Achieving Competitive Advantage: IKEA Case Study

Strategic business units in IKEA

Each country is a strategic business unit in IKEA as they are all a part of the organisation but for which there is a distinct external market for goods or services and distinct competitors that is different from another SBU. Also, the financial performance of each country can be clearly evaluated.

From the case, it can be noted that each SBU faced the same class of customer – the class, but customer behaviors in each SBU are different. For instance the American had a different set f measurement system. Therefore, each SBU needed to tailor its product and service and have particular business strategies in order to satisfy distinct needs in each market segment.

Porter (1980) asserts there are basic businesses strategies – differentiation, cost leadership, and focus – and a company performs best by choosing one strategy on which to concentrate.

However, many researchers feel a combination of these strategies (hybrid strategy) may offer a company the best chance to achieve a competitive advantage (Cross, 1999; Karnani, 1984; Miller and Friesen, 1986;; Miller, 1992;).

There is much debate as to whether or not a company can have a differentiation and low-cost leadership strategy at the same time (Helms et al., 1997). Porter felt differentiation and cost-leadership were mutually exclusive (Helms et al., 1997). However, research shows this is not the case (Kumar et al. 1997).

This case study is an example of how IKEA employed a hybrid strategy and successfully maximize its competitive advantages. Generic strategies can be successfully linked to IKEA performance through the use of key strategic practice. IKEA positioned itself as both a cost leader as well as differentiator. It distinguish itself from its competitor by providing a better shopping experience, a new concept of lifestyle, a wider range of product, a simultaneous service which involved customer’s participation. As customer have to delivery and assemble the flat packed furniture by themselves, this unique delivery system also partly contributed to IKEAS low cost strategy.

Differentiation

Differentiation is one of Porter’s key business strategies. When using this strategy, a company focuses its efforts on providing a unique product or service (Hyatt, 2001; Porter, 1980).

IKEA managed to distinguish itself from other furniture merchants by successfully making its customers around the world believe that instead of selling furniture, it was selling a lifestyle by offering a much wider range of home products. It has been commented by Retail Consultant Bryan Roberts that there were other retailers offer affordable furniture, but there is no one else who “offer the whole concept in the big shed”. In fact, there were 7000 products from kitchen cabinets to candlestick. Thus, the focused diversified production choice is a decisive advantage.

And:

Hybrid Strategy

With a Hybrid strategy, IKEA was simultaneously achieving differentiation and a price lower than competitors which enables it to achieve greater volumes. It counterbalances the risk of just using one generic competitive strategy, such as the loyalty problems caused y cost leadership strategies (Cross, 1999).

In fact, it has been found out that when an organization follows a hybrid strategy, they exhibit higher performance than those following either cost leadership or differentiation alone (Kumar et al. 1997). Similarly in their research on the UK wine industry, (Richardson and Dennis, 2003) found the hybrid focused differentiation approach was best for niche segments. (Spanos et al., 2004) studied the Greek manufacturing industry and found hybrid strategies were preferable to pure strategies.

and how they can be applied to the case. You don’t do so with every argument however, sometimes you simply offer opinions such as:

These product differentiations fulfilled customer need and involves tailoring the product or service to the customer. This allows IKEA to capture market share. The differentiation strategy is effectively implemented as IKEA provides unique and superior value to the customer through product quality. Also, the message of differentiation reached its clients (McCracken, 2002). It s vital to the effectiveness of the strategy as the customer’s perceptions of the company are important (Berthoff, 2002).

These senses of differentiation created strong brand loyalty among IKEA customers and lower their price sensitivity. This helps to insulate IKEA from competitive rivalry. Second, the lack of perceived acceptable alternatives with comparable combinations of features and costs increases the IKEA’s power over customers. Third, with the existing customer loyalty, potential competitors need to overcome the attractive uniqueness of IKEA product so it creates substantial entry barriers.

While some researchers suggested that when using differentiation, firms must be prepared to add a premium to the cost (Hyatt, 2001), as customers perceive the product or service as unique, they are loyal to the company and willing to pay the higher price for its products (Cross, 1999), price therefore is not the main focus, IKEA went for a different approach. It employed a hybrid strategy which combined differentiation and low cost and focus strategy.

