Introduction
This paper aims at discussing and evaluating the strategic management of IKEA’s current situation, and future position and development. This research paper identifies the source of competitive advantage for IKEA and the strategic challenges faced by the company in its expansion plans. In order to help understand the current situation, the paper has adopted some management models or frameworks. Each company strives to apply distinctive, unique, and successful business strategy that can enable it to stay ahead of competition, specifically on a global perspective. To this end, the paper conducts an analysis of IKEA’s business strategy.
Company overview
IKEA prides itself as one of the most successful global manufacturer and retailer of home furnishings (Rumelt, 2011). Ingvar Kamarad from Sweden established this privately owned firm in 2008. By 2008, IKEA owned and operated its own retail stores in twenty-four countries, with ongoing plans to open several retail stores in various locations. Additionally, IKEA has 32 retail stores in 16 countries, owned and managed through partnerships, which broadens the company’s global to 35 countries abroad. The company has also diversified its product portfolio beyond furniture and furnishings into prefabricated housing and food products (Johnson, Scholes, and Wittington, 2011). IKEA has franchise agreements with many retailers abroad, which enhances the company’s local market knowledge and capitalization.
Strategic analysis
IKEA prides itself as one of the most successful global retailer in the world, which gives a good reason to talk about the firm’s success. Every successful business realizes its goals with a good strategy. IKEA has a strategy based on selling good quality, self-assembly, Swedish designed furniture products at low prices. After entering the furniture industry, IKEA realized that they had to change their operations to meet consumer needs. IKEA has been able to gain a competitive advantage by displaying its products in large warehouses located in posh location far away from the city noise, and finding suppliers with good quality and cheap labor. Evidently, some of the company’s strategies were planned while others emerged in the business operation process.
In general, Mintzberg’s model provides prove to evolution of IKEA’s strategy. The company started with a planned strategy but introduced new strategies in response to consumer needs and market trends. Using a hybrid of both planned strategy and unplanned strategy have helped IKEA become one of the most successful global retailers.
Every company starts with a target and reason. IKEA’s first long-term goal was to provide stylish functional designs at low cost under contract by suppliers and sell products to consumers at low prices to motivate people buy their products (Mintzberg et al., 2008). In an attempt to cut down cost, IKEA started retailing and exhibiting their products in their furniture store based in Sweden to, thereby eliminating retailers and using their new concept of self-assembly.
Considering IKEA’s emergent strategy, the firm is very creative and flexible on how it handles problems. When IKEA experienced the problem of damaged goods during the shipping process in the 1950s, the company reacted to the problem by implementing flat packaging for their products. This decision helped the company reduce damage cost as well as help customers customize their cost due to self-assembly. This is the main reason for the emergence of self-assembly an integral part of IKEA’s concept in 1957 (IKEA, 2012). However, while IKEA implemented self-assembly of their products to reduce prices, established outlets started accusing IKEA of coping their designs.
In an attempt to solve this problem, IKEA started designing more products in-house and looking for suppliers who could produce their design. Subsequently, IKEA expanded its Almhult warehouse as the first store where customers could view how IKEA manufactures their furniture. The company also contracted Polish manufacturers where production costs rates 50 percent lower than produce price in Sweden (IKEA, 2012). The company also noticed that faced problems with the location of Almhult far away from the city. In order to solve this problem, IKEA opened a restaurant at their Almhult plant where customers could refresh and relax while shopping out of the city noise. Additionally, when IKEA realized that it had many lines of orders, which it could not deliver, they invited their customers to pick up and assemble what they want. This has continued as the culture of IKEA (Baraldi, 2008).
Analysis of IKEA’s capabilities
According to March and Simon (1958), the management and administration of an organization involves full use of the company’s resources towards achieving the overall organizational goals. Resource based view model provides a good means of assessing IKEA’s recourse capability. According to Jarzabkowski (2008), resources are specific assets owned by a firm that it can use to create a competitive advantage
Physical assets
The company owns 313 stores worldwide, which are usually located outside the city center. Additionally, the company has 37 stores owned through franchises. IKEA is the largest furniture retailer in the world.
Financial assets
The company has a strong financial base and is able to engage in extensive promotion and advertising activities. The company experienced sales growth of 15 percent between 1990 and 2005. IKEA realized sales of £14.8 billion. The company had a capital base of $ 23 billion by 2010.
Intellectual resource
The company enjoys a good relationship with government, which has helped it secure big government contracts. IKEA also has a large pool of skilled staff that are able to support the delivery of unique furniture styling offered by the company. Additionally, the company operates 24 hours daily thereby enhancing convenience to the customers. IKEA has a good relationship with its suppliers, which enables it ensures timely supply of high quality products.
Reputation of resource
The company has a well-established global brand achieved though global expansion and franchising. Additionally, IKEA has a wide following in Europe, America, and Asia, all which constitute large share of the world market. IKEA plans to inject more than $28 million into UNICET by 2015.
Human resource
The company has about 127,000 skilled employees in store management and wood technology. IKEA also has good transportation system, courtesy to flat packaging that was invented by competent personnel. The company also produces expert design and provides good customer service. IKEA motivates its employees through a number of programs.
