Generic Strategies and Business Model
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Generic Strategies and Business Model
A well-thought-out business strategy is key to company success. A business plan defines an organization’s objectives and identifies the actions needed to attain the planned goals. As the current market environment continues to change drastically, having a proper work strategy is necessary for ensuring that the company attains a competitive edge and success within an industry. The plan also allows a corporation to challenge its rivals and attain excellent performance. It connects the corporate entity’s resources and abilities with the market environment. Today’s market, whether domestic or global, has become highly competitive. Given such a trend, some sectors tend to have heavy competitive rivalry among the primary players of the industry. For an organization to attain higher profitability and outperform its rivals, it must clearly choose a practical and feasible business model. This report seeks to review the common generic business strategies and models, with a focus on how they impact IKEA”s organizational success.
Generic strategies
Many people view that in highly competitive sectors, an organization cannot survive unless it adopts and follows the generic strategies. According to Porter, every generic tactic offers a unique way of attaining a sustainable competitive advantage and organizational success. Thus, a company should decide between the available business strategies and select the most practical and feasible approach (Baroto, Bambang, & Abdullah, 2011). Failure to select an appropriate method will lead to the business being stuck in limbo due to the lack of a coherent scheme. Below is a review of the two common generic strategies, as illustrated in Figure 1.
Figure 1. Porter’s Generic Strategies
Cost Leadership
A cost leadership approach improves the value chain process and makes it effective to produce services and products with the least cost devoid of compromising the quality. The strategy identifies the company’s efforts to attain a competitive through low-cost leadership. As such, companies using this approach seek to adopt a cost leadership strategy through tough control of costs and efficiency in all business operations. When a company chooses to adopt a cost leadership approach, its focus is to create and offer the least possible price tag, attract customers, and boost sales. By engaging in critical activities of the value chain at low costs relative to rivals, a company attains organizational success of cost leadership (Baroto et al., 2011). Further, a cost-leadership approach aims to offer high volume, standards, and no-frill product or service at the most competitive cost to end-users. Such a method is applicable in nations with cheap labor and lower cost of production, such as China and third world nations.
A cost leadership strategy assumes a competitor-oriented approach and not a customer-oriented approach. With this approach, firms focus on the issue on the market supply side but not on the market demand side. Therefore, there is a high need for customer orientation. Because of this, businesses that seek to adopt a cost leadership approach should constantly benchmark against rivals and determine the relative costs and position. Porter proposes that an organization that adopts a cost leadership approach attains a low-cost position through increased attention to the aggressive establishment of efficient scale infrastructures, tight overhead and cost control, and forcefully pursuing reductions in cost, among others (Baroto et al., 2011). Firms that have adopted the cost leadership approach realize excellent competitiveness in delivery time, quality, cost reductions, and increased efficiency. Nevertheless, a company may encounter pitfalls for depending solely on a cost leadership approach, given that it focuses on controlling the cost. Nevertheless, it foregoes the other elements that can allow the company to interact with the consumer’s demands and needs in the current dynamic business setting. Another setback for this strategy is that it needs costly investment in equipment and technologies to produce low-cost quality products and services.
Differentiation
The differentiation strategy seeks to produce distinctive services or products with a focus on improved quality, simplicity, and better look. It’s a company’s capacity to be innovative and creative. The plan’s focus is to create better value for end-users by offering innovative products, good services, excellent quality, and brand image. With this approach, an organization creates a unique and sustainable market position industry-wide. However, the effectiveness of this strategy relies on how best the company balances product costs and benefits of consumers comparative to the offerings of rival businesses (Baroto et al., 2011). When a company adopts a differentiation approach, it seeks to not only create but also market distinct products for diverse consumer groups. It seeks to have excellent attainment of consumer needs using one or many production attributes that encourage consumer loyalty and satisfaction.
By pursuing a differentiation approach, a company develops a perception in the consumer’s mind that the service and product offerings have excellent features than rival companies, including reputation, image quality, and design features. As a result, a company integrates real qualitative variances in product offerings and services, engages in charging high prices, implementing marketing techniques and advertising programs. A company attains competitive advantages and organizational success over its competitors due to the distinctiveness of its services and products. According to Porter, competitive strategies focus on the creation of attributes, which depict business and differentiates its value creation and offerings relative to its rivals (Baroto et al., 2011). Many firms have adopted the differentiation strategy, especially corporations in developed nations, such as Canada and France.