Which, whilst they cite references do not offer justification and support for the views that you are expressing. And in other places you merely summarise the theory without providing clear linkages to how this relates to the case – such as in saying:

Sustainable competitive advantage

Sustainable competitive advantage can be achieved through the following methods.

Achieving Low Prices

  • Operate with lower margins
  • Develop a unique cost structure
  • Create efficiency in Organizational capabilities
  • Focus on market segments with low expectations

Achieving Sustainable Differentiation

  • Create difficulties of imitation
  • Create a situation of imperfect mobility
  • Establish a lower cost position

Establishing Strategic Lock-In

  • Size or market dominance
  • First-mover dominance
  • Self-reinforcing commitment
  • Insistence on preservation of position

Paraphrasing or summarising the theory is not, on its own, proof that you know how to apply it in a practical situation such as the case study. Be careful of simply offering assertions and opinions – you need to cite evidence and draw in facts from the case, compare and contrast them to the models and frameworks from the course and then draw strategic conclusions from that process. When you actually try to apply the concepts explicitly such as in saying:

The CAGE Framework

The CAGE of Distance framework can be applied in this case study of IKEA in a large extends. The four dimension of distance namely cultural distance administrative and political distance, geographic distance and economic distance between the Sweden and its foreign markets indicated how different is the foreign market and what strategy should IKEA adapt accordingly (Ross, 1999).

It has been illustrated by the IKEA’s difficulties in reaching the California Hispanic market. Hispanic is geographically far away from Sweden, socially different in term of having larger family size and different color preference. Also there was economically different. Thus IKEA designers need to customize product and pricing strategy according to the particular market needs. The result is more seats were added to dining tables and sofa. Showroom color was warmed to avoid the more subdued Scandinavian palette.

you are demonstrating a level of understanding and application of some of the marketing concepts in this response that is at least the sort of thing we are expecting from a postgraduate student at this point in your studies, and sometimes even better than expected. These demonstrate an understanding of the concepts that is appropriate and explicit. Whilst the way that the concepts have been described and applied is really sound, and I was pleased to see the use of a wide range of concepts – but remember that you need to use them to analyse (explain and interpret) rather than simply to observe and comment and throw in some course references as headings or citations – such as in saying:

Strategic position

Strategic capability

Internally, some strength of IKEA can be identified in the case. IKEA’s core competences lay on it low cost distribution system and innovation product design which ease manufacture and distribution which enable the organization to become cost leadership. Besides, with the company creative flair, strong capability in research and product engineering, IKEA can put its differentiation strategy into practised effectively.

Macro Environments

Externally, IKEA was benefited from the opportunities identified below.

Economically, the growing size of the world middle class especially in China, India and Russia implies that there will be an increasing need of IKEA’s product (contemporary household furniture with value of money). Also the growing wealth with the world’s population means middle class with higher purchasing power.

Socially, the fact that the new emerge middle class are more aware of their home design present an opportunity for IKEA to expand.

In conclusion, it e be seen that IKEA has successfully generated strategic choices that utilized its strength to take advantage of opportunities

The difference between analysis and commentary is the capacity to interpret and make explicit what the facts are telling you. Commentary on the other hand describes what you see and asserts (rather than proves or demonstrates) a set of conclusions. So, if you take the wide range of course concepts that you are obviously familiar with and compare and contrast a little more explicitly facts and evidence from the case itself, it will make your arguments flow much more directly, and more ‘reasoned’ conclusions emerge. From time to time, what you offer here is like an explanation of the theory and an assertion that ‘X is true at IKEA!’ without always providing specific evidence and analysis to substantiate the comments. Understanding how you get to conclusions from your analysis is as important as setting out what the conclusions are. However while it strikes me that your observations about could use some more ‘reasoning’ your other answers are sound and reflect a good understanding of strategy. Overall, this is well-structured and laid out piece of work and offers a clear indication of your emerging understanding of this subject and ability to apply it in practice – good work.

Bill Carlson

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