Strategic Management: IKEA Business Strategy - Case Study Example

Strategic management IKEA business strategy case analysis Executive summary IKEA is a leading furniture designer and retailer and has market presence in 26 countries. The company has implemented a low-cost concept and standardised approach to furnishings designs. The current strategy has led to significant growth in revenues and store visits, but the changing market conditions has forced the management to rethink about their business strategy in order to attain sustainability. The recommended business strategy is a hybrid of differentiation and cost leadership in order to create higher perceived customer value and enable the company to focus on several niche markets while striving to attain cost leadership position in the market due to the declining customer purchasing power. IKEA must align its products with national characteristics and culture in order to attain higher market penetration and cater for varying needs of the diverse customer segments. Table of contents page number 1.0 Introduction……………………………………………………………………………………………4 2.0 Advantages and disadvantages of IKEA business strategy using Bowman’s strategy clock………...4 2.1Advantages……………………………………………………………………………………………..4 2.2Disadvantages……………………………………………………………………………………….…7 3.0 Porter’s international strategies…………………………………………………………………….…8 4.0 Recommended sustainable strategy for IKEA……………………………………………………..…9 5.0 Conclusion…………………………………………………………………………………………....10 6.0 References………………………………………………………………………………………….…12 1.0 Introduction IKEA is the leading furniture designer and reseller with market presence in 26 countries. The company started its operations in Sweden in 1943 and has maintained its unique furniture design that has sustained business growth over the years (Scholes 2009). IKEA is a value-driven company that aims at making homes a better place through offering a wide-range of functional and well-designed home furnishing products. The company is committed to providing its customers with high quality furniture at affordable prices and ensuring meaningful relationships with its supply chain partners (Stonehouse & Houston 2003). The company registered 20.6 billion Euros in revenues in 2009 which was more than 300 percent growth for the past 10 years (Scholes 2009). 2.0 Advantages and disadvantages of IKEA business strategy using Bowman’s strategy clock Bowman’s strategy clock model is useful in analysis of the competitiveness of a company in relation to its competitors in the market (Partridge 1999). The model is useful in understanding the cost structure and differentiation advantage that enables the company to understand the competitive advantage of the firm in the market. Bowman’s strategy clock represents different customer value requirements and different positions in the clock represent different generic strategies that should be implemented by the firm to meet the customer requirements (Kourdi 2009). 2.1 Advantages IKEA business strategy has enabled the company to attain high market growth and profitability in the furniture industry across the world. The company has revolutionized the furniture market through the ‘flat pack’ furniture chic that has enabled the company attain a competitive edge in the market (Dransfield 2001). IKEA business strategy has enabled the company to understand the customer product benefit expectations. IKEA is capable of understanding the factors that affect the trends in furniture industry in markets of operations and respond appropriately to changing market demands (Jeffs 2008). IKEA designers constantly offer new design furniture products that are appealing and stylish in the perceptions of the customers. Accordingly, the furniture products are easy to assemble and transport thus leading to higher customer perceived value and loyalty (Hagele 2010). The business strategy has enabled IKEA attain high brand reputation and market presence through consistent commitment to unique design traditions of Sweden in all markets of operation. IKEA business strategy has entailed use of innovations to drive down such as the use of new materials that is cheap and eco-friendly (Ferrell & Hartline 2012). The business strategy has enabled IKEA to attain close working relationships with suppliers through the supply chain integration process that has led to reduced logistics costs and high quality raw materials (Mckeown 2012). IKEA business strategy has been instrumental in achieving economies of scale and scope of operation through the international standardisation of the furniture product design. The attainment of economies of scale has been critical in ensuring that IKEA offers low-cost furniture to its esteemed customers thus leading to higher sales volumes. The low-cost concept has discouraged several smaller competitors from entering to the industry (Jeffs 2008). Position 1: low price/low value- This is a bargain basement where companies are forced to compete with undifferentiated products through lowering prices. IKEA entered in to low-cost supply in the early years and has remained committed to its low-price concept in order to meet the changing market conditions (Bowman1992, p 77). IKEA was capable of adopting this strategy by lowering its prices after the adverse effects of the recent global economic crisis. This strategy has enabled IKEA to overcome competition and increase its sales volumes through charging lower margins to its customers (Jeffs 2008). Position 2: low price- The second competitive strategy according to Bowman’s strategy clock is the low price strategy that enables the companies attain low price leadership position in the market. IKEA has been able to drive down prices in the market through sustained low price strategy that