When companies internationalize to less developed economies such as multinational corporations (MNCs), they enjoy an intrinsic competitive advantage over the local firms in terms of implementing a differentiation approach. That is because such firms are advantaged by technological and financial resources, innovative products, trained employees, and modern management systems. Businesses in many developing markets adopt a differentiation strategy focus on many dimensions, such as consumer loyalty, corporate image, quality, level of services, and innovation simultaneously (Baroto et al., 2011). Therefore, when applying this strategy within a developing market setting, it requires the simultaneous creation of consumer loyalty through creating a unique product, management, and intensive marketing. It also requires creating services and products that ate serviceable, durable, dependable, and innovative.
Business Models
A business model is the organization, governance, and content of transactions that companies design to generate value by exploiting commercial prospects. It shows the inter-alia actions that organizations should undertake to expand and surpass their limitations (Mahfod, Ismaeel, Al-Haddad, & Upadhyaya, 2017). It is the foundation of how an organization functions and creates value for diverse stakeholders. A business model has strategic components, value creations, and customer and market components. Betz (2002) views a business model as an organization’s abstraction to identify how to make money profitably. It involves how an organization transforms inputs and adds value to outputs. All business models function like open systems. Porter’s model is one of the business models that organizations apply in strategic planning. An organization can construct a generic commercial structure with business outputs and inputs, including resources, sales, capital, and profits. An organization can also generate a business model from the unique amalgamations of four operative facets, including the capital, profits, sales, and resources.
The major business models that organizations can use include strategic finance, response, enterprise, learning, firm, and innovation models. A strategic financial model focuses on the necessary performance to attain organizational success. As such, an organization maximizes both capital and profits, whether long-term or -short term, like in General Motors. A tactical enterprise model allows for the effective focus of organizational divisions. The business’ production function optimizes its production efficiency with this model. The model treats profits and sales as outputs and resources and capital as inputs. It also offers a way to optimize long-term profits and short-term sales through resource utilization and rationalizing capital like in Ford and Mazda. A strategic response model allows a company to penetrate an established market that large competitors dominate (Betz, 2002). With time, the company becomes the market’s dominant player and starts to optimize long-term capital value. An organization attains success by its capacity to react to market shifts fast compared to rivals like in Toyota Corporation.
With a strategic learning model, an organization concentrates on the growth of resources and returns as business yields. The commercial structure allows organizations to optimize resources to create new markets. For instance, a company can apply its employee’s skills and knowledge to create markets and satisfy consumers like in AOL. A tactical learning model is important in growing the new business through organizational capital. A strategic innovation model allows an organization to develop early growth during its inception, like what Jeff Bezos did during Amazon’s early years. Though this model is not suitable and feasible for the long-term. With a tactical firm model, an organization uses its sales and profits to not only grow capital but also to offer corporate-level resources. The model seeks to optimize the financial valuation strategy to boost the shareholder’s return on investment and the stock-market valuation (Betz, 2002). Given these strategies, their use relies on the policy that a company wants to focus on, including diversification, innovation, production, market, or financial.
IKEA
IKEA is a furniture retailer, multinational, and privately owned company that designs and trades in home accessories, kitchen appliances, and furniture, among other useful goods and household services (IKEA, 2020). The company’s roots can be traced back to Sweden when Ingvar Kamprad, at 17 years of age, founded the company in 1943 (Yuan, Wang, & Yuan, 2016). The corporation enjoyed steady growth over the years. By 2008, IKEA became the leading furniture vendor globally (Burt, Johansson, & Thelander, 2011). IKEA is famous for its attention to operational details, cost management, contemporary designs, constant product development, and
cost leadership
IKEA complies with its business idea, which seeks to help many people to attain better livelihoods at their homes. To achieve this, the company emphasizes in producing home furnishing with complete function and superior designs but at a low price. Today, the company has become a leader applying a cost leadership approach with superior designs, effective services and products, and outstanding strategies. Home furnishing is a relatively large industry. Companies in this industry produce products of high quality that also attract premium prices and common quality products that attract a low price. Despite this, IKEA assigns low prices to its high-quality products due to its competitive cost saving approaches. A cost leadership strategy allows IKEA to establish an obstacle against rival companies by charging its consumers low prices but offering quality products. The company also attains many benefits trough ensuring low-cost operations. With low-cost leadership, IKEA controls the buyers’ bargaining power since it limits their capacity to lower the prices of the products. IKEA maintains its innovation in the design and adoption of cost leadership (Yuan et al., 2016). The company monitors low cost and wins market competition through three approaches: the logistics system and global product management, limited service, and furniture design method modularization.
