Strategic Management of Ikea - Case Study Example

IKEA STRATEGIC MANAGEMENT REVIEW By (Name of Student) Student ID Number Subject Code Due Date Introduction All successful individuals and organizations with no doubt follow certainly a good strategy. A strategy that definitely improve the performance of an organization. A good and effective strategy can be seen and defined as the main aspect that makes the organization successful. The adopted strategy can be unconsciously pursued, implicit and explicit, though it is advisable to make it explicit. Making the strategy explicit allows an organization to work out its implications as extensively as resources and time allows. The process undertaken in strategic development and the strategy content ought to reflect the nature of the organization that it’s developed and implemented. It is advisable to take in to consideration of the behavioural and institutional realities before formulating, developing and implementing strategies (Hanafizadeh and Ravasan 2011). This report is based on IKEA group of companies. IKEA is a privately owned international retailer that deals with home products. The company sells accessories, flat packed furniture, kitchen items and bathrooms items in their retail chain of stores across the world. IKEA Group is the largest furniture retail store in the world. The report intends to critically analyse internal and external environmental factors that influence operations of IKEA Group of Companies. This report further analyses IKEA’s strategic management in comparison to four strategic management theories namely; Mckensey’s 7S model, Porter’s five forces, Porter’s diamond model competitive advantage and Wernerfelt’s resource based theory. The report will entirely scrutinize the similarities and difference in the theories view as opposed to the IKEA incorporation of the theories into its strategic management. Theoretical Review Porter’s five forces analysis Rivalry within competing sellers; (High) Borrowing from Hunt and Morgan (1995). IKEA’s products are diversified. It sells highly designed and fairly priced furniture that make a tough situation to compete with other manufacturers globally (Hunt and Morgan 1995). The author indicated that IKEA is increasing its products market share. The upholding positive issue of IKEA is the fact that it has more product line that is both expensive and cheap, indicating that the company’s target market ranges from the low income customers to high income earners. Therefore IKEA’s market value can be easily intimidated by its competitors. These features increase their sales as opposed to their competitor who might have fewer and less quality varieties for customers (Schendel 1994). New competitors’ potential entry: (Low) Mcgarry (2015) states that although IKEA faces low threat of new entrant’s competition. The company faces limitations in creating market share in developing countries, especially in countries that there is implementation of legislature that governs and or controls production standard and quality. This in return gives other competitors an upper hand since they can flack the market with substandard products that give unhealthy competition and alternatives to the customers. Also it creates a reasonable barrier for IKEA to secure market share that is meaningful (Mcgarry 2015). Substitute products competitive pressure: (Moderate-High) Spanos and Lioukas (2001), indicated that for every IKEA product there is a substitute. Some of this product substitute include Substitutes that are mostly copy-cats of IKEA’s products also restrict its production and sales in the market share since users will prefer products that serve the same purpose and are affordable. Furthermore IKEA’s products can be limited to a specific market share and certain clientele. This issue influences the competitors to immensely produce similar products that will soothe the lowest income earners (Spanos and Lioukas 2001). Supplier bargaining power: (Low-Moderate) IKEA products are unique to manufacture. This limits the bargaining power of the suppliers, all though the number of IKEA suppliers is reasonably high, the company faces challenges of supplier adherence to supplier code of ethics. This promotes supplier-worker and supplier-buyer conflicts. For example one supplier might employ unqualified worker in order for him/her to under pay them to un-acceptable levels set by the labour laws in the process of reducing costs and maximizing profits. Customers bargaining power: (Low) Product switching “cost” is high since alternative product manufacturer sometimes leads to compromise in quality and sometimes design. This gives customers upper hand when it comes to choosing between IKEA’s products and other substitutes. Most of the customers will prefer substitute to IKEA products mainly because of high costs on specific products. Customers also have a variety of products to choose from. This products are manufactured by different companies that compete with IKEA products but cheaper to acquire (Jofre 2011). Wernerfelt’s Resource based view model Resource based model suggests that companies can make profits