The Business Environment of IKEA Company - Assignment Example

Business Environment- IKEA Company [The of the will appear here] [The of the will appear here] Introduction IKEA is a Swedish company that deals with the designing and selling of furniture, home appliances and accessories. In 2008, the company acquired the position of one of the leading furniture retailers globally. IKEA is popular for its minimalistic and eco-friendly furniture. The company has operations in around 43 countries with more than 350 retail stores. IKEA was founded by Ingvar Kamprad, a Swedish 17 year old who went on to become one of the worlds richest person last year. Purposes of different types of organizations Generally, there are four kinds of organizations: for-profit organization, non-profit organization, governmental organizations and hybrid organization. The purpose of these different types of organizations are: For-profit Organization: These organizations serve the main purpose of making profits for the owners or stakeholders. The aim is to maximize profits and to improve brand standing of the organization. Non-profit Organization: Such organization operate to provide services to the community without working on making any profits. Their aim is to improve the community. Such organizations includes universities and charitable organizations. Governmental Organization: These organizations are owned by the government to provide benefit to the citizens in the country. Another purpose is to utilize the resources in the country for the benefit of the community. Hybrid Organization: These organizations include a combination of private and public sector organization. Their purpose is two-fold: provide profits to the company and also to improve the community. Comparison of IKEA with a similar organization IKEA is a for-profit organization just like Tesco. IKEAs vision is to create a better everyday life for many people (IKEA, 2014). They do this by introducing a wide product range which includes all kinds of home and even office products at low affordable prices. The vision of Tesco is ‘to be the most highly valued business by: the customers we serve, the communities in which we operate, our loyal and committed colleagues and of course, our shareholders.’ (McKeown, n.d). Tesco does not specifically deal in one kind of product. Rather Tesco is more of a retail store. IKEA deals with one niche of the retail sector which is home furniture, appliances and accessories. Tesco aims to provide maximum value to its stakeholders which include customers, employees and stakeholders. This vision clearly shows Tesco as a for-profit organization. Even IKEA is a for-profit organization but it has cleverly worded its vision statement to show respect to its customer. This also shows that IKEA is highly customer centric. Organizations today have also begun to include their corporate social responsibility in their vision and mission statement. While the vision statement of IKEA is too broad, Tesco has accepted its corporate social responsibility by including the community in its vision statement. Critical Analysis of IKEA and its strategic objectives Stakeholders include the people who directly or indirectly are responsible and effected by the organization. These include the customers, the employees, the shareholders, and the community in general. For the customers, IKEA has the objective of increasing their customer base and retaining its existing customers. To increase customer base, IKEA has followed an extensive growth strategy. The company now has operations in more than 43 countries around the world. This allows the company to reach a higher number of customers. In order to retain its existing customers, the company has taken a proactive approach. The company has initiated many cost cutting measures. Along with this, company has taken to improving its product range by adding variety and number to its product range. IKEA is an equal opportunity employer. It calls its employees co-workers. Diversity within the organization is valued and the IKEA family consists of people from all kinds of backgrounds. IKEA has recently reviewed its pay scale and announced that the company would no longer work on giving a competitive minimum wage to its employees. Rather the wage would be determined by the living costs in the area. This is a step in a positive direction. The main responsibility that IKEA has for its shareholders is to provide them with profits. The company has been going through a favorable period as sales increased by 1.4 percent in 2009 despite the global financial crisis. In 2010, the sales further increased by 7.7 percent. The company has been able to achieve this mainly by pursuing an extensive growth strategy in new and existing markets. For the community, IKEA has created its People and Planet Positive Strategy. The aim of this strategy is to improve the environment by investing in sustainable projects. For this, the company invests in buying cotton that comes from an eco-friendly source. The company has also invested in solar energy to source its energy needs. Apart from that the entire value chain has been remodeled to bring sustainability in business operations (IKEA, 2014b) Natural Environment Impact of fiscal and monetary policy on businesses and activities The government uses both fiscal and monetary policy to regulate the flow of money in the country. This is to prevent both inflation and deflation in the economy and ensure that resources are optimally allocated within the country. The government uses fiscal policy in two ways: spending and taxing. In the case of spending, the government often stimulates growth in the economy by increasing spending. This will increase the general demand for goods and services in the country. In the case of IKEA, the demand for its products would increase. IKEA would manage this increase in demand by increasing