IKEAs Strategic Management - Essay Example

? Question Introduction IKEA’s business model thrives on a minimalistic design which promotes practical thinking in so much as combining the two allows for greater levels of efficiency in utilizing resources which translates to lower prices for the consumers. Thus, the main focus is on a cost leadership business model, in which the PRICE of the product dictates all other forms of operations, such as manufacturing, logistics, and design. IKEA, while recognized as a furniture store, is home to a bigger set of ideas and products of Scandinavian origin. IKEA primarily sells furniture along with other home products such as appliances and accessories for kitchens and bathrooms. It sells these in knock-down kits that are ready-to-assemble by the customers themselves who are also resorted to for transportation of the goods to their respective homes. This retail model has been very successful for the company in all its emerging markets, resulting in a sheer increase in size to the point of becoming the largest furniture retailer in the world (Reuters). Their business model wholly focuses on a cost leadership strategy which forms the core of their competitive advantage. As we shall see, IKEA resorts to offer a distinguished appeal by coupling this strategy with various other methods of creating a unique product which not only appeals to those with an urge to maintain a level of quality but also to those looking to cut their purchasing costs. The purpose of this report is to outline its internationalization model and to verify some of the key opportunity areas for growth as well as managing looming risks. Analysis Retail is a fast growing industry in today’s consumer based societies, managing to look out for the needs of consumers directly without the expense of innovation. In today’s business, it has managed to become an important pillar industry of the society, certifying economic and social development in the region it most thrives in. With prosperity comes an improvement in lifestyle and comfort, and with an edge towards affordability, IKEA has sought to cater to the household goods market by passing on its cost leadership strategies to the benefit of consumers in the form of cheaper yet quality-proven products up to a range of 25 to 50 percent. Ever since its inception, IKEA has gradually set up shop in several different countries reaching a grand total of 267 Group stores by the end of 2009, with Germany being the highest selling country by far as a percentage of total sales. Their model incorporates the various principles of expansion that in turn harmonize their competitive advantage of price in several other markets. They achieve this by the process of internationalization. Internationalization for a company is a crucial stage of development, as it serves to integrate it into the retail sector for a consumer based economy (Dawson 2007). It not only increases the life cycle of a product, but also attains economies of scale by extending the size of potential markets. In order to pursue this task for any company, it must develop some conceptual strategies IKEA has managed to successfully integrate into other markets with the strategies of cost leadership, focused cost leadership, and focused differentiation. Cost leadership engages in reducing the product costs and ignoring the various market segments that the company caters to, while focusing on a distinct narrow segment, thereby saving on the additional research, analysis and management requirement that necessitate additional investment and lead to a rise in manufacturing costs. IKEA does this by allowing the customers to choose, buy, assemble and transport their own goods, passing on the benefit of cost leadership directly to the consumers in the form of a 25 to 50% discount compared to competitor rates. Moreover, IKEA’s Scandinavian image capitalizes on the persistence of quality, so that their target audience of first-time buyers, and elderly people are infused with the perception that the product they buy is made affordable without compromising originality or quality of construction. Their mission statement reads to the same principle; Your partner in better living. We do our part, you do yours. Together we save money. IKEA utilizes its immense economies of scale to secure long term contracts with suppliers at a low cost which they can afford to provide to reliable long term buyers. Moreover, customers are expected to transport the goods home in their own vehicle of transport, saving on delivery costs to the company. IKEA further places its showrooms away from the city centre where the cost of land may be noticeably lower, allowing them to pursue large tracts of land as showroom space which double as warehouses. In contrast, competitors tend to place their showrooms in the city whereas the purchased furniture is shipped from a warehouse located at a distance. This adds to their delivery cost. Moreover, IKEA engages in the strategy of focused differentiation as well. Showrooms outside of the home country house Sweden Shops that sell Swedish eatables that customers can buy and experience a differentiated cultural experience. The warehouse itself comprises of supervised play areas where children can spend time while their parents browse through the product line. In addition to that, the display areas are set up in domestic settings so that each display is comprised of the natural setting the customers would naturally use them in. For example, chairs are lined with tables, lamps, and cupboards instead of having separate rooms dedicated to several types of chairs. This eliminates the need to hire personnel to explain to each customer how a particular type of chair might be used, as it is already displayed in a way familiar to the browsers, saving on costs. IKEA has carried over this model of internationalization to each