IKEA Competitive Strategy - Case Study Example

Introduction IKEA is a furniture Multi-national cooperation selling Scandinavian-style home furnishings and other house hold goods for its customers at affordable prices (Rosenhauer 2008). This company operates in more than 33 countries with 231 stores (most of them in Europe and the rest in Canada, United Sates, Australia and Asia) and hosts 410 million shoppers per year. IKEA started out its operations in 1943 by entrepreneur Ingvar Kamprad who still runs the company through a foundation by the holding company (INGKA holding B.V) (Inter IKEA Systems 2011). The company offers a product range of about 18000 items. Based on its original ethos of fusing cost obsession with design culture, the company utilizes its signature feature of flat packed furniture which consumers can assemble for themselves at their homes, thus reducing the transportation costs. No matter how inspired, there is no design which can enter into the IKEA catalogue if it cannot be made affordable. The company has therefore held sustainability at heart and through their internal tune of ‘low price but not at any price,’ it designs its own furniture which is manufactured by about 1,500 suppliers in more than 50 countries (Inter IKEA Systems 2011). Key components of the company’s success lie on finding the right manufacturer for the right products, as well as their experience in retail marketing through the use of integrated marketing communication. This paper examines the competitive positioning of IKEA in the furniture retailing industry and analyses the strategic directions that the company has utilized to remain competitive in the global market. To determine the IKEA’s competitive position, it is necessary to first understand the nature of the industry in which it operates by applying Michael Porter’s five forces to the company. Porter’s Five Forces Analysis IKEA can be evaluated using Porter's Five-Forces Model of Industry Competition: bargaining power of suppliers, bargaining power of buyers, intensity of existing rivalry, threat of substitutes, and threat of new entrants (Porter 2008). The analysis of these competitive forces helps to understand the strategy that IKEA utilizes in maintaining their market edge as well as competitive standing in the industry. Bargaining power of suppliers According to Porter (2008), “powerful suppliers capture more of the values for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants” (p. 6). In the situation with IKEA, the company has thousands of suppliers who set the standards in delivering materials. Usually, the company sets out base prices for their products and then seek to balance between cost-effective labor and their product’s quality standards (Finntrack 2005). Therefore most of the company’s suppliers have to compete with one another for the production package implying that they have little bargaining power. Bargaining power of buyers Porter (2008) considers buyer power as the flip side of supplier power; powerful customers demand better quality driving up costs, capture more value by forcing down prices, and thus playing the industry participants against one another at the expense of the industry’s profitability. Buyers have low bargaining power due the exiting low-price option that IKEA offers them. Although there are alternatives for furniture and other household items, the company’s low price strategy has limited the consumers from choosing such option (Inter IKEA Systems B.V. 2011). IKEA has found itself unique among other competitors for effectively responding to consumers who are price conscious. Intensity of existing rivalry Intensity among the existing rivals takes various forms including price discounting, introduction of new products, improving services as well as their advertising campaigns (Porter, 2008). He further notes that the basis and the intensity at which firms compete determine the degree of rivalry in the industry. High intensity of rivalry in an industry affects its profitability. There are a number of IKEA’s furniture competitors in the industry, who however, offer different styles and functionality. For instance, Cartel & Barrel offers product in a box that is however subject in higher prices; Conrin aims at a low cost furniture line; Wal-Mart is categorized as a big box furniture under the general store, however, with no much of style; and Ethan Allen which targets a more upscale market (Finntrack 2005). To survive competition in the industry, IKEA has wisely attempted to deliver a complete package for the customers and thus reflecting weak rivalries. Threat of substitutes According to Porter (2008), substitute products perform a similar or same function as an industry’s product by through a different means. In this case there are no specific products that can substitute the furniture. However, the company has to keep up with the latest trends and technologies in avoiding running sort of style (Sand 2010). Their cutting edge technology enables the company to fairly and effectively copy any new style to move their products into the stores. Threat of new entrants