Blue Ocean Strategy. How IKEA created a new market

Table of Contents

Executive Summary

List of Abbreviations

List of Figures

1. Introduction
1.1. Problem Definition
1.2. Objectives
1.3. Methodology

2. Strategy
2.1. Aims and Characteristics
2.2. Corporate and Business Strategy
2.2.1. Marked-based View
2.2.2. Resource-based View

3. Blue Ocean Strategy
3.1. Basic Approach
3.1.1. Accruement
3.1.2. Red and Blue Oceans
3.1.3. Value Innovation
3.2. Analytical Tools and Frameworks
3.2.1. Strategy Canvas
3.2.2. Four Actions Framework
3.2.3. Three Characteristics of a Good Strategy
3.3. Six Path Framework to find Blue Oceans

4. IKEA and BOS
4.1. Facts and Figures
4.2. Business Model
4.3. Market Overview
4.4. IKEA’s Blue Ocean Strategy
4.4.1. Strategy Canvas
4.4.2. ERRC Grid

5. Critical Analysis
5.1. Sustainability
5.2. BOS versus Marked-based View
5.3. BOS versus Resource-based View
5.4. Limitations of the BOS

6. Conclusion

Bibliography

List of Abbreviations

Executive Summary

This assignment describes the Blue Ocean Strategy as an innovation concept within the corporate strategic management on the example of IKEA. This is be done by analysing the framework and the tools of the Blue Ocean Strategy by considering both basic principles and practical implementation.

The Blue Ocean Strategy aspires to turn strategic management on its head by putting “value innovation” in front of “competitive advantage” as the basically goal to create consumer demand and exploit untapped markets. When IKEA entered the market in the late 1950s they focused on the important factors that buyer value and make them to co-producers by implementing unique do-it-yourself mentality. Therefor IKEA combined differentiation with a cost leadership and created a blue ocean helping the founder Ingvar Kamprad to become one of the wealthiest people in the world. As the current business world continues moving towards a faster, more global environment in which there are more and more competitors trying to grab a piece of the pie, the need to develop blue oceans has never been greater.

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: Porter´s Five Forces

Figure 2: Value Innovation

Figure 3: Red Ocean versus Blue Ocean Strategy

Figure 4: Strategy Canvas of Casella´s [yellow tail]

Figure 5: The Four Actions Framework

Figure 6: History of IKEA

Figure 7: Stores Opening Worldwide from 1958 - 2013

Figure 8: Value of imported furnitures in 2012

Figure 9: Strategic Canvas

Figure 10: Most important factors by buying furniture

Figure 11: Properties of IKEA furniture’s

Figure 12: ERRC Grid IKEA

1 Introduction

“ Innovation is the central issue in economic prosperity. ” ¹

This statement merits closer examination because also Peter F. Drucker defined innovation next to marketing as the basic function of a business enterprise in order to achieve their purpose: to create a customer.² The Blue Ocean Strategy (BOS) belongs to the most successful innovation concept within the corporate strategic management and was developed by two professors of economics W. Chan Kim and Renée Mauborgne at the well-respected French Business School INSEAD.³ Their in 2005 published book “Blue Ocean Strategy” changed the way thinking about business strategy and became the worldwide bestselling strategy book which is to date translated into 43 languages and sold over 3.5 million times.⁴ They found out that competing in overcrowded industries is no way to sustain performance and the only way out is to create blue oceans of uncontested market space.⁵ This assignment analyses the BOS and gives a practical implementation on example of IKEA.

1.1 Problem Definition

Since Michael Porter´s publishing of “Competitive Strategy” in 1980 competition has been the heart of corporate strategy and companies have to be flexible to respond rapidly to competitive and market changes.⁶ The BOS allows companies to break from this competition and give them the opportunity for highly profitable growth.

1.2 Objectives

The objective of this assignment is to analyse the framework and the tools of the BOS by considering both basic principles and practical implementation.

1.3 Methodology

Besides the introduction and the objectives in chapter one, the structure of this assignment bases on the explanation and definition of the strategic process in chapter two. The third chapter is dedicated to the BOS and its process. Therefore the tools will be defined and explained. In chapter four the practical implementation on IKEA is given. The fifth chapter provides a critical evaluation of the BOS before the assignment closes with a conclusion in chapter six.

2 Strategy

2.1 Aims and Characteristics

On an etymological view the roots of the term strategy based on the greek words “Stratos” (army) and “Agein” (lead). Whereas by the time of Pericles (450 BC) military leaders in greek were named “Strategos” the transfer into business administration began with the game theory of Neumann and Morgenstern in the middle of the 20th century.⁷ For them strategy is the completely plan that allows players in all situations making the right choice.⁸ Due to that Ansoff and other representatives of the “Harvard Approach” implemented the term of strategy into the management teaching.⁹

Although, there is to date no exact definition a company´s strategy can be defined as the game plan management is using for running the business, conducting operations and to gain competitive advantage.¹⁰ Generally a strategy should get the answers to three central questions:¹¹

- What´s the company´s situation?
- Where does the company need to go from here?
- How should it get there?