Furniture Design Method Modularization
To save costs, the company does not allow sellers to assemble furniture. Instead, it creates its modularized furniture design approach. It divides the furniture to models that are created separately, then assembled. Such an approach saves cost and allows clients originality to assemble the furniture to different styles and for various uses (Yuan et al., 2016). Its flat packaging saves space and lowers transportation costs; thus, incur a low cost of storage and transportation.
Limited service: IKEA offers its customers limited service; for instance, it does not assemble the furniture, but rather the buyer does it. Accordingly, this promotes consumer self-satisfaction while saving costs (Yuan et al., 2016). Its advertising strategy encompasses the use of brochures, which are cheaper compared to large scale media.
Global Production Management and Logistics System
At IKEA, prices and products follow a global integration approach. The company creates its methods of selecting suppliers and appointing procurement teams. By allowing rivalry among the suppliers and designing copyright protection, the company controls the cost (Yuan et al., 2016). The company lowers the cost involving tariff, logistics, and manufacture by creating strict admittance prerequisites to select suppliers with the least cost.
IKEA’s Differentiation
As a well-established business, IKEA differentiates itself from its rivals through the design, style, and marketing of its products.
Design Differentiation: IKEA attains differentiation by creating uniquely designed products that can withstand the competitors’ product selection. The company seeks to attain the differential design of its products alongside special management ideas. In particular, it hires qualified professional designers to create distinct products that meet the different requirements of clients (Yuan et al., 2016). Despite the company seeking feedback and ideas from consumers, it follows its design technology and brand to develop a product that will ensure the company has control of its core position, as well as the entire value chain.
Style Differentiation: IKEA products follow a classical Swedish style design. The style is practical and simple, skillful and ingenious and natural, and elegant. Over the years, IKEA has inherited and continued the Swedish tradition (Yuan et al., 2016). The company seeks to become people-oriented and represent modern fashion, wide variety, beautiful, practical, health, and fresh.
Marketing Differentiation: Today, consumers focus on and pay more for quality products that offer a fulfilling experience and optimal satisfaction. That is why the focus has shifted to experiential marketing. IKEA exploits the consumers’ desires for experimental marketing by creating its marketing mode. In its stores, exhibition rooms integrate the home-style setting (Yuan et al., 2016). As such, consumers can not only use but also feel the furniture directly and experience consumption freely.
IKEA’s business model
IKEA’s business model focuses on ensuring the company becomes a cost leader in its industry. The company places its suppliers in low-cost markets where it is easier to access raw materials required for production and connection with the distribution channel. As such, it applies a cost leadership approach to sustain its competitive edge and organizational success. Consequently, this forces the company to adopt a strategic innovation business model. The model strives to increase the efficiency of IKEA’s internal production. Given this, the company has proved a pioneer in innovations. It keeps renewing its innovation model. Mainly, that is because new techniques and innovations are necessary for organizational success. IKEA also applies a strategic financial model. The company is vast and can spend significant financial resources to procure lots of furniture (Betz, 2002). Because of the huge orders, the company equally has access to huge discounts, thus, attaining economies of scale.
IKEA also applies a strategic firm model in its operations. Its success stems from relatively unsophisticated ideas ensuring a low cost between customers and manufacturers. The company has no manufacturing facilities. As such, it uses subcontracted manufacturers throughout the globe for supplies. In addition to this, the company allows consumers the opportunity to assemble the furniture; thus, maintaining a low cost. Such an approach leads to innovation upstream that enables the suppliers to reduce costs (Betz, 2002). It also leads to innovation downstream as consumers save on high costs.
IKEA’s Drivers of Internationalization.