Relational resource
IKEA has a strong human resource support system that features 28 networked distribution centers. The company’s website has traffic of more 550 million people every year. Additionally, IKEA has a good transportation system.
Business - level strategy
According to DeSarbo & Grewal (2008), generic business strategies include, cost leadership strategy, focused cost leadership strategy, differentiation strategy, and focused differentiation strategy. A company that follows cost leadership strategy attempts to achieve product differentiation through reducing production cost to low levels as compared to competitors. Cost reduction also involves reducing the number of market segments that a firm follows because the high number of market segments proves expensive due to the high cost of research and implementation (Henry, 2011). Focused cost strategy involves combining cost strategy with and focused business level strategy to provide cheap products to a narrow market (Porter, 1985).
With this theory in mind, it is evident that IKEA has differentiated its products in design (nice, unique, and simple in design), customization ability, customization ability and convenience. However, the level of differentiation is moderate because IKEA concentrate on cheap price, good quality, young design, and customization. Categorically, IKEA concentrates more on cost advantage. The company’s prices are cheaper compares to competitors’ because they contract cheaper suppliers with excellent skills in home furnishings all over the world. IKEA also restructured their business model to find convenience to customers by making customized products thereby helping IKEA to reduce cost of inventory, management, and warehouse (Nelson and Winter, 1982). Additionally, IKEA has a wide product lines at cheap prices. Overall, IKEA follows cost leadership strategy.
Synergy between IKEA’s strength and business – level strategy
In order to support IKEA’s strategy of cost leadership, IKEA conducts many functional level activities including quality, efficiency, innovation, and customer satisfaction. To start with, IKEA achieves operational efficiency by focusing on achieving economies of scale, experience curve, learning effects, mass customization, and flexible product systems. Outsourcing goods from different countries does not only help in reducing cost due to inexpensive materials and cheap labor, but also help IKEA learn and adopt new technology from other businesses.
Secondly, since IKEA’s strategy revolves around providing customers with high quality and cheap products. The company has continuously invested in R&D, finding new suppliers, redesigning IKEA’s products annually, and helping suppliers adapt new technologies. IKEA spends more resources on research, marketing, and design to try to understand customer needs and trends.
Beyond doubts, it is undeniable that IKEA’s organizational structure and culture work best at supporting the company’s business success. IKEA use non-formal, non-hierarchy and team based leadership styles (Gamble & Thompson, 2011). This style works best by creating more creative, self-confident, and dynamic employees regarding their individual and organizational success (Grant, 2010. Additionally, IKEA regards all employees and their family as part of the company and conduct activities such as weekend picnics and vocations together. After realizing, that the company could collapse if left in the hands of family, Kampard decided to trust control of the company to two foundations. The company’s first priority, when conducting business is to serve people rather than make profits. As result, IKEA knows its customers, and that is the reason why IKEA’s strategy focuses on supporting customers including good design, lower prices, and high quality products.
Weaknesses of IKEA’s strategy
The size and scale of IKEA’s global marker could make it hard for the company to control standards and quality. Some of the countries, where the company acquires its suppliers do not implement regulations on working conditions (Burgelman & Grove, 1996). This could negatively affect customer view on IKEA’s products. Another weakness emanates from the need for low cost products. The company has to balance low cost with producing good quality products. Another threat to the company’s strategy emanates from the fact that creativity and product development may falter over time making the company loose a massive market share.
Recommendations and conclusion
In conclusion, IKEA’s success story comes from the leadership and business culture that guides all company’s operations. The firm responds to marketplace conditions by modifying their competencies as well as means of differentiating their products from those of competitors. IKEA’s goal is to deliver maximum value at lowest total cost. As such, the company needs to consider which part of the business strategy to improve.
IKEA stand on a delicate balance between customers and global suppliers based on its distinctive business strategy, which means that the company must continuously strive to satisfy consumer needs with cheap but high quality products (Garrett and Gray, 2005). The company must also ensure that they find cheap suppliers. Conversely, strategic differentiation and offering prices lower than competitors would help the company sustain its global business position, while responding to changing business environment with strong leadership and culture conversed in organizational routine (Porter, 1985). However, it is difficult to dominate the global furniture industry due to global competitiveness (Robertson and Caldart, 2009). As a result, increasing market coverage as well as developing a sustainable advantage becomes a challenge. IKEA could derive sustainable advantage through devising trade-offs to increase customer loyalty. Furthermore, choosing a unique location does not guarantee enough sustainable advantage.
IKEA prides itself for stylish and affordable furniture retailer. In order to achieve sustainable development, IKEA should persist with this spirit to create a powerful branding and reputation. The firm’s low margins come from tight cost, but if IKEA fails to pressure suppliers to minimize cost and price, IKEA may face fierce completion, which demands that the firm establishes a long-term relationship with suppliers. IKEA is not in a position to enter delicate furniture market because it will confuse consumers and lose credibility due to mutual exclusive image. Consequently, developing multi-functional furniture would prove viable way to explore product categories or range.
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