IKEA's Competitive Standing against a Background of Generic Competitive Strategy Models - Case Study Example

IKEA Analysis Introduction IKEA is involved in designing and selling furniture that is ready to assemble such as desks and beds as well as home accessories and appliances. The company has private ownership and operates internationally dealing in home products alone. IKEA came into being in 1973 having been founded by Ingvar Kamprad. The company has a record of unending product development which helps in its expansion process. INGKA holding B.V controls the group of companies that make up IKEA. There is an array of corporations controlling the IKEA concept and Trademark. In this essay an in-depth analysis of IKEA will be carried out including a comparison of the same company with HABITAT. Habitat is a company that was in the past involved in the same business as IKEA but was met with failure. SWOT Analysis The SWOT analysis will reveal the strengths, weaknesses, opportunities and Threats to the company. Strengths IKEA is known as a strong brand globally that serves to attract major groups of consumers. All over the world the company promises the same range and quality. IKEA has a vision of “creating a better everyday life for many people.” It has a strong concept which has its basis on providing a broad range of low priced functional products that are well designed (Johnson and Scholes 2004, 105). The company also boasts of having a democratic design through which it creates a balance between quality, function, price and design. The cost consciousness of the company makes it possible for low prices to be considered in the design of all the products. These strengths make it possible for the company to get and maintain customers. In its process of production Ikea has strengths all through. Ti has increased the quantity of renewable raw materials used. It also uses the raw materials in a smarter way especially the reclaimed and recycled waste products in the production of energy in all of its stores. The volume commitments are high. The company creates long term partners in its suppliers for it to have this (Grant 2010, pp. 65). The company commits itself to buying big volumes in a given amount of years which gives it the ability to negotiate lower prices. Suppliers benefit also because they have bigger security of guaranteed orders. Ikea has economies of scale because it buys at unit costs that are low. It sources materials close to its supply chain so that its transport costs can go down. It does direct delivery of products from the supplier to its stores. Through this handling costs are slashed, road miles are reduced and the carbon footprint is lowered. It also applies new technologies such as the OGLA chair it has kept in its range from the 1980s. This chair has been changed over the years to reduce the quantity of the raw materials used on it (Grant 2010, pp. 65). Opportunities Businesses use the strengths they have to use the opportunities coming up. IKEA has a business conduct that is environmentally focused and the company believes that the conduct will bring it good returns in a market that is sensitive to prices. (Lawrence 2009, pp. 99). IKEA makes effective solutions for its customers so that it can support them as they re-use and recycle products. This aims at reducing the products going to the landfill and IKEA uses the recycled products to produce new products. IKEA takes advantage of opportunities such as an increasing demand for products that are greener, and low priced (Magretta 2002). Another opportunity is the demand for a reduction in the use of water as well as low carbon footprints. It focuses on areas that it supports such as giving solutions life that is sustainable. It supports sustainable utilization of resources by treating waste water and reducing solid wastes. It also reduces carbon footprint by reducing the use of energy, use of renewable energy, reducing packaging and air transport. IKEA develops social responsibility by supporting charities like UNICEF. Finally the company maintains openness with each of its stake holders by building trust (Lawrence 2009, pp. 61). Weaknesses The first weakness that IKEA has is scale and size of its business globally. It faces problems in controlling quality and standards. Producing quality must be balanced with the need for cheap products. The company must create a distinct difference between its products and those of its competitors. IKEA has difficulties keeping good communication with consumers and stakeholders over its environmental activities because of its scale of business (Lawrence 2009, pp. 66). Threats The threats facing IKEA come from social trends like the go slow among first time buyers. This is an important segment in the market for IKEA. Another threat in is market forces where more competitors enter the market. In economic factors there is a threat of consumers reducing their expenditure because of recession (Lawrence 2009, pp. 79). Porter’s five forces Bargaining power of suppliers When the number of substitute inputs is large then suppliers do not have large laverage on producers. This is caused by competing substitutes. When the competition is high IKEA is affected positively. When the concentration of suppliers is low the implication is that many suppliers will not have a high bargaining power. Ikea is affected positively when the concentration of suppliers is low. Suppliers compete stiffly at times and this eventually reduces prices to the producers and Ikea gains from this (Porter 2009, pp. 35). The distribution channel can be diverse and when this happens then single distributors have lesser bargaining power thus benefiting Ikea. Suppliers have little bargaining power when they depend on big volumes because any producer can reduce the profits of the suppliers by cutting down volumes. Ikea benefits from this. When there are similar critical production inputs then inputs can be mixed and matched easily. This lowers the bargaining power of the suppliers and this positively affects Ikea (Porter 2009, pp. 36). Bargaining power of customers Producers tend to depend less on distributors. When this happens the bargaining power of distributors is reduced. Ikea gains from this arrangement. Customers can also cherish specific products they pay highly for that particular product. Ikea gains from this. The number of customers can also be large and this makes to single customer have leverage for bargaining. When there is limited leverage for bargaining Ikea benefits (Magretta 2002, pp. 33). Intensity of existing rivalry Ikea gains positively when there are few competitors because this implies that fewer firms will be competing for resources and customers. The size of the industry is significant. Large industries make it easy for producers and multiple firms to grow without stealing each others market share. This affects Ikea positively. (Rainbird 2004, pp. 300). Substitutes threaten the products of Ikea since the products of substitutes are more costly. High product differentiation adds to product rivalry. When there is a big difference between products and services then customers do not find comparable services and products that satisfy their needs. Ikea gains positively