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This paper consists of three major parts that leads to the strategic development process for IKEA. Part one evaluates the recent past strategies that IKEA pursued and its outcomes. It identifies the strategic development process involved in its past and its consequences. Part two evaluates the current strategic position of IKEA, current strategic position is been identified by analysing the macro and micro environmental factors that influence the performance of the organizations and identifying the strengths, weakness, opportunities and threats of IKEA. Based on the above results, Part three deals with developing future strategic choices that suits IKEA’s goal and mission and those choices are been evaluated to identify the suitability, sustainability and acceptability in its context. Finally a strong recommendation is been given to IKEA about its future strategic choice.
PART 1 – Recent past strategic development history of IKEA and its outcomes
Strategic development history an overview
IKEA is a leading furniture retailer that operates globally. The company was founded by Kamprad in 1943, at that time he started selling pens, Christmas cards and seeds from a shed on his family in Southern Sweden. In 1951, First catalogue is been realised, Kamparad penned all the text himself. The company is been transformed into a huge company that generates 23 billion Euros per annum. IKEA emerged one of the most successful companies in retail business. Retail commentators and business analysts said that the success is based on its well established long-term strategy that has clear focus on its customers and the skill in implementing the strategies successfully (Economist, 2011, pp. 67-68).
IKEA pursued many strategies in the past to obtain the current top position. Some of those were long-term changes and far-ranging implications for organisational structure and control. IKEA had an understandable purpose and structured value in both business achievements and both customers and employees relationship. Moreover, IKEA had focused on young furniture buyers and also it targeted them to market its products. While looking into IKEA’s growth it was organic growth, the company gradually expanded to a giant retailer. In the beginning the stores were built in Scandinavia and it’s been expanded wherever it got opportunities. Kamparad used the same retailing concept in all countries (Norman & Ramirez, 1993).
Pattern of strategy development in IKEA
Strategic development process of organisations is better to describe and understood typically in terms of continuity. There is a tendency towards momentum of strategy (Miller & Friesen, 1980). Once an organization has adopted a particular strategy, it tends to develop from and within that strategy, rather than fundamentally changing direction (Johnson & Scholes, 1997). However, it depends upon the successfulness of the adopted strategy. For example, Company like Burton Group transformed from manufacturing to retailing, which is a major change. In IKEA’s case the company transformed itself from a small corner shop to a giant retailer. However, the growth of the company was incremental and it adopted a particular strategy “To offer a wide range of well designed, functional home furnishing products at cheap price” and stick to it by improving its resources and capabilities to meet its strategic requirement. The company’s incremental strategy is been detailed in the following sections.
Anders Moberg’s era, low cost high quality strategy
In 1980’s IKEA remained economical in its spending, it relocated to Denmark to save Swedish taxation. Anders Moberg became the CEO, his simplicity and business tactics of understanding the customers and fulfilling their expectations encouraged the customers. Anders Moberg dressed informally, he used to clock in just like other employees, he used to stay in economically class hotels in international trips, and he used to travel on economy class air-tickets and expected his executives to do likewise (Norman & Ramirez, 1993).
IKEA planned to deliver low-cost and high-quality products by redefining its relationship with its suppliers by establishing 30 buying offices around the world. IKEA chosen most economical suppliers over traditional suppliers, it made the shirt manufacturer to be employed to produce seat covers. It is an impractical practice however, once suppliers join into the IKEA network they got access to global markets and received technical assistance. Suppliers leased equipments and they were trained to bring the quality up to world-class standards. IKEA managed to procure 12,000 items from 1,800 suppliers in 45 countries at approximate 20 to 40 percent lower cost compared to its competitors. Thus, IKEA developed its core competence with good quality and cheap price.
Through the above strategy the company attracted most of the cost sensitive customers and obtained a significant market share. The company attained its break-even and started offering the best designs in low price that attracted most of the population. Now, it is time for the company to expand its market. So Anders Moberg started looking opportunities in international markets for expansion. The following section details the expansion strategy of IKEA.
