IKEA is all about Diversification

Corporate diversification strategies can be categorized into three types: limited diversification strategies, related diversification strategies, and unrelated diversification strategies.

Limited diversification is when a firm stays within one industry and market and most or all of its business activity is focused within a single business or dominant business. Ikea’s main business is home furnishings and it has largely stayed within that industry. Ikea continually encourages diversification through the IKEA Concept. Ikea also has food items that people are very fond of. While Ikea is not in the food industry, they realized that when people visit the massive IKEA stores and spend hours browsing and shopping, they get hungry. So IKEA started offering food for purchase and a spot in the middle of the store where people can order fresh meals. Customer also can purchase a variety of packaged food items.

IKEA also teamed up with DreamWorks back in late 2015 to introduce a series of animations on youtube to introduce their new collection, LATTJO, in a playful 2D animation.

 

IKEA and Vertical Integration

Chapter 10 talks about the concept of vertical integration in order to gain competitive advantage. Through corporate business strategies, a firm’s vertical integration choices define which business functions it will be in and which business functions it will not be in. The number of stages in a product’s or service’s value chain in which a particular firm engages defines that firm’s level of vertical integration. The greater this number, the more vertically integrated a firm is; the smaller this number, the less vertically integrated a firm is. Vertical integration is used as a means of cost advantage however, under times of uncertainty firms should be careful when deciding to vertically integrate to increase competitive advantage.

IKEA has been implementing their vertical strategy over the past several decades and have been successful in doing so, making them one of the top firms in the world in their industry. With the increasing awareness, implications, and seriousness of climate change, more and more companies are stepping up their efforts to be more environmentally friendly and sustainable. IKEA’s latest move to be more conscious of this was to invest in a plastics recycling plant. One of IKEA’s goal is to make all of its plastic products with 100% recycled plastic and this investment takes IKEA closer to that goal and is also an example of IKEA implementing their vertical integration strategy.

IKEA’s cooperation with Competitors

Chapter 9 talk about collusion, explicit and tacit. While explicit collusion is illegal in many developed countries, IKEA has managed to avoid explicit collusion with competitors by taking steps that have ‘signaled’ cooperation with competitors.

By essentially branding themselves as a DIY furniture retailer and investing heavily in the wooden self-assembly segment of the furniture market, IKEA has signaled to traditional furniture makers that it has no intention of entering that market and at the same time discouraging traditional furniture makers from entering IKEA’s segment.

How IKEA Handled the risk of volatile cotton prices?

In searching the web about the risks and uncertainty IKEA has dealt with, I found an interesting report by a risk management company Strategy& (formerly Booz and Company) about hoe IKEA dealt with volatile cotton prices.

IKEA was concerned about the volatility of cotton prices on the open market as well as the growing “green conscience” among consumers. By working with the World Wildlife Fund, it firmed up relationships with its farmers by helping them grow cotton in a more sustainable way. At the same time, the company worked to reduce its dependence on cotton as a whole. It developed an alternative fiber, Lyocell, a form of natural rayon. Ikea was also smart enough to limit its efforts to activities within its competence. The resulting flexibility in production means that Ikea can handle volatility in prices — while its competitors see their margins or sales suffer. With a two-base material approach and by partnering with the WWF, Ikea addressed financial as well as ecological concerns effectively.

Click to access Strategyand_Managing-multiple-uncertainties.pdf

 

IKEA’s Cost Leadership and Differentiation (Chapters 6 and 7)

IKEA has most definitely set itself apart in the furniture industry by keeping their prices low and by achieving sustained cost leadership. They have been able to do this implementing a low cost strategies (designing low cost, modular, self assembly furniture and long term supplier relationship) and by implementing a target marketing strategy (focusing on the young family that is conscious of how much they spend).

