IKEA's Strategy Formation Process

Introduction:

Globally present organization usually have 2 stages in their approach to replicate internationally, i.e. firstly, to conduct an explorative search of which methods, processes should be followed during replication followed by an exploitative replication of the knowledge gained in the first phase. IKEA, however, has managed to successfully replicate its business globally by adding a third step to the method of expansion called “Flexible replication”. This strategy of flexible replication is IKEA’s method of categorizing factors necessary for replication hierarchically and allowing the lower level factors like marketing efforts, pricing etc. to alter based on what they learn about the market while keeping the replication of their higher level core factors like vision and fundamental values uniform across all the markets they are replicating into.  (Jonsson, 2011)

While key feature for IKEA’s success in their international expansion and solving their futuristic problems is the strategy of flexible replication, with the help of this essay we will be discussing this strategy that IKEA adopted which gave them a competitive advantage and desired market penetration in each of the markets.

Analysis:

We will be analyzing the corporate strategies of IKEA firstly by understanding their strategy formulation process and then analyzing their corporate decisions in a chronological order. We will also be then relating the main corporate strategy theories to the decisions that were made by IKEA to arrive on a suitable conclusion on why IKEA did what they did. Also, we will shed light on how the portfolio and Hub strategy in those regions coupled with a strong internal knowledge sharing system helped IKEA to create a strong regional data base to enter and succeed in similar markets.

Strategy formulation

We can explain the strategy formulation of IKEA in terms of the strategy process diagram as below (Armendáriz, 2020):

a)      Intended Strategy:

When the local market of Sweden was saturated the Leadership of IKEA entered into the nearby Norwegian market to sell their products. During this phase IKEA had no experience in moving their business international however the main aim of was to learn by entering regions. IKEA even tried to enter the conservative markets like Switzerland as well to gain knowledge and confidence of the market. Kamprad had the thought-process that if they were successful in this conservative market, they would be successful in any other market. This phase didn’t have a fixed replication format instead it was mainly like test stores. These trials were not based on concrete data instead were based on intuitions and learnings from the errors in the previous trials. (Jonsson, 2011)

b)      Unrealized strategy:

Here the Unrealized strategy phase can be related to the rigid Internationalization phase where IKEA leadership had strategized that they would expand by exploitative replication of their operations owing to the unstandardized format in replication and their failure in Japan region. This strategy was formulated to save cost from customizing in every market they enter and derive maximum benefits from economies of scale.

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While IKEA was growing at an unprecedented rate by following the rigid replication model, they faced a typical problem in one of the bigger developed markets that they tried to enter. Reluctance to adapt the product design as per the market requirement, in order to avoid conflict with the concept of offering a global range of products, led to a failure of IKEA to enter the US market in 1985. This unrealized strategy led to the need of a much more flexible strategy which could allow IKEA to offer products driven by a markets culture rather than rigidly sticking to a fixed range of products. (Jonsson, 2011)

c)       Emergent strategy:

From the failure in US it was realized that the rigid replication strategy would fail in markets which gave importance to a more localized range of products. Thus, the emergent strategy for IKEA i.e. “Flexible replication” rose out of the necessity for the center to learn from the Peripherals of the organization in order to create a range of products that are accepted in the local markets as well. Here IKEA replicated keeping the “Idea concept” Intact i.e. the vision, guiding principles and culture intact while allowing the “The concept in practice” like specifications of the products, cost, general instructions to store design to be more flexible. (Jonsson, 2011). Successful firms generally do not change their core strategy to a great extent as they move into a new market (Jedrzej George Frynas, 2015)

d)      Realized strategy:

While Flexible replication is described as the last phase in the “timeline of IKEA’s internationalization process” however it can be assumed that even this will not be the final stage for IKEA’s replication in the future. It is also one of the core values of IKEA to question the existing practices and derive newer much more efficient practice out of it. Due to the size of IKEA there is a high likelihood that they will face even more challenges in the future for which IKEA will emerge with unorthodox solutions which will change its core way of reaching to a solution. So, this strategy of “Constant evolution” can be assumed as IKEA’s realized strategy. (Jonsson, 2011)

Chronological corporate strategy analysis:

In the above table we have chronologically listed the Corporate strategies that IKEA decided to go forward with in order to understand those deeper. We have only included entry into significant markets as including all the markets would mask the other decisions and features. Taking an overall look at the type of advantage that IKEA has tried to gain from its strategies, we see, major concentration towards either the competitive advantage or long-term advantage. If we look at a combined advantage of these, we can say it is towards offering products at a low cost by optimizing the value derived from the resources used. Also, this resonates with IKEA’s core strategy in the earlier stages of their international expansion has been simple i.e. to sell standard, self-assembly furniture at a low cost. (Jedrzej George Frynas, 2015). IKEA takes pride in being a vendor that trades off service against effective prices and cost of the product always comes first while designing a new product. (Jonsson, 2011).

