Merits Of Ikeas Competitive Position Marketing Essay

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This report will investigate on competitive position of IKEA using various strategy analysis tools that are SWOT, Poter’s five forces, Value chain, PESTAL analysis, Strategic Drift, life of the industry and resource base view of competitive position.

IKEA Group is one of the world’s largest privately owned companies, engaged in the retail of flat-packed home furniture and other house wares. IKEA’S success in the retail furniture industry is due to its immense experience, cost leadership and the innovative product differentiation. It is the world’s most successful multinational retailing firms that operates globally based on the concept of furniture kits that would have to be assembled at the customers place (IKEA Annual Report 2002).

The major strength of IKEA is its ability to shift variety of cost burdens to the customer that might be found desirable or perceived as an added value. For example, customers are encouraged to deliver the merchandise themselves. There is also an extra charge if customers do not assemble the merchandise. The customer is usually eager to perform these services because of low prices, ease of assembly, and superior styling (Michman and Mazze, 2001, p. 78). The self-serve environment is both strength and weakness of IKEA. The self assemble component can put many customers – particularly new buyers – at immediate risk for defection (Michman and Mazze, 2001, p. 21).

IKEA is converting its main weakness with its key opportunity, which is expansion into emerging markets in Asia and Eastern Europe. Market developments are driving the threat of a possible over saturation of the market, increased by the fact that competitors are following suit, by introducing similar product ranges at low prices. This is compounded by the negative impact on sales of continued depressed economic conditions in its core European market and the political and economic instability of the Chinese and Russian markets, in which the company plans to invest heavily in the short-midterm, also presents a potential threat.

IKEA achieves competitive advantage in different ways and at different points in its value chain. Restructured value chain of IKEA has created superior customer value and competitive advantage. It attains an absolute cost advantage over its competitors. It offers a no-frills product to a broad target market using standardization to derive the greatest benefits from economics of scale and experiences (Dess and Taylor, 2004).

According to Prahalad and Hamel (1994), a core competence can be identified by applying three simple tests: Does IKEA provide significant sources of competitive differentiation? Does IKEA transcend a single business? And is it hard for the competitors of IKEA to imitate? And the answer is yes for all three questions because IKEA has radically refined the value providing way to the customer and without compromising the quality of product it has also able to maintain the cost leadership position. The founder IKEA Ingvar Kampard is always seen as the spiritual leader of IKEA. There is no one at present that has the charisma and flair to take on his position.

Table of Contents

Executive summary 2

Table of Contents 3

Introduction of IKEA 4

Macro Environment – Key Aspects of PESTEL Analysis of IKEA 4

SWOT analysis to get an overview their resources and capabilities of IKEA 5

Strength 5

Weakness 5

Opportunities 6

Threats 6

Competitive advantage 6

The Five Forces Framework 7

IKEA’s Value Chain analysis 8

IKEA’s sources of cost efficiency 10

Core Competences 10

Criteria for Inimitability 11

Core Values 11

Logics for possible ultimate demise of IKEA 11

Pitfalls of business level strategy 11

Strategic Drift Perspective 11

Demise of founder 12

Conclusion 13

References 14

Introduction of IKEA

IKEA Group is one of the world’s largest privately owned companies, engaged in the retail of flat-packed home furniture and other house wares. Operating over 300 large-scale stores in over 35 countries, and with a mail order division, IKEA sells a range of furniture, which is made by over 2,000 suppliers in more than 55 countries. The IKEA vision is “To create a better everyday life for the many people” and the business idea is “To offer a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them” (www. ikea.com).

IKEA’S success in the retail furniture industry is due to its immense experience, cost leadership and the innovative product differentiation. It is the world’s most successful multinational retailing firms that operates globally based on the concept of furniture kits that would have to be assembled at the customers place (IKEA Annual Report 2002).

Macro Environment – Key Aspects of PESTEL Analysis of IKEA

In PESTEL analysis, it highlights issues around political stability, disposable incomes, and inflation rates, changes in life-style, technological advancement, environment preservative issues and legal aspect of the business activities of IKEA. Here it is looked into what will be affected by the business environment of IKEA.