The first question faces the status quo of the company as well as the industry conditions and competitive pressures and can be covered by using the SWOT analysis. Furthermore an answer of preferred branches and market should be given. The second questions pushes managers to deduce consequences from the SWOT analysis by making choices about the direction of the company whereas the third question challenges them to craft and execute a strategy by considering the core competences and there long potential as well.¹²

2.2 Corporate and Business Strategy

According to the three basic strategic questions in chapter 2.1 two¹³ distinct or levels of strategy occur: corporate and business strategy.¹⁴ Corporate strategy is deciding in what business the company should be in and how the general processes should be structured as well as managed.¹⁵ Business strategy is deciding how to compete within the particular business segments. Due to that companies with more than one business segment can have several business strategies whereas in single-business companies the corporate and business strategy merge into one business strategy.¹⁶ The two most established and contrarian business strategy approaches are the market-based view or approach and the resource-based view or approach.¹⁷

2.2.1 Marked-based View

Basis of the marked-based view is the structure-conduct-performance-paradigm of Mason/Bain in which competitive advantages (performance) are dependent on the industry structure as well as the strategic behaviour (conduct) of the company. Therefor the significant character is the consideration of the company from a sales market view that is called outside-in perspective.¹⁸ The most popular representative of the marked-based view is Michael Porter who measures the attractiveness of a branch with Porter´s five forces that are shown in Figure 1.¹⁹ The strength of these five basic competitive forces determine the intensity of industry competition as well as the profitability whereas the strongest force become crucial from the point of view of the strategy formulation.²⁰ Generally the higher the intensity the lower is the profitability.

Figure 1: Porter´s Five Forces (own figure, taken from: Porter, M. E. (1980), p. 4.)

illustration not visible in this excerpt

In order to achieve a competitive advantage Porter developed three generic strategies: cost leadership, differentiation and market niche leadership.²¹

2.2.2 Resource-based View

The resource-based view based on the resources-conduct-performance-paradigm of Penrose and focuses on an active inside-out perspective in which the internal resources as well the potential of the company are the basis for sustainable prosperity. Therefor the main task of the management is to structure and develop resources. These resources can be classified into tangible, intangible and human resources.²² According to Barney/Hesterly the internal resources and capabilities can be analysed with the VRIO framework that is the abbreviation for value, rarity, imitability and organization.²³ Due to that a resource: has to create a value, is rare, difficult to imitable and has to apply properly by the company.

3 Blue Ocean Strategy

3.1 Basic Approach

3.1.1 Accruement

The accruement of the strategy based on a study of Kim/Mauborgne in which they investigated over 150 strategic moves made from 1880 to 2000 in more than 30 industries.²⁴ They found out that neither industry nor organizational characteristics can explain the success of a business but that there is a striking commonality concerning the approaches of the successful ones. Most of them decided to find new markets with no competitors that Kim/Mauborgne called blue oceans. In order to achieve success and to forget competition companies have to open up blue oceans.²⁵

3.1.2 Red and Blue Oceans

Red oceans represent all existing markets and are characterised through exacting competitors and market saturation. The industry boundaries are well defined and accepted and furthermore the competitive rules are known.²⁶ In these markets companies have to gain a competitive advantage for example by using the generic strategies of Porter (see chapter 2.2.1). Caused by the increasing of market participants both profit and growth are moderate. Products are becoming bulk goods and the competition is getting rougher colouring the water blood red.²⁷

Otherwise blue oceans are markets that are defined by unexplored market space, demand creation and the chance for highly profitable growth as well.²⁸ There is no competition and the industry boundaries have to be defined additionally.

Most of them are created from within red oceans by expanding existing industry boundaries.²⁹

3.1.3 Value Innovation

Innovations are major drivers of long-term corporate growth and especially different products as well as services creating new potentials.³⁰ The value innovation is the cornerstone of the BOS and the strategic logic of high growth that was firstly proofed by Kim/Mauborgne in a five-year study in the late 1990s.³¹ The value innovation is shown in Figure 2 and created when the company can reduce costs and lift buyer value at the same time. It anchors innovation with buyer value and differs from value creation as well as technology innovation.³²

illustration not visible in this excerpt

Figure 2: Value Innovation (own figure, taken from: Kim, W. C., Mauborgne, R. (2005b), p. 16)

Therefor the BOS is a hybrid strategy that pursues differentiation and low cost simultaneously.³³ This is possible by reducing the factors an industry competes on and by raising and creating elements the industry has not offered before.³⁴ Value innovation furthermore based on a Reconstructionist view due to that market boundaries as well as industry structure could be reconstructed by actions and beliefs of industry players.³⁵ Due to the fact that many products offering a plurality of functions that customers neither value nor use value innovation has not to be a technical enhancement.³⁶ The key defining features of both red and blue ocean strategies are shown in Figure 3.

illustration not visible in this excerpt

Figure 3: Red Ocean versus Blue Ocean Strategy (own figure, taken from: Kim, W. C., Mauborgne, R. (2005b), p. 18.)