if they employ rare, valuable, non-substitutable and inimitable superior resources. The model justifies that an organization can effectively gain competitive advantage if it fully utilizes its resources at its disposal (Grant 1991). Every managerial efforts of an organization is focused on gaining competitive advantage. An organization can achieve competitive advantage that is sustainable if it effectively and efficiently deploy these resources to attain product market. Therefore, the resource based view has an emphasis on strategic choices, charging the company’s management with important tasks like identifying, deploying and developing key value resources for maximum returns (Van den Steen 2013). Resource based approach indicated argues that companies ought to position themselves in a manner that is strategic based on the company’s rare, inimitable, non-substitutable and valuable rather than services and products derived attained from those capabilities and resources. Therefore, resource based review has a focus on leveraging capabilities and resources across several products and markets other than targeting particular products for specific market (Eisenhardt and Martin 2000). The theory further states that organizational managers have the responsibility to identify, develop and deploy key resources in order to sustain and earn superior profits. Borrowing from waterman et al (2001), resource based approach emphasizes in developing competitive advantage by means of capturing higher profits, beginning from the fundamental company level resources and various capabilities. Resource based view in adopted by IKEA in many ways which include; striving for resources as well as energy independence, the company has secured a long term accessibility to sustainable raw resources or materials, this has increased resource availability within the community that the company outsources its raw materials. This has therefore promoted continuity and availability of the same. Lastly, the concept by waterman et al (2001) indicates that IKEA regularly recycles its waste materials to produce energy, this is a clear indication that IKEA’s strategy is in line with the resource based review. Porter’s diamond competitive model Porter’s diamond competitive model can be viewed as productivity whereby a nation is able to utilize its capital, natural resources and human resources. The diamond model interconnects macroeconomic view with microeconomic competitiveness. Porter’s diamond internal factor include; demand conditions, factor conditions, supporting and related industries, company strategy, rivalry and structure. These factors have to be in sync to obtain competitive advantage. In addition to the aforementioned internal factors, there exists external factors that include; government and chance (Porter 1991). This report will examine three main factors that are of great influence to IKEA. Firm Strategy IKEA’s implemented strategy is designed to achieve bigger market share and competitive advantage in the furniture industry as opposed to its competitors. IKEA Company’s strategy is articulated to attainment of long term goals and is reinforced by reasonably the organizational values, mission and vision. The aspect application by IKEA Company as describes in the 7s model. Therefore, it is safe to indicate that IKEA strategy is in line with the two theories respectively. Balcarová (2014) states that the main point of this theory is that structures and strategies of an organization highly depends on the environment encouraging difference in the given business sector that determine the way organizations perform. . Taking into account Porter’s strategic management principles, it is safe to suggest that they significantly contributed to modern management approaches. Rather than the rule-of-thumb criteria which is the first principle, defining how work can be done better and splitting the work into components can be considered as job/performance analysis, work design and work study in today’s management practices. The principle that describes selection of workers using scientific techniques, training and developing them is an essential function of strategic management practices. Intimate collaboration between employees and management which is the third principle does not appear to be a feature of scientific conditions in management practice. The last principle which denotes equal responsibility between management and employees in labour division can be defined as the division of planning as well as implementation in modern management practices (Van den Steen 2013). Structure IKEA has a well-articulated business division which clearly indicates who is answerable to what. Business structure of the company is designed in the manner that all operational departments run independent activities but all are geared towards a common goal of effectiveness and to gain competitive advantage (Porter 1991) Demand Demand condition in a country highly determine the competitiveness advantage of an organization Porter (1991). The author however, emphasized less on demand similarities within an organization than the demand differences