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Strategic Management: Popular And Largest Home Furnisher Retailer IKEA’s

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Questions:

Analyse and evaluate the current strategic situation of IKEA (emphasising the benefits and problems). You may consider the following aspects:

1) What overall strategy the company uses? In your opinion, is this the correct strategy? How responsive is the company to differences among nations? Why the company is active in specific markets and not in others? What are the key challenges facing the company? (1200-1400 words)

2) Suggest alternative strategy directions and indicate which strategy you find most promising and suggest how the company may go about implementing this strategy.

 

Answers:

Introduction

In this research, one of the popular and largest home furnisher retailer IKEA’s strategy is analyzed by providing a general and competitive analysis. The corporate strategies are scrutinized with its effect on 313 stores in 37 countries in 2010. IKEA provides a basic model that has not only moved in different places but with success (Lutz, 2015). The IKEA business model presents a broad range of home furnishings with functioning quality and price that makes affordable for people with various tastes, dreams, needs and aspirations (ikea.com, 2015). However, IKEA’s corporate strategy will be examined based on the partnership with the customer in specific markets among different nations with responsiveness to key challenges faced by the company. Moreover, devising the strategy from the current strategy, which will be promising at the end.

IKEA Generic Strategies for Business

The basis of business strategy is based on the strategic management done by the top management of the company involving performance and resources in the external environment to achieve the objectives. Strategic management is based on the competitive organizational environment and knowledge of the firm to take right decisions (Hill et al., 2014).

IKEA just like ALDI, one of the upcoming supermarkets in Australia follows a Cost Leadership and Differentiation Strategy. IKEA’s main foundation for pursuing a cost leadership strategy is primary to the targeted market segment that is in search for fashionable household furniture and accessories and about customer’s demand, the company offer a combination of good design, acceptability and functionality at lower prices. The following concept of the company applies to every phase of activities and can be explained with the help of figure 1 (Pena & Ricart, 2015).

Mapping System

Figure 1 Mapping System

Source: (Larsson, 2015)

Though IKEA specializes in cost leadership, it also differentiated products that asks its target customers to enjoy the shopping experience in a store while making the customer comfortable in a way by offering playrooms for children in-store, wheelchairs for old customers. However, IKEA offers products and services for minor things that can help IKEA to retain its customers. One of the ways can be with the help of Sweden shops outside stores offering specialty to customers who are young, likely to have children and need to shop outside of standard hours (Wit & Meyer, 2010).

Situational Analysis

A situational analysis is the best guide to study the business strategy of IKEA. However, it can be done by applying different modules and tools like PESTEL, SWOT, and Porter’s Five Forces, which will briefly elaborate the strategic analysis.

PESTEL

Political- The political climate of United Kingdom analyze the taxation, tariffs, customer protection legislations and trade restrictions but holds negative regarding labour industry. However, as far as IKEA’s business environment is concerned across nations, it is politically stable in Europe and America but does not operate in Africa due to political volatility (Harapiak, 2013).

Economic- The economic factors of IKEA is based on industry specific economic growth. However, weakened economies have affected consumer’s disposable income in Europe and the vast disparity in cost of labour in China and Poland is accessible in US or London have influenced IKEA. Other factors are distinctive in nature with each country referring to wage rates, inflation rates and interest rates (Frynas & Mellahi, 2015).

Social- The demand for useful low cost furniture is prevalent in inter-country migration, and that is where most of IKEA’s business is found. However, IKEA is majorly affected by changing social trends, transportation network, and infrastructure during hard economic times, which leads to the slackening of market’s rate of growth but otherwise it provides a positive impact. Nevertheless, the product range of IKEA reflects openness in Sweden’s healthy life (Ayodele, 2013).

Technology- Technology acts as a business tool for IKEA because of adoption of data website to view online catalogues and correspondence with customer service team to keep pace with global networks from suppliers to distributors (Fredman & Nilsson, 2015).

Environment- IKEA is not only sensitive to the environment but also follows in making the best use of energy and raw materials. The company achieves its overall positive impact by keeping its cost down and achieving its green targets like reducing pollution, etc. (Ayodele, 2013).