International expansion strategy of IKEA
Sweden is a very small country and it is logical, in a country like this if a business is very strong and successful then it is reasonable to expand into international markets at some point. IKEA found much bigger growth potential outside Sweden. IKEA was one of the leading companies to become a global player. IKEA built its brand through its uniqueness on its products and its low cost high quality strategy. The company believed that the brand awareness has always been higher than the company’s actual size and sales volume (Kling & Goteman, 2003). He planned to expand the company using its internal funding itself, 15 percent of the turnover is being reinvested in expansion (Norman & Ramirez, 1993).
IKEA re-organized its supply chain as it was supposed to cope up with the widely dispersed sources of components and high-volume orders made it imperative for the company to have an efficient logistics system for ordering parts, integrating them into products and delivering them to the stores with less cost of inventory management. IKEA has achieved this through its world network of 14 warehouses. These provided storage facilities, acted as logistical control points, consolidation centres and transit hubs and aided integration of supply and demand, reducing the need to store production runs for long periods, holding unit costs down and helping stores to anticipate needs and eliminate shortages (Baraldi, 2008).
IKEA’s corporate culture a way to its sustainability
In 1996, IKEA split into three groups, comprising the retailing operations, an organisation holding the franchise and trademarks, and third one in banking and finance. The new structure meant that the Kamprad’s family would not access to the capital of the business or the right to inherit it. However, it would continue to have influence-rich roles in the governance of IKEA. Kamprad believed that IKEA will survive, preserving both its profitability and egalitarian culture. In 1999, Andres Dahlvig became a new president and CEO for IKEA group of retail stores. In October 9, 1999, total sales profit of that special day form the worldwide stores was divided equally amongst all co-workers and hard working employees which was â‚¬84.85 million. This was one of the key strategies to improve the working ability of the employees towards the organisation goal.
IKEA shopping online was introduced in the year 2000 which made easier way to buy the products from home itself. It produced the furniture in fibreboard and particleboard for the first time in same year. IKEA recovery was launched in 100 stores in Europe in 2003 by which repaired and recycled instead of waste the materials. In 2005, IKEA made all type of home products available under a roof. The next, IKEA labelled foods were launched about 150 foods with high quality in 2006. These new products launched every year shows that the IKEA recognized the environment needs and made the valuable strategy. IKEA catalogue- it was considered the major marketing medium tool. Catalogue was spent 70% of the annual marketing budget. It was printed in 38 various editions in 17 languages of 28 countries. In 2008, 110 million copies of catalogues were distributed which was three time higher than bible prints available in United Kingdom (IKEA, 2011).
IKEA’s product differentiation strategy that attracts the customers
IKEA’s product range is developed to be extensive enough to have something that appeals to everyone and to cover all functions in the home. The products are modern not trendy so they are practical enough for everyday use. IKEA is the home furnishing specialist. IKEA products are functional and appealing, and enable many people to improve their home life through practical solutions to everyday problems. IKEA’s concept of marketing is that “We do our part” by focusing on our part by designing consumer valuable products through inexpensive materials in a novel way ad minimising production, distribution and retail costs to benefit its customers through low price (Norman & Ramirez, 1993).
IKEA believes that products don’t appeal unless it represents good value for money. So, the company is committed to have a good relationship with its suppliers to purchase good quality products, economically. IKEA’s products are based on a functional approach to design. Its designs products those are attractive, practical and easy to use. They don’t have unnecessary features and they give genuine solutions for specific home furnishing needs and are made of the most suitable materials for their purpose. IKEA makes sure that the quality of the product must be appropriate for the intended use (IKEA, 2011).
Summary of IKEA’s recent past strategic development
IKEA identified its customer’s expectations and developed an inimitable core competency through low cost high quality strategy to fulfil its customer needs. The company organized its resources and capabilities to support its core competency. The company developed good relationship with its suppliers to get cheap products. Its unique corporate culture and diversity in management roles enable the company to compete more flexibly. Its diversified products and unique presentation played an important role in its success. Its international expansion strategy supported the company to create global brand awareness and to increase its market share.
