IKEA: Making a success of being “Stuck in the middle”?
Each organization in the world follows some strategies to carry out its business activities in an appropriate manner. Strategies are the game plans stating that how to achieve an organization’s goals. Strategies, if outlined in an optimal manner can take full advantage of a company’s competitive advantage, where competitive advantage refers to a company’s ability to stand out from its competitors in the business, i.e. a business’ distinctive point, which is not easily imitate able by the firms in competition. Competitive advantage of a firm can come from its core competencies, a business’ capability to do a thing in a different manner from others, organizational resources, firm’s plus points like an organization holds something very unique which others in that industry don’t have. It’s not a real issue that a company is having competitive advantage over the other firms, but the main thing is to ‘ sustain’ that competitive edge over a long period of time. Because all business firms have resources, capabilities and core competencies, if these are utilized effectively, competitive advantage is gained but the crucial fact is the sustainability of that edge over a long time. For that purpose a business has to adopt such a business strategy which will lead to a sustainable competitive advantage, because a business strategy directs a business in dealing with its competition within the business or industry, in which it serves, i.e. it simply defines a competitive strategy.
Basically, there are three general competitive strategies proposed by Michael Porter, and famously known as “Porter’s Generic Competitive Strategies”. Porter has done a lot of work to develop literary work on the key concepts of Strategic Management. Porter implied that for any business organization there are two most important things to decide. Firstly, the scope of the market in which that organization is going to serve i.e. whether organization is going to serve a broad market or it is planning to serve into a small niche only, that is, it defines competitive scope for the business organization. Secondly, the organization has to decide that in what way it would be competing in the chosen market i.e. whether it’s going to compete on some distinctive factor by providing goods and services in a unique way or by providing similar products and services at lower prices as compared to their competitors. Competitive strategies play a significant role in determining the position of a company in its industry. Based on the above two factors which are size of the target market and the approach to serve it, Porter proposed three generic competitive strategies which can be opt by any organization. These are:
- Lower Cost Strategy
- Differentiation Strategy
- Focus Strategy
Lower Cost Strategy: When a firm competes on the basis of lower charged prices for the goods and services in the industry, it is called to be following a “lower cost or cost leadership strategy”. A company which adopts this business strategy seeks out new and efficient ways in all activities and processes of the firm. It tries to reduce production costs, marketing costs, administrative costs, and other operative costs which are necessary for that business. This strategy is beneficial to earn more profit than competitors while at the same time it is also very useful in resisting the entry of new competitors in the business, because a very little number of new competitors will be able to provide similar goods and services at the lower price as compared to the cost leader. As this strategy serves a broad target market, so by selling to such a huge market covers the costs and also earns sufficient profits. The darker side of this strategy is that sometimes businesses which are following a cost leadership and in effort to reduce costs it may affect some of the essential feature of the business process, which may cause lose of its position within the market. Another scenario is that where a company could be a cost leader but it is not offering low priced goods and services, rather it’s charging prices equivalent to other competitors, hence earning a higher profit than others.
Differentiation Strategy: When a company competes on the basis of some differentiation in its goods and services, it is called to be following a differentiation strategy. A company can differentiate its goods and services on the basis of some unique or exclusive feature provided by the company as compared to other players in that industry. Businesses which follow this strategy usually charge high prices. As the company is providing some very distinctive feature, so it charges a premium price for that feature, and hence the prices are charged higher. Differentiation can be based not only on a unique product itself but it can also be based on some unique feature in the product, its design, it superior quality, its customer services, brand recognition, and others. As an advantage, where this strategy earns a premium, on the disadvantageous side it may also be problematic to cover the extra incurred cost in differentiating that product, even after charging a premium price. And if this business is successful there is a danger of new entrants which may provide the same products or services.
Focus Strategy: When an organization targets a narrow market or identifies a particular small segment to serve, where the competition is very low, it is called to be following a focus strategy. A company can be a cost focus or differentiation focus. The mechanism of cost focus strategy or differentiation strategy is same as mentioned above in the cost leadership and differentiation strategy but the basic difference is the “Scope of Competition”, i.e. it only produce goods and services for a narrower market.
Concept of Being “Stuck in the Middle ” : Porter argues that for any company to be successful, it’s necessary to select one of the above mentioned generic strategies. These competitive strategies are termed as generic because these can be used by any type of the organization, irrelevant to its size or market share. Hence, Michael Porter proposed a new term that is “Stuck in the Middle” for those organizations that are unable to make a choice between a cost leader and differentiation or focus, or uses all of these strategies simultaneously. Porter argues that a firm which is stuck in the middle is likely to fail because it will not be able to sustain a competitive advantage for a longer period of time, and its consequence might be a poor financial performance. Because a company which is stuck in the middle have no strategy at all, and if a company is in this position it can be successful for a shorter period of time, but in the long run it’ll fail.