IKEAs Competitive Strategies - Case Study Example

IKEA’S Competitive Strategies Introduction Businesses are established with the aim of maximizing profits and wealth creation and for such a goal to be achieved any firm should be ready to face the stiff competition from rivals in the market. This competition, according to Porter (2008, p. 27) is determined by five competitive forces which are: “entry of new competitors, threat of substitutes, rivalry between existing competitors and bargaining power of buyers as well as bargaining power of suppliers” (Li 2010, p. 8). These five competitive forces largely affect a firm’s profitability. Porter (2008, p. 29) states that competition and a firm’s profitability are affected by suppliers depending on how they price input elements. For example, if suppliers have a high bargaining power they will charge higher prices for inputs hence lowering the profitability of an industry. New entrants in the market affect competition and profitability in that when they introduce new products as well as advanced technologies they generally increase the competition in the market (Li 2010, p. 10). According to Porter (2008) as discussed in Li (2010, p. 10), introduction of substitute products in the market lowers a firm’s profitability as well as increase competition in the market. Further, competition in the market as well as a firm’s profitability is largely influenced by the existence of rivalry between industries based on price, technology, quality and innovation (Li 2010, p. 10). The fifth force affecting competition and profitability is the bargaining power of customers whereby customers with a high bargaining power will pressure industries to sell products at lower prices (Porter 2008 in Li 2010, p. 9). Industries will be pressurized to sell their products at lower prices to attract and maintain customers. The above forces of competition in turn affect a firm’s decision on the competitive models to be adopted to maximize profits as well as beat the stiff competition in the market. For example, a company can choose to lower the price of its products to attract more customers as well as beat the competition from its rivals. Another example is that a company can adopt the product differentiation approach to beat the competition of new entrants in the market who have new and better products. This paper will therefore discuss the strategies that have been adopted by IKEA in order to beat the competition in the furniture industry while at the same time making profits. IKEA serves as an example of an excellent company that has survived the stiff competition through adoption of competitive advantage strategies. IKEA competitive strategies IKEA is a Swedish company that started out small by selling pens, wallets, watches and picture frames at low prices in the year 1943 (Chaletanone & Cheancharadpong 2008, p. 22). The company’s name was derived from the founder’s initials. I. K, and the farm and village of origin (Elmtaryd and Aguunaryd respectively) (Chaletanone & Cheancharadpong 2008, p. 22; Reichert & Larson 1998, p. 2). In 1951, the founder, Ingvar Kamprad, ventured into the furniture business, which saw it expand and open the first furniture showroom in 1953 in Almhult, Sweden (Grol & Schoch 1998, p. 5; Chaletanone & Cheancharadpong 2008, p. 22). From the beginning, the company managed to sell the furniture at low prices by packing them in boxes for customers to assemble them at home (Chaletanone & Cheancharadpong 2008, p. 22). This self-assembling cut on the costs that would otherwise be borne by the company. The expansion of the company saw it venture outside Sweden by opening stores in Norway, Denmark, Switzerland and Germany in the 1960s (Chaletanone & Cheancharadpong 2008, p. 22). However, IKEA changed its ownership and since 1982 is under the INGKA Foundation that is based in Netherlands. According to the thesis by Chaletanone & Cheancharadpong (2008, p. 22), IKEA currently owns 279 stores in 36 countries. Moreover, the company has over the years adopted the concept that it is determined to make “innovative affordable products” at low prices (Chaletanone & Cheancharadpong 2008, p. 22). Additionally, the stores are located at less-expensive areas to cut on costs. It is also worth noting that IKEA has been in the forefront of environmental management by ensuring that it protects the environment as it carries out its activities. To show their commitment, they joined the UNICEF as well as the WWF, which deal with environmental matters. The success of IKEA can be attributed to the adoption of competitive strategies that are aimed at attracting and maintaining customers while at the same time ensuring profitability. These strategies/approaches have been discussed below. Cost leadership/low prices strategy According to Li (2010, p. 26), IKEA biggest aim is to produce high quality products to customers at low prices. Since its inception, IKEA has adopted the strategy of providing affordable products to customers as stated in its concept and vision of “being creative with the aim of making affordable innovative products (Chaletanone & Cheancharadpong 2008, p. 22). The management of the company came up with a way of cutting down the overall cost of products from manufacture to delivery; at every manufacturing stage, ways of cutting costs are adopted. Li (2010, p. 26) says that IKEA ensures that the price of a product is confirmed before it is designed. Additionally, the firm uses the “flat-package so as to cut down transport costs” (Li 2010, p. 26). Moreover, store charges are reduced by lowering the number of store personnel whereas through the procurement of goods from around the globe, the bargaining power of suppliers is lowered hence cutting down on costs of inputs (Li 2010. P. 26). Furthermore, IKEA ensures that its stores are located in cheaper areas to cut down on the costs of storage. The low cost strategy also aims at providing high quality products to customers. According to Thompson et al n.d, p. 134), low prices for quality products gives customer more value for their money and this will make any firm beat its rivals. Additionally, IKEA through this strategy aims at attracting and maintaining more customers as compared to its rivals. The differentiation/diversification approach Differentiation is used by businesses as a way of attracting and maintaining more customers as well as beating the existing competition in the market. Through differentiation, products can be designed to serve a diverse range of customer interests or one product can be designed in such a unique way that is so different from the competitor’s commodity (Abdullah & Baroto 2011, p. 1366). IKEA has invested in creativity and innovation to promote the designing of products that are unique and suit different age