IKEA uses its corporate strategic models to internationalize. The company has attained a competitive edge and organizational success because of high-quality products, low prices, and appealing retail store settings. Given this, one of the company’s major drivers for internationalization is the market drivers. The company seeks to offer consumers with trendy and functional products having minimalist lines (Kraus, Mitter, Eggers, & Stieg, 2016). IKEA’s suppliers produce products with cost efficiency, and in return, the company assigns a low price to allow many people to afford them. The company classifies its consumers into young and middle-class customers who like fashionable and affordable domestic products and furniture (Harapiak, 2013). Then again, the shopping trends in the global market continue to shift; thus, IKEA must adjust its strategies accordingly.
Cost drivers also encourage IKEA to internationalize. The company spends a significant amount of time to develop cheaper products. It is constantly looking for new approaches to manufacture cheaper products while at the same time fortifying its lasting relations with suppliers. Favorable logistics also allow IKEA to attain strategic international outsourcing (Kraus et al., 2016). Therefore, this lets the company to successfully lower their product prices and subsequently result in global expansion. Competitive drivers are also reasons for IKEA to internationalize. For instance, IKEA has attained a productive internal competitive edge among its supply chain distributors and retail outlets (Harapiak, 2013). The company has successfully adapted to the global market in addition to sustaining its business concept. It remains concept-driven and identifies the significance of managing operations and sharing knowledge despite the geographical boundaries. IKEA also values communication as important to its operational systems.
IKEA’s Hybrid Approach
Differentiation and low-cost strategy can be compatible with addressing competitive forces. Consequently, IKEA pursues a hybrid approach by combining differentiation and low-cost elements in its business operations. Such a successful combination has allowed the company to attain sustainable organizational success. If the company was to fail to combine the differentiation and low-cost leadership policy, it could have been stuck-in-the-middle. The approach IKEA uses to combine the two strategies demonstrates that a hybrid approach is not only profitable but also feasible. Given that the benefits from low-cost leadership and differentiation are hard to sustain, by combining the two methods, IKEA attains higher performance compared to businesses that follow one scheme. With a hybrid strategy, the company attains low price and differentiation simultaneously relative to its rivals (Baroto et al., 2011). Such success is granted by the company’s capacity to offer enhanced goods to consumers at a low price point. Therefore, it allows the company to attain adequate margins to reinvest, as well as sustain and create the foundations of differentiation.
With the increase in global competition, IKEA considers the hybrid strategy an important factor. Unlike its competitors that apply only a singular approach, IKEA’s hybrid approach permits it to position itself strategically in the global marketplace. Therefore. It can grow its capacity to adapt quickly to the market environment challenges, as well as learn new technologies and skills. Through this, IKEA effectively leverages primary competencies throughout its product lines and business units. The hybrid strategy also allows the company to create products having different characteristics and low prices, which attract many consumers. Meanwhile, the differentiation approach enables IKEA to assign its products first-class prices; the cost leadership scheme allows the corporation to assign its products the least competitive price. Therefore, IKEA attains organizational success by delivering customer value based on low price and product features (Baroto et al., 2011). IKEA’s implementation of a hybrid strategy is feasible and generates excellent incremental performance, unlike the adoption of a singular tactic. Through implementing a hybrid method, IKEA attains several advantages, including increased customer loyalty and scale economies.
The Role of Organizational Culture
IKEA has a unique organizational culture. In particular, the company is a typical model of an international corporation. For some, IKEA embraces an egalitarian culture. That means the company addresses the concerns of the labor force first, then the managers, the directors, then the owners come last. The existing cultures stem from the founder’s personal values. Kamprad is not only a frugal but also an informal person, and his values are renowned; thus, they permeate every cultural aspect of IKEA. The company forbids its employees from dressing in business attire but instead prefers sweaters and jeans (Harapiak, 2013). IKEA also motivates its workforce to discover new ways of lowering costs within all organizational levels. According to Kamprad, the company’s true spirit stems from enthusiasm, their unending will to renew, and willingness to be responsible and help. Therefore, the company offers its workforce a family-friendly feeling. The company’s founder modeled IKEA’s organizational success by flying economy class. He also ate in cheap restaurants and furnished his household with IKEA’s products only for an extended period (Harapiak, 2013). Therefore, the personal values of the founder show that he was cost-conscious. For this reason, IKEA’s organizational culture focuses on delivering quality furniture at a low cost.
