Ikea Business Strategy
The strategy of IKEA adopted was cost leadership strategy. The cost leadership strategy is an integrated set action taken to produce goods or services with feature that are acceptable to customers at the lowest cost relative to that of competitors. Firms using the cost leadership strategy commonly sell standardized goods or services to the industry’s most typical customers. IKEA sells a lifestyle that customers around the world embrace a signal they have arrived good taste and recognize value. “If it wasn’t for IKEA,” Wrote the British design magazine Icon, “Most people would have no access to affordable contemporary design. The firm’s vision is “good design and function at low prices. ” In fact that everyone like low price products and everyone like new and good design products. But the good design products seldom mark at low prices, but not many are affordable or want to pay much just for the furniture. So IKEA targets at this group people. Good design is IKEA’s competitive level of quality that creates value for customers. To achieve its positioning, IKEA has put much effort on several ways. Firstly, IKEA sells good designed furniture at low prices.
But how can IKEA make its product good design and lower its production cost? IKEA has a group of good designers in Sweden. They are responsible for product design and innovation. In order to lower the cost, other members work hand in hand in house production team to indentify the appropriate materials and the least cost suppliers. IKEA works overtime to find the right manufacturer for the right product. It has a big network of suppliers over the world and keeps in good relationship. As primary activities, inbound logistics (e. g. materials handling, warehousing, and inventory control) and outbound logistics (e. g. , collecting, storing, and distributing products to customers) often account for significant portions of total cost to produce furniture. Research suggests that having a competitive advantage in terms of logistics creates more value when using cost leadership strategy than when comparing t using the differentiation strategy. Thus, cost leaders seeking competitively valuable ways to reduce costs may want to concentrate on primary activities of inbound logistics and outbound logistics.
In so doing many now outsource the operations to low cost firms with low-wage employees (e. g. , China). IKEA’s big products will usually be designed as a box packaged, which not only saves IKEA’s millions dollars in shipping cost, warehouse storage cost, but also enable shoppers haul their own stuff home. It is another way saves ilea’s delivery cost – get lower cost. Secondly, IKEA uses remarkable shop design. The blue-and-yellow buildings average 300000 square feet in size. The big showrooms let shoppers and scholars have a comfortable and rich environment enjoy shopping inside.
IKEA practices a form of gentle coercion to keep you as long as possible. Right at the entrance, for example, you can drop off your kids at the playroom, an amenity that encourage more leisurely shopping. The stores is designed as a circle, you can see everything as long as you keep walking in one direction. Wide aisles let you inspect merchandise without holding up traffic. The furniture itself is arranged in fully access wised displays, down to the picture frames on nightstand, to inspire customers and get them to spend more.
Besides, along its designed path shopping, one touch after another seduces the shopper, from the paper measuring tapes and pencils to strategically placed bin with items like pink plastic watering cans, scented candles, and picture frames, these are things you never knew you needed but at less than $2 each you load up on them anyway. That’s why you spend more money than you set out at the beginning. Thirdly, IKEA promotes by sending catalogues. It is produced different editors in different language for 28 countries; over 100 millions catalogues were circulated – more than the Bible.
It may increase sales volume by promotion. IKEA provide food services in the stores. The restaurants usually locate at the centre. It provides shoppers a breather and encourages them to keep going and spend more money. It may increase sales volume by provide more services. Once a big sales volume created, IKEA has more space in making an affordable price for the customers or making discount without affecting its income too much. Besides, the firm may have a large bargaining power to the suppliers.
It may have a longer account payable period or a quicker inventory supply at lower prices. IKEA has effectively used the cost leadership strategy. It allows firms to earn above-average turns. The reasons of the strategy difficult for competitors imitate are: To a certain extend, IKEA acts a first mover in the furniture market. It has its own group designers. They design new style of furniture each year. As Ikea’s vision is “good design and low price”. Also IKEA has a team of buyers who are responsible to find the appropriate materials for the products at the lowest cost.
This material searching also helps ikea to be the first mover over the market. A first mover is a firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position. The first-mover concept has been influenced by the work of the famous economist Joseph Schumpeter, who argued that firms achieve competitive advantage by taking innovative actions. In general, first movers “allocate funds for product innovation and development, aggressive advertising, and advanced research and development. The benefits of being a successful first mover can be substantial. Especially in fast-cycle markets, where changes occur rapidly and where it is virtually impossible to sustain a competitive advantage for any length of time, “a first mover may experience five to ten times the valuation and revenue of a second mover. This evidence suggests that although first-mover benefits are never absolute, they are often critical to a firm’s success in industries experiencing rapid technological developments and relatively short product life cycles.
In addition to earning above-average returns until its competitors respond to its successful competitive action, the first mover can gain (1) the loyalty of customers who may become committed to the goods or services of the firm that first made them available, and (2) market share that can be difficult for competitors to take during future competitive rivalry. The general evidence that first movers have greater survival rates than later market entrants is perhaps the culmination of first-mover benefits.
The firm trying to predict its competitors’ competitive actions might conclude that they will take aggressive strategic actions to gain first movers’ benefits. However, even though a firm’s competitors might be motivated to be first movers, they may lack the ability to do so. First movers tend to be aggressive and willing to experiment with innovation and take higher, yet reasonable, levels of risk. To be a first mover, the firm must have readily available the resources to significantly invest in R&D as well as to rapidly and successfully produce and market a stream of innovative products.