Political environment mean some kind of regulation or legal issue made by the local government. For IKEA, Fair-trade policy in Russia and minimum wage in European countries are a few examples. After immense presence in European countries IKEA tried and is trying to span its market in US, Japan, Russia and China. Due to the different taxation polices IKEA compel to adopt different price in different part of the world. Similarly, entrance to Russian and Chinese marketing was tough resulted because of the strict local government and social welfare policies. The governmental decision of allowing foreign investments in the real estate industry in China in the mid 1990s increased the market demand for home improvements and decoration market. To exploit this advantage and huge opportunity in China resulting 1.3 billion populations IKEA established its first outlet in China in 1998. Likewise, China’s high import taxes hit the IKEA’s profitability extensively (IKEA’s Globalization Strategies and its Foray in China http://www.icmrindia.org).

Economical environment: During the economic recession, most people don’t want to spend too much. Customers will think twice before they pay for the product. IKEA have some advantages that the price is very reasonable for the customer. However, personal disposable income, inflation, interest rates largely determine the consumer’s behavior. For the IKEA it is important to aware of how the U.S economy is behave, as a example economic growth or decline, interest and exchange rates and credit availability. Likewise, because of the high economic level, employees in Japan were paid much higher compared than employees in other Asian countries like China (IKEA: The Japanese Misadventure and Successful Re-entry, http://www.icmrindia.org).

Social-culture: Continuous changes on the demographics of population, income distribution, and lifestyle, attitudes to work and leisure and levels of education impacts the market response towards IKEA. For example, when IKEA opened its first outlet in Japan in 1974 they could not understand the life style of Japanese people. They were not ready to accept to carry the flat-packed furniture and assemble it by themselves. They were looking more quality and vibrant products rather than cheaper and Scandinavian pastel colored designs. In 2002 returning to Japan it conducted a thorough market research and visited several Japanese homes to understand their requirements better. IKEA then changed its strategy for the Japanese market based on ‘small space living’, and brought in products that were suitable to the Japanese (IKEA: The Japanese Misadventure and Successful Re-entry, http://www.icmrindia.org).

Environment: In this 21st century, people are concerned more on the environmental friend issue. IKEA have been providing environmentally friendly products complying with the environmental protection laws. To minimize the use of wood in its products, IKEA concentrated on bringing out products made of recycled and reusable material. To minimize waste, energy consumption and possible harm to the environment whatever they take they have used, reused, and recycled, either by themselves or natures. Continuous trainings have given to its employees and suppliers to make them more environmentally conscious (IKEA’s Environmental Practices: Making Good Business Sense http://www.icmrindia.org). In 1990, it adapted a systematic approach t its environmental polices starting, developed an environmental plan and conduct environmental audits. Furthermore, to increase credibility they made all of its suppliers to have environmental policy, establish measurable targets to reduce environmental impacts, and develop a plan for meeting those targets (Lorey, 2003, p264).

Technological environment: Technology has changing rapidly and becoming more advanced. New innovations, speed of technology transfer, rates of obsolescence and governmental and industrial focus on it varies the outcome. IKEA has matched their pace with technological changes. One to the example would be the use of “board-on-frame” involving a thin which dramatically reduced material costs for the tables (Gibbert and Durand, 2007, pg 51).

Legal: In IKEA most of the production takes place in China and Poland. IKEA has to confirm that certain criteria that include local legal employment, social and environmental responsibilities, competition law, health and safety, and product safety. That would no child labor and provides a safe working environment (Bill, 1987).

SWOT analysis to get an overview their resources and capabilities of IKEA

The key elements to IKEA’s winning formula are well known as simple, affordable, functional, high quality, Scandinavian design and an extensive product line.

Strength

The major strength of IKEA is its ability to shift variety of cost burdens to the customer that might be found desirable or perceived as an added value. For example, customers are encouraged to deliver the merchandise themselves. There is also an extra charge if customers do not assemble the merchandise. The customer is usually eager to perform these services because of low prices, ease of assembly, and superior styling (Michman and Mazze, 2001, p. 78).

Brand recognition: IKEA has the strong brand image and massive awareness. By the recent research of Datamonitor, IKEA ranked 41st among the best global brands around the world in 2006 with a brand value of $8,763. The strong brands enhance customer loyalty and lead to repeat purchases.

In-house design group: It can make sure that their products can match the trend of the industry. The present of industrial group can co-operate with the design group, which efficiently convert the design into the finished product.

Marketing strategy: Wide well designed product range with strong pricing strategies

Defined strategy: differentiated and low-cost provider

Great quality products at entry level price

Higher margins than competitors

High economies of Scale

Long-term relations with suppliers

Organizational capabilities adapting change

Market leader and first mover

High service level

Good product information

Charismatic leader

Research on cheaper components

Market surveillance keep up with trends

Weakness

The self-serve environment is both strength and weakness of IKEA. The self assemble component can put many customers – particularly new buyers – at immediate risk for defection (Michman and Mazze, 2001, p. 21).

