Firms Competitive Behavior - Essay Example

Student Name Tutor Title: Firms’ Competitive Behavior: The Case of IKEA Institution Date Firms’ Competitive Behavior: The Case of IKEA Introduction The field of competitive dynamics has flourished in the recent years, for a variety of reasons including serving as an important source of competitive advantage (Sea-Jin Chang and Jay Hyuk Rhee 2011: 1). But more so, offering a fine-grained approach to understanding what specific firms does when they compete with specific rivals (Chen and Miller 2012: 3). On the other hand, little deliberation has been given to these approaches. This study seeks to fill the existing gap in information by considering the competitive behavior with particular reference to IKEA. To this end, its competitive standing will be examined against a background of generic competitive strategy models. The rest of the paper is structured as follows. Section two gives a brief background Information of IKEA, followed by a review of key terms (competitive behavior, strategy, as well as generic strategy models) in section three. The next section four present a detailed analysis of IKEA’s competitive advantage and its generic competitive strategy. Finally, the study concludes by stressing major findings drawn from the foregoing analysis. Background Information IKEA is a Swedish Multi-National Furniture Company (MNC) founded in 1943. The name IKEA comes from the initials of the founder Ingvar Kamprad, I and K, plus the first letters of Elmtaryd and Agunnaryd, which are the names of the farm and village where he grew up (IKEA 2012 web). It has a total of 231 supplies in 33 states the majority of them in Europe whereas the remaining is in USA, Canada, Asia, and Australia. In UK alone, IKEA currently has a total of 18 stores with an enormous supply centre in Peterborough in Cambridge shire however the largest supply is in Wembley, north London. Against this background, it is worth analyzing how the firm continues to shine despite the world dynamic business environment but first there is need to understand the key terms. The next section presents a review of competitive advantage and generic strategy. Key Concepts A competitive advantage is simply an advantage over competitors achieved by giving consumers greater value, either by lowering prices or offering greater benefits or service that justifies higher prices. Porter argues that competitive advantage is all about being different that is, intentionally selecting a different set of actions to bring about an exceptional combination of values (Porter 1996; 64). On the other hand, Generic strategy is simply defined as methods used to outshine rival firms or companies. They are approaches to outperforming other firms in a business that involves generally cost leadership, differentiation and focus (Porter 1998: 35) described in details later in the following chapters. IKEA’s competitive advantage and Generic Strategy Competitive advantage is shaped by mainly five forces namely: threat of new entrants; bargaining power of buyers; threat of substitute products or services; bargaining power of suppliers; and rivalry among existing firms where each area exerts a "force" on every player in a particular industry (Porter 2008: 26-27). A firm therefore needs to be positioned appropriately in order to deal counter these forces. In this section, some of the methods used by IKEA in dealing with aforementioned competitive forces will be highlighted. As a reaction to bargaining power of suppliers, IKEA has generally relied upon long-term cooperation and relationships with specific suppliers as external sources for its offerings. According to Baraldi, Its complex supply network spans the world. This network is adopted in order to design and purchase products that entail low production and transportation costs by taking into account all the activities performed in the network, from raw materials to customers. IKEA performs just only a few of these activities internally, intensively using its relationships with suppliers for the sake of efficiency (Baraldi 2008: 1-3). IKEA cooperates with more than one supplier but also look for the suppliers from all over the world. Nearby industry collaboration with and among dealers has significant impact on the service level and ultimate client satisfaction. The company generally sources about 17% of its furnishings and house fitting goods from Poland and collaborates with almost 80 Polish manufacturers. The mainly significant aim is the successful arrangement of consignments from Poland to distribution centers and supplies. In order to achieve this purpose or objective, IKEA executed the scheme of the supply chain arrangement reconfiguration. Latest system design involves secure collaboration with Polish dealers. The selected ones cooperate in the function of consolidation position in IKEA’s delivery chain (Ocicka 2009: 3). In so far as competitive force of bargaining power of customers is concerned, IKEA’s strategy is founded on selling high-class, Swedish designed, self-assembly fittings goods at cheaper price. The IKEA business idea is: “We shall offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them”. In the same breadth, IKEA products are subjected to rigorous tests to make sure that they meet national and international safety