Transnational strategy:

The companies that perform well internationally are the ones that include regional strategies in addition to a global one as compared to the ones that only have a global strategy (Ghemawat, 2005). This is statement is seen to be true in case of IKEA, as it combines the benefits derived from using a globally established format with the benefits of regional modification. While at their first setback in Japan, IKEA stuck to the “rigid replication” strategy. Here the leadership standardized the IKEA concept and its business idea with respect to internationalization. However, later on with their failure in US they understood that while the upper hierarchies (Idea Concept) of their factors needed to be constant, they needed to be flexible at the lower hierarchies of their features. Thus, while IKEA started off with a Global strategy of following fixed standards to be used in their replication sooner, they realized that, the global strategy, while it can help them reduce costs during replication, it won’t help them expand with the desired results. Thus, they adopted the Transnational strategy with which helped them create localized experience to their customers while keeping their core values intact. The main enabler for the adoption of this transnational strategy in IKEA was the internal Knowledge-sharing. It can be credited to the efficient transfer of knowledge from the peripherals to the center and then the validation and standardization of that knowledge for the benefit of the entire organization. (Jonsson, 2011)

Hub and portfolio method:

For effective expansion in the International markets IKEA had followed the Hub and portfolio strategy. The portfolio strategy enabled IKEA’s fast growth Internationally while generating revenue and being able to absorb setbacks and failures in regions whereas the Hub strategy helped IKEA exploit the economies of scale and utilizing resources from the correct hubs to maximize profits. This strategy was strengthened by the presence of internal units which were accountable for knowledge assimilating and processing the knowledge gained in each of the hubs and distributing it in a uniform manner across the organization. A key instance to this can be seen in the joint project between Russia, China and Poland to cater to consumers with low purchasing capabilities. Another instance would be when Japan IKEA sought help from Germany IKEA with queries prior to market entry. Also, organizations that learn from their subsidiaries profit from the knowledge gained at the peripherals. Earlier in IKEA’s expansion stage we can see evidences of operations mostly in the form of portfolio’s when they expanded to the nearby markets by having a centralized headquarters while having the operations outside their home base. While down the line they started having hubs which would operate on their own regions catering to the nearby portfolio’s, this was for decentralizing the decision-making process and for quicker administration. Later in the failure in Japan they realized allowing the hubs to be performing on their own was not in line with the core idea of IKEA. This issue was fixed in the Flexible replication phase of IKEA where they kept the core values (Idea concept) constant and were given the liberty to change the lower factors (the concept in practice) basis the region or the market’s demand. (Jonsson, 2011)

Conclusion:

IKEA’s international strategy has stood the test of time developing itself based on the setback’s and failures they received. The key driver here was the strong core principle of knowledge sharing right from what is learnt in the peripherals to that knowledge becoming a standard across the organization. While these Knowledge sharing will lead to changes at the “concept in practice” level the “Idea concept” level will remain pretty much intact.

The future, will never be restricted to a fix set of products or instructions to IKEA but they will be evaluating and sizably trying to fit in new globalized products and ideas which they gain by the centrally sharing the knowledge accumulated at each of their hubs. Every year, in the “range week” at Sweden new product range for the upcoming year is introduced.

Thus, to conclude in the future we can easily say that due to the strong knowledge sharing within the organization and the core values that empower the employees to question existing solutions, we can see IKEA always developing and offering new products and services to the markets that they enter keeping the core value of delivering it at a low price intact.

References

• Armendáriz, F., 2020. International Business lecture. Dublin: Armendáriz Fabián.
• Ghemawat, 2005. Regional Strategies for Global Leadership. Harvard Business Review, 83(12), pp. 98-108.
• Jedrzej George Frynas, K. M., 2015. Global Strategic Management. Third ed. Oxford: Oxford University Press.
• Jonsson, A. &. F. N. J., 2011. International expansion through flexible replication: Learning from the internationalisation experience of IKEA. Journal of International Business Studies, Volume 42, pp. 1079-1102.