Strategic Capability of IKEA - Case Study Example

Strategic Management

Table of Contents

1

Task 13

1.1 Strategic capability of IKEA3

Core competencies3

Identification of 3 competencies and core product of IKEA4

Strategic capability and resource strength based on above4

1.2 Environmental analysis5

Porter’s five forces model5

1.3 Issues related to ethics and CSR6

Summary7

Task 2:8

Inside-out approach8

The outside-in approach9

The best plausible strategy and elaboration of strength10

Criticize the approach10

Task 3:11

Analytical presentation of Mintzberg11

Review of strategy12

Emergent strategy (PESTLE)12

Discuss difference and weight for both strategies13

Conclusion14

Reference List16

• Task 1
  • 1.1 Strategic capability of IKEA
  • Core competencies

Pralahad model highlights four key competencies consisting of resources, capabilities, competitive advantage and strategy that are accommodated in the four square matrix. Moreover, the four key competencies are combined with the existing or new markets as shown in the figure.

Fill in the blanks- the core competencies are identified to be used in existing market and deployed to strengthen the position of IKEA.

White space- By deploying in new market, organisations can have extensively large diversification of product; hence, it needs to focus on its core businesses (Akhsassi, 2014).

Premium plus ten- deployment of new and high quality competency in existing market for 10 years time

Mega Opportunity- The strategy is anticipated to expand the company’s market reach.

• • Identification of 3 competencies and core product of IKEA

In reference to IKEA, the home furnishing products are considered the primary economic product. IKEA attain its objective to maximise its profit deriving from this particular product. The range of home furnishing products includes products for living rooms, kitchen, bedrooms and children’s room (Andersen and Skjoett-Larsen, 2009). This particular product draws significant group of target customers thereby enhancing the company’s profit. The main competencies of IKEA include the premium quality furniture that has led the company to position itself as the most innovative company that deliver all kinds of furniture.

Human resource factors of the company are also its key competencies. IKEA focuses on developing the skills and knowledge of its talent group by incorporating appropriate training programs. There would be its durable partnership with the suppliers and furniture producers in order to maintain the quality standards.

• • Strategic capability and resource strength based on above

The resource strength of IKEA will encompass its physical resources of modern and advanced machineries. Financial resources regard its reinvestment process as the key resource. The two types of intangible resources focus on the non-human resource that highlights the technology of patent as per the composition of materials (Andersen and Nielsen, 2011). Human resource covers the facets of permanent workers, high standards and average wages.

The core competencies that differentiate IKEA from its competitors include the following:

• The sold furnishings are stored and transported in flat and smooth packaging in order to decrease the costs.
• IKEA maintains its brand image of modern designer through its innovative designs of production
• Capability to broadcast huge catalogue of high quality products which in turn attracts large base of customers (Blackwell and Eppler, 2014).
• It can easily adapt to new countries and has the capacity to invest in accordance to its cash flow.

Hence, in relation to the Pralahad model of core competency, the innovatively designed furniture has enabled the brand to strengthen its position by filling product gaps in the market. IKEA’s deployment in consumer restaurant section offering a choice of local dishes has created a white space with large diversification; hence, it needs to focus on its core business of home furnishing products (Capdevielle, Li and Nogal, 2007).Its durable partnership with furniture producers and suppliers over a period of 10 years has created premium plus 10 and lastly, the huge catalogue of premium quality products is not a mega opportunity to yield its potential but helps in market expansion.

• • 1.2 Environmental analysis
  • Porter’s five forces model

Bargain power of customers – IKEA furniture is engaged in decor and retail furnishing. Hence, customers tend to have relatively large bargain power due to the availability of similar products in other stores.

Threat of substitute- IKEA furniture cannot be replaced or provide the same level of satisfaction due to premium quality range (Harapiak, 2013).

Competitive rivalry- There is various large brands serving the same target group in furniture industry. Albani and Ashley furniture are examples that make the rivalry all more intense as the products they offer are not heavily differentiated.

Threat of new entrants- The threat arising from new entrants in the industry is adequately low for IKEA. This is primarily due to the fact that the furniture market is quite saturated. (Harapiak, 2013) Moreover new entrants are required to make much investment and acquire adequate expertise so as to be able to emerge as strongly established discounted furniture retailers.

