Analyzing External Factors And Business Model Of IKEA, An Essay.

PESTEL Analysis of IKEA

IKEA is a Swedish based company headquartered in Delft, the Netherlands providing its customers with ready-to-assemble furniture, home accessories, kitchen appliances and different other home services (Ikea.com, 2022). The company is operating in 60 countries with a total number of stores count 458 worldwide (Ikea.com, 2022). The global revenue generated by IKEA Group is roughly around 42 billion euros (Statista, 2020). The company has also employed 225,000 employees worldwide. The following report will analyse IKEA's external environment factors affecting the company. the report will also provide an analysis of the company’s value proposition and resources and capabilities. The report will address the issues and opportunities of IKEA and will provide proper justification and alternatives for the company.

Political

Political Factors resemble government policies, foreign trade and political risk in foreign markets. In the case of IKEA disruption has occurred due to ongoing pandemic conditions imposing lockdown, shutting stores affecting the sales of the company worldwide (the Guardian, 2021). Also, in some countries trade regulation has changed like in UK IKEA has to shortage its stores count due to Brexit causing logistical problems in the country (Stellinger, 2018).

Economic

Economic Factors include unemployment rates, GDP, personal disposable income and many more. In the case of IKEA, the global pandemic has caused a rise in unemployment rates affecting the sales of the company. The company's value-based pricing and low cost assembled furniture are helping the company in gaining sales as the market has opened in various countries and retail stores have started its functionality worldwide (Sin et al., 2021).

Social

Social Factors include a change in culture and fashion, taste and preferences, income distribution etc (Laurin and Fantazy, 2017). IKEA has to consider the culture of each country for expanding its target market. IKEA has also received one-star reviews due to improper logistics and extended delivery time for its furniture. This can cause an effect on a company’s brand image as loyal customers can shift to other brands for better service.

Technological

Technological factors include innovation and development in the research field. Customers are preferring online shopping in the recent generation with dynamic pricing. IKEA is following the trend by providing a similar realistic experience for their customers in the online segment. Customers can categorize products depending upon price and room requirements through home visualization technology (Alves and Luís Reis, 2020). IKEA has also provided customers with products less than $10 through flat packing technology.

Political

Environmental

In recent times environmental issues are addressed by companies to bring sustainability. IKEA has invested 1 billion dollars towards the production of renewable energy for operating their in-store (IKEA Foundation, 2021). The company is also providing the option to customers to disassemble their furniture to IKEA through Removal and Recycling service for protecting the environment from household waste.

Legal

Legal Factors include standards, tax regulations and safety regulations. IKEA in recent times has landed in news for poor quality offering resulting in injuries causing a bad impact on brand image and quality management that the company has to focus on improving its performance of sales (BBC News, 2021). 

The Bargaining Power of Buyers

The customer bargaining power in the home appliances manufacturing industry is huge. IKEA's main customers are price sensitive and considering this situation the overall bargaining power increases (Kremer, 2019). Moreover, the absence of switching costs because there is no additional cost that buyer has to provide for getting the same product from competition increases the power of buyers.

The Bargaining Power of Suppliers

The bargaining power of suppliers is also high in this industry. The scarcity of wood supply is placing suppliers in dominating position as they can switch brands for better options (Jiang, Jia and Gong, 2018). IKEA is trying to use sustainable wood and reached the goal of 91% through getting supplies from FSC certified Plantations better for the environment and local communities.

Threat of Substitutes

The threat of substitute products is low in the furniture and home appliances industry. IKEA through its cost leadership model and value pricing has provided its customers assembled furniture at low cost (Yuan, Wang and Yuan, 2016). The company is providing a large range of product availability under one roof minimizing the risk of substitution for IKEA.

The threat of New Entrants

The threat of new entrants in the home appliances industry is high as there are no barriers but considering IKEA’s Global brand value the threat of new entrants at the global level to rival IKEA is low. This is because for the new entrants the initial operations will be the low considering economy of scale at the global level  IKEA maintains and secondly it will be difficult for the new entrants to match IKEA’s because the company has a strong distribution channel (Wilhelmsson and Persson, 2018).

Competitive Rivalry

Threat from competitors is high for IKEA as the company is facing rivalry from both direct and indirect channels (Miller and Smith, 2021). Direct competitors include Ashley Furniture, Argos and indirect includes local small-scaled manufacturers selling products online through Amazon. Even Tesco and Sainsbury sell some type of furniture increasing the risk of competition in the marketplace.

Economic

The main trends of the business include AI and automation for better visualization of products to customers. using sustainable raw materials to protect the environment and climate. Increase of unemployment and low-income sector, differentiation in range of products all these trends if focused by IKEA can provide the brand with competitive advantage through execution of new AI tools in the online segment, opting full sustainable raw materials supply and creating both low and premium quality products to cater every customer need in this industry maintaining global position ahead of competitors (Charged, 2020).

