company has the largest share of market based on its revenue. This leadership is sustained by its large and loyal customer base who believes in its quality product and services (Hitt, Ireland, Hoskisson 2012). 3.0 Corporate level strategy and its impact in IKEA Company IKEA Company implements a people-oriented and futuristic corporate level strategy. Other corporate level strategies pursued by IKEA include vertical integration, supplier vendor relationship management, alliance for international markets and focus on innovation (The Times 100 n.d). The firm prides itself in having solid and effective plans which are done in good time to echo long-term strategic course of its key individuals, customers, employees, suppliers and government agencies. The management believes that although prospect market wars in furniture sector can be decided on the cost factors, there is a necessity to provide comfortable home and office accessories to its clientele. For that matter, the IKEA gives its key personality an opportunity to contribute on furniture designs, assembly and even in organizational strategy. Eventually, the firm has implemented a globalization and internationalization position when tackling every corporate level challenge by taking into account, the demands of its international partners, their economic abilities and their welfare (Mullins, Walker & Boyd, 2010). Edvardsson Enquist & Hay (2006, p. 241) posit that as a result, the firm has achieved a competitive edge over Home Depot, Costco, Wal-Mart, and others as it can currently distribute its culturally diverse labor force into significant organizational activities including maximizing its key competencies like designing superior home and office furniture. As IKEA gets into the international markets they have established strong supplier relationship in different geographies that ensure quality raw materials on timely delivery so as to also make precuts on time for market delivery. Large firms are frequently involved in numerous different forms of businesses and distribute products in several various countries. One of such companies is IKEA which has been applying Vertical Integration in international furniture market to meet its corporate level strategy. Managers employ corporate level strategy in vertical integration to classify which sectors their company ought to compete in so as to increase its profitability (Mullins, Walker & Boyd 2010). In the two categories of vertical integration, that is forward vertical integration and backward vertical integration, the research has established that IKEA has being applying backward vertical integration to spread out their businesses in order to increase profit. IKEA have benefited through vertical integration in many ways comprising of enabling investment in the specialized assets, improved scheduling, and increased bargaining power and other ventures among others. According to Mullins, Walker & Boyd (2010) a specialized asset is normally designed to carry out a particular function and whose value is considerably declining in the next best application. In the IKEA, the special asset is workforce skills which they acquired via training and experience. IKEA has invested in these forms of asset since it enables it to differentiate their product and also to reduce its cost structure. Vertical integration has enabled IKEA Improve it’s scheduling. According to Kotler& Armstrong (2010), corporate level strategy has been achieved because vertical integration makes operation easier, quicker and cost-effective to plan, coordinate, and products transfer like finished beds, chairs and other home and office furniture from designing and assembling plant to distributing or retail shop. IKEA employed vertical Integration in its corporate level strategy since it enables them to attain bargaining power over its suppliers and increase profitability. By the consolidation of the industry by means of vertical Integration, IKEA has turned into a larger purchaser of the suppliers’ product and apply this situation as a leverage to bargain the price, hence decreasing its cost structure (Edvardsson Enquist & Hay 2006. p.243). IKEA also ventures into hotel industry to spread risks. In August 2012, the firm stated that it will set up a 100 chains of hotels in Europe, though different from its few current hotels in the Scandinavia, these new ones will not have the IKEA title; They will be run by an unnamed global group of the hoteliers. While operation at the global arena, IKEA has developed alliances in the new markets which it avoid market risk and also help in market its products since such partners are known in the market. One of its partners that have played part in marketing its products is Unilever Company. IKEA Company believes in enhancing its product attributes and design through innovation so as to continue attracting the existing customers and new ones. 4.0 Strategy and structure issues IKEA are facing IKEA’s current strategy is to enter into global markets, increase its brand awareness and maximize its profits. Therefore, its first problem faced by the firm is the scale and size of its international business. IKEA is regarded as the largest furniture marker worldwide and carries an array of 9,600 products consisting of furniture and accessories. It implies that IKEA’S stores are extensively established in several countries. Hence, this could