PART 2 – Current strategic situation of IKEA
It is essential to understand the strategic position of an organization before choosing strategic direction for future. There are two basic views to identify the strategic position of an organization, one is external factors of the organization and the second is internal factors. The external factors of an organization matters most to the success of a strategy, strategy development is the process of seeking attractive opportunities in the market. Attractive opportunities are those favours the internal capabilities on an organization. So, understanding about external environment matters a lot in formulating future strategies. Internal environment of an organization should be evaluated to identify the internal strength and weakness of an organization. It also helps to identify the resource availability to pursue a new strategy. It weights the internal capability of an organization. It also interrelated with the external environment as if the environment changes the internal capabilities and resources need to develop in order to match the external environment (Johnson, Scholes, & Whittington, 2008).
There are several tools that could be used to analysis the external and internal environment of an organization, they are PESTEL analysis which is used to analyse the macro-environment, Porter’s five forces is used to analysis the micro-environment. SWOT analysis can be used to analysis the internal strengths, weakness and external opportunities, threats of an organization (Johnson, Scholes, & Whittington, 2008).
PESTEL analysis on furniture industry
PESTEL stands for political, economical, social, technological, environmental and legal elements of a macro-environment. It provides a broad list of influences on the possible success or failure of the strategies. In these elements Politics refer to the influence of government policies upon the strategy, Economy refers to the macro-economic factors such as business cycle, exchange rates and differential economic growth rates around the world. Social refers to the factors such as demographics, ageing population and changing cultures that influence the strategy. Technology refers to the elements such as automobiles, aeronautics, internet that influences the strategy. Environmental stands for pollutions control and policies related to green issues that may influence the strategy. Legal refers to the legislative constraints, restrictions upon a company that may influence the strategy (Thomas, 2007).
There are fortunate political situations in European countries and Middle East countries. IKEA has successful in international and domestic business portfolio. IKEA hopes that Indian political unfavourable will be revolutionized soon to make foot prints in the country (Economist, 2011).
Economic downturn globally hits the IKEA’s sales. However IKEA is adopting the current trends and moving towards sustainability. IKEA derived economic thoughts and strategies managing the lacking of the external economic presents. IKEA is focusing middle class and young buyers to deliver its goods in increasing economic countries such as China, UK, and Canada etc.
IKEA understands its customer’s social life and implements its design according to their needs. It considers the various cultures in world and manufacture products accordingly. The company produces low cost high quality products which is affordable by the society.
IKEA continuously adopts latest technologies and educate its suppliers to follow the same. In that way the company could able to manufacture cheap products and world-class quality within the time line. The company incrementally updates its supply networks to obtain cheapest transportation.
Due to pressure from global environmental situations IKEA has moved towards sustainability. Today, 71% of all IKEA products are recyclable, made from recycled materials, or both. The group recycles 84% of the waste generated in its stores.
Porter’s five forces for IKEA in furniture industry
Porter (1980) states that, “Porter’s Five Forces framework helps to identify the attractiveness of an industry or sector in terms of competitive forces”. The five competitive forces in this framework are the bargaining power of buyers, bargaining power of suppliers, threat of new entrants into an industry, threat of substitutes for the industry’s product or service and competitive rivalry in an industry.
Fig 10.1 Porter’s Five Forces, IKEA
Bargaining power of buyers
Since there are huge competitions in the furniture industry from direct furniture manufacturers and retailers to customized designer retailers, the buyer has low of leverage in switching from one retailer to another. Switching cost between retailers are very less in this industry.
Bargaining power of suppliers
Since there are lot of furniture and home appliance manufactures in developing countries like China and India, IKEA has access to lot of suppliers that increases the bargaining power of IKEA. The company is well experienced in developing small suppliers into a highly competitive world class producer that increases the wide access.
Threat of substitutes
Threat of substitutes in furniture and home appliance industry is very low. People look for most convenient and appropriate furniture that suits their home.