Legal- IKEA performs its functions in international business where it is governed by many laws and regulations. The threat can be imposed when third parties initiate legal battles that results in implications in consumer rights, court injunctions, damages, and fines. Employee protection acts are also considered legislative issues in some countries (Frynas & Mellahi, 2015).

SWOT

The other tool that can be assessed is SWOT analysis that is given using the figure 2 below.

SWOT Analysis

Figure 2 SWOT Analysis

Source: (Albarrak, 2012)

Competitor Analysis (Porter’s Five Forces)

 Michael Porter's Five Forces

Figure 3 Michael Porter's Five Forces

Source: (Hamid, 2014)

Competition in any company is based on competitive forces that define the Porter’s five forces.

Rivalry among existing customers is high when it comes to a global market of markdown furniture and the premier players in the market are namely Euromarket Designs Inc., USA market Cronin, Wal-Mart Stores, Cratel & Barrel, Ethan Allen market and many others. Though the competition is great IKEA remains the acknowledged market leader in the industry of discounted furniture (Hamid, 2014).

The threat of new entrants is low because IKEA applies a low cost strategy and any firm who enters the market needs to have a unique brand name and vast supply chain in the name of low prices to compete with IKEA, which in insubstantial as the current market is inundated (Leavy, 2102).

The bargaining power of buyers is highly strong as the competition is quite high and customers possess a wide variety of substitute preferences. However, the alternatives are here from global retailers as well as local producers of furniture (Ayodele, 2013).

IKEA’s competitors have the low bargaining power of suppliers because the company maintains long-term commonly beneficial relationships with suppliers to meet the ends of the customer that promptly responds to the changing trends in the market. In addition, IKEA possesses numerous factories across the nations with resources and potential to structure partnership with IKEA.

The threat of substitute goods is considerably low because there are not many products and services that can replace home appliances or demand for furniture (Harapiak, 2013).

Internationalization of IKEA

IKEA applied a risk-reducing approach initially to enter a new potential market. However, in the case of IKEA, a supplier was linked to the Swedish market that could provide political, legal, financial and cultural issues that could provide opportunities and threat in the external market. However, IKEA adopted internationalization expansion through franchising which has relatively small and high-risk markets that applied the intermediate mode of entry where franchisor was responsible for marketing, centralized control, production and R& D. Franchising is considered a good way to transpose name, concept and standing (Hollensen, 2014). Nonetheless, if looked at the broader concept, IKEA internationalization has three phases namely explorative internalization, rigid replication, and flexible replication. The timeline can be shown in figure 4 below.

Timeline of IKEA's Internationalization Process

Figure 4 Timeline of IKEA's Internationalization Process

Source: (Jonsson & Foss, 2011)

However, IKEA’s current replication mode may begin from the difference between IKEA’s Idea Concept and Concept in practice. This difference not only highlights the IKEA’s thinking of hierarchical process but also throws light on the embodiment of some features to be fixed while others are certified flexible. The term flexibility comes from the dissimilarity in the local market and the need to amend replication under the influence of new and advanced learning. The replication strategy follows two stage of flexible replication. One is explorative, and the other is exploitative in which the future is full of opportunities where it is nourished by IKEA system belief to search for superior solutions (Jonsson & Foss, 2011).

Internationalization in Europe was different from rest of the world because internationalization in Europe was accompanied by marketing satellite, pure global strategy and country offices. Nevertheless, the same cannot be said for rationalized manufacturing rest of the world where methods like rationalized manufacturing g were used for wholly owned subsidiaries. Franchising in North America is hard to capture because of currency movements, free deliveries, and easy payment options but it was gradually done when certain adaptations were made according to culture and economy. Asia, on the other hand, posed problems like pricing strategy, intense domestic competition, and corruption but it soon was adapted to the creation of supplier relationship (franchising) and understanding of local needs (Goenka, 2010).

However, lately, IKEA adopted different modes to entry which is explained in figure 5 below.

Modes of Entry

Figure 5 Modes of Entry

Source: (Suwaris, 2013)

International Environment

The four strategies that IKEA has adopted to deal with international business environment is due to local responsiveness and cost reduction. The figure 6 below explains the strategic choice of IKEA.

