IKEAs Competitive Standing against a Background of Generic Competitive Strategy Models - Case Study Example

Analysis of IKEA’s competitive standing against a background of generic competitive strategy models Table of Contents Analysis of IKEA’s competitive standing against a background of generic competitive strategy models 1 Table of Contents 1 Introduction A privately held company, IKEA is into the business of ready-to-assemble home furnishing products that are well-designed but so effectively priced that enables them to be bought by a cross-section of people on account of the being highly affordable. This niche market strategy endears IKEA products to millions word wide making the company largest retailer of furniture (Reuters, 2008). The company has an interesting history and has been going strong since 1943 after this 17-old boy naming Ingvar Kamprad of Sweden founded it. He named it IKEA, where I and K stood as an acronym for his first and last name, E for Elmtaryd, a farm where he grew up and A for Agunnaryd, a village where he was born (Harvard Busines School Publishing, 1996). The firm is continuously into global expansion and thrives successfully in the market; primary reasons for which are supposed to be its impeccable product development, minute and careful attention to details regarding operational cost, cost control, and regular and innovative product development and still maintain average low, affordable cost to its consumers (Kamprad, 2011). A Dutch corporation, INGKA Holdin B.V. controls IKEA group of companies, which, in turn, is controlled by a not-for-profit, tax-exempted Dutch foundation. Swedwood, which is owned by INGKA Holding B.V. is responsible for sourcing IKEA furniture manfacture and designing and developing the products. Spread a far as Singapore, the company’s logistics center is based in Germany’s Dortmund. The idea of IKEA’s hugeness can be gauged by its range of products, which stand around 12,000 in all and its popularity by its website that registers more than 500 million visitors every year, with a global traffic rank of 290, US rank of 325, and links in around 39,000 sites (IKEA.com Search Analytics, 2012). Theory of competitive advantage behind IKEA success IKEA has been successful in creating a value for its buyers, and keeping in line with the theory of competitive advantage the value exceeds IKEA's cost of creating it. Customers are always willing to pay for value, and it is generally seen that most of the value that customers derive is when companies/ products offer lower prices than competitors. Since IKEA has endured this ability over time, it has attained a sustainable competitive advantage (Augustine, Boyd, & Wright, 1992). This can also be attributed to the fact that IKEA has been able to maintain both cost advantage and differentiation advantage, which are two basic types of competitive advantage. The company has achieved differentiation through its wide, innovative and impressive range of products suiting almost everyone’s need and desire. And the very nature of its business has embedded into it the low cost factor, almost putting it at the top of cost leadership (Scocco, 2012). IKEA’s biggest aim so far has been to stick to the strategy that helps it stay at the overall cost leadership. Interestingly when it comes to IKEA products, it has been seen people look for them primarily for cost and quality. The company works first on cost, and then on design rest of the worries in the production line. In order to reduce transport cost, it uses “flat-package” model; and with respect to procurement, IKEA purchases from throughout the world using “scale effect” (Salzer, 1994). Fulfilling Porter's five forces model Adherence to Michael E. Porter's five competitive forces determine profitability and sustainability of a company. IKEA used all to the best of its capability. While three of the five forces are exerted from outside, two comes as threats from within a firm. Competitors/ industry rivalry IKEA works in a very competitive environment since United States' Wal-Mart and England's Galiform are also producing low cost furniture. To counter the escalation of the competition, IKEA decided to enter new markets seen as posing the largest competition like Japan and China. Industry experts term this as a very wise move having widespread external ramification on the company and its growth. Internally, reports have emerged on differences of opinion on its products and their positioning, but nothing beyond that. These minor differences, expert opine, in fact act as catalysts for being more innovative and competitive. Suppliers and their power IKEA has been hearing for some time complaints from customers that their products were a little too complicated to be assembled. IKEA, thoughtfully, roped in its suppliers and asked them if they had options in materials that offered its customers ease of use and assembling. Overjoyed by IKEA's tendency to hear, suppliers got more than willing to cooperate. This is aid to have strengthened company's supplier relationship. Buyer power IKEA has been having direct feedback from its customers, which the company uses for improvements in its design, innovation and other developments. Company’s decision to use flat cartoons for packaging was based on such customer feedback who had said non-flat deliveries from IKEA were difficult to handle. In North America the company decided to open 50 new stores based on customer demand in 2006. New entrants That could be a domestic threat IKEA might face, but given its long history and fortune, it is assumed to be unlikely that the new entrants might hold the sway so quickly and so successfully as IKEA. Demise of Habitat Habitat, a torchbearer, of Britain high street design lost its identity in July 2011; even though its enjoyed heydays in 1960s. Analysts believe that such a fate was written in 1992 when IKEA’s Ikano Group took it over; but it actually took 19 years for such a thing to happen when Habitat disappeared from the Britain’s furniture scene. The reasons for failure are difficult to enumerate, but it is largely seen that Terence Conran’s, owner of Habitat, vision of providing high quality furniture at affordable prices could not sustain in the wake of IKEA’s pricing policy. Conran found it difficult to steer in an environment where IKEA lapped profits at the bottom and other players at the top for their luxury offerings. It also revolved around low price for the same quality and appeal; people found it unimaginable when they bought Habitat’s solid oak at thrice the price of IKEA’s oak veneer. Gradually, Habitat’s brand equity was lost in a high street market that was crowded with other offerings (McGuirk, 2011). The major difference perceived between the two was that while Habitat could be termed as ‘brand of times’, IKEA could be dubbed as a ‘brand of many.’ Its SWOT analysis reveals this to a greater extent: SWOT analysis Strengths The company has endeared itself to its customers through unique value proposition, and maintained an excellent company to supplier relationship, which enables it to get high quality materials at expected prices The company maintains uniformity in its range and targets key consumer groups. The vision of “creating a better everyday life for many people’ gets across well with the users The company has a wide range of well-designed products at low prices with an advantage of flat package delivery offering customers ease to assemble products at home IKEA's strengths begin from its production processes where it has been increasingly using renewable material; it went up to 75% in 2009 from 71% in 2007 It also uses recycled waste in energy production during processes and its use went up to 90% in 2009 from 84% in 2007 Weaknesses Bing a global company, it may be difficult for the company to maintain product standards There could be a compromise possibly between quality and price since low cost has to be maintained Time taken to establish a fruitful stakeholder dialogue on account of being a global company and working under different environment and under different rules and regulations IKEA China lacks a corporate social responsibility profile of its own Opportunities Global environmental awareness can be capitalized by IKEA by showing its customers that it cares for nature and thus float a concept for ‘greener products’ (IKEA.com, nd) Can spread awareness among customers about creating sustainable homes Create a philanthropic initiative which testifies its resolve towards a greener world. Can be further innovative in packaging and thus reduce carbon print. Threats Directly the furniture stores and indirectly outlets as SEARS and Wal-Mart Costs of raw materials that may rise on account of a slowing down economy Chinese operations/ sales may hit problems since Chinese preference for furniture stems from Ming Dynasty luxurious style than the low cost ones Marketing Mix and Relationship Marketing Theory of IKEA IKEA has been using marketing mix theory in combination with relationship marketing theory generally practiced (Sheth, 1994). IKEA's marketing mix theory has been using 4Ps of "product, price, promotion, and place" very effectively (Baumgartner, 1991). This is because of the size of IKEA operations. The company has operations in 25 countries, huge furniture stores (100 and counting), and 12,000 products being offered through around 1,500 suppliers. That is a very complex network which not a single theory can suffice when it comes to maintaining and handling them. Customers get a first hand feel of IKEA's marketing relationship when they drop in at its stores; but that is not all, the company send posts more than 60 million catalogue copies to its customers annually, apart from members of its club which has millions of customers since 1994 when it was founded. Resource based analysis Global sourcing is a challenging task in terms of purchasing for supply managers and IKEA has met this challenge without any frills and in a manner that fulfills its commitment of providing high quality, low cost furniture. The challenge comes in the wake of one of incidents whereby companies shift their sourcing partners every now and then hoping to get cheaper supplies, but that is fraught with the danger of maintaining the ultimate costs of shipment to the tune of balancing the overall cost of ownership (Steinle and Schiele 2008). IKEA’s sourcing strategy can be equated with a linear stage process based on the network and interaction model. Although IKEA is different from what it was way back in early 1970s, its basic principles regarding sourcing have stayed relatively stable, aided by s small production of sources that are its own. Majority of supplies comes from a huge network of supplier that are spread over other nations. IKEA has been looking for continuous growth and in order to achieve that it has realized to be self-reliant to some extent while maintaining good relationships with its suppliers (Monczka, & Trent, 1991). This is seen as one factor that has led the company to reduce its supplier count to 1400 in 2009 from 2000 in 1990s. But to streamline the business further it included Poland as a major sourcing hub while purchase offices at around 30 strategic locations across the globe, which, in 2008, sourced furniture from as many as 54 countries (Hultman, et al., nd). Value chain theory Companies derive huge competitive advantage when they are able to provide customers great value for money (Barney, 1999) and at the same time keep their costs optimally low (Walters, & Lancaster, 1999). Effective value chains know the art of separating wheat from chaff and also the fact that only a thin line separates success from collateral disaster in business. If costs are cut, the business in no more able to survive because it cannot meet customers’ expectation of a low cost, high quality product. Value chain, normally the buzzword for which is supply chain management, is a term used to denote all activities pertaining to a product – its design, development, marketing, and even post-marketing backup. IKEA is a model example of a successful value chain since it incorporates simple designs and material, and reduces transport costs by sending products directly to home where buyers can assemble the same themselves. This eliminates superfluous add-ons that normally are a part of any supply chain. Furthermore its Scandinavian image helps it gain a competitive advantage in marketing and inventory management (Exinfm.com, nd). Conclusion In conclusion it can be said that IKEA’s success has stood on two pillars of low cost and high quality products. There is why there has been either no or only little competition but none of it has actually been able to cut through the company’s customer base. It is because IKEA being one of the oldest companies and having been founded on a specific vision has got a knack of the market and insight into customers’ mindset while they are looking for furniture and allied products. IKEA marketing based on several proven marketing theories can be attributed to this success. References Augustine, L., Boyd, N., & Wright, P. (1992). A Competency-Based Model of Sustainable Competitive Advantage: Toward a Conceptual Integration.” Journal of Management, March 1992, pp. 77-92. Barney, J.P. (1999). Firm Resources; Gaining Competitive Advantage, Addison Wesley Publishing. Baumgartner, J. (1991), “Nonmarketing Professionals Need More than 4Ps”, Marketing News, 22 Exinfm.com. (nd). Value Through the Supply Chain. Available http://www.exinfm.com/board/value_supply_chain.htm. Accessed March 01, 2012 Hultman, J., Hertz, S., Johnsen, R., Johnsen, T. (nd). Global Sourcing Development at IKEA – a Case Study Paper prepared for the 25th IMP conference. Available http://www.impgroup.org/uploads/papers/7227.pdf. Accessed March 01, 2012. Ingvar Kamprad and IKEA (1996). Harvard Business School Publishing, Boston, MA, IKEA. Available http://www.thomaswhite.com/explore-the-world/global-players/ingvar-kamprad.aspx. Accessed March 01, 2012 IKEA.com Search Analytics. (2012) Available http://www.alexa.com/siteinfo/ikea.com#. Accessed March 01, 2012 IKEA.com. (nd). Think what 170 million of us could do. Available http://www.ikea.com/ms/en_US/the_ikea_story/people_and_the_environment/a_more_sustainable_life_at_home.html. Accessed March 01, 2012 Kamprad, I. (2011). Global Players: Ingvar Kamprad, Founder and Senior Advisor, McGuirk, J. (2011) Habitat's Identikit crisis. Available http://www.guardian.co.uk/artanddesign/2011/jul/05/habitat-identikit-crisis-design. Accessed March 01, 2012 Monczka, R.M. and Trent, R.J. (1991), Global sourcing: a development approach, International Journal of Purchasing and Materials Management, 27 (2), 2-8. Reuters (2008). IKEA mulls joint venture with Bosnia furniture maker. Available http://www.reuters.com/article/2008/01/08/idUSL0861625720080108. Accessed March 01, 2012 Scocco, D. (2012). Competitive Advantage: Introduction. Available http://innovationzen.com/blog/2007/01/24/competitive-advantage-introduction/. Accessed March 01, 2012 Salzer, M. 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