Ikea Strategy: Global Expansion and Profitability

Ikea

Strategy: Actions managers take to attain firm’s goals. Strategies focus on profitability (rate of return on invested capital) and profit growth (% increase in net profits over time). How to Increase Firm’s Profitability: Value must be created by consumer. Value creation measured by difference between price charged and cost of production. 2 strategies: Differentiation and low cost. Strategic Positioning: To maximize profitability firm must be efficient, configure internal operations, have the right organization structure (all must be consistent). Value Creation Activities: 1 Primary activities (creating, marketing and delivering product to buyers and providing support after-sale). 2 Support Activities (provides inputs that allow primary activities to occur). Implementation of Strategy: Organizational structure refers to: Division of the organization into subunits, location of decision-making responsibilities, and integrating mechanisms to coordinate subunits activities. Global Expansion, Profitability and Profit Growth: Firms that operate internationally can (expand the market, make location economies, realize greater cost economies and earn a greater return). Location Economies: Firms should locate value creation activities where economic, political and cultural conditions are better. Locating value creation activities can lower costs of value and enable a differentiation of product. Multinationals create global web of value activities. Thus, different stages of value chain are dispersed. However, introducing transportation costs complicates the picture. Political risks must be evaluated. Pressures for Cost Reductions: are greatest (In industries/ when major competitors based in low cost locations/ where there is persistent excess capacity/ where consumers powerful and face low switching costs). To respond to these pressures firms need to lower value creation costs.

Pressures for Local Responsiveness: Appear from differences in consumer tastes-traditional practices and infrastructure-and distribution channels/ host government demands. Firms facing these pressures need differentiate their products and marketing strategy in each country. Strategies: 4 basic strategies to compete in international environment: 1.Global Standardization (Focuses on increasing profitability and profit growth by reducing costs that come from economies of scale and location economies. Strategic goal is pursue a low-cost strategy on a global scale. G.S.s makes sense when there are strong pressures for cost reductions and minimal demands for local answers) /2.Localization (focuses on increasing profitability by customizing firm’s goods. Makes sense when are substantial differences across nations and where cost pressures are not too intense)/ 3.Transnational (achieve low costs, differentiate product offering across geographic markets to account for local differences and to stimulate a multidirectional flow of skills between subsidiaries. Makes sense when there are high cost pressures and high pressures for local responsiveness)/ 4.International (Taking products first produced for domestic market and selling them internationally with minimal local customization. Makes sense when low cost pressures and low pressures for local resp.) Strategic Alliances: Cooperative agreements between potential or actual competitors. Examples: Formal joint ventures & short term contractual arrangements. Number of strategic alliances has risen recent decades. Advantages of Strategic Alliances: Attractive because they (facilitate entry into foreign market, allow firms share fixed costs of developing new products, unifies complementary skills and assets, and can help establish technological standards for industry). Disadvantages of Strategic Alliances: Can give competitors low-cost routes to new technology and markets, and can give away more than it receives.