Items out of stock

Long checkout queues

The business culture- Charismatic leader hard to substitute

Too big may increase bureaucracy

Huge percentage of stores are concentrated in European Markets

Mass marketing expensive

Real estate – store requires extremely large areas

Privately owned – restricts capital

Not for the elderly- Do it by yourselves (DIY)

Standardized products offer little customization for local customer needs

Using traditional print catalogs and not using e-commerce

Opportunities

IKEA is converting its main weakness with its key opportunity, which is expansion into emerging markets in Asia and Eastern Europe. The development of premium lines, whether within existing stores or through new high street fascias complementing the out-of-town stores, and an increase of sales via the development of e-commerce sites in each country, are both improving customer service, and reducing the volume demand on existing stores.

Starting e-commerce: Bright prospect of online sales. There is an opportunities to gain more revenue in online retail sales. With the use of the internet becoming an even bigger global concept, IKEA should ensure that every opportunity to expand internationally is explored.

Expand their company in more parts of the world and be the biggest provider of retailing brands

Sourcing from China: Sourcing from low cost countries like China would reduce its costs and enable IKEA to concentrate on increasing its market share through competitively priced product offerings.

Growing Asian Markets

New technology may lower marketing cost

International expansion

Smaller stores – IKEA Lite Increasing Number of stores

Threats

Market developments are driving the threat of a possible over saturation of the market, increased by the fact that competitors are following suit, by introducing similar product ranges at low prices. This is compounded by the negative impact on sales of continued depressed economic conditions in its core European market and the political and economic instability of the Chinese and Russian markets, in which the company plans to invest heavily in the short-midterm, also presents a potential threat.

Global Economic Conditions

Decreasing Housing Markets

Competitors – direct (furniture stores) and indirect (Wal-Mart, Target)

Rising commodity & shipping prices

Aging population on key shopper segments

More focus on environmental issues

New trends

Individualism

Time is money- people do not have the time to put products together

Too dominate- defense position man hamper innovation

Unsure in lowering cost

Competitive advantage

IKEA achieves competitive advantage in different ways and at different points in its value chain. It attains an absolute cost advantage over its competitors. It offers a no-frills product to a broad target market using standardization to derive the greatest benefits from economics of scale and experiences. It achieves a successful cost-leadership strategy avoiding perceptions of poor quality or ‘cheap’ merchandise at the same time; thus achieving relative parity on differentiation (Dess and Taylor, 2004).

IKEA has targeted middle-class customers who seek stylish furniture at an affordable price. “Low price with meaning” slogan of IKEA refer to its objective to offer stylish, smartly designed furniture at a reasonable price without making the consumer feel low-priced. This clearly affirms IKEA’s stress on competing on price and quality. IKEA is “for the many people” present a broad variety of products and services.

Nearly all the products on offer by IKEA are sold in IKEA stores throughout the world. IKEA has achieved the impossible, to create a range of products attractive to consumers everywhere, in countries with very different cultures, and to apply a formula for presentation and sale of those products which reinforces the attractiveness.

Michman and Mazze (2003, p 78) states that five key components are important for either success or failure in the retail furniture industry: innovation, market segmentation, image, physical environmental resources, and human resources. They further argue that a high degree of innovation should be useful as an effective strategy in a fragmented industry. IKEA is noted for their innovations. It is successful niche furniture retailers and it has offered Swedish lifestyle furniture that is ready-to-assemble and less costly to transportation.

The Five Forces Framework

Porter’s five forces model assess attractiveness of the industry or sector and also identify sources of competition (Johnson et al., 2008, p60).

It highlights the potential threats of new entrants and substitute products/services. After analysing the case study it can be mentioned that there is a medium to low threat of new entrants due to the barriers of entry in regards to innovation, network and experience requirements which has led IKEA to have cost leadership and quality status. Threats of substitutes are median due to the brand equity that IKEA maintains along with cost leadership and differentiation strategy that they provide customers. The power of suppliers is low due to the large and un-concentrated suppliers’ base, and suppliers are dependent on IKEA for design and innovation. In regards to the buyer power is also low due to the individual buyers, and the competitive price of the product which has led IKEA to have competitive advantage.

