Understanding The Austrian Market: A Case Study Of IKEA's Business Environment (Essay).

Demonstrate an understanding of the global context in the business environment.

Introduction to IKEA and its operations

IKEA was started in the year 1943 and is the largest furniture retailer. Ikea also makes its presence in Austria and covers a large share in the market. It offers a large variety of the designer home furnishing products at a very rational price so that as many as individuals can able to afford them (Ikea, 2017). Ikea develops those methods of production from which production can be increased along with increase in effectiveness and efficiency of the business. It is trying to make and sell ready to assemble furniture, kitchen appliances and home accessories which are innovative and cost-effective as well. The objective of the report is to make the understanding of the business environment in Austrian market and understanding the nature of the business organization. Nature of business organization can competition can be judged by its type of industry and competitors (Edvardsson and Enquist, 2011). The business environment can be understood by the scanning of the environment to know the opportunities and threats present in the market. For scanning of the business environment, some analytical tools are used which include PESTLE Analysis, Swot Analysis, Porter’s five forces model.

Ikea is Swedish founded Dutch-based multinational group. Ikea product is such which can easily assemble at any place because of this, sales of the company is showing the increasing trend. It was founded by Ingvar Kamprad and currently has over 375 stores across 48 countries. The headquarters of Ikea is located in Leiden, Netherlands. The parent company of the Ikea is Stichting INGKA Foundation. IKEA is owned and operated by a difficult arrangement of not-for-organisation and for-profit corporation. The structure of the company is divided into two parts: operations and franchising. The company is dealing in the retailing business of furniture. Operations and management activities of many shops are designed, manufacture and controlled by the INGKA holding, a private company for profit-making Dutch company. Ikea has its presence in 36 countries and 235 stores are run by the INGKA. INGKA holding is not an independent company but wholly owned by the Stichting Ingka Foundation. Ikea sales have been increasing from 2011-2017 around 29% in Austria. The net profit of the company is also showing the increasing trend and company is growing very fast in the retail sector (ICAEW, 2018).

The pricing strategy adopted by the Ikea is to give the low-cost furniture to the consumer at large. Ikea always maintains a good and healthy relationship with its distributors and influence them to buy new technology so that economies of scale can be achieved and per unit cost declines. Ikea is using the low-cost leadership by using the low-cost leadership strategy. There is a better use of new technology and outsourcing of specialist manager by the company as the company is having the low average cost of production in the end. The company is having a competitive edge over the market because of its lower price strategy. Entry for the smaller companies makes difficult because of the existence of the barriers. As the company is actively present in the market and communicate its policies, CSR activities to customers also help to maintain a large customer base to Ikea.  Ikea has many competitors in the market which are offering furniture in different styles and functionality. Competitors include Conrin, Cartel & Barrel, Ethan Allen, and Wal-Mart (Invest in Austria, 2018) (Marcilla, 2014).

Nature of business organization and type of industry

Financial performance of the company found to be increasing day by day because of its innovative technology and cost leadership strategy. The sales revenue in the year 2013 was 28.5 billion euros and in 2017 sales was marked at 36.3billion euros (Statista, 2018). So these figures show an immense increase in the sales of the company. Ikea is also planning to expand its business in other sector and countries also (Rothaermel, (2015). 

PESTLE Analysis is done to know the effect of business environment on the business and industries. The opportunities and threats in external environment can come to know by this analysis. This analysis is useful to know the political factors, economic factors, socio-cultural factors, technological changes, legal factors or government policies and the environmental factors affecting the business directly or indirectly. These external factors are important as they can affect Ikea’s brand profitability and its position in the market.

Political Factors

Ikea has its operations in many countries and every nation has its own different political scenario. From supply the goods to selling them, all are affected by the political forces. In Austria, the political environment is found to be stable so business can expand easily. In Austria, there is high personal security and a reliable legal system. Administration policies and other policies are more liberal as compared to other countries. The infrastructure developed in Austria by the government is excellent. Austria government also introduced the group taxation scheme for the welfare of business and individuals (Cheshnotes., 2018).