Bargaining power of suppliers- The suppliers of IKEA hold less bargaining power over the firm. This is due to the aspect that, there are numerous suppliers existing in the industry who possess the capabilities of forming partnerships with IKEA (Harapiak, 2013). IKEA can choose to source products from any of them. However the company considers to form long term partnerships with their suppliers.

Hence, from the above analysis, it is quite evident that, IKEA has developed its significant brand image and recognized among its strong base of customers. The high quality products targeting the premium group which acts as the significant competitive advantage which will help them to achieve sustainable future. To combat the high bargain power of customers, IKEA must focus on developing some unique range of patent products that are not available on its rivalry companies mentioned above.

• • 1.3 Issues related to ethics and CSR

In reference to PESTLE analysis,

Political- Political aspects include the regional profits of IKEA which is subjected to regional tax laws. Moreover, subsidiary business model of IKEA forces its subsidiaries to abide the regional laws.

Economical - The growing economies has raised the standards of living and rate of employment. The increases in consumer’s disposable income have profitable impact on IKEA’s business (Haskel and Wolf, 2001). However, the high inflation rate deforms the consumer stability in UK, which in turn leads to shortage of resources thereby distorting the entire value chain.

Social factors- The aging population is less likely to buy furniture; whereas, the young generation focuses on buying less bulky and easy-assemble furniture. However, the reduced level of income leads to less purchase of furniture.

Environmental factors - IKEA’s contribution towards emission of carbon, manufacturing wastes and disposable hazards.

Legal- IKEA has been found to be contradicting the group values of protecting the employee health and safety concerns at work (Johansson and Thelander, 2009).

Considering the ethical and CSR issues identified through the PESTLE analysis, it is evident that IKEA must emphasize on compelling its business to meet the specific environmental standards to reduce its adverse effects on nature. In addition, the company must work in compliance with WHS standards in order to facilitate its workforce with adequate benefits.

CSR related issues are vital for the organisation as such aspects directly impacts the image of the firm. Hence the company’s operational strategies should be well alleged with the overall social, environmental, economical and the political conditions (Andersen and Skjoett-Larsen, 2009). Compliance with the legal norms related to economical activities would facilitate IKEA to form better alliances with the government authorities of different nation. Since IKEA utilises resources which are directly extracted from the environment, it is essential that the company restrains from depleting the quality of the environment and ensure that eco friendly operational processes are used. From the social point of view IKEA must develop innovative, useful and attractive furniture’s by utilising metal and other substitute products instead of wood, so that environment depletion can be minimised.

• Summary

On analysing the micro and macro environmental elements of IKEA, it is evident that IKEA has adopted a proactive and dynamic approach to maintain its competitive advantage. IKEA is regarded as the successful global brand, due to its ability to exploit most of its competencies and resources identified above (Malo Milara, 2014). Additionally, IKEA aims to add more value to its value chain which in turn incurs immense opportunity to establish more intensified relationship with its customers.

• Task 2:
• Inside-out approach

IKEA should consider the inside-out strategy by considering its core competencies, its resources and leverage of its strengths to eliminate its weaknesses. The distinctive competitive advantage of IKEA in the furniture industry was a contribution of its streamline decision-making, purchasing built raw materials at cheaper cost, efficient maintenance of delivery schedules, effective advertising methods, etc (McEnally and De Chernatony,1999). IKEA specialises in manufacturing high-quality, low-cost and functional manufacturing of furniture. The combination of IKEA’s brand perception on manufacturing “trendy” products has surpassed the “quality” of John lewis and “affordability” of Argos, due to its unmatched service and product functionality. IKEA invests in staff training and development in order to establish the efficient talent group. The company’s regular investment in research and development activities has significant impact on its sustainable development. The use of information technology within its business processes not only enhances the customer experience but also produces low price and quality products. IKEA’s procurement strategies include establishment of long-term relationship with its suppliers, facilitate the local suppliers and operate closely with the communities where it functions.

The discussion carried out in section 1.1 highlights that the company possess strongly established relationships with their suppliers and strategic business partners. Such strong alliances internally strengthen the company’s operations and the quality of their products and services. Additionally from the discussion in section 1.1 it can be assessed that IKEA holds adequate competencies in terms of developing a range of products with superior quality. This indicates the existence of high talent and skill within the organisation. Moreover the company is observed to be adaptable with the markets of different nations, indicating that the organisational processes are quite flexible. All such core competency aspects support the fact that IKEA can suitably undertake the inside-out approach for their business development.