Strategic Choice

Figure 6 Strategic Choice

Source: (Suwaris, 2013)

International Business level strategy- This approach emphasizes the acquiring of markets in advanced economies and the will to acquire more economies especially developing economies to realize the greater gain from the competitive advantage (Suwaris, 2013).

Multidomestic Strategy- This strategy involves getting maximum local responsiveness through customization of marketing and product strategy using a decentralized authority structure. This strategy bears high-cost structures and lacks core competencies (Lakshman, 2013).

Global Strategy- IKEA has a diverse distributional network that ensures timely delivery of products to retail stores by exploiting control points in the cycle of distribution. IKEA has a significant network of suppliers with close immediacy to raw materials and distributional channels that not only helps in gaining advanced knowledge but continuously enhance operational efficiency and flow facilitation of information. The company on a general view responds to emerging tastes and preferences with more emphasis on product lines that appeal to locally based customers (Mittal, 2013).

Transnational Strategy- To meet the conflicting demands of the company, one strategy that needs to be adopted globally is that IKEA deals with both cost leadership and differentiation strategy with a competitive advantage. IKEA relies on standardization of products, and the system is known as ‘democratic design’ through which producers can meet the demands of the local consumers. Nevertheless, this strategy is difficult to facilitate and implement (Hitt et al., 2012). The figure 7 will help in enlightening the achievement of the translational strategy of IKEA.

Transnational Strategy Of IKEA

Figure 7 Transnational Strategy Of IKEA

Source: (Suwaris, 2013)

Alternative Strategy Directions of IKEA

The alternative strategy decisions IKEA has made is in the corporate social responsibility area known by Sustainability Strategy for 2020, “People, and Plant Positive.” However, this strategy helps in using sustainability in driving transforming business, innovations, shaping investments and letting loose new business opportunities. This strategy will not only strengthen the competitiveness but bring change in society through long-standing access to raw materials, deepening relationships with employees and customers, maintaining and developing supplier base and increasing productivity (Bouvrain & Sarka, 2015).

However, IKEA has identified three drivers of change that will transform the business making it more sustainable. Firstly by inspiring and enabling millions of customers to live a sustainable life. Secondly, by striving for energy and resources interdependence and lastly creating a better life for the people by extending the code of conduct through value chain (ikea.com, 2015).

The adoption of sustainable competitive advantage should possess valuable resources, rare resources, imperfectly imitable resources and non-substitutable resources in the strategy making process. The change can be assessed based on the competitive inertia of the alternative strategic decision taken. Nonetheless, IKEA adopted a sustainable strategy because of the successful competitive practices that are cost leadership and differentiation strategies. Nevertheless, an effective change is possible if it takes place at the highest level of the company, which is the best way of reinventing the marketing strategy. However, the unique methodologies can build up a pertinent theory to tackle the complexity and uncertainty of current markets (Gummesson et al., 2014).

An effective way of alternative strategy decision can be based on the efficiency of alternative course of actions. The following actions can be explained with the help of the table below.

Alternative Courses of Actions

Advantages

Disadvantages

Developing Research and development Programs

Investment in R & D will give better ideas on current trends, needs and behaviour of the entire market

Expensive in execution and could possibly effect price rate

Promotional activities to be implemented

Creating attention and store traffic for more sales and customer loyalty

Deregulated promotional activities might end up for customer disloyalty due to expectations of loyal customers

Merging with potential local companies to strengthen financial competence

Experience and knowledge of the maket

Conflict of different principles and cultures

Source: (Kwong, 2011).

Conclusion

IKEA is one the popular home furnishing company that has adopted cost leadership and differentiation strategy to meet the demands of the young middle-level customers locally and globally. Different types of tools were applied to check the effectiveness of IKEA’s business strategy. However, according to situational analysis, it was brought that IKEA is one company that offers products at cheap and affordable prices and its meets the requirements of the suppliers the most by building a strategic relationship between the two. IKEA has mostly chosen to enter markets majorly with franchising and joint ventures for internationalization. The strategic choices and alternate decisions adopted by IKEA has enabled it to maintain competitive advantage and produce above due to leadership in the market.