standards (IKEA website 2012). In addition, there is also a lot of emphasis on value offering particularly based on value chain theory. Porter argues that an organization can enhance its competitive positioning by performing key internal activities in the value chain at a lower cost and better than its competitors which include two major activities; primary and secondary. The former entails production, marketing, logistics and after-sale functions whereas the latter relates to basically support processes like firm infrastructure, Human Resource Management, Technology development, as well as procurement which IKEA has put a lot of emphasis. The firm has also improved its value chain strategy by involving the customer its process. In relation to competitive forces, IKEA has to deal with threat of a new entry product and competitive rivalry, In part; this can be related to the game theory which tends to emphasize the importance of thinking ahead, thinking of the alternatives, and anticipating the reactions of other players in your "game.” Key concepts relevant to strategy are the payoff matrix, extensive form games, and the core of a game. Some of its core areas include but not limited to new product introduction, pricing and advertising. Consequently, IKEA employs the use of catalogue or advertising as well as improved image. In the IKEA supplies, the insubstantial work of arts are usually founded on requirements of daily life and at the same time supported by anthropological researches. Pictures are articulated by means of fashionable design, high-class technical quality, cheap fixtures, and extra things for the house and everyday living. Themes are mainly created and articulated in the experience rooms and supported by the commercials, and constancy program. Other forms include media advertising (television, Internet) and IKEA’s catalogue or guerrilla advertisements, like bedroom-car riding all over USA or big square IKEA’s table in Rome. In addition, the brand name “IKEA” is kept on each of three markets, each product is sold under the IKEA brand, the registered trademark at the world dimension. This name appears on every product and on packaging. On every market, the company still gives to most of products a name; products of each line are then identified by a first name or an indication of feature (door, table). Products names are still the same on the three markets (Capdevielle, Min Li and Nogal 2007: 44). Also important is IKEA values of casualness, cost awareness, and an incredibly modest and “down-to earth” approach. The firm’s culture is therefore symbolized and shared with its clients through its subtle artifacts (Edvardsson, Enquist, and Johnston 2005: 8). IKEA’s products are quite unique. This is in line with the resource-based theory which stems from the principle that the source of firms competitive advantage depends on the unique resources and capabilities that a firm possesses. These types of resources owned and controlled by firms have the potential and promise to generate competitive advantage and eventually superior firm performance (Raduan et al., 2009: 406). Closely related to this is the Integration of the Value Chain from product design to the final consumer, enables it to package together the different resources and competences thus difficult to separate the resources and competences of such competitors, or even imitate this package (Lanlan and Marc, 2010:21). This has enabled IKEA, to maintain their competitive advantage. Unlike IKEA, Habitat’s management is not quite keen in moving the firm forward. One of its major shortcomings is its inability to advertise. Despite the fact that it has good, often priced product, the positive perception of Habitat’s brand has generally declined or gone down. Unlike IKEA which is quite new in the market, its base is relatively low thus a major weakness. As already seen, the secret behind IKEA’s success in the business arena revolves around its generic strategy. In this section, I will specifically use Porter theory of competitive advantage/generic strategy to explain how IKEA has survived in the dynamic and competitive business environment. Porter argues the main generic strategy involves three main components namely cost leadership, differentiation and focus. Cost leadership is where a firm strives to become the leading cost producer and distributor in the industry whereas differentiation involves the firm’s strategies of producing and distributing products or services perceived as unique throughout the industry through product image, expertise, features, client service, and wholesaler system. Focus on the other hand relates to an emphasis in a narrow buyer segment where the firm strives to satisfy this particular segment through lower cost compared to the rivals. Key criteria for competitive advantage along the focus dimension revolves around understand consumers: distinctive preferences, special requirements, or unique needs, competitors’ segment targets, strategy “grounded” in specific value chain for target segment, otherwise segment not defensible and good opportunity for smaller company with limited resources (Porter cited in Venohr 2007: 36). Grant believes that the focus is geared towards customer Specialization so that the firm can offer an array of product varieties to a limited set of