• The outside-in approach

This approach relates to the customer experience management, the growth market available for the business, opportunities and trends, etc. IKEA has expanded to the international market and share its business operations regardless of its retail outlet locations. To meet the need of American customers while its international expansion, IKEA focussed on localising its products, find larger and modern store locations and outsource goods from the local low cost suppliers. IKEA incorporated a series of “quirky hip advertisements” aimed at their American target market who are highly interested on contemporary designs and disposable furniture (Miller, Eisenstat and Foote, 2002). Additionally, IKEA focuses to reduce the carbon emission and target to attain zero wastage in compliance with improved relationship with its stakeholders, consumers and suppliers. This in turn allows the business with opportunities related to competitiveness, sustainability and higher profit.

IKEA operates in a highly competitive market where several low priced manufacturers’ offers quality products namely, Argos, Galiform, Euromarket designs, etc (Morris et al., 2015). Incorporating the concept of DIY (do-it-yourself), IKEA continues to compete and grow in the furniture market of china and Japan.

• • The best plausible strategy and elaboration of strength

On close evaluation of both inside-out and outside-in strategies of IKEA, the most plausible is considered to be the Inside-out strategy. This particular strategy allows the organisation to embrace a more reflexive form of management. Inside-out strategy enables the company to be mindful of its own history, as they are aware of its growth trajectory over the years and has significant pulse on their own milestones and benchmarks (Srivastava, 2005). IKEA being the inside-out organisation is finely adjusted to the capability of its managers and staff and also familiar to its organisational climate.

The inside-out approach to strategy formulation significantly relies on the resource-based view. Typically, this approach involves the organisation to evaluate what is currently good for the company and the amount of resources the company require to allocate and how efficiently it can leverage its strengths to eliminate the weaknesses. The resource based view of inside-out strategy assumes that the company’s success is significantly dependant on their respective capabilities (The economist, 2011).The inside-out approach depends on the company’s ability to drive change on the internal features of the company. The internal features include development of products; however, paying less attention to its competitors, market place and customer preferences, which in turn invoke external influence on the company.

• • Criticize the approach

Critics on implementing inside-out strategy argue that the approach is particularly biased towards the shareholders return; however, it is significantly slow in responding to the ever-changing marketplace. Moreover, not all the resources of IKEA is strategically relevant and those are actually used are done by the sole discretion and preferences of the management (Akhsassi, 2014). This could create a lot of mismatch between the desired strategies of IKEA to product manufacturing and what the potential customers actually wants to purchase, particularly considering furniture.

Moreover, IKEA needs to be aware of the externalities while formulating their strategies, in order to become successful within a market environment that is driven by the swiftly changing consumer trends and globalisation.

In respect to Harmel and Pralahad model, their findings state that competition is a significant mindset of winners that finds less resource intensive methods to satisfy the goals. Based on this resource based theory, Andersen and Skjoett-Larsen (2009) suggested a modified framework to the inside-out strategy, that initially matches the resources and abilities of company with the market opportunities and then they exploit the match. The inside-out strategy approach does not pay attention to the transformation of resources required over time and also, it does not broadcast a detailed execution roadmap for the company.

Such consequences is likely to have adverse effect on IKEA, hence it will advisable for the company to choose the alternative, instead of relying on inside-out strategy.

• Task 3:
• Analytical presentation of Mintzberg

Mintzberg and Water (1985) model discusses about the five types of strategies that include intended strategy, emergent strategy, realised and unrealised strategy and deliberate strategies. They are explained in the following manner,

Emergent strategies are described as the responses to unexpected problems and opportunities, whereas realised strategies are a blend of emergence and intentions which are interpreted in reference to the external pressure. Intended strategy is decided by the management which is a result of compromise, negotiation and bargain. Strategies that are implemented are actually realised within the company and it tends to effect the intended strategy over time.

In the model of business development strategies, Mintzberg had included the perspective of intended strategies and realised strategies. These perspectives uphold the aspect that a company’s realised strategies are a product of the actual intended strategies, which may or may not alter over a given duration of operations. Planned strategies begin with intentions. However a number of external factors may impact the intended strategies which may cause alterations, leading to the development of new strategies altogether. Hence the strategies ultimately followed and executed might not be same as those which were initially formed (Andersen and Nielsen, 2014).