Organizational slack makes it possible for firms to have the ability (as measured by available resources) to be first movers. Slack is the buffer or cushion provided by actual or obtainable resources that aren’t currently in use and are in excess of the minimum resources needed to produce a given level of organizational output. As a liquid resource, slack can quickly be allocated to support competitive actions, such as R&D investments and aggressive marketing campaigns that lead to first-mover advantages.
This relationship between slack and the ability to be a first mover allows the firm to predict that a competitor who is a first mover likely has available slack and will probably take aggressive competitive actions to continuously introduce innovative products. Furthermore, the firm can predict that as a first mover, a competitor will try to rapidly gain market share and customer loyalty in order to earn above-average returns until its competitors are able to effectively respond to its first move.
The strongest barrier for the competitor to imitate is the drain organization structure of IKEA. It is simple that the bigger company, the bigger bargaining power to the suppliers and more resources to make a sale to the customers. Synergy inside the big company is also its advantage. IKEA as global furniture company, it has a large advantage in leading its marketplace. An organization’s size affects the likelihood it will take competitive actions as well as the types and timing of those actions.
In general, small firms are more likely than large companies to launch competitive actions and tend to do it more quickly. Smaller firms are thus perceived as nimble and flexible competitors who rely on speed and surprise to defend their competitive advantages or develop new ones while engaged in competitive rivalry, especially with large companies, to gain an advantageous market position. Small firms’ flexibility and nimbleness allow them to develop variety in their competitive actions; large firms tend to limit the types of competitive actions used.
Large firms, however, are likely to initiate more competitive actions along with more strategic actions during a given period. Thus, when studying its competitors in terms of organizational size, the firm should use a measurement such as total sales revenue or total number of employees. The competitive actions the firm likely will encounter from competitors larger than it is will be different from the competitive actions it will encounter from smaller competitors. The organizational size factor adds another layer of complexity.
When engaging in competitive rivalry, the firm often prefers a large number of unique competitive actions. Ideally, the organization has the amount of slack resources held by a large firm to launch a greater number of competitive actions and a small firm’s flexibility to launch a greater variety of competitive actions. Quality has many definitions, including well-established ones relating it to the production of goods or services with zero defects and seeing it as a never-ending cycle of continuous improvement.
From a strategic perspective, we consider quality to be an outcome of how the firm completes primary and support activities. Thus, quality exists when the firm’s goods or services meet or exceed customers’ expectations. Some evidence suggests that quality may be the most critical component in satisfying the firm’s customers. In the eyes of customers, quality is about doing the right things relative to performance measures that are important to them. Customers may be interested in measuring the quality of a firm’s goods and services against a broad range of dimensions.
In my point of view, Ikea’s unique quality is its shop design. The big showroom with the combination of different kind of furniture just like a real new house, many different kinds of design houses group together, for customers visit and imitate for their own house. It is not only shopping, but also travelling. The competitive risks of cost leadership strategy: The cost leadership strategy is not risk free. One risk is that the processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors’ innovations.
These innovations may allow rivals to produce at costs lower than those of the original cost leader, or to provide additional differentiated features without increasing the product price to customers. A second risk is that too much focus by the cost leader on cost reductions may occur at expense of trying to understand customers’ needs or perception of “competitive level of differentiation. ” One design hard to fulfill different tastes and requirement for more customized furniture. Different countries have different culture and taste towards the furniture, for examples, Chinese style, Japanese style, HK.
People in those countries may have their own favorite furniture style, not everyone likes Ikea’s deign. They may only like their own country style furniture. Therefore, Ikea’s a set of design may not fit all markets. They may have some special need customers. IKEA was difficult to transfer its culture to U. S. The stores weren’t big enough to offer the full IKEA experience, and many were poor locations. Prices were too high. Beds were measured in centimeters, not king, queen, and twin. Sofas weren’t deep enough, curtains were too short, and the kitchens didn’t fit U.
S. – size appliances. American customers were buying vases to drink because the glasses were too small. Ikea’s low price products and partial board furniture not fit Japanese taste. The Japanese wanted high quality and great materials, not low price and particle board. As there was a earthquake happened in Japan before. It may happen in the future, the particle-board made furniture is not strong enough. They may manufacture high class furniture by employing good designer and use high class materials. The cost leadership strategy is not risk free.
Accounting to the risks describe above, I think the IKEA’s managers should make some change base on the strategy in order to guard against the risks. To avoid obsolete by the market, IKEA should keep doing marketing research for every year or every season. Marketing research let the IKEA get the update marketing information. That’s why marketing research is very important. If you want to be a leader in your market, maybe not just cost leader, it depends on how much you know about the market, a in time marketing research is necessary.
Because these customer expectation, a number of firms engage in primary and support activities that allow them to simultaneously pursue low cost and differentiation. Firm’s with this type of activity map use the integrated cost leadership/ differentiation strategy. The objective of using this strategy is to efficiently produce products with differentiated attributes. Efficient production is source of maintaining low costs while differentiation is the source of unique value. Firms that successfully use integrated cost leadership/differentiation strategy usually adapt quickly to new technologies and rapid changes in their external environments.
Simultaneously concentrating two sources of competitive advantages (cost and differentiation) increases the number of primary and support activities in which the firm must become competent. Such firms often have strong networks with external parties that perform some of the primary and support activities. In return, having skills in a larger number of activities makes a firm more flexible.