groups. Furniture designed by IKEA serve the interest of all age groups ranging from children to adults as well as those of other customer groups such as romantics, liberals and professionals (Li 2010, p. 27). In 1997, IKEA launched the children’s package, which was aimed at designing products specifically for children (Li 2010, p. 18). This focused more on families with children such that they could shop for all furniture under one roof. These products are not only unique but are also of high quality hence putting IKEA ahead of their competitors additionally, IKEA’s products are quite affordable and can be purchased by the low- income population in the society. The affordability of these products creates a large market base for IKEA hence increasing its profitability. IKEA’s differentiation approach also includes the delivery of services as well as the venture into new markets such as the establishment of restaurants and food markets serving Swedish foods (Gawor, Halasova & Polzin 2008). Service delivery at IKEA store is customer-friendly which in turn attracts customers to these stores hence increasing the profitability of the firm in general. On the other hand, IKEA has gone beyond provision of furniture to the establishment of “restaurants, bistros and children’s playrooms” (Chaletanone & Cheancharadpong 2008, p. 23). This does not only increase the profitability of the company but also improves its public image of being a family care business. Beyond product differentiation and diversification, IKEA has also ventured into environmental management and protection by being responsible for their actions (Chaletanone & Cheancharadpong 2008, p. 22; Li 2010, p. 27). IKEA is a member of UNICEF and WWF and through these organizations makes donations in support of environmental management as well as the protection of children rights. Due to the current emerging environmental issues with the most sensitive being climate change, companies are encouraged to protect the environment to promote sustainability for the sake of the future generations. A firm that is environment friendly will improve its public image and in turn attract customers who are pro- environment. Therefore, it can be said that through its environmental initiative, IKEA expands its market base. The focus strategy This according to Thompson et al (n.d, p. 135) includes “focus based on low costs and focus based on differentiation”. Focus based on low costs aims at concentrating on a small segment of customers to beat competition from rivals whereas focus based ion differentiation aims at concentrating on a small segment of customers and providing them with high quality products that beat those of rivals (Thompsons et al n.d, p. 135) To make the focus strategy of IKEA more successful, IKEA has segmented its customers into age groups and according to their wants. Though the target customer is everybody, IKEA has segmented its areas of focus into three parts that are IKEA office, home storage and children’s IKEA (Li 2010, p. 27). This segmentation helps IKEA to design better products that are specific to each group of customers and hence satisfy customer needs. For example, through focusing on children, IKEA has managed to design an attractive design for children that according to Li (2010, p. 27) has won the hearts of many. The focus on the older segment of customers has also led IKEA to create furniture designs best suited for this generation. On the other hand, segmentation into IKEA’s departments such as office and storage has helped the company in cutting down overall costs. For example, the company designs furniture that requires less storage space and hence less storekeepers will be required. In addition, customers will be attracted to furniture that will occupy less space at home; the ease of storage will attract customers. Furthermore, IKEA focuses on designing of best office furniture at lower costs as compared to those of rivals. Combination of the generic strategies According to Li (2010, p. 27), IKEA has managed to flexibly use the above strategies to gain a competitive advantage over their rivals. Firstly, cost leadership and differentiation can be used together such that before designing a product the price is confirmed. This will ensure that quality low- priced products that meet specific customer requirements are manufactured (Abdullah & Baroto 2011, p. 1367; Li 2010, p. 27). As Li (2010, p. 27) states, the flat package and self-assembly not only save the cost of transport but also give the designer more room to seek differentiation”. Secondly, cost leadership can be embodied with focus such that low priced products that suit customer needs are manufactured. IKEA adopted the life system to establish customer wants at different ages (Li 2010, p. 27). This strategy has helped the designer in designing a low priced product that is useful to a customer; designing low priced products does not mean that they are substandard. Furthermore, IKEA has managed to cut down transport costs by ensuring that products available at a local store suit the customer wants. Conclusion From the above discussion, it is evident that companies should adopt several competitive strategies to make profits and at the same time gain a competitive advantage over their rivals. IKEA, a firm dealing with furniture, which started out small, has managed to beat all odds and has emerged as one of the best in its field due to the adoption of competitive strategies. A Swedish based company that has expanded globally has harmoniously adopted the differentiation, focus and cost leadership approaches in its operations. The company produces high quality goods that are lowly priced to beat the competition of their rivals. In addition, it has adopted the focus strategy whereby products are designed to suit specific customer groups. These products are not only cheaper but are also of unique designs. Finally, IKEA uses the differentiation and diversification approach to produce best designed products that are of low prices hence are affordable to all customers even the low- income buyers. References Abdullah, M.M., & Baroto, M.B. 2011. The application of cost, differentiation and hybrid strategy in business operations: Will hybrid strategy become the new competitive strategy, paper presented at the 2nd international Conference on Business and Economic Research Proceeding, viewed 1 March 2012, www.internationalconference.com.my/.../261- Chaletanone, W., & Cheancharadpong, W. 2008. Internationalization of IKEA in the Japanese market and Chinese markets, Master’s thesis in international business and entrepreneurship-MIMA program, viewed 1 March 2012, www.eki.mdh.se/uppsatser/seminarie/.../VT2008-FEK-D-2022.pdf Gawor, K, Halasova, S., & Polzin, F. 2008. 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