Strategic Management by Example IKEA

Outline

  • Introduction
  • Key Success Factors
  • The Parading Mindset
  • The Paradigm Shift
  • The Paradigm Shift
  • Global Strategy
  • Porter’s Five Forces and Generic Strategy
  • Competitive advantage
  • Ethical Issues
  • Conclusion

Introduction

IKEA is a leading home products retailer selling its [products worldwide. In order to succeed on the global scale, giant retailer like IKEA needs effective marketing strategies and philosophies, unique corporate vision and outstanding product management. To succeed globally in the coming decade, there are two pathways a retailer needs to travel. First, an understanding of the consumer must be acquired to allow for greater segmentation and more refined target markets; second, improved methods of differentiation are necessary to combat competitors.

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Few retailers can boast of comprehending the consumer’s wants and conquering the competition. Those that can are part of an elite group that set a precedent for other retailers to follow. IKEA is one of those leaders. In less than forty years, IKEA has become a globally successful business, with stores on six continents and a very large customer following. Competitors constantly strive to imitate IKEA, but this company’s secret to success is not easily duplicated.

Key Success Factors

Approximately 40% of IKEA’s furniture and small items are self-served from the selling floor or adjacent warehouse. Remaining items are brought to the customer at the checkout counter. Virtually all IKEA merchandise falls into the knocked-down category and requires some customer assembly. However, only one tool is needed — a wrench, which is supplied with each purchase. Delivery services are available at a nominal fee.

Further, IKEA has a “no-nonsense” price guarantee in which all merchandise can be returned up to a full year after purchase (“IKEA in 2005”, 2005). A commitment to functional design has always been one of IKEA’s greatest strengths. Fifteen to twenty in-house designers, in addition to one hundred outside resources, all work closely together to achieve the right look for the store and its merchandise.

Imports from Scandinavia represent 45% of merchandise, Eastern Europe supplies 20%, and Western Europe 24%. Today, with all the technology available, it sometimes seems that nearly all business is done by computers, the Internet, e-mail, voice mail, fax, and telephone and the like. The truth is, nevertheless, that business is still done on a person-to-person basis. IKEA has built a reputation through loyal customers because those loyal customers have experienced the quality and value of the cars.

And they’ve experienced being treated right—before, during, and after their purchase (Kotler & Armstrong 54). So, naturally, those thrilled customers have no qualms about telling others. Most had directly referred one to three others, with many of those referred actually becoming new IKEA customers. And direct referrals don’t include strangers who may have overheard these loyal customers bragging about their IKEA (“IKEA in 2005”, 2005).

The Parading Mindset

The parading mindset is based on the customer centricity principle. Antecedent to any successful business, IKEA idolizes the customer. The retailer’s main target market is the price-sensitive, style-conscious consumer — most notably, young families just beginning a new home. Along with the idolatry comes an effort to completely understand the customer. In doing so, IKEA has attempted to create a wholesome family shopping orientation in all of their stores.

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IKEA knows that purchasing furniture is an arduous task and one that should not be made hastily. Because children often make this type of shopping difficult, IKEA made it easy. By providing an in-store child-care program, including a “ballroom, videos, toys, tunnels, and supervisory staff, parents are free to shop as long as they wish. Along with child-care facilities, each IKEA store is equipped with strollers, baby-care rooms, and a restaurant. In-store clowns and contests are common. Holiday promotions, such as Christmas tree giveaways, have been incorporated by IKEA for nearly fifteen years (Kotler & Armstrong 81).

IKEA will stop at nothing to cut costs, and does everything possible to make shopping an enjoyable experience, not a chore. The process of striving for quality is continuous. IKEA does it through a combination of efforts: using industry benchmarks, setting stringent quality goals, auditing, testing, training, and teamwork (“IKEA in 2005”, 2005).

The Paradigm Shift

IKEA acknowledges their competition as systems competition. Not only must they keep on top of such intratype rivals as mutlinational Habitat, and U.S.-owned Pier 1, Wal-Mart, and Stor, but they also feel they are in competition with restaurants and other types of entertainment, because their goal is to create the family-shopping atmosphere. IKEA has been improving upon their backwards vertical integration slowly over the past ten years.

Most notably, they have acquired a POS (Point of Sale) system that allows them to maintain a strong in-stock position. Currently, IKEA’s largest problem is shortages. The system is designed to order the merchandise from its nearest available distribution center. If it is not available at the local one, an international system is tapped. Further, most manufacturing companies are owned or contracted by IKEA (Kotler & Armstrong 88).

The marketing strategies and tools used by IKEA allow to say that it is success is based on unique mixture of strategies and brand position, customer relations and product differentiation. The difference at IKEA is a company that emphasizes a unique buying experience. IKEA empowers employees—people who enjoy their jobs and who strive to create enthusiastic customers. The difference is a unique partnership between all the people in the workforce, from assembly-line team members to engineers and retailers. The difference is an organizational structure that is represented by circles instead of the conventional hierarchy.

