In this assignment I intend to focus on one of the schools of strategic management and how my understanding of this has developed in relation to strategic management. In section B I will apply my chosen school of strategic management to Swedish furniture chain IKEA in order to assess both their current and future strategic position. Section C will focus on Corporate Social Responsibility in relation to my choice of future strategy. Finally I will conclude with an overview of my personal development throughout this module on strategic management.
Section A: Choice and understanding of theory and history
Strategy applies to all organisations and is effectively a way of interpreting the future direction of the organisation. Historically strategy can be dated back to military origins within the Ancient Greek period and the work of Sun Tzu in that ‘winning a battle without fighting is the best way to win'(Tzu, n.d.). Strategic management was a relatively new concept primarily brought into application after the Second World War. Peter Drucker defines this as ‘The pattern of major objectives, purposes or goals, and essential policies or plans for achieving those goals'.
Strategic management builds on strategy as it allows organisations to develop, research and build in order for them to achieve their strategic goals. Chris Carter states that ‘If there was no competition, there would be no need for strategy'. He uses the example of the Hard Rock Café which is a industry with low barriers of entry, and how they use a musical/nostalgic theme, which is a strategy to differentiate themselves from their competitors. (Carter, Clegg 2008) Strategic management effectively allows an organisation to allocate its resources in the correct way and constantly adapt in order to achieve their chosen strategy. (Chandler, 1962)
In this essay, I have chosen to focus on the positioning school as per the below diagrams. This school of thought simplifies the design and planning schools as it allows the organisation to survey the environment and helps them to effectively choose a position within it. Once a position has been chosen, the organisation can then use mobility barriers to defend their position. A key example of this is re-investing profits back into the organisation in order to maintain their position.
Diagram 1 - Porter's 5 Forces Diagram 2 – Porter's Generic Strategies
Firstly when looking at Porter's 5 Forces model, The main characteristic of this model is the perceived ability to identify competitors, partners and customers in a predictable way in an environment that stays relatively static with some slight disruptive changes (Flower, 2004, p. 67). Therefore one would not advise, if not to say it is impossible to develop a strategy solely on the basis of Porters' models (Recklies, 2011). This is due to the constantly changing business environment through updates in technology, globalisation and deregulation. However this model does not factor in that most business markets would now be considered as being dynamic. Porter's Five Forces model ‘assumes relatively static market structures. This is hardly the case in today's dynamic markets' (Recklies, 2018).Recklies concludes that Porters' model can still be considered as being viable by todays standards, however in order to be utilized completely it must look at Globalization Deregulation and digitalisation as extra forces which are now applicable to most modern day businesses and their long term strategies.
Although Porter's 5 forces model cannot be considered as being outdated, the basic idea is that all companies are operating in a micro-network of Buyers, Suppliers, Substitutes, Competitors and new market actors, however a strategist should not rely only on this model. Nowadays it is important to consider other factors as well and make use of further management tools. (Dalken, 2018). I believe this approach has a good basic grounding of strategy, however it cannot solely be relied upon in today's organisations without factoring in other external factors which fall outside of the basic five forces framework.
When considering Porter's generic strategies, this looks at placing the organisation into either a cost leadership, differentiation or focus strategy. The firm would effectively follow one of these strategies in order to achieve a sustainable competitive advantage. (Tanwar, 2013, 11) Cost leadership allows for a relatively low cost product to be made available to a large consumer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. Differentiation focuses on having a unique product which usually charges a premium price. Due to customer loyalty, technological features etc, extra cost can be passed on to the consumer. An example of this is Apple in which their products have similar features to their competitors however due to the brand being marketed as a ‘status symbol and lifestyle brand', they have a fierce following worldwide which allows them to charge a premium price. ‘Research does suggest that a differentiation strategy is more likely to generate higher profits than a low cost strategy because differentiation creates a better entry barrier. A low-cost strategy is more likely, however, to generate increases in market share'. Finally Focus strategy relates to the firm concentrating on a select few target markets which would allow for the firm to tailor their strategy and marketing and tailor themselves to meet the needs of their target market/s. However if the organisation attempts to use more than 1 of these at the same time, they can get ‘stuck in the middle'. Porter states that this would put them in extremely poor strategic direction which would cause them to lack market share and investment as there would be no clear strategy for them to follow. (Porter 2009)
Ref - (PDF) Supports and Critiques on Porter's Competitive Strategy and Competitive Advantage. Available from: https://www.researchgate.net/publication/266967720_Supports_and_Critiques_on_Porter's_Competitive_Strategy_and_Competitive_Advantage [accessed Dec 16 2018].