IKEA has also implemented a differentiation strategy by setting itself completely apart from the average furniture store. The whole experience of IKEA is unique from the minute customers step in the store. From the magnitude of the stores, walking through out the entire store in a maze taking in all the sights and smells (thanks to the in store restaurant) to the actual experience of picking the furniture from the bins, to checking out and assembling the furniture at home, IKEA offers customers something no other furniture store does. This concept is so unique to IKEA. Customers blog proudly about their IKEA furniture and how they have customized it.

VRIO Analysis of IKEA

A VRIO Framework is a tool evaluate a firms strengths and weaknesses. The framework is structured in a series of four questions to be asked about the business activities of a firm. These four questions are about value, rarity, imitability, and organization. These questions are summarized in the image below.

 

The table below is an application of VRIO as it relate to IKEA.

 

IKEA And The Five Forces

Chapter 3 talks about Porter’s five forces and discusses these forces in different industry settings. Below is a quick overview of these five forces as it relates to IKEA.

The Threat of Entry

Although there are many furniture companies out there offering so many choices, it is clear that IKEA stands out because of how unique it is and the low prices it offers. For new entrants to compete at that level, the cost of entry would be high therefore affording IKEA a cost advantage over them since they have already achieved production economies of scale. The threat of entry for IKEA competitors is low to medium.

The Threat of Rivalry

There is intense rivalry in the furniture industry. At IKEA’s level, there are other big firms constantly competing with IKEA. Firms like Walmart, Amazon, Target, Wayfair are all competing with IKEA. The threat of Rivalry for Ikea is quite high.

The Threat of Substitutes

Furniture can not really be substituted. People will always need furniture and IKEA being an innovator in modern furniture is actually at the fore front of this race constantly offering new designs and looks. The threat of substitutes is very low.

The Threat of Powerful Suppliers

Since IKEA is a high volume retailer and keeps 10,000+ products in its stores all the while keeping their prices low, they have to make sure that they are well stocked. IKEA manages this by having long term contracts with their suppliers which allows IKEA to get low prices from their suppliers. IKEA’s material suppliers are most likely not looking to integrate vertically in the furniture industry and since IKEA deals with thousands of suppliers, the threat of powerful suppliers is quite low for IKEA.

The Threat of Powerful Buyers

IKEA’s customers tend to have quite a lot of power. IKEA’s main goal and focus is to be able to provide low prices for their customers. With the number of firms in the industry with the same exact goal and more and more savvy customers, the threat of powerful buyers for IKEA can be quite high.

Helping Customers Visualize

IKEA has developed an app that allows customer to see what a furniture piece from IKEA would look like in their home!

http://on.wsj.com/2sC6IjE

IKEA Readies Augmented Reality App for Shoppers, Using Apple Tech – CIO Journal

The ‘Augment Reality’ process by which IKEA does this has been around and implemented in factory floors and IKEA is using it to make furniture shopping more fun and easy for customers. The innovation also offers IKEA competitive advantages since only one other firm, Wayfair (an online furniture retailer), is using this technology to help customers visualize furniture in their living spaces. The firm the develops the better and more user friendly first will certainly enjoy competitor advantages.

IKEA’s Economic Value (Chapter 2)

IKEA is known for it’s low priced furniture. But what is amazing to me is how IKEA manages to reduce their prices further on products. IKEA frequently features products in their catalogues and promotional emails with a “New Lower Price” tag and compares the price with the previous year’s price.

How does IKEA manage to continue to lower prices and still create economic value? One of IKEA’s core strategy is to be a low price retailer in the industry. In addition to be being competitively low priced, IKEA offers a wide range of well designed functional products that cater to various lifestyles for people of all ages and stages of life.

Below is IKEA’s income statement for 2016 and 2015 showing an increase in the revenues and net income year over year.

The fact that IKEA is growing and continuing to open new stores worldwide, and the fact that shoppers are excited about IKEA tells me that IKEA is doing a great job in creating great economic value for its customers.

IKEA

Hello and welcome to my blog! I will be documenting my weekly readings from the assigned text of my MBA Global strategic management class, and will be connecting the concepts to IKEA.