Combines Michael Porters Generic Competitive Strategies Marketing Essay

IKEA achieves competitive advantage under the cost leadership strategy by producing at the lowest possible cost. Wherever possible, under this strategy IKEA will reduce costs at every stage of the value chain and either charge lower prices or charge competitive prices resulting in relatively high profit margins.

IKEA cuts costs constantly and is always asking its makers to seek the least costly suppliers. IKEA also, seeks to offer prices much cheaper and target very wider audience. Therefore, to be able to achieve required margins.

Differentiation Strategy:

In the differentiation strategy, IKEA look for competitive advantage by offering products that are perceived to be different and better than competitors’ products by customers due to its unique characteristics, e.g. quality of the products.

Focus Strategy:

The focus strategy has two variants i.e. Cost Focus and Differentiation Focus. This is where IKEA focuses on a narrow segment of the market. This is where IKEA focuses on a narrow segment of the market and applies a Differentiation strategy.

IKEA’s Hybrid Strategy:

IKEA uses a combination of these strategies in achieving its vision which is

Its business idea

The part of the cost leadership strategy that IKEA adopts is that part aimed at producing at the lowest possible cost, so they can charge as low a price as possible to maintain their competitive advantage.

For the differentiation strategy, IKEA focuses on quality designs. However, the IKEA does not do this, so they could charge a premium price. They do it to promote their brand. The differentiation focus strategy is also used in some segments of the market. For example, they produce customized plastic mats to commemorate the year of the rooster in China.

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Functional level strategy defines different functions within the business unit, such as sales, accounting or production, which contribute towards the success of the business level strategy. This contribution will differ from function to function, but the overall aim will be to support the overall strategy. If the strategy is to be a cost leader, then production will be integral in achieving cost advantages. Therefore, Functional strategy refers to the strategy of individual departments linked to achievement of business goals. For example, a Marketing department of a firm may have promotional or pricing strategy, while a finance department will have a credit control policy.

Similarly, IKEA has functional strategies aimed at achieving its vision and business ideas. For example, under the Marketing function, IKEA increased its distribution channels by opening 19 new retail outlets in 2006. This is to support its business growth strategy. In the US, by the end of 2010 the number of IKEA outlets is expected to be 50, in comparison to 25 in 2006.

To support its hybrid strategy, IKEA is determined to ensure that

This policy applies to the research and development and well as the purchasing functions of the company.

The customer perception of IKEA is that the company offers quality products at affordable prices. Going shopping at IKEA’s is treated more like an event to be looked forward to by the customers, rather than a task which needs to be completed. The following quotes demonstrate how IKEA is seen by many people:

“If it wasn’t for IKEA, most people would have no access to affordable contemporary design”.

“IKEA makes me free to become what I want to be”.

“Half my house is from IKEA – and the nearest store is six hours away”.

“Every time, it’s trendy for less money”.

IKEA is addressing the needs of most customers. Customers buying behaviour usually demonstrate price sensitivity, with the average shopper constantly looking for bargains or discounts. On the other hand, these same customers would look for a higher quality product over what they perceive a lower quality product where both cost the same almost always.

IKEA is perceived as providing to the needs of the modern and cool as well as those with aspirations for the finer things in life. There appears to be a strong bond as parents are generally comfortable leaving their children in the shop’s playroom while they go about shopping, which create a trust.

As it mentioned above, the IKEA strategy is a hybrid strategy, which incorporates elements of cost leadership, differentiation and differentiation focus strategies.

IKEA brand is very strong, most competitors do not possess the strengths that IKEA does and, which are important in achieving a hybrid strategy.

Consequently, IKEA is able to attract good quality of customers and even better is able to duplicate its quality and price ranges globally. It also has economies of scale and a strong research and development team constantly looking at innovative ways to meet its business objectives. Therefore, for the strategy to be imitated, the distinctive competencies of competitors must be strong, they must have the resource to deal with any potential price wars, and they must also have the capabilities to react to changing external environment.

The main threats of IKEA come from its external environment. IKEA’s threats can be measured with PESTEL, Porter’s Five Forces and SWOT analysis.