to explain the competitive advantage of an organization within the country of operation. According to the author, business success is not only determined by the size of the country of operations that matter but also the level of sophistication of the country’s home buyer. IKEA’s success and competitive advantage is highly enhanced by the fact that the company operates of the customer oriented and tailored to meet specific needs. Product range of IKEA spans across the needs of the community, nationally and internationally. Therefore, it is safe to state that greater gain of the market share and bigger competitive advantage as fur as IKEA Group is concerned is not a matter of comparison with other competitors since the company’s product quality and standards are higher. McKinsey 7s model McKinsey 7s model is an analysis tool used to analyse a company’s organizational design by studying 7 main internal elements; systems, structure, strategy, staff, skills, shared values and styles. The logic of studying these seven elements is to clearly identify if they are aligned and geared towards the achievements of the organizational goals (Peters et al 1982). McKinsey 7s model was introduced in 1980s by Robert Waterman, Julien Philips and Tom Peters. The main aim of the model was to illustrate how the 7 elements can and should combine to efficiently aid an organizational to realize its effectiveness. The author states that all the seven elements are intertwined and any slight modification on one element entails modification in all for the model to be effectively applicable. The authors further, divided the model sections in to two parts the “Soft Ss” and the “Hard Ss”, the two parts were interconnected by one common aspect “Shared Value”. “The Soft Ss” include; skills, staff and style while the “Hard Ss” are strategy, structure and system. Applicability of the model can be witnessed when analysing an organizational design. Mostly the model can be applied; to facilitate the implementation of new strategy, organizational change, in the identification of areas that may change in future and lastly, to facilitate organizational mergers (Waters (Ed.) 2003). 7s model evolution is on basis on the theory that for any given organization to effectively execute its intended objectives successfully, these underlying seven aspects have to be aligned in a manner that is mutually compatible and reinforcing. Therefore, these model can be highly depended on by an organization to determine what aspect of an organization has to be adjusted or reviewed and realigned in order to improve the organization’s performance. Moreover, regardless of the change encountered by an organization be it; new processes, restructuring, organizational mergers, leadership change, new system and so on. The 7s model is more than applicable in the verge to understand how organizational elements are interrelated and the required formality of alignment that is much needed to effective performance. IKEA Group of Company can use the 7s model to analyse its current business situation (Point A), intended future destination (Point B) and identify the missing link between the two positions and the way to cab it. Therefore, the model suggests that any change implemented in one are, has to be taken into consideration. Even though the 7s model is quite applicable to organizational development and performance, there are critical aspects that one has to effectively explore in order for an organization to know its position or. Situation in regards to the 7s models. Elements analysis and applicability in IKEA Strategy IKEA’s strategy is designed to achieve sustainable competitive advantage in the furniture industry. The company’s strategy is based on long term achievements and is reinforced by reasonably strong values, vision and mission. Ambrosini and Bowman (2009) states that the key focus for 7s model is not for an organization to find a great structure, strategy among others, but to make sure that all other elements are aligned together in order to achieve the desired goal ( Ambrosini and Bowman 2009). This is in line with IKEA’s strategy since it is designed not only to achieve success in the industry but also to ensure that all required aspects of success interplay in the required ways. IKEA has focus in achieving its goals of being the leading in furniture production, therefore, it has adequate implemented strategies that deal with issues of objective achievement, containment of competitive pressure and gain of competitive advantage by venturing into markets that other competitors do not. This is also initiated by the fact that IKEA produces above standards products that suite its wide clientele. IKEA’s strategic approach is defined by the environment that the company is or intends to operate in. Structure IKEA has a well-articulated business division which clearly indicates who is answerable to what. Business structure of the company is designed in the manner that all operational departments run independent activities but all are geared towards a common goal of effectiveness and to gain competitive advantage. IKEA’s team members are also