Threat of new entrants
Due to huge capital involved in this industry it is hard for a new company to enter a new market. To be successful in this industry, companies should establish the best supply chain and supplier relationship to become competitive. Due to huge disinvestment cost involved there is threat for new entrants.
Due to lot of retailers in this industry the market is highly saturated and the rivalry through price war is high. Companies developed their own core competencies and focuses on a particular market to increase its market shares. However, the competitive rivalry is quite high in this industry.
SWOT Analysis for IKEA
It identifies the key issues of a business atmosphere and the strategic ability of an organization that are like to influence the strategic development. The goal of SWOT analysis is to identify the degree to which the strength and weakness are relevant to or capable of dealing with the changes occur in a business environment. SWOT analyse is only effective when it is comparative in relation to its competitors (Jacobs, 1998). Identifying opportunities and threats is a valuable part when thinking about strategic choices for the future. It is used to respond strategically to the environment by reducing the identified threats and taking advantage of the best plausible opportunities (Valetin, 2001).
Fig 11.1 SWOT analysis for IKEA
Strengths: – Significant market presence
IKEA sells more than 9,500 home furnishing products in about 301 stores in more than 36 countries. A strong presence gives the group considerable bargaining power and an advantage in terms of customer recall. The IKEA concept is based on offering home furnishing products at low prices. To help keep prices low, the group ensures maximizing production equipment, using raw materials efficiently (IKEA, 2011).
Strong in customer satisfaction
IKEA was ranked 9th in Data monitor’s retail brand Consumer Satisfaction Index (CSI) which measures how satisfied customers are with the retailers they use. CSI looks at satisfaction across different aspects of the retail proposition range, convenience; price, service, facilities, ambience, quality, and layout that provide an overall satisfaction score for each of these.
Focus of sustainability
In response to pressures on global retailers to co-exist with the environment, IKEA has been working towards sustainability since 1999. Previously, IKEA was accused of being a landfill-waste generator because it made large volumes of products that did not last for long time. To reduce the associated poor publicity, IKEA has been pursuing sustainability in a big way since then. In 2009, IKEA invested $77 million in clean technology start-ups like solar. Today, 71% of all IKEA products are recyclable, made from recycled materials, or both. The group recycles 84% of the waste generated in its stores (Datamonitor, 2010).
Weakness – Location disadvantage
Most of the IKEA stores are located outside the city. It is because of high land cost and traffic access. Since this strategy reduces the cost of operations, IKEA still struggles with convenience problems. Out-skirts stores are disadvantaged because of long travel considerations of customers (Economist, 2011).
Declining sale densities in the UK
Since 2005, the IKEA’s average sale density in the UK is declining so the group deviated from its previous plan and just opened 1 store instead of 32 stores planned previously. IKEA just operate 18 stores in UK. The sales density increased during 2002-04 and started declining since 2005. Opening more stores distribute the IKEA customers and decline the sales density. So, the company has to look into its growth strategy to increase its sale density in UK.
Opportunities – Diversifying sourcing base
IKEA sources a substantial portion of its products from low cost manufacturing centre China. In 2009, IKEA sourced 30% of its products from Asia being China (21%) as its major supplier. To reduce its overdependence on China for the first time in several years, the group intends to strengthen its sourcing relationship with India. India, which currently accounts for 3% of IKEA’s worldwide purchases, is expected to become a stronger supplying partner. A diversified supplier base will reduce IKEA’s dependence on China and increase its bargaining power (Datamonitor, 2010).
Increasing online sales
Online retail spending is expected to increase world-wide. Retail e-commerce revenue in the US was increased of 4.1% between 2008 and 2009. Retail e-commerce revenue is expected to grow at an annual rate of 8%, 9.5% and 9.2% in 2010, 2011 and 2012, respectively (Datamonitor, 2010). To benefit from this trend, IKEA has also started transacting on its website, www.Ikea.com. Through online sales IKEA can also overcome the issues faced by customer due to out-skirts stores and inconvenience.
