Porter’s Generic Strategies And Ikea Business Model

Using The Strategy Clock, Explain The Existing Business Strategy of Either NIKE or IKEA And Recommend With Justification, Key Strategic Actions Needed To Improve The UK Market Share of Either NIKE or IKEA.

Porter wrote a book called Competitive Advantage. In this book, the business expert identified that have the ability to help a company build and nurture a sustainable competitive advantage over its competitors.

Porter has divided his strategies into two distinct categories — Competitive Scope and Competitive Advantage. Let us first discuss Competitive Scope.

Porter’s Generic Strategies basically tells us whether a company is focused on the market as a whole or whether it focuses on some specific aspects of the market. So, judging by this definition, this category can be further divided into two sub-categories — Broad Spectrum or Narrow Spectrum.

Porter’s Generic Strategies — Competitive Advantage

Now coming to the Competitive advantage part, it tells us how a company has achieved a competitive edge over its competitors in the market. This competitive advantage can be done in various ways — pricing the product low, making products that are different from those of its competitors etc.

As said, a company can achieve competitive advantage with the help two ways -

1. Making the product price lower. The company can focus on the entire part of the industry that it focuses on. In this case, it will set a low price for all of its products. In other cases, it can focus on a specific segment of the market. In this case, it will only make only some of its products inexpensive.
2. Making the product in such a way that customers feel that the product is different from other such products in the market. In this case also, the company can focus on the market or industry as a whole or it can focus on the specific segment of the market. A company that focuses on the entire industry, has to make all of its products different from those of its competitors. While a company targeting only the specific segments of the market will have to make some of its products stand apart.

The question, then, is — how can a company manage to lower the prices of its products while its competitors can’t?

The company employs various tactics to achieve this ability. Maybe, the company buys raw materials in such huge amounts that the cost of these raw materials come drastically down. The company then passes this price advantage to the selling price.

Today, tech savvy companies are using bleeding edge technologies to cut production costs. For example, Ikea chooses lands in the outskirts away from urban dwellings to build its stores and warehouses. This is how it saves a ton of money. So if your cost price is low, if your production and operations cost is low, you can easily sell products at a cheaper rate.

Now coming to the differentiation strategy part, a company can stand apart from the crowd to get noticed by the customer. This it does in a variety of ways. Some companies like Apple focus on keeping the quality high. Apple smartphones are also priced higher than their Android counterparts. Naturally, those people who are looking for quality will flock towards Apple. Again, look at Tesla. It is different because it does not make petrol or diesel cars — it makes electric cars. Oftentimes the image of the brand or the brand owner can act as a differentiation strategy. For example, Elon Musk’s quirky yet smart attitude differentiates his company from the usual ones.

Bowman’s Strategy Clock

Now, Bowman adds to the theories proposed by Porter. He identifies 8 different ways that a company can choose to tread in order to stay competitive. There are two aspects of Bowman’s theory — price of the product and whether the customers perceive the products to be valuable.. Bowman’s Strategy Clock is explained below -

If a company makes a product that has little perceived value to the eyes of the customers and if the company fixes a very low price for that product then it will fall into this category. However, the company has to be always on the lookout for the entry of similar products made by its competitors in the market. This is an easy way out and this strategy can easily be replicated by the competitors.

If a company employs this strategy, it has to make products that people think to be of somewhat value. But at the same time, the company has to set the price on the lower side. There will already be similar products like this in the market, so the company has to face severe competition.

When a customer finds the product to be of significantly high value and yet its price is on the lower end of the spectrum, the product falls under this category.

In this level, the customers perceive that the price of the product matches with the value of the product. The product satisfies the customers, so the price can be increased over time. Low price and high perceived value is achieved through efficient operations, low cost price and awesome branding strategy.

In this level, the product targets a specific segment of the market. For example, Tesla cars target the electric car segment. Because of this specific focus the price of such products can be on the higher end of the spectrum.

When a company’s product does not satisfy the customers much but still its price is high, the business model will fall under this category. This is a high risk category because the moment another company comes up with a similar product but with lower price, the former one will see a loss of customers

When a company sells something that nobody else sells, the business model will fall under monopoly. In this case, since nobody is there to compete, the company can price that product unjustly.

When a company sells a product at a price that other companies sell at but the product quality does not match the quality of the same product sold by other companies, the business model will fall under this category. Such type of companies are bound to fail.

There are differences between Porter’s approach and that of Bowman’s Strategy Clock -

• Porter’s Generic Strategy Model does not tell us that the strategic position of an organisation can change overtime, while Bowman’s model reveals that the strategic position of a company can change — either negatively or positively.
• Porter’s model does not show a correlation between cost and differentiation . But Bowman’s model is better than that of Porter. It shows that there are strategic positions products can achieve differentiation in both cases — high price and low price.
• Porter’s model is inefficient when an organisation employs two or more generic strategies simultaneously. But Bowman’s model can account for this. So in Porter’s models a company that is trapped between the no man’s land of generic strategies is bound to be doomed, while this is not true in case of Bowman’s model.
• Bowman’s model does not emphasize much on differentiation.

Bowman’ Strategy Clock and Ikea

Ikea was founded in 1943. At that time, decorating the home, furnishing it was considered to be done only in the wealthy households. Ikea’s business strategy was to bring home furnishing to the masses. There were two USPs of Ikea -

1. The company offered flat pack furniture. The customers had to furnish their houses in a do it yourself way. This provided a lot of independence and customisation to the customers.
2. The company bought lands for warehouses and stores in non-urban places. So the prices of these lands were extremely low. The company used the saved money to offer products at low prices and to build state of the art facilities. At the same time, Ingvar Kamprad — the founder — was also thinking about expanding internationally.

So as far as Bowman’s strategic clock is concerned, here is an analysis of Ikea’s strategy -

• When Ikea was founded, it was at the first level of low value and low price position. The tagline of Ikea — To create better everyday for the many people — quite clearly indicated the products of Ikea will be for the masses and not for the select few.
• In the early 1950s, the company used catalogues and ads to spread the word. So its perceived value increased.
• Later Ikea ended its home furnishing business and focused entirely on selling and manufacturing furniture. So this decision put the company on the Focused Differentiation level in the strategy clock.
• With gradual expansion, Ikea was able to retain its Focus Differentiation strategy for quite a long time.
• However, today Ikea is riddled with lack of innovation. This means that it is losing the perceived value. And as a result its business model is shifting towards the High Risk domain.
• There are many competitors now. The economic crisis resulting from the 2008 debacle hurt Ikea badly. Added to this, because of the recent Corona virus scare, Ikea has to lower its price. The standard price is not standard any more. Therefore, Ikea is now at High risk level. It can never go below that since there are many other companies to prevent it from monopolising and it has a significant perceived value still left.
• So the suggestion for Ikea is it has no other way but to lower the prices of the products temporarily. At the same time, it has to use new technologies to incorporate innovation and uniqueness.

Originally published at https://www.immortal-ideas.com on August 5, 2020.