make it very hard to control these stores with regard to quality and standards (Jacobides 2007, p.455). So they have to figure out some answers to tackle the problem which brings gains to the general organization. While pursing global markets the company faces many challenges associated with operating in another country such as environmental laws, and market regulation (Kotler & Armstrong 2010). It should be noted that while in other countries, the company also pursues different market strategies. One of the major challenges IKEA underwent was that its charges, regarded low in North America and Europe, were more than the average in China (Edvardsson Enquist & Hay 2006, p.242). The furniture designed by domestic stores were lower in price since they was the availability of cheaper raw materials and cheap labor, and owing to the fact that their design and assembly costs were normally nil. IKEA is operated and owned by a complicated range of for-profit corporations and not-for-profit corporate structure. Its corporate structure is categorized into two major parts; franchising and operations. Even though, pursuing globalization is a good idea for any business, IKEA has faced many challenges because they chose to establish store in many countries which may not be good due to global market risks. As such, the company should consider creating joint ventures with some of the market players in these countries. IKEA also uses a functional organizational structure which it can be argued to perform with efficiency since every department usually performs specialized tasks. However, this form of structure is very difficult to control as the organization grows and expand. The situation has been felt in IKEA as the company grows beyond 43 countries (The Times 100 n.d). Functional structure has compelled the company to delegate some decision-making roles to every functional area in other countries, increase the level of autonomy but making coordination more difficult. Specialization which is often associated with functional organization structure has also led less teamwork causing completion of tasks. As a company that has expanded, a matrix can be the best organization structure for IKEA. Its arrangement combines product and functional based divisions, with staff reporting to two supervisors (general and project supervisors). This form of structure creates team spirit; the firm empowers staff to make their individual decisions, and trained to build both soft and hard skills (Jacobides 2007, p.457). 5.0 SWOT Analysis of IKEA IKEA’s ability to remain on top of quality rankings and design efficiency can be attributed to the company’s internal environment (The Times 100 n.d). This involves the way process of designing is managed by their management who are renowned for their proficiency. Thus, to wholly understand IKEA’s situation analysis, analysis of its SWOT is conducted. 5.1 Strengths IKEA has a strong brand: IKEA is the largest furniture maker worldwide with a presence in 43 countries. This points out that this company has a strong and recognized brand globally. IKEA has customizable products: the company focuses on unique designs, a situation which has made it a market leader. Diversification: the company also has interests in the hotel industry and own more than 100 hotels in different countries Technology: the company has an online presence, which it uses to market and even sale its products. 5.2 Weaknesses The scale and size make it difficult for the top management controls all its stores that are distributed in 43 countries. Customer’s need for low-cost products; the company makes high quality products yet are forced to sell them at a low cost due top customer demands. It can very difficult to increase price even if the raw material costs goes up. Focusing on different strategies in different countries. Countries differ in terms of customer demand, some prefer low cost other goes for high cost and quality. 5.3 Opportunities China is an emerging market undergoing industrial; hence IKEA has the opportunity to improve its profit in this market. There is opportunity in making product from non-timber raw materials including reeds. IKEA has been accused of not focusing in conservation because it operates in a sector which uses trees to make its products. As such, the company can focus in environment responsibility to boost its image 5.4 Threats Competition is getting stiff from other market players such as Home Depot, Costco, Wal-Mart, and others, hence IKEA must work its strategies ahead of the rest to remain a market leader. IKEA is operating in an industry which normally gets affected by the economic downtown. During these times people tend to focus on basic things like food, cloth and shelter and not furniture. 6.0 New strategies as result of matching Strengths and Opportunities One of the strengths of IKEA is diversification mainly in other industries like hospitality. The company most notes that it can still carry out diversification strategy within its furniture industry (The Times 100 n.d). IKEA just needs matching this strength with the opportunity to reach this goal. In the past, IKEA has been accused of not taking heed on environment conservation yet their use trees for their work. For the company to improve this negative image, they can use reeds and bamboo trees to come up with customizable and unique furniture. They can partner with environmental organizations in this diversification to make it look like they are environmentally responsible. This form of type of strategy is called concentric diversification and reduces the chance of becoming irrelevant to your customers (Kotler & Armstrong 2010). This is because the company has just improved its existing product which customer recognizes. In a nutshell, IKEA can “pursue S-O strategies where it matches opportunities that matches it strength to develop a new form of strategy; concentric diversification” (Mullins, Walker & Boyd 2010). 