has triggered price wars and cost savings to consumers (Zanoni 2011). Position 3: Hybrid (moderate price/moderate differentiation) - This strategy position entails combination of low cost and differentiation of the product perceived value. IKEA has been able to attain significant growth through understanding the customer product expectations and offering low prices for its sofas in Britain. For instance, charging $ 150 for a sofa is perceived lost cost in Britain as evidenced by the high number of customers buying their furniture from IKEA local high street shops (Scholes 2009). This strategy position has enabled IKEA to build market reputation by offering fair prices for reasonable quality products than the other low cost competitors. The hybrid strategy has enabled IKEA to increase its turnover from 20,685 million Euro in 2007 to 22,713 million Euros in 2009 (Scholes 2009). Position 4: Differentiation- Companies that use this strategy position offer their customers perceived-value through providing additional product features and benefits. The companies concentrate on the differentiated product benefits rather than lowering their prices and thus are capable of ensuring high quality brands with lower premium prices (Aaker 2001). Some of the differentiation strategies that have been implemented by IKEA include enhancing furniture design features, branding and implementing innovative distribution channels that aim at creating customer convenience (Johnson & Scholes 1999). Position 5: Focused differentiation- This strategy position entails offering designer products to a particular high value customers who are interested in premium design furnishings. IKEA has benefitted from this customer perception of high value to charge premium prices without affecting the sales volumes. IKEA is capable of charging high margins in highly targeted markets due to long standing reputation of quality and brand loyalty in those markets (Jeffs 2008). Position 6: Increased price/ standard product- The strategy entails raising product prices without providing additional product value and benefits to its customers. This is not appropriate strategy and IKEA has refrained from increasing their prices due to the high low-cost competitors in the market (Johnson and Scholes 1999). Position 7: High price/low value- This strategy position entails offering products at high prices regardless of the value. The position is only ideal for monopolies and thus IKEA is not capable of implementing this strategy due to number smaller scale players that account for more than 90 percent of European furniture market (Jeffs 2008). Position 8: Low value/standard price- This strategy position entails proving low value products. The position will definitely lead to decline in market share and thus IKEA cannot implement this strategy position (Johnson & Scholes 1999). 2.2 Disadvantages One of the main advantages of IKEA business strategy is the product homogeneity due to the One-size-fits all model that has been implemented over years. Although IKEA has been able to attain economies of scale in furnishings design and manufacturer, the products lack the national cultural appeal and national characteristics thus leading to low market penetrations in certain geographical countries (Jeffs 2008. The current business strategy of IKEA may lead to perceptions of low quality products due to the low-cost concept and lower margins charged to the customers (Peng 2011). The continuous cost reductions may lead to negative perceptions regarding the quality and durability of IKEA furnishings among UK consumers. Another disadvantage associated with IKEA business strategy is product homogenization and standardisation. IKEA main competitive edge is the low-cost concept and thus standardisation of the furniture designs has led to fewer market segments. According to Lei and Slocum (2013), the company inability to offer highly differentiated and niche differentiated products have allowed competitors to attain market leadership in those niche markets. The main competitors such as Argos, Ashley furniture home stores and Bob’s discount have responded to this gap through offering premium furniture. The expansion of IKEA overseas has led to cultural challenges since the company has not been able to respond to the national demands and cultural expectations of different countries. IKEA business strategy has forced the company to slash more than 5,000 jobs due to negative effects of recession and slowdown in sales growth (Scholes 2009). (Bowman’s strategy clock model diagram) 3.0 Porter’s international strategies Michael Porter outlined three generic international generic strategies that can be implemented by firms to attain competitive edge in the industry and include focus strategy, cost leadership strategy and differentiation strategy (Urbany 2011). According to Porter, firms attain market leadership by either ensuring customers perceive uniqueness in the products or implementing the low-cost position in the market (Porter 2008). One of the Porter’s international strategies is the focus strategy that involves targeting a particular niche market and concentrating resources in serving that niche market. IKEA targets customers aged 25-50 years and 80 percent of the customers are female with a majority having a kid. According to the case study, the social class of their customers includes Bs and C1s since these customers are interested in the company kitchenware and tableware. IKEA does not target the rich customer segment, but the sophisticated customers who aim at making their home a warm place to live. IKEA has enjoyed high degree of loyalty through focusing on the niche market and this is why smaller competitors are discouraged from entering in to those markets dominated