IKEA and Strategic Management - Case Study Example

IKEA: Strategic Management Name: Tutor: Course: Date: IKEA: Strategic Management 1. Strategic issues facing IKEA a) Customizing products in the international market: The challenge IKEA finds herself in is characteristic in other rival companies. Emerging from the recession, the company realizes the need to stand out and increase its market share. International markets are sensitive to price, taste, preferences and culture. Adam (2004) notes that multinational companies have the opportunity to learn the cultures of the host countries and adjust accordingly. Products have to be customized or tailor made to suit the purchasing power and values of consumers. For instance, the tastes of customer in the Middle East cannot be similar to those in Brazil. This results from differences in religious and cultural values relating to personal dressing, furnishing rooms and floors. Customizing products means creating franchises in these countries with capabilities drawn from the local markets and local knowledge. The company will have to develop a strategy like CocaCola which licensed franchises in host countries that suits the local economy, values and purchasing power of people (Bridge, O’Neill & Cromie 2003). Selling similar products with similar pricing across the board will be loose cannon in the long-term because local competitors will outrun their standardized products. Argos knows that diversification goes alongside product customization. This strategy will work better for IKEA if it invests in local knowledge, raw materials and purchase trends. b) Changing market conditions: The global market is quickly changing which means that IKEA must also change. The factors that have changed are consumer preferences, changing income patterns, levels of consumer satisfaction or customer service, emphasis on quality, sustainability and corporate social responsibility and product liability. Burns and Davidson (1996) argue that many customers in the past decade have had a tendency towards leather products, hardwood furniture and fancy clothing (Burns & Davidson 1996). There is also a growth in the middle class among developing countries which becomes a solid market for new sales. The emerging economies become a strategic market for IKEA. When the company maintains the traditional markets in Europe and Americas without diversifying to other developing markets, it loses its share when competitors give a big shot there. The firm has not shown more detailed studies on levels of customer service, reactions to their quality, response to price and product liability. New and emerging markets are now focusing on companies that bring value to their own population as well. The issue of corporate responsibility and ethics is running high. IKEA has not shown how they have integrated this emergent issue which is associated with sustainability and profitability (Crampton 2008). Companies seen to be violating local laws regarding employment and environment easily lose their market share. Local consumers would want to be associated with products they deem to have connectedness with local people and economy. Some regions observe dwindling incomes and economic hardships, the firm should monitor such trends and conditions. c) Effect of competition and downsizing: The major IKEA competitors mentioned are Argos, Jysk, DFS and Home Retail Group. Since the home furnishing market is high fragmented. The competitors are specializing in furniture product range, multi-branch retail furniture outlets and companies selling furniture in a wide product range. These competitors are quickly learning the tactics of outweighing the multinational companies (Evans, Campbell & Stonehouse 2003). Competitors also take advantage of their local knowledge of customers and their changing preferences. They are adaptive and resilient to changing economic circumstances. IKEA takes pride in its broad financial base to crash any form of competition by investing in innovation, automation and price cuts. However, competitors are also getting smart with tactics like positioning of the company, and engaging in price wars. By reducing the number of employees by about 5,000, the firm noticed a slight increase in profits. This is a short-term strategy that backfires in the long-term (Getz, Carlsen & Morrison 2004). By downsizing, it created discomfort among employees who feel their jobs were at stake became skeptical and worried of their continued employment with IKEA. This negatively affects job commitment, retention and overall satisfaction of the employee which directly translates to the dissatisfaction of the customer. Downsizing reduces costs in terms of salaries and their benefits but will kill entrepreneurship and expansion. The roles carried out by exiting employees will be lifted onto remaining staff creating pressure and overload; this is the genesis of fatigue and poor workmanship. Quality also reduces in these circumstances and so will be customer satisfaction. 2. IKEA’s Strategic Capabilities a) Dedicated employees: The Company boasts of a great team that has remained loyal and devoted. Employees have a sense of belonging since they enjoy avenues of growth and promotion within the company (Hicks 2009). Their relationship is good with that of their managers. They are also in tune with the company culture of thriftiness and values of hard work and loyalty. The employees feel part of the IKEA family which takes care of all the emotional, financial and psychological needs. This is a win-win situation for IKEA and its employees. Employee involvement has increased the fortunes of IKEA since they are treated as a great asset. This is certainly a winning point. b) Functional organizational and leadership structure: The description of IKEA’s Peter Hogsted leading more than 10,000 employees in an interactive and integral manner shows a kind of objective and bottom up approach to leadership. The simplicity of the managers makes them approachable and capable of understanding and solving employee issues. The management understands their mission and employees are part of this achievement (Johnson & Scholes 2008). Proper management and leadership structures promote problem-solving, customer and employee retention; clear understanding of roles and better relationship among the various managerial levels. c) Adequate positioning and segmentation strategies: The Company has relevant information relating to potential and existing customers. By profiling and segmenting this market, the firm has been able to gain from a wider array. The ages of 24-50 years are those involved in building families and