Should IKEA Keep Its Ambitious Growth Plan? Essay Example

Published: 2022-03-11
Should IKEA Keep Its Ambitious Growth Plan? Essay Example
Type of paper:  Case study
Categories:  Company Business strategy
Pages: 7
Wordcount: 1858 words
16 min read

Having begun from small mail order shop, IKEA has grown tremendously to be the leading furniture retailer in the globe. IKEA is popular for its culture, which promotes ambitious growth and endeavors to balance quality with price. However, its management thinks that the household items giant has not been growing fast enough. Hence, it has lately embarked on a faster expansion plan that will see its sales revenue reach $60 billion from by the year 2020 (Draft and Armstrong, 2015). Accordingly, the company takes some measures to ensure it realizes this dream. One of the steps was the development of new growth strategy that has helped it expand its production capacity, increase its distribution to new global markets and open many click-and-collect stores. The firm has been so committed to its ambitious growth plan that in the year 2017, it named a new CEO, Jesper Brodin to lead its growth strategy.

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There many advantages that a large business can enjoy from significant expansion; one of them being economies of scale, which leads to competitive pricing. When business deals in many products in broader markets, it shares its cost of doing business across a broader customer base and gets price reductions from suppliers. Therefore, big firms find it possible to keep the prices of goods low. For a company like IKEA, which has hundreds of outlets in many countries, and prides in delivering quality at low prices, the economies of scale that come with massive growth are enormous. That explains why for the last 15 years, the company has maintained a double-digit growth rate (Draft and Armstrong, 2015). Moreover, IKEA has been able to maximize low cost markets like China, which compensate for the high cost of production in markets like the USA.

Secondly, venturing into new markets increases the brand presence of a business, leading to greater brand awareness. As IKEA enters new markets in Asia and the Americas, more people who initially were not aware of its existence begin to interact with its products. It only started as a small business many years ago, but its undying passion for growth and expansion has prominently put it on the global map. Every place where IKEA establishes a new store, it strengthens its brand recognition through advertising and personal selling. The company recognized that in consumer psychology, people associate big names with quality and efficiency. Hence, whenever they make purchase decisions, customers always think of organizations that have stronger brand presence first. That has been one of the reasons behind IKEA's massive sales over the years, and it is committed to exploring it further.

Also, expansion raises the human resource capability of a business because it attracts a larger pool of talents from diverse backgrounds. As a result, companies like IKEA use specialization to promote efficiency. Although its original primary selling point is Swiss design, IKEA works with local personnel and franchises in international markets to appeal to local consumer tastes and expectations. That is the strategy that the company has been using to overcome competition from local competitors in different countries.

On the other hand, ambitious growth can be detrimental to a company if it is not managed strategically. Many giant global companies, including BP, Dell, Starbucks, Toyota, Washington Mutual, AIG, and Merrill Lynch have fallen from the tower of ambition because they obsessively focused on minimizing costs and growing their revenue to the extent that their businesses lost significant value. There are already fears that IKEA's aggressive quest for growth could compromise its quality and take it down a similar path.

The primary pillar of IKEA in its local and international markets has been its ability to offer products of satisfactory quality to consumers at better prices. The company claims that it specially designs its furniture to make them presentable and affordable to their primary market segment, which is young families. Although its furniture quality has not changed despite the pressure to supply larger markets, IKEA has had accusations of negligence with other products, which it has occasionally recalled.

There are signs that the company is likely to face challenges in meeting its international demand should its annual visitors hit 1.5 billion visitors in the next two years. The volume of solid wood that the company uses already exceeds 15 million cubic meters a year. That comprises over 1% of all timber harvested in world forests ("Ambitious growth plans - IKEA Careers," 2017). Despite IKEA's progressive sustainability policy, People and Planet Positive, it has been criticized by some environmental groups for violating wood and forest usage certification policies in countries like Russia. IKEA and its suppliers may soon begin to face a significant shortage of raw material, and that may lower their value. Moreover, its strategy of supporting tree planting initiatives will not efficiently offset the limitation because trees once planted; take decades before they can get ready for harvesting.

As of now, IKEA should continue to pursue its growth targets because it has demonstrated exceptional ability to control quality in a broad market. The company currently has over 300 outlets in nearly 40 countries, but its value to the customers remains the same, especially in furniture (Draft and Armstrong, 2015). However, it should approach the growth with a keen eye on the value that it offers the customers. It must also prove its genuine commitment to managing sustainability, not only for profits but also for posterity.

Was the click-and-pick the right model for the future?