from this eventuality. The number of substitutes can be limited and this makes it hard for customers to switch from one service or product to another that has a similar price and get the same benefits. When the switching costs are high, then Ikea gains from them, (Macmillan, & Tampoe, 2000, pp. 10). Threat of new competitors Competition is limited when there are high sunk costs. A competitor is hindered from entering a new market by high sunk costs. This is so because they must commit some money upfront that has no guarantee for returns. This reduces the threat of competition is favor of Ikea. There is need for a strong network for distribution. Weak networks of distribution make the distribution of goods expensive (Porter, 1985, 66).The expense incurred in building strong networks of distribution has a positive effect on Ikea. The industry needs economies of scale which helps producers to reduce their cost through low cost production of their next units. When a new competitor enters the market he incurs high production costs because of his low economies of scale. This balance works in favor of Ikea (Barney 1991, 63). Competition is also limited by geographic factors. If the competitors are well situated geographically then incoming competitors will face a competitive disadvantage. Such a situation benefits Ikea. Building a brand takes money and time and when customers have loyalty to existing brands then the new brands spend a lot of resources building themselves and are left with fewer resources for competing in their new market. Ikea being an existing brand gains from this (Porter, 1985, 66). Value Chain theory In IKEA the value chain has product design as its first part in which it makes use of simple parts and designs. Secondly its costs are kept low by asking the customers to take the product home before assembling it. This method eliminates added links that have no value in the value chain. The products sold by IKEA are of high quality. It leverages technology in order to create competitive advantage via marketing and inventory management. Core competence leveraging is important for getting value from the supply chain (Katarzyna, Sona, and Friedemann 2008, 123). IKEA changed its primary and secondary activities in the value chain. It cooperates with suppliers and customers in order to improve the value chain. The company supports suppliers in development, training and innovation. Customers are also involved in designing and producing the products so that value can be created, delivered and served. The organizational structure of IKEA works well with a strategy meant for the global market. Ikea in the past years spend time redefining roles, organizational practices and relationships. This has produced an integrated and innovative business that creates value through the matching of the various capabilities and merits that stakeholders have in a more effective and efficient way than the competitors. This gives IKEA a competitive advantage which makes it sell products below what competitors sell (Magretta, 2002, pp. 100). Resource Based analysis The resource based analysis explains why Ikea is different from other firms in its ability to appropriate returns that are above average. IKEA has the best position due to its advantage. The warehouse is located properly for control and has three zones. IKEA is then able to analyze the time for processing, queue times, resource utilization times and the lengths of the different functions. Application and detailing of the resources is done in working schedules that have been simulated and sorted at a level that is higher. Staff and resources moved so that they could complete orders from customers in each picking area before merging orders (Peteraf 1993, pp. 43). Comparison between Habitat and Ikea Ikea deals in the same business that Habitat was dealing in but collapsed. The popularity of Habitat declined during the 1980s. With the rise of competitors such as Ikea business was slowly snatched from its hands. Competitors began offering the market similar merchandise and shopping experiences. Habitat could no longer maintain its uniqueness in the market and this led to a weakened market share. Habitat also suffered from declining efforts to protect its market share. The company became lax in competing for customers even those that passed outside its stores. They also did little to make their window displays in their various stores attractive to customers. Again with rising competition in the market one would have expected that they launch aggressive campaigns to overcome competitors. However, this was not to be. (Mail online 2011). With the arrival of IKEA in Cardif for example the sales of Habitat may have gone down by half but in response to this nothing was done. With the arrival of John Lewis the sales of Habitat may have fallen further but the company made no meaningful reaction. This kind of attitude contributed a lot to the failure of the company in all of its branches. (Mail online 2011). IKEA and Habitat both target the ‘young home’ which is a common target for the two of them. However they offer to the market different valorizations of furniture that is designed for the home. Each of these brands has values opposite to the others and do not look like the others. Ikea promotes practical and critical values while Habitat promotes the utopian and the ludic. Habitat has a concept that makes it into a shop with simple, beautiful and cultural items valorized in that manner. (Mail online 2011). Conclusion In this essay a thorough analysis of Ikea has been done. This analysis was based on the SWOT analysis model, Porter’s five forces model, value chain theory and resource based analysis. The essay has also touched on the reasons for failure of Habitat in the same business as well as a comparison between Ikea and Habitat. Ikea has many advantages over its competitors and this has enabled it to succeed in a business that Habitat failed to have a sustained good performance. The analysis through all the models used has shown how strong the company is in the market something that keeps it growing. Bibliography Johnson G. and Scholes K. (2004) Exploring Corporate Strategy. London: Prentice Hall. Robert M Grant (2010): Contemporary Strategy Analysis, 7th Ed, (2010) Blackwell Robert M. Grant (2010): Cases to accompany Contemporary Strategy Analysis, 7th Ed, (2010) Blackwell. Hill, W. L. C. & Jones, R. G. (2007), Strategic Management: An Integrated Approach, 7th ed., Houghton Mifflin Company, Boston: New York. Magretta, J. (2002), Why business models matter, Harvard Business Review. Macmillan, H. & Tampoe, M. (2000), Strategic Management, Oxford University Press Barney, J. B. (1991a). “Firm resources and sustained competitive advantage.” Journal of Management, 17, pp. 99-120. Peteraf, M. A. 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(Online) Retrieved on 5, 03, 2012 from http://www.dailymail.co.uk/news/article-2007560/Habitat-Door-shuts-furniture-chain-took-Swinging-Sixties-storm.html Porter M. Competitive strategy, Techniques for analyzing industries and competitors Lawrence F. (2009) The SWOT Analysis: Using Your Strength to Overcome Weaknesses, Using Opportunities to Overcome Threats, CreateSpace. Read More