Case Study: Political Legal Factors in IKEA

In order to identify the objectives and strategies of the IKEA it is very important to identify vision, mission and objectives of the company.

IKEA vision statement is:

“To create a better everyday life for the many.”

IKEA mission statement is:

“To offer a wide range of home furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them”

IKEA market positioning statement is:

“Your partner in better living. We do our part, you do yours. Together we save money.”

Objectives

– To produce cheap and affordable product for the public/customers.

– Better life for those who can’t afford expensive products.

– Ensure the customer finds what they are looking for in store.

– Low prices

Source: www.ikea.com

Since the political and legal issues highly influence the organizational activities the management should have a brief but clear knowledge on these factors and how they affect the organization.

Trading agreements – (EU,NAFTA,ASEAN)

Competition law

Government stability

Taxation policies

Business ethics

Social welfare policies

Employment law

Health and safety issues

Product safety

Foreign trade regulations

According to the case IKEA has always been outstanding among the conventional companies in the same industry. This tendency to be radical that comes as package with the company culture draws attention to IKEA in the global political arena. A company should always comply with the laws and legislations of a county where all the legal procedures are maintained by the political system of that country. For example, the environmental protection law, tax laws, attitude towards foreign companies. Because of the new environmental protection laws IKEA has taken procedures to comply their products with a more eco- friendly category.

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IKEA Goes Renewable

The long term direction is for all IKEA Group buildings to be supplied with renewable energy. In addition, we want to improve the IKEA Group’s overall energy efficiency by 25 percent compared with 2005. Among other things we will use energy-saving light bulbs where possible, will have the lights on only when warehouses are open, and will install extra insulation to save on energy for heating and cooling.

Then we are going to make sure that all IKEA Group stores, warehouses, distribution centers, factories and offices are heated and cooled using renewable fuels such as wind, water, solar power, biofuels and geothermal energy.

Source: www.ikea.com

The above passage taken from the IKEA website shows the initiative taken by IKEA in order to abide by the Environment Protection laws as well as to ensure their cooperate responsibility.

Economic Factors

The purpose of having any business/organization is to have a better economic stability. Due to this reason any business organization has to be highly concerned of the economic factors in short term as well as long term.

economic stability

Interest rates

Inflation,Unemploymet

Gross Domestic Product (GDP),Gross National Product (GNP)

Money supply

Disposable Income

Business Cycles

Especially in a case such as IKEA since the future of the organization directly affects to country’s achievements; adjustment with the economic variables is essential. The government and the organization have an unbreakable relationship when it comes to the economic environment. The government can directly affect the economic situation of the organization and the organization is also able to influence the government (in an instance such as IKEA). When considering the main economic variables, purchasing power of consumers, consumer confidence, disposable and discretionary income, consumer credit and interest rates, general economic conditions and government trade policies such as fiscal and monetary policies, industry subsidies, foreign trade policies, goods and services tax (GST) can be taken in to consideration(Marketing,P.38). While each and every component affect to the organization and also later to the government it is good for IKEA to perform according to the standards.

IKEA is an organization which is in an industry where the price is always perceived as high. But the strategies of IKEA most of the time serve the low budgeted customers who are known as the middle class in the social hierarchy. Since IKEA is considered less expensive than its competitors it should attain and compromise with effective plans with the community it works with. This mainly focus on the rules and regulations declared by the respective governments on their economical plans and as business services organizations they should adapt to these conditions to keep their business in tact with the respective countries. Business that flow as a services has to look out for GDP trends, interest rates , wage, price controls as they should also try to maximize the gap between expenditure as income. According to the case study IKEA is expanding at a massive rate like 20 new stores opening up annually.