However, there is a medium to high threat of competitors as the industry is traditionally very diversified and there are numbers of furnishing companies growing in the market trying to compete with IKEA. The first force is the rivals. IKEA is the leader in the market. There are only a few rivals can compete with them.

IKEA’s Value Chain analysis

Restructured value chain of IKEA has created superior customer value and competitive advantage.

Michael Porter argues that an organization can enhance its competitive positioning by performing key internal activities in the value chain at a lower cost and better than its competitors (Bartol et al, 1993, p211). The value chain approach identifies two major activities- primary and secondary. The ultimate purpose of the firm is to add as much customer “value” in each of the primary activities (Pearce et. al, 199, p184-187). IKEA has modified the value chain approach by integrating the customer in the process and introducing a two-way value system between customers, suppliers, and Ikea’s headquarters.

In this global sourcing strategy, the customer is a supplier of time, labor, information, knowledge and transportation. On the other hand, the suppliers are customers, receiving technical assistance from Ikea’s corporate technical headquarters through various business services. The company wants customers to understand that their role is not to consume value, but rather to create it (Norrmann et al, 1993, p67).

Ikea’s role in the value chain is to mobilize suppliers and customer to help them further adds value to the system. Customers are clearly informed in the catalogs of what the firm’s business systems provide, and what they are expected to add to the final process. In order to furnish the customer with good quality products at a low cost, the firm must be able to find suppliers that can deliver high quality items at low cost per unit. The headquarters provides carefully selected suppliers with technical assistance, leased equipment and the necessary skills needed to produce high quality items. This long-term supplier relationship does not only produce superior products, but also add internal value to the suppliers (Normann et al, 1993, p72). In addition, this value-chain modification differentiates IKEA from its competition.

Sources: Cited in Neal Thornberry, Lead like an entrepreneur, Published by McGraw-Hill Professional, 2006, p 113

IKEA, on the other hand, combines the warehouse and the showroom into one. Customers select the exact piece of furniture they want and take it home and assemble by themselves. It’s win-win situation. Customers enjoy greater convenience, and IKEA enjoys tremendous cost savings (Deans and Kroeger, 2003, p 163). IKEA is able to keep costs and prices down because the roles, relationships and organizational philosophy within the value chain have been systematically redefined (Hougaard and Bjerre, 2003, pg. 103). IKEA was founded by actually disaggregating and rearranging this value chain to create a new pattern that resulted in a strategic and defensible competitive advantage (Thornberry, 2006, p 112).

IKEA’s sources of cost efficiency

(Johnson et al, 2008) Porter (1980) states that organisations can enhance competitive positioning by performing key activities in the value chain better than competitors. Furthermore, understanding the management of cost efficiency as a strategic capability thoroughly explain the capabilities, resources and competences. Nattrass and Altomare (1999, p 196) states that in long term as cost savings and efficiencies are realized, they can result in more competitive prices for the customer. IKEA knows this thing and it’s important to a company IKEA where low cost to the customer for the value received is central to its business idea. The lower costs of operation or product creation allows IKEA to maintain the lowest possible price for the consumer and remain highly competitive in the marketplace. IKEA can achieve cost efficiency through its economies of scale, huge experience in many regions and controlling its raw materials and supply cost by design or product innovation (Johnson et al, 2008, p 100).

Core Competences

Resources and capabilities that are rare, difficult to imitate and valuable generates core competencies (Prahalad & Hamel, 1994). IKEA has built and maintained a unique market space in a traditional industry by successfully leveraging global forces and creating a completely new set of core competencies unmatched by any of its competitors and making shopping for home furnishings a unique experience(Nankervis, 2005, p137).

IKEA’s brand is associated with simple, low cost, stylish, good quality products. IKEA standardized the product and operations strategy and hence minimized costs and maximized profits. The corporate mantra is “Low price with meaning”. The goal is to make things less expensive without ever making customers fell cheap. They offer nearly the same products in its stores all over the world; they can order high volumes and get cheap prices. The company targets the customer who is looking for value and is willing to do a little bit of work serving them, transporting the items home (Idea Annual Reports).

The integrated business model of IKEA is the real innovation rather than particular aspects of strategy, product design or service deliver. The combination of good design, low costs and low prices are certainly important, but these advantages are achieved as a result of philosophy, vision and value system that has completely redefined the furniture and home furnishing industry and as a result, provided a revolutionary new value stream for customers states Nankervis (2005) Miles (2003).