This force is determined by the barriers that exist in the industry which may deter the entering of new players in the industry. Porter (2008) refers to these barriers as those advantages enjoyed by the incumbents in the industry as compared to the new entrants. New entrants rolling on a low-cost strategy can compete with IKEA in delivering furniture and other household items. New entrants can find their way into the many small towns and cities where IKEA stores do not reach. However, it is not easy for new entrants to establish their businesses in major and big cities since they must first create a unique brand name as well as establish a vast supply chain that demand high capital. The threat of new entrants is generally low since the new firms must first require a strong distribution network, seek to gain customer loyalty to their brands as well as meet the high sunk costs. Competitive strategy model According to Grant (2010), competition in an industry eliminates the profitability differences that exist between the players of the given industry. As a disequilibrium phenomenon, gain of competitive advantage through change is the only option that can enable an organization to stand against other competitors in the industry. These changes can either be internal (i.e. having greater creative and innovative capability) or external (i.e. technological change, changing customer demand and changing prices). Grant (2010) argues that an organization can respond to such changes either through cost advantage or differentiation advantage. Cost advantage refers to a firm’s strategy of supplying identical products or services at a lower cost while differentiation advantage refers to a firm’s strategy of supplying products and services in a differentiated manner such that a consumers are willing to pay more. Cost advantage strategy is pursued if a firm wishes to become a cost leader in the market or a particular market segment. Such a strategy requires the organization to seek and exploit all the possible sources of cost advantage while they sell a standard (no-frills product). On the other hand, differentiation strategy is pursued by a firm that wishes to offer unique products to its customers making them feel the value beyond the low prices. The figure below shows the ways in which a firm can achieve competitive advantage. Similar product At lower cost Price premium from Unique product Figure 1. Source: Grant (2010) According to Johnson, Scholes and Whittington (2010), pursuing a cost advantage strategy requires a company to compete on low cost while pursuing a differentiation strategy requires a company to compete through differentiation in terms of market positioning, resources and capabilities, and organizational characteristics. Appendix A illustrates the characteristic features of cost and differentiation strategies. Michael Porter illustrates the three generic strategies: differentiation, cost leadership, and focus in a table by combining the two types of competitive advantage (cost leadership and differentiation) with an organization’s choice of scope (i.e. broad market verses narrow segment) (Kim, Nam and Stimpert 2004). According to Porter (1985), cost leadership and differentiation are mutually exclusive strategies which should not be pursued both at the same time. Any firm that attempts to pursue both of them at once will be “stuck in the middle”, and consequently achieve low profitability. The Porter’s three generic strategies are illustrated below. TABLE 1: SOURCE OF COMPETITIVE ADVANTAGE LOW COST DIFFERENTIATION COMPETITIVE industry-wide SCOPE Single-segment Figure 2. Source: Porter (1998) In strategic management, porter’s generic strategies frameworks are used to analyze a firm’s business strategy to ascertain its competitiveness in relation to other players in the industry. Johnson, Scholes & Whittington (2010) suggest that a given strategy must be evaluated using the criteria of suitability, feasibility and acceptability before it is implemented. This evaluation determines whether the strategy will actually give the company a competitive advantage in the industry. IKEA’s Competitive strategy Cost Leadership IKEA’s strategy has been founded on cost leadership. It is the relationship between three ideas involved in their business: the business idea, the entrepreneur, and the company culture that explains the success of IKEA. As a business idea, the company focuses on the concept of helping in the creation of a better everyday life (Inter IKEA Systems B.V. 2011). The company holds the belief of providing its customers with quality home furnishing at low prices than the competitors, thus weakening their market share. Guided by organizational objectives, the company’s culture enables their competitive strategy to attract more customers and keep them coming back. Thus, the company offers a wide range of home furnishings which combine good function, good design, and good quality at lower prices making more customers to go for them. IKEA’s cost advantage is as a result of the company offering stylish and quality functional designs (IKEA’s ‘democratic