production of it products. When production increases, the company needs more resources including human resources to manage the high production needs. This then increases employment in the country which then increases money in the hands of the citizens. This further increases demand for the product. In the same way that government increases spending, it can also decrease spending. This then would have the opposite effect and production would go down. IKEA would then face a decrease in production and revenues. Another way in which the UK government would use fiscal policy to control money supply is through taxes. When the government decreases taxes, it allows more money in the hands of the consumers. This consumers would thus be more likely to buy more products including products from IKEA. IKEA would also charge less on sales tax from its consumers which would overall decrease the prices of IKEA products. People would thus be willing to buy more products. Thus IKEA revenues and production would increase proportionally. The effect would be reversed when the government would increase taxes. Another way in which the government regulates money supply is through monetary policy. The Federal Reserve does this by buying or selling securities. When the Fed Reserve sells securities, it decreases the supply of money in the country. When money supply decreases, the purchasing power of the consumers decreases. This then decreases demand for IKEA products which negatively effects production and revenues for the country. Impact of competition policy and other regulatory mechanisms in the UK UK is part of the European Union and has to abide by all the policies and regulatory mechanisms instituted by the EU. The purpose of this organization is to improve trade between all European nations and to ensure that the businesses do not take undue advantage of the consumers. For this, all companies operating in the EU including IKEA have to abide by these policies and regulatory mechanisms. The EU tries to make sure that perfect competition is perfect in all industries. It does this by removing tariffs between EU nations so that trade improves and competition increases directly (Wise, 2000). IKEA and Market Environment Market structures determine the pricing and output decisions of businesses There are three basic kinds of market structure: monopoly, oligopoly and perfect competition market. In monopoly, business determine pricing through their own expectations. They have the liberty to charge maximum profits for their products because there is no competition that would compete with them. Business operating in monopoly market structure are usually the only business in the particular market. Most countries try to avoid monopoly in any kind of industry and UK is no exception. In oligopoly, the market is dominated by a few powerful sellers. This sellers determine their pricing structure to prevent new competition from entering in the market. They do this by keeping prices very competitive that new entrants would find very difficult to manage. In perfect competition market, the market consists of many sellers- both big and small. Here the price is determined through the demand of the product and by keeping in view the prices offered by the competitors. Pricing is determined by the product that the business offers. IKEA exists n a perfect competition market. Most of its products are competitively priced. IKEA determines its outputs based on the demand of the product. The price is determined considering the cost price of the product along with the prices offered by the competitors. IKEA also considers whether the consumers would be able to pay the price for their products. While IKEA is constantly striving to decrease the price of its products, it is not harming the competition by decreasing it too low. Market forces shape organisational responses Market forces determine how an organization develops its strategy. An organization cannot exist in isolation since it is the market that determines all aspects of the organizational output including price, quality and quantity etc. Market forces include the supply and demand decision. If demand for a particular product increases, IKEA would have to respond by increasing production. The reverse would be true when demand for the product decreases. Customer perception and attitude also impacts the business. When customers begin to prefer a certain kind of style, then IKEA would have to respond by improving on its product range to include that particular style. Customer attitudes also change the way a company operates. When customers began to become more environmentally conscious, IKEA responded by redoing its entire supply chain so that it became more environmentally conscious. A change in resources also impacts business. When a particular resource such as the wood used in furniture becomes more expensive, IKEA responds by increasing the selling price of its wood products. Similarly, when the supply of a product decreases, it leads to an increase in price of the product. Another manner in which market forces impact business is economies of scale. A company usually tries to achieve economy of scale in order to decrease production costs and thus decrease cost price of its products. IKEA also tries to achieve economies of scale. Business and cultural environments shape the behaviour of IKEA A number of business and culture factors shape the way a company like IKEA manages its operations and strategy. These include Political, economic, social, technological forces Political: Since IKEA operates in more than 40 countries worldwide, it has to ensure that governments of these company perceive IKEA as a positive entity. IKEA strives to achieve a neutral stance when it operates in different countries. Politically IKEA cannot side with one country. Also IKEA ensures that it does business in politically stable countries. This