Economic Factors

Economic factor plays a crucial role in the business environment. The condition of the country decides whether the business will earn the profits or not. Austria has around 8.8 million people living there and the employment rate is around 77.3% there. The real GDP growth rate in 2015 was1.0%, in 2016 it was 1.5% and in 2017 it was found to be 2.4%. There is an increase in the GDP rate every year which implies that the production level and consumption level in the country is increasing. There will be high productivity in the country and low unit labor costs. Per unit cost of products are low because the operation of economies of scale. Consumers are earning a high amount which increases their standard of living also.in Austria, there is a condition of inflation in the market and people are enjoying a high quality of life. The interest rates are also found to be low in Austria so business can be expanded and start easily (Export.gov, 2018).  

Pricing strategy and competition

Social Factors

Social and cultural factors talk about the society and the culture the society and people are following. Social and cultural will also has the deep impact on the business and its profits. While printing the magazines and catalogs for distribution, Ikea ensures that no wrong things to be shown up in them as it have a wrong impact on the company in society. Austria’s social trend and other factors have a great effect on the sales of business. As the people of Austria have specific demand for the designer and perfection in their products so Ikea has to make goods accordingly.  Normally the furniture may last for long and are inherited by their forefathers but this trend in Austria has been changing recently (UPI, 2018).

Technological Factors

Technology has become important in 21 century. From finance to marketing of the product, every business needs up gradation in technology to survive in the dynamic environment. Technological factors include the research and development activity, automation, customization and rate of technological change. Brands like Ikea are trying to provide the best experience to its customers through digitalization. Now customer expectations have also heightened, they also want to be served best by the company (Jonsson and Foss, 2011). 

Legal Factors

Legal factors include the threat that affects the workings of the business. Labor cost has a great impact on the business operations but some other laws are also there that require compliance and increase the cost to the company. These rules and laws can become costly to the business. According to the law labor there is a rule that any worker works for more than 40 hours a week then he is eligible for the bonus. In Austria also there are many restrictions and barriers to legal laws. Sometimes Ikea is unable to control its standard and quality in the jurisdiction in Austria (Lybeck and Henrekson, eds. 2014).

Environmental Factors

Since it was found that Ikea has been sensitive to the environment but maintaining sustainability in business is also an important focus area. This increased the brand image and overall experience of business along with that it also helps to control the cost of business. It helps the company to reach its target on time and have a positive impact overall environment. For achieving sustainability in its business, Ikea is planning that all the energy used in the business should come from a renewable source of energy in its business operation. For this Ikea has invested a huge amount in the wind and solar panels. Not just that, Ikea also wants that its cotton and wood to come from the sustainable sources only (Truth Today, 2018).

Financial performance and expansion plans

Ikea is exploring the local source raw material to have a low cost per unit and less transportation cost and this can be done Austrian market. From the economic point of view, the country population has been increasing so there is a wide scope for the Ikea to explore its business there. In Austrian market, expansion can be done easily in emerging economies with potential for low-cost manufacturing. Low-interest rates and increase in the demand of the consumer encouraged the companies like Ikea to invest more in the market. Ikea also gets the stability in the political environment and legal system as it has a reliable system and Austria is considered to be the heart of Europe.  From the technical point of view, there is an introduction to the digitalization in the business of Ikea leads to the popularity of e-commerce and pick and drop formats (Market Research report, 2018). 