In an effort to change the whole image. IKEA determined that “retailers” or “retail facilities” presented a much more positive—and different—connotation.) IKEA uses a “market area approach, ” meaning that only one retailer occupies any given geographical area. The difference is in carefully designing IKEA’s retail facilities. The sparkling clean and attractive service department is right up there next to the showroom.

The waiting room for service customers is located right in the showroom. The difference is the ingenuity and high standards that go into designing and building the cars. The difference is an entire “IKEA experience” that results in enthusiastic, loyal customers. There is no single solution for creating customer loyalty, just as there is no single furniture that pleases everyone. It’s a combination of lots of little things that add up. The case of IKEA shows that all businesses are different, customers are different, and there is a world of options from which to choose (IKEA Home Page 2008).

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Global Strategy

On the one hand, global branding rests on what consumers have in common, information technology also enables firms to pay more attention to what makes consumers different from one another. Focusing on such variation serves as the basis for positioning a brand as being highly intimate with consumers. In order to support and sustain its strong global image, IKEA creates a system based on detecting patterns in the purchase histories of other customers who have bought some of the same books as the target customer (Carmichael and Drummond 33).

As a global company, IKEA tries exceed the expectations of customers rather than just meeting expectations is one difference between having loyal customers versus simply having satisfied customers. Continually exceed means it has to be practiced every day. Team members can also be rewarded with an above-average salary, based on other elements like production, quality, and financial performance of the company. The goals are negotiated each year. They are targeted at meeting IKEA’s overall goals, not to put groups or divisions in competition with each other. So, everyone does indeed have responsibility, accountability, and authority, which contribute to the company excelling (“IKEA in 2005”, 2005).

Porter’s Five Forces and Generic Strategy

IKEA position itself as premium global brand. Just as one advertisement is not enough to move a person to buy, a single method used to create interest is not enough. IKEA doesn’t only rely on media advertisements or exposure. In fact, IKEA strongly believes that selling cars is a word-of-mouth business. A customer’s decision to buy a particular make of each item is shaped more by word-of-mouth opinions and referrals from family, friends, and coworkers than by advertising.

The IKEA customers who told me that they were initially attracted to IKEA because of commercials or printed advertisements didn’t cite those as the sole attractions. If customers even mentioned ads, 99 percent of the time it was in conjunction with other reasons—most commonly reputation or personal referrals. Starting with a quality product sometimes means reinventing the technology and engineering better parts. For example, IKEA was the only furniture manufacturer to use an environmentally friendly method of production (Hollensen 98).

The uniqueness of IKEA’s strategies is that it relies on promotions such as word-of mouth and blogs. “When it comes to promotion, IKEA laid a strong emphasis on non-traditional media” (“IKEA in 2005” 2005, p. 7). From the beginning, IKEA’s advertising philosophy has been to take the high road, to be different from typical advertising. They’re focused on people, both customers and team members, from the plant to the retail facilities. They indirectly talk about aspects of personal values and quality. Another thing that makes IKEA ‘s advertising unique is that a consistent message appears at local, regional, and national levels.

The company’s “market area approach” (selecting only one retailer for a given geographical area) keeps retailers from competing directly with one another. This means harmony in advertising on the different levels. Retailers do have standard guidelines to follow for their local advertising, which is generally in newspaper and on the radio, although some larger retailers also do TV advertising. Retailers also participate on marketing councils that approve creative direction for regional work. And while many companies have different ad agencies at regional and national levels, IKEA has stuck with only few partnerssince the beginning (Hollensen, 88).

Competitive advantage

Competitive advantage helps IKEA drive sales consultants’ behavior toward filling customer needs, rather than to driving up the price to make a higher commission. IKEA retailers are independent business owners, so IKEA can’t tell them how to pay salespeople. Instead, IKEA might suggest compensation packages and share best practices or ideas that work among retailers. Some retailers pay their sales consultants a higher fee per item after the team meets a set goal for sales. Some pay a salary only. Others combine both methods to pay on some type of a risk/reward program, and they may utilize survey results as part of the equation.

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A part of IKEA ‘s allocation system—used to determine the number of cars that go to each retail facility—is driven by how well customers are treated. Retailers are continually evaluated against standard scores. Scores below an acceptable range signal problems. Likewise, there is incentive to earn more cars with high scores (Carmichael and Drummond 33).

For IKEA, goal setting and performance measurement is a big part of continuous improvement. Every team sets standards and measures performance, and tracks its own performance through charts and graphs and boards that seem to be posted everywhere. For instance, a large board in the Customer Assistance Center indicates monthly and year-to-date measurements against “key success factors” like training, correspondence, phone calls, and case quality. Each factor is assigned a goal in terms of a percentage or number that can be measured. Responsibility, accountability, and authority also apply to employers in another way.

A IKEA manager offered his insight in this area (Perreault et al 65). The job is to provide a fertile environment for those seeds to grow. People generally have the seeds, but most companies don’t provide a fertile environmental for those seeds to grow (Carmichael and Drummond 51).