aligned to organizational achievement and exercise high level of team spirit that enable the organization to effectively serve its customers. Systems and Shared Values IKEA’S systems are designed for the overall wellbeing of the organization for example IKEA’s finance department uses several financial measurements that are mainly based on productivity and sales. Reports are made weekly and are then availed as a tool for stores follow-up. The measurements are used by store managers to make a follow-up on store’s performance as compared to it set goals. The reports on sales of previous are usually called out every morning and availed to all managers, sales and employees whom may have interest in knowing the stores performance. IKEA also uses different types of systems in rewarding its staff that have achieved outstanding performance for example IKEA uses premium salary system to reward its staff, salary reward is determines by costs, sales and customer satisfaction. IKEA’s employee selection criteria ensures that the organization that hired individuals have the right beliefs and values to fit the organization’s culture. Skills and styles According to Balcarová (2014), IKEA has a great ability of its employees to perform well. This is articulated by the fact that the company has a well-structured and effective human resource development ( Balcarová 2014). Hiring and promotions of staff is based on skills, experience and qualifications. In return this enable IKEA to efficiently achieve its intended objectives. Leadership style of the management is as well focused on wellbeing of its staff and achievement of the organization as well (Yarger 2012). IKEA can important activities that enhance its performance can be identified by mapping out its important activities in combination with MacKinsey 7s framework. This will help IKEA management to identify which business activities can be or are challenging and the challenges countering activities. Borrowing from () IKEA can apply specific procedures in mapping out the activities. Firstly, IKEA ought to map out activities that are similar and are performed within a given area. This also can be performed by mapping out activities that are relevant to a project that already in existence within the organization. IKEA can achieve this by interviewing its key management staff in the process of analysing which activities that are similar and are curried out within the IKEA, this will help the organization to identify activities that are replicated and consume resources that can otherwise be channelled into other more activities and secondly, this will help IKEA to eliminate procedural conflicts within the organization’s projects and business activities. Mapping out of these activities should first begin by visualizing on the activities and creation of an activity system map that shows relationship between activities that are curried out within IKEA. IKEA should as well map it project activities, by mapping out activities that have been performed or are to be performed in its various outlets or franchises, this will enable IKEA to regularly evaluate its identify activities that are value adding and what areas need to be worked on to improve performance. Mapping out of activities will aid IKEA to analyse what level of fit particular activities have within the organization and a specific project. IKEA can apply the 7s model by simply identifying factors that are not in line with the organization’s objective and might cause challenges and substitute them with ones that will serve a positive purpose. IKEA’s Strategy for Winning Customers IKEA has experienced issues in a few of its outlets as far as customer satisfaction and sales are concerned. Feedback from a couple of clients shows that they are dissatisfied with IKEA product and service delivery. Therefore the company has devised the following six Sigma methodology of four phases (define, measure, analyse, improve and control) to avert the situation; Define phase The process starts when a customer places an order or brings a product for repair. IKEA has defined standardized procedures across its outlets to ensure that adequate information concerning the product is collected and availed to the suppliers or concerned personnel for immediate action. This phase is mainly concerned with the “Voice of the Customer-VOC”. VOC captures the requirements and feedback of every customer in order to provide them with best service. This in return provides the company with sufficient information on customer’s needs and satisfaction levels on provided goods and services. Measurement phase Quality of product (QoP) and quality of service (QoS) is key in IKEA as a retailer and wholesaler of home products. IKEA’s products are manufactured with daily safe to use concept in mind and they are environmental friendly as well. Product designers and developers take environmental and quality impacts in every stage of new products development. IKEA ensures that all its products are developed from recyclable materials and must meet the client’s needs and expectations and completely without any defects. Analyse phase Customer complains