Political, relates to the influence of government legislation and regulations on a business.

Economic, how economic factors like interest rates, inflation and exchange rates affect businesses

Social, refers to social trends and includes things like change in consumer taste and fashion and demographical changes

Technological, level of automation and the rate of technological advancement and the impact on businesses

Environmental, relates to how businesses are impacted by environmental factors such as global climate change

Legal, health and safety laws

Porter’s five forces, is a tool used to analyse how competitive pressure impact on businesses, i.e. the extent of competitive rivalry, barriers to entry, buyer power, supplier power and the availability of substitutes.

SWOT, summarises the key issues from the business environment and the strategy capability of an organisation that most likely to impact on the strategy development.

In IKEA’s case, the main potential threats come from three of these factors, i.e. Economic, Social and Competition.

In terms of economic factors, the global recession has significantly reduced business growth as customers have less disposable income and are consequently spending less. With limited income, consumers prefer to spend only on necessities mainly, and saving. Many governments affected by the recession have been putting stimulus packages in place partly to encourage consumer spending.

As far as the social threat is concerned, due to a collapse of the housing and mortgage market which started the downward spiral into global recession, the amount of first time buyers, who are mainly IKEA customers, has considerably reduced.

From a competitive point of view, there is the threat the extent of competitive rivalry will put at risk IKEA’s strategy. For instance, it has to compete with major competitors Target Corporation and Kmart in US, Fly in France and Nitori Co. in Japan. Furthermore, increasingly buyer power will increase as competition increases demanding review of price or even design. This could potentially hurt the IKEA brand.

IKEA must constantly analyse its internal and external environment to determine what the business is at for any given point in time and to identify what needs to be done going forward. For the internal analysis, IKEA must analyse its resources and capabilities with a view of making improvements as appropriate. They must always seek to ensure that their resources and capabilities are superior to those of their competitors to reduce the threat of imitation, which would eliminate their competitive advantage. In terms of the resources, they could look at the following with a view of identifying strengths and weaknesses:

Finance – what is the state of the business in terms of profit and loss, cash flow and the balance sheet position?

Marketing – they must continue to revaluate their marketing strategy. for example:

Are the products priced adequately?

Is the roll out of new stores meeting growth targets?

Promotion – how successful have the gift initiatives activities been?

Product – how environmentally friendly and are they to meet with any challenges?

Operations – IKEA could review the strengths and weaknesses of their machines, method of operations and materials used to produce furniture.

Management – as the founder is an old man now, this is a significant area that needs looking at. Is the management in place currently skilled enough to achieve objectives?

Staff – assess their motivation, their training needs and contribution to the success of the company, for example.

An external audit should then be performed by analysing PESTEL & SWOT is to determine the opportunities and threats facing IKEA from the external environment. Subsequently, IKEA should then be in a position to determine how it can use its key strengths, minimize weaknesses, take advantage of opportunities and triumph over threats to achieve a competitive advantage through its hybrid strategy.

The greatest challenges facing IKEA can be outlined below:

Entry into new markets and segments in US and Japan

Environmental challenges

Culture and Values

As we know, IKEA over the last few years expanding in Japan and US markets. These are two countries where it has recorded failure in the past. For instance, in the US, according to them they did not listen to the needs of the customers and employed a hybrid strategy. With time, they realized that the Americans needed larger sized products which they subsequently corrected. In Japan, they miscalculated thinking the Japanese were interested in low price products when their interest was in quality. It would be interesting to see how they fare in the next 10 years for these reasons, especially with the high level of competition from Target Corp. and Nitori Co.

IKEA is committed to meet environmental challenges.

Another big challenge is internal in nature. The owner and founder Ingvar Kamprad instilled a lot of the values that is currently being pursued today. A lot of the top brass are committed to his philosophies. With the passage of time however, the culture of IKEA which has delivered such great success will decrease. In the next 10 years, it is important that whoever is driving the business operates in line with its core values, as the brand is one of its discriminating strengths. This brand was built on the back of the core values and business idea. Any threat to that may mean a threat to the entire business as a whole.