The opening of the first click-and-pick stores in 2016 is associated with the significant increase in sales revenue in that financial year. In 2016, the company's revenue rose from to $38.4 billion from $35.9 billion in the previous fiscal year. The change represented 7.1% growth in sales. However, the increase in revenue did not translate to equal growth in the overall business. When IKEA increased its sales by 7.1% in 2016, its overall growth slowed from 8.9% to 7.9% at constant currency (Draft and Armstrong, 2015).

Arguably, even with its ambitious growth plan, IKEA may not reach 2020 sales target unless its growth also accelerates at an equal pace as sales. Moreover, the 7.1% rise in sales could not be attributed entirely to expansion because, in the same fiscal year, sales revenue from the established stores rose by 4.8%. Even so, experimentation has been the motivation behind the click-and-pick model. The company is in touch with its target market, the poor, which it believes do not find it convenient to visit the mega box stores in city suburbs to make purchases and carry items home. Therefore, it came up with the technological innovation to increase everyone's access to the shops more frequently. Besides, click-and-pick will also help the firm compete better against e-commerce retailers.

Therefore, click-and-pay will be the future of IKEA. It comes in handy to make the company relevant to the expectations of the market, which is shifting towards online platforms. IKEA has even announced plans to develop a mobile application that will enable customers to see 3D images of their products from anywhere. The app will be incorporated into the click-and-pick model to increase the number of IKEA visitors through virtual access.

Would IKEA remain essentially unchallenged? How would it do that?

Whether IKEA will remain essentially unchallenged or lose its market leadership depends on its future quality management and the strategies that its current and prospective competitors use. Notably, there are loopholes that IKEA's competitors can take advantage of to knock it down from the top of the table. The first one is its international strategy, which restricts its adjustment of products and business to fit in diverse traditions and customs of foreign countries where it has outlets. As a result, its sales have been low in some countries such as the USA, where the majority of people have different expectations for furniture and household goods.

The second factor that could cause IKEA serious drawback is quality (Edvardsson & Enquist, 2008). IKEA's good prices come at the cost of quality of products. Hence, the shop no longer appeals to the elite class because it focuses on low-class products. At the same time, IKEA can hardly improve its quality because it seeks to minimize costs. Hence its ability to leverage product quality to match the competition in the upper class is limited. Some of the products of the organization fall below the international quality threshold. Besides, because of its stingy approach to business, it does not spare resources for reasonable training for its workers and its customer service is always wanting. For the same reason of cost consciousness, the market giant relies on experiments rather than research, so it misses out on important market information.

Thirdly, the company's low price strategy could cease to work at some point because of the dynamism of a myriad of market forces. Apart from quality and customers, the market forces that could affect the prices of IKEA's goods are government regulation and the state of the economy. On government regulation, IKEA and its associates are on the spot for the environmental impact of their business. The need to control their usage of wood continues to attract new restrictions from ecological authorities and national governments. There are countries where IKEA and its suppliers face the challenge of having to negotiate around environmental limits. Therefore, their cost of production is bound to rise with time, making it necessary to change the product prices. When it has to adjust its prices up without retouching quality, IKEA will lose many of its customers.

Nonetheless, IKEA will maintain its lead if it continues to balance between its low price strategy and quality intricately. In the management of quality, the firm could follow the principles of Total Quality management. First, IKEA will remain unchallenged if it changes its focus from sales revenue to customer satisfaction. IKEA had a great need to train its workers to meet the customer expectations better. Customers are the primary drivers of business progress and organizations must treat them with dignity despite offering incentives like price cuts.

Secondly, IKEA needs to be very keen on its leadership approach because of its tall management structure. In large companies like IKEA, leadership, and management of processes comes with many difficulties. The company has to ensure that at all times, each of its outlets has competent leadership and guided by a standard set of objectives and rules. That also requires significant investment in training. Thirdly, IKEA should base its management of quality on processes. It can maintain an overall market advantage if it allocates organizational processes optimum time and resources.

The fourth principle is decentralization of decision making. Because of its vast size, it is no longer possible for IKEA to approach business with the abundance of caution it does. Maintaining its market share requires that it becomes less conservative and aggressive in seeking correct information that will propel its growth.

Lastly, the secret to keeping good quality is continuous improvement. It is not enough that IKEA had set a strategy to balance its quality with prices. Quality improvement requires appropriate adjustments in the day to day activities, controlling outcomes and providing improvement feedbacks that specify the gains made. Apart from balancing price strategy with quality, IKEA will also have to rely on scientific methods of decision making and stop experimenting with every ki...

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