Ethical Issues

In IKEA, ethical problems arise when a man’s assignment forces him to emphasize a single job objective–say, maintaining the profit margin on a particular product. But suppose that in order to meet this objective his only alternative is to sacrifice quality. Choices of this kind must be forced upward in the corporation; for–as one assumes increased obligations toward employees and stockholders-profit itself represents an ethical standard. IKEA adopts social corporate responsibility policies in order to meet ethical and moral questions and respond effectively to changing demands and laws. Thus, the main dilemma is how to respond to consumer’s social demands and expectations and meet social responsibility in marketing (Frederick 54).

For IKEA, consumer citizens are pressuring business to achieve higher levels of social and ethical responsibility. Why should corporations, and especially marketers, respond to these new demands? Part of the answer lies in business concern with the “threat” of more governmental regulation. But part of the reason why business is moving to higher levels of social performance is to be found in consideration of the ethics of the situation.

Socially responsible behavior on the part of the firm can be justified by standards of rightness as well as of economics and the law. It may be sound business practice, as well as morally right, for a marketer to attempt to meet socially responsible performance standards.

The pressures imply the development of rules and standards by which business actions may be judged as “right” or “wrong”. In other words, ethical decisions under free enterprise are “moral decisions”, impelled by social sanctions, but modified by economics and environmental requirements (Velasquez 45). The growing professionalism in marketing is also stimulating the development and acceptance of pervasive “socially conscious” standards of ethics. Some insights into the changing social and ethical responsibilities of marketing are explored (IKEA Home Page 2008).

IKEA is often criticized for its unfriendly environmental policies and manufacturing processes which ruin natural environment and contribute to global warming. In IKEA, expenditure of time and resources on such issues is still regarded by some managers as wasteful or as time spent on peripheral issues. However, allocating resources to such issues is no longer a matter of option (Carmichael and Drummond 91).

These questions are not on the periphery of corporate planning, but an inescapable part of corporate planning and concern. The partial answers existing in accounting-economics terms do not satisfy growing concern with the corporation as a means to a social end–improving the quality of life. The quality of life issue is the major problem confronting business now. Meeting the issue will require management commitment and time, will be costly, and frustrating, but necessary.

Corporate presidents can expect to spend more time on the quality of life issues–on consumer/environmental and social concerns–than their predecessors. Management’s new task is to balance traditional profit and rate of returns on investment criteria with new definitions of social costs, social purpose, and social conscience (Kotler and Lee 87).

Public policy sees social progress as a goal to be achieved in itself and not necessarily the same as economic progress (Kotler & Lee 23). With the new parity between social progress and economic progress, social progress is seen as a goal to be deliberately sought–by business and other social groups (IKEA Home Page 2008). Here is where national goals and governmental programs can be useful as indicators of major areas of social concern.

IKEA’s international goals have business relevance as citizens move toward a social industrial complex. In a social industrial society national goals are increasingly relevant to business policy. Specialists concerned with social indicators are now developing tools and measures to appraise progress towards such goals. Social indicators are tools to be used to measure progress in quality of life areas. They are statistics, statistical series, and all other forms of evidence that enable us to assess where we stand and are going with respect to our values and goals, and to evaluate specific programs and determine their impact.

A social indicator is a describable trait/characteristic/attitude which either is applicable to a substantial segment of the population or has shown evidence of recent change in magnitude or intensity (Trachtenberg 32).

Conclusion

IKEA productivity gains are likely to result from utilization of technology such as electronic point of sale to improve customer service and control wage cost. In order to proceed, IKEA should also operate a centralized distribution system consisting of eight depots. Technological advances on the order of multi-temperate distribution depots and vehicles have helped increase productivity by facilitating frequent deliveries of varied products, assuring freshness and availability.

The proposed strategy will help IKEA to attract more customers and maintain a strong brand image on the local market. The starting point for socio-industrial progress analysis is not to be found in corporate traditions or corporate history or even industrial history.

The starting point is to relate social progress of the corporation to national goals and to the social indicators being developed to evaluate the attainment of these goals. This approach sounds like socialism to some. It is not. Social progress was once considered to be a national by-product of economic progress. Society believed that social progress was achieved through continued economic growth and progress. The accumulation of material wealth and affluence is no longer automatically equated with social progress by a growing number of influential Americans.

Works Cited

Carmichael S., Drummond J. Good business: A guide to corporate responsibility and business ethics. Hutchinson, London, 1989.

Frederick, R. (ed.) A companion to business Ethics. Blackwell Publishers, 2002. IKEA Home Page.

Kotler, Ph., Armstrong, G. Principles of Marketing. Prentice Hall; 11th edition, 2005.

Kotler, Ph, Lee, N. Corporate Social Responsibility. John Wiley & Sons, 2004.

Hollensen, S. Global Marketing: A Decision-Oriented Approach. Financial Times/ Prentice Hall; 4 edition, 2007.

IKEA in 2005, Evaluation of the Global Marketing Strategy. Business Week. pp. 2-15.

Perreault, W.D., Cannon, J.P., McCarthy, E.J. Marketing: Principles and Perspectives. McGraw-Hill/Irwin; 4 edition, 2003.

Trachtenberg J. IKEA Furniture Chain Pleases with Its Prices, Not with Its Services. Wall Street Journal, 1991.

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