IKEA Pestel Porters 5 Forces And Swot Analysis

This report focuses on the analysis of IKEA, one of the world’s largest stores for home furnishing appliances. The socio-economic and political environment is analysed using PESTEL. An insight into the level of competition within the market and influence of major factors in the growth of the company are obtained by using Porter’s 5 Forces. SWOT analysis of IKEA is conducted to exploit the many strengths of the company and apply them to provide more opportunities by overcoming significant threats it may run into during the continuous development. A scrutiny of the value chain activities which directly and indirectly affects the customer is also conducted as part of this study.

IKEA is a Swedish global home furnishing company founded by Ingwar Kamprad in 1940s (IKEA, 1999) with its market expanded into Europe, US, Asia, Australia and Middle East. Spanning more than six decades, the company has spread its wings into other major sectors like food and media. The sales figures for 1998 showed a humble 6.3bn Euros while the figures increased to an impressive 21.2bn Euros in just a decade (IKEA, 2008). During this decade, IKEA developed from a home furnishing retailer into a global icon through meticulous planning, effective resource utilisation and pricing strategies. In 2005, the company had 226 stores spread over 33 countries; sales being highest in Europe by 81% (BusinessWeek, 2005). In a press report released in November 2009, IKEA has reported growth in UK annual sales to £1.2bn and an increase in market share by 0.7%. (IKEA, 2009). Considering the morbid economic climate that prevailed in US and European markets in this period, these statistical figures can be considered as a positive sign for the continual growth of the company. This report investigates the various factors in the company’s growth and survival, through PESTEL, SWOT and Porter’s five forces analysis.

World Trade Organisation has relaxed the restrictions on foreign trade by introducing trade liberalisations which forced the economies of developing countries to open up their markets to Western goods (Bentley, 2009). IKEA originated in Sweden but the furniture retail, distribution and wholesale market has now expanded to other European Union countries, Asia, North America and Australia in a short time due to opening up of the global market.

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Recession took its toll largely on the job markets in US, UK and other Western economies. Unemployment hit a record high of 80,000 per day in these countries (Wray, 2009), as a result of which customers do not have enough money to spend on shopping. IKEA’s figures showed a flat profit in 2009 with the same forecasted for financial year 2010 while sales for Sept 2008-Aug 2009 have increased by 1.4% (The Local, 2010).

While markets in UK and US remain stagnant, International Monetary Fund has predicted the growth of Asian economies by 5.75% in 2010 (BBC News,2009). As IKEA has opened stores in Asia, the growing trend in those markets may compensate the flat profits obtained by the company from Western economies.

Based on World Bank’s GDP statistics for 2008, growth rate was 0.7% for Europe and US, 5.8% for UAE and 6.9% for South Asia (The World Bank, 2008). IKEA has operations in Eastern economies like UAE, Kuwait, Saudi Arabia and Asian economies like China which can hopefully counteract the slowdown in economies of the West.

UK government has introduced tax relaxations for environment friendly, energy saving equipments and raw materials as part of the Enhanced Capital Allowance (ECA) scheme to promote environment friendly technology and combat climate change (ECA scheme, 2010). IKEA has come up with a Green Tech (Murray, 2008) investment focusing on utilising renewable and energy efficient sources like solar energy for heating and lighting.

UN and WTO have joined hands with countries across the world in promoting waste recycling, reclaiming products and reducing carbon emissions. IKEA has optimised transportation of raw and finished materials per load thereby reducing the number of truck journeys which helped in lowering carbon emissions and fuel consumption. IKEA also promotes recyclable packaging and water conservation (IKEA, 2008).

With increasing purchasing power in online shopping more companies are trying to imitate large retailers for luring customers. IKEA had gone into legal battle with a company having its internet domain name registered as “iloveikea” (Nylander, 2009). Although IKEA won the case, the possibility of customers being misled by the similarity in domain names cannot be ignored.

Expansion of trade into the Far East and third world countries has led to the illegal employment of children by suppliers for reducing labour cost. IKEA was recently exposed to sensitive issues like child labour and illegal cutting down of trees to secure raw materials (Wadsworth, 2010).