customers as well as cater to the particular needs of the customer group served (Grant 2010). The strategy of overall cost leadership is always the IKEA’s biggest aim. From data available so far, it is clear that IKEA endeavors for a low price cost production. A good illustration of cost leadership is well illustrated in its activity system in Value chain, which relates to limited clients service, modular furniture design, self selection by clients and low mechanized cost (Porter 1996: 71). Again, its core aim of cost leadership is reflected in its vision. According to Venohr, cheap price is the spotlight. The company vision is this: “To create a better everyday life for the many people”. It achieves this by providing a broad variety of elegant, useful house furnishing goods at reduced prices so that as many persons as possible can be able to pay for them (Venohr 2007: 20). In addition, IKEA has developed a Supply chain perfection through fast market feedback, coordinated design, outsourcing, perfect logistics and perfect IS support (ibid 24). In relation to differentiation, IKEA has largely ignored the retailing rule that international success involves tailoring product lines closely to national tastes and preferences. Rather, IKEA caught up with the vision, expressed by the originator that the firm must put up for sale a fundamental product variety that is "typically Swedish" anywhere it starts a project in the globe. IKEA philosophy is – if you can't change the product you've got to change people (Lewis 2005: 123). Looking at the focus dimension of its generic strategy, IKEA has embraced the Practice of Cost-based focus with a greater level of specificity; the firm’s focus is based on the needs of a customer group (Porter 1996: 67). IKEA also adopt combination of more than one of its generic strategy since these strategies are mutually interactive, that is, they influence each other. For instance, it uses a combination of cost leadership and differentiation. One way of doing this is the “self-assembly” which not only save the cost of transport but also give the designer more room to seek the differentiation (Zhi Li 2010: 27). This can probably explain why IKEA has continued to gain more competitive advantage than other competitors. Based on SWOT analysis, IKEA major strengths revolves around its Global Network and suppliers which in Baraldi’s words spans the world(Baraldi 2008: 1). According to Ocicka (2009: 3) an incorporated supply network permits to attain enormous remuneration (synergy effect). Again, Success could also be attributed to its approach of offering value to customers as already seen in the foregoing paragraphs. Besides this, IKEA’s operations involve some degree of specialization which offers a significant advantage over other rival firms. Despite the fact that IKEA is considered an international brand, there is some level of reliance on European markets which holds a larger number of stores. This can be considered one of its weaknesses. Apart from this, since IKEA is one of the largest furnishing company world over, it requires a lot of wood this may open doors to confrontations with environmental or conservation organization. It is also faced with threats arising from car industry with increasing prizes leading to few car owners. This will in the long run affect IKEA since no one would use buses. Apart from this, mainstream retailers in the context of competitive business environment have also embarked on copying the model of low cost value furniture which will impact on IKEA’s performance. IKEA’s major opportunities lies it its greener products as well as its movements from its traditional products of low price high volume towards a mid and higher price points which will go a long way in increasing its demographic base as well as its basket value instead of relying on a limited market group. Conclusion In summing up, the main aim of this paper was to discuss IKEA’s competitive standing against generic strategies model. From the study analysis, it is clear how IKEA has adopted a myriad of methods to survive in the contemporary dynamic business environment, remaining one of world famous company. Some of the reasons why it has remained so popular, for example, are cooperating with the suppliers from all over the world and provision of high quality goods. On the other hand, its generic strategy mainly revolves around low cost production. To keep doing well it must find ways of monitoring and assess internal and external factors that may affect its general performance. To this end, it should take full benefits of the available opportunities but at the same time be able to manage possible threats in a more appropriate ways. Reference Baraldi, E., 2008. Strategy in industrial networks: Experiences from IKEA. California Management Review, 50(4), 99-126. Capdevielle, L., Min Li and Nogal, P., 2007. A creation of competitive advantage by using differentiation of company’s strategy actions. The case study of IKEA Sweden with experiences on Chinese and French markets. Halmstad, 23rd of May 2007 Chen, M.J., and Miller, D 2012. Competitive Dynamics: Themes, Trends, and a Prospective Research Platform, Academy of Management Annals February 8, 2012. Edvardsson, B., Enquist, B., and Johnston, R., 2005. 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