A Case Study of IKEA Essay Example

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    Business
  • Document type:
    Essay
  • Level:
    Undergraduate
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How theoretical Concepts Influences Strategic Management Practices

Introduction

IKEA is one of the leading furnishing retailers in the world. The company was established in 1948 and has developed through the years to become what it is today. Its range of products is diverse and includes accessories and home furniture. By 2008, the company had about 253 stores in about 24 countries. It also had about 32 additional stores run under franchise. In the recent past, it has recorded huge profits due to the number of customers that visit its stores either physically or through its website. Its sales exceeded the 21 billion Euro mark in 2008, a 7% increase from the previous year. Its biggest sale countries include the USA, Germany, Sweden, France, and the UK.

The company is known for its low prices and this is the reason why many customers flock to its stores. It also offers a wide range of products that cater for any life stage or lifestyle of its customers. On the other hand, it has fully embraced the concept of Community Social Responsibility in its policies. It is involved in community services as well as the conservation of the environment. It has devised ways and means of making better use of energy and raw materials (Isc.hbs.edu, 2017).

Industry Attractiveness

The attractiveness of any industry can be determined by the porter’s five forces model. These forces have influenced IKEA to develop a number of management strategies to increase its market share and increase its market expansion.

At the initial stages, new entrants into the industry are unable to enjoy the same economies of scale like IKEA owing to the size of the company. They are confronted with barriers particularly the access to distribution channels. However, this situation is changing fast due to the emergence of new online furniture stores and retailers like Amazon, Alibaba Group, Zara, H&M and many others. This has compelled IKEA to improve the quality of its products and at the same time maintain lower costs to meet the expectations of consumers to mitigate against this threat by the new entrants. It has implemented this strategy by emulating strategies applied in the auto industry of creating platforms for product groups to attain economies of scale. These platforms feature many models with varying price ranges.

IKEA’s customers are price sensitive and this makes them to yield a huge bargaining power over the company. The furniture retail business is also common and provides buyers with a variety of places to buy from. This situation has made the company to maintain its price strategy. The company has been able to apply the low price model and at the same time remain cost effective. By offering lower prices to its customers, IKEA can reduce the buyers bargaining power and equally attract more customers.

IKEA has over 1,000 suppliers in over 50 countries who supply products that are not differentiated. This gives much bargaining power to the company and it can purchase products at very low prices. This situation has influenced the decision of the company to form alliances with its suppliers to improve its market share and also develop its innovations. By forming these partnerships and alliances the company has been able to impose its CSR programs on most of its suppliers. It has been able to take advantage of its bargaining power to develop relationships and loyalty with its suppliers which are strategic. In the 2014 Financial Year, the company motivated its suppliers to improve their energy efficiency by 19%.
This type of cooperative strategy has enabled the company to strive and meet its energy efficiency goals.

Resource based view (resources, capabilities and core competencies)

The resource based view tries to bring a match between the requirements in the market and an organization’s ability to meet those requirements. It concerns itself with the resources, the capabilities and core competencies of a company to meet the requirements in the market. It is therefore important to undertake a SWOT analysis to understand the company’s internal operations in attempting to formulate appropriate strategies.

Resources

The view sets out the flow of marketing resources, assets and capabilities and how they can be deployed to gain competitive advantage. Companies need to therefore develop sustainable strategies based on their internal as opposed to their external resources and capabilities. Assets are different from capabilities because they do not represent processes. Tangible assets are physical in nature while intangible assets can take the form of brand names (Barney, 1991).

IKEA is a well-known global brand name which makes it have a competitive advantage over other companies. It has been able to leverage on this by adapting the Community Social Responsibility strategy to enhance its image in the sight of the consumer as well as improve its market share. By adopting cooperative strategies that involve developing relationships with its suppliers, workers, and consumers it has been able to improve its value in the market (Miles and Snow, 1978).

Core Competencies

The company mainly focuses on its core competency of maintaining profitability through a low cost business model. The company evaluates the real cost incurred by a process or product so as to maintain low costs. The company strives at being a low cost leader without affecting the products quality. By using the flat packing method, the company is able to transport and store more merchandise between distribution centers at lower costs. Moreover, it has drastically improved the value chain approach by involving the customer in the process and effecting a value system that serves the customer, the company and the supplier both ways. This is a differentiated supply chain that allows the company to grow and operate efficiently.