country, expanding their potential market place and further utilizing economies of scale, an essential ingredient of internationalization (Dawson). It uses its expertise of distribution and quality of construction, maintaining the latter by centralizing quality control to its headquarters in Sweden. Penetrating markets of U.S and Europe has thus far proved very successful using the cost leadership model, with Germany being the highest grossing country for IKEA at the end of 2009. Risks and Conclusion IKEA faces the risk particular to focused cost leadership strategies, the risk of changing trends. Customers can easily sideline their requirement to purchase fanciful affordable furniture and simply pursue conveniently located large competitor retail chains that also sell affordable household goods. The way to counter it is by way of an emergent strategy, which reacts to customer responses. There exist several opportunities in e-commerce which the company can also benefit from in terms of low-cost expansion. Those can be utilized to counter any economic pressures and regulation surprises the company might receive during further internationalization. Question 3 Introduction IKEA recognized its cost leadership strategy as signifying the primary reason of its market prominence and sustainability. By providing high standards of product at low prices and focusing on differentiation in terms of transport, marketing, presentation, operations and range, IKEA has captured the essence of customer demands (Johnson, Scholes, & Whittington 249). The company realizes the need to meet the needs of customers as evidenced by social trends, therefore, quality control is centralized within the original headquarters where as marketing and logistics is delegated to individual stores. The culture follows the inverted pyramid strategy, where the customer is placed at the pinnacle directly underneath which is the staff pursuant to which is the top management (Sancovich). This allows the company to follow a culture where every member of the staff is treated equal, discouraging the presence of a strict hierarchy based on status. This is in line with IKEA’s original policy which opposes conventional line of thinking and encourages open communication between staff and management in order to emphasize innovation. Ikea’s Cultural Web IKEA organizes its internal culture around communication between staff members and the management in a way that avoids disruptions caused by high employee turnover rates and internal conflicts. Periodically, IKEA serves its employees with appreciation events such as the Big Thank You event in 1999 where the day’s sales were distributed amongst all of the staff as equivalent bonuses (Sancovich). IKEA believes in preservation of image. It keeps a constant check on suppliers and their respective images as any mishap on a third party levels reflects adversely on the company’s image as a whole. IKEA dictates terms of agreements on most its contracts because of its leverage maintained by its huge economies of scale. Thus, transparent and non-conventional means of hierarchy signify the power control structure of IKEA. The company maintains distinct definitions to signify other individual paradigms of the cultural web. Embedded within its stories is the story of the formation of IKEA and a reminder of its values of simplicity and affordability without compromising quality as coined by the founder of the company, Kamprad. IKEA’s symbol realizes its Scandinavian lineage, whereas further solidifying its core principles of simplistic customer-driven presentation. Thus, the paradigm surrounds the primary philosophy of aiming to provide Swedish quality products that surpass those of its competitors while at the same time preserving cost-effectiveness. To maintain the same, IKEA places Sweden Shops within its stores located outside of the home country. It complements the same with the IKEA restaurant and cafe. Together, the staff engages in preserving the Scandinavian image to allow better integration of individual staff services with the rest of the brand image that the customers can instantly recognize. Problems and Recommendations IKEA’s global presence and diversified cultural experience allows it to benefit from knowledge transfer and national cultural differences. However, potentially, its emphasis on large scale operations presents to it a common hurdle of acquiring planning permission. This is important for IKEA’s symbolic low-cost quality driven image as smaller easier to acquire locations may translate to an increase in costs. Although the overall culture is synergized with Swedish origins and affordability, these practical hurdles are imminent and present a possible challenge to further growth. Works Cited Johnson, Gary, Scholes, Kevan, and Whittington, Richard. Exploring Corporate Strategy Text and Cases. 7th ed. Harlow: Prentice Hall, 2005. Print. Kling, K. and Gateman, I. “IKEA CEO Anders Dahlvig on international growth and IKEA’s unique corporate culture and brand identity.” Academy of Management Executive. 17.1 (2003): 31-37. Print. Kotter, Jule and Heskett, James. Corporate culture and performance. New York: The Free Press, 1992. Print. Magonelly, Lisa. “How Ikea designs its sexy price tags.” Business 2.0. 2002. Web. 20 April 2005. Normann, Richard and Ramirez, Rafael. From value chain to value constellation: designing interactive strategy. Harvard Business Review. (1993): 65-77. Print. Porter, Michael. Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press, 1985. Print. Quick MBA. Strategic Management. Porter’s Five Forces: a model for industrial development. Web. 20 Apr 2005. . Rowe. “Judge flattens Ikea’s challenge.” Estates Gazette. 2002: 28. Web. IKEA. IKEA. Web. 16 Apr 2005. . Mintel. Furniture Retail-UK-August 2004. 2004. Web. 16 April 2005. . Sancovich, Allen. The IKEA Philosophy. 2009. Web. 15 Dec 2012. . Read More