IKEA has got high competition within the industry, main competitors being Ashley Furniture, Galiform, Wal-Mart, John Lewis and Homebase in the home furnishing sector. But the global brand name and the trust in customers about the product quality, cost effectiveness and immensely popular design has given IKEA a competitive edge.

Growing market trends made IKEA diversify its business empire into food and textile industry. UK food industry is already being ruled by supermarket giants Sainsbury’s, Tesco, Morrisons and Asda. To gain a place among these thoroughly established companies is a big challenge.

IKEA also forayed into the mobile industry by offering cheap and flexible non-contract mobile services for its customers (Lomas, 2008). Mobile sector is intensely competitive with the top players Virgin, Vodafone, Orange, O2 and BT offering unlimited free minutes and messages over the contract period. While price slash and flexibility may give viability, it is immensely hard to stay on top as the customers will be more inclined towards conservative brands.

Logistics include receiving and replenishment, managing goods coming in and going out and stock controlling. IKEA has got well defined rules to ensure all these activities are completed efficiently. Suppliers are categorised based on the lead time that they work on. It has got over 31 distribution centres and more than 1350 suppliers in over 50 countries (Jonsson et al., 2008).

Production Planning

IKEA uses integrated planning process with the help of information system support for a centralised planning organisation. Supply chain is majority make to stock and very minimal customer orders. Forecasting plays a major role in the planning activities of the organisation. Advanced planning tools has been deployed to effectively forecast the requirement (IKEA, 2009)

Sales and Distribution

Just like production planning the sales planning of IKEA begins with the overall sales forecast by the corporate management team. Another set of forecasting is done by the demand planners for all 12 business areas based on future outlook and growth plan. Both these results are compared and reconciled to reach at the final target. This is further taken forward by need planners who ensure that it matches with the capacity planning (IKEA, 2009).

Marketing

The organisation makes use of mixed options for their marketing purposes. Primary concentration is on the print media while video, audio and internet related communications are also used to a great extent. Catalogue is the main marketing tool with majority of the annual marketing budget spent on it. Visual simulating tool (Portable Interior Planner) (MobiADNews, 2009), mobile coupons and customer loyalty programs over the internet also helped in communicating effectively the ideas of the organisation and increase the customer following (IKEA, 2009).

Support Chain

Customer Services

Innovation in IKEA and the acceptance of its customer service helped place the organisation as one of the most sought after retail stores. There have been few complaints on the responsiveness of IKEA customer services but lately the organisation has been trying to sort out all the concerns quickly and in a satisfactory manner (IKEA, 2009).

Administration and Management

IKEA has an almost flat organisation structure where all employees are addressed as co-workers. The corporate culture is built not only at employee level but also at supplier level. Efficiency and cost saving are given more emphasis without compromising on quality. The organisation is clearly structured and there are good communication channels between the various units (IKEA, 2009)

Resource Management

Resource Management is one of the key focus areas of IKEA. This resulted in building a committed team responsible for all the innovative ideas in home furnishing. Due importance is given to recruit the right talent and provide regular trainings and other opportunities to enhance skill sets. Openness and flexible work design also encouraged the co-workers to provide their maximum output.

Technology

IKEA has strategically invested in various technological innovations which help in keeping the competitive advantage. Advanced Planning Systems, Visual Simulator (MobiADNews, 2009), catalogue application in iPhone (Baker, 2009) are few key investments done by the company.

Procurement

IKEAs’ strategy is to procure the raw-materials from low-cost countries which help in reducing the overall cost to the customer. The organisation believes that competition is the driving factor for improvement and goes into a competitive mode with its suppliers. Possibility of greater competition between the various suppliers helps IKEA to maintain the cost advantage (IKEA, 2009).

Conclusion

IKEA has evolved as a global leader achieving a cult status in the retail industry and has earned the faith and goodwill of the customers all over the world by exploiting its strengths in production, marketing and distribution sectors. The growth prospects and business expansion are already approaching saturation. In addition to focusing on expansion, IKEA has to be very careful in preserving its image as a cost effective solution without compromising on quality. Search for greener pastures and fertile economies to sow the seeds of success have to be meticulously carried out by overcoming the challenges faced by the industry.