 

References

Albarrak, O. (2012). IKEA Strategic case study & analysis. Slideshare.net. Retrieved 21 February 2016, from https://www.slideshare.net/OsamaAlbarrak/ikea-strategic-case-study

Ayodele, A. (2013). A SITUATIONAL AND STRATEGIC ANALYSIS OF IKEA AND THE FUTURE.Academia.edu. Retrieved 21 February 2016, from https://www.academia.edu/8046929/A_SITUATIONAL_AND_STRATEGIC_ANALYSIS_OF_IKEA_AND_THE_FUTURE

Bouvrain, S., & Sarka, D. (2015). Compatibility of Corporate Sustainability with a Cost Leadership Strategy.

De Wit, B., & Meyer, R. (2010). Strategy: process, content, context: an international perspective. Cengage Learning EMEA.

Fredman, M., & Nilsson, S. (2015). The preferred Complex Purchase Process in-store–A case study on IKEA.

Frynas, J. G., & Mellahi, K. (2015). Global strategic management. Oxford University Press, USA.

Goenka, C. (2010). Ikea presentation final. Slideshare.net. Retrieved 21 February 2016, from https://www.slideshare.net/chetangoenka/ikea-presentation-final

Gummesson, E., Kuusela, H., & Närvänen, E. (2014). Reinventing marketing strategy by recasting supplier/customer roles. Journal of Service Management, 25(2), 228-240.

Hamid, R. (2014). IKEA Porter's Five Forces and Value Chain Analysis. Slideshare.net. Retrieved 21 February 2016, from https://www.slideshare.net/karipap313/ikea-porters-five-forces-and-value-chain-analysis

Harapiak, C. (2013). IKEA's International Expansion.

Hill, C., Jones, G., & Schilling, M. (2014). Strategic management: theory: an integrated approach. Cengage Learning.

Hitt, M., Ireland, R. D., & Hoskisson, R. (2012). Strategic management cases: competitiveness and globalization. Cengage Learning.

Hollensen, S. (2014). Global Marketing, Harlow.

ikea.com, (2015). The IKEA Business Model. Retrieved 21 February 2016, from https://supplierportal.ikea.com/doingbusinesswithIKEA/Documents/The%20IKEA%20Business%20Model.pdf

ikea.com,. (2015). People & Planet Positive IKEA Group Sustainability Strategy for 2020. Retrieved 21 February 2016, from https://www.ikea.com/ms/en_GB/pdf/people_planet_positive/People_planet_positive.pdf

Jonsson, A., & Foss, N. J. (2011). International expansion through flexible replication: Learning from the internationalization experience of IKEA.Journal of International Business Studies, 42(9), 1079-1102.

Kwong, M. (2011). A case study on ikea. Slideshare.net. Retrieved 21 February 2016, from https://www.slideshare.net/philmayo/a-case-study-on-ikea

Lakshman, S. (2013). Multinational Companies Executive Selection Practices: challenge of Human Resource Management in International Business Management (Doctoral dissertation, Paris, CNAM).

Larsson, R. G. (2015). Ikea’s Almost Fabless Global Supply Chain—A Rightsourcing Strategy for Profit, Planet, and People. Lean Management of Global Supply Chain, 12, 65.

Leavy, B. (2012). Updating a classic formula for strategic success: focus, alignment, repeatability and leadership. Strategy & Leadership, 41(1), 18-28.

Lutz, A. (2015). Ikea's Strategy For Becoming The World's Most Successful Retailer. Business Insider. Retrieved 21 February 2016, from https://www.businessinsider.in/Ikeas-Strategy-For-Becoming-The-Worlds-Most-Successful-Retailer/articleshow/45904642.cms

Mittal, N. (2013). Supply Chain Management: Ikea's Low Price Strategy. Cmuscm.blogspot.in. Retrieved 21 February 2016, from https://cmuscm.blogspot.in/2013/02/ikeas-low-price-strategy.html

Peña, C. R., & Ricart, J. E. (2015). The Practice Of Strategy. European Business Review.

Suwaris, S. (2013). IKEA Case Study. Academia.edu. Retrieved 21 February 2016, from https://www.academia.edu/5197655/IKEA_Case_Study

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