is because when governments change on a regular basis, they have a negative impact on both the economy and the regulatory policies of the country. This could impact IKEAs position in that particular country. Economic: Economic condition of a country directly impacts consumer spending. When economic conditions are favorable, consumers are willing to spend more money. However, when a country goes through a period of recession, consumer spending and confidence decreases and so does demand for a product. Economic conditions also include employment rate in the country. When the employment rate is high, the overall spending rate increase. This positively effects demand and sales for IKEA products. Social: Social norms also impact business conditions because they relate directly with consumer attitudes. When lifestyle improves in a country, people spend more money to buy home products and accessories. This then increases demand for IKEA products. Social norms also includes changing fashion trends. Sometimes demand for a particular product increases. IKEA then adapts by increasing product range for that product category. Technology: Technology also shapes the way IKEA operates. This usually deals with internal operations. Technology has greatly changed the way business operate. Technology has allowed businesses to expand their production outside their geographical boundaries. Technology also allows IKEA to contact suppliers outside UK. Technology has also changed the way IKEA operates its retail stores. One example is the way barcodes have come to dominate the retail experience. Globalization and Business Environment Significance of international trade for IKEA Globalization and mainly technology has greatly changed the way company manage their business operations. One significant impact of technology has been the way many companies including IKEA has been able to operate outside their geographical boundaries. Expanding operations into more than 40 countries has allowed IKEA to expand its customer base and to take advantage of its economies of scale. The presence of EU in UK also allows IKEA to manage trade between member EU countries without paying custom tax or excise duty. Also the EU has allowed IKEA to treat the entire European nation as one single market. This presents unique advantages to IKEA which can freely move its goods without having to bear additional costs. International trade also allows IKEA the advantage of outsourcing its production and supply. The company has outsourced most of its production to China (Leob, 2012). China allows IKEA the advantage of decreasing production costs because China boosts of low labor costs and production costs. This allows the company to cut down its production costs which eventually allows the company to offer low prices to its consumers. This generally increases demand for the product. Impact of global forces on IKEA While international trade allows IKEA to expand its operations and customer base, it also presents unique challenges to the company. When operating in the international market, the company has to face increased competition. It often has to compete with local giants in the market which requires the company to adapt its strategy for each market. Even in the local market, IKEA faces increased competition as more and more foreign companies are entering into UK. IKEA thus has to work extra hard to gain a competitive edge in the market. Even when IKEA does not face any tariffs in the EU market, the company has to pay tariffs when it enters into non-EU countries. These include USA and Canada. This leads to increased prices for the products in these countries. Consumers have to pay extra when they shop at a IKEA store in USA. This decreases the competitive edge that IKEA enjoys in its home country. Exchange rate is also an important factor with respect to global trade. Since IKEA deals primarily with Euros, it is impacted by any fluctuations in the exchange rate of IKEA. Recently, Euros are depreciating (Detrixhe, 2014) and this has a negative impact on IKEA. This is because prices of raw materials increase and foreign revenues from IKEA stores outside the EU decreases. Impact of policies of the European Union on IKEA The EU carefully controls business operations through numerous policies. These include employment policies, taxation policies, inflation policy, international policy etc. Employment policies relate with the minimum wages that IKEA has to pay to its employees. It also include benefits and incentives given to the employees. Companies need to be abide by these polices to prevent undue fines. Taxation policies directly impact the companys production costs. Inflation policies also impact IKEA operation. This is because they regulate the supply of money in the country. This directly impacts demand of IKEA products. International policy deals with IKEAs operations outside the home country. These include both outsourced operations and franchises operating in International countries. References Detrixhe, J. 2014. Euro Drops to 14-Month Low on ECB; Dollar Strengthens, Bloomberg, Retrieved from http://www.bloomberg.com/news/2014-09-04/euro-declines-to-14-month-low-after-ecb-unexpectedly-cuts-rates.html IKEA. 2014. Our vision and business idea, Retrieved from http://www.ikea.com/ms/en_SG/about_ikea/our_business_idea/index.html IKEA. 2014b. IKEA Group Sustainability Report. Retrieved from http://www.ikea.com/ms/en_GB/pdf/yearly_summary/sustainability_report_2013_final.pdf Leob, W. 2012. IKEA Is A World-Wide Wonder, Forbes, Retrieved from http://www.forbes.com/sites/walterloeb/2012/12/05/ikea-is-a-world-wide-wonder/ McKeown, A. n.d. Tesco: Every little helps, Retrieved from http://www.arthurmckeown.com/bmg345/tesco.pdf Wise, M. 2000. Italy - The Role of Competition Policy in Regulatory Reform, OECD, Retrieved from http://www.oecd.org/regreform/sectors/2497327.pdf Read More