From the societal point of view, the consumers are changing the habits the consumptions and spending. Previously furniture is inherited by their forefathers but now consumers are spending on the furniture items as well. Another opportunity for Ikea, we can take into consideration is that now people are more conscious towards an increase in their standard of living so maintaining well-furnished home is also a need for a consumer

The biggest threat for Ikea to enter the Austrian market is that all the existing companies are enjoying the benefit of economies of scale and have a lower price advantage. Ikea may face the pressure of prices in the initial years of business. Ikea may face the entry barriers in the Austria market in the form of copyright and franchising as the market already has the dominating player. These dominating players will not allow entering the other party in the market. Another challenge that Ikea will face in Austrian market is related to the legal issues. In Austria, there is the burden of regulation in the form of registration, transportation, storage and disposal regulation of products. The process for entering into the market will take a long way than it would be in some other country (Moon, 2004).

The Michael Porter's five forces model determines the market competition and attractiveness of the market. These fives forces helps to identify the business power are lying in which hands: buyers or sellers. The five forces of Porter are discussed below:

The rivalry of the firm

PESTLE analysis of Austrian market

The rivalry of the firm includes the presence of intense competition in the market, which is determined by the number of existing competitors. Rivalry competition is found to be high in the market when there are few sellers selling the same type of product and service. In the market for Ikea, there is a large number of competitors and market is having intense rivalry among them. This rivalry encourages the business to have an investment in innovation in products and services (Porter, 2012). The company has to face the price wars (reduction in price due to competition in price) also. All these will increase the cost of the business and lower the profits of the business.

Availability of the substitutes

Substitutes are the products and services which can be used for one another. Ikea has substitutes present in the market that create a threat to the company. Consumer moves to substitute only when they are getting the exactly same product and services at the same price or lower than that. The power of substitution decreases the seller’s power and the attractiveness of the market (Kumar, Dass, and Kumar, 2015).

Bargaining power of the buyers

Bargaining power of the buyer can be defined as the negotiating power of the buyer that how a buyer can influence the price of a product or service in the market. The cost of switching from one supplier to another for the buyer is too low. As the market of the retailer is of low margin and high volume business, so if there is more influence of customer on the prices of the product, the businesses will go into losses. Ikea has many loyal and customer in the market and are not price sensitive, but rely on the quality provided by the company (Magretta, 2011). 

Bargaining power of the suppliers

Bargaining power of the supplier factor analyses how many suppliers of business has the power to influence the decision of the business and its competitors. Suppliers influence the prices and control over the market of business. If the market has fewer suppliers then they have a monopoly over the market. In Austria, large numbers of suppliers are present in the market so they do not have to play in the monopoly market (Kim and Min, 2015).

Threats of Entrants

An entry of new firm also affects the power of the existing firm. Involvement of cost and money is quite low for a competitor to enter the market. The new company will enter the market only when they see profits in the industry and market. Similarly, Ikea has seen the profitable opportunities in the market of Austria and want to convert them into high yields. There exist some barriers in the entry of the firm like patents and copyrights. Ikea can easily enter the market of Austria and can grab the market share. The greater the risk Ikea will face in the competition, more the reward it will get from the market (Kogler, Batrancea, Nichita, Pantya, Belianin and Kirchler, 2013).

Political and economic factors affecting the market

Conclusions and Recommendation

From the above discussion, we can conclude that Ikea dealing in the retailing business of furniture. The company is selling the assemble furniture, kitchen wares etc. the company wants to expand its business to other areas as well. The company is expanding its business operations in Austria market, which is a good place to explore its business in the retail sector. Before entering the Austrian market, the company has performed various analyses and environmental scanning to know more about the nature of the market. For scanning of the environment, Ikea has done the PESTLE Analysis in which company comes to know about how the political force, legal forces, economic forces, technological forces and social forces are playing in the market. The market has a large number of buyers present which demands innovativeness and uniqueness in their products, so their more scope of expanding the market for the company. Company evaluates the possible opportunities and threats from the scanning of the environment. Ikea also evaluates the competitive advantage and market attractiveness using Michael Porter’s five forces. By using this Forces Company comes to know that the business can be enter into the market and can take advantage from the competition.

From all the discussion it is recommended that the Ikea can establish its business easily in the Austrian market as it is suitable for doing business there in terms of political stability, profit motives, and expansion of business activities. 

References:

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