3.2 Analytical Tools and Frameworks

In the following subchapters a description of tools and frameworks of the BOS are given as well as the three essential characteristics of a good strategy.

3.2.1 Strategy Canvas

The strategy canvas is the initial point of every value innovation and represents the actual market situation that is shown in Figure 4 on example of the U.S. wine industry.³⁷ The key competing factors are represented on the horizontal axis and the offering level that buyers receive on the vertical axis.³⁸ The initial situation within the U.S. wine industry is illustrated by the two value curves of premium and budget wines. It’s clear that the branch is representing a classic red ocean consisting of differentiators (premium wines) and cost leadership (budget wines).

illustration not visible in this excerpt

Figure 4: Strategy Canvas of Casella´s [yellow tail] (taken from: Kim, W. C., Mauborgne, R. (2005b), p. 32

[...]

---

¹ Porter, M. E. (1980), p. 30.

² Cf. Drucker, P. F. (1974), p. 57.

³ Cf. Rawitzer, H., Hefti, J. (2013), p. 125.

⁴ Cf. Thompson, V. (2014), p. 1.

⁵ Cf. Kim, W. C., Mauborgne, R. (2004), p. 77.

⁶ Cf. Kim, W. C., Mauborgne, R. (2005a), p. 105; Mintzberg, H. et al. (2003), p. 16.

⁷ Cf. Welge, M. K., Al-Laham, A. (2008), p. 15.

⁸ Cf. Neumann, J., Morgenstern, O. (1967), p. 79.

⁹ Cf. Welge, M. K., Al-Laham, A. (2008), p. 15.

¹⁰ Cf. Barney, J. B., Hesterly, W. S. (2008), p. 26; Drucker, P. F. (1994), pp. 99-104; Mintzberg, H. et al. (2003), pp. 16-18; Thompson, A. A., Strickland, A. J. (2003): p. 1; Thompson, A. A. et al. (2010), pp. 5-6.

¹¹ Cf. Drucker, P. F. (1994): pp. 99-100; Steinmann, H., Schreyögg, G. (2005), p. 169; Thompson, A. A. et al. (2010), p. 5.

¹² Cf. Steinmann, H., Schreyögg, G. (2005), p. 169; Thompson, A. A. et al. (2010), p. 5.

¹³ Next to these two levels other authors add functional-area as well as operating strategies, cf. Thompson, A. A. et al. (2010), p. 39.

¹⁴ Cf. Steinmann, H., Schreyögg, G. (2005), p. 170.

¹⁵ Cf. Thompson, J., Martin, F. (2010), p. 28.

¹⁶ Cf. Steinmann, H., Schreyögg, G. (2005), pp. 170-171; Thompson, A. A. et al. (2010), pp. 39- 41.

¹⁷ Cf. Bea, F. X., Haas, J. (2009), pp. 27-28.

¹⁸ Cf. Bea, F. X., Haas, J. (2009), pp. 28-29.

¹⁹ Cf. Porter, M. E. (1980), pp. 3-4.

²⁰ Cf. Porter, M. E. (1980), pp. 4-6.

²¹ Cf. Porter, M. E. (2004), pp. 11-15.

²² Cf. Bea, F. X., Haas, J. (2009), pp. 30-31.

²³ Cf. Barney, J. B., Hesterly, W. S. (2008), pp. 76-77.

²⁴ Cf. Kim, W. C., Mauborgne, R. (2005b), p. 11.

²⁵ Cf. ebenda, pp. 10-12.

²⁶ Cf. ebenda, p. 4.

²⁷ Cf. Kim, W. C., Mauborgne, R. (2005c), p. 72.

²⁸ Cf. Kim, W. C., Mauborgne, R. (2005b), p. 4.

²⁹ Cf. Kim, W. C., Mauborgne, R. (2004), p. 80.

³⁰ Cf. Buisson, B., Silberzahn, P. (2010), p. 359; Drucker, P. F. (1974), p. 60.

³¹ Cf. Kim, W. C., Mauborgne, R. (1997), p. 103.

³² Cf. Kim, W. C., Mauborgne, R. (1999), p. 45.

³³ Cf. Kim, W. C., Mauborgne, R. (2004), p. 83.

³⁴ Cf. Kim, W. C., Mauborgne, R. (2005b), p. 13.

³⁵ Cf. ebenda, pp. 17-18.

³⁶ Cf. Kim, W. C., Mauborgne, R. (2005c), p. 76.

³⁷ Cf. Kim, W. C., Mauborgne, R. (2005b), p. 32.

³⁸ Cf. ebenda, pp. 25-27.