IKEA’s founder stressed an informal organizational structure that has no perks, privileges, and titles. IKEA has no noticeable hierarchy among employees. Managers can stock shelves like normal employees, while design teams can also enjoy full autonomy. IKEA builds such an organizational culture on the concept of sustainable development in addition to a lasting need to progress in all aspects of the value chain. The company considers this a successful approach to shaping its industry and fit its future strategies and business models. He also ensured that the company adopted a team-based and non-hierarchical or matrix design (Harapiak, 2013). As such, he stressed the need for IKEA to have an open flow of information and knowledge within its management. The founder preferred addressing the front-line managers directly, including the purchasing teams and designers, instead of assigning such roles to upper management. IKEA has face-paced management; thus, it lays emphasis on detail and simplicity. Additionally, the salary is not high since employees enjoy working in the company. The founder viewed the company as a family whose core value is love. Given his family-oriented approach, Kamprad hired like-minded talents, people who value respect, modesty, and humility towards others. IKEA’s organizational culture values creativity, particularly in the design team (Harapiak, 2013). Kamprad did not intend to allow the public listing of IKEA in the future. Mainly, he viewed that the listing could impose temporary pressures on the company and harm its long-term goals
Recommendations for the Role of the Strategic Leadership
The existing organizational structure at IKEA is manifest as highly functioning within the global market strategy. Given this, the company can sustain centralized control over its business activities. At the same time, the company can take advantage of improved quality from global suppliers and low cost. In addition to this, the company has improved policy direction control and minimized functional layoffs. As the company seeks to attain efficiency in its value chain and logistics process, it has incorporated distribution and purchasing prices into one umbrella function. Despite this, IKEA still seeks to expand overseas and internalize to untapped markets. Therefore, the significance of centralized strategic leadership and direction will grow. Besides this, IKEA’s rapid internationalization continues to prompt many varied challenges in its local market. This includes the company’s growing difficulties in responding to cultural nuances and local needs (Davies & Davies, 2004). Given the adverse effect of the emerging demographic trends, IKEA needs to implement new approaches that can allow it to widen its focus and successfully respond to the varying national and global consumer groups.
IKEA should make changes to its strategic leadership. Such changes should focus on improving how the organization sustains its global organizational success, structure, culture, and competitive advantage. To this end, the company will use its tactical leadership to determine the suitable equilibrium between global and country-level autonomy. It will also apply its strategic leadership to ensure centralized operations by growing its franchise autonomy and subsidiaries (Mubarak & Wan Yusoff, 2019). Given that IKEA continues to experience extended lead times and logistics complications, it will use its tactical leadership to sustain high control standards over the dealers. IKEA will create long-term links with its suppliers, which ensures high quality, scale economies, and technology transfers. Such a relationship will help prevent suppliers from incorporating forward and generate competitive product offerings for IKEA’s local rivals.
The discussion above has reviewed how generic approaches and business models define and determine IKEA’s organizational success. IKEA designs its quality products to fit the target markets. It offers affordable prices by streaming its business operations with local suppliers and differentiating its products. Several drivers allow for IKEA”s internationalization, such as market, cost, and competitive drivers. After reviewing IKEA’s case, I can conclude that the organizational success of any company is highly reliant on how it designs and formulates its generic tactics and business models, along with ensuring they are a good fit for its perceived goals. An organization’s business strategy must mirror its success and competitive advantages, which separates it from its rivals while at the same time securing its position in the market. For IKEA, the cost leadership approach enables it to attain organizational success by offering consumers low prices; thus, more sales and high returns. IKEA’s successful organizational performance stems from its execution of well-designed business models and a hybrid approach. Many companies often apply one policy, either a differentiation or cost leadership strategy. Other companies have successfully applied a hybrid or combination model simultaneously. Both the differentiation and cost leadership method are critical to attaining effective organizational success and excellence. By implementing the hybrid strategy, along with sustainable business models, a company can attain significant growth while ensuring a completive edge. In IKEA’s competitive market, the company can attain sustained organizational success and better financial performance by a hybrid approach
References
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