Competitive advantage of IKEA Essay

INTRODUCTION In this modern hypercompetitive marketplace, a company must be a powerful competitor to survive. A company must possess a powerful strategy in order to become a powerful competitor. But what makes a good strategy for the company? A good business strategy would be that to attain a competitive advantage over other competitors. So what is a competitive advantage? And how company can be able to have a competitive advantage over other competitors? This essay would now discuss what a competitive advantage is and how a company can build a competitive advantage over other competitors in the same industry by using two furnishing stores, Ikea and Courts as examples. COMPETITIVE ADVANTAGE Definition A company is said have competitive advantage over its competitors when the company earns profits that are above the normal average in the industry where it competes. Types of competitive advantages According to Michael Porter, there are two basic types of competitive advantage, namely: Cost Advantage- A cost advantage is the ability of the firm to deliver the same product or services at lower cost than competitors. This can be achieved through using economies of scale, production efficiencies, low labor cost or better access to raw material and etc. Differentiation advantage- A differentiation advantage is the ability of the firm to deliver products or services that are different from the product mix of competitors. Due to the added costs in achieving differentiation for the  product or services, differentiated products or services are often marketed at premium prices. Model of Competitive Advantage Source: www.quickmba.com Competitive advantage derives out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that reduce the price sensitivity of the buyer. Value can be achieved though utilizing the firm resources and capabilities that would then become core competencies of the particular firm. The core competencies created will allow the firm to position either as a cost leader or differentiation leader in the industry and this will in turn create value for the buyers which will become the firm competitive advantage in the industry. Resources and capabilities A firm needs to possess resources and capabilities that are better than its competitors in order to develop a competitive advantage over them. Any competitive advantage will disappear if the competitors can easily imitate what the firm was doing. Resources are assets of the company that its competitors cannot easily acquire. Some examples of a firm resource include the firm’s reputation, loyal customer base, patent and trademarks and strong branding. Capabilities refer to the ability of the firm to make the most of its resources. One good example of the capabilities of a firm is the ability to carry out a successful marketing campaign. The combination of both capabilities and resource will become the distinctive competencies of the firm. The competencies will allow the firm to achieve  innovation, efficiency, quality and customer responsiveness. The core competencies created will allowed the firm to position either as a cost leader or differentiation leader in the industry Cost advantage and differentiation advantage A firm will position itself as a cost leader or differentiation leader in the industry based on the distinctive competencies formed using its resources and capabilities which become the firm competitive advantage against other competitors. Value creation Value is created by firm through performing a series of value creating activities that Porter identified as the value chain. The value chain comprises 4 supporting activities (procurement, technology development, human resource and firm infrastructure) and 5 primary activities (inbound logistics, operation, outbound logistics, marketing as well as sales and service). On top of the firm own value creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel members. In order to achieve competitive advantage, a firm must perform one or more value-creating activity that is more superior compared to other competitors. Superior value is created through lower costs or superior benefits to the buyers. IKEA Profile Ikea, the Swedish furniture giant was founded in 1943. It is the world’s largest furniture retailer that sells stylish but inexpensive Scandinavian designed furniture. It has outlets in 35 countries, including Singapore. The company is, perhaps, one of the World’s most successful multinational retailing firms operating as a global organization based on its unique concept that the furniture is sold in knock down form that are to be  assembled by the customer at home. Ikea mission statement Ikea’s mission is to offer a wide range of home furnishing items of good design and function, excellent quality and durability, at prices so low that as many people as possible can afford to buy them (www.ikea.com) Ikea competitive advantage Ikea’s success in the retail furniture industry can be attributed to its vast experience in the retail market and its ability to integrate both product differentiation and cost leadership strategies successfully. As pointed out in Ikea’s mission statement, the company is in business to produce high quality products at a low cost. This would support a cost leadership strategy. However, the company is also applying differentiation strategy due to its unique way of incorporating the customer in the value chain and unique marketing strategies Cost advantage Ikea cost leadership strategy allowed it to have a competitive edge over other competitors in term of pricing. Ikea achieved this through tight cost control and production efficiencies. Under Ikea’s global strategy, suppliers are usually located in low-cost nations, with close proximity to raw material and reliable access to distribution channels. These suppliers produce highly standardized products intended for the global market, including Ikea. This allows Ikea to take advantage of economies of scale. Ikea also practice tight cost control in order to keeps its product price low and affordable. Some key cost control measures undertaken by Ikea includes: * Locating their outlet outside the city area on places where the lease or the cost of the land is cheaper * Flat packaging of its product allows Ikea to transport its goods from suppliers to its outlet at low cost as it efficiently maximizes the space during transportation. Flat packaging also means lower warehousing costs for them. * â€Å"No waste† policy when Ikea develops product. For example, the remnants of fabrics that are left over the heart shaped FAMNIG cushion, one of Ikea product, are used to make smaller FAMNIG cushion. Door manufacturer are used by Ikea to make their table-top with the leftover raw material thus reducing production cost. In addition to tight cost control and production efficiencies, Ikea also incorporate customer into the value chain approach as a mean of reducing costs. Customers are to use the information on the product price tag to collect from the racks in the store self-service area, transport the items themselves back home and to assemble by themselves. The costs saved are passed back to the consumer in term of charging lower price for their product rather then including the labor costs and delivery costs into the selling price, a usual practice of other furniture stores. Differentiation advantage Ikea had also successfully integrated its cost leadership strategy with differentiation strategy that allowed it to further distinguish itself from other furniture stores and develop a strong branding for the firm. Ikea differentiate itself from other competitors by performing the following: * As mentioned earlier in page 6, Ikea incorporate customer into the value chain approach to reduce cost. Customers are to use the information on the product price tag to collect from the racks in the store self-service area, transport the items themselves back home and to do assembling of the  furniture. Ikea is the only furniture store that adopts this practice in Singapore and it is accepted by all Ikea customers as they understood it as a cost saving method through education by Ikea to the customer on their catalogues. * Ikea adopted different marketing communication strategy from the rest of its competitors. Instead of choosing to advertise every weekend in the newspaper to reach out to consumer, which is the norm of most of the popular furniture stores in Singapore, Ikea main communication strategy lies in the complimentary catalogue mail to every household in Singapore annually. This allowed customer to read the catalogue at the comfort of their home. Furthermore, the dimensions of the furnitures are indicates in the catalogue that allowed the customer to measure up their place for the furniture and come up with a systematic shopping list. Thus, the catalogue is the best way to prepare the customer for a visit to Ikea compare to newspaper advertisement used by other competitors. * Ikea provides child care services and supervised play area in their outlets to ensure parents can focus on their shopping in Ikea store without having any worries for their children. * In-store restaurant (Rare among furniture stores), Burger King as in the case of Singapore, offer a chance for shoppers to take meal breaks without the hassle of leaving the store. Summary The cost leadership strategy adopted by Ikea allows it to set attractive price for their product compare to other competitors in the same industry. By setting attractive price, it also reduces the price sensitivity of the consumer. The cost advantage is achieved by Ikea through tight cost control and production efficiencies. The differentiation strategy approach such as the Ikea catalogue, in-store restaurant, the incorporation of customer in the value chain and providing of child care services undertaken by Ikea helps to create a highly differentiated picture of Ikea in the target  market’s mind. Ikea through successfully integrating cost leadership and differentiation strategy had become one of the most successful international furniture retailers.