experienced by IKEA can be analysed by the use of “Pareto Chart”. This is technique that tends to identify the “trivial many” from the “vital few” this is because IKEA’s bigger portion of quality issues resulted from few causes. Pareto indicated that 80% of problems are usually as a result of 20% of the cause. IKEA’s problems were attributed by poor communication, delays in deliveries, damaged products upon delivery and getting refunds by customers. IKEA has since been working around the issues identified it a fast and swift manner, which have indicated a tremendous increase in its customers. Improve Stage IKEA’s improve stage has is focused on the frequent cause of customers complaints. Issues that come up in the analysis stage have been countered effectively; late delivery has been improved by installation of GPS tracking devices into all delivery vehicles, introduction of delivery labour training has been introduced to counter delivery of damaged items. Difficult to get refund has been countered by others; training staff on how to effectively deal with unsatisfied customers. Lastly, poor communication with customers has been dealt with by introducing a service feedback after every customer call and secondly IKEA introduced awards for “employee of the month”. Control Phase After IKEA’s improvement and retention on customer service delivery, the use of control charts has been applied to monitor the process. The chart indicates when all aspects concerning customer relations are in within patterns and it also indicates when the activities and customers responses and or feedback is off limits. This enable the management of IKEA to effectively evaluate their services to clients. If customers’ responses indicate negatively, IKEA enforces necessary mechanisms to rectify the situation (Miski 2014). IKEA globalization Strategy Entry strategies to foreign market have been studied extensively, some of the studies have extensively focused on predictors and antecedents as the preferred mode of entry, while others have concentrated on specific factors as preferable mode of entry for some companies. Moreover, other studies have indicated that some entry modes are led by consequences. This section of the research will focus on evaluation of New Trade Theory as adopted by IKEA Company in entry process to global market. The theory explains the empirical element of trade, which indicates that mostly trade takes place between regions or countries that have similar productivity levels and factor endowment. This theory is mainly based on certain assumptions like increased returns to sales and monopolistic competition. One of the main results of this theory is home market effect, with the assentation that if given industries tend to cluster in one area because there exists return to scale. Consequently, if the companies incur high transportation costs, then the location of the industry will be based in area or location that has high demands in order to reduce or minimize its running costs. For the purpose of this study, two main strategies will be focused upon, a) Franchising and b) joint ventures (Parker 1998). Franchising can be termed as the buying or selling of rights to carry on business in a prescribed way. Most operations of the company’s businesses are standardized. IKEA engaged in its furniture making industry since it’s a specialized way of licensing. IKEA entry as a franchise enabled the host to have a long term commitments and strict guidelines that govern the operating relationship of the two. The benefit of franchising to IKEA Company is that it enables room for rapid growth at low cost while its pitfall include; the potential loss of profits and likelihood of losing control over the business. Joint venture is another form of strategy that IKEA employed in the verge to secure global furniture industry market. The main benefit that IKEA Company gained through this strategy is that; IKEA shares risks with the host company in possible loss of profits and returns. Secondly, IKEA can always capitalize and benefit on the partners strength. The greatest limitation of this strategy is the fact there exists limited potential of profits and secondly, the company does not enjoy the full management authority (Dunning 1999). IKEA’s Challenges Faced in International Market Economic Challenge IKEA is affected by global advanced economies crises which has lead countries into recess. For example, unemployment has affected IKEA’s growth in sales. These situations have lead IKEA in to financial dilemma. The US stringing dollar is another source of issues that face prices of furniture products, profit margins and transportation costs. IKEA is not attracted to invest in most developing countries. This has limited its diverse growth only to developed countries. Technological Challenge Tata faces issues of technological advancement. Technology is evolving at very rapid speed which influences product use and customer needs. Technology makes faster updates that affect IKEA’s position at the top in the industry. Just like any other company, IKEA is required to often evaluate it furniture product line in efforts