Strategic Analysis of Ikea Group - Example

STRATEGIC ANALYSIS OF IKEA GROUP Prepared by (Student’s Name) University Name Professor’s Name Course Date Table of Contents Executive Summary........................................................................................................3 1.0 Introduction & Company Profile.................................................................................4 2.0 External Analysis.......................................................................................................5 3.0 Internal Analysis........................................................................................................6 4.0 Porter’s Five Forces Analysis....................................................................................8 5.0 Competitive Advantage............................................................................................11 6.0 Core Competencies..................................................................................................12 7.0 Differentiation Strategy..............................................................................................12 8.0 Possible Strategic Alliances......................................................................................13 9.0 Conclusion & Recommendation for Future Strategies.............................................14 References.....................................................................................................................16 Executive Summary This paper has clearly demonstrated the different operational capacities of IKEA Group in relation to its furniture retailing activities. The company continues to enjoy significant opportunities like the recent change in customer’s tastes and preference for eco-friendly products. It is however; threatened by the recent global recession that has continued to lead to reduced disposable income. The Group enjoys a positive and popular brand image that has resonated well with customers across the globe. It has adopted an international diversification strategy whereby furniture products are sold to different regions and economies across the globe. The market upon which it operates is highly competitive and there is a high threat of substitutes. However, the entry into the market, bargaining power of suppliers and buyers remain relatively low due to the fact that the Group is considered an international giant producing quality products at affordable prices. The Group can opt for a local partnership venture in order to improve on its customer base within the different market segments and, also foster cultural sensitivity in these markets as well. 1.0 Introduction & Company Profile The purpose of this paper is on strategic examination of IKEA Group in relation to its immediate external and internal analysis, Porters’ 5-Forces, and capability to go global as well as its immediate capacity to effectively uphold a feasible and reliable competitive advantage. Having been founded in Sweden in 1943, IKEA Group remains to be one the most sought after retailing business that offers top notch quality and functional home furniture at relatively competitive prices. Presently, the Group enjoys more than 298 stores situated across 26 countries and has employed more than 147, 000 employees (Perchinunno & Schirone, 2012). It is well-known for its capability to adopt and embrace modern architectural designs in the process of producing its products. The firm is fundamentally known for its eco-friendly nature of operations as well as cost control mechanisms that has allowed it to engage in intensive operational activities; ever-constant product development as well as corporate characteristic that has facilitated a significant corporate structure with numerous platforms in such countries as Netherland and Luxembourg (Perchinunno & Schirone, 2012). It is important to note that IKEA Group operates on a distinctive philosophy that focuses on ensuring care for both people and environment as a whole. The firm is engaged in continuous assistance to different programmes that is set to benefit the causes of younger generation as well as the environment as a whole. Notably, the firm’s new sustainability strategy: “People & Planet Positive ensures to create a close working relationship with different environmental enthusiasts as well as coordinates significant social issues (Perchinunno & Schirone, 2012). The strategy focuses on creating a better life for both people and the entire extended community at large. 2.0 External Analysis Opportunities IKEA Group uses its strengths to exploit the advantages that could arise out of the possible opportunities at hand. The entity ascertains that its underlying environmental-friendly operations will result in future positive returns despite the fact that the existing market is marred with extreme price sensitivity (Terry-Armstrong, 2012). As a result of understanding this, IKEA’s most viable include; the current ever-growing demand for eco-friendly products. The entity’s sustainability focuses on protecting the environment for future generation while still minimising possible wastage as much as possible. Consequently, the firm is likely to benefit from the current ever-growing demand for low-priced products. The patterns being witnessed in the existing financial climate might lead consumers opting for a trading down for expensive stores and products (Terry-Armstrong, 2012). IKEA achieves low cost production, which is a positive attribute that might result to its low-pricing structure. In essence, IKEA Group has made stringent efforts to reduce the level of carbon-related emissions into the atmosphere and thus, accomplish the zero wastage environmental set targets that is also enhanced by improved form of relationship with such distinctive stakeholders as suppliers, as well as consumers that avail enormous opportunities that could later result to sustainability, competitiveness as well as significant amounts of profits. Threats The company is faced with intensive levels of threats especially relating to the ever changing global economic conditions. For instance, the recently witnessed global recession as well as suppliers’ issues with the firm has continued to threaten the Group’s overall successful operations (Terry-Armstrong, 2012). Subsequently, the underlying social patterns portraying a rather lower-level of entrance to the first-time purchasers of housing market continue to affect the degree of furniture sale. There has also been an intensive increase in the level of competition as well as a lowered disposable income that have continued to push prices for furniture on a downward trend. In fact, these threats has resulted to IKEA choosing to reform its overall value chain while still making sure to optimise the innovative technological aspect in order to avail perfect quality products but at relatively lower prices (Terry-Armstrong, 2012). Of particular interest to note, the overall strategic development that could foster easier entrant barriers into this furniture retailing business continues to threaten the Group into devising distinguishable ways of maintaining and improving on its existing market share. 3.0 Internal Analysis Strengths The Group enjoys great strides especially in the application capability of the existing strategic practices. A perfect example is its capability to optimise material in order to decrease the level of manufacturing costs while also making sure to develop further the underlying manufacturing plants in order to optimise on the utilisation of recycled materials (Terry-Armstrong, 2012). It also uses innovative technological advancements like the iPhone application in order to foster a perfect and well-laid out customer experiences. IKEA is certainly a global giant in the retail furniture industry, which assures it of stronger brand image and position. In particular, considering its global brand image that solely targets fundamental consumer groups; provides distinctiveness in aspects related to product quality and range cross the different global markets. The continual capability of the company to strike a balance between aspects related to quality; design and cost confirms a cost and competitive advantage position in the highly competitive market segment. Weaknesses The Group has continued to identify the existing weaknesses in its operations and efforts made to curtail them into unproductiveness. Some of the notable weaknesses are discussed as follows; The Group’s existing size and scale of its overall international businesses has made it very hard to attain efficient levels related to control standards as well as aspects related to quality. In essence, it is ascertained that some of the countries where manufacturing takes place fail to implement necessary legislation needed for maintaining a successful controlled working condition. This is likely to result to a weak link especially to the Group’s supply chain, which might go ahead to affect consumer’s different views on its range of furniture products on offer. To counter this weakness, the company came up with IWAY; an initiative that is focused on formulating and implementing training activities with supervisors visiting different factories in order to ensure that supplier’ requirements are met at a timely manner (Wenzel & Förster, 2013). The Group further suffers from the customers’ need for lowly-priced products. This need has been balanced against generation of perfect quality products. Certainly, the entity is also expected to differentiate itself from its range of products since it operates on philosophy that does not leave room for possible compromise. Additionally, due to its massive scale of activities, the Group suffers from the incapacity to maintain a perfect and effective communication framework with its different stakeholders in relation to its environmental-based activities. Notwithstanding, it has continued to make efforts relating to production of such publications as People and the Environment, major TV and radio campaigns in order to ensure that the business communicates effectively with different targeted stakeholders. 4.0 Porter’s Five Forces Analysis Bargaining Power of Buyers Purchasers of furniture across the globe enjoy a variety of substitutes from different global brands and local manufacturers. The force attributed to bargaining powers of buyers is strengthened by the intensive levels of competition in the industry hence giving the purchasers a high bargaining power. Notwithstanding, the threat of these substitutes is deemed weak since IKEA is fairly-known for the production of top notch low-cost, perfect-quality and unique unbeatable products (Wenzel & Förster, 2013). It is important to note that, in most cases, the high level of competition within the overall furniture retail market allows a potential buyer enormous options to select from in relation to price, designs and after-sales services. The recently witnessed global recession has further compelled retailers to come up with competitive ways especially in pricing in order to attract more potential customers that are reluctant to spend more money for home improvement services. Threat of Substitutes The underlying threat of substitutes within the retail furniture market is considered to be relatively medium. Although there are a significant number of substitutes in the market in relation to home furnishing market, the low-to-medium income consumers still opt for IKEA Group’s products due to the fact that it offers them on a low-cost effectiveness model (Wenzel & Förster, 2013). This threat is further deemed to medium since the company has for a long period been associated with poor and ineffective customer service strategies, stock availability, product after-sale guarantees as well as fewer varieties of furniture products at a time of potential purchase. Bargaining Power of Suppliers The bargaining power of suppliers within the retail furniture market is considered low. Different suppliers do not enjoy any form of significant power since IKEA is a well-established entity with positive brand reputation. In fact, suppliers tend to enjoy even more by seeking competing ways of creating relationship with such well-developed businesses as IKEA; which enjoys a high value retailing capability (Wenzel & Förster, 2013). The Group has however; focused on developing a strategic relationship with the suppliers in order to empower them to a particular degree while making sure to curtail their bargaining power. Following this line of argument, it can be noted that the existing weak industrial force plays a significant role in sanctioning the Group in order to optimise on their resource capabilities and profit maximisation. Threat of New Entrants The underlying threat of potential entrants into the furniture retail industry is deemed to be significantly lower given that IKEA enjoys a massive global presence. The industry giant enjoys a great deal of customer loyalty, which has set out to improve on its competitive advantage within the international markets where it enjoys massive followers (Wenzel & Förster, 2013). The Group’s enormous market presence in such places as Europe, USA and Asia has ensured that potential entrants are threatened to achieve the development of a business giant characterised by geographic and product diversification. In addition to this, there is a high level of market saturation, high capital investment requirements as well as an obligatory need for skilled expertise in order for a new retailer to achieve a global giant status especially in discounted DIY-furniture production industry. Threat of Competition The aspect of competition is deemed to be relatively high. There are a huge number of competitors in this sector that also command a significant percentage of the market share. Some of these notable competitors include; Wal-Mart, Ashley Furniture and Homebase (Wenzel & Förster, 2013). However, IKEA Group enjoys massive competitive edge as a result of its positive brand image and trust amongst the customers as well as the product quality, cost effectiveness and the highly rated design framework adopted by the company. The ever-growing markets compelled the entity to adopt a diversified strategy towards food and textile industry in order to curb the effects of this high competition. Consequently, it also diversified into the telecommunication industry where it focused on providing affordable and, flexible non-contract mobile services to its customers. Particularly clear, IKEA’s DIY furniture philosophy has catapulted it beyond the reach of its competitors hence allowed it to gain substantial degree of market share in such new markets as China and Japan (Wenzel & Förster, 2013). On the contrast, however; with the low demand in furniture products due to low spending competition is likely to slightly diminish over time. 5.0 Competitive Advantage IKEA Group enjoys a great deal of competitive advantages over its immediate rivals. Some of the notable advantages are discussed as follows; First, the Group operates under a low cost strategy. In the course of manufacturing, the company uses low cost raw materials such as ply wood and metal as opposed to cast iron and expensive hardwoods only found in specific markets across the globe (Lu & Thawatthatree, 2011). The ability to adopt an in-house design framework of the different furniture product lines provides an opportunity to save even more money that could emanate from spending high amounts on paying-off extensive design commissions to both local and foreign-based designers. Secondly, IKEA practices effective strategic sourcing capabilities. The Group, unlike its competitors, has made sure to develop stringent relationships with its underlying producers and suppliers who avail them with outstanding and quality furniture parts ready for assembling. Notably, the Group further considers their respective producers and suppliers as a fundamental type of stakeholder who can influence its activities (Lu & Thawatthatree, 2011). To ensure that the relationship with these producers is guaranteed into the future; the company recently implemented technological advancements meant to smoothen and optimise their investments capability within its operations. Consequently, IKEA benefits a lot from its wide array of products offered to customers at any given moment. It is engaged in the production of products that cover all forms of home needs- a feature that well explains its all-in-one shop philosophy that attracts even large number of customers to its stores. Additionally, it is highly positioned in regards to its packaging innovation capability. The distinctive flat packaging model adopted allows easier transportation and assembly of the purchased furniture products by customers at their own pleasure and time. The feature also ensures to cut down on operational cost by at least 80% since customers are involved in the assembly of these parts (Lu & Thawatthatree, 2011). The warehousing component of the business fosters a hand-on technique to offering customers with these products. The component also reduces the level of operational cost since fewer employees will be needed for the transportation purpose. 6.0 Core Competencies IKEA Group core competency is focused entirely on sustaining a profitable venture through a low-cost business model. It is important to note that the model allows the Group to evaluate the exact costs incurred in generating specific products or processess; including aspects like design, sourcing and operational expenses as a whole (Harapiak, 2013). Certainly, while making sure to develop and expand its overall expansion, IKEA continues to capitalise on sustaining low-cost model. In essence, it is set to attain a low-cost leader while still maintaining high quality products. This is achieved by its flat packing process that facilitates more merchandise to be shipped and kept within the different distribution centres in place. By doing this, IKEA want the end users to comprehend that they are not perceived as value consumers but they are also involved in developing it firsthand (Harapiak, 2013). It has also resorted to updating its underlying value chain processess by way of integrating consumers into the entire process and thus, launching a two-way value system that encompasses suppliers and customers. Through the competency of consumer intelligence, IKEA has been able to comprehend the American market culture in relation to furniture (Harapiak, 2013). This core competency has fostered the company into comprehending the immediate different tastes and preferences characterised in the American market in comparison to the European. The Group further enjoys a strengthened sustainability platform- an aspect that is accomplished by its ability to offer unique furniture products to all consumers. It facilitated the overall shopping experience by incorporating distinctive forms of extended- services like offering playgrounds, restaurants and showroom effects hence providing a relaxed environment for all potential buyers. Another core competency portrayed by the Group lies in the way it embarked on emphasising customer satisfaction over other stipulations. In essence, this mere but effective strategy allowed it to sustain a low-cost structure while at the same time putting focus on customers across the globe. 7.0 Differentiation Strategy IKEA seems to be operating under an international diversification strategy. International Strategy reflects one for which an organisation make efforts to expand operations especially sales activities for its products across different global boundaries and countries and into different distinctive geographic markets (Hitt et al 2006). From a strategic management viewpoint, international operations are a form of diversification strategy. In essence, it is deemed to be the best model that could effectively replace product diversification strategy. Research establishes that international diversification strategies, just like other forms, is focused on accessing new resources and markets, enjoy from the distinct economies of scale and cost reduction, as well as exploit aspects related to location advantages and performance improvements. IKEA Group’s early international market entry demonstrates that the value creation potential that emanates from international diversification strategy (Hitt et al 2006). In fact, as a result of being exposed to restrictions related to growth in its overall core furniture store operations, the Group embarked on adopting unique growth opportunities that included the expansion of its product lines in order to serve newer customers segments in its country origin- Sweden and, also to a greater extent recognising and serving their already existing customer base that is composed of young professionals and families in other economies (Hitt et al 2006). In essence, international diversification indeed allowed the Group to cater for its overall customer base within the different global regions while still enjoying the position of an international leader in its original market segment. 8.0 Possible Strategic Alliances Presently, IKEA Group is not engaged in any form of joint venture or even strategic alliances. It is only focused on enhancing the existing strategic networks between different suppliers and retail outlets. Exploiting the probability of a joint venture will prove beneficial to this company especially because it will likely replace its overall system of franchising and through this manner, benefit from aspects related to cultural sensitivity as well as operational networks that could be developed in a strategic network platform. In essence, there is likelihood that by engaging in these forms of strategic alliances; IKEA will likely enjoy increased market coverage. Through a Kenichi strategy, the Group can go ahead and find a proper partner and expand into different market segments for which competitors are fairly-integrated while it provides the partner with distinctive access to reliable suppliers (Harapiak, 2013). Of particular interest, IKEA Group seems to be insensitive to specific market needs, which has resulted to a barrier of increasing overall market share. A perfect example lies in most of the Scandinavian countries being compelled to furniture preferred by American market and vice versa thereby ignoring the plight that emanates from these individual market needs. For this case, IKEA should form local joint ventures in order to develop furniture products that lie within their immediate core-competencies for the underlying local markets and in doing so, responding to customer needs. 9.0 Conclusion & Recommendation for Future Strategies In sum, it can be noted that IKEA Group enjoys a greater market share in both local and global markets, which is a result of its low-cost control model that ensures the provision of high quality products and at affordable prices. The Group seems to adopt an international diversification strategy where it has made efforts to market a huge market presence in different foreign markets. The organisation’s competitive advantage is highly attributed to such aspects as; effective sourcing capabilities; low cost model; high innovation packaging capacities; as well as ability to provide a wide range of furniture products to different markets. To cut down on cost, the company ensures to incorporate the consumer into its supply chain so that they also play a role of a creator as opposed to being only users; they are allowed to assemble shipped furniture parts to a final product. In relation to future recommendation strategies, IKEA Group should consider forming local joint partnership ventures in the different global markets in order to meet specific individual needs of these segments. The Group can seek to establish new partnerships in order to improve on its overall cultural sensitivity within these markets as a whole. Considering that local furniture manufacturers comprehend the specific local market needs in regards to design and colours; IKEA can benefit greatly from this venture by improving on its customer base within these foreign markets while at the same link this local producer with international raw material suppliers. References List Hitt, M, A Et al. 2006. International Diversification: Antecedents, Outcomes, and Moderators, Journal of Management, 32(6), p. 831-867 Harapiak, C., 2013. IKEA's International Expansion.p.21-42 Lu, C. & Thawatthatree, A., 2011. Use value innovation to create competitive advantages in Blue Ocean: A case study of IKEA in Nanjing. Perchinunno, P. & Schirone, D.A., 2012. Cluster analysis for strategic management: a case study of IKEA. In Computational Science and Its Applications–ICCSA 2012 (pp. 88-101). Springer Berlin Heidelberg. Terry-Armstrong, N., 2012. IKEA: The Homeware Category Killer. Busidate, 20(1), p.7. Wenzel, H. & Förster, A., 2013. Blue Ocean Strategy. How IKEA created a new market. Read More