7.0 Findings This research established that IKEA has several store of up to 349 stores operating 43 countries across Europe, Asia North, America and Oceania. This demonstrates how the company is committed to expansion so as to create brand awareness. This research also found that most IKEA stores on 24-hour basis so as to remain competitive, whilst its maintenance and restocking taking place at night. IKEA is diversifying its operation into Hotel industry so as to spread risks. According to IKEA (2014) in 2005, the company formed IKEA Social Initiative to manage the firm's social engagement on an international level. In this initiative, its major partners are Save the Children and UNICEF (IKEA 2014). However, the company is also faced with several controversies, including price gouging in Canada, partial branding and promotion in Norway and labor issues in US factories. 8.0 Strategic recommendations IKEA Company is a recognized global brand with several stores worldwide. So as to maintain this status, it must enhance its performance through product research and development. Market research will help increase understanding of the customer needs, market demands and about competitors to make effective marketing. This is important bearing the fact that the company lacks creativity and spend most of its time making similar products. Its success depends assessing its market forces and use its strengths, particularly diversification to maximize profit. Diversification is not only about the products but also geographical. The company is yet to set any store in Africa. Some of the countries in these regions like South Africa and Morocco have high disposable income making them a good target for IKEA. Asia is regarded as an emerging market with a large consumer base with over 3 billion population. As such, IKEA require building several stores in Asian nations to enable access to outlets. Similarly, some of these nations boast of high income, a situation which is even good for the company which depends on the level of income. So as to gain a high share of the market in various countries, IKEA require focusing on the ‘pull’ marketing strategy through integrating a promotion that markets its products as the fashion statement. By form of campaign pull the company will create awareness amongst people concerning its quality furniture. From a organizational viewpoint, pull marketing tries to build brand loyalty and make consumers coming back, IKEA is recognized by its stylish and inexpensive furniture business. Therefore, to maintain this stance, IKEA required improving its products constantly on the basis of consumer taste and preferences. Some of the products it needs to introduce to the market are bamboo made chairs and tables, which would also enhance its image as environment responsible company. This will not only improve is creativity and innovation but also improve profits. The company continues to operate under a centralized complex business structure. The company must decentralize some of its powers within various countries to make decision making easy and fast. 9.0 Conclusion IKEA enjoys market share and dominance in both the local and globally in the furniture sector. However, IKEA experiences difficulty in its strategies, organization structure and competition from its competitor. There are a number of opportunities which it can exploit so as uphold its dominance of the market such as the introduction of bamboo made furniture will most probably improve its diversification and revenue. However, to attain this, the IKEA will have to reduce competition created by Home Depot, Costco, Wal-Mart, and other upcoming furniture companies. 10.0 References Edvardsson, B., Enquist, B & Hay, M 2006,Values-based service brands: narratives from IKEA, Managing Service Quality, Vol. 16, Iss: 3, pp.230-246. Hill, J 2010, Theory of Strategic Management with Cases, International Edition, South Western College Hitt, M.A, Ireland, R.D, Hoskisson, R.E 2012, Strategic Management: Concepts and Cases: Competitiveness and Globalization (10th Ed.), Cengage Learning IKEA 2014, Company’s official website, Retrieved May 06, 2014 from http://www.ikea.com/ Jacobides, M 2007, The inherent limits of organizational structure and the unfulfilled role of hierarchy: Lessons from a near-war, Organization Science, 18(3), 455-477. Kotler, P & Armstrong, G 2010, Principles of Marketing, 13th (Global) ed. Boston, Pearson Education, Inc. Lancaster, G & Reynolds, P 2005, Management of marketing, Oxford, Elsevier. Mullins, J., Walker, J & Boyd, H 2010, Marketing management: a strategic decision making approach, Boston, A McGraw-Hill Irwin The Times 100 n.d., IKEA: SWOT analysis and sustainable business planning, viewed on 26th 2014 http://www.circleinternational.co.uk/CIRCLE/Strategy_files/ikea%20mrktswot.pdf Read More