to accommodate technological changes. Issue on intellectual property Intellectual property theft is another issue facing IKEA. IKEA Company is concerned about competitors stealing and implementing its ideas, this has led to lawsuits for competitors. Although it is not clearly indicated how many lawsuits IKEA Company has sued its competitors for technology and design theft. It is advisable for IKEA to be strict on its designs and innovations in order to protect the products from competitors’ theft and development. (Grunert and Ellegaard 1992). Conclusion IKEA is global brand that is well known internationally, in order for the company to improve on its performance, it must take a critical look at its competitive and external environment. This procedure will enable it realize the unutilized opportunities that it can embrace on and consequently the possible threats that it has to deal with. IKEA has the capability to realize and respond to both external and internal aspects in a dynamic and proactive manner. This is mainly by employing its strengths to reduce its weaknesses. IKEA has a passion to combine low prices, design, responsibility and economical resource usage for human beings and the environment at large. The company’s systems, processes and products demonstrate the company’s environmental stance. For instance, clever usage of design and packaging indicates that more products can be contained in one create, hence few delivery journeys and reduction of the company’s carbon footprint. Furthermore, the company believes that there is no difference between “doing good business” and “being a good business”, it only aims to exceed reputation and profitability. Theoretical statement that “modern organizations that avoid the outdated principles of strategic management will always perform well” holds some truth to a large extent. The principles of strategic management have been embraced for having positive implications on organizations. Secondly, while most contemporary theories evolved from scientific management, contemporary theories have built upon the scientific principles and included human relations and social factors that the strategic or traditional approaches did not envision or include. It is safe to argue that most organizations today use a strategic principles to a certain extent. References Ambrosini, V., & Bowman, C. (2009). What are dynamic capabilities and are they a useful construct in strategic management?. International journal of management reviews, 11(1), 29-49. Balcarová, P. (2014). The Comparison of nine-factor model and diamond model: Application for the Czech Republic, Slovakia and Hungary. Acta academica karviniensia. v. XIV, (1), 5-15. Van den Steen, E. (2013). A formal theory of strategy. Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capabilities: what are they?. Strategic management journal, 1105-1121. Eden, C., & Ackermann, F. (2013). Making strategy: The journey of strategic management. Sage. Grunert, K. G., & Ellegaard, C. (1992). The concept of key success factors: theory and method (pp. 505-524). MAPP. Grant, R. M. (1991). The resource-based theory of competitive advantage: implications for strategy formulation. California management review, 33(3), 114-135. Hanafizadeh, P., & Ravasan, A. Z. (2011). A McKinsey 7S model-based framework for ERP readiness assessment. International Journal of Enterprise Information Systems (IJEIS), 7(4), 23-63. Jofre, S. (2011). Strategic Management: The theory and practice of strategy in (business) organizations. DTU Management Yarger, H. R. (2012). Strategic theory for the 21st century: the little book on big strategy. Lulu. com. Parker, B. (1998). Globalization and business practice: Managing across boundaries. SAGE Publications Ltd. Peters, T. J., Waterman, R. H., & Jones, I. (1982). In search of excellence: Lessons from America's best-run companies. Porter, M. E. (1991). Towards a dynamic theory of strategy. Strategic management journal, 12(S2), 95-117. MacInerney-May, K. (2012). The Value of Dynamic Capabilities for Strategic Management (Doctoral dissertation, Universität zu Köln). Miski, A., (2014). Improving customers service at IKEA using Six Sigma methodology. International Journal of Scientific & Engineering Research, 5(1), pp.1712-1720. Schendel, D. (1994). Introduction to ‘Competitive Organizational Behavior: Toward an Organizationally‐Based Theory of Competitive Advantage’. Strategic Management Journal, 15(S1), 1-4. Spanos, Y. E., & Lioukas, S. (2001). An examination into the causal logic of rent generation: contrasting Porter's competitive strategy framework and the resource‐based perspective. Strategic management journal, 22(10), 907-934. Hunt, S. D., & Morgan, R. M. (1995). The comparative advantage theory of competition. The Journal of Marketing, 1-15. Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic management journal, 509-533. Waters, C. D. J. (Ed.). (2003). Global logistics and distribution planning: strategies for management. Kogan Page Publishers. Quayle, M. (Ed.). (2005). Purchasing and Supply Chain Management: Strategies and Realities: Strategies and Realities. IGI Global. Read More