developing stable incomes. The firm benefits from the growing middle class and a set of new families moving in to equip their new homes. They will need textiles, furniture and home finishing so as to beget a middle class lifestyle (Morrison, Rimmington & Williams 1999). The firm has positioned the product as cheaper than a cup of coffee. This forms a mental picture on the minds of customers that their products are cheap. It’s positioning and segmentation strategy is good for growth and acquisition of new niches like professionals and institutions. d) Financial capability: The Company boasts of sales estimated at about $30billion yearly. This contributes to a 7.5% market share. The company is also second after Argos which means it has the revenue sufficient to diversify and create new markets (Olsen, West & Tse 2008). The financial success is also an indication of stability to the owners and employees since they are confident of long-term employment in the company, assurance of continued dividends and rewards of pension. Employees and customers believe in IKEA since it provides a broad range of furniture meeting the middle of all social and economic classes. The financial reserves are good for strategic planning especially in purchase of production equipments, expansion of markets to emerging countries and investment in automation of processes (Stogdill 2004). Financial success of IKEA mirrors long-term investments with lower vulnerability to risks and recessions. e) Employee Diversity and Inclusion: IKEA has a lot to gain from equal opportunities to among people of all gender, creed, religion, race, age and other affiliations. The diversity of its employees becomes a formidable weapon to win international market. For instance, the case of Chung being hired as IT consultant in IKEA has help draw his home market in Malaysia to IKEA. Customers feel part of the company and will cherish it since it represents their wishes, becomes a solution and increases the local interests in trading with the company (Rae 2007). Diversity in employment shows the company’s internal commitment to equality and treatment of all people as equal and potential of contributing to the success of the firm in different ways. IKEA has a lot to gain from employee diversity. 3. Recommendations a) Diversification through Mergers and Acquisitions: IKEA still has the financial resources to reach emerging markets especially in Latin America, Africa & Middle, and East Australia. The terms of negotiation and entry should be based on franchise with local subsidiaries that have local knowledge and expertise in furniture, textiles and home furnishing. Through M&A, IKEA will spend less in conducting feasibility studies, training and enabling quality. Wighton (2009) affirms that the firm will be able to tackle the element of producing international products that fail to include local touch. Acquiring local firms may not be a wise move compared to mergers since the company will not have to micro-manage the entire business. The amount of financial resources in mergers is lower with anticipation in the level of synergy similar to that witnessed during acquisition. IKEA will reap more returns through mergers with more other companies beside the 24 countries it already exists in (Rae 2007). The firm will be able to increase the number of stores, customer visits, turnover, and catalogues. b) Change of Business Model: The IKEA’s ‘one-size-fits-all’ will be its undoing when competitors learn the demerits of this business model. The company at strategic level must customize its products to fit the host markets. The unique preferences, tastes and values of every nation cannot be summed up to mean a standardized product just to meet economies of scale. While it is accepted that standard products lowers costs in production and quality inspection, it suits convenience products rather than specialty products (Wighton 2009). Therefore, the business models should be adaptive and responsive to unique customer needs. The decisions made at corporate level must be informed by growing middle class, increasing level of competition from local and other multinationals, reduction in volume of global trade in furniture as a result of laws governing forest management and competition from cheaper and alternative commodities from Asian tigers like Malaysia, China, Taiwan and Singapore. c) Repositioning and Segmentation: The markets need to be repositioned to take into consideration local languages, knowledge and tastes. Having moved to newer niches, the company should invest in local employment, targeting of professionals and institutions, adoption of product lines as opposed to brands (Johnson & Scholes 2008). The company can read demographic dynamics in developing countries and sway its head towards it. Since, many of these countries are politically stable and a host to a growing middle class, it is possible to increase the market share from 7.5% to 12%. This is possible through corporate and business level decision making. The corporate level can invest in equipment while the business level invests in meeting the specific needs of customers through methods, quality improvement and good customer service (Thomas 2004). Reference list Adam E 2004, Alternative Quality Improvement Practices and Organizational Performance. Journal of Operations Management. 12: 27-44. Bridge S, O’Neill, K & Cromie, S 2003, Understanding Enterprise, Entrepreneurship and Small Business. Basingstoke. MacMillan Burns, P & Davidson, J 1996, Small Business and Entrepreneurship (2nd Edition) Basingstoke. MacMillan Crampton, R 2008, ‘Why we love IKEA’, The Times, London. Evans, S Campbell, D & Stonehouse, G 2003, Strategic Management. Oxford. Butterworth Heinemann Getz, D Carlsen, J & Morrison, A 2004, The Family Business in Tourism and Hospitality. Wallingford. CABI Publishing. Hicks, D 2009, The state of Supply Chain Strategy, IIE Solutions, 31,8: 24-30 Johnson, G & Scholes K 2008, Exploring Corporate Strategy. Harlow. Financial Times, Prentice Hall. Morrison A, Rimmington, M & Williams, C 1999, Entrepreneurship in the Hospitality, Tourism and Leisure Industries. Oxford. Butterworth Heinemann Olsen, M West, J & Ching-Yick Tse, E 2008, Strategic Management in the Hospitality Industry (2nd ed) Chichester, J. Wiley and Sons. Rae, D 2007, Entrepreneurship: from opportunity to action, Basingstoke. Palgrave. Stogdill, R 2004, Personal Factors Associated with Leadership. Journal of Applied Psychology. 25: 35-71. Thomas, R 2004, Small Firms in Tourism: International Perspectives. Oxford Elsevier Wighton, D 2009, ‘Is IKEA’s business model coming apart’?, The Times, London. Read More