Socio- cultural Factors

Since the business world is a compilation of diverse people who are differentiated by age, religion, country and gender it is vital to have a clear idea about the socio-cultural factors such as;

Life style changes

Role of men and women within society (Gender)

Population

Education level

Religion

Attitudes towards work and leisure

Languages

This element is particularly used to find about the particular socio and cultural issues in the particular country. This is a mixture of set of values, beliefs and norms. Since IKEA is a globally expanded Company it has to be concerned about both socio and cultural issues which strictly affect the business as well as the government.HR managers have to think about these HR practices since there will be expatriates who comes from different regions.”They provide a good insight in to the understandings of the markets and how they impact on a business.”(Williams, 2008, p.35)

This is an important element in identifying the target segments of some particular business. In the case of IKEA the best example to prove that the socio-cultural environment is important is the failure when they tried to move to Japan with their products. The Japanese culture and the social norms were not compatible with the products introduced by IKEA. And another fact is the refusal to recognize unions and not providing adequate work conditions. After all if the company is unable to look after and to hear what their employees say then there will not be a productive working culture which would without doubt result in a loss of profits.

Technological Factors

In the simplest manner technology can be defined as the practical application of science to commerce or industry (‘Word Net’, n.d.).

New Discoveries – Tailor machines, robots

New developments – Internet banking, mobile phones

New technologies – Books via internet

New ways to communicate – Customer relationship management (CRM)

Rates of obsolescence

Technology is a remarkable factor which influences both the consumers and the organizations in today’s world. Technology can do many things within few seconds. It can perform tasks which are 100% accurate and humanly impossible. Most of the time technology is the Sustainable Competitive Advantage among the competitors and the substitutes in a particular industry.

“Technology can be used to enhance the product by improving quality, adding features, expanding the range, reducing the price etc”. (Williams, 2008, p.39)

Technology is an integral part of any business. Using it to gain more effectiveness and efficiency to a business is of a positive approach but similarly it is be used in such a manner that sometimes it could lead to ethical issues. Even IKEA with its high tech tactics contribute to the environmental issues as many of the other companies in the industry do. And there also raises the ethical concern of how far this is correct and what the limit is.

Appendix_3

Porter’s five forces Model

Source: www. tomspencer.com.au

Intensity of current Competition

The purpose of having this factor “Intensity of current competition” is to evaluate the degree of competition among similar firms in the same industry. Because of this insistent competition it is hard for generate profits.

Rivalry will be high if:

many competitors are in the market

Slow market growth in the product life cycle

High fixed costs in an industry

High exit barriers

Markets are undifferentiated

Brand loyal customers who wish to switch with particular brands

This aspect assesses the competition among the firms in the same industry. When the competition occurs it benefits the customers. Because then they have the bargain power and they can get the best offers. There are approximately 10 direct and indirect competitors for IKEA globally. All these home products businesses are very similar to each other. But they may use different business plans and strategies; because their financial details, capital involved, technological advancements and other factors are different in one to another. And also all these companies do not use the same raw material and most of the time IKEA possess the advantage of technological advancement.

The target market of IKEA which is mainly the middle class is highly price conscious and therefore it will massively influence the profits of IKEA if its competitors come up with the same strategy with better prices and quality.

Threat of potential competitors

This factor explains the limits to entry exist for the competitors. Therefore current firms can make comparatively high profits.

The barriers would be;

The economies of scale

Level of capital requirements of entry high

Customer or supplier loyalty towards the existing brands

Competitive organizations in the market, behave aggressive manner towards new entrants

Experience which has been gain after operating in the same industry

Expected retaliation

Government rules and regulations prevent entry and make them difficult.

Differentiation

Threat of potential competitors explains the barriers that exist for the competitors when they enter in to the industry. Among the factors which influence the product/service in the market main factor is brand loyalty. IKEA has a high rate of brand loyalty among its customers over period of thirty years.

Level of capital requirement would be another issue. Since the economic level is not so good it is not that easy to go to higher investments (capital) and also when a new comer comes in to the market before gaining profits they have to undergo thee expenses such as purchasing or hiring carpenters, recruiting new managerial staff, do research and development, maintaining the quality of the products, wages/salaries, advertising and many other things. Till the new comers identify the exact strategies they will have to spend time without gaining profits which will be highly expensive and has the probability of leading to a closure if proper strategies are not implemented. Because of the above expenses it is difficult to provide low prices to the customers.