According to Prahalad and Hamel (1994), a core competence can be identified by applying three simple tests: Does IKEA provide significant sources of competitive differentiation? Does IKEA transcend a single business? And is it hard for the competitors of IKEA to imitate? And the answer is yes for all three questions because IKEA has radically refined the value providing way to the customer and without compromising the quality of product it has also able to maintain the cost leadership position.

Criteria for Inimitability

Providing value to customers and possessing rare competences, IKEA can make it difficult for competitors to imitate their core competencies through the use of complex internal and external linkages. In regards to external connections, it can be done by developing activities together with the customer on which the customer is dependent on them. And there are some culturally embedded competences in IKEA which are not easy to imitate (Johnson et al, 2008, p 105). The great company IKEA has created a set of core competencies that link ingeniously and would be difficult to imitate in total. Even though IKEA has outsourced their production and supplies, it has kept back for itself an interconnected set of competencies and capabilities that confront all set imitation to competitors (Kotler, 2003, p 132).

Core Values

The core values of IKEA can be learnt from its vision. That is ‘The IKEA vision is to create a better everyday life for the many people. We make this possible by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them’. The cutting cost every year by conducting effective and efficient business model is the core value of IKEA.

Logics for possible ultimate demise of IKEA

Pitfalls of business level strategy

The business level strategy of IKEA is position between cost-leadership and differentiation position. However, such a strategy may fail if IKEA is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for design changes and innovation (Dess et al., 2004 b).

Strategic Drift Perspective

To extrapolate forward and predict what might cause the ultimate demise of the IKEA, the concept of strategic drift can be also used. Unable to keep pace with changing environment IKEA may lose its strategic focus or the strategy that is adapted by IKEA may not be viable in different environment situation. Naturally, the success of the past may lead managers to unwillingness to change strategy significantly. This may be happened to IKEA because they have built its capabilities that have proved to be the basis of competitive advantage (Johnson et al, 2008 b, p 179). There are chances of increasing gap between strategy and the changing market demands. Resulting it will cause a period of flux where clear focus towards ahead will be unclear because of the downturn in performance. There may develop strategic choices and it will be significantly different to choose the right strategy in flux stage. This may result great confusion and corporate confidence will steeply fall down The implications of confusion on flux stage may result either IKEA will get taken over by another organization or it may go through a period of transformational change or shut down completely (Johnson et al, 2008 c, p 183).

Demise of founder

The founder IKEA Ingvar Kampard is always seen as the spiritual leader of IKEA. There is no one at present that has the charisma and flair to take on his position. Founder’s personality and leadership are driving factor of major aspects of business and sustainability of IKEA after Kampard’s demise is a big question ( Rothacher, 2004 a, p 118). IKEA is still predominantly run by managers who were trained and groomed by Kamprad himself – and who are personally devoted to the founder; most of them are Scandinavian. Furthermore, even in case of appointment of non-Swedish managers whether they will be able to assimilate into the Swedish culture or psyche, which demands management to be simple, people-oriented and non-hierarchical, or whether they will reject it and instead impose their own cultural imprints onto IKEA will be seen only in the future ( Rothacher, 2004 b, p 118).

Conclusion

IKEA’s major strength is its ability to shift variety of cost burdens to the customer that might be found desirable or perceived as an added value. The self-serve environment is both strength and weakness of IKEA. The self assemble component can put many customers – particularly new buyers – at immediate risk for defection. It is converting its main weakness with its key opportunity, which is expansion into emerging markets in Asia and Eastern Europe. Market developments are driving the threat of a possible over saturation of the market, increased by the fact that competitors are following suit, by introducing similar product ranges at low prices.

Restructured value chain of IKEA has created superior customer value and competitive advantage. It attains an absolute cost advantage over its competitors. It offers a no-frills product to a broad target market using standardization to derive the greatest benefits from economics of scale and experiences. It achieves a successful cost-leadership strategy avoiding perceptions of poor quality or ‘cheap’ merchandise at the same time (Dess and Taylor, 2004).

IKEA’s brand is associated with simple, low cost, stylish, good quality products. IKEA standardized the product and operations strategy and hence minimized costs and maximized profits. IKEA can achieve cost efficiency through its economies of scale, huge experience in many regions and controlling its raw materials and supply cost by design or product innovation (Johnson et al, 2008, p 100).

The founder IKEA Ingvar Kampard is always seen as the spiritual leader of IKEA. There is no one at present that has the charisma and flair to take on his position. Similarly, unable to keep pace with changing environment IKEA may lose its strategic focus.

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