Section B: Application of strategy to current and future situations
In this section, I have chosen to focus on Swedish furniture chain IKEA and how the positioning school is relevant to this organisation. Ikea describes their basic strategy as: “Creating a better everyday life for the many people, by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them”. (Ikea Website).
When looking at the current strategic position of IKEA, they are considered as being the largest furniture chain globally with 355 sores in 29 IKEA group countries. (Ikea Website). Ikea follows a strategy of designing innovative and simple products in order to cut costs and find a network of cheap suppliers for their products. (Baroto, B., Abdullah, M. & Wan, H. L., 2012. Hybrid Strategy: A New Strategy for Competitive Advantage. International Journal of Business and Management, 16 October, 7(20), pp. 1-14) This has allowed them to succeed with following a cost reduction strategy ‘with the elements of design culture and hence has successfully delivered beautifully designed products that are inexpensive'. (Baroto, B., Abdullah, M. & Wan, H. L., 2012. Hybrid Strategy: A New Strategy for Competitive Advantage. International Journal of Business and Management, 16 October, 7(20), pp. 1-14)
In order for IKEA to sustain their competitive advantage over their competitors they have adopted certain practices such as hiring designers who work in a collaborative and team spirit environment in order to design the best possible and affordable products for its customers and continuously building a strong relationship with myriads of suppliers across the globe.
When applying Porter's 5 five forces to IKEA's strategy, firstly when considering the bargaining power of suppliers, this would be considered as being low as IKEA has their own manufacturing facilities and has numerous links to suppliers worldwide due to their current position as the market leader in furnishing. The threat of substitution would be low as IKEA offers a multitude of home furnishing products which satisfies the demand for these types of products from consumers. The bargaining power of customers is high due to the number of furniture retailers available globally, although IKEA does have a USP of low cost, well designed products. When considering the threat of new entrants, this would be extremely low, as IKEA is the market leader, ‘The requisite expertise is difficult to replicate and financial investments are significantly high for new entrants to this market'. Finally when considering existing competitive rivalry. Although this isn't high from new entrants, from stores such as Tesco and large furniture chains, this would be quite high as these organisations have supply and distribution networks allowing them to offer relatively low cost furnishing products which means they can still offer similar products at a low cost, therefore creating more competition for the market leader in this area IKEA.
When applying Porter's generic strategies to IKEA, this organisation pursues a strategy which is based on ‘a fact that the goods and services are to be delivered at a low cost but simultaneously in a higher perceived value than the cost competitors'. This is so that they can increase the organisations reputation among consumers therefore increasing their market share by expanding their customer base.
IKEA has always followed a strategy to design its products in the simplest and most innovative ways which has helped the firm to cut their costs to the lowest value and also find the cheapest suppliers of their products (Baroto, et al., 2012). This has allowed them to succeed as an organisation with a cost reduction strategy by being able to consistently deliver beautiful and inexpensive designed products while embracing elements of IKEA's design culture. In order for IKEA to stay as the market leader in this industry and sustain their competitive advantage, certain practices have been adopted by them. These include: having in house designers consistently working to design modern furniture while keeping the end cost relatively low, rolling out a code of conduct for their massive network of suppliers to follow using recyclable and discarded materials, which increases their reputation in regards to being environmentally friendly as well as keeping costs low as well as many more.
Considering the future strategic options available to IKEA, the main focus of future strategy would be in regards to globalisation and expanding the business into countries such as China and Japan as this would increase profitability. This means they cannot focus entirely of Porter's 5 forces as this wouldn't satisfy changes needed in relation to government regulations in new countries which they are looking to enter in order for them to be a market leader worldwide. IKEA would need to understand the preferences of a diverse range of consumers worldwide and introduce products/services to meet the needs of these new consumers.
Section C: Understanding of governance, ethics or CSR
In this section I have chosen to focus on CSR, This is described as ‘a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders'.
...(download the rest of the essay above)