Capability

This is the ability of an organization to manage, organize, and coordinate specific activities to maintain its competitive edge. It reflects on a company’s ability to deploy a combination of assets, both tangible and intangible, to achieve a desired objective (Hooley, Broderick and Möller, 1998). The management of IKEA makes strategic decisions based on priorities which are in line with the interest of the business and stakeholders alike. It has the capability of motivating both its clients and staff to achieve its mission and objectives. It is also able to effectively identify its suppliers and this gives it a comparative advantage. It is also able to diversify its business operations and strategies in the global market.

Competitive advantage

The most notable advantages of IKEA include its strong global brand image and its low cost business model. Moreover, the company has also a strong understanding of the needs of its customers. It has been able to design products based on the needs of its customers by providing reliable and attractive furnishing solutions at low cost. The company has also formed strong business partnerships and alliances with furniture makers and suppliers that limits threats from competitors.

These advantages have contributed greatly to the application of the sustainability strategy that the company has been pursuing. The People and Planet Positive sustainability strategy was borne out of this realization. The strategy attempts to incorporate the company’s vision and mission to improve its business and drive innovation. The strategy strengthens IKEA’s competitive nature by ensuring a sustainable access to raw materials and energy supplies, developing business relationships with customers and workers, developing its supplier base, and increasing its market share. This has made sustainability an important element in the company’s global image.

Recommendations

Distribution is an important component in the operations of IKEA. IKEA strives to make the route from the manufacturer to the customer as short as possible (Kelly, 2010). It operates a chain of distribution centers in many countries and distributes its products to its stores globally. It uses a number of strategies to simplify distribution and minimize the time spent. However, the company should be able to evaluate the number of types of products that are required to satisfy any given demand. This will help the company to drastically reduce costs incurred due to production and warehousing.

Another recommendation is for the company to improve processes related to packaging of its products. The company is known for its flat-pack furniture that brings in the do it yourself concept in terms of assembly. The company sells its products as flat packs for easier transportation and efficiency. This method drastically reduces wasted space and enables more products to be transported. However, the company should try and adopt a system of how HOTT kettle is transported (Chu, 2013). These kettles are packed in such a manner that there is even more space created. They are packed in an upside down position that enables ten pieces to fit in one box as opposed to the usual number of six. This process enables the use of less packaging materials which in turn keep the transportation costs at the barest minimum.

The third recommendation has to do with IKEA’s rapid expansion. There has been a debate on whether the expansion it is experiencing is good or bad for business. Some believe that the expansion is good because it reflects growth. However, it should be noted that rapid expansion also comes with a number of challenges. These challenges include high rates of employee turnover and compromised product quality. There are also financial problems associated with such expansion, and even loss of control. For the company to operate optimally it is recommended that it should be in a position to reduce the rate at which it is expanding. It should not add new warehouses and stores because this will only compound the problem and increase its responsibilities. Since it has many challenges to deal with, it is only reasonable for it not to add new ones by expanding.

References

Barney, J.B. (1991) Firm resources and sustained competitive advantage. Journal of

Management 17(1), 99-120.

Chu, V, (2013). Couching Tiger Tames the Dragon, Business Today, available from:

http://www.businesstoday.in/magazine/lbs-case-study/how-ikea-adapted-its-strategies-to-

expand-in-china/story/196322.html

Hooley, G., Broderick, A. and Möller, K. (1998). Competitive positioning and the resource-

based view of the firm. Journal of Strategic Marketing, 6(2), pp.97-116.

Isc.hbs.edu. (2017). The Five Forces — Institute for Strategy and Competitiveness — Harvard

Business School. [online] Available at: http://www.isc.hbs.edu/strategy/business-

strategy/pages/the-five-forces.aspx [Accessed 16 Aug. 2017].

Kelly, S, (2010). International Supply Chain Management, Written Examination Stimulus

Material, Case Study – IKEA

Miles, R.E. and Snow, C.C. (1978). Organizational Strategy, Structure and Process. New York:

McGrawHill.