The economic down turns or most of the time external shocks ( for example the recession in 2008) will be disastrous or the more specifically deadly for the new entrants to the market. Massive companies such as IKEA survive those shocks due to the superior power they have gained in the market over the years.

Threat of substitute products

Substitutes are other products which can be used to satisfy the same needs. It gives the equal satisfaction to the consumer. Normally people switch to these substitutes when the original product does not exist in the market or it could totally depend on the customer’s purchasing power. Customers switch to these substitute products when they are:

reliable

cheap appliances

few substitutes

limited rivalry

weak suppliers and buyers

Substitutes are the products which can satisfy the same needs. IKEA provides the home products which are used at home. So the substitutes of IKEA will be similar appliances like (a plastic chair for a wooden chair). According to the example the plastic chair will be preferred by a certain group of customers due to the reasons of durability, low price etc.

Bargaining power of customers

When there are no of firms in the market which provide the same set of products it automatically makes bargaining power of customers higher. Because of that it could have enough strength to reduce the price.

Buyer bargaining power will be high if:

there are few, big buyers who are very important to the firm

there is a lot of suppliers and optional sources of supply.

the buyers can easily switch to the products as high quality at a good price.

there is the threat of backward integration

Bargaining power always depends on the quality of the product, brand loyalty, demand & supply, and number of buyers in the industry. Since global home products industry is a massive market, buyers’ bargaining power is high when they bargain collectively, but there is a less bargaining power when they bargain individually. When it comes to switching cost of the IKEA, it is very low even though there are many other businesses which are on the same industry and it is essential for IKEA to keep a competitive price with the competitors since it is one of their Key Success Factors.

Bargaining power of suppliers

When there are few suppliers in the market they can set the price to the product. They have an authority to bargain the price. They are the price makers.

Suppliers bargaining power is high when:

Customers bargaining power is low

Customer has to spend high switching cost or difficult

Buyer has few alternatives

Supplier’s brand name and quality highly powerful

Supplier bargaining power depends on the amount of the suppliers in the market. If the suppliers are limited then the bargaining power is high. Competitors in the home products industry are Target Corp. (TGT), Kmart, Fly and Nitori Co.

IKEA is the pioneer of low cost furniture segment. When it comes to furniture most of the other home products companies have been charging relatively higher prices. Therefore IKEA holds a competitive advantage compared to the other home products companies when it comes to their prices as well as their strategy.

Appendix_4

VRIO/VRINE Model

Source: www.fao.org

Appendix_5

Value Chain Analysis

Michael Porter’s Value chain analysis can be used as “a tool for identifying the best ways to create more customer value” (Kotler, 2004) accordingly. By using value chain Porter recognizes nine strategic activities which make value and cost to the business. This is divided in to two ways as;

Primary activities – direct with design and the production.

Inbound logistics, operations, outbound logistics, marketing and sales, service

Support activities – not directly involved with the production but to increase the efficiency and effectiveness.

Procurement, technology development, human resource management, firm infrastructure

Primary Activities:

Inbound Logistics – they are purchasing of bulks. IKEA always uses this strategy in order to minimize its costs. When you purchase a bulk of products you can have special discounts. Operations – the raw material are brought to the factories and are made by employees under the supervision of the experts. And the new designs are being always made in the Research and development units of IKEA.

Outbound logistics – they make sure they use environmentally friendly methods of transportation and maintains the maximum level of efficiency and the minimum level of cost.

Marketing and Sales- IKEA uses certain cost cutting methods like the material used to make the products and so on.

After sales services – IKEA provides an excellent service of after sales services.

Secondary Activities:

1. Procurement – IKEA is highly concerned about the brand awareness of their customers and make sure their advertising strategy does its job.

2. Technology development – with the technology development IKEA has adopted to new, fast methods of producing home products which most certainly provide them the chance of more rapid growth.

3. HRM – IKEA is highly concerned about the customers safety and comfort as well as the affordability. When they recruit so far they have been given a training of the company’s values and its culture by its core founder Kamprad.

4. Firm Infrastructure – There has to be a high concern for the factors such as safety of the workers in factories and ensure that they are provided with the necessary infrastructure facilities.