PART 3: Strategic directions for the future
Decisions about an organization’s future and the way in which it needs to respond to the pressure and influences of external environment. There are basically three choices should be made (Johnson, Scholes, & Whittington, 2008). They are,
The choice of how an organization positions itself in relation to competitors.
The choice of markets and products of an organization.
The choice about how the developed strategies are to be pursued.
Strategic clock to develop competitive strategy options
If an organization to position itself in the competitive market, it has to develop core competencies that are not been inimitable by its competitors easily. The base of competitive advantage in business-level can be identifies using strategic clock tool (Browman & Faulkner, 1995).
Fig 12.1 Strategic clock to develop competitive strategy options
Source: Bowman C., and Faulkner D., (1995) The essence of competitive strategy, prentice hall.
Where the strategic clock illustrates price and product benefit relationship in eight ways. In which it is classified in to 5 major areas such as Price-based strategy, Differentiation strategies, the hybrid strategy, focused differentiation and failure strategies. Sustaining competitive advantage: Organizations that try to achieve competitive advantage may try to hold it for long time. So there are three different areas of sustaining competitive advantages they are based on the organization’s current strategic position. If an organization plans to sustain its cost leadership, it should pursue sustaining price-based advantage (Johnson, Scholes, & Whittington, 2008). IKEA’s strategic direction is towards hybrid strategy where it produces high quality products in low price.
Strategic direction using Ansoff Matrix
Based on the current strategic position and opportunities in the future it has to develop its market through online sales. Corporate level strategies can be developed using Ansoff matrix. In this the organization could decide whether it has to concentrate on the product development or market development or diversification (Ansoff, 1988).
Fig 13.1 Strategic direction using Ansoff Matrix
Source: Ansoff H., (1988) corporate strategy, penguin
There are huge opportunities visible towards online shoppers and there is chance for IKEA to increase its market share by launching existing products in a new market.
Alternative methods of strategy development
The above Ansoff matrix concerned with strategic choices at the generic level. However, in more precise level these strategies are developed into different potential method of development to support the generic strategies. IKEA also has opportunities to develop its supplier base by expanding its global sourcing. IKEA has started pursuing into Indian markets for sourcing. It can develop its supplier relationships through strategic alliance with Indian manufacturers to increase its bargaining power. Strategic alliance enables IKEA to develop good relationship with suppliers and can produce goods at competitively cheaper and good quality.
Evaluating the strategic choice
Evaluating the strategies is necessary to analyse whether the developed strategic choice will succeed in future. This can be analysed in three main criteria’s they are.
It is concerned with whether a strategic choice that is been developed is addressing the key issues related to the strategic position of an organization. To fulfil the customer needs it is necessary for IKEA to increase its online sales facilities. It also fulfils the issues related to store locations as the customers who feel inconvenient to reach outskirts stores can access online facilities. The company also have enough financial resources to adopt strategic alliance with suppliers and (Johnson et. al., 2008).
It is concerned with whether the expected performance outcomes such as return or risk of a strategy and the degree to which these strategies meet the stakeholder expectation (Johnson et. al., 2008). Since IKEA is pursuing a market development strategy through online business, the risk involvement is quite low. However, there can be uncertainties in online sales upon expected return. As the company is going to invest in developing websites and online shopping facilities, the expectation for sales growth is high and the stakeholders will be happy that the company could increase its revenue with increased profitability.
It is concerned with whether the company has the capabilities to deliver a strategy and whether the strategy could work in practice. Financial feasibility analysis and Resource deployment analysis are the tools used to evaluate the feasibility of a strategy (Johnson et. al., 2008). IKEA has financial capabilities and infrastructure to pursue the online market development strategy and expanding its supplier base.
Conclusion and Recommendation
Based on the above analysis IKEA could pursue market development strategy by concentrating on online business. IKEA could able expand its supplier base into other developing countries like India to obtain buyer bargaining power among its suppliers. The company has enough resources and capabilities to pursue these strategies in future. The above strategies may support the company to obtain its goal.
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