by IKEA (Porter 2008). However, the focus strategy presents market risks such as product imitation and difficulties in product adaptation in other target markets. For instance, IKEA has standardised its furniture offerings in certain across the geographical markets in order to attain economies of scale thus ignoring the effects of national characteristics and culture on product acceptance in those foreign markets (Mazzucato 2002). The second generic strategy is the cost leadership strategy that involves offering customers the expected product value at the lowest cost relative to competitors in the industry (Prasad 2010). IKEA has implemented the cost leadership strategy through stringent cost control and suppling standard, no-frills high volume products at most competitive prices in the market. IKEA has attained cost leadership position due to its internal strengths such as ability to access capital required to mass design and production of low-cost furniture. IKEA has efficient distribution channels in more than 20 countries and adequate skills to ensure faster design of furniture that meets the customer product expectations. This strategy has been utilised in countries with lower labour costs and low furniture design costs such as China and some European countries where the customers are price-sensitive (Prasad 2010). The third generic strategy that is available for IKEA is the product differentiation strategy that involves providing customers with added product benefits and perceived value (Aras & Crowther 2012). According to Stephen Bayley, an IKEA designer, the company has maintained the unique IKEA idealism of designing chairs at minimal prices for their customers, but has not differentiated the design elements over the years. IKEA has access to highly skilled and product development team that is based at the headquarters and strong marketing communication teams that are able to highlight the perceived benefits of the furniture products (Porter 2008). IKEA has not fully implemented a differentiation and thus is faced with a threat of substitutes from competitors such as Argos. 4.0 Sustainable IKEA strategy From the above analysis, it is clear that IKEA offers low-cost and standardised thus leading to unsustainable competitive edge in the changing market conditions. The customers have less money to spend and thus IKEA must attain cost leadership and differentiate its products in order to attract high market share and customer loyalty. A sustainable business strategy of IKEA will involve a hybrid of differentiation and cost leadership strategy in order to attain competitive edge in the market and meet the changing market conditions. The differentiation strategy should focus on the reliability, durability, appeal, quality, design features of the furnishings and marketing channels in order to enhance the perceived customer value from the use of the furnishings (Mazzucato 2002). The strategy will allow IKEA to reduce the threat of competitor substitutes and maintain customer loyalty due to the unique features of the products. Differentiation strategy will enable IKEA to pass any supplier price increases to the customers thus maintaining the profit margins of the products. IKEA should offer innovative furnishings designs that are aligned with national characteristics in order to facilitate new market penetration and charge premium prices for the higher customer perceived value for the products (Urbany 2011). IKEA must differentiate its distribution channels through increasing its online sales and tapping the power of advanced customer relationships technologies to expand the market reach. For instance, non-specialist companies such as Home retail group and Argos have expanded their furniture retailing through implementing online retailing platforms that overcome the location barriers and enhance the brand recognition (Scholes 2009). The second sustainable strategy that should be implemented is cost leadership strategy that will entail use of the low-cost concept through sourcing raw materials and labour from low-cost countries and passing the cost savings to customers in form of price reductions and discounts. Innovative designs that use less raw materials will also be critical in reducing the product assembly costs thus facilitating attainment of cost leadership (Sekhar 2009). 5.0 Conclusion IKEA is the world’s largest furniture manufacture that is headquartered in Sweden and with market presence in 26 countries. The company has attained significant growth in retail stores, sales volumes and customer visits due to its furniture designs and low-cost concept. The current business model strategy of low-cost concept has enabled the company to attain economies of scale through standardised products and lower margins to customers. IKEA has experienced exponential growth in sales volumes, store visits and new catalogue distributions due to its unique furniture designs and brand reputation. The current business strategy has led to negative perceptions regarding the quality and durability of IKEA products and high competition in the industry. Accordingly, standardisation of the furnishings across national markets has hindered the market penetration in emerging markets such as Romania, Turkey and Japan and thus the company must differentiate the products through factoring in the national factors in the design. However, the changes in market conditions such as reduction in consumer spending power and shifts in customer preferences due to different national characteristics will force IKEA to implement a sustainable business strategy that will entail differentiating the product offerings in order to maintain customer loyalty and enter niche markets. 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