• Review of strategy

The inside-out strategy discussed in task 2 was intended to incorporate considering the internal strengths of the company and the weakness that hampers the progress of the company. The intended strategy also acknowledges how a company has progressed or regressed over the years and the core competencies that have led to its success. Moreover, the inside-out strategy (or intended strategy) of IKEA facilitates them to ensure the function or division through which they will be channelizing their resources (Blackwell and Eppler, 2014). This is a perfect strategy through which the company can leverage its internal strengths and eliminate their weaknesses. An inside-out strategy makes the company completely in sync with its internal strengths, capabilities of its resources and organisational scenario.

• Emergent strategy (PESTLE)

The emergent strategy that could arise here will be PESTLE analysis that considers the political climate that has direct impact on the company’s performance. Economical perspective enlightens the purchase power of consumers and trend of disposable income, rate of employment, currency rate, etc. Socio-cultural factors in case of IKEA, significantly emphasizes on the age of demographic as younger generations are more likely to buy furniture whereas the old age people are less prone towards buying them. Hence, it considers the growth rate of population, age and career attitude of consumers. Technological factors emphasizes on the utilisation of technology for research and development, online marketing and promotion of its products, etc(Capdevielle, Li and Nogal, 2007).Furniture companies like Argos introduced the concept of digital stores that enable the customers to walk in and pick goods that were ordered online. As far as the environmental perspective is concerned, the company considers the introduction of greener products, reduction of carbon emission, sourcing of raw materials and manufacturing of products to dispose harmful wastes. Lastly, legal factors acknowledge the acts and standards that are abide by the companies work in compliance with consumer rights, employee protection acts, legislative issues, etc(Harapiak, 2013). It can also be mentioned that the strategies followed by IKEA in respect of their social, economical, political and environmental factors are seen to have often changed with the changing industry and market aspects. Hence the intended strategies of the company become altered leading to the development of a differentiated realised strategy. Hence it can be stated that the external environmental factors impacts the company’s strategies and causes a spectrum related to intended strategies and the actual realised strategies.

• Discuss difference and weight for both strategies

The emergent strategy thus discussed in the previous context focuses firmly on the externalities. This strategic approach emphasizes on the high quality services, customer care, in order to ensure that the companies perform the best in industry. PESTLE analysis is an efficient tool used for strategic planning, through which the strategists analyse the key business factors in order to detect and understand the long term trends in industry. Nonetheless, the organisations can look into the bigger picture, comprehend the various factors that would have impact on their business, the risk prone cases and strategies to mitigate the risks through the PESTLE analysis. However, only identifying the key external factors would not be sufficient to shape the strategic decisions. Ideally, the emergent strategy of PESTLE analysis will be effective only if the cause-and-effect relationship of business is scrutinised properly (Haskel and Wolf, 2001). Most importantly, the identified scenarios can be improved by understanding the changing scenarios more closely and listing down the relevant factors that would apply to the business.

In comparison to macro-environmental factors highlighted by PESTLE analysis, the concept of inside-out strategy emphasizes more on the internal capabilities of a firm. This particular approach raises questions on its own set of core competencies in terms of its capital, human resources, equipment, distribution network and customer relationships and mechanism to leverage its potential based on this (Johansson and Thelander, 2009).

However, in real world scenario, the IKEA might fall somewhere in between the continuum of inside-out and outside-in strategies. The best strategic option would be to implement both the approaches skilfully in order to get the best results.

• Conclusion

In reference to the above study, the core competency of IKEA has been analysed by using the Pralahad model that demonstrate the capabilities of a firm in respect to four significant matrices. The Porters model has been used to identify the impact of external environment on IKEA and the manner in which it can shape the future of the company. Additionally, Porter’s five forces model has been used to identify one ethical and one social responsibility problem faced by the company and its actual impact on the future strategy of the organisation.

Looking into the various strategic options presented here, inside-out is the best strategic option so far that has enabled the company to design its strategies based on their internal capabilities. Before making a strategic planning in order to combat the external competition, IKEA should be aware of its internal strength and capabilities. Similarly, strategy formulation process is best argued by the Mintzberg viewpoint which mainly relies on the five P process. According to Mintzberg five P process, IKEA must emphasize on incorporating strategies through proper planning, learning from the past experiences, position of the organisation to comply with its past experiences and perspectives that focuses on impact of organisational culture on the strategic decision making.

• Reference List

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