IKEA has been a customer-focused company since its launch in different markets catering for the needs of the customers by exploring the requirements of the customer. IKEA's value proposition is quality at an affordable rate. The company is providing quality furniture and home appliances to customers under 10$ to target mass audiences (Kleber, 2018). IKEA is also providing recyclable service to customers by taking back old furniture from customers and optimizing its service of sustainability. IKEA offline stores have always welcomed customers with a cup of tea and coffee as a token of gesture. The company is also catering to lower-middle group customers providing them with the opportunity to buy furniture with alternative designs at reasonable prices (Spinoglio, 2020). The company's online experience has also used innovation to provide customers with a seamless shopping experience. IKEA has used the AI Visualization tool to help customers to recognize the perfect furniture size for their rooms and special designs to create a better ambience. The company is using Flat Packaging technology that is helping in reducing the cost of the products and providing them durability (Yu, 2019). This technology is also saving materials for the company and also lowering the transportation costs of the company. The following technology is helping customers of IKEA to easily assemble the furniture and also helping in providing seamless transportation carrying products from one place to another. The IKEA customers are also getting valuable designs regarding their choices and have various categories of products to cater for the needs of every customer segment. The main mission of IKEA is to provide its customers with well-designed appliances and furniture at a price so low that everybody can afford and experience the product at the same building eco-system of sustainability and contributing novelty in-store experience (Ikea.jobs.cz, 2022).

Value

The resources and capabilities of IKEA are valuable. The company's consistency in bringing innovation in its operation and product development has created a brand image in the market. The company is offering quality at a reasonable price-point catering to the need of every customer and even the low-income group people can buy IKEA designed furniture. The company is transforming its business on a global level through different distribution channels catering both online and offline where customers can choose products and can self-assemble the furniture because using sustainable wood and cotton that the company is aiming to achieve in every product in the next five years and customers can recycle their product to IKEA service for controlling unwanted waste (Andersson and Wictor, 2018).

Social

Rare

Yes, the products of the IKEA brand are Rare. Through flat packaging technology, the company has managed to design its products at low cost and offer customers lower than that of market competitors rate. Customers are also can self-design their furniture according to their choices with new technologies providing audiences with the freedom to have the design the company products is offering is rare because it is difficult to find the three core pillars in one brand offering and those are quality, price and design. IKEA advertising is also taking a prominent part in attracting more customers based on the social and influential message. IKEA's customer satisfaction rate in stores is exceptional as the brand offer novelty gesture of providing tea and coffee to its customers increasing the loyalty of the brand among customers (Cichosz et al., 2017).

Inimitable

The use of technology of IKEA is exceptional at the global level with proper product management and design and operation handling but competitors can copy the idea of IKEA to create a more sustainable business in the future. the right skill of money, time and resources will help competitors to imitate the products of IKEA in the long run. The companies are presently falling behind the strong brand image of IKEA in the global market but competitors are focusing on quality and design to affect the market of IKEA also in recent times IKEA has got negative reviews on quality as the company is focusing on Cost Differentiation strategy. IKEA products can be imitable and have to be constantly innovated for long-term strategy (Wu, 2020).

Organizational Support

The company is constantly serving customers in over 60 countries depending upon the cultural values and systems of different countries. IKEA has been in a global market for a long time and has a huge customer reach and base through expanding its brand recognition which has helped IKEA to be successful in its global presence (Koudounias, 2018). the company has faced issues in Saudi Arabia of portraying women in advertising but the brand hyperdynamic in managing different cultural ethics has successfully helped the company in managing the business in the country.

Reflecting on trends in manufacturing home appliances and furniture business is the application of new technology regarding sustainability and innovation in creating new ways to provide better quality, design at affordable cost. IKEA should consider targeting premium customers to increase its reputation in providing good quality products. The company's use of AI in the online segment has enlarged the visual experience of customers while buying furniture for their homes (Aimagazine.com, 2022). The political factors including taxation and export-import issues in different countries in recent times have lowered the supply chain of the company and especially talking about the UK the company has been facing problems in stacking of products in retail stores due to Brexit formulation and trade regulation. The company has been known for providing top-notch experience but in recent time facing allegations of misguiding customers and getting revenues through poor quality offering providing negative reviews in company’s portal (Shin and Larson, 2020).

Technological

IKEA should change its sustainable goal to 100% renewable resources to make their products in the market which will help the company in gaining a competitive advantage through expanding brand image and lowering operating costs to provide customers with more valuable resources. IKEA's threats are its competitors providing high-quality products at high prices to consumers with proper design catering to premium class customers who prefer quality above cost. IKEA should use this threat as an opportunity to create sub-products based on premium value segment enlarging its product diversity in the market. IKEA is also providing solar panels in many countries and should expand this business to the more economy emerging country to get a competitive advantage. IKEA has to improve its delivery options to a more sophisticated method providing customers with on-time delivery with assembling options. Customer Experience matters a lot in home appliances and IKEA should customize its Recommendation AI tools to provide valuable feedback to customers (Alrubah et al., 2020).

IKEA has a low dominance in Latin America. The company has expanded its business to Mexico but not in Chile and Brazil and both are emerging markets.  Brazil is an emerging nation but has high taxes on imports therefore IKEA should optimize its transportation costs to open production in Brazil. The company should also opt for a strategic alliance with another local company to enter the market or use a franchising strategy to lower capital costs and run its presence in these new markets. IKEA should also expand its electronic appliances portfolio to cater to more customers as the rise of technology has provided growth of electronics appliances in the global market and IKEA should use this opportunity to produce quality at low cost disrupting the electronic segment marketplace (Alaali and Vines, 2020).

Conclusion

The above report is analyses IKEA's external and internal environment concerning trends emerging in the market. IKEA has been continuously dominating the global market in manufacturing home appliances and furniture with its price and design and the value the company is providing to the customers. The company is facing a drop in sales due to the rise of pandemic and governmental conflicts but has adopted new technologies to cater for its target segment. The company is also focusing on customer experience by improving AI in its online segment for a better seamless shopping experience at the same time increasing brand equity.

References

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Environmental

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