design’) at low and fair prices for consumers to afford. This is enhanced through cost effective establishment of contracts with suppliers. Besides, the company emphasizes on reducing the assembling costs in their minimalist production lines. IKEA has kept costs under control starting at the design level of the value-added chain. Through packaging of the items compactly in flat standardized boxes as well as stacking as many as possible has helped the company cut down costs due to the reduced storage space during the logistic process of distribution (Inter IKEA Systems B.V. 2011). According to Porter illustrated in Botten (2009) a firm enhances its competitive standing by performing their key internal activities in the value chain at a lower cost compared to the competitors. IKEA has modified the traditional value chain which identifies major activities: primary (production, logistics, marketing, and after sale functions) and secondary (human resource management, firm infrastructure, procurement and technology development. As illustrated in Appendix B, IKEA has integrated the consumer in the process and introduced a two way value system between suppliers, customers and the company itself (headquarters). In this sourcing strategy, the company regards the consumer as a supplier of labor, time, transportation, information and knowledge while the suppliers are regarded as consumers who receive technical assistance from the company (Norrmann et al, 1993). In this way, customers should understand their role of creating the value rather than just consuming it. The company’s role within the value chain is to mobilize the customers and suppliers to further help in adding value to the entire system. IKEA looks for suppliers who deliver high quality materials at low cost per unit to enable them offer their customers with quality products at lower costs. Technical assistance and necessary skills offered as well as the leased equipment enhance the production of high quality products. Generally, these long-term relationships add internal value to the suppliers and consequently differentiate IKEA from the rest of other competitors in the industry. Conclusion The analysis of the industry in which IKEA operates suggests that the company has a good competitive standing in furniture retailing. Being the world’s largest furniture conglomerate, IKEA maintains that it is better for an organization like them to invest on producing high volumes but selling them at low prices. The lower costs not only offer the firm a barrier to entry against potential new entrants, it also reduces the impact of competitive rivalry as well as the impact of supplier and buyer power. It is therefore, through cost leadership that the company has been able to achieve sustainable competitive advantage over its competitors. Attributable to their success is the incorporation of various values to their supply chain that enable the IKEA produce quality products that meet the strong environmental and social standards needed. The company has developed a strong supply chain with a reduction in production and transportation costs and consequently enabling the company to sell their products at low and affordable prices. List of references Botten, A. 2009. Enterprise Strategy: Strategic Level, E3. New York, NY: Butterworth-Heinemann. Finntrack, E. 2005. IKEA Discussion Notes on Strategy: Analysis and Practice. McGraw-Hill Education, Europe. Grant, R.M. 2010. Contemporary Strategy Analysis. 7th ed. Chichester: John Wiley and Sons Inter IKEA Systems B.V. 2011. The Owner and Worldwide Franchisor of the IKEA Concept [online]. Available at http://franchisor.ikea.com/ [Accessed 05 March 2012]. Johnson, G., Scholes, K., & Whittington, R. 2010. Exploring Strategy - Text and Cases. 9th ed. Harlow: FT Prentice Hall. Kim E, Nam D, Stimpert JL. 2004. “The applicability of Porter’s generic strategies in the digital age: Assumptions, conjectures, and suggestions,” Journal of Management 30(5), 569-589. Norrmann,et al. 1993. Things That Make Us Smart. Reading, MA: Addison-Wesley Publishing Company. Porter, M 2008. “The five competitive forces that shape strategy”, Harvard Business Review Journal, pp.79-93. Rosenhauer, S 2008. “Profit is a Wonderful Word: IKEA’s Strategy behind the Profit.” Norderstedt: GRIN Verlag Sand, C. 2010. The Packaging Value Chain. Lancaster Pennsylvania. DEStech Publications, Inc. Appendices Appendix A Generic strategy Key strategy elements Resource and Organizational requirements Cost leadership Scale efficient plants Design for manufacture Control of overheads and R&D Process innovation Outsourcing (especially overseas) Avoidance of marginal customer accounts Access to capital Process engineering skills Frequent reports Tight cost control Specialization of jobs and functions Incentives linked to quantitative targets differentiation Emphasis on branding advertising, design, service, quality and new product development Marketing abilities Product engineering skills Cross-functional coordination Creativity Research capability Incentives linked to qualitative performance targets. Appendix B Read More