IKEA:Internal Analysis - Essay Example

?IKEA – Internal Analysis Contents Sr. # Topic Pg Brief overview 2 2. Introduction 3 3. Internal Analysis: 5 3 VRIO Framework 5 3.2. Value chain analysis 7 4. Conclusion 12 References 14 1. Brief Overview: Background Sustaining one’s competitive positioning in an industry which is highly complex and globalized, is one of the most crucial challenges faced by managers in recent times. The advent of globalization, followed by information age, has expanded and to an extent, blurred the geographical boundaries, in the process, opening up newer avenues for global competitors to co-exist alongside the local firms. Considering the current corporate climate, it is imperative for corporate leaders to continuously strive to improve their product offerings and range, and offer good quality products to their customer at affordable rates, as compared to their competitors. Retaining competitive advantage is inevitable for firms to ensure profitability. This can be achieved by implementing effective management strategies and processes that allow them to conduct a thorough internal analysis of their businesses, such as benchmarking, value chain analysis etc., to name a few. For the purpose of this paper, benchmarking as a method of internal analysis is used and applied on IKEA. The process of benchmarking is of vital significance for organizations today, since it affords them the ability to compare their performance with that of their rivals or similar processes within their own organizations. The process was first used and introduced by Xerox Corporation, with a view to gain competitive advantage over their rivals in the industry, and capitalize on their strengths by overcoming their weaknesses and limitations (Zairi, 1996). The process of benchmarking is evolutionary in nature, whereby the companies involved begin by analyzing the various internal processes employed by them, and seek improvements in areas identified as problematic, thus ensuring best practices within the organizations (Wireman, 2004). Definitions: The concept of benchmarking has been widely used within the field of management and is defined differently by different authors. According to Zairi (1996: 35) "A benchmark refers to something that serves as a standard by which others may be served". However one of the most commonly and widely used definitions of benchmarking is the one developed by Xerox, which states describes benchmarking as "the continuous process of measuring our products, services and practices against the toughest competitors or those companies recognized as industry leaders" (cited in Kozak, 2004: 5). 2. Introduction: The global furniture retail industry comprises of various stakeholders and players. IKEA is one such international furniture retail chains, which dominates the global furniture market. It was founded by a Swedish furniture manufacturer, Ingvar Kamprad, in the year 1943 (IKEA, 2012a). IKEA today, has grown into a global retail brand, with as many as 131,000 employees working in 41 countries across the globe, generating annual sales worth 24.7 billion Euros (IKEA, 2012b). IKEA, as is apparent from the statistics mentioned above, has come to become one of the most globally trusted and appreciated brands in the retail furniture industry. However by the turn of the 20th century, several new players entered the industry, thus making it imperative for the existing businesses to improve and enhance their product capabilities in order to retain their competitive positioning in the industry. In present day competitive climate, the firms within the retail furniture industry are required to lower their costs, improve product range and quality, and cater to a wide consumer segment spread across the globe, in order to increase their profitability. The situation is worsened with the highly volatile external economic environment, making it difficult for firms to offer good quality products at lower prices. Its core business mantra is “Low prices with meaning” which drives them to strive for lowering the costs of their products which are as low as 30 to 50 per cent as compared to their global competitors (Chase, 2006). IKEA offers high quality products which have unique designs, by using effective manufacturing and distribution expertise. It is on account of these corporate tactics that the company is successfully able to market and sell its products worldwide, at affordable rates, as compared to its competitors. Benchmarking enables the firms to compare their historical process with the current ones and draw meaningful conclusions from the same with regard to their status and progress achieved so far. Such comparison in turn further enables them to identify various threats and opportunities available at the disposal of the firms, and provides them with an insight to exploit the same to their advantage (Koller, 2007). 3. Internal Analysis: Internal analysis is one of the core elements of the strategic planning process which entails reviewing of the firm's resources, capabilities, as well as core competencies. The key aim of this process is to identify the strengths and weaknesses within the firm and develop alternative strategic policies to help overcome the weaknesses identified during the process. This helps the firms to retain its competitive positioning within the industry and counter external threats and competition at the same time develop its strengths and exploit the opportunities available to them (Hill and Jones, 2012). For the purpose of this study two key tools used by firms for internal analysis i.e. benchmarking and value chain analysis are used and discussed below: 3.1. VRIO Framework The VRIO framework introduced by Barney refers to four key organizational capabilities or attributes possessed by a firm which contribute to its strengths and weaknesses. These include: Value, Rarity, Inimitable, and Organized for usage (Tovstiga, 2010). Value: IKEA has a large number of stores spread over 35 countries across the globe. Most of its strategies are centered on reducing costs and increasing its profitability. For this purpose IKEA relies heavily on outsourcing its products from countries where the raw materials are easily available, relatively cheap and has an effective and well-developed logistic support. This strategy adds value to the firm and helps it in maintaining lower costs as compared to its competitors. Rarity: Rarity is one of the most essential elements which contribute to the development of a competitive advantage in a firm. IKEA’s strategy of selling unassembled furniture to its customers is rare in the industry and unique to the company. This affords the company the cost advantage required in transporting heavy furniture to distant locations. However the company has collaborations with companies offering car rentals and small trucks, which allows it to cut its transportation costs which in turn is transferred directly to the customers in the form of heavy discounts. This product pricing strategy is both rare and unique in the industry. Inimitable: IKEA’s supplier and distribution network as well as unique marketing and customer service strategies are inimitable. This is because IKEA boasts of a dedicated team of in-house and freelance designers who work exclusively for IKEA and develop unique designs which are unheard of in the market. This strategy also helps IKEA in product differentiation and thereby gaining a unique competitive advantage within the industry. Organized Usage: IKEA works with its suppliers, designers and customers in a way which enables both to add value to the firm. The suppliers and designers are required to compete with each other to make the product while the customers share the burden of transportation costs thus adding value to the firm in the process. 3.2. Value chain analysis: Value chain analysis is a method of strategic analysis developed and introduced by Michael Porter which is used by organizations to assist them in developing a transformation process with inputs and outputs across various stages of the model. The value chain analysis categorizes the various processes within an organization into different stages whereby each stage is linked to the other and generates value for the organization. The key aim of this analysis is to measure the value generated by each link/ stage and calculate the total profit likely to be earned by the organization. The firms may choose to focus on a particular stage/ link or process which is expected to offer the highest value to the organization and dedicate adequate resources to earn optimum benefits (Finne and Sivonen, 2009). With the growth rise in the retailers’ profitability and expansion of its stores from local to international markets the strategies used for promotion of its business also undergoes a simultaneous change. The marketers are required to develop market and customer specific strategies in order to stay ahead of its competitors in the industry. According to Porter there are various key elements which form a typical value chain - such as marketing, sales, inbound and outbound logistics, procurement, technology development as well as human resource management. In order to create a cost advantage the retailer is required to reduce the costs in each of the individual value chain activities. This strategy as adopted by IKEA is discussed below: IKEA value chain: Value chain analysis played a key role in the growth and expansion of IKEA from a humble domestic retail store to an international retail chain which specializes in mail-order furniture. Some of the key core competencies of the company is its low-cost strategy, effective warehouse management, as well as excellent customer service. The firm, unlike the others in the business offers a unique service whereby the customers are offered a discount between the range of 25% to 50% as compared to the fully assembled products offered by its competitors. IKEA sells simple, high-quality and ready to assemble furniture kits to its customers, which they are required to assemble and transport themselves. This unique service strategy affords them the ability to reduce their costs significantly. Thus the cost saved due to effective sales strategy, transportation, as well as effective warehousing is in turn transferred to the customers in the form of heavy discounts (Harvard Business Review, 2000). At IKEA the system of product pricing is done in a unique manner. The price tag for a product is decided in advance and the product is developed in accordance with the pre-decided price. This strategy requires the suppliers and product designers to work closely with each other thus enabling the firm to successfully acquire low cost product components, and raw materials. This in turn helps in significantly reducing the prices of the products. The firm strives to maximize its production in an attempt to maintain lower production costs. Also wastage is kept at bare minimum and controlled through effective flat-pack transportation and self-assembly thus giving the firm a unique competitive advantage which is unparalled in the industry (IKEA, 2012c). Another unique feature of IKEA's value chain is that it uses subcontracted manufactures all over the world since it does not have any manufacturing facilities of its own. The firm focuses on its supplier networks in order to maintain cost leadership in the industry. IKEA's global product procurement strategy is to hire suppliers from low cost economies who have close proximity to required raw materials and with effective and reliable access to distribution channels. These suppliers offer standardized products intended for sale in various international locations in order to reap the benefits of economies of scale. The low-cost products coupled with uniquely designed standardized products and use of technology to enhance the quality, offers IKEA a competitive advantage which is unique in the industry (Hollensen,2009). In accordance with the market demands and changing global market dynamics, IKEA has successfully reconfigured its value chain to include customers as a key part of the process. IKEA now uses a two-way value system between the customers, suppliers and the IKEA headquarters whereby the customer is the supplier of time, labor, information, knowledge and transport; while the suppliers play the dual role of customers who receive technical assistance from IKEA's corporate technical headquarters in the form of various business services (Hollensen, 2009: 401). Capabilities for achieving and sustaining competitive advantage: The core capability of IKEA is its ability to work with wide range of suppliers and its talented team of in-house and freelance designers. IKEA boasts of an impressive number of suppliers worldwide, totaling to about 1800 in number spread in over 55 countries around the world which are dedicated in making of products exclusively with IKEA. Furthermore IKEA also has a large network of trading offices which are connected closely with its suppliers in helping them to reduce costs, and improve the product quality as well as enhance the working environment. Also, IKEA uses a unique strategy whereby all its suppliers as well as its team of in-house and freelance designers are required to compete with each other for gaining the right to manufacture the product. For instance, the teams of designers are assigned the task of developing unique products and only the best product design is chosen to be manufactured by the IKEA team (Williams, 2008). Source: Bestlog.org This enables the team of designers to compete with each other and provides the company with a unique advantage of developing the best quality product. The suppliers, on the other hand compete with each other to gain the right to produce the newly developed product. This strategy provides IKEA the core capability to work with a wide range of competitive suppliers and designers and the ability to generate low-cost products. The suppliers are benefitted with mass production orders and ultimately high profitability while the designers are rewarded with higher returns. This distinctive competence of IKEA enables it to sell its products at low cost, with designs which are unique and distinct than found anywhere else in the world (Williams, 2008). Marketing and Sales: The marketing and sale strategy of IKEA is also starkly different as compared to its competitors. IKEA's product promotion strategy is mainly executed through its product catalogs which are printed in 24 languages in 47 editions made available in over 33 countries across the globe. These catalogs have a worldwide circulation of over 160 million copies (Czinkota and Ronkainen, 2007). IKEA has a unique distribution network. All its outlets are located outside the city limits of major metropolitan areas and the products are not delivered directly to the customers but instead the customers are required to manage for their own transportation. However as a part of its customer service and product delivery strategy the company has established effective collaborations with companies which offer car rentals and small trucks (Czinkota and Ronkainen, 2007). 4. Conclusion: The retail furniture industry is a critical sector of the economy, and IKEA holds a strong position of imminence within the same. The IKEA stores worldwide are synonymous with a wide range of good quality affordable products in stores which provide a comfortable ambience complete with restaurants, which offer the customers the opportunity to shop at ease and leisure. This unique store design has catapulted the company into the world’s most well known home furnishing retailer, over the years. One of the key strategies employed by the company is to attract customers from a large segment, by offering low priced products, a concept which is readily welcomed and accepted by its customers making it a globally valued and respected brand. Furthermore the company boasts of an impressive sustainability practice, which ensures and promises a good, clean and environmentally friendly approach to business, thus encouraging the implementation of best practices across the industry. Internal analysis and Benchmarking has helped in assessing the industry wide practices, and afforded a comparison with the key competitors such as Pottery Barn. The data so collected has helped in highlighting the key strengths of IKEA as compared to its rivals within the industry, and an opportunity to overcome the weaknesses. The process of internal analysis is one of the key corporate processes available at the disposal of the companies to enable them to excel in all aspects of its business, and provide good quality products to its customers, thus catering to their specific needs and preferences, and enabling them to keep up with the complex and highly dynamic external environment. References: Chase, R., (2006). Operations management for competitive advantage. McGraw Hill Publication, p. 137-138 Czinkota, M. R., Ronkainen, I. A., (2007). International marketing. Cengage Learning Publication, pp. 170-172 Finne, S., Sivonen, H., (2009). The retail value chain: How to gain competitive advantage through efficient consumer response strategies. Kogan Page Publishers, pp. 5-11 Harvard Business Review (2000). Harvard Business Review on managing the value chain. Harvard Business Press, pp. 188-190 Hill, C. W. L., Jones, G. R., (2012). Strategic management. Cengage Learning Publication, pp. 19-20 Hollensen, S., (2009). Global marketing. Pearson Education Press, pp. 401 Koller, G., (2007). Modern corporate risk management: A blueprint for positive change and effectivness. J. Ross Publishing. Kozak, M., (2004). Destination benchmarking: Concepts, practices and operations. CABI Publishers, pp. 5 Tovstiga, G., (2010). Strategy in practice: A practitioner's guide to strategic thinking. John Wiley & Sons Publication, pp. 107-109 Williams, C., (2008). Management. Cengage Learning Publication, pp. 201-202 Wireman, T., (2004). Benchmarking best practices in maintenance management. Industrial Press, pp. 37-38 Zairi, M., (1996). Effective benchmarking. Springer Publication, pp. 11-15 Online Sources: Bestlog.org [Online] Available at http://www.bestlog.org/ [Accessed: August 29, 2012] IKEA (2012a). History [Online] Available at: http://www.ikea.com/ms/en_GB/about_ikea/the_ikea_way/history/1940_1950.html [Accessed: May 28th, 2012] IKEA (2012b). Facts & Figures [Online] Available at: http://www.ikea.com/ms/en_GB/about_ikea/facts_and_figures/facts_figures.html [Accessed: May 28th, 2012] IKEA (2012c). Our low prices [Online] Available at: http